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Newman v. Arenstein

A-4624-04T5 (N.J. Super App. Div. 2006) (Unpublished)

CONTRACTS; REPRESENTATIONS; FRAUD; “AS-IS”—Even where a property is sold “as-is,” the seller has a duty to disclose all known latent defects not readily visible; further, an “as-is” clause does not bar a common law fraud claim.

Before closing title on a house in 1985, the original purchasers obtained a home inspection report identifying damage caused by a fire to its floor joists, the attic, and the basement. The purchasers went ahead with the deal, paid for the house, and acquired title. In 2003, in connection with their own sale of the home, the original purchasers (now the sellers) answered “no” on their Seller’s Property Disclosure Statement when asked if they were aware of any “past or present movement, shifting, deterioration, or other problems with walls, foundations, or other structural components[.]” A contract was executed. The home inspection report obtained by the subsequent purchasers made no mention of damage to the house caused by an earlier fire. After making some adjustments to the cost of the house to cover costs of termite treatments, the house was sold “as is. ” After closing, the subsequent purchasers discovered that the house had been damaged by the earlier fire. They sued their seller, claiming fraud and breach of contract, and sued the home inspection company that failed to identify the damage caused by the earlier fire claiming negligence and breach of contract.

During discovery, two other home inspection reports were produced. One stated the damage was visible, and the other indicated it was not. The sellers moved for summary judgment claiming there was no basis for the fraud claim. In support of their motion, they asserted that although they were aware of an earlier fire, they were never informed of any structural damage. Thus, according to them, they completed the Seller’s Property Disclosure Statement truthfully to the best of their knowledge. The subsequent purchasers cross-moved for summary judgment on the failure to disclose the latent defects. The lower court found that although the original purchasers were aware of the earlier fire, they were unaware of the structural damage and its adverse impact on the purchase price. Therefore, the lower court granted summary judgment in favor of the original purchasers. The subsequent purchasers settled with their home inspection company, and appealed the lower court’s grant of summary judgment in favor of the original purchasers.

As to the breach of contract claim against the original purchasers, the Appellate Division affirmed the lower court’s grant of summary judgment, finding that the original purchasers had fulfilled their contractual obligation by transferring title to the subsequent purchasers. Thus, there was no factual basis to support a breach of contract claim.

On the other hand, the Court reversed the summary judgment in favor of the original purchasers on the common law fraud claim. The necessary elements to sustain a cause of action in common law fraud against the original purchasers, as sellers, were: (1) a showing that the original purchasers made a material misrepresentation of a presently existing or past fact; (2) that the misrepresentation was made with knowledge or belief as to its falsity; (3) that the misrepresentation was made intending to induce the subsequent purchasers to rely on that misrepresentation; (4) that the subsequent purchasers reasonably relied on that misrepresentation; and (5) that the subsequent purchasers were damaged. The Court held that in the real estate context, a deliberate concealment of a latent defect material to the transaction is sufficient to justify the remedy of rescission and may permit recovery of monetary damages. In a claim alleging deliberate concealment, the defect must be latent and not reasonably observable to the subsequent purchasers. Additionally, the non-disclosure must relate to a material or significant matter in this case. The Court held that there was a genuine issue of material fact as to whether the alleged structural defects were latent and unobservable to the subsequent purchasers. Although some fire damage may have been visible, it found that the damage to other parts of the house may not have been visible to the subsequent purchasers. The Court further found an outstanding factual issue as to whether the original purchasers had knowledge of any alleged structural defect. The home inspection report from 1985 merely assumed that all structural damage caused by the fire had been repaired. Additionally, the original purchasers installed a new roof over the burned roof. Since the original purchasers had knowledge of the fire, there was a question as to the extent of their knowledge of the damage. According to the Court, viewing these facts in a light most favorable to the subsequent purchasers, the motion for summary judgment should have been denied. It further ruled that the fact that the subsequent purchasers obtained their own home inspection report was insufficient to determine whether the subsequent purchasers did or did not rely on the statements of the original purchasers as to the quality of the house.

As to the claim that the property was sold “as is,” the Court held that while the general rule would relieve the original purchasers from liability, the original purchasers nonetheless have an obligation to disclose all latent defects not readily observable. Further, the “as is” clause does not bar the common law fraud claim.

The judgment of the lower court granting summary judgment in favor of the original purchasers on the contract claim was affirmed, but its ruling on the common law fraud claim was reversed. The matter was remanded for trial to determine whether the defects were latent and to determine whether the original purchasers were aware of such defects.

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