To Disclose or Not to Disclose: Caveat Emptor in Alabama
This blog was part of an ongoing series of educational classes and attempts to summarize a class on Caveat Emptor in Alabama. Nothing in this blog should be used in place of actual legal advice. Please contact an attorney with any questions regarding Caveat Emptor.
Caveat Emptor is all about disclosures: when we’re required to disclose and when we’re not.
Caveat Emptor: “Let the buyer beware.” This refers to a legal principle that relieves the seller of any duty to disclose to a buyer defects in the property, placing the burden on the buyer to thoroughly inspect and discover any issues prior to purchasing.
When and what a seller is required to disclose when selling real property is a state-by-state issue. Looking across the US, there are two standards:
- Caveat Emptor state: States in which it is not necessarily required to disclose
- Disclosure state: States in which it is required to disclose
Most states in the US have moved to Disclosure states, so when you’re talking to buyers coming in from out of state, be aware that they are likely not aware of or used to the Alabama concept of Caveat Emptor and it will be your responsibility to educate them on it. There are only 6 states based on my research that still use some form of Caveat Emptor: Alabama, Arkansas, Georgia, North Dakota, Virginia, and Wyoming.
There are two provisions that go along with Caveat Emptor and can make it stronger or weaker: the “as-is” provision and inspections. These three things play together all the time and can change the meaning of the contract depending on which of them are included.
CAVEAT EMPTOR IN ALABAMA
In Alabama, our Caveat Emptor concept applies to used property and unimproved property; it does NOT apply to new builds. Unimproved property is defined as a property where no dwelling has been created, so vacant land. A new build is qualified as anything that has not been slept in (including a model home). If you purchase a new build and never sleep in it and then sell it, arguably it is still a new build and Caveat Emptor would not apply in this situation; however, if you buy it and sleep in it one night, it is no longer considered a new build and Caveat Emptor applies. This is a separate issue from builder warranties though, where a builder would be required to repair certain aspects of a new build for a specific time period after closing.
As a general rule, Caveat Emptor puts all the onus on the buyer to do inspections on the property and the seller is not under any duty to disclose known issues with the property; however, there are three exceptions to this rule where a seller would have to disclose to a potential buyer based on fraud and fraudulent suppression claims:
- Seller has a duty under §6-5-102, Ala. Code 1975 to disclose known defects if a fiduciary relationship exists between the buyer and the seller
- Examples: trustee & beneficiary, guardian & ward, real estate agent & client, corporate relationships, attorney & client, etc.
- When a Realtor is selling their own property and makes it known they are in fact a Realtor but then also chooses to represent the buyer in the deal, this puts you at a higher burden for disclosure because this is a fiduciary relationship and therefore requires you to disclose any known defects to your client.
- Seller has a duty to disclose material defects affecting health or safety not known to or readily observable by the buyer
- This is the exception that is most often asked about
- This exception only applies if the buyer performed an inspection
- Seller has a duty to disclose if the buyer inquires directly about a material defect or condition of the property
- This exception also only applies if an inspection was done
If you are going to try to apply exceptions to Caveat Emptor, the base for that exception is that you have to prove fraud or fraudulent suppressions, which is a very high burden. These exceptions also don’t apply every single time and many court cases have found reasons not to apply them based on “as-is” language and whether the buyer actually inspected the property. The buyer’s duty to inspect does not go away when we are trying to apply these exceptions, they are just part of a broader concept we have to prove.
If a buyer is trying to claim a Caveat Emptor exception after purchasing and cites health and safety issues but had never done an actual inspection on the property, the court will likely throw the case out because the buyer didn’t do their minimum duty to inspect. Similarly, if a buyer asked a seller outright about possible foundation issues and the seller didn’t answer honestly, but then the buyer finds known foundation issues after purchasing and attempts to claim a Caveat Emptor exception, this would also only apply if the buyer had done an inspection. Whether the inspection finds these known issues or not is irrelevant: the buyer’s basic duty in purchasing is to show they care enough to inspect the property regardless of what the results are. It is highly unlikely your claim will go through as a buyer if you did not inspect the property you purchased regardless of the seller’s duty to disclose, so it is very important to inspect the property.
CAVEAT EMPTOR, INSPECTIONS, AND AS IS
- Exceptions
- Volenti non fit injuria: “to a willing person, no harm is done”
- You must thoroughly inspect the property to hold the seller accountable for the three exceptions
- If the buyer was willing to take the risk of purchasing the property without having it inspected, then they were a willing party in buying the property and the court will not protect them from a bad purchase
- As Is
- A fraud or fraudulent-suppression claim is foreclosed by a clause in a purchase contract providing that the purchaser of real property accepts the property “as is”
- As “as is” provision negates the element of reliance essential to any claim of fraud and/or fraudulent suppression
- Watch for "as is" language in boilerplate contracts that may be hidden within dense paragraphs
- "As is" language should make buyer’s suspicion of property issues heightened
Real estate purchase agreements allow a period of time between execution and closing. During that time, the buyer should confirm not only that the seller has good and marketable title to the property, but also that the property is structurally sound and mechanically sufficient and that all systems are in good working order. A buyer cannot rely on a seller with only practical experience and no specialized knowledge to confirm the suitability of the property; rather, the buyer should engage inspectors to thoroughly assess the condition of the property before purchase. Once a transaction is closed under the terms of an agreement containing “as is” language and property is conveyed, the seller should have no further risk that liability for the condition of the property would remain.
- Kidd v. Benson, 321 So.3d 676 (Ala. 2020)
REAL WORLD EXAMPLES
- Unfinished basement did not set right during construction due to backhoe filling in too early
- Braces put on basement walls to support structural issue
- Buyers asked about the braces and were told it was built that way in homes like that
- Had friends and family “inspect” but never hired a licensed inspector
- Ended up having real foundation issues and Caveat Emptor applied because the buyers never had it officially inspected
- Property overlooking a river had retaining walls on bluff to protect from shore erosion
- The bluff had continuous issues and needed repairs and rebuilding
- New buyers asked about it and were told it was only preventative, which was untrue
- No inspection, Caveat Emptor applied
- A builder purchased vacant land from a developer
- After building and selling homes, the builder learned the dirt was not suitable for septic systems (all failed)
- Court ruled Caveat Emptor applied because contract had an "as is" provision
- Previous flood and mold
- A previous potential buyer had backed out of the purchase, but allowed the new buyer to use their inspection report, so new buyers never ordered their own inspection
- "As is" provision barred Caveat Emptor exemption
In the above issues it initially feels like these buyers would be protected due to the fact that these issues were known by the sellers, but because of the "as is" language and the lack of inspections ordered by buyers, the court didn’t side with the buyers on any of the above cases and the buyers were not protected. I would highly encourage any buyers thinking of using a previous inspection report (from a previous potential buyer, for example) to sign an agreement with the inspector who wrote that report in order to protect themselves better. If you are not a direct client of the inspector, the court would not count the inspection report as being ordered by the new buyer.
QUESTIONS
If my client signs a seller disclosure form, does that void his protection through Caveat Emptor?
Seller disclosure forms are a mixed bag in Alabama because we don't have seller disclosure requirements. It would really come down to the language used in the form, such as “We disclose x, y, and z but everything else is sold as-is where-is.” The "as is" language is what is going to help you out there by allowing you to say that not only did you disclose certain things in a Caveat Emptor state when you didn’t have to, but you are also reinforcing Caveat Emptor by using that "as is" language. To give you better advice on this, I’d have to see the specific seller disclosure form to check what type of language is being used. Alabama generally has very strong case law so we don’t often see seller disclosures unless specifically asked.
Where does a latent defect fall in this?
The requirement for the buyer to do an inspection is the base minimum to even start a Caveat Emptor exception case. You don’t have to discover the actual problem in the inspection, but you do have to perform the inspection to have a case at all if anything comes up.
What are the agent’s responsibilities to inspect?
There is no requirement of the agent to inspect, but it is the agent’s duty to advise the buyer to have the property inspected by a licensed inspector and to let them know that if they don’t inspect then these exceptions to Caveat Emptor will not be available to them should they need to file a claim later on.
How does the buyer protect himself in Alabama?
The basic answer is: inspections. If the buyer wants to protect himself in Alabama, there are two things they can do:
- Inspect the property
- Remove “as is” language
I’m not recommending you disrupt local markets that use contracts with default “as is” language in them; however, if you’re a buyer and you have any concerns about a property or about a seller possibly not being truthful about a defect, it is in your best interest to remove any “as is” language in case the seller is lying. If they refuse to remove it, then you have a risk analysis to go over with your clients regarding whether they think it’s in their best interest to move forward knowing there could be serious issues with the property that would not be covered by the seller.
I deal with a lot of estates where the heirs often ask if they should do an inspection before closing, and my advice is usually to avoid an inspection and list as-is to minimize the seller’s knowledge of any property issues. Is this good advice?
I don’t mind this advice. As a seller, it’s not your job to inform buyers of issues – you should let them discover those on their own. The “as-is” provision would also make it difficult for any buyers to apply the Caveat Emptor exemption after closing even if the seller did know about certain issues, so in this situation you seem to be doing a good job of protecting your sellers and heirs. It’s always a good idea for heirs particularly, who may not be familiar with the property as they likely didn’t live there themselves, to walk the property and get a sense of what needs to be done in order to list in the best light, but in Alabama the sellers should never take on the burden of performing a home inspection before listing a property as that duty falls on the buyers.
Why do residential contracts not allow for a due diligence period such as in commercial sales where a buyer would submit a letter of intent and then perform inspections prior to committing to a contract?
That’s a fantastic question that I haven’t previously given much thought to, but if I had to guess I’d say that we typically have standards in the industry that we all agree to, and because there is so much protection involved in selling residential properties and the process around it, your due diligence period on a residential property is really the inspection period. The due diligence period in commercial sales can work one of two ways: you can have an unofficial due diligence period before you go under contract, but you can also have a due diligence period while under contract. In my experience, the ones with the sharpest legal teeth are the ones that take place during a contract. While you may have a letter of intent that introduces the concept of a due diligence period, a letter of intent is not a legally binding contract, it just opens the door to draft the contract. Once you’re under contract, that’s when due diligence applies. The reason the due diligence period in commercial sales is longer is because you typically have more complicated issues to address including zoning issues, compliance with city rules, use issues, whether the property has previous damage, etc. So to answer your question, I would assume this is because with a residential property it’s really only about the condition of the property and not all those other issues you deal with in commercial sales, and so a longer due diligence period isn’t typically needed.
If a property I’m listing goes under contract and the buyer performs an inspection that finds health and safety issues, leading to the buyer pulling out of the deal, do I then have a duty to disclose those health and safety issues to future buyers?
Generally, Caveat Emptor is your basic rule no matter what you, as a seller, know. This means that, based on the third exception, unless they ask you directly about a specific issue, you do not have to answer. If they do ask you then you have to answer honestly, but if the contract has an as-is condition and the buyer does not perform an inspection then they wouldn’t be able to use the Caveat Emptor exception anyway. Just because there is a legal process to prevent buyers from coming after you doesn't mean you should live life on the edge though; if you have knowledge of a health and safety issue, the second caveat emptor exception says you have to disclose. However, what you’re learning in this class is that this isn’t the end of the story – the buyer also has to perform an inspection and there can’t be an "as is" provision in the contract for these exceptions to apply. You should always abide by the exceptions and disclose known health and safety issues, but also know there is more to it than that and you’ll need to assess that risk with your sellers. The best I can do is give you court precedent to show you how these things have played out before, but how you move forward is really between you and your client and that assessment of risk.
