A real estate company and a pair of home sellers were accused of false advertising after a Wisconsin couple bought a house and discovered numerous defects with the property. A circuit court dismissed the claims, citing an “as is” clause included in the amended offer. But did the clause hold up to additional scrutiny by an appellate court? Read on.
A couple in Wisconsin bought a house that they allegedly believed had been completely remodeled and had included a four-season gazebo. When the house was in worse shape than they anticipated, the buyers sued the sellers and the realty firm that listed the property, claiming false advertising had induced them into buying the house.
A circuit court dismissed the buyer’s claims, ruling that an “as is” clause in the amended offer barred the allegations. But on June 3, the Court of Appeals of Wisconsin reversed the ruling and sent the matter back to the courts.
The issue unraveled after defendants Brian and Pamela Schertz decided to sell their home, and listed it with defendant Country Aire Realty Inc. in 2006.
Country Aire placed the listing online and in print advertisements, which stated the house had been “completely remodeled … inside & out” and had a four-season gazebo, new windows, plumbing and electrical work, among other features.
Plaintiffs James and Barbara Berard saw the ads and scheduled a tour. While viewing the property, the Berards reviewed a real estate condition report which stated the Schertzes were unaware of any defects in the house.
The Berards submitted an offer to buy the property, and the Schertzes accepted. The offer included an inspection contingency, but the buyers didn’t have an inspection performed.
Including an “as is” clause
At the closing, the buyers signed an amended offer to purchase. The amendment noted an “as is” clause and stated that the buyers and sellers were aware that the buyers were provided with “full opportunity to inspect the property” and were buying the house in “as is” condition, with no warranties.
After the closing was complete, the Berards uncovered several alleged defects, and sued the Schertzes and Country Aire on causes of action for breach of contract warranty, false advertising and theft by fraud.
The Shawano County Circuit Court granted the Schertzes’ motion for summary judgment to dismiss the Berards’ claims, finding that the claims were barred by the “as is” clause that was contained in the amended offer. The Berards appealed.
The warranty at issue was included in the initial offer and stated under the “property conditions representations” that as of the date of acceptance, the sellers had no knowledge or notice of conditions that would affect the property or the transaction other than any that were identified in the real estate condition report.
The Schertzes did not disclose any property defects in the condition report, the appellate court noted. The issue with the Berards’ breach of contract warranty claim was whether the sellers were aware of defects they failed to disclose.
“The Berards claim a litany of defects, but do not develop coherent arguments for most of them,” the appellate court said. “However, we conclude there is sufficient evidence to create genuine issues of material fact” regarding several alleged defects including foundation problems, water leaks and rotted windows, among others.
The Berards had the house inspected in preparation for the case. The inspection report indicated rot in the second floor windows. Affidavits by the Berards noted they found water leaking into the basement, mold on basement drywall and baseboards, foundation issues, exterior wall defects and defects in the gazebo’s foundation. In each alleged defect issue, the appellate court noted there was a genuine issue of material fact regarding whether the Schertzes had knowledge of the problems.
Does failure to disclose constitute theft by fraud?
The theft by fraud claim related to the Berards’ allegations that the Schertzes’ failure to disclose defects in the condition report was a means of obtaining money for the property through false representation with the intent to defraud. The appellate court stated that a factfinder could conclude that the Schertzes failed to disclose the defects for the purpose of defrauding a potential buyer by inducing them to buy the house. Genuine issues of material fact, therefore, existed on the theft by fraud claim.
The false advertising claim brought by the Berards was aimed at Country Aire and the Schertzes. The appellate court explained that when such a claim is brought against a real estate broker, the plaintiff must prove that the defendant knew the advertisement to be untrue. The Berards alleged that the realty firm’s ads were untrue, deceptive or misleading because not all of the electrical systems and windows were new, the gazebo was “three-season” rather than four and the house was not completely remodeled as advertised.
“A factfinder could determine that these statements were untrue, deceptive or misleading and that Country Aire was aware of that fact based upon its agent’s admission that he knew not all the windows and electrical were new,” the appellate court said. “Regarding the gazebo, however, the Berards point to no evidence from which a jury could reasonably infer that Country Aire knew it was not a four-season gazebo.”
Since the appellate court had already determined there was a genuine issue of material fact regarding whether the sellers failed to disclose known defects, there also existed a genuine issue of material fact as to the false advertising claim against them, the court of appeals said.
The “as is” clause that was allegedly included in the amended offer was the next major point of contention. Although the amended offer stated the “as is” clause was in effect with no warranties, it also contained a certification from the sellers that the property was in the condition as stated in the condition report. This led the appellate court to find the warranty claim was not affected by the amended offer’s terms.
“Thus, the amended offer reaffirms the original warranty that the Schertzes were unaware of any conditions affecting the property, except those disclosed in the condition report,” the appellate court stated. “The contract, as amended, therefore does not bar the Berards’ breach of contract of warranty claim.”
Disclaimer must be specific
The amended offer also did not bar the buyers’ claims of false advertising or theft by fraud, the appellate court found. The court cited the case of Grube v. Daun, where a contract stated the buyer was purchasing a property in “as is condition without any warranties.” In that case, the court determined the buyer’s tort misrepresentation claims were not barred by the “as is” clause, asserting that tort disclaimers in contracts should not be honored unless the disclaimer is specific about the torts it means to disclaim. The disclaimer “must make it apparent that an express bargain was struck to forgo the possibility of tort recovery” in exchange for negotiated alternate economic damages, the court in the Grube case ruled.
In another matter, Peterson v. Cornerstone Prop. Dev. LLC, a contract involved an “as is” clause and led to a false advertising claim. The court in Peterson determined the disclaimer was permitted under the Grube ruling because it specified a disclaimer for the buyer’s right to rely on any alleged fraudulent misrepresentations.
“Based upon Peterson, we conclude the Berards’ false advertising and theft by fraud claims are not barred by the contract. In Peterson, the court’s holding was supported by language in an integration clause, and an integration clause also existed here,” the appellate court said, pointing to the statement in the clause that read “Entire Contract. This offer, including any amendments to it, contains the entire agreement of the buyer and seller regarding the transaction. All prior negotiations and discussions have been merged into this offer.”
The Schertzes’ clause varied somewhat from the Peterson integration clause, however. The Peterson clause included language stating the buyer wasn’t relying on any representations of the seller, but the language in the Schertzes’ contract could be read as disclaiming liability for the sellers’ representation that they were unaware of defects in the property, or Country Aire’s allegedly untrue or misleading ads, the appellate court said.
“The integration clause here is merely standard-form language in the WB-11 residential offer to purchase. It is not a bargained-for disclaimer of liability for fraudulent content,” the appellate court stated.
Finding genuine issues of material fact on all of the claims, the court of appeals thus reversed the circuit court’s ruling, and remanded the matter for further proceedings.
James Berard and Barbara Berard v. Brian Schertz, Pamela Schertz and Country Aire Realty Inc.