Monday, October 29, 2012

Caveat Emptor Will not Apply if your House is Haunted as a Matter of Law

It is the end of October, which means we are so close to my third favorite holiday of the year:  Halloween.  As a kid, I always enjoyed the novelty of the day: dressing up as your favorite super hero or villain, ringing doorbells and plundering as much candy as one could dream of consuming.  “ARGGG...he who has the most cavities wins” (in your best pirate voice).  At Daily & Woods, there is candy located at the front desk year round.  Feel free to come trick or treat anytime this week.

Halloween also reminds me of a famous property law case that demonstrates a split from the general rule of caveat emptor.  Arkansas real estate and property lawyers are surely familiar with the general rule of caveat emptor, which is often applied so long as both parties were in an equal bargaining position and had access to the same information about the property.  In other words, "let the buyer beware" of all of the defects of the seller's house.  Most courts, including Arkansas courts, have modified the harsh rule in various ways to protect purchasers who may have relied on express or even implied covenants.

Very few courts have modified caveat emptor to the extent of Stambovsky, v. Ackley, 169 A.D.2d 254, 572 N.Y.S.2d 672 (1991). In Stambovsky, the defendant owned a Victorian era house in the Village of Nyack, but this was no ordinary house.  Based on local folklore, and the defendant’s own admission, the house was haunted–and not just allegedly haunted, but haunted as a matter of law.

According to the case, the home owner had seen poltergeists in the house, and had even reported their existence to the Readers’ Digest and the local newspaper.  In 1989, between the time the home owner had entered into the contract of sale with the buyer, but before closing, the house was even made part of a walking tour in the village.  The walking tour literature described the house as having ghosts.  Needless to say, the house had a bit of a reputation.

The reputation was apparently unknown to the buyer, however.  When the plaintiff learned of the house’s reputation for being haunted prior to closing, he sued to rescind the contract, alleging that he would not have entered into the sales contract had he been advised of the house’s poltergeist activity.  Of course, the defendant countered on a caveat emptor  theory and asked that the court enforce the contract.

The plaintiff’s complaint was dismissed by the trial court, but on appeal, the Supreme Court of New York, Appellant Division reversed.  According to the court, caveat emptor would not apply due to home owner’s reports of the alleged hauntings in national and local publications.  Therefore, the court determined that the seller was estopped to deny the poltergeists’ existence.  In a chilling decision for home sellers, (pun), the court held that the house was haunted, “as a matter of law.”

Noting that reports of hauntings lowered the resale value of the house, the court held that while caveat emptor prevented an action for damages for the plaintiff, it did not prevent the equitable remedy of rescission  Here, the court found that rescission was appropriate since defendant not only took unfair advantage of plaintiff's ignorance as to the house's reputation, but the defendant herself also created and perpetuated the reputation.

While this is an extreme example of an exception to caveat emptor, there are other more relevant exceptions.  For instance,in Arkansas property law and in other jurisdictions, one can not mislead and misrepresent a material fact of the house to a seller.  Also, in new home sales, the rule of caveat emptor has been tempered by the implied warranty of fitness--that is, a new home must be warranted against major defects that make it unfit for habitation.

If you are in need of advice regarding a real estate contract, either as a buyer or a seller, feel free to contact me or my firm of experienced Arkansas property lawyers on the web, on linkedin, by email or at the Daily & Woods office.