Thursday, April 9, 2009

Noticeably Lacking Information, and Seller Liability

Ten months after escrow closed, Vig, an assignee of the original parcel contract purchaser, brought an action against Nix for breach of contract and statutory rescission, on the basis that Nix’s affidavit of disclosure did not comply with A.R.S. § 33-422(F). The trial court held that the affidavit of disclosure really did comply with § 33-422, so an appeal was filed, leading to the opinion in Vig v. Nix Project II Partnership, 2009 WL 565024 (March 5, 2009). Vig’s beef regarding the affidavit’s substance is that in a question about whether there is legal access to the property or not, the Seller “ticked” the box (how they say “check,” in Australia) for “is NOT,” but did not fill in the blank provided in the state statute’s proposed form where room is provided to give an explanation of that answer. Like so: “Explain ________”

The Arizona Appeals Court first held that an affidavit of disclosure complies with A.R.S. § 33-422 so long as it is furnished to the buyer at least seven days before closing, and that the buyer’s failure to formally acknowledge receipt has no legal significance. Second, the Court held that so long as the affidavit of disclosure is self-explanatory and puts the buyer on inquiry notice of all relevant conditions within the scope of the statute, it complies with § 33-422(F). The court said that in the event of an answer that is “self-explanatory” there is no further “elaboration” required to satisfy the statute’s purpose. Since the seller disclosed the “defect” of access, no further explanation was required; the checked box was sufficient to create “inquiry notice” on the part of the buyer.

The court fails to describe the contours of “inquiry notice”; probably, that’s because the language of the opinion is self-explanatory! That leaves something of a hole in the ozone ceiling above the territories of real estate agents and title companies; the former are fiduciaries in some respects, while the latter are supposed to insure transactions based in part upon the review and assessment of recorded documents. The omission of a working definition of "inquiry notice" is most unhelpful. A law dictionary tells you that it’s notice sufficient to alert an ordinarily prudent person to investigate the circumstances further. So how does that work, exactly?

Suppose, for instance, the seller checks the box on the disclosure affidavit that indicates “yes,” there is physical access to the property, but doesn’t reveal that a pipe--installed just far enough beneath the graveled path of physical access to be invisible--could burst and spill water, sewage or natural gas all about, if grading of the dirt path with a backhoe punctures the pipe? Would that failure of disclosure of a material fact constitute a violation of the implied covenant of good faith and fair dealing? The delivery of the affidavit occurs beyond the stage of negotiating the purchase and sale contract—and since it’s seller’s performance of the contract that triggers making the affidavit, omission of a material fact may qualify as a breach of the implied good faith covenant, if such a material disclosure isn’t made in the affidavit of disclosure.

So, what’s a Superior Court judge going to do when determining whether the disclosures in the seller’s affidavit are sufficient—or not--to create inquiry notice? The Court of Appeals a few years ago provided the missing narrative, I suggest. If the seller fails to disclose a known latent defect or fails to give a buyer to an appropriate opportunity to discover latent defects, caveat emptor does not apply in Arizona; that vendor must disclose that material defect or, at a minimum, be subject to tort liability for nondisclosure. S Development v. Pima Capital Management, 31 P.3d 123 (App. 2001). Probably the standard of “bad behavior” constituting a breach of a legal duty to disclose a known, concealed defect to a buyer isn’t so far removed from the standard constituting a breach of the seller’s promise to give a buyer a fair opportunity to obtain the benefit of his bargain.


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