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April 1, 2006
By: Richard W. Laubenstein

As is so often the case, the little things you learn from your mom and dad turn out to be right. When you were growing up, how many times did you hear “honesty is the best policy?” That is especially true if you are selling residential real estate.

In Illinois, the seller of residential property, which includes everything from a single family house to a four-flat, is required to furnish the prospective buyer with a written disclosure of any defects that the seller is aware of regarding the building and land. If a seller is aware of a problem and fails to disclose it to the buyer and the sales transaction is completed, the buyer has the right to sue the seller and recover the repair costs, court costs and, depending on the circumstances, other expenses including attorneys fees.

Even if the seller specifically makes the sales contract”AS IS” and the buyer knows that the seller is not making any representations concerning whether the building is in good condition. if the seller is aware of a defect and fails to disclose it, the seller will wind up paying the consequences. Consider what happened to these unfortunate sellers:

The sellers owned a home with a fully finished basement.. The home was on one of the lower lots in their subdivision. After a particularly heavy rain, they found the basement flooded and the drywall and carpeting soaked. The sellers repaired the home and hired a contractor to fix the problem. The contractor built a berm (a low, earthen mound) along the lowest spot of the yard and added new drainage tile around the perimeter of the building. However, the contractor wasn’t certain if this fully would protect the property, and in fact, told the sellers personally and in writing that he could not guarantee that the basement would not flood if there was another heavy rain. The sellers put the home on the market and sold it “AS IS” and did not disclose that there was a flooding problem at the home.

After the sales transaction was completed, there was another heavy rain and the basement flooded again. The buyers sued the sellers for misrepresentation. The sellers claimed that since the transaction was “AS IS” the buyers bought the home knowing that there might be problems and therefore, the buyers had agreed to assume the risks. The Appellate Court of Illinois disagreed. A seller must disclose all defects of which the seller is aware. Once the seller has made the defects known to the buyer, the parties can still choose to negotiate a contract which provides that the sale is “AS IS” – meaning the seller has pointed out the problems and made it clear to the buyer that the seller will not pay for any repairs, and the buyer has agreed to take the building in its present condition. If only these sellers had listened to their parents.

The real property disclosure report that is used on all residential transaction s only requires the seller to disclose problems that the seller knows currently exist. If, for example, there was a leak from the roof and the homeowner hired a roofer to repair it, and the roofer gave his guarantee that the problem was corrected then unless the homeowner had any reason to dispute the contractor, the problem no longer existed for purposes of making the disclosure. Obviously, if the roof leaked again after the work, or if the roofer would not guarantee the work, then the homeowner could not truthfully state that he was not aware of a possible problem with the roof. In the situation we just considered with the flooded basement, the seller could not honestly tell the prospective buyer that the seller was not aware of possible flooding problems, since the contractor who put in the berm and drainage tile specifically said he could not guarantee the property would remain free from flood problems in the future.

However, in situations where the repair work has been done and the owner is not aware that the problem is still ongoing, the seller can honestly state that he is not aware of any problems. I recently had a situation like this on a transaction where I represented the seller.

Many years ago, the seller put an addition on her home. She hired a builder to pour a new foundation, concrete slab floor and frame out the room to attach it to her existing house. Several years later, she put in new carpeting and the carpeting contractor noticed a crack that ran from side to side in about the middle of the room. It was a very narrow crack, and the client never noticed it because it was always covered with carpeting. The contractor told her it was a minor crack and that he could easily repair it. She had the crack repaired and put in the new carpet and thought nothing further about it.

A few years later, she listed the property for sale. She filed out the disclosure form and slated that she was not aware of any problem with the floor. The buyer completed the sales transaction and shortly after he moved in, he decided to redecorate and put in new carpet. When the carpet was removed, he noticed that the floor had cracked again at the same spot where the contractor had patched it. The buyer sued my client and claimed that she made a false statement.

During the trial, I had the seller show the court the repair receipt she had received from the contractor, in which he agreed to patch the crack and guaranteed his work. The seller testified that she had experienced no trouble with the floor and had no reason to believe that the problem had reoccurred. The trial judge concluded that there was no way (short of destroying the house by tearing up the carpet) that my client would have known the crack came back and there was no reason for my client to have doubted the contractor. The judge ruled against the buyer and determined that the buyer was not entitled lo recover any money from the seller, The disclosure document does not require the seller to conduct any type of invasive testing or to hire an expert to see if there are any conceivable problems with the home it merely asks the seller to truthfully disclose any problems that the seller actually knows about. If you know a problem hasn’t been fixed, then listen to your mom and – just tell the truth.