MURDERING THE MARKET: HOW STIGMATIZED PROPERTY DISCLOSURE REQUIREMENTS IN SOUTH DAKOTA UNREASONABLY DIMINISH ECONOMIC VALUE IN THE RESIDENTIAL REAL ESTATE MARKET.

Author:Bouwman, Jacquelyn A.
 
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  1. INTRODUCTION

    I just moved in my new house today Movin' was hard but I got squared away Bells started ringin' and chains rattled loud Knew I'd moved in a haunted house Still I made up my mind to stay Nothin' was a gonna drive me away When I seen somethin' that give me the creep Had a one big eye and a two big feet ... Say yes I'll be here when the mornin' comes Be right here and I ain't gonna run I bought this house now you know I'm boss Ain't no haint gonna run me off. (1) Jumpin' Gene Simmons sang about being unfazed by ghosts in his home. (2) However, not everyone has this same mantra when it comes to psychologically stigmatized property, as evidenced by two infamous cases: Reed v. King (3) and Stambovsky v. Ackley. (4) The holdings in both of these cases have all but put the nail in the coffin for the age old doctrine of caveat emptor, and replaced "buyer beware" with "seller disclosure." (5) The holdings of Reed and Stambovsky have left states to interpret what constitutes a material defect necessitating disclosure by a seller in residential real estate transactions. (6)

    First, this comment will delve into the history and demise of caveat emptor as well as the infamous cases that put the doctrine to death. (7) Next, this comment will discuss South Dakota's statutory property disclosure form and legislative history as well as the standard for required disclosures in other states. (8) This comment will then discuss the unsound logic behind stigmatized property disclosure by comparing other outdated disclosures with the resulting gray area South Dakota's statute creates in the law. (9) Furthermore, this comment will consider the economic impacts of reducing property values due to non-structural "defects." (10) Finally, this comment will offer a two-part recommendation to South Dakota's current property disclosure form and the statute defining an adverse material fact. (11)

  2. THE ASPHYXIATION OF CAVEAT EMPTOR

    Caveat emptor or "buyer beware" is the shortened form derived from the Latin maxim, "Caveat emptor, qui ignorare non debuit quod jus alienum emit" or translated to English, "Let a purchaser, who ought not to be ignorant of the amount and nature of the interest which he is about to buy, exercise proper caution." (12)

    1. HISTORICAL ANALYSIS OF CAVEAT EMPTOR

      The doctrine of caveat emptor dates back to market signs in ancient Rome that portrayed the Latin phrase and warned purchasers that it was their responsibility to inspect goods before purchase and to protect themselves from crafty merchants. (13) The doctrine became so engrained in society that it was easily transferred to the common law standard for real estate in England. (14) Real estate during the Middle Ages in England was predominantly centered around transfers of land for agricultural purposes, rather than for residential purposes as is common today. (15) The strict application regarding the law of caveat emptor was proclaimed in an old English real estate case, Peek v. Gurney, (16) dating back to 1873 which held the seller has "no duty to disclose facts regardless of how 'morally censurable' silence may be." (17)

      Naturally, caveat emptor carried over from English jurisprudence to the American legal system through the birth of American common law regarding real estate transactions. (18) Caveat emptor was predominantly popular in America during the industrial revolution when the courts reflected society's emphasis on laissezfaire values and the government refused to intrude into economic business pursuits on the basis of efficiency. (19) In fact, the very phrase "laissezfaire," French for "let (them/it) do," corresponds seamlessly with the doctrine of caveat emptor. (20) Caveat emptor requires buyers to be responsible for dealing with the consequences of a poor transaction without the remedies of governmental or judicial interference. (21) However, during the latter half of the twentieth century, courts switched positions and adopted the policy that sellers, having superior knowledge of their property, had a duty to disclose certain defects to buyers, thereby descending into the demise of caveat emptor. (22)

    2. FRAUD AND MISREPRESENTATION

      Even the common law doctrine of caveat emptor in American jurisprudence did not protect sellers who engaged in fraud or misrepresentation. (23) At common law, sellers could protect themselves by remaining silent on issues; however, the courts have found that in instances of partial disclosure or when asked directly by a buyer, a duty to inform may arise. (24) Therefore, omission of a material fact is now actionable as fraud in states that have expanded the doctrine. (25) Absent statutory definition, the classic definition of a material fact generally relied on is one "to which a reasonable man might be expected to attach importance in making his choice of action." (26) Similarly, a Florida court held a material fact is one that "substantially affects the value of the property." (27) Absent statutory provisions excluding stigmatization as a material fact, such as in South Dakota, courts are left with an unclear recourse as to what types of stigmatization implicate the classic definition of a material fact. (28) Historically, courts have held material facts to be those which may affect the structural integrity or use of the property, such as:

      prior termite damage, active termite damage, illegal and condemned building, defective roof, defective well, radioactive mine tailings, filled soil, defective septic system, building code violation, lot requiring retaining wall prior to constructing a building, generally deteriorated condition of the property, wood beetle damage, water rights, contaminated well, basement flooding, drain tile underneath house, structural defects, artisan well underneath property, prior fire damage, tilting house, sewer connection charges, house insulated with urea formaldehyde insulation, defective earth-sheltered home, and flood damage. (29) C. PATENT AND LATENT DEFECTS

      Therefore, the question then becomes: what is considered a material fact necessitating disclosure to alleviate the seller against claims of fraud, concealment, or misrepresentation? At common law, sellers were only required to disclose "latent" or "hidden" defects, while "patent" or "non-hidden" defects were considered the responsibility of the buyer to observe through due diligence. (30) However, the latent defect exception to caveat emptor became blurred when courts began characterizing psychologically stigmatized property as a material fact due to its hidden nature, despite the purported defect having no bearing on the structural integrity of a residential property. (31)

    3. THE EROSION OF CAVEAT EMPTOR THROUGH CASE LAW

      In 1983, Reed v. King was the first case to hold stigmatized property to be a material defect due to its latent nature. (32) In Reed, a home was the site of five gruesome murders of a mother and her four children ten years prior to the sale of the home. (33) Although the buyer never specifically asked about any stigmatizing events occurring on the property, the seller purposely did not disclose the murders. (34) In fact, the seller went so far as to ask the neighbors not to inform the prospective buyer. (35) However, as the court quoted the words of Shakespeare, "it seems 'truth will come to light; murder cannot be hid long.'" (36) Such was the case when, after the purchase, a neighbor informed the buyer of the gruesome murders, and the buyer sued to rescind the contract. (37) For the first time, the court held that stigmatization of property could be a material fact despite there being no "physical defects or legal impairments to use." (38) In coming to this holding, the court reasoned that

      [t]he murder of innocents is highly unusual in its potential for so disturbing buyers they may be unable to reside in a home where it has occurred. This fact may foreseeably deprive a buyer of the intended use of the purchase. Murder is not such a common occurrence that buyers should be charged with anticipating and discovering this disquieting possibility. Accordingly, the fact is not one for which a duty of inquiry and discovery can sensibly be imposed upon the buyer. (39) However, the Reed court recognized that the floodgates to litigation based on "idiosyncratic grounds" may prove troublesome if the buyer is unable to establish a significant effect on market value due to undisclosed stigmatizing events. (40)

      In fact, Reed did pave the way for subsequent litigation regarding rescission of contracts based on stigmatized property. Eight years later, a case from New York resulted in another haunting holding for sellers in the real estate market. (41) In Stambovksy v. Ackley, the court permitted recession of a real estate contract, holding the seller was estopped from denying "as a matter of law, the house [was] haunted." (42) The seller claimed to have seen poltergeists in the home, and publicized these sightings in Readers' Digest. (43) The court recognized that the state strictly applied the rule of caveat emptor, and therefore could not award damages due to the seller's mere silence. (44)

      However, it was not the ghostly puns expressed in the court's opinion that were the cause of shrieks by those in the real estate market, but rather the court's ethereal holding. (45) The court logically reasoned that "if the doctrine of caveat emptor is to be discarded, it should be for a reason more substantive than a poltergeist." (46) The court expounded by stating that the purported hauntings were no more binding upon the seller than they were upon the court. (47) Similarly, the court held the buyer did not have a "ghost of a chance," in an action for fraudulent misrepresentation. (48) Despite this reasoning, the court contradicted itself when it determined it was "moved by the spirit of equity" and allowed the buyer to seek rescission of the contract and recover his down payment. (49) The court ridiculed the idea of...

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