By: Peggy Kirk Hall, Attorney and Director, Agricultural & Resource Law Program
“Do your due diligence” is the lesson learned from a recent Ohio appeals court decision in a case alleging that a seller fraudulently induced a buyer in a real estate transaction. The Seventh District Court of Appeals rejected the buyer’s claim, stating that the doctrine of caveat emptor or “let the buyer beware” negated the fraudulent inducement argument because it placed a duty on the buyer to examine all “conditions open to observation.” The court reasoned that the buyer could not blame the seller for fraud because the buyer had the duty to examine public records that provided accurate information about the property.
The case
The conflict arose from the purchase of 143 acres of land in Belmont County, negotiated by two attorneys representing the parties. The buyer was present throughout the negotiations and read all of the e-mail correspondences between the two attorneys. The parties agreed to a purchase agreement, the buyer ordered a title search for the property, and the purchase took place. The buyer later learned, however, that a third party held an easement and right-of-way on the property. The easement allowed surface activities such as locating pipelines and well pads and restricted some development activities by the buyer.
After learning of the easement, the buyer filed a lawsuit claiming fraudulent inducement by the seller. A fraudulent inducement claim arises when someone uses a misrepresentation to persuade another to enter into an agreement. The buyer argued that the seller was fraudulent because the seller’s attorney never mentioned the easement during the purchase negotiations. The trial court agreed and determined that through misstatements and concealment, the seller had committed fraud that was “aggravated, egregious and/or reckless.”
The Court of Appeals disagreed. The court explained that, despite the seller’s actions, the doctrine of “let the buyer beware” obligated the buyer to investigate and examine “discoverable conditions” about the property. The easement was discoverable, as it had been recorded in the county public records. Because the easement information was readily available and the buyer had the opportunity to investigate it, the buyer could not successfully claim fraudulent concealment, the court concluded. According to the court, the buyer could not justify reliance on the seller’s omissions about the easement when the easement itself was a public record that was available to the buyer.
What does this decision mean for property transactions?
We’re back to “do your due diligence.” For property purchases, due diligence is the process of investigating and evaluating the property before finalizing the sale. A purchase agreement should include adequate time for due diligence after initial terms are agreed upon. During the due diligence period, a buyer can take a number of actions to evaluate whether or how to proceed with the purchase, such as:
- Complete visual and physical inspections of the land and buildings.
- Verify who holds ownership interests in the property.
- Determine if there are any easements, deed restrictions, covenants, severed mineral rights, pipelines, leases or other types of legal interests and limitations.
- Identify zoning and access regulations that apply to the property.
- Investigate environmental issues.
- Identify availability of water and utilities.
Additional inquiries might be necessary, depending on the type and intended use of the property. Hiring an attorney and other professionals can ensure that due diligence is thorough and tailored to the type of property at issue.
The time and cost of due diligence might be painful, but the doctrine of “let the buyer beware” demands it. As the Court of Appeals stated, “a seller of realty is not obligated to reveal all that he or she knows. A duty falls upon the purchaser to make inquiry and examination.”