Limitations On Sellers’ Warranties In Real Estate Transactions

By Stephanie Monroe Wilson

I.    INTRODUCTION.

The standard Arizona real estate purchase contract contains the following in the warranty section: “Seller warrants that Seller has disclosed to Buyer and Broker(s) all material latent defects and any information concerning the Premises known to Seller, excluding opinions of value, which materially and adversely affect the consideration to be paid by Buyer.”  After a purchase of a home, if a buyer discovers that the seller did not disclose material information or misrepresented information about the property, a buyer may consider bringing a lawsuit against the seller for breach of contract. Real estate attorneys often also argue that regardless of potential disclaimers in the contract which require buyers to verify information, that an affirmative representation by a seller or the seller’s agent of a material fact overrides a disclaimer. However, an Arizona Court of Appeals case, Elm Retirement Center, LP. v. Callaway, 226 Ariz. 287, 246 P.2d 938 (Ariz. App. 2010) establishes limits on reliance on the warranty provision. This article summarizes that case.

II.       LEGAL ANALYSIS BY THE COURT OF APPEALS.

Elm Retirement Center, LP contracted to purchase a Scottsdale home in 2005.  Elm alleged that in entering into the contract, it relied on an advertisement stating the home has 3,792 square foot of living space.  After the purchase, Elm alleges that it discovered that the home contained only 3,605 square feet and that the difference from the advertised square footage was material.  Elm filed suit in April 2009 against the seller and the seller’s Broker alleging breach of contract, among other claims, based on the difference in the square footage from the representation made in the advertisement.

The purchase contract contained the warranty provision as quoted above. Elm argued in its complaint that the sellers breached the warranty provision when they identified the home square footage as 3,792 square feet in writing in the advertisement.  The Superior Court dismissed Elm’s breach of contract claim and the Court of Appeals agreed.

The Court of Appeals, in reaching its ruling, relied on a subsection of the contract titled Inspections, which indicates that the buyer acknowledges the benefit of and the right to have performed, at its own expense, more than a dozen different tests and surveys to determine the value and condition of the premise. In that section was the following provision in bold face type (hereinafter referred to as the Verification Provision):

BUYER IS AWARE THAT ANY REFERENCE TO THE SQUARE FOOTAGE OF THE PREMISES, BOTH THE REAL PROPERTY (LAND) AND IMPROVMENTS THEREON, IS APPROXIMATE.  IF SQUARE FOOTAGE IS A MATERIAL MATTER TO THE BUYER, IT MUST BE VERIFIED DURING THE INSPECTION PERIOD.

The Court of Appeals held that the Verification Provision barred Elm’s claim. The Court of Appeals held that the general warranty provision must give way to the parties’ specific agreement set forth in the Verification Provision.  The Court of Appeals also provided an analysis of general contract interpretation holding because a specific contract provision expresses the parties’ intent, more precisely then a general provision. The specific provision would qualify the meaning of the general provision and that parties who contract can agree to limit their respective liabilities or remedies under a contract.  The Court of Appeals held that the sellers’ representation about the square footage of the home in the advertisement necessarily falls within the broad reach of the phrase “any reference to the square footage of the premises” in the Verification Provision. Thus, pursuant to that provision, Elm agreed that any such representation made by the sellers, or on their behalf, was only approximate. If square footage was material to Elm, the obligation to verify the square footage lies with Elm.  Based on the analysis, the Court of Appeals held the Verification Provision constituted a disclaimer of liability for any representation by the sellers as to the square footage of the property. The Court further concluded that to give meaning to the Verification Provision of the contract that they must conclude that it effectively prevents any representation by the sellers of the square footage of the home from constituting a warranty of the size of the premises.

Elm argued that affirming the dismissal of its claims would mean that no seller would be compelled to comply with purchase contracts or common law requirements a truthful disclosure regarding square footage and that no buyer could pursue a lawsuit where a seller and the seller’s real estate agent agreed to falsely misrepresent and hide the square footage of the house.  In response, the Court of Appeals disagreed stating that they “merely hold that when the contract contains no express warranty of square footage and to the contrary, expressly warns the buyer to verify any representation about square footage, the buyer may not state a claim for breach of warranty based on an alleged astringent statement by the seller about the size of the property.”     While the Court of Appeals did not agree that their ruling would essentially eliminate liability for a seller or a seller’s agent who makes a statement about square footage that is likely the result in most residential transactions.

III.    CONCLUSION.

The standard real estate purchase contract is used in most sales, and that standard contract contains the verification provision. This is important for buyers to understand, but also buyer’s agents for providing proper advice to their clients in a transaction that involves, for example, square footage, or similar material facts.