Buying a home is the largest single financial decision most consumers make and legislation approved by the State Senate on February 24 will take some of the uncertainty out of the process for Wisconsin homebuyers. Senate Bill 9, introduced in January by Senators David Hansen (D-Green Bay) and Jon Erpenbach (D-Waunakee), would reverse a Wisconsin Supreme Court decision and restore a legal remedy for home buyers for intentional misrepresentation made by a seller concerning the condition of property.

The State Bar’s Real Property, Probate & Trust Section recently voted to support the bill, as well as AB 6, an identical bill introduced by Rep. Mark Radcliffe (D-Black River Falls).  (Senate Bill 9 received final passage in the State Senate on Tuesday, February 24, and now advances to the Assembly for legislative action.)

Buyers have always been advised to “beware,” but a July 2008 ruling by the Court makes caution an especially high priority for Wisconsin homebuyers. In Below v Norton (2008 WI 77), the Court determined that the economic loss doctrine (ELD) bars certain claims for damages due to intentional misrepresentations that occur in the context of residential real estate transactions.

Sellers are required by Ch. 709 Wisc. Stats. to provide a Real Estate Condition Report (RECR) to prospective buyers. Previously, sellers who misrepresented or concealed the condition of the home in a RECR could be sued for intentional misrepresentation and could face both compensatory and punitive damages. The potential punitive damages, in particular, created an incentive for sellers to be honest about providing a complete and accurate RECR.

In this case, the sellers of a home completed a property condition report indicating that they were not aware of any problems with their home’s plumbing. After buying the property, however, the purchasers discovered a broken sewer line and commenced an action in circuit court to recover damages, alleging common law misrepresentation, false advertising and causing property damage by criminal failure to disclose. The sellers responded that the ELD precludes misrepresentation claims in residential real estate transactions and the courts agreed.

The ELD generally holds that claims for damages cannot be brought in disputes regarding contracts for goods or services (the court had previously determined that a residential real estate transaction is included under this doctrine). Because the property condition report was a part of the real estate contract, the ELD effectively bars the buyer from asserting intentional misrepresentation as the basis for a claim.

The court noted in its decision that purchasers in this type of situation are “not left without a remedy” because other state laws are available to address contractual misrepresentation. However, these laws offer less protection to buyers because sellers are subject only to compensatory – not punitive – damages. Thus, sellers who misrepresent the condition of their home could only be compelled to pay for repairs that should have been done in the first place (plus court costs and some legal fees), creating less of an incentive for sellers to be completely honest with buyers.

If enacted, SB 9 will better protect homebuyers by providing that, in addition to any other remedies that are available, a buyer in a residential real estate transaction may maintain an action in tort against the seller for fraud committed, or an intentional misrepresentation made, by the seller in the residential real estate transaction. The bill defines a residential real estate transaction as a real estate transfer for which a RECR is required.

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The State Bar of Wisconsin establishes and maintains sections for carrying on the work of the association, each within its proper field of study defined in its bylaws.  Each section consists of members who voluntarily enroll in the section because of a special interest in the particular field of law to which the section is dedicated.  Section positions are taken on behalf of the section only.

The views expressed on this issue have not been approved by the Board of Governors of the State Bar of Wisconsin and are not the views of the State Bar as a whole. These views are those of the Section alone.