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Last month, I wrote about how the Superior Court in Phelps v. Caperoon, 2018 Pa. Super. LEXIS 674 (June 18, 2018) concluded that a seller of a personal residence in Pennsylvania is still obligated to comply with the property disclosure requirements under Pennsylvania’s Real Estate Seller Disclosure Law (RESDL), 68 Pa. C.S. Section 7301-7315 even if the parties to the real estate contract agree that the property is being sold in “as is” condition.

In Phelps, for the first time, the Superior Court also outlined how courts in Pennsylvania should calculate “actual damages” under RESDL.

According to Section 7311(a) of RESDL, a seller who fails to comply with the statutory property disclosure requirements “shall be liable in the amount of actual damages suffered by the buyer as a result of a violation thereof.”

As a reminder from my article last month, according to the opinion in Phelps, after the buyer purchased the property, the buyer “discovered numerous deficiencies, including a deteriorated septic system requiring replacement; a cracked furnace heat exchanger; leaky roof; flawed electrical wiring; water damage from a never-connected washer drain; and various issues associated with the improper removal of load-bearing walls and heating ducts.”

At the bench trial, the buyer in Phelps argued that he suffered damages of almost $200,000 as a result of the seller’s violation of RESDL.

During the bench trial, a real estate appraiser testified on behalf of the buyer. According to the opinion, the real estate appraiser valued the property at “$200,000 with all of its issues and opined that the property would have been worth $325,000, had it been in average condition.”

Furthermore, another witness for the buyer during the bench trial estimated the cost to replace the property’s roof and beams was $60,318.30.

At the conclusion of a bench trial, however, the buyer was only awarded damages of $39,065.02 for the seller’s violation of RESDL with respect to “the defective roof and resulting water damage; and re-wiring of the electric which resulted in hidden junction boxes and open air splices.”

The buyer subsequently appealed the trial court’s ruling on the amount of his award to the Superior Court.

On appeal, the buyer claimed that the court miscalculated the damages which should have been due under RESDL and did not consider whether he was entitled to additional damages of almost $200,000 which represented consequential and difference-in-value damages under Skurnowicz v. Lucci, 798 A.2d 788, 795 (Pa. Super. Ct. 2002).

The question before the Superior Court was whether, under the RESDL, “damages are recoverable consisting of: the difference in value between the actual market value of the property at the time of the transaction and the higher price the buyer paid as a result of the seller’s failure to provide the statutorily required disclosures; and consequential damages, including the cost to replace a roof.”

The Superior Court first scrutinized the buyer’s reliance on Skurnowicz.

In Skurnowicz, the sellers provided a real estate disclosure statement disclaiming any knowledge of flooding issues with the property and, after the buyers took possession of the property, the property was flooded.

The Superior Court in Skurnowicz “stated that when the aggrieved party elects to not rescind the [underlying real estate sales] contract, it may recover damages equal to: the difference in value between the real, or market, value of the property at the time of the transaction and the higher, or fictitious, value which the buyer was induced to pay for it; and the consequential damages suffered in reliance on the defendant’s misrepresentation.”

As indicated by the Superior Court in Phelps, that panel of the Superior Court in Skurnowicz, “although summarizing the law for damages for a tort claim of fraudulent misrepresentation following a property transaction … did not address the definition of ‘actual damages’ for a RESDL violation,” as the buyers waived their argument on appeal.

Pointing out that RESDL does not define the term “actual damages,” the seller in Skurnowiczcountered that actual damages under RESDL should be defined as the lesser of two figures: the difference in market value, and the cost of repairs.

In making this argument, the seller cited to Gadbois v. Leb-Co. Builders, 458 A.2d 555 (Pa. Super. Ct. 1983).

In Gadbois, after the buyers purchased new homes from the builder, improperly working sewer disposal systems resulted in raw sewage flooding their homes. When the builder in Gadbois failed to fix the systems, the buyers sued the builder, raising claims of breach of implied warranty of habitability and negligence.

The Superior Court in Gadbois held that “the measure of damages in cases where a homeowner sues for defective construction is the difference between the market value of the house as constructed and the market value that the house would have had if constructed as promised, with the qualification that if it is reasonably practical to cure the defects in construction by repairs, and if the cost of repairs does not exceed the difference in market value, then the measure of damages is the cost of repairs.”

As the panel of the Superior Court in Gadbois also did not address what would be deemed “actual damages” for a violation of the RESDL, the Superior Court in Phelps elected to examine the legislative history of the RESDL for guidance.

While its review of the legislative history of RESDL admittedly did not shed much light on the intended meaning of “actual damages,” the Superior Court pointed out that the state legislature “noted that RESDL protects the purchasers of real property and ensures that both parties have some parity of knowledge regarding any issues with the property” and, “because of RESDL’s protective purpose, it must be liberally construed to achieve its remedial goal.”

The Superior Court in Phelps ultimately held that ‘actual damages’ under RESDL “for a violation of the requirement to produce a property disclosure statement may be determined by the repair costs, capped by the market value of the property.”

Lessons Learned

The Superior Court’s ruling in Phelps provides much-needed guidance on how attorneys representing sellers and buyers should address the issue of actual damages under the RESDL.

Under this newly enunciated damage analysis, sellers and buyers dealing with a lawsuit filed under RESDL must now obtain evidence of the amount it would cost to repair the alleged material defects with the property as well as how much such alleged material defects have reduced the fair market value of the property.

Reprinted with permission from the August 10, 2018 edition of The Legal Intelligencer © 2018 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.