Homebuyers Third Party Beneficiaries in Sale of Home

March 15, 2013 | Erika Eckley

In order to sue for breach of contract, a claimant must be a party to the contract, be an intended beneficiary of the contract, or have sufficient privity with the other party to the contract. Without this, the claimant does not have sufficient rights to the outcome of the contract to bring a claim.

In this case, the defendant contracted with a sales company for the sale of their home. As part of the agreement, the defendant completed a disclosure form listing any known issues with the home and agreed to hold the sales company harmless for any misrepresentations or claims arising from the disclosure form. The company sold the home to the plaintiffs who received a copy of the defendant’s disclosure form and conducted a home inspection. The plaintiffs contracted with the company to purchase the home. After the sale was completed, the plaintiffs discovered the home had suffered water damage, mold and other problems that had not been disclosed.

The plaintiffs sued the defendant for breach of contract, fraud, negligent misrepresentation, civil conspiracy and rescission. The trial court granted summary judgment in favor of the defendant finding there was no privity of contract between the defendant and the plaintiff because the contract for the sale was actually between the plaintiffs and the company.

The plaintiffs appealed. The Court of Appeals reversed, determining the plaintiffs were third-party beneficiaries of the contract between the sales company and the defendant for the option to sell the house. The court held that the plaintiffs did not have to be specifically named in the contract because they were “potential buyers”, which was a designated class that was identifiable as a benefitted person of the contract. Because they were third party beneficiaries of the contract, they could sue to enforce the requirement that the defendant disclose all information about the property.

The court also noted the defendant’s disclosure form was incorporated by reference into the contract between the plaintiffs and the sales company. The court relied on Osterhaus v. Toth, 187 P.3d 126 (2008), in finding that the defendant’s disclosure statement was incorporated to inform the plaintiff about the condition of the house and place liability for the condition of the house on the defendants.  Thus, the contract between the sales company and the plaintiffs provided the required privity between the plaintiffs and the defendant.

Because privity existed, the court held that it was error for the trial court to grant summary judgment for the defendant and reversed the decision. The court held that the Osterhaus case made it clear that the plaintiffs’ reliance on the disclosure form established the reasonable reliance necessary for a fraud claim. The court also rejected any argument that the plaintiffs’ waived their rights to rely on the disclosure through the “Buyer Beware” or the “As is” clauses in the sales contract. This was also clearly stated in the Osterhaus case. The court remanded the case to determine whether the inspection that was conducted should have revealed the undisclosed defects.

The court did uphold the trial court’s dismissal of the plaintiffs’ claim for conspiracy because there was no evidence to establish any meeting of the minds between the defendant and real estate agent to establish a conspiracy. The Court also upheld the dismissal of the plaintiffs’ rescission claim because the plaintiffs failed to give prompt notice of their intent to rescind and they maintained possession of the home and made repairs.

Home-buyers should always have an inspection done before closing on the home, but this case makes clear that home-buyers can reasonably rely on the previous owner’s requirement to truthfully disclose latent defects in the home. The ability to enforce this requirement inures to the buyer even when a sales company acts as an intermediary to the sales process.Kincaid v. Dess, No. 107,970, 2013 Kan. App. LEXIS 14 (Kan. Ct. App. Mar. 8, 2013).