Seller Beware?

or Caveat Venditor?
In re Estate of Gattis, Residential Property Sellers, and the Economic Loss Rule

It is not always the buyer who is at risk in a real estate transaction.

The Economic Loss Rule (“ELR”) was adopted by the Colorado appellate courts in an attempt to clarify the often murky waters between the battleships of tort and contract law.  Unfortunately, the courts’ formulation has long been a source of confusion to construction law practitioners.  The Colorado ELR states that a party who suffers only economic loss from the breach of a contract may seek redress for such breach in contract only, and may not assert a tort claim unless the breaching party owed a duty of care independent of the duties laid out in the contract.  Put differently, whether a tort claim is precluded by the ELR depends on the source of the duty being breached — in order to recover in tort, the plaintiff must prove the breach of a duty separate from any duties imposed by the contractual relationship between the parties.  See, generally, Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256 (Colo. 2000); A.C. Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862 (Colo. 2005); BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004).

In November 2013, the Court of Appeals handed down In re Estate of Gattis, further clarifying the parameters of the ELR.  318 P.3d 549 (Colo. App. 2013).  The Court held that sellers of residential property owe an independent duty to disclose latent defects to the potential homeowners, and this duty exists independently of any disclosure terms included in the real estate contracts.  The result is that the ELR is inapplicable in such cases and a homeowner may sue either in tort or in contract, or both.  While Colorado courts had previously imposed this independent duty on home builders, Gattis extended this duty to residential sellers as well.

In Gattis, the Court further held that a seller’s independent duty to disclose defects was not subsumed by the standard form purchase and sale agreement. On the contrary, even had the form contracts not required disclosure, the sellers had a common law duty to disclose the existence of latent property defects independent of their contractual relationship with the buyers.

The policy considerations outlined by the Gattis court evidence a growing protective instinct towards homeowners, who are traditionally seen as less sophisticated than builders or sellers of residential properties, and whose claims against construction professionals the courts are increasingly hesitant to bar.  While it remains to be seen just how broadly the case will be interpreted, Gattis may well be considered a herald of a limiting of the ELR in construction cases as well as of a change in policy considerations coming from Colorado benches.