Buyer Beware:

Your ability to recover damages in
commercial real estate transactions is limited.

by Todd M. Pfeil, Esq.

In Van Lare, the plaintiffs, Terry D. Van Lare and Norman J. Wachtl, entered into a written contract with Vogt, Inc., to purchase a 55-acre parcel of property containing a gravel pit in Waukesha County. The purchase agreement between Van Lare and Vogt, Inc., contained representations indicating that there were no underground storage tanks or any structural, mechanical, or other defect(s) of material significance affecting the property, including but not limited to, waste disposal materials. Additionally, there was d an “as-is” provision which stated: “Upon closing, Buyer accepts this property in ‘as-is’ condition and represents to Seller that their purchase of the property is made on the basis of their own investigation and testing.” Counsel represented both parties to the transaction, and Van Lare was provided with an opportunity to inspect the property prior to purchase.

Van Lare used the property to mine gravel and operate a landscaping business, however eight years after closing on the property, Van Lare attempted to develop the property for residential purposes. It was during this period that Van Lare learned construction debris, including concrete, asphalt, fencing material, PVC piping, pails, ropes, barrels, wood and other types of material had been buried on the property.

Van Lare filed suit against Vogt, Inc., alleging various tort claims including intentional misrepresentation, negligent misrepresentation and strict liability misrepresentation related to Vogt Inc.’s failure to disclose the buried waste. At trial, Van Lare chose to submit only the strict liability claim to the jury and acting on that theory, a verdict in favor of Van Lare in the amount of $375,000 was returned. On post verdict motions the circuit court ruled in Vogt Inc.’s favor and dismissed the case on the ground that the misrepresentation claim was barred by the economic loss doctrine. Van Lare appealed.

In approving the dismissal of the action against Vogt, Inc., the Wisconsin Supreme Court noted that although the economic loss doctrine was developed in cases involving defective products, courts have also applied it to transactions involving real estate. The Court concluded:

While we do not decide today whether…economic loss doctrine…covers all real estate transactions, we conclude that the economic loss doctrine may not be discarded simply because a transaction involves real estate. In this case we have a written, bargained for contract for the sale of commercial-use land between two sophisticated parties represented by counsel during the negotiation process. This is the kind of situation that is tailor made for the application of traditional contract law.

We can take the following from this case:

1. The application of the economic loss doctrine will not be limited to cases where the “product” in question is a manufactured product. Commercial real estate and potentially all real estate transactions will be considered a “product” for purposes of applying the economic loss doctrine. Thus, the remedy for a breach of a real estate contract will generally be limited to contract remedies.

2. Be mindful of the applicable statute of limitation for the action you want to bring. If you file your action after the statute of limitation period has run, you miss the opportunity to recover your losses.

3. A misrepresentation theory (tort action) generally will fail if you are attempting to use the theory to remedy what amounts to a breach of contract claim.

4. When negotiating a commercial real estate transaction assess whether you should third party inspection of the property before purchasing. In other words, assess the potential of future problems developing on the property and assign a value to the risk. An inspection of the property may be a cost effective way to mitigate potential risk.

This Van Lare decision emphasizes the need to negotiate your contracts carefully; be mindful of potential risks that could develop as a result of the contractual relationship; and, that Wisconsin courts will not allow a tort action to be brought where a contract action is appropriate.