In a unanimous decision handed down July 21, 2014, the Pennsylvania Supreme Court ruled that psychological stigma is not a material defect of real estate which sellers must disclose to buyers. The Court held that the occurrence of a 2006 murder/suicide in a suburban Philadelphia home did not constitute a "material defect" of the property itself, and thus the sellers' failure to disclose the event to the buyer of the house did not constitute fraud, negligent misrepresentation or a violation of Pennsylvania's Unfair Trade Practices and Consumer Protection Law ("UTPCPL").
In February 2006, Konstantinos Koumboulis shot and killed his wife and himself inside his house. The gruesome murder/suicide, witnessed by one of the couple's children, was highly publicized in the local media and on the internet. That September, Joseph and Kathleen Jacono purchased the home for $450,000 at an estate auction, where Joseph Jacono first learned of the tragic event from another auction attendee. After making repairs to the house, the Jaconos sold it to Janet Milliken nine months later for $610,000.
Milliken was moving back to Pennsylvania with her two children following the recent death of her husband in California, which also happened to occur in the family's home there. But when Milliken entered into an agreement of sale to purchase the Pennsylvania property, the Jaconos did not disclose the Koumboulis murder/suicide as a known "material defect" on their Seller's Property Disclosure Statement. Milliken allegedly learned of the event from a neighbor several weeks later. She claims that, had she known about the incident prior to closing, she would have never gone through with the purchase.
Milliken filed a complaint against the Jaconos and the real estate agents involved in the transaction, alleging a violation of Pennsylvania's Seller Disclosure Law, common law fraud, negligent misrepresentation, and a violation of the UTPCPL based on the Jaconos’ failure to disclose the murder/suicide. Upon motion of the Jaconos and the real estate agents, the trial court granted the moving parties summary judgment, finding as a matter of law the murder/suicide was not a material defect required to be disclosed by either the statutory Seller Disclosure Law or common law.
On appeal to the Superior Court, a three-judge panel initially reversed the decision of the trial court. But in a rare en banc reconsideration, the Superior Court ruled in December 2012 that "psychological damage" to a property cannot be considered a "material defect" required to be disclosed by a seller under the Seller Disclosure Law. In July 2013, the Supreme Court granted allocatur to determine whether the trial court erred in granting summary judgment to the Jaconos and the real estate agents only on the common law issues and the alleged violation of the UTPCPL. The Supreme Court denied any further review of the Superior Court's ruling on the Seller Disclosure Law (which still stands).
The basic question before the Supreme Court was whether Pennsylvania's common law requires a real estate seller to disclose a past murder/suicide to the buyer in order to avoid fraud or misrepresentation, even if the seller has no statutory duty to do so. The Court noted that the issue was one of first impression, but its holding is broad and not limited to the narrow consideration of disclosing only a murder/suicide. Rather, the Court extended its analysis to include all varieties of psychological stigma, holding that a real estate seller's non-disclosure of any psychological stigma cannot form the basis of a common law claim for fraud or negligent misrepresentation, or a violation of the UTPCPL.
The Court's rationale was based upon two primary considerations. First, the Court stated that the varieties of traumatizing events that could occur on a property are endless and that efforts to define those warranting mandatory disclosure would be a "Sisyphean task." Deaths by poisoning or overdose, violent crimes such as rape, assault, home invasion or child abuse—or even the occurrence of satanic rituals—were all examples considered by the Court, noting that the "possible fact patterns are endless and lead down a slippery slope — a slope we are not willing to descend."
The second basis for the Court's ruling speaks to the nature of real estate itself. Even if some people may not want to live in a house where disturbing events have occurred, "this does not make the events defects in the structure itself. The occurrence of a tragic event inside a house does not affect the quality of the real estate, which is what seller disclosure duties are intended to address" (emphasis added). Accordingly, absent direct inquiry from the buyer, a seller has no common law duty to disclose to the buyer any psychological stigma associated with the property.
It is important to note that Milliken v. Jacono arose from a residential transaction. But the Supreme Court's limiting of a seller's disclosure duties under the common law applies also to commercial transactions. Even though similar duties under the Seller Disclosure Law are imposed only on sellers transferring properties consisting of one to four residential units, Pennsylvania's common law does not distinguish between residential and commercial transactions. A commercial seller, therefore, can be liable if the buyer suffers losses directly resulting from the buyer's justifiable reliance upon any false material representation made by the seller—or upon the seller's failure to disclose information material to the transaction.
While psychological stigma cannot be presumed to be material to a transaction, a buyer can make disclosure of it material by raising the issue—even in a commercial context. Whether such disclosure is "material" to a real estate transaction is generally determined by whether the buyer and seller have negotiated an item or have reduced its terms to writing in a purchase and sale contract. Over time, Pennsylvania courts have lessened the harsh standard of caveat emptor by presuming as a matter of law that certain disclosures are material to any transaction—for example, if dangerous conditions are known to exist on the seller's property. It is therefore important for sellers to understand their duties of disclosure under the common law and for buyers to raise any matter of importance to the transaction. After the Supreme Court's decision in Milliken v. Jacono, however, buyers can no longer assume that sellers have any duty to disclose past gruesome or traumatizing events occurring on the property. Buyer always beware.