You’ve bought some vacant land—perhaps to build a new home on, to hold as an investment, or for a future vacation home—and you discover that the seller has acted fraudulently in the course of the transaction. For example, the seller may have failed to disclose that the land was the site of toxic dumping or that there’s a public easement allowing people to walk straight through the area you planned to build on, or you may have received notices from contractors about past unpaid bills for work done there. What are your most likely remedies?
You spent a lot of time and money on that purchase and sale agreement. If it was well crafted, many of its provisions anticipated the possibility of fraud, and bind the seller even after the closing. Those protections will likely include representations, warranties, or covenants about good title and the condition of the land and other matters which, if the seller did not disclose, might have affected the value of the land or rendered it unusable.
Here are the clauses of your purchase and sale agreement to take a particularly close look at:
Title. Your agreement should contain language about how you were receiving good and marketable title to the land. Good and marketable title means that the land was free of any undisclosed claim, like a mechanics’ lien; that no zoning or other provisions were in place that might materially affect uses of the land (such as to build a home on); that, if the land was currently burdened by a mortgage or other debt, the seller would discharge these at the closing; and that, if existing easements or restrictions affected the land, they wouldn’t prevent you from occupying it as you intended, using it as collateral for a mortgage loan, or reselling it in the future.
If, after the closing, you discover that the seller didn’t deliver good title, you can sue the seller for damages if the “cure” for the title defect can be reduced to a monetary value, such as in a case where an undisclosed easement runs over a corner of your land). You might also be able to sue for rescission (canceling of the entire deal), which would probably be your best option in a situation where, for example, the easement runs right through the middle of your land, preventing you from building on it. You needn’t prove the seller’s fraudulent intention in order to succeed in such a lawsuit. Assurances of good title cover all misrepresentations, whether fraudulent or not.
Condition of the Land and Other Representations and Warranties. Your purchase and sale agreement should also contain a seller representation stating that the condition of the land at the closing was the same as when you completed your investigation of the property. It will contain representations and warranties about hazardous wastes and other materials, endangered species or habitats, access to public roads, and other site conditions. Additional representations and warranties might address the seller’s capacity to enter into the purchase and sale agreement and the absence of any litigation or other proceeding that might affect the land.
Seller’s representations and warranties that title to the land is good and marketable and that the land is in good condition will cover most kinds of seller fraud. You can potentially recover damages, or even rescind the purchase, under these provisions of your purchase and sale agreement. Your main challenge will be to prove that, in fact, the seller’s representation or warranty was false; the seller’s fraudulent intention is not at issue. You will bear the cost of the resulting litigation; if the litigation turns on complicated issues of fact (was the material covertly dumped on the land actually hazardous? Does the public actually have a right to cross your land to reach the nearby ocean?) you may need to hire professionals who are expert in the area of your claim.
Your title insurance policy provides you with an even better remedy. Buyers of vacant land typically obtain title insurance when their lawyer searches title before the closing. Title insurance covers title defects that were not disclosed at the closing. deliberately or otherwise, such as an undisclosed right of the public to cross the land to reach a nearby beach or a lien placed on the land by a soils engineer whom the seller never paid for soils testing.
If you bought the land with bank financing, the bank will have insisted on title insurance with itself named as the beneficiary. You, in turn, will have likely asked the title company to extend its coverage to you by paying a modest increase in the title insurance premium. Claiming under a title insurance policy is a whole lot less expensive than litigation. Typically, you and your bank file claims with the title insurance company, which then evaluates the economic value of the loss to the bank (impaired collateral) and to you (reduction of the value of your land) and reimburses you accordingly. In return, the title insurance company gets the right to pursue the seller for damages and bears the full cost of the resulting litigation.
In the absence of relevant provisions in your purchase and sale agreement or title insurance policy, the general rule caveat emptor (“Let the buyer beware!”) applies to purchases of undeveloped land. At the closing, a buyer takes the land “as is.”
However, fraud, defined as intentionally deceitful or misleading words or actions that wrongfully benefit the perpetrator of the fraud at the personal or monetary expense of another, is an exception to this rule. Although more difficult than suing under a representation or warranty in a purchase and sale agreement, a buyer who can prove that a seller committed fraud can sue to recover money damages or even rescind the sales contract, depending on the scope and nature of the fraud and its resulting harm.
Many states have consumer protection statutes that provide remedies for purchasers of vacant land who have been defrauded by a seller, especially sellers who are actively engaged in the real estate business.
If you bought a piece of vacant land and think that you’ve been defrauded by the seller, check with your state’s consumer protection bureau, agency, or commission to see if you have additional remedies beyond those provided by your purchase and sale agreement.