The Pipes, The Pipes Are . . . Frozen! (Or, Who Is Liable For Property Damage While Home Buyer And Home Seller Wait For The Final Check To Clear?)

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Frozen pipe (pd)Although the temperature today is supposed to reach 90 degrees, this post is about frozen pipes. More specifically, pipes in a house that is under contract for sale that freeze and cause property damage after the scheduled, but not completed, closing, but before the buyer takes possession of the home. In a case like that, who is liable for the damage?

In Bianchi v. Ladjen, plaintiff was under contract to buy a home. It was an all cash sale, no mortgage was involved. The closing was scheduled for New Year's Eve. Plaintiff performed a walk through on the morning of the closing and reported no damage to, or issues with, the home. The closing could not be completed as scheduled, however, because plaintiff did not wire the balance of the purchase price to the title company prior to the closing as he had been instructed to do. Instead, plaintiff brought a certified check to the closing. As a result, the parties entered into an escrow agreement, which provided that the title company would hold  "all closing proceeds" and the "Deed & Keys" in escrow until the check cleared.

This is where it gets tricky.  

The home had a steam heat system requiring water to be supplied to the furnace for it to function. As the court noted: "During periods of cold water, the water supply to the furnace needed to be manually replenished periodically." In addition, the furnace had two on/off switches, one on the furnace and one on a nearby stairwell wall. The heat was working when plaintiff conducted his walk through on the morning of the scheduled closing.

After the scheduled New Year's Eve closing was adjourned, plaintiff did not enter the house again until January 7th, the same day he picked up the keys from the title company. When he arrived, he "saw ice outside of and throughout the dwelling." He claims that he went to the basement to turn the water off and found that "the lid to the furnace was off, and the switch, the electrical main shutoff switch, was off." The loss of heat had caused the pipes to freeze, which damaged the home.

Plaintiff sued sellers, the title company, and his lawyer. All three successfully moved for summary judgment. Plaintiff appealed each, but this post focuses only on plaintiff's claims against the sellers and his appeal of the trial court's decision on the sellers' summary judgment motion, which was affirmed by the Appellate Division.

The Appellate Division observed that the issue on appeal involved several provisions in the sales contract, all of which referenced "the closing," but none of which defined that term. For example, the sale contract included a "customary" term found in the "Standard Form of Real Estate Contract promulgated by the New Jersey Association of Realtors," which provided: "The risk of loss or damage to the Property by fire or otherwise, except ordinary wear and tear, is on the Seller until the Closing."  Other provisions contained representations from the sellers, including that "all heating systems now work and shall be in proper working order at the time of Closing." Other provisions made clear, however, that seller's representation about the property did not survive "closing of title," and that sellers did not guarantee the condition of the property "after the deed and affidavit of title [were] delivered to the Buyer at the Closing."

So, the question for the Appellate Division was: When did the closing occur? The scheduled closing date when all relevant documents were exchanged? The date plaintiff's check cleared? The date plaintiff picked up the keys from the title company? Some other date?

The trial court held that the closing occurred on the scheduled date because that was when "title had passed with the sellers' execution of the deed." Thus, the sellers were not liable for any damage to the property after that date. The Appellate Division disagreed, observing that, "[i]f, for some reason, the [buyer's] checks did not clear through the banking system and the purchase funds were not duly transferred, the transaction would not have been consummated and title would have remained with the sellers." Therefore, the closing was not complete on New Year's Eve, and "the risk of loss on the premises continued with the [sellers] through the point in time when the checks for the purchase cleared."

Unfortunately for plaintiff, this did not help his cause because the Appellate Division held that plaintiff's checks cleared on January 2nd, several days before plaintiff returned to the home and found the property damage. Therefore, the "closing" was complete on January 2nd.

In reaching this conclusion, the Appellate Division rejected plaintiff's testimony that the title company only confirmed that his check had cleared on January 6th, and that he could not, therefore, get the keys to the home until January 7th, the same day he discovered the property damage. This version of events was corroborated by plaintiff's counsel, who also testified that he did not learn that the check had cleared until January 6th, when he spoke with someone from the title company.

But the real estate agent, who was acting as a dual agent on the deal, testified that she texted plaintiff on January 2nd and January 4th, asking him if he wanted her to pick up the keys, thus suggesting that the check had cleared on January 2nd. The texts were included in the record before the trial court. In addition, the title company paid the agent her commission on January 2nd, which it could not have done before the check cleared.

Finally, after plaintiff returned to the home on January 7th and discovered the property damage, he contacted the real estate agent to find out if the sellers had turned off the furnace. She confirmed that they had not, and then texted plaintiff: "I would be very angry with my attorney if I were you because he's lying to you if he told you we only closed today. Everything was closed and finalized last Thursday [January 2, 2014]. You should have had the keys and been checking on that house. I would have been doing it for you if I picked them up Thursday." All of this evidence confirmed that the checks had cleared on January 2nd, which was the date the "closing" was complete.

Thus, even though the Appellate Division held that the closing occurred on January 2nd, when the checks cleared and title transferred to the buyer, instead of New Year’s Eve, as the trial court had held, it was not enough to save the buyer’s claims against the sellers for the property damage that he discovered on January 7th.

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