B-135684, APRIL 22, 1958, 37 COMP. GEN. 700

B-135684, APRIL 22, 1958, 37 COMP. GEN. 700

PROPERTY - PUBLIC - DAMAGE, LOSS, ETC. - DAMAGE OCCURRING AFTER EXECUTION OF SALE CONTRACT - ORAL WARRANTY EFFECT AN ORAL WARRANTY WHICH WAS GIVEN BY A REAL ESTATE BROKER, PURSUANT TO INSTRUCTIONS FROM A GOVERNMENT PROPERTY OFFICER, GUARANTEEING THE OPERATING CONDITION OF THE PLUMBING, ELECTRICAL, AND HEATING EQUIPMENT IN A HOUSE, BEFORE THE EXECUTION OF THE SALE CONTRACT WHICH EXPRESSLY PROVIDES THAT THE PURCHASER HAS EXAMINED THE PROPERTY AND WILL NOT MAKE ANY CLAIM AGAINST THE SELLER FOR ANY DEFICIENCY OR IMPERFECTION IN THE PHYSICAL CONDITION, IS WITHOUT EFFECT TO BIND THE GOVERNMENT FOR COSTS OF REPLACING A HEATER WHICH WAS DISCOVERED TO BE DEFECTIVE SHORTLY AFTER EXECUTION OF THE CONTRACT BUT BEFORE THE SALE WAS CLOSED.

TO LESTER H. THOMPSON, FEDERAL HOUSING ADMINISTRATION, APRIL 22, 1958:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 27, 1958, TRANSMITTING VOUCHER AND SCHEDULE OF PAYMENTS ( BUREAU SCHEDULE NO. 3027 AND BUREAU VOUCHER NO. 46,365) FOR $82, IN FAVOR OF BRANNON BROTHERS REAL ESTATE AND INSURANCE AGENCY, AND REQUESTING A DECISION AS TO WHETHER THE VOUCHER MAY BE CERTIFIED FOR PAYMENT. THE AMOUNT CLAIMED REPRESENTS THE PURCHASE PRICE OF A WATER HEATER PURCHASED BY THE PAYEE AS MANAGING AGENT AND BROKER UNDER CONTRACT NO. 1072-3 FOR THE MEADOWBROOK 1METROPOLIS PROJECT AS A REPLACEMENT FOR THE WATER HEATER IN THE DWELLING LOCATED AT 513 WEST 20TH STREET ( FHA CASE NO. 913-60405). THIS REPLACEMENT WAS ACCOMPLISHED ON DECEMBER 29, 1956, FOLLOWING THE ACCEPTANCE OF AN OFFER FOR THE PURCHASE OF THE DWELLING SUBMITTED BY FRED SCHWARTZ AND ALEEN SCHWARTZ. ARTICLE 6 OF THE BROKER'S CONTRACT AUTHORIZES THIS FIRM TO PROCURE AT PROJECT EXPENSE SUCH SUPPLIES, MATERIALS, EQUIPMENT, AND SERVICES (OTHER THAN PERSONAL) AS MAY BE NECESSARY FOR THE MAINTENANCE, REPAIR, AND OPERATION OF THE PROJECT WHERE THE COST DOES NOT EXCEED $1,000, IT BEING SPECIFIED, HOWEVER, THAT SUCH AUTHORITY MUST BE EXERCISED IN STRICT ACCORDANCE WITH WRITTEN INSTRUCTIONS AS ISSUED FROM TIME TO TIME BY THE GOVERNMENT.

THE SALES CONTRACT ENTERED INTO ON NOVEMBER 23, 1956, BETWEEN MR. SCHWARTZ AND THE FEDERAL HOUSING COMMISSIONER BY THE FORMER DIRECTOR IN SPRINGFIELD, ILLINOIS, RECITES THAT---

THIS CONTRACT CONTAINS THE FINAL AND ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO AND THEY SHALL NOT BE BOUND BY ANY TERMS, CONDITIONS, STATEMENTS, OR REPRESENTATIONS, ORAL OR WRITTEN, NOT HEREIN CONTAINED.

THE ABOVE DOCUMENT FURTHER RECITES THAT "THE PURCHASER HAS EXAMINED SAID PROPERTY AND WILL ACCEPT THE PROPERTY IN ITS PRESENT CONDITION, EXCEPT FOR REPAIRS AND/OR IMPROVEMENTS SPECIFIED ON THE RESERVE HEREOF.' NO REPAIRS OR IMPROVEMENTS ARE SPECIFIED ON THE REVERSE SIDE, BUT INSTEAD AN AMENDMENT TO THE ABOVE SALES CONTRACT, DATED NOVEMBER 26, 1956, APPEARS THEREON AS FOLLOWS:

THE PROVISO REQUIRING "THAT THE PURCHASER HAS EXAMINED SAID PROPERTY AND WILL ACCEPT THE PROPERTY IN ITS PRESENT CONDITION" IS AFFIRMED AND THE PURCHASER WILL MAKE NO CLAIM AGAINST THE SELLER FOR ANY DEFICIENCY OR IMPERFECTION IN THE PHYSICAL CONDITION OF SAID PROPERTY.

A NOTATION ON THE PURCHASE OFFER REPORT AND REQUISITION ( FHA FORM NO. 2530) INCIDENT TO THE SCHWARTZ- OFFER SUBMITTED TO THE PROPERTY MANAGEMENT DIVISION IN WASHINGTON UNDER DATE OF DECEMBER 3, 1956, STATES THAT THE PROPERTY IS SOLD " AS IS.' THE RECORD DISCLOSES THAT THE INVOLVED SALE WAS CLOSED BY THE ADMINISTRATION ON JANUARY 3, 1957.

IT IS FURTHER REPORTED THAT AT THE TIME OF THE EXECUTION OF THE SALES CONTRACT THE FHA INSURING OFFICE IN SPRINGFIELD, IN ACCORDANCE WITH AN UNDERSTANDING PREVAILING AT THAT TIME WITH THE DIRECTOR OF THE PROPERTY MANAGEMENT DIVISION, VERBALLY AUTHORIZED THE BROKER TO WARRANT TO THE PURCHASERS THAT THE PLUMBING, ELECTRICAL, AND HEATING EQUIPMENT WERE IN OPERATING CONDITION. YOU POINT OUT THAT THIS WARRANTY WAS NOT INCLUDED IN THE SALES CONTRACT; THAT IT WAS NOT AMENDED TO INCLUDE SUCH WARRANTY; AND THAT THE ADMINISTRATION HAS BEEN UNABLE TO ESTABLISH WHETHER THE WATER HEATER WAS IN OPERATING CONDITION ON THE DATE THE CONTRACT WAS EXECUTED. YOU STATE, HOWEVER, THAT AFTER THE EXECUTION OF THE SALES CONTRACT ON NOVEMBER 23, 1956, AND PRIOR TO THE CLOSING OF THE SALE ON JANUARY 3, 1957, THE PURCHASER WAS PERMITTED TO ENTER THE PROPERTY (WHICH WAS VACANT) FOR CLEANING PURPOSES; THAT THE PURCHASER HAS REPORTED THAT WHILE AT THE TIME THE SALES CONTRACT WAS EXECUTED THE WATER HEATER WAS APPARENTLY IN OPERATING CONDITION, IN 2 OR 3 DAYS AFTER THE GAS WAS TURNED ON IT BEGAN TO LEAK BADLY; THAT AFTER EXAMINATION, IT WAS CONCLUDED THAT THE WATER HEATER COULD NOT BE REPAIRED; AND THAT THE MATTER WAS THEN REPORTED TO THE BROKER AND THAT THE BROKER'S FIRM AUTHORIZED HIM TO HAVE THE WATER HEATER REPLACED AT THE EXPENSE OF THE ADMINISTRATION.

IT IS STATED THAT THEREAFTER ON DECEMBER 29, 1956, A NEW WATER HEATER, PURCHASED BY THE BROKER FOR $82, WAS INSTALLED IN THIS BUILDING; THAT THE BROKER CONSIDERED SUCH EXPENDITURE AS AN OPERATING EXPENSE; THAT ACCORDINGLY, ON JANUARY 30, 1957, THIS FIRM PAID FOR THE HEATER OUT OF PROJECT FUNDS AND SUBMITTED THE RECEIPTED PAID INVOICE WITH ITS JANUARY 1957 REPORT OF DISBURSEMENTS; THAT AN EXCEPTION TO SUCH PAYMENT WAS TAKEN BY YOUR OFFICE FOR THE REASONS STATED IN YOUR LETTER; AND THAT SUBSEQUENTLY THE AMOUNT OF $82 WAS COLLECTED FROM THE BROKER BY DEDUCTING THIS SUM FROM A SUBSEQUENT VOUCHER SUBMITTED BY THEM.

YOU STATE THAT NEITHER THE BROKER NOR THE PURCHASER FEELS THAT THEY SHOULD BE HELD RESPONSIBLE FOR THIS EXPENDITURE SINCE THE BROKER WAS ADVISED VERBALLY BY THE FORMER DIRECTOR OF THE SPRINGFIELD OFFICE TO GUARANTEE THE PLUMBING, FURNACE, AND OTHER FACILITIES TO BE IN GOOD CONDITION AND THAT ANY NECESSARY REPAIRS WOULD BE MADE AT THE EXPENSE OF THE ADMINISTRATION. YOU STATE FURTHER THAT THE BROKER IS OF THE VIEW THAT SINCE IT WORKS UNDER THE SUPERVISION OF THE DIRECTOR IT ASSUMED THAT HE HAD AUTHORITY TO AUTHORIZE THIS GUARANTEE AND THAT THE FHA COMMISSIONER IS OBLIGATED TO RECOGNIZE AND HONOR THE VERBAL COMMITMENT OF THE FORMER DIRECTOR.

AS WE POINTED OUT IN OUR DECISION OF AUGUST 7, 1956, TO YOU, REPORTED IN 36 COMP. GEN. 90, THERE IS A CONFLICT OF AUTHORITY AS TO WHETHER THE VENDOR OR THE PURCHASER UNDER AN UNCONDITIONAL CONTRACT FOR THE SALE OF REAL PROPERTY ASSUMES THE RISK OF A PARTIAL DESTRUCTION OR DETERIORATION OF THE PROPERTY BETWEEN THE EXECUTION OF THE CONTRACT OF PURCHASE AND THE TRANSFER OF TITLE, WHERE NEITHER PARTY IS AT FAULT. IT IS STATED, HOWEVER, THAT THE MAJORITY RULE IS THAT THE LOSS FALLS ON THE PURCHASER. FURTHER, WE POINTED OUT IN THE CITED DECISION THAT THE DECISIONS OF THE COURT FOLLOWING THE MAJORITY RULE HOLD THAT A CONTRACT FOR THE SALE OF REAL PROPERTY OPERATES AS AN EQUITABLE CONVERSION AND THAT THE VENDEE IN CONTEMPLATION OF EQUITY BECOMES THE REAL OWNER AND ASSUMES ALL THE RISK OF LOSS FOR DAMAGE TO OR DESTRUCTION OF THE PROPERTY NOT DUE TO NEGLECT OR DEFAULT OF THE VENDOR, IN CARRYING OUT THE CONTRACT, UNLESS IT APPEARS THEREFROM THAT SUCH WAS NOT THE INTENTION OF THE PARTIES. IN ILLINOIS, HOWEVER, IT HAS BEEN HELD THAT AN EXECUTORY CONTRACT OF SALE DOES NOT CONVEY AN EQUITABLE TITLE TO THE PURCHASER AND THAT THE RISK OF LOSS REMAINS WITH THE OWNER. BUDELMAN V. AMERICAN INSURANCE CO., 130 N.E. 513.

WE AGREE GENERALLY WITH THE OPINION OF YOUR LEGAL DIVISION AS STATED IN YOUR LETTER AS TO THE LIABILITY OF THE PARTIES IN SUCH CASES. IN OTHER WORDS, IF THE CONTRACT CONTAINS A PROVISION THAT THE VENDOR SHALL CONVEY THE PREMISES OR DELIVER POSSESSION OF THEM OR THE VENDEE AGREES TO ACCEPT SAME IN THEIR PRESENT CONDITION, OR EQUIVALENT WORDS MEANING THAT THE PROPERTY IS SOLD IN ITS CONDITION AT DATE OF CONTRACT AND THE BUILDING IS DESTROYED OR DAMAGED PRIOR TO CONVEYANCE IT IS GENERALLY HELD THAT THE LOSS WILL FALL ON THE VENDOR. 27 A.L.R.2D 444, 459.

HAD THE CONTRACT IN THIS CASE NOT CONTAINED THE ABOVE AMENDMENT OF NOVEMBER 26, 1956, A REPAIR OR REPLACEMENT EXPENDITURE FOR THE DAMAGED HEATER MIGHT HAVE BEEN PROPER. HOWEVER, THIS AMENDMENT, EXPRESSLY PROVIDES THAT THE PURCHASER AFFIRMS THE PROVISO STIPULATING THAT THE PURCHASER HAS EXAMINED THE PROPERTY AND WILL MAKE NO CLAIM AGAINST THE SELLER FOR ANY DEFICIENCY OR IMPERFECTION IN THE PHYSICAL CONDITION OF THE PROPERTY. THE MANIFEST PURPOSE OF INCLUDING THIS PROVISION WAS TO PROTECT THE COMMISSIONER, AS VENDOR, FROM ANY SUBSEQUENT CLAIM ARISING OUT OF ANY DEFICIENCY OR IMPERFECTION IN THE PHYSICAL CONDITION OF THE PROPERTY, AND THE PROVISION IS CLEARLY INCONSISTENT WITH ANY WARRANTY BY THE GOVERNMENT OF THE CONDITION OF THE PROPERTY OR ANY FIXTURES THEREIN. THE PROVISION HAS THE EFFECT AND OPERATES AS AN ESTOPPEL AGAINST THE PURCHASER. THAT SUCH WAS THE PURPOSE IN THIS INSTANCE IS CLEARLY EVIDENT FROM PARAGRAPH 8143.2 (8-30-57) OF THE PROPERTY MANAGEMENT HANDBOOK, VOL. VIII.

IT IS WELL ESTABLISHED THAT CONTRACTS ARE TO BE PERFORMED AS WRITTEN AND MAY NOT BE AMENDED OR MODIFIED WITHOUT A VALID CONSIDERATION MOVING TO THE GOVERNMENT. UPON EXECUTION OF THE INSTANT CONTRACT THE RIGHT VESTED IN THE GOVERNMENT TO RECEIVE PERFORMANCE IN STRICT ACCORDANCE WITH THE TERMS THEREOF AND SUCH RIGHT PROPERLY MAY NOT BE GIVEN AWAY OR SURRENDERED BY ANY OFFICER OF THE GOVERNMENT. BRAWLEY V. UNITED STATES, 96 U.S. 168; SIMPSON V. UNITED STATES. 172 U.S. 372; UNITED STATES V. AMERICAN SALES CORPORATION, 27 F.2D 389, AFFIRMED 32 F.2D 141, CERTIORARI DENIED, 280 U.S.C 514; PACIFIC HARDWARE AND STEEL COMPANY V. UNITED STATES, 49 C.1CLS. 327, 335. UNDER THE CIRCUMSTANCES, THE ACTION OF THE FORMER DIRECTOR IN INSTRUCTING THE BROKER TO GUARANTEE THE PLUMBING, FURNACE, ETC., TO BE IN GOOD CONDITION COULD HAVE NO EFFECT AFTER THE EXECUTION OF THE CONTRACT, AND THE ACTION OF THE BROKER IN INSTRUCTING THE PURCHASER TO HAVE THE HEATER REPLACED AT FHA EXPENSE MAY NOT BE ACCEPTED AS BINDING ON THE ADMINISTRATION.

YOU ARE THEREFORE ADVISED THAT CERTIFICATION OF THE VOUCHER, RETURNED HEREWITH TOGETHER WITH THE SUPPORTING PAPERS, IS NOT AUTHORIZED.

CONCERNING THE ADMINISTRATIVE PROBLEM INVOLVED REFERRED TO IN THE FIRST FULL PARAGRAPH ON THE LAST PAGE OF YOUR LETTER, IT WOULD SEEM THAT THERE SHOULD BE STRICT COMPLIANCE WITH THE MANDATORY PRECAUTIONS PRIOR TO SALE AS REQUIRED BY PARAGRAPH 8109.5 (A) OF THE PROPERTY MANAGEMENT HANDBOOK, OTHERWISE THERE WOULD APPEAR TO BE FOR APPLICATION THE PERFORMANCE GUARANTEE AS PROVIDED IN PARAGRAPH 8109.5 (B).