## Facts

- Warren G. Hill and Gloria R. Hill agreed to buy Ora G. Jones and Barbara R. Jones’s residence for $72,000.
- The purchase contract required the sellers to place in escrow a termite inspection report stating the property was free from evidence of termite infestation.
- Before contracting, the buyers noticed a small ripple in a parquet wood floor on a step.
- Mr. Hill asked the sellers whether the ripple could be termite damage; Mrs. Jones said it was water damage from a prior broken water heater.
- A termite inspection report stated there was no visible evidence of termite infestation, and the buyers were told the home passed inspection.
- After closing and moving in, the buyers discovered substantial termite damage and a history of termite infestation and repeated treatments dating back years.
- The sellers had termite treatment guarantees and had been informed of termite problems affecting parts of the structure and surrounding fence.
- The sellers did not disclose the prior infestation, treatments, or known damage to the buyers, the real estate agent, or the termite inspector.

## Issues

1. Whether a residential seller who knows of past termite infestation and damage must disclose it when it materially affects value and is not readily observable or known to the buyer.
2. Whether an integration (merger) clause bars claims based on oral misrepresentations or nondisclosure concerning termite damage.
3. Whether genuine disputes of material fact precluded summary judgment on fraudulent concealment and misrepresentation.

## Decision

- The Court of Appeals reversed the dismissal of the misrepresentation claim and reversed summary judgment for the sellers on the concealment claim.
- The court held that a seller who knows facts materially affecting property value that are not readily observable and not known to the buyer has an affirmative duty to disclose those facts; termite infestation and damage can qualify.
- The court held that an integration clause does not insulate a seller from liability for fraud and does not bar parol evidence offered to prove fraud or misrepresentation.
- The court remanded for further proceedings because disputes existed regarding the sellers’ knowledge and disclosures, the materiality of the information, and the buyers’ knowledge and diligence.
- The court’s ruling also required reconsideration of the attorney’s fee award in light of the changed disposition.

## Legal Principles

- A seller of a private residence must disclose known facts that materially affect the property’s value when those facts are not readily observable and are not known to the buyer.
- Prior termite infestation, termite damage, and related treatment history may constitute latent, material facts triggering a duty to disclose.
- A buyer’s direct inquiry about a suspected defect heightens the seller’s obligation to provide truthful and complete information about that subject.
- Materiality and whether a buyer knew or should have discovered the condition are generally fact questions for the trier of fact, making summary judgment inappropriate when the record supports competing inferences.
- Integration clauses and the parol evidence rule do not bar claims for fraudulent inducement, misrepresentation, or concealment.

## Conclusion

The appellate court held that residential sellers may have an affirmative duty to disclose known, latent termite infestation and damage that materially affects value, and that a merger clause does not defeat fraud-based claims; because factual disputes existed, summary judgment for the sellers was reversed and the case was remanded.


Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (Ct. App. 1986)