Buyer beware: new Court decision may change residential due diligence in Michigan

26 Oct 2011

Kevin blogged last year about a Michigan Court decision that held that if someone owns property and has knowledge that it is contaminated, he must disclose this information in the lease or purchase agreement and describe the general nature and extent of the contamination.  Otherwise, there is a risk having your transaction voided by the courts.  This was based on Michigan statute requiring this disclosure.   There is also a requirement that if an owner or operator of property has a Baseline Environmental Assessment (BEA), that BEA must also be disclosed to transferees. 

Now, the Michigan Court of Appeals has handed down a new decision that further muddies the obligations of buyers and sellers.  This new case involved a developer gone bust, a replacement seller and its agent.  The litigation was between somewhat sophisticated buyers of a condo in a former industrial building and the seller’s agents. 

At trial, the jury found the agents liable for failing to disclose information that they had regarding the contamination of the property by the solvent TCE (as reported in a video from WWMT TV), after they had distributed sales information that the property had been cleaned up.  Interestingly, the Court held that the agents owed the buyers a duty of truthfulness because the buyers had made direct inquiries about the property’s condition and the MDEQ had advised that the sales brochures were not accurate.

Where it gets interesting is in the Court’s discussion of the jury apportioning 35% of the responsibility (and reducing the agent’s liability by that same percent) because the plaintiffs did not obtain an environmental inspection and they signed a purchase agreement that said that defendants knew nothing about the environmental conditions.

Frankly, environmental inspections on residential properties are almost unheard of!  This seems contrary to conventional wisdom that the buyer should be able to rely on what he or she is told by the seller.

Leave a Comment to “Buyer beware: new Court decision may change residential due diligence in Michigan”

  1. Anthony Kashat 26. Oct, 2011 at 9:03 am #

    Environmental inspections for residential property is not industry practice. It seems unreasonable to expect a home buyer to conduct an environmental review or to be knowledgable about what to reveiw. Sounds like its time to better educate our residential broker community. It will be interesting to see how banks respond to this case, if at all. Should lenders be conducting a certain level of environmental due dilligence during foreclosure of residential real estate? Raises a number of questions and concerns.

  2. Nicholas G. Maloof 27. Oct, 2011 at 7:29 am #

    Arthur, Based upon the facts you presented, this holding appears to paertially contradict or at least negatively impact the prior Michigan Court of Appeals holdings in both 1031 Lapeer LLC v Rice (published) and the follow on case A.D. Transport v Michigan Materials (unpublished) that a seller/lessor has the obligation to disclose the known “facility” status and/or presence of contamination. I would agree that it is not customary nor contemplated in the statutes (that I am aware of) that a purchaser of residential property conduct environmental due diligence prior to purchase. The holding by the court in this matter does appear to limit or curb the prior two decisions in certain circumstances…I will have to read the published holding on this matter and compare it to the two above referenced holdings. I would not be surprised if this decision is appealed.

  3. Arthur Siegal 28. Oct, 2011 at 11:27 am #

    Tony – this case raises but doesn’t answer these questions. Ultimately, no one was holding the loft buyer liable, they were simply reducing their recovery for fraud. As an appellate decision, it isn’t at all clear what the Jury was basing its decision upon but based on a quick discussion with one of the lawyers that because of the buyer’s status as a realtor, the Jury might have held him to a higher standard than the ordinary buyer. Upon reflection, a residential buyer is categorically not liable for cleanup under Michigan law (unless they dump contaminants in a non-residential way) but it does appear that it’s better to be safe than sorry.

  4. Arthur Siegal 28. Oct, 2011 at 11:35 am #

    Nick – I dont think that this case actually does impact or contradict the 1031 case. It was a surprise to me that the Court of Appeals didn’t discuss 1031 or AD Transport, however. In 1031, as you know, the tenant was trying to undo its lease after having been misled by the landlord. Here, the Court of Appeals accepted the premise from the court below that the buyer had been misled and focused on two questions: (1) can a realtor (agent) be held liable for a failure to disclose; and (2) was there enough evidence below allowing the buyer to partially at fault for the negligent misrepresentation that caused him to buy the contaminated loft. The Court’s answer to both questions was “yes.” Under Michigan law, any residential buyer who acts consistent with a residential use (no 55 gallons of solvent at your house!, but an 8 oz bottle may be ok), is off the hook for environmental contamination but now to protect your value from fraud or negligent misrepresentation, you would still have to do a investigation.

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