Disclosure of Contamination is Mandatory upon a Transfer.

8 Sep 2010

Photo credit: Ken Roberts Photography

In 1031 Lapeer L.L.C. v. Rice (Mich. Ct. App. No. 290995, August 5, 2010, unpublished), the Court of Appeals held that a lease was void under MCL 324.20116(1) because the owner failed to disclose to its tenant that the leased property was contaminated.  This is the first appellate decision to interpret this section of Part 201 of the Michigan Environmental Code.

The parties had entered into a ten-year lease for a gas station.  When the lease was signed, the owner knew that the property was found to be contaminated ten years earlier, but failed to disclose that to the tenant.  The tenant learned of the contamination a year into the lease and sued to void the lease under MCL 324.20116(1).

MCL 324.20116(1) provides that a person who has knowledge that its property is a “facility” (i.e., a contaminated site) shall not transfer an interest in the property without providing written notice to the purchaser/transferee and disclosing the general nature and extent of the contamination. The owner didn’t dispute that that his property was a facility or that he failed to disclose that to the tenant; rather, his argument was that a violation of the statute should not allow rescission of the lease.

The court held that, even though MCL 324.20116(1) does not specify a remedy for a violation, disclosure was mandatory and public policy supported a finding that the contract is void. 

The takeaway: If you own property and have knowledge that it is contaminated, you must disclose this information in the lease or purchase agreement and describe the general nature and extent of the contamination.  Otherwise, you risk having your transaction voided by the courts.  The Court of Appeals definitely just added some serious teeth to the disclosure requirement.

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