Michigan's Seller Disclosure Act(1)

Vance A. Fisher

Fisher Law Office

Law & Title Building

811 Ship St., P. O. Box 83

St. Joseph, Michigan 49085

(616) 983-5511

www.fisherlaw.com

email: fisherv@fisherlaw.com

Michigan real estate transaction sellers are now required to furnish the purchaser a timely, specific and detailed disclosure concerning the physical condition of the premises, its structures and certain tangible personal property in it, as well as certain broader and historical data such as the presence or absence of environmental hazards. Although the Act specifically states that the seller shall supply such a statement, no consequences are provided for failure to do so,(2) nor for errors in the statement,(3) whether inadvertent or deliberate. Various subjective and objective standards test the disclosure under the Act, again without specificity of consequences for violation: information not within seller's personal knowledge is somehow exempt (5(1)),though information must be "based upon the best information available and known" to seller (6), and must be made in "good faith", which means "honesty in fact in the conduct of the transaction" (apparently a new objective test for a subjective standard(10).) Presumably, the legislature meant to relegate the result to the case law of Michigan concerning misrepresentation and nondisclosure.(4) But by specifying the minutiae and avoiding the substance, the Act has not necessarily improved the lot of the buyer, and may have unnecessarily complicated that of the seller.

1. Historical perspective of the law. In order to determine where Michigan stands now, it is appropriate to try to determine where it has been. Michigan has long held that intentional misrepresentation of a material fact is ground for rescission of a real estate transaction.(5) If the seller makes a

representation of

material fact, which is

false, and

known to be false when made,(6)

intended to be relied upon,

and it was relied upon, and

injury was suffered thereby,

there is actionable fraud, which justifies rescission, or unwinding of the transaction, as well as possible damages.(7) When the facts vary from this black letter rule, the law becomes more murky.

If there is not a representation of fact, but only the assertion of an opinion, the rule does not apply.(8)

Or if there is no representation of fact, but only silence, the rule will not apply, unless, for example, there is a "duty to speak," in which case silence will justify rescission.(9)

Or if the fact was not known to be false, but believed to be true, rescission may be still be awarded in a proper case, to avoid "unjust enrichment."(10) Sometimes this doctrine is couched in terms of "mutual mistake" of a "basic fact," which also can in a proper case also justify rescission.(11)

An "as-is" clause may or may not change the result, although it ordinarily shifts the risk of mutual mistake,(12) and of innocent nondisclosure,(13) but probably not intentional misrepresentation. It may not shift the risk of loss to the buyer if the condition involves "unreasonable risk," such as a dangerous furnace installation.(14)

2. Possible effects of the new act on traditional misrepresentation law. What does the new act change? Considering the elements of the misrepresentation/mistake defenses one by one:

Representation. Nondisclosure of items specifically mentioned in the disclosure is now unlikely to occur. But if it does occur, the result should be the same under the new law as under the case law.

Material fact. Arguably all items of the disclosure are now material, so the burden on sellers is increased. The argument would be, if it weren't material, why would the legislature specify it? Presumably, an admission by the buyer that it was immaterial to the buyer would change the result, but that would be unlikely.

False. That criterion should not change.

Known to be false. The act sets forth new criteria for culpable knowledge, as set forth in the first paragraph of this Article. Since the standards are different from prior law, and internally inconsistent in the act itself, it will be interesting to see how the courts work them out.

Intended to be relied upon. The act implies that the disclosure is intended to be relied upon, but does not so state. However, the act is replete with warnings to the purchaser to obtain one's own evaluation (e.g., 7). This criterion therefore may or may not be affected.

Actually relied upon. This factual question will change its focus, in view of the specificity of the disclosure and its caveats concerning the desirability for additional advice and inspections.

Injury was suffered. This question will remain unchanged.

3. The thrust of the act seems misplaced and obscure. The act in terms gives a right of rescission to a purchaser for non-furnishing of the specified disclosure. (i.e., 4,7)(15) The rescission rights, however, end at closing. (4(4)). Accordingly, if no disclosure is furnished, do the rescission rights, unknown to the purchase, cease at closing nonetheless? It would seem so. What, then, is left of the statute? Since Section 14 says that no transfer shall be invalidated because of noncompliance with the act, does it have no effect?

I believe, unfortunately, that is not the case. Bearing in mind that traditional Michigan law of misrepresentation gives rise not only to defenses to contract enforcement actions and to rescission rights, but also to claims for damages for fraud, and noting that the statute does not specifically address damages, I conclude that damage claims for misrepresentation and nondisclosure are not directly affected by the Act. Since the Act apparently cuts off rescission rights at the closing, and also may heighten the materiality of trivial defects by raising them to the same level of significance in a standard disclosure, I believe that the principal effect of the new act may well be an increase in damage claims against hapless sellers, unless appropriate precautions are attempted in the purchase agreement.

4. Prophylactic draftsmanship is required. Though the Sales provisions of the Uniform Commercial Code do not in terms apply to real estate sales, the Code is often applied by the courts in situations it deems analogous to sales transactions, and real estate sales appear a likely candidate. In that hope, a limitation of remedies clause of the sort sanctioned by U.C.C.'s Section 2-719 (MCLA 440.2719, MSA 19.2719), might be judicially acceptable. That provision authorizes a contract to contain clauses providing for limitation of damages, limitation of remedies, and specification of exclusive remedies. Two such possible drafting solutions immediately appear: (1) a clause providing that in any action for damages under the agreement, recovery shall be limited to the amount of the down payment, which the parties have agreed is an appropriate measure; or (2) a clause providing that no other remedy shall be awarded except rescission, which must be demanded by written notice prior to closing, and closing shall be deemed a waiver of that remedy.

It will be interesting to see courts applying the law under this new statute.

Copyright 1994 Vance A. Fisher, Michigan Lawyers' Weekly. All rights reserved.

Posted with permission of the author and Michigan Lawyers' Weekly.

(1) Act 92, P. A. 1993; MCLA 565.951 et seq., MSA 26.1286(51) et seq. References hereinafter are to Act section numbers.

(2) The Act does provide for the extension of rescission rights in the event of tardy disclosure. (Sec. 4(3).)

(3) The act enumerates several situations in which erroneous statements in the disclosure statement are not violations of the act; e.g., not within seller's knowledge (5(1)), based upon public agency information and reported with ordinary care (5(1)), information which would require thorough inspection or observation of inaccessible areas (5(1)), information furnished directly by the public agency, as long as the seller has no knowledge to the contrary (5(2)), information furnished by experts at the buyer's request, again unless the seller knows otherwise (5(2)), information becoming erroneous after the disclosure is made (5(6)), or information which is the "best available and known to the transferor" (5(6)).

(4) Indeed, the act specifically states that it is not intended to "limit or abridge any obligation for disclosure created by any other provision of law regarding fraud, misrepresentation, or deceit in transfer transactions." (11)

(5) See, e.g., Cole Lakes, Inc. v. Linder, 99 Mich. App. 496 (1980).

(6) Or made recklessly, without knowledge of its truth or falsity. Hammond v. Matthis, 109 Mich. App. 352 (1981).

(7) Ibid.

(8) State-William v. Gale, 169 Mich. App. 170 (1987).

(9) McMullen v. Joldersma, 174 Mich. App. 207 (1888). There, no such duty was found. Compare U. S. Fidelity & Guaranty v. Black, 412 Mich. 99 (1980), where it is held that a buyer's stated interest in the subject of the omission may give rise to such a duty.

(10) Britton v. Parkin, 176 Mich. App. 396 (1989) (property believed zoned commercial).

(11) Lenawee County Board v. Messerly, 98 Mich. App. 478 (1980), reversed on other grounds, 417 Mich. 17 (1982).

(12) Lenawee County Board v. Messerly, 417 Mich. 17 (1982).

(13) State-William v. Gale, supra.

(14) Stewart v. Isbell, 155 Mich. App. 65 (1986).

(15) Anomalously, the disclosure statement requires a statement that failure to furnish it (the disclosure) gives rise to rescission rights.(7) How that notice would come to the attention of the non-furnished buyer is mystifying.