Earlier this year I reported here on the then-new Michigan Seller Disclosure Act, which imposes certain rather specific disclosure requirements on sellers of Michigan residential real estate, and commented on the rather confused state of the appellate decisions in the area.

Since that time, there have been no Michigan appellate decisions reported under the new Act. There are three decisions of interest in the last 20 months, however, which deal with real estate disclosure duties. Price v. Long Realty Co., 199 Mich. App. 461 (1993); Clemens v. Lesnek, 200 Mich. App. 456 (1993); and Lorenzo v. Noel, ___ Mich. App. ___ ,1994 Mich. App. LEXIS 366 (1994).

Price involved broker liability for a mistaken statement as to local codes. The buyers had retained defendant broker to assist them in finding a suitable lot for a house and pole barn. Defendant broker, apparently unaware that seller's broker had been informed of zoning prohibitions and health problems prohibiting it, told the buyers that they could build a house and pole barn on the parcel. Prior to closing, buyers became aware of the problem, but closed anyway. Found liable by a jury for fraud, malpractice in not making house location a condition of the agreement, and violation of the Michigan Consumer Protection Act, defendant broker appealed the judgment of some $36,000 in damages, costs and fees. Held, (1) there was sufficient evidence of common law fraud to justify the instruction and the result. A false representation was made, knowing it was false or recklessly without any knowledge of its truth. (2) Buyers were entitled to the expense of a longer driveway and a natural gas line, but Buyer's testimony as to the loss in value as a result of having to build at the rear of the property and without a pole barn was also properly received.

This case is troubling because it awards "benefit of the bargain" damages for what seems quite close to innocent misrepresentation. The fiduciary relationship owed by the buyer's broker may have played a role. However, if the misrepresentation was innocent, the result seems severe. Perhaps the court imputed the seller's broker's knowledge to the buyer's broker, but that is not clear; but there appeared to be no evidence that the broker actually knew of the problems. Except for the MCPA claim, under the appellate court's rationale would apply to a seller liability case on the fraud theory.

Clemens involved an "as-is" clause in the purchase agreement, a leaky roof, and a faulty septic system. Buyers sued on a fraudulent concealment theory, The court held that (1) the defect need not be unreasonably dangerous to thwart the as-is clause, if a seller makes fraudulent representations prior to buyers' execution of the contract; (2) sellers' statement that the roof was in good condition except for a couple of minor leaks, was sufficient evidence of fraudulent concealment to go to the jury, although one of buyers' roofers found the roof also to be in good condition, since sellers had had the roof worked on; and (3) sellers' statement that the septic tank was pumped annually also was sufficient evidence of fraudulent concealment to go to the jury, where sewage odors appeared shortly after buyers took possession, and septic tank effluent was directed into a nearby stream by pipes manufactured during seller's ownership of the house. The measure of damages, the court suggested, would be the cost of replacing the roof and the septic system. (4) Mental anguish damages were improperly awarded.

The lesson of Clemens appears to be that the seller is charged with the knowledge that his contractors had.

Lorenzo was a "silent fraud" case involving leaky and bowed basement walls, covered by paneling. Buyer's complaint alleged nondisclosure of these facts. Buyer did not have the house inspected prior to closing. Buyer had the house inspected after closing. Held, the issue of nondisclosure goes to the jury, upon the premise that sellers may have known what the post-sale inspection disclosed. Basically, a post-sale inspection was held to justify rescission or damages.

Lorenzo's learning would be that a seller must disclose defects that his contractors have concealed, it seems, and perhaps may indicate that a seller should dismantle any portions of his home necessary to reveal such defects so that he may disclose them to the buyer.

The danger to sellers, underscored by all these cases, is clear. If there is a zoning ordinance that will frustrate the buyer's purpose, it must be disclosed. If cosmetic repairs have been made that may mask underlying defects, those defects must be disclosed. And if seller's contractors have made unauthorized diversions of the septic system, or makeshift roof repairs, the seller is charged with that knowledge, and is under a duty to disclose it.

In summary, the these cases point to a duty on the part of a seller to be intimately familiar with the actions taken and not taken by his contractors during the entire period of his ownership, and perhaps before, and to disclose them fully, and a duty of the seller to disclose matters of law (such as code limitations) known to seller's agents if they materially frustrate the buyer's plans.

It does not appear that the Michigan Seller Disclosure Act would directly affect these results, but the disclosure form might highlight the conditions if earnestly addressed by sellers.

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