No reported cases have yet interpreted the Seller Disclosure Act (Public Act 92 of 1993, MCL 565.951 et seq.), though there have been a number of cases in recent years dealing with the issue of misrepresentation and nondisclosure in real estate transactions. The most common factual settings in the cases, and in the author's experience, involve roof leak problems, dampness or flooding, termite and other destructive insect infestations, and improper sewage installations.
In each of these factual situations, there is opportunity for surprise, as the condition is either not obvious, is intermittent, or is not readily apparent due either to its nature or to seller activities.
Typically, the parties do not discuss the problem, and often there is an "as-is" clause in the agreement.
The various and somewhat conflicting cases are perhaps exemplified by the following: Clemens v. Lesnek, 200 Mich App 456 (1993), after remand, 219 Mich App 245 (1996) (leaky roof and defective septic system); Lorenzo v. Noel, 206 Mich App 682 (1994) (bowed and cracked basement walls); Shimmons v Mortgage Corp, 206 Mich App 27 (1994) (uninhabitable house); Farm Bureau Ins Co v Wood, 165 Mich App 9 (1987) (problem artesian well).
The results have been confusing, until the Court of Appeals, in a special conflict panel, took a position, approved one line of cases, repudiated another, and clarified a Supreme court decision. M&D, Inc. v McConkey, ____ Mich App ____ (No. 17501, July 31, 1998) (Michigan Lawyers Weekly No. 33445).
The panel was convened to resolve the conflict between the prior opinion in that case (226 Mich App 801 (1997)) and Simmons v Mortgage Corp of America, 206 Mich App 27 (1994). (Selected prior case law and the statute itself were the subject of prior articles by the author in the Michigan Lawyers Weekly of March 21, 1994 and of October 17, 1994.)
In the M&D Case, the defect was periodic flooding of the property. As the property was commercial, the Seller Disclosure Act did not apply, and indeed the parties provided expressly in the purchase agreement that a seller disclosure would not be furnished. The agreement contained an "as-is" clause, and provided "Owner has never occupied this property." The buyer retained an inspector expressly to check out flooding concerns, and found no evidence of it prior to closing. Nothing was asked or said about flooding or water problems. Plaintiffs contended that the property had been painted and recarpeted.
In fact, the property had had flooding problems for many years. Prior tenants had left because of the problem. The owner testified the problem had been fixed, but the broker testified that he had seen flooding there.
2 months after the buyer opened a pet store on the premises, the building flooded after heavy rain. Buyer sued on the basis of fraud and innocent misrepresentation.
The trial court determined there to be no issue of material fact and dismissed the fraud and innocent misrepresentation claims. The initial panel of the Court of Appeals reversed, feeling bound by Shimmons but reasoning that the result should be otherwise. And the special panel adopted the reasoning of the prior panel, reversing the result but adopting its reasoning:
Fraudulent misrepresentation involves a material misrepresentation, which was false, when made it was known to be false or made recklessly without knowledge of its truth, with the intention that it be relied upon, and which was in fact relied on by the plaintiff. Fraudulent misrepresentation is actionable.
Innocent misrepresentation has all of the fraudulent misrepresentation elements, except that a fraudulent purpose is not required, but actual injury, to the benefit of the injuring party, is required.
Silent fraud, or fraud by nondisclosure, or fraudulent concealment, is a "suppression of truth" or "misdirection" by silence, which makes under the circumstances a statement previously made, untrue or misleading.
(In addition, there is the special rule of Christy v Prestige Builders, Inc, 415 Mich 684 (1982), a negligence case, which holds that "unreasonably dangerous" conditions must be disclosed to buyers, and sellers are liable for "unreasonably dangerous" conditions to third parties injured before the buyer discovers or should have discovered the condition.)
In M&D, however, there was no representation, and thus no viable claim, under the fraudulent misrepresentation, innocent misrepresentation, or silent fraud rules.
Having due regard for the foregoing, therefore, how does it relate to the Seller Disclosure Act, and the factual settings most often encountered? Currently, in most residential sales, a "Seller Disclosure" form under the Seller Disclosure Act is given by the seller to the buyer. If it is provided there will be representations. And specific representations are required on the following subjects: water in the basement; roof leaks; septic tanks and drain fields; city water and sewer systems; well and pump; settling; flooding; drainage, structural or grade problems; infestation by wood-destroying insects; underground storage tanks; other on-premises environmental hazards including those enumerated; and finally, neighborhood environmental concerns including those enumerated.
All questions are required to be answered, as "yes", "no", "unknown", or "not applicable", for some of the questions, and "unknown", "yes", or "no", as to the remainder.
Thus if indeed all questions are answered, there will be representations as to all factual areas of concern in the litigated cases.
If any question is answered that there is no problem with the item, and that representation is false, then a misrepresentation has occurred.
If an item is answered as "unknown", but the seller actually has knowledge of a problem with the item or category, then there is a misrepresentation as to the state of the seller's knowledge.
In the case of any such misrepresentation in a Seller Disclosure, the M&D test will be met if the other elements of fraud are met. And many of them will be virtually automatically met due to the statements in the disclosure form.
Fraudulent misrepresentation under M&D involves a material misrepresentation, which was false, when made it was known to be false or made recklessly without knowledge of its truth, with the intention that it be relied upon, and which was in fact relied on by the plaintiff.
Innocent misrepresentation under that case requires materiality, falsity, reliance, and injury.
So in the disclosure form setting, all representations are presumptively material and presumptively intended to be relied upon. Knowledge of falsity would be a matter of proof, as would be reliance and injury. Therefore, the disclosure form will considerably assist and simplify the proof of seller claims. And even if a question is not answered, it will meet the M&D criteria for innocent misrepresentation, if the other elements of the test are met, for an unanswered question imposes a duty to speak in view of the instructions on the form.
Therefore, where the disclosures are given, fraudulent misrepresentation, innocent misrepresentation and silent fraud will be much easier to prove.
M&D, therefore, has significantly clarified the atmosphere surrounding seller disclosure.
--Vance A. Fisher
This article was published by Michigan Lawyers Weekly November 2, 1998, 12 Mich L. W. 1816.
(1) Vance A. Fisher is a lawyer in St. Joseph, Michigan, concentrating his practice in estate planning, estate administration, and real estate.
Copyright 1998 Vance A. Fisher. All rights reserved. Portions copyright 1998 Michigan Lawyers Weekly.