What Real Estate Transactions Are Subject To The Seller Disclosure Act In Michigan?

Michigan law requires a seller of residential property to fill out a standardized form disclosing what he or she personally knows about the home, including any past issues and current imperfections. This form must be completed and returned to the buyer or buyer’s agent prior to the completion of the sale. Failure to accurately complete the document or outright misrepresent facts about the home can expose the seller to severe civil penalties.

Michigan’s Seller Disclosure Act apply to the transfer of ANY interest in residential real estate consisting between one and four dwelling units, whether by sale, exchange, installment land contract, lease with an option to purchase, or any other option to purchase the land. MCL 565.952. However, this statute does NOT apply to the following transactions:

• “Transfers pursuant to court order, including, but not limited to, transfers ordered by a probate court in administration of an estate, transfers pursuant to a writ of execution, transfers by any foreclosure sale, transfers by a trustee in bankruptcy, transfers by eminent domain, and transfers resulting from a decree for specific performance.” MCL 565.953(a).

• “Transfers to a mortgagee by a mortgagor or successor in interest who is in default, or transfers to a beneficiary of a deed of trust by a trustor or successor in interest who is in default.” MCL 565.953(b).

• “Transfers by a sale under a power of sale or any foreclosure sale under a decree of foreclosure after default in an obligation secured by a mortgage or deed of trust or secured by any other instrument containing a power of sale, or transfers by a mortgagee or a beneficiary under a deed of trust who has acquired the real property at a sale conducted pursuant to a power of sale under a mortgage or deed of trust or a sale pursuant to a decree of foreclosure or has acquired the real property by a deed in lieu of foreclosure.” MCL 565.953(c).

• “Transfers by a nonoccupant fiduciary in the course of the administration of a decedent’s estate, guardianship, conservatorship, or trust.” MCL 565.953(d).

• “Transfers from 1 co-tenant to 1 or more other co-tenants.” MCL 565.953(e).

• “Transfers made to a spouse, parent, grandparent, child, or grandchild.” MCL 565.953(f).

• “Transfers between spouses resulting from a judgment of divorce or a judgment of separate maintenance or from a property settlement agreement incidental to such a judgment.” MCL 565.953(g).

• “Transfers or exchanges to or from any governmental entity.” MCL 565.953(h).

• “Transfers made by authorized builders of newly constructed residential property that has not been inhabited.” MCL 565.953(i).

The actual statutory disclosure form is very lengthy and includes, but is not limited to, the following questions:

• Are the appliances, systems and services in working order (e.g. furnace, electrical system, washer, dryer, refrigerator, microwave, water heater, sump pump, septic tank, air conditioner, etc.)?

• Has there been evidence of water in the basement or crawl space?

• How old is the roof and has it ever leaked?

• Are there any known problems with the heating or plumbing system?

• Has there been a history of infestation (e.g. termites, carpenter ants, etc.)?

• Are there environment hazards present such as asbestos, radon, lead-based paint or contaminated soil?

• Is there flood insurance on the property?

• Does the seller still own the mineral rights to the property?

• Are there encroachments, easements, zoning violations or nonconforming uses?

• Is the property subject to the authority of a homeowner’s association?

• Are there structural modifications, alterations or repairs made without required permits or licensed contractors?

• Was there major property damage due to fire, wind, floods or landslides?

• Is there any pending litigation that could affect the property or the seller’s right to convey the property?

The seller must make each disclosure in “good faith”, which means honesty in fact in the conduct of the transaction. MCL 565.960. Furthermore, all information disclosed should be based upon the best information available and known to the seller. However, the seller or his or her agent “is NOT liable for any error, inaccuracy, or omission in any information delivered”, pursuant to MCL 565.955(1), IF ANY OF THE FOLLOWING IS TRUE:

• The error, inaccuracy, or omission was not within the personal knowledge of the seller. Many sellers will claim that they have never personally seen the roof leak, water in the basement or a single termite in the house.

• The error, inaccuracy, or omission was based entirely on information provided by public agencies or provided by a licensed professional engineer, professional surveyor, geologist, structural pest control operator, contractor, or other expert, dealing with matters within the scope of the professional’s license or expertise (at the request of the seller), and ordinary care was exercised in transferring the information. This does NOT apply if the seller has knowledge of a known defect or condition that contradicts the information provided by the public agency or the information contained in the report or opinion.

• The seller fails to disclose information that could be obtained only through inspection or observation of inaccessible portions of real estate or could be discovered only by a person with expertise in a science or trade beyond the knowledge of the seller.

Furthermore, if information disclosed becomes inaccurate as a result of any action, occurrence, or agreement AFTER the seller’s disclosures are provided, the resulting inaccuracy does not violate the law. MCL 565.956. In addition, it is not unlawful for the seller to list answers to those questions as “unknown” if he or she claims they do not have enough information to make the disclosure.

There is nothing more frustrating to a new homeowner than to purchase a home based, in part, on the seller’s warranties that there are no structural issues and then walk into a major problem. For example, a new buyer receives a seller’s disclosure statement indicating that there was no evidence of water in the finished basement and then discovers two inches of water on the floor after the first moderate rainfall. The seller claims that he has never personally seen water in the basement, so he had no personal knowledge. The home inspector did not discover any telltale signs of water before the sale such as mold, staining or damaged drywall. However, the buyer talks to the new neighbor and discovers that, two weeks before listing the home for sale, the seller had contractors at the home to replace the drywall and apply a new coat of paint to the finished basement. Furthermore, the neighbor disclosed that the seller complained often about water in the basement and could not wait for the first opportunity to sell the house to rid himself of the problem. Now the buyer is furious, for he would have never purchased the house if he knew that these serious defects exists. What are his legal remedies?

When buyers believe that they were swindled by false statements on the seller disclosure form, the three causes of action they generally pursue are fraudulent misrepresentation, innocent misrepresentation and silent fraud.

FRAUDULENT MISREPRESENTATION

To prevail on a civil claim for fraudulent misrepresentation, the plaintiff (“buyer”) must prove all of the following elements:

• (1) the defendant made a material representation; (2) the representation was false; (3) when the defendant made the representation, the defendant knew that it was false, or made it recklessly, without knowledge of its truth as a positive assertion; (4) the defendant made the representation with the intention that the plaintiff would act upon it; (5) the plaintiff acted in reliance upon it; and (6) the plaintiff suffered damage. Bergen v Baker, 264 Mich App 376, 382; 691 NW2d 770 (2004)

A fraudulent misrepresentation claim requires an “affirmative representation” that is false and “made with an intent to deceive.” M&D Inc v WB McConkey, 231 Mich App 22, 27; 585 NW2d 33 (1998). The challenge for most sellers is proving that the seller knowingly made a false statement. The fact that the sellers made renovations to the home before listing it is not an “affirmative representation” of flooding, water damage or mold in the house. If the seller was silent about a matter that was not required on the seller disclosure form (e.g. age of the carpeting), then that does not constitute an “affirmative representation” either. It is possible that the sellers of a residential home never lived at the property or used it infrequently as a vacation home, so they can plausibly say that they have no knowledge to the truth.

INNOCENT MISREPRESENTATION

To prevail on a civil claim for innocent misrepresentation, the plaintiff (“buyer”) must show that he or she detrimentally relied upon a false representation in such a manner that the injury suffered by the defendant who made the representation. United States Fidelity & Guaranty Co v Black, 412 Mich 99, 118; 313 NW2d 77 (1981). This differs from fraudulent representation in that the plaintiff does not have to show a fraudulent purpose or intent that the plaintiff acts on the misrepresentation. Id at 118. The plaintiff does not have to show that the defendant knew the statement was false. Id at 115. However, there must be a privity of contract between the party making the representation and the party detrimentally relying on it. Forge v Smith, 458 Mich 198, 212; 580 NW2d 876 (1998).

However, in Roberts v Saffell, 280 Mich App 397, 760 NW2d 715 (2008), the Michigan Court of Appeals held that an innocent misrepresentation claim is incompatible with the exemption from liability by MCL 565.955(1)(“lack of personal knowledge”) in the Seller Disclosure Act. If there is no requirement to show a false statement, then this claim would allow liability for erroneous information even if the seller lacked knowledge. Since this contradicts with the liability shield in the Seller Disclosure Act, a claim of innocent misrepresentation is not available to an aggrieved buyer.

SILENT FRAUD (“FRAUDULENT CONCEALMENT”)

To prevail on a civil claim for silent fraud, also known as fraudulent concealment, the plaintiff (“buyer”) must show that the defendant suppressed the truth with the intent to defraud the plaintiff and that the defendant had a legal or equitable duty of disclosure.” Lorenzo v Noel, 206 Mich App 682, 684; 522 NW2d 724 (1994). A duty to disclose can arise solely because “the buyers express a particularized concern or directly inquire of the seller.” Alfieri v Bertorelli, 295 Mich App 189, 194; 813 NW2d 772 (2012). “A misleadingly incomplete response to an inquiry can constitute silent fraud.” Alfieri, 295 Mich App at 194. “A plaintiff cannot merely prove that the defendant failed to disclose something; instead, a plaintiff must show some type of representation by words or actions that was false or misleading and was intended to deceive.” Lucas v Awaad, 299 Mich App 345, 363-364; 830 NW2d 141 (2013).

The silent fraud claim is intended to attack situations where the buyer made a direct inquiry to the seller via the seller disclosure form about property conditions and the seller omitted information. However, this is also problematic. The seller’s remodel of the basement may have been done with the intention to spruce up the home for sale and not to conceal water damage. Furthermore, there may be a lack of a false representation if the buyer did not directly inquire to the seller about any flooding on the property. Even worse, the buyer must prove that he reasonable relied to his detriment on the seller disclosure statement when he purchased the property. This is difficult if the buyer also had a home inspection completed before the sale that did not uncover any type of water damage. Once again, the challenge is demonstrating that the seller had some kind of actual knowledge.

CONCLUSION

The general rule for any real estate transaction is caveat emptor (“let the buyer beware”). It is difficult to prevail on fraudulent claims for inaccurate statements on seller disclosure forms, but it is not impossible. If you or a loved one is aggrieved by a seller in a real estate transaction, you need a lawyer on your side that will dig into the facts and determine if you have a strong case for recovery. When you need legal representation, do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC today.