Buyer Beware? No; Seller Beware! The Michigan Appeals Court Has Spoken and the Decision Should Put Sellers on Notice for Failing to Disclose Known Defects.

Stout Law has traditionally represented a large number of clients who purchased their new home to then learn firsthand the horror of the seller not fulfilling their duty to fully disclose known defects of the property. In some cases, the expenses incurred can be in the hundreds of thousands of dollars.

We commonly approach these very difficult situations by attempting to negotiate a settlement with the seller using a number of legal theories to support our client’s claims. One of the key arrows in our legal quiver is the legal weapon of a claim of fraud and misrepresentation.

In our legal opinion, this area of the law has been settled for some time, thereby creating a means of recovery for buyers who have been taken advantage of in such a fashion. And we have an extremely high percentage of success when pursuing this wrong-being made right. However, we do occasionally come across another attorney, and even an occasional judge, who seems to be somewhat stuck in antiquated legal precedents that says the buyer should beware and that the burden of discovering such hidden defects falls on the buyer.

Fortunately, there has been an important update in regards to the application of the Seller Disclosure Act in Michigan in recent years. Issued on March 26, 2019 (Docket No. 341990), Kondrat v. Servitto, unpublished per curiam opinion of the Court of Appeals, involved the sale of a home by the defendants. The sellers in this case failed to disclose certain conditions of their property in the Seller’s Disclosure Statement including any history of infestation on the property. While the sellers indicated that the roof was approximately six years old and had no leaks, they failed to disclose both an existing insurance claim for water damage to the roof and a mouse infestation that was present on the property. The Appeals Court concluded that the homebuyer’s claims for negligent misrepresentation, fraudulent misrepresentation, and silent fraud could be pursued (Erin R. Cobane, 2023).

Caveat Emptor: The “As-Is” Clause

The Kondrat court held that the common-law rule of caveat emptor (“let the buyer beware”), otherwise known as the “as-is” clause was not a valid defense for the seller’s failure to disclose material defects. The “as-is” clause is frequently cited in cases involving non-disclosure of material defects based on the notion that it is the buyer’s responsibility to perform due diligence before purchasing a property. However, the Kondrat court’s ruling has significant implications in regards to the use of the “as-is” clause as a legal defense. Specifically, this has to do with what the court cited as a silent fraud exception to the “as-is” clause under Michigan law.

Silent fraud applies when a seller makes a representation that is misleading or false and intended to deceive. Per the Seller Disclose Act, the seller has a duty to make good faith disclosures to the buyer in terms of the condition of the property. The Kondrat court held that the buyer’s claim (that the sellers breached their duty to disclose) was “tantamount to saying defendant’s disclosures were made in bad faith, which under the circumstances necessarily indicated deceitfulness.” Thus, the Kondrat court concluded that the seller’s had sufficiently pleaded silent fraud.

The Kondrat court also determined that the buyer was not required to exercise due diligence to discover the seller’s fraud. The evidence in this case showed that it would have been impossible for the buyer to discover the defects and mouse infestation during the initial inspection, and the infestation was only first discovered when the buyer began renovations. The Kondrat court stated that the seller could not “willfully ignore known facts,” contrary to the seller’s assertion that the buyer had to “conduct destructive investigations into the veracity of defendants’ representations.”

How this ruling affects you as a buyer

We are pleased to report that the Michigan Court of Appeals ruling in the Kondrat v. Servitto case has important and significant implications for the use of the “as-is” clause defense going forward. It establishes that there is a silent fraud exception that applies in cases where the defendant made a representation that was false or misleading and intended to deceive.

In other words, the transferor of real property (seller) has a duty to make good faith disclosures to the transferee (buyer) in regards to the condition of the property. Additionally, the Kondrat court determined that the plaintiff did not have to exercise due diligence to discover the defendants’ fraud in order to have a valid claim of silent fraud, fraudulent misrepresentation, or negligent misrepresentation. This is a crucial ruling that will impact many non-disclosure, fraud, and misrepresentation cases going forward in Michigan.

References

Erin R. Cobane, D. W. (2023, July). Think Twice About the Mice--Failing to Disclose Property Conditions under the Seller Disclosure Act. State Bar of Michigan.

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