Daily Development for Wednesday, September 13, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

VENDOR/PURCHASER; DISCLOSURE: Under statutory requirement that sellers disclose to buyers an "defect" in residential property - defined as a condition that materially affects the value or use of [the property] in an adverse manner, seller is under no duty to disclose that property was damaged substantially by a water leak if obvious damage from leak was repaired and seller has no actual knowledge of the fact of mold contamination or the danger of mold contamination resulting from the event.

Nelson v. Heer, 163 P.2d 420 (Nevada 2007)

In 1998, a water pipe on the third floor of Nelson's cabin burst,flooding the cabin.  Nelson promptly had the water turned off and reported the damage to her insurance carrier.  An adjuster and contractor surveyed the damage and the contractor made substantial repairs and replacements.  The contractor did not perform any mold remediation. 

Four years later, Nelson sold the contract to Heer.  She completed a disclosure form as required by Nevada law, listing all defects of which she was aware.  She did not disclose the 1998 water damage.  But some time after Heer bought the cabin, his homeowner's insurance cancelled his policy, citing information it had of the prior water damage.  Heer obtained a more expensive policy with a mold exclusion.  But even worse, when Heer then proceeded to do a mold analysis, he discovered sufficient evidence of a mold problem to occasion $81,000 in recommended repairs.

The trial court, after a jury trial, awarded Heer almost $280,000 in damages, based upon breach of contract, intentional misrepresentation and a breach of the duty of good faith and fair dealing.

The Nevada Supreme Court here reversed, holding that, as a matter of law, that a seller has no duty to disclose a prior condition that affects value if the seller "does not realize, perceive, or have knowledge of that defect or condition."  The prior water damage, in the view of the court, notwithstanding the jury verdict, "no longer constituted a condition that materially lessened the value or use of the cabin" after it has been repaired.  According to the court "the record is devoid of any evidence that the later damage to the cabin caused the presence of elevated amounts of mold." 

Comment 1: Of course, the water damage did affect value because the fact
of the water damage (not the mold) cause the insurance carrier to cancel the insurance and to require a higher premium without mold coverage.  So the premise of the court is demonstrably wrong. 

It is true, however, that Nelson may not have been aware that the fact that the history of water damage was a defective condition.  So, at least in this case, the statutory requirement probably didn't apply.

Comment 2: But what about the broker?  At least after this case, if not before, this broker, and most brokers in Nevada, will know about the fact that prior evidence of water damage affects insurance coverage and can lead to mold problems.  Undoubtedly this case will be the subject of frequent broker education programs in Nevada. 

If Heer had a broker who knew that water damage would cause insurance problems, shouldn't Heer have been instructed to ask about water damage? Since the court has held that the seller need not disclose it without prompting, should buyers be instructed to prompt?  Is it possible that the broker need not tell the client about possible additional problems not disclosed by the seller?

In Missouri, the standard form disclosure, prepared by brokers, requires the seller to disclose information about any prior water leaks, repaired or not.  

Compare:   Hess v. Chase Manhattan Bank, U.S.A., N.A., 220 S.W. 3d 758 (Mo. 2007) (The DIRT DD for 7/26/07) (Fact that EPA is conducting investigation of contamination on property is a material fact of independent significance, even when evidence of such contamination is evident from an inspection of the property, and seller's failure to disclose investigation is fraudulent, even where sale agreement contains
"as is" clause.)

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