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
dirt@umkc.edu
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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