Daily Development for Tuesday, May 4, 1999

 

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

 

 

 VENDOR/PURCHASER; MISREPRESENTATION; "AS IS" CLAUSES:  A purchaser of land acquired on an "as is" basis fails to state a claim for fraudulent concealment, or "silent fraud", based on the seller's failure to disclose a hidden defect where the seller has not made a false or misleading representation about the defect and has no legal or equitable duty to disclose the defect. 

 

 M&D, Inc. v. W.B. McConkey, 585 N.W.2d 33 (Mich. Ct. App. 1998)

 

 Seller sold commercial property pursuant to a contract that contained a number of indications that the property was sold "as is."  The critical provision read as follows: 

 "Owner has never occupied this property.  No representations or warranties implied as to condition.  Property being sold in 'as is' condition."  Seller refused to sign a seller's disclosure statement and that refusal was incorporated into the documents.  In fact, however, the seller was aware of what the court described as a "hidden defect" --a history of flooding--of which the seller knew the purchaser was not aware.   The purchaser had never asked the seller about flooding or water problems with the property.  

 

 A special conflict panel of the Court of Appeals was convened to resolve a conflict between a earlier opinion in this case and the Court's prior ruling in Shimmons v. Mortgage Corp. of America, 520 N.W.2d 670 (Mich. Ct. App. 1994).  In Shimmons, the Court held that a purchaser may state a claim for silent fraud, even where the purchase agreement includes an "as-is" provision, if the purchaser can demonstrate that the hidden defect was known to the seller and that the purchaser had no knowledge of it.  See id. at

670. 

 

 

 The M&D Court specifically overruled Shimmons, holding that "[i]t is not enough . . . that the seller had knowledge of the defect and failed to disclose it; rather, the seller must make some type of misrepresentation."  Seller made no such misrepresentation here. 

 

 The court did allow that there could be liability for misrepresentation if the seller "duty bound to disclose, intentionally suppresses material facts to create a false impression to the other party."  Further, the court allowed that there could be a cause of action for "silent fraud" where the seller fails to disclose material information when the buyer has expressed a "particularized interest" in a certain issue and the seller communicates

some information, but withholds critical parts.  Finally, the court allowed for the possibility of a claim for negligent failure to disclose when a party is injured by property conditions that are unreasonably dangerous and a seller fails to disclose them to a buyer under circumstances where it is reasonable to expect that the buyer will not discover them and cure them in time to avoid injury.

 

 But the court found no facts here to support an independent duty of disclosure, no "unreasonably dangerous" condition, and no specific inquiry by the buyer. 

 

 The buyer further argued that the seller had deliberately disguised the evidence of flooding by painting walls and replacing carpet, but the court replied that there is nothing inherently fraudulent about a seller doing some clean up before sale.

 

 Comment 1: The case is a good example of tort law oriented judges throwing around concepts of causes of action and burdens of proof without taking any account of the impact of their opinion on the conduct of parties in the marketplace.

 

 The common law rule, of course, is that sellers have the affirmative duty to disclose latent defects.  The court describes the flooding condition as a "hidden" condition, and uses the term "latent defect" in an ambiguous footnote reference, but there is no indication that the court is aware of the common law rule or its potential significance.  Consequently, we really don't know whether the flooding condition was reasonably discoverable by the buyer or not.

 

 Further, the court doesn't really tell us whether the "as is" clause is a critical element.  The court's discussion of various disclosure situations does not really clarify whether, absent  the "as is" clause, the seller might have a duty to disclose latent defects, but escapes that duty through use of the clause.  The latter interpretation would be consistent with some, but not all, common law authority, but it is very difficult to wring that interpretation out of this case.

 

Comment 2: As to the brokers, the court holds simply that there is no duty to disclose if there is no privity, and the brokers apparently were the seller's brokers and therefore lacked privity.  This, also, is inconsistent with law in a number of jurisdictions, which have held that brokers as professionals owe special responsibilities to the persons with whom they deal, contract or not, and consequently must disclose undiscoverable defects where they know that a party is not aware of them and will suffer a loss when they ultimate appear.   

 

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

ABOUT DIRT:

DIRT is an Internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 ‑ 10 messages per workday.

Daily Developments are posted every workday.

To subscribe to Dirt, send an e-mail to:

To:

ListServ@listserv.umkc.edu

Subject:

[Does not matter]

Text in body of message

Subscribe Dirt [your name]

To cancel your subscription to Dirt, send an e-mail to:

To:

ListServ@listserv.umkc.edu

Subject:

[Does not matter]

Text in body of message

Signoff Dirt

For information on other commands, send the message Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only commercial and general real estate matters but also focuses specifically upon residential real estate matters. Because real estate brokers generally find this service more valuable, it is named "Brokerdirt." But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to Brokerdirt, it is not necessary also to subscribe to DIRT, as Brokerdirt carries all DIRT traffic in addition to the residential discussions.

To subscribe to Brokerdirt, send an e-mail to:

To:

ListServ@listserv.umkc.edu

Subject:

[Does not matter]

Text in body of message

Subscribe Brokerdirt [your name]

To cancel your subscription to Brokerdirt, send an e-mail to:

To:

ListServ@listserv.umkc.edu

Subject:

[Does not matter]

Text in body of message

Signoff Brokerdirt

DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors.

DIRT has a WebPage at: http://www.umkc.edu/dirt/