Duty of Seller to Disclose Lawsuit to Buyer – Michigan

Author: LegalEase Solutions

Introduction 

Woodlands Condominium Association has a pending lawsuit for defects in the construction and installation of common elements of the condominiumcomplex.  The association expects that individual co-owners may wish to sell their units during the pendency of the litigation.

Question Presented 

Are the selling co-owner or the Condominium Association required to disclose the existence of the lawsuit and the defects to any potential buyer?

Short Answer

Possibly Yes. The selling co-owner or the Condominium Association may be required to disclose the existence of the lawsuit and the defects to any potential buyer.

Discussion 

In Michigan, the principle of Caveat emptor prevails in land sales and normally the vendor is not liable for any harm due to defects existing at the time of sale. However, this is subjected to two exceptions. Clemens v. Lesnek, 200 Mich. App. 456,459 (Mich. Ct. App. 1993).  The first exception requires the seller to disclose to the purchaser any concealed condition known to the seller. Id.  The second exception makes the seller liable to those outside the land for a dangerous condition on the land even after the sale. Id.

However, the Michigan Seller Disclosure Act has modified these common law principles by imposing a new duty to disclose certain enumerated information.  PENA V. ELLIS, 2006 Mich. App. LEXIS 1190, 1194 (Mich. Ct. App. 2006) (unpublished).  The Act provides a mandatory disclosure form. Mich. Comp. Laws § 565.957. The form requires that the seller answer all questions and report known conditions affecting the property. Bergen v. Baker, 264 Mich. App. 376, 383 (Mich. Ct. App. 2004).  A collective analysis of the language of the relevant statutes that comprise the Michigan Seller Disclosure Act, Mich. Comp. Laws § 565.951 et seq., shows that “the legislature intended to allow for seller liability in a civil action alleging fraud or violation of the act brought by a purchaser on the basis of misrepresentations or omissions in a disclosure statement, but with some limitations.” Id. at 385. The seller will not be liable for the errors, inaccuracies, or omissions in a seller disclosure statement where the seller lacks personal knowledge, would not have had personal knowledge by the exercise of ordinary care, and proceeds in good faith to deliver the disclosure statement to the buyer. Id. However, if the seller has personal knowledge of the defects or omissions, the seller has a mandatory duty to disclose the same to the purchaser. In the instant case, the selling co-owner or the Condominium Association is bound by the Act to disclose the defects in the construction and installation of common elements of the condominium to the prospective buyer, since these defects are within their personal knowledge.

The Appellate Court examined the contours of the Seller Disclosure Act in Bergen v. Baker, 264 Mich. App. 376, 383 (Mich. Ct. App. 2004). In Bergen, the buyers brought an action against the sellers and claimed that the seller failed to disclose a leaking roof in violation of the Seller Disclosure Act. Id.  The Court analyzed provisions of the Act that require disclosures to be made in “good faith,” which means “honesty in fact in the conduct of the transaction.” Id. at 384; MCL 565.960. The Court held that the Seller Disclosure Act undoubtedly creates a legal duty of disclosure, but that it does not abridge or limit any obligation for disclosure created by any other provision of law regarding fraud, misrepresentation, or deceit in transfer transactions. Id; MCL 565.961. The Court found that there was a genuine issue of material fact as to whether the seller disclosure statement under Mich. Comp. Laws §  565.957 contained a misrepresentation, error, inaccuracy, or omission, of which the sellers had, or should have had, personal knowledge. Id.

Thus, the seller’s personal knowledge of any defects in the property is a key component in determining liability for nondisclosure. If the seller, having personal knowledge of an error or any relevant fact, fraudulently conceals this knowledge from the notice of the prospective buyer, the seller may have committed a “silent fraud.”  To establish a claim of silent fraud, the buyer must present evidence that the seller made some sort of representation that was false. M&D, Inc. v. McConkey, 231 Mich. App. 22 (Mich. Ct. App. 1998). In Lorenzo v Noel, 206 Mich. App. 682, 684-685; 522 N.W.2d 724 (1994), the Court explained the “silent fraud” doctrine as follows:

“A fraud arising from the suppression of the truth is as prejudicial as that which springs from the assertion of a falsehood, and courts have not hesitated to sustain recoveries where the truth has been suppressed with the intent to defraud. Thus, the suppression of a material fact, which a party in good faith is duty-bound to disclose, is equivalent to a false representation and will support an action in fraud.”

Id. at 28-29. [Internal citations omitted]

Similarly, in M&D, Inc., 231 Mich. App. 22, 25 (Mich. Ct. App. 1998), Plaintiff purchaser of commercial real estate appealed summary dismissal of a fraud and innocent misrepresentation claims, arguing that the seller was aware of the history and severity of a flooding problem but concealed these issues from the purchaser before the property sale. The Court held that a claim of silent fraud is only established when the seller has suppressed a material fact that there was a legal or equitable duty to disclose. Id. at 34-35. Holding that there was no misdirection or silent fraud, because the seller did not make any representation that was proven to be false, The Court observed:

[I]t is not enough, as this Court in Shimmons held, that the seller had knowledge of the defect and failed to disclose it; rather, the seller must make some type of misrepresentation.  A misrepresentation need not necessarily be words alone, but can be shown where the party, if duty-bound to disclose, intentionally suppresses material facts to create a false impression to the other party.

The misrepresentation requirement will be satisfied when a seller suppresses information that he is required to disclose. Williams v. Benson, 3 Mich. App. 9, 19-20 (Mich. Ct. App. 1966). In Williams, an action for foreclosure, the third party purchasers of a hotel counterclaimed against the seller for damages due to non-disclosure of termite problem. The appellate court affirmed partial summary judgment for the third party purchasers. Because termites were instruments of progressive destruction, there was a duty to disclose their presence, even if it was believed that they had been successfully eradicated. Id.  The court held:

[T]he suppression of a material fact, which a party in good faith is duty-bound to disclose, is equivalent to a false representation and will support an action in fraud…failure to disclose material facts even absent specific inquiry can amount to fraud and support rescission under the proper circumstances.

Id. at 19-20.

Failure to disclose the existence of a pending lawsuit can also give rise to liability. In Ball v. Sweeney, 354 Mich. 616 (Mich. 1958), after purchasing a resort from the sellers, the buyers sued for rescission of the contract of sale alleging that the sellers concealed the existence of sewage difficulties with the sellers’ over disposal of sewage, culminating in an injunction being issued to restrain the sellers from depositing the effluent from their septic tank on their neighbor’s property.  In addition, the buyers alleged that defendants sellers concealed that fact that “for several years the State health department had been attempting to compel defendants to make changes in their sewage setup based on State health department recommendations.”  The Appellate Court, affirming the trial court judgment, found that “the failure of appellants to disclose the problem with the Michigan health department, and lawsuit with the neighbors to the south was the withholding of a material fact, constituting fraud,” and plaintiffs were entitled to rescind the contract and recover their money.  Id. at 617.

In the instant case, whether the pendency of the lawsuit is a material fact or not is an open question. Under the reasoning in Ball, the concealment of the existence of a lawsuit may be a material fact if it adversely affects the rights of the buyer and interfere with the peaceful enjoyment of the property.  The existence of a lawsuit, like the one in Ball, that may result in an injunction or any other restraining orders interfering with the free enjoyment of the purchased property would constitute a material fact.  “Whether a duty to speak exists is determinable by reference to all the circumstances of the case and by comparing the facts not disclosed with the object and end in view by the contracting parties.  The facts concealed must be such as, in fair dealing, the one party has a right to expect to be disclosed, and such as the other party is bound to disclose.”   Groening v. Opsata, 323 Mich. 73, 81 (Mich. 1948).

In the case at hand, since the existence of defect is well with in the knowledge of the seller, the seller has a duty to disclose any errors, omissions or defects within his personal knowledge.  Once the prospective buyer is aware of the defects in the construction and installation of common elements, the principle of caveat emptor may apply to hold him responsible to confirm from the seller any step that the seller may have taken to rectify the defect, which may lead to the buyer getting information about the law suit instituted for its redressal.

The fact that the property involved in the instant case is a condominium makes it more likely that the lawsuit must be disclosed, in addition to the defects. The rights and duties of a co-owner of a condominium are far different from the individual owner of a real property. The unit owners of a condominium have limited freedom of choice as compared to the owner of a separate, privately owned property. Cohan v. Riverside Park Place Condominium Assoc., 140 Mich. App. 564, 570 (Mich. Ct. App. 1985).  “Condominium unit owners comprise a little democratic sub society of necessity more restrictive as it pertains to use of condominium property than may exist outside of the condominium organization.” Id. at 570.  As an incoming member of the Condominium Association, the prospective buyer will step into the rights and liabilities of the seller.  If the pending litigation pertaining to the enjoyment of such common facilities is not disclosed to the prospective buyer, it would result in the watering down of his/her rights.  Thus, any concealment of the existence of the lawsuit would be tantamount to the buyer paying the liabilities of the ex-owner, who might have failed to pay the costs or attorney fees of the litigation. MCL § 559.211 Sec. 111(2), requires the buyer to request a written statement regarding unpaid assessments, interest, costs and attorney fees from the association of co-owners, at least 5 days before sale.  The Section reads:

A purchaser or grantee is entitled to a written statement from the association of co-owners setting forth the amount of unpaid assessments , interest, late charges, fines, costs, and attorney fees  against the seller or grantor and the purchaser or grantee is not liable for, nor is the condominium unit conveyed or granted subject to a lien for any unpaid assessments , interest, late charges, fines, costs, and attorney fees  against the seller or grantor in excess of the amount set forth in the written statement. Unless the purchaser or grantee requests a written statement from the association of co-owners as provided in this act, at least 5 days before sale, the purchaser or grantee shall be liable for any unpaid assessments against the condominium unit together with interest, costs, fines, late charges, and attorney fees incurred in the collection thereof.

Thus, the principle of caveat emptor may apply if the prospective buyer ignores its duty under Michigan Condominium Act to ask for a written statement.

Conclusion

The statutory form under the Michigan Sellers’ Disclosure Act requires that the seller should answer all questions and report known conditions affecting the property to the buyer.  The standard for determining liability for nondisclosure is the personal knowledge of the seller of any defects in the property and the willful suppression of that knowledge, amounting to fraudulent concealment.  Fraudulent concealment is established by showing that the hidden defect (which need not be unreasonably dangerous) was known to the vendor and that the purchaser had no knowledge of it.  Michigan case law suggests that the failure to disclose a material lawsuit amounts to withholding of a material fact.

The rights and duties of the condominium co-owners are different from the individual owners of a private property.  Based on the provision of the Michigan Condominium Act, the purchaser has a duty to request a written statement from the seller with regard to unpaid assessments, costs, attorney’s fees, etc at least five days before the sale.  In such a situation, the principle of caveat emptor may be applicable.