Michigan Court Imposes New Duty to Disclose on Real Estate Agents

Posted on February 16, 2012 by Michael Hockley

In Alfiero v. Bertorelli, the Michigan Court of Appeals affirmed a jury verdict holding a real estate agent liable under a theory of silent fraud and negligent misrepresentation for the failure to disclose environmental contamination beneath an abandoned factory that was rehabilitated into condominiums.  This decision raises the duty of care for real estate agents in transactions involving property where there are known past environmental issues.

Plaintiffs sued both the seller and its agent after learning the condominium unit plaintiffs’ purchased had not been properly decontaminated, contrary to statements in a sales brochure and newspaper article the agent provided to plaintiffs in response to plaintiffs’ inquiry about the status of past environmental contamination at the property.  The real estate agent relied upon information provided by seller and argued that although a seller has a duty to disclose to a buyer, that duty does not extend to the seller’s agent, and the agent should not be liable for seller’s misrepresentations. 
 
The unit was located in a former factory that had been contaminated with trichloroethylene (“TCE”).  During the conversion of the factory into condominiums, a TCE vapor barrier was installed, but the site was never properly decontaminated.  Plaintiffs believed that the site had been properly cleaned up because of statements to that effect in the newspaper article and sales brochure provided to them by the real estate agent in response to buyers’ inquiries concerning past contamination.  Plaintiffs purchased the condominium in reliance on those representations without conducting independent due diligence. 

The appellate court ruled in favor of plaintiffs on the grounds of common law fraud or fraudulent misrepresentation, noting that the elements are (1) a false representation of a material fact with the intention of reliance by plaintiffs; (2) defendant knew the representation was false or was made with reckless disregard for its accuracy; and (3) plaintiff actually relied on the representation and suffered damages as a result. (M&D Inc. v. McConkey). The court further found silent fraud is essentially the same except it is based on the defendant withholding or suppressing a material fact that he or she was legally obligated to disclose rather than making an affirmative representation. 

Because both silent fraud and negligent misrepresentation require that a defendant owe a duty to the plaintiff, defendants argued that previous Michigan decisions did not impose on an agent a per se duty of disclosure to buyers and that such duty instead lies solely with the sellers.  The court held that although that is the general rule, when a buyer has expressed a concern about a particular statement, a duty to disclose may arise solely because of the buyer’s expressed interest or direct inquiry to the agent.  Defendants also argued there cannot be fraud if the party claiming to be defrauded had an independent means to determine the truth of the matter.  The court again acknowledged the general rule but held that it is not an absolute rule, stating it is “only applied where plaintiffs ‘were either presented with the information and chose to ignore it or had some indication that further inquiry was needed.’” 

The agents provided plaintiffs with a sales brochure stating that the site had been cleaned up.  When plaintiffs further inquired to the agents about the state of the cleanup, the agents referred plaintiff to a newspaper article reporting that the building had been decontaminated.  Based on those statements, the court found that plaintiffs had no duty of further inquiry and could reasonably rely upon information provided by the agent. 

Nevertheless, the court issued a comparative negligence instruction to the jury, and the jury determined that Plaintiffs’ decision not to obtain an environmental inspection knowing that there had been contamination in the past made Plaintiffs partially at fault. 

This decision reinforces the duties on both sides of a real estate transaction (1) to make adequate and accurate disclosures, on the part of the seller and its agents, and (2) to make reasonable environmental inquiries on the part of the buyer, notwithstanding seller’s statements.  Even though a real estate agent as a general proposition may not be responsible for the seller’s representations concerning a property’s environmental status, a duty is triggered when a buyer makes specific inquiry concerning a factual representation about the property and the agent provides additional information to buttress the seller’s representations. 

The lesson to be gleaned from this case is simple:  a seller’s agent should conduct his or her own due diligence concerning statements about the remediation of environmental contamination when the property has known or suspected past contamination.  Similarly, even for residential properties, buyers have an obligation either to conduct independent verification of seller’s statements concerning environmental conditions or to seek contractual representations and warranties from the seller concerning such conditions.