State Court Reduces Damages of Condo Purchaser Because It Failed To Conduct Environmental Investigation

In the wake of the Great Recession, many foreign investors are buying bulk quantities of condominium units at what they perceive to be distressed prices for projects located in certain gateway cities such as Miami and New York. Frequently, these condominium projects are developed on brownfield sites. In phased transactions where multiple buildings are constructed over a period of time, portions of the brownfield site cleanup on other parcels comprising the larger project may not be completed. Some states will not issue no further actions letters with covenants not to sue or liability releases until construction of the entire complex is completed. In such circumstances, buyers would acquire condo units without the liability protection afforded by the NFA letter.

As a result, some banks are requiring environmental due diligence when investors seek to finance condo acquisitions. However, other banks and cash buyers may not conduct any such diligence since they do not perceive of significant liability. In the case of foreign investors, they may also not be familiar with US environmental laws. 

A condo buyer will not normally be liable for an incomplete cleanup or failure of the building to comply with post-remedial engineering or institutional controls since the condominium association will be considered the property operator for purposes of CERCLA liability. Of course, if the buyer acquires enough units to control the condo association, it is possible the buyer could inadvertently become an “operator” of the property.  A condo buyer could also face indirect liability if the condo projects subsequently experiences adverse environmental publicity which causes the units to lose significant value—even from distressed valuation levels. In such instances, lenders who financed the condo acquisition could also confront a loss of their collateral.    

A recent Michigan case illustrates the risks associated with such projects. In Alfieri v. Bertorelli, 2011 Mich. App. LEXIS 1796 (Mich.Ct. App. 10/18/11), the plaintiffs purchased a condominium unit in a former factory building. The plaintiffs did not intend to live in the condo but purchased it as an investment. The factory had been impacted with trichloroethylene (“TCE”) from its former use.  A newspaper article and the sales brochure prepared by the real estate agents indicated the site had been remediated. However, the developer did not remediate the contamination beneath the building but instead installed a vapor barrier. When asked about the environmental condition of the property, the real estate agents told the plaintiffs the property had been remediated despite the fact that the Michigan Department of Environmental Quality had advised the agents that the sales brochure was inaccurate and misleading. Because of the newspaper article and the sales brochure, the plaintiffs did not perform their own due diligence

The property turned out to be heavily contaminated. Plaintiffs subsequently filed a lawsuit against the real estate agents on theories of silent fraud and negligent misrepresentation.  The defendants claimed that they owed no duty to the buyers, that there was insufficient evidence that the buyers relied on the sales brochure, and any reliance was unreasonable because the agents did not make any misrepresentations.  The jury found that the agents engaged in negligent misrepresentation. However, the jury also determined that the plaintiffs were partially responsible for their damages because they had failed to perform their own due diligence. The jury found that the buyers were 35% at fault on the negligent misrepresentation claim.

Both parties appealed but the Michigan Court of Appeals affirmed the jury’s verdict. The Court of Appeals began its opinion by distinguishing between silent fraud and negligent misrepresentation. While the concepts were similar, the court said that silent fraud was based on a defendant suppressing a material fact that they were legally obligated to disclose while negligent misrepresentation was premised on an affirmative inaccurate statement. The court said that a misleadingly incomplete response to an inquiry could constitute silent fraud.

Rejecting  defendant’s contention that sellers’ agents a per se duty of disclosure to buyers, the court said that a duty of disclosure may be imposed on a seller’s agent to disclose newly-acquired information that is recognized by the agent as rendering a prior affirmative statement untrue or misleading. The court said this would be especially true where the agent knows that the buyer has a particular concern with the subject matter of that statement.

Turning to the facts of the case, the court found there was evidence that plaintiffs made direct inquires of defendants about the condition of the property and that the Department of Environmental Quality advised defendants that the sales brochure contained inaccurate and misleading information. The defendants had  argued that there could be any fraud if the allegedly-defrauded party had the means to determine the truth of the matter. However, the court said the general rule only applied when the plaintiffs were either presented with information and chose to ignore it or had some other indication that further inquiry was needed. Moreover, the court went on, when the defrauded/injured party tried to examine extrinsic evidence supporting a false statement, the injured party owed no duty to the defrauder to exercise diligence to uncover additional evidence disproving the defrauder’s representations

The court noted that the plaintiff testified that it was his understanding that the site had been cleaned up based on general public discussion, conversations with the defendants and local newspaper articles. Moreover, the court said, plaintiffs directly inquired of Greene regarding the condition of the property and whether it had been cleaned up at the time they signed the purchase agreement. While the court acknowledged that the facts set out in the sales brochure could have been independently verified, the court said that viewing the evidence and all reasonable inferences that can be drawn from it in the light most favorable to plaintiffs, there was sufficient evidence to establish that the plaintiffs had reasonably relied on the sales brochure where numerous sources–including the defendants, the local newspaper, and public “buzz”– indicated that   the site had been cleaned up

On the jury instructions regarding the plaintiff’s comparative negligence, the court ruled that given plaintiff’s decision not to obtain an environmental inspection and execution of a purchase agreement specifically stated that defendants had no knowledge of the property’s environmental conditions, there was sufficient evidence for the jury could have found some comparative fault on the part of plaintiffs with respect to the negligent misrepresentation claim.

We have a number of posts about broker liability associated with environmental conditions and incomplete property condition disclosure statements in our “archived” blogs.

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