Appeals Court Reverses Judgment For Seller Who Failed To Disclose Wetlands on Disclosure Form

We have reviewed several cases where sellers have been held liable for failing to adequately disclose environmental conditions in mandated property condition reports even where the property is sold “as is”. Another example is Wise v. Hays, 943 N.E.2d 835 (Ind. Ct. App. 2011), a state appeals court reversed a grant of summary judgment  in favor of a seller of residential property where the seller had failed to disclose correspondence with the Army Corps of Engineers (Corps) discussing the presence of wetlands on the property.

In 2007, the plaintiffs were interested in purchasing a 16.5 acre parcel that contained a residence. After inspecting the property, plaintiffs sent defendant written questions about the property. One of the questions asked if there were any wetlands that could impact development of the property. The defendant allegedly responded that the property could be developed for additional residential housing.

In connection with the purchase agreement, defendants completed a Residential Real Estate Sales Disclosure Form. The “no” box was marked next to question 7 (“Have you received any notices by any governmental or quasi-governmental agencies affecting this property?) and question 14 ( “Is the property in a flood plain?”).

Sometime after the purchase, plaintiffs began to have concerns about the certain structural issues about home and the presence of wetlands. Plaintiff obtained copies of correspondences from the Corps to the defendant. A June 2003 letter informed defendant that he had engaged in improper “sidecasting” of dredged material from an excavated channel, that he would have to obtain a wetlands permit for the portion of the property he proposed to develop and that any such a permit would likely compensatory mitigation. The November 2003 letter acknowledged receipt of the defendant’s permit application to leave the dredged material in place until it could be removed during the winter freeze and advised the defendant that a site visit would be conducted in March 2004 to verify that the spoil material had been removed and the area restored to its original grade.

Plaintiffs filed a complaint, alleging that defendant knowingly misrepresented certain items on the sales disclosure form. The trial court granted defendant’s motion to dismiss, ruling that plaintiffs had no right to rely on their representations when they had a reasonable opportunity to inspect the property. On appeal, the court reversed.

The appeals court began its analysis by stating that the common law recognized that a seller had a duty to disclose material facts about the property when asked by the buyer. The court said that this common law obligation was amended in 1993 when the legislature required  sellers of certain residential real estate must complete and sign a disclosure form and submit the form to a prospective buyer before an offer is accepted. However, the court said that a seller is not liable under the statute for any error, inaccuracy, or omission on the sales disclosure form that was not within the seller’s actual knowledge.

Turning to the disclosure statement, the court said the evidence established that seller had failed to disclose that the Corps had informed him that the property could not be developed with a wetlands permits, had failed to disclose that he had been informed that the dredging activities had violated the Clean Water Act, and that he was under obligation to remove the dredged materials. However, there were genuine issue of material fact as to whether the defendants had actual knowledge of the structural problems with the residence if the property lies in a flood plain. Accordingly, the court remanded the matter to the trial court for further proceedings.

The New York Property Condition Disclosure Law provides for a statutory penalty of $500 for non-compliance. Many real estate lawyers advise their clients to give the buyer the $500 credit rather than completing the form and risking greater damages for misrepresentation.