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Michigan Seller’s Disclosure Act: Court Grants Rescission Due to Seller’s Fraud

Michigan Seller’s Disclosure Act: Court Grants Rescission Due to Seller’s Fraud

Buying a home is one of the most important, and can be one of the most enjoyable, events in a person’s life. However, there are always unknowns when a home is being purchased, and although there are mechanisms to take out some of those unknowns (including obtaining title insurance), the condition of the home can be difficult to ascertain. To combat some of the uncertainties regarding the condition of the home, and to provide some additional comfort to home buyers, Michigan mandates that every seller of residential real estate provide certain disclosures pursuant to the Michigan Seller Disclosure Act, MCL 565.951, et seq. These disclosures include the existence (or lack thereof) of certain known conditions regarding the property. In most instances, these disclosures will be made by way of a document called a “Seller’s Disclosure Statement.” The disclosures must be made by the seller in good faith (MCL 559.960) and should include any additional disclosures required by the city, township, or county where the property is located (MCL 559.959).

In most transactions, after receipt of the disclosures, an inspection will occur, and the closing will happen shortly thereafter. However, sometimes only within days after taking possession, a buyer will discover issues with the property, including structural damage or water infiltration issues, and, in some instances, active concealment of these issues—all which should have been disclosed before the transaction was consummated. If this happens, Michigan law allows some relief to the buyers in the form of a claim for a violation of the Michigan Seller Disclosure Act, as well as for misrepresentation, and, potentially, silent fraud. Silent fraud is a failure to disclose facts when there was a duty to disclose, and is used often when the seller of real estate or the realtor representing the seller suppresses known defects in the property. See, e.g., Alfieri v Bertorelli, 295 Mich App 189, 194, 813 NW2d 772 (2012) (chemical contamination); Bergen v Baker, 264 Mich App 376, 383–385, 691 NW2d 770 (2004) (leaking roof); Lorenzo v Noel, 206 Mich App 682, 522 NW2d 724 (1994) (paneling concealed bowed-in, cracked, and leaking basement walls).

Recoverable Damages For a Fraudulent Seller Disclosure Statement

Whenever a purchaser of residential real estate realizes that the seller did not properly disclose, or actively concealed, an issue with the property, the analysis inevitably turns to the types of damages recoverable for the failure to disclose. The general rule is that in fraud and misrepresentation actions, the tortfeasor (or, in this case, the seller) is liable for all injuries resulting from the wrongful act, provided that the damages “are the legal and natural consequences of the wrongful act and might reasonably have been anticipated.” Barclae v Zarb, 300 Mich App 455, 479; 834 NW2d 100, 117 (2013). What might have been anticipated is not always a straightforward analysis, but out-of-pocket costs to remedy the issue that was not disclosed (or actively concealed) are typically sought by the purchaser. Another possible way to measure damages is the diminuition in value for the property as a result of the undisclosed issue. See, e.g., Smith v Michigan Realty & Construction Co, 175 Mich 600, 607; 141 NW 635 (1913) (“the measure of damages is the difference between the actual value of the property at the time of the sale or exchange, and what it would have been worth had it been as represented, or what its value was represented to be, and that this measure of damages applies without regard to the price paid or the value of the property given in exchange by the party defrauded …”)

However, there are times when the cost to remedy the issues with the property are too high, and in that situation, the purchaser may also look to try to “get out of” the contract. This remedy is called “rescission.” Under Michigan law, a party seeking rescission of a contract must prove three elements: (1) a seasonable assertion of the rescission right; (2) tender of the consideration and benefits received; and, (3) demand for repayment of any price paid. Mesh v Citrin, 299 Mich 527; 300 NW 870, 872 (1941). Importantly, rescission is an equitable remedy and generally not allowed if another remedy (money damages or reduction in the value of the home) would compensate the injured party. Additionally, if rescission is allowed in the real estate context, the injured party may also be entitled to money damages incurred, especially if those time and materials expended increased the value of the property which is being “given” back to the seller through the rescission process.

Bell V Keller: Michigan Seller Disclosure Act Permits Rescission

Recently, the Court of Appeals dealt with a violation of the Michigan Seller Disclosure Act in relation to a failure to disclose water infiltration issues in a home. In Bell v Keller, unpublished per curiam opinion of the Court of Appeals, issued May 20, 2021 (Docket No. 352421), the seller answered the following two items in the negative on the Seller’s Disclosure Statement:

  • “Basement/Crawlspace: Has there been evidence of water?”
  • “settling, flooding, drainage, structural, or grading problems.”

The trial court granted the purchaser’s request for rescission of the contract, and also granted money damages for out-of-pocket expenses incurred by the seller. However, the trial court refused to grant monetary damages for time spent dealing with the water infiltration issues by the purchaser herself, as well as for materials purchased by the plaintiff in her attempt initially to remedy the issues.

The Court of Appeals sustained the grant of rescission in favor of the purchaser. As the Court held, “[t]he purpose of the equitable remedy of rescission is to restore the status quo.” Id. at *2, citing Lash v Allstate Ins Co, 210 Mich App 98, 102; 532 NW2d 869 (1995). The Court further stated that, “[w]here a rescission for fraud has been had, repairs and improvements made by the innocent party are recoverable as damages.” Id. citing Patten v Downer, 227 Mich 95, 100; 198 NW 722 (1924).

The Court of Appeals then went on to say that the trial court’s decision to allow recovery of expenses paid to third-parties, but not to reimburse the purchaser for her own time and purchased materials, was in error. More specifically, the Court stated that those holdings were “inconsistent.” That being said, in addition to materials purchased directly by the plaintiff, she had also attempted to recover $30/hour for her own time in dealing with the water infiltration issues (which she calculated at 440 hours). The Court of Appeals stated that the trial court’s decision not to grant that relief was appropriate because the plaintiff failed to put forth evidence that $30/hour was reasonable for the work she performed or accurate records of time that she spent performing work at the house. As such, based on the facts presented, the Court held that the actual recoverable damages to the plaintiff should be: (1) rescission; (2) out-of-pocket expenses paid to third-parties to perform repair work; and (3) materials purchased by the plaintiff.

Conclusion/Takeaways

If a purchaser is facing an issue with undisclosed items in the purchase of a home, it is important that all remediation efforts be fully documented, including time spent performing any of the remediation work by the purchaser. Even further, because rescission of contract is an equitable remedy that requires a demand be made in an expeditious manner, hiring an attorney to help guide you through this process is absolutely necessary. Cases and claims can be won or lost based on documentation, including pictures and videos of the property itself, and, if remediation work is to be performed on the property, there may be notices to be provided to the seller before the remediation work is performed.

Adam Toosley is a member at Hirzel Law, PLC and focuses his practice on real estate litigation, zoning and land use, construction, and financial services litigation. Over the course of his career, he has represented property owners, landlords, condominium associations, lenders and all parties in the construction chain, handling all aspects of real estate-related disputes, including construction defect cases, payment and landlord-tenant disputes as well as real estate foreclosures, mechanic’s lien cases and fraud and business tort claims in state and federal court as well as in mediations and arbitrations throughout the United States. He is licensed in both Michigan and Illinois. He can be reached at (248) 480-8704 or at atoosley@hirzellaw.com.

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