On August 18, 2022, the Michigan Court of Appeals issued a published Opinion in the matter of Coosard v. Tarrant, No. 357950, 2022 WL 3568714 (Mich Ct App, August 18, 2022). In Coosard, the Plaintiffs purchased a parcel of real estate from the Defendant. The property was listed on the Multiple Listing Service (the “MLS”) and the listing included a photograph showing a small house with a covered porch and a covered area to one side, and a detached garage-like structure on the other side. The MLS listing indicated that the structures shown were included with the sale of the home.
As part of the sale of the property, the Defendant signed and completed a Seller’s Disclosure Statement, as required by MCL 565.957. The Seller’s Disclosure Statement asked the following two questions relevant to this litigation, both of which were answered as “UNKNOWN” by the Defendant/Seller:
Features of the property shared in common with adjoining landowners such as walls, fences, roads, driveways or other features whose use or responsibility for maintenance may have an effect on the property?
Any encroachments, easements, zoning violations or nonconforming uses?
The purchase agreement stated that Plaintiffs were advised to “have a survey performed to satisfy Buyer as to the boundaries of the Property and the location of improvements thereon” but the Plaintiffs chose not to perform a survey. The purchase agreement also stated that “[w]hen closing occurs, Buyer shall be deemed to have accepted the boundaries of the Property and the location of such improvements thereon.” The purchase agreement also stated that “Buyer agrees that Buyer is not relying on any representation or statement made by Seller or any real estate salesperson (whether intentionally or negligently) regarding any aspect of the Property or this sale transaction, except as may be expressly set forth in this Agreement, a written amendment to this Agreement, or a disclosure statement separately signed by the Seller.”
The Plaintiffs closed on the purchase of the property without performing a survey and the legal description of the property that was conveyed at closing was the same as listed in the purchase agreement. After closing, the Plaintiffs learned that the garage, the fence, and part of the patio were located within a 14-foot-wide strip of land that was owned by the neighbors of the property they purchased. A post-closing survey confirmed that the structures were encroaching on the neighboring property, but the Plaintiffs did not have title insurance to cover this defect because they neglected to perform a survey before closing, which is necessary in order to remove the “survey exceptions” for title insurance commitments.
The Plaintiffs sued the Defendant for fraud and asserted that Defendant knew about the encroachment based on testimony from the neighboring property owners who testified that they told the Defendant about the encroachment and demanded he remove the structures from their property boundary. Importantly, although the neighbors demanded that Defendant remove the alleged encroachment, they did not provide Defendant with any concrete proof (such as a survey) to establish that the improvements were in fact encroaching on the neighbor’s property. The trial court concluded that Defendant’s Seller’s Disclosure Statement constituted “a giant red flag” and Defendant did not appear to have made “an obvious and open misrepresentation,” so it granted summary disposition in favor of Defendant and dismissed the Plaintiffs’ claims.
On appeal, the Michigan Court of Appeals held that the Defendant “clearly made a variety of material representations for the purpose of selling the property” and that “if defendant was aware of the encroachment, he seemingly committed fraud in the MLS listing, which clearly represented that the property included everything up to the fence line.” The Court of Appeals held that the Defendant “seemingly committed innocent misrepresentation,” however, “the trial court properly concluded as a factual matter that defendant did not commit any knowing misrepresentations, and the purchase agreement precludes plaintiffs’ innocent misrepresentation claim as a matter of law.”
Notwithstanding the integration clause in the purchase agreement, the Court of Appeals first held that the Plaintiffs were not precluded from bringing fraud or innocent misrepresentation claims premised on (1) misrepresentations in the Seller’s Disclosure Statement, or (2) misrepresentations in the MLS listing. The Court held that the parol evidence rule would not preclude evidence that a statement within the purchase agreement, or within the seller’s disclosure statement referenced in the purchase agreement, was fraudulent. Furthermore, extrinsic evidence may be introduced to show fraud sufficient to invalidate the contract entirely.
The Court of Appeals next explained that an “as is” clause in the parties’ contract constitutes persuasive evidence that the purchaser assumed the risk of loss. However, an “as is” clause does not “transfer the risk of loss where a seller makes fraudulent misrepresentations before a purchaser signs a binding agreement.” Nevertheless, innocent misrepresentation is premised upon the seller having no knowledge of the falsity of a representation, and “as is” clauses are fundamentally intended to allocate the risk of unknown losses. Therefore, the Court held that an “as is” clause does preclude a claim of innocent misrepresentation. Although not specifically addressed by the Court, it stands to reason that a claim of negligent misrepresentation would similarly be precluded by an “as is” clause.
In addition, the Court of Appeals held that although there is no legal obligation of a purchaser of real estate to obtain a survey before closing, it is “the most prudent course of action.” The Court of Appeals agreed with the trial court that the Seller’s Disclosure Statement should have alerted Plaintiffs that there were likely to be problems with the property. Notwithstanding the fact that the Plaintiffs should have been on alert of potential issues with the boundary line, the Court of Appeals held that the “as is” clause in the purchase agreement did not preclude Plaintiffs’ fraud claim.
Finally, because there was never any clear proof provided to Defendant to establish that the improvements were encroaching on the neighbor’s property, the trial court found that the Defendant did not knowingly lie on the Seller’s Disclosure Statement or in the MLS listing. Because there is no evidence establishing that Defendant was affirmatively aware of any encroachment, the Court of Appeals agreed and also held that the Defendant did not commit fraud. The Court of Appeals also held that the Plaintiffs may potentially have an adverse possession claim against the neighbors, but this issue does not appear to have been litigated in the trial court and it is unclear if the requisite elements and necessary 15 year time period can be established by Plaintiffs.
In conclusion, there are three important takeaways from the Coosard case for residential real estate transactions. First, although most purchase agreements include integration clauses, it is possible for a purchaser to assert a fraud claim or innocent misrepresentation claim based on representations that are made in a Seller’s Disclosure Statement (which sometimes is incorporated into and deemed part of the purchase agreement) and/or in an MLS listing if evidence demonstrates that the representations made were fraudulent. Second, many purchasers assume that an “as is” clause in the purchase agreement, which is standard and included in most real estate purchase agreements, makes it impossible for a purchaser to sue the seller after closing. As illustrated in Coosard, this is not the case as the Court of Appeals held that a purchaser could bring a claim for fraudulent misrepresentation. Third, although claims for fraudulent misrepresentation are not barred by an “as is” clause in a purchase agreement, claims such as innocent misrepresentation and negligent misrepresentation are barred by such a provision, and the purchaser will need to prove the more difficult standard of fraudulent misrepresentation.
Since many residential real estate transactions in Michigan are negotiated using pre-printed real estate brokerage/agency forms, there is often little to no negotiation of legal matters such as “as is” clauses, and most negotiation simply revolves around the financial terms of the transaction. The fact that this may be the norm does not mean that it is a prudent practice. The Coosard case illustrates the importance of carefully reviewing and negotiating purchase agreements, carefully reviewing Seller’s Disclosure Statements, obtaining the best possible title insurance coverage, and performing all necessary due diligence before closing. Importantly, if the purchasers in Coosard had obtained a survey prior to closing, they would have discovered the boundary line dispute before closing, they could have attempted to have the seller resolve the issue before closing, and the purchasers could have obtained title insurance that would cover them for defects in title related to boundary line disputes. The Coosard case is a classic example of the importance of having an experienced real estate attorney assist with real estate transactions, even those that may seem otherwise standard or uncomplicated.
Brandan A. Hallaq is a Senior Attorney with Hirzel Law, PLC where he litigates cases involving defective construction, contract disputes, shareholder/member disputes, quiet title actions to determine interests in property, enforcement of restrictive covenants, real estate foreclosure actions, and bankruptcy matters representing creditors. Mr. Hallaq is also a licensed Real Estate Broker in the State of Michigan and leads the real estate transactions department at Hirzel Law, PLC where he negotiates and prepares the necessary documents for business and real estate transactions, including purchase agreements, franchise agreements, loan/financing documents, and commercial and residential leases and mortgages. In each year from 2018 through 2022, he has been recognized as a Rising Star in the area of real estate law by Super Lawyers Magazine, a designation that is given to no more than 2.5% of the attorneys in the State of Michigan each year. He was also recognized as a 2020 Up & Coming Lawyer by Michigan Lawyer’s Weekly, an award given to no more than 30 attorneys in the state each year, and he has been recognized in the Best Lawyers in America: “Ones to Watch” list for professional excellence in real estate law in each year from 2021 through 2023. Mr. Hallaq obtained his Juris Doctor degree, cum laude, from Wayne State University Law School where he served as an editor on the Wayne Law Review. Prior to joining Hirzel Law, PLC, Mr. Hallaq worked for a Federal Judge and in a Fortune 500 corporation’s in-house legal department. He can be reached at (248) 986-2290 or at firstname.lastname@example.org.