Does Seller’s Real Estate Agent Have A Duty To Purchaser?

A recent Michigan Court of Appeals decision, Alfieri et al. v. Bertorelli et al., dated October 18, 2011 re-visits the issue of whether a real estate agent has a duty to disclose environmental information to a prospective purchaser in the absence of privity.

The take-away in this and similar cases is that the result is often dependent upon the specific facts presented, and even then, according to the Property Investment in New Zealand the result may vary depending upon the law of the state at issue. For example, New York strongly adheres to the doctrine of caveat emptor, which imposes no liability on a seller (let alone the seller’s agent)  for failing to disclose information regarding the premises in an arms length transaction, unless there is some conduct on the part of the seller which constitutes active concealment.  In New York, the purchaser of contaminated property would arguably have a difficult time, in the absence of some affirmative misrepresentation and a showing of reasonable reliance, holding seller’s agent liable.

Although the Alfieri case is based on Michigan, not New York, law, its holding is instructive. Alfieri arose out of plaintiffs’ purchase of a condominium unit in what had once been an abandoned factory. The factory had been contaminated with trichloroethylene, and in the process of converting it into condominiums, a vapor barrier was installed. Nonetheless, the former factory property was never properly decontaminated. However, plaintiffs were led to believe that the contamination had been cleaned up. In part, plaintiffs relied upon a sales brochure, prepared by Coldwell Banker, the seller’s agent, indicating that the site had been decontaminated. The plaintiffs purchased the condominium without conducting any independent diligence of their own and only learned following the closing that the property was seriously contaminated.

In rejecting Coldwell Banker’s motion for summary judgment, the Michigan court discussed two of plaintiffs’ theories of recovery – silent fraud and negligent misrepresentation. The court explained that common law fraud or fraudulent misrepresentation involves: (1) a defendant making a false representation of material fact with the intention that a plaintiff would rely on it; (2) the defendant either knowing at the time that the representation was false or making it with reckless disregard for its accuracy; and (3) plaintiff actually relying on the representation and suffering damage as a result. Silent fraud is essentially the same, except that it is based on a defendant suppressing a material fact that he or she was legally obligated to disclose, rather than making an affirmative misrepresentation. A silent fraud may be a misleadingly incomplete response to the purchaser’s inquiry concerning a particular concern.

The court did not accept seller’s agent’s argument that Michigan jurisprudence did not impose upon the seller’s agent a duty of disclosure, in contrast to the duty imposed on the sellers themselves. The court held that a duty of disclosure may be imposed on seller’s agent to disclose newly acquired information that is recognized by the agent as rendering a prior affirmative statement untrue or misleading. In this case, there was evidence that the plaintiffs made direct inquiries of defendants about the condition of the property. The Michigan Department of Environmental Quality provided information to the seller which suggested that the sales brochure contained inaccurate and misleading information. What is troubling about the court’s holding is that the agent for the seller prepared the sales brochure on the basis of information obtained from the client. Did the agent have reason to believe that the contents of the sales brochure were not true until the plaintiffs filed suit? The decision does not provide a clear answer. However, the court apparently believed that there was a sufficiently genuine issue of material fact to deny the agent’s motion for summary judgment.