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Filling Out the Seller’s Disclosure Statement

The Seller Disclosure Act (the “Act”), requires most house sellers in Michigan to fill out a prescribed Seller’s Disclosure Statement (the “SDS”) before selling their houses. That form will be presented to the potential buyers who are interested in purchasing the Sellers’ house.  The legal challenge for Sellers is to properly fill out the SDS and avoid the legal pitfalls which have befallen many Michigan Sellers since the Act was passed in 1994.

I.         The Risk

Prior to closing, a buyer who successfully asserts noncompliance with the Act can walk from the deal prior to closing. That’s it; that is the Buyer’s sole and exclusive remedy under the Act. There are no post-closing remedies under the Act.

Buyers may, however, invoke fraud law to sue Sellers after the closing.  The Act serves as a portal providing the representations upon which the fraud lawsuit is founded.  However, fraud law and not the Act applies to these cases.  The Buyers must prove fraud as required by law to recover.  In most cases, simple mistakes will not suffice.  Sellers face this very real risk: any missteps on the SDS could lead to a lengthy and expensive courtroom battle and judgment for the Buyers.

II.        The Disclosure Standard

When sellers fill out the SDS, it is necessary for them to understand just what effort they must make imparting their knowledge of their house on this form.  There are plenty of realtors, buyers, and others who will instruct sellers that the Act requires them to reveal everything they know about their house.  One Michigan court actually declared this to be the standard in a 2001 appellate case.  These same folks may also implore sellers to conduct yet another investigation of their house before they complete and present the SDS to their broker or buyers.

This advice is perhaps well intentioned but it is wrong, at least under current Michigan law.  The baseline standard is still buyer beware.  The Act modifies this standard; it does not reverse it into a seller’s confessional act.  The seller must honestly disclose information known to the seller at the time the SDS is completed.  This simple standard will be difficult to follow at times and as to certain questions on the SDS, but at least it gives sellers some guidance, and provides much better direction than the overwrought advice to “tell everything you know.”

III.      Filling out the SDS

Sellers who occupy the house they are selling are required to sign and deliver the SDS; exceptions to this rule will be rare. Non-occupying sellers may be able to avoid most or all of the questions on the form due to a lack of knowledge, but such sellers must be careful not to avoid their legal responsibilities.

The first interactive section of the SDS presents 36 separate questions inquiring as to whether specified appliances and building systems are in working order.  The seller can answer yes or no, claim a lack of knowledge, or indicate “not available.”  This is the only section of the SDS that provides a default answer for blanks; a declaration at the end of this section states that all appliances are in working order unless otherwise indicated.  This standard apparently also applies to yes answers. Sellers must thus be diligent in answering these inquiries to avoid inadvertently giving erroneous answers.

The stakes are raised in the second section of the SDS.  This part of the form asks 12 questions about major elements of the house, such as the roof, basement water, and the heating system.  Just for good measure, one question dwells on environmental problems. Most of the serious allegations of fraud reported in the appellate cases have arisen from responses given to inquiries in this section.

There are plenty of pitfalls in this section of the form.  Sellers must carefully read the inquiries and meet the timing and topics of each question that is posed.  Most importantly, when sellers must give an explanation, they should be very careful.  Many sellers have been found liable for giving explanations that are erroneous or “too helpful.”

The third section of the SDS, entitled “Other Items,” is not as treacherous as the previous section, but presents its own challenges.  Sellers must respond to 11 inquiries and explain any yes answers.  Sellers should be particularly cautious with questions 4 and 5 in this section; the buyer fraud cases that have arisen from this section have primarily arisen from these questions.

IV.       The Seller’s Duty to Amend

Even discounting current difficulties in the market, sellers will typically prepare the SDS months or more than a year before the buyer reviews the form and the house is sold.   Naturally, the condition of the house will change during this period.

Section 6 of the Act provides that the seller is not required to amend the SDS when these changes occur.  The SDS form, however, requires the seller to disclose any changes to the “structural/mechanical/appliance systems” of the house.  This rather awkward phrase is difficult to interpret, particularly when it appears to conflict with the earlier Section that doesn’t require amendments to the SDS.

Sellers must walk an unfortunate tightrope here. Failure to amend can lead to litigation based on alleged “cover-ups.”  Excessive amendments to the SDS can cause the same result.  Until this issue is resolved, sellers are forced to consider their alternatives on a case by case basis.  Sellers should consult our firm when they are faced with such dilemmas, to avoid the problems that can ensue after a bad decision.

V.        The Buyers’ Inspection

Sellers should presume buyers will review the SDS and will proceed with their own inspection(s) of the house.  Indeed, the SDS instructs them to do so.

Sellers should not place undue reliance on buyer inspections.  In several fraud cases, sellers have argued that the buyer inspection negates any misstatement or misrepresentation the sellers made in the SDS.  In many of those cases, the courts have declared that the buyer’s failure to conduct an investigation or failure to discover a house defect does not excuse the sellers.

On the other end of the spectrum, courts have also found that buyers must not place excessive reliance on the SDS.  If a house defect is in plain sight and could be (or was) discovered upon inspection, the buyer will not likely prevail with arguments about seller misstatements on the SDS that fail to properly disclose the obvious defect.

VI.       The Sellers’ Responses

Once the buyers conduct their inspections, sellers must be prepared for the inquiries and demands for credits and repairs that follow. Aside from the obvious “answer the question” imperative, Sellers have two potent weapons in their arsenal when the inevitable buyer inquiries are received: silence and expert reports.

If the seller is given a specific question regarding a specific defect or element of the house about which the seller has knowledge, then the seller will normally have to provide an honest response.  Failure to respond could result in legal liability after the closing.  There are, however, certain instances where silence is golden, particularly when the seller has no knowledge regarding the inquiry.

The Act also affords sellers an essential safe harbor in cases where repairs have been made after the SDS was delivered. If the report is prepared by a qualified professional on the matter, sellers can pass it along without comment, unless the sellers have personal knowledge contradicting the report.

VII.     The As Is Clause

Buyers and sellers frequently argue about the meaning and impact of the “as is” clause found in nearly every purchase agreement and closing documents for a house sale.  “As is” clauses provide meaningful legal protection to sellers, but they are not a “get out of jail free” card for sellers, who still remain liable for misrepresentations that were made before the buyer signs the binding agreement.

VIII.  Seek Legal Advice

Our office has represented several buyers and sellers in disputes based on obligations imposed under the Seller Disclosure Act.  Brad has written one of the leading articles in Michigan law publications on the topic. There are plenty of opportunities for buyers and sellers to encounter challenges under the Act, and they should consult with us both before and after any dispute arises.

Caution: This article provides general information and is not intended to be legal advice. Your personal circumstances likely vary from those discussed in this article. You should contact Lambert & Lambert PLC if you are seeking specific legal advice as to your contract or circumstances.

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