Real Property Notes Blog

Disclosure Statement states “Seller has never lived at the property”: Buyer Has No Claim

In Celano v Hofstra, an unpublished Michigan Court of Appeals Opinion, Seller originally purchased lakefront property for her granddaughter and granddaughter’s boyfriend to live in.  Seller later sold the property to buyers.  Seller visited the property only once and never lived there.  The statutory Seller’s Disclosure Statement contained lines through the first two pages, with the notation “Seller has never lived at the property.”  The buyers sent an e-mail to the granddaughter asking “Can Seller fill out the Disclosure to the best of her ability?  They must know some information about the age of the roof, etc.”  In response, the granddaughter replied that seller was unaware of the age of the roof and “it will probably need a new one shortly.”  Buyer had an inspection of the property which revealed no issues.  Buyer closed.  Within a few months, severe flooding occurred at the property.  The neighbors informed buyer that the property was known to flood and that the granddaughter and boyfriend had troubles with flooding.  Seller’s seller also informed Buyer that he had experienced flooding.  Buyer sued, claiming Fraud, Silent Fraud, Negligent Misrepresentation, Failure to Disclose, and Breach of Contract.  The trial court, on summary disposition motion filed by the Defendant, dismissed the case.

On appeal, the Court of Appeals affirmed.  Fraud and negligent misrepresentation claims require that the defendant make an “affirmative misrepresentation.”  Since Seller made no representations about the condition of the property, Seller could not be held liable.  Silent fraud requires that the Plaintiff supress the truth which he had a legal duty to disclose.  Seller had a legal duty to disclose under the Michigan Sellers Disclosure Act, but Seller indicated that she had no knowledge of the condition of the property; Buyer was unable to adduce any evidence that Seller was aware of the flooding and failed to disclose it.  Further, Buyer could not prove reliance, because Seller disclosed nothing and Buyer had the property inspected.  Finally, because the purchase agreement provided that Buyer was buying the property “as is,” and because there was no change in the condition of the property from that disclosed in the Disclosure Statement, Seller did not breach the contract.

This case reinforces the warning “caveat emptor:”  “let the buyer beware."

Prohibition on Using Lots for Commercial Purposes Bars Any Rentals

In Bauckham Trust v Petter, an unpublished Michigan Court of Appeals opinion, the defendants were advertising and renting the homes on their lots as vacation rentals.  The declaration of restrictions prohibited using lots for “commercial or manufacturing purposes.”  Plaintiffs sued to stop the vacation rentals; the trial court entered an injunction prohibiting “any” rental of homes.

On appeal, the Michigan Court of Appeals affirmed.  The court held that “[t]he act of renting property to a third-party for any length of time involves a commercial use because the property owner is likely to yield a profit from the activity. Restrictions barring commercial uses of property proscribe a wide variety of activities, even activities that are residential in nature, such as renting to residential tenants for extended periods of time.

This decision is intriguing in its possible ramifications.  Some condominium documents prohibit commercial activities, but also contain provisions allowing rental of units, sometime subject to restrictions.  One can argue that a specific provision allowing rental of units overrides the prohibition on commercial activities.  However, does elimination of the section regarding rentals prohibit any rental of units?  

It does not appear that any party in that case raised the issue of a restraint on alienation.  While courts in other states differ on whether a flat prohibition on rental of property is a restraint on alienation, Michigan courts have not directly addressed the issue.  This case would seem to indicate that, if the restrictions prohibit commercial use, a flat ban on renting is not a restraint on alienation.

Option Signed Before Agency (commission) Agreement Did Not Extend Period of Agency Agreement

fIn Colburn Hundley, Inc. v West Michigan Developers, Inc., an unpublished Michigan Court of Appeals opinion, a real estate broker sued for a commission based upon an Agency Agreement, which provided that its term would be extended for any period during which the seller granted an option for the property.  The owner of the property granted an option to purchase to a third party (of which the broker was one of the principals) in the morning.  In the afternoon of the same day, the owner of the property signed the Agency Agreement which provided that “in the event” the seller granted an option to purchase, the term of the Agency Agreement would be suspended for the term of the option and automatically recommence for the remainder of the term at the option’s expiration.  The Broker argued that the option, entered into before the Agency Agreement, extended the term of the agency agreement for the duration of the option. The trial court held otherwise, granting summary disposition for the owner on the broker’s claim for a commission.

The Court of Appeals ruled that the words “in the event” used in the Agency Agreement were forward-looking, and could not be construed as to encompass an option agreement entered into before the Agency Agreement.  Because the Agency Agreement expired by its own terms before the property was sold (to a third party), the seller was not liable to the broker for a commission.

The Court of Appeals also rejected the argument that there was a subsequent agreement to pay a commission, finding that there had not been a meeting of the minds sufficient to form a contract.

Terms in Restrictive Covenant Should Be Given Ordinary Meaning; Covenant Enforced

In Theil v Goyings, an unpublished Michigan Court of Appeals Opinion, the Defendants installed a home, assembled partially off-site, trucked to the site, and installed on the foundation by crane.  The restrictive covenants prohibited “modular” homes and required homes to be “stick-built.”  The trial court found that the term “modular” was ambiguous and held that the home did not violate the covenant.

The Court of Appeals reversed, holding that the term “modular” should be given its plain and ordinary meaning; under such meaning, it clearly applied to the home built by defendants.  The court remanded to the trial court for entry of an injunction requiring removal of the home.

The court noted that there are two, sometimes inconsistent, principles in the enforcement of restrictive covenants.  The first is that owners of land should have broad freedom to make legal use of their property.  The second is that courts must normally enforce restrictions on which other owners similarly burdened have relied.

Retaining Wall Trespasses, but Owner Entitled to only Nominal Damages

In Divito v Post, an unpublished Michigan Court of Appeals Opinion, the defendant built a retaining wall whose footings were on her property but which leaned, over time, over the Plaintiff’s property.  The Plaintiffs sued, claiming the installation of the retaining wall caused erosion on their property and that the retaining wall was a trespass.  The trial court dismissed the case entirely and the Plaintiffs appealed.

On appeal, the court held that the trial court erred by finding that no trespass occurred, because the evidence showed that the wall did in fact lean over the Plaintiff’s property.  However, the court found that requiring removal of the wall would impose harm and hardship on the defendant, and that Plaintiffs had proven no actual damages because of the trespass.  The court reversed and remanded the case to the trial court for an award of nominal damages for the trespass.

6th Circuit Court of Appeals Interprets MCL §600.3280

In DAGS II, LLC v Huntington National Bank, where commercial property sold at foreclosure sale for $1.85 million and subsequently sold less than a year later to a third party for $2.35 million, the Sixth Circuit Court of Appeals held that the latter value was the true value of the property at the time of the foreclosure and used this value to determine whether there was any deficiency left on the debt.  Based upon a debt in excess of $5 million, the court held that there was still a deficiency left to be collected, thereby dismissing the debtor’s claims that the bank engaged in wrongful conduct in pursuing collection of the deficiency.

MCL §600.3280 provides two defenses to a deficiency action:  1), that the property was fairly worth the amount of the debt at the time of the sale, and 2), that the amount bid at the foreclosure sale was substantially less than the true value of the property.  In this case, the court held that the property was worth more than the amount of the foreclosure sale price, but still was substantially less than the debt owed.

Amendment of Articles of Incorporation for Homeowner Association Does Not Extend Deed Restrictions

In Deghetto et. al. v Beaumont’s Seven Harbors White and Duck Lake Association, an unpublished Michigan Court of Appeals Opinion, the restrictions recorded in the chain of title to several subdivisions provided that they would expire on January 1, 1986, unless they were extended by the “written consent of at least 75% of the membership of the Association.  An amendment to the Articles of Incorporation recited that it made membership in the association mandatory for owners of lots in the subdivisions, but was signed only by an officer of the corporation.  The association relied upon the amendment as an extension of the restrictions.

The Court of Appeals held that the amendment to the Articles of Incorporation, which did not explicitly state that the restrictions were extended, and which was not signed by 75% of the membership did not satisfy the requirement of needing to obtain “written consent” of the lot owners.  The restrictions expired by their own terms because they were not extended.

The case has other interesting twists and turns; the above is only a synopsis of the main ruling.

2nd Mortgagee’s Claim to Surplus Proceeds Has Priority Over Claim by Mortgagor’s Estate

In a published opinion, the Michigan Court of Appeals has decided for the first time that, when there are surplus proceeds from a sheriff’s sale on foreclosure of a mortgage by advertisement, upon competing claims made by a junior lienholder of the property and by the mortgagor (or here, the mortgagor’s estate), the surplus proceeds are paid first to junior lien holders in order of thier priority and the balance, if any, to the mortgagor.  In re $55336.17 Surplus Funds (Parker v PNC Bank).

The statute does not explicitly state how competing claims are resolve; however, reading the statute as a whole, the court ruled that it was apparent that junior lien holders were to be paid out of any surplus proceeds.  The court rejected the estate’s argument that the lien holders were extinguished by the senior mortgage foreclosure and thus became general creditos.  The court also rejected the argument that such lien holders needed to make a claim against the estate in accordance with the Estates and Protected Individuals Code.

Registering the New Co-Owner: The Attorney’s Perspective

Community Association News, the monthly magazine published by the Michigan Chapter of the Community Associations Institute, contains Steve Sowell’s latest article to be published, “Registering the Co-Owner:  The Attorney’s Perspective.”  The articles advises management companies and associations on how to properly set up their records upon the change of ownership of a condominium unit.

Properly Perfected Assignment of Rents: Rents Not Part of Bankruptcy Estate

The United States Court of Appeals for the Sixth Circuit (which includes Michigan) has held that, if a creditor has properly perfected an assignment of rents prior to the filing of a bankruptcy case, the rents are not property of the estate.

In Town Center Flats, LLC v ECP Commercial II LLC (In re Town Center Flats), the debtor owned a 53-unit residential apartment complex, which construction had been financed through a mortgage and assignment of rents.  Rents from the tenants were the debtor’s only source of income.

The debtor defaulted on its obligation under the loan and the creditor properly perfected the assignment of rents by notifying the tenants and recording a notice with the register of deeds.  The debtor then filed a Chapter 11 bankruptcy.

The creditor filed a motion to prohibit use of the rents collected after the filing.  The debtor opposed the motion, claiming that the rents were cash collateral and pointing out that, without the rents, it had no income to fund a plan of reorganization.  The bankrupcty court agreed and entered an order allowing use of the rents.  The creditor appealed, arguing that, due to the perfection of the assignment of rents, the rents no longer belonged to the debtor and were not part of the bankruptcy estate.

The district court agreed and vacated the bankruptcy court’s decision.  The debtor appealed to the Sixth Circuit Court of Appeals, which affirmed.

Applying Michigan law, the court held that once the assignment of rents had been perfected, the debtor “no longer had an interest in the rents,” citing Otis Elevator v Mid-America Realty Investors, 522 NW2d 732 (Mich. Ct. App 1994).

The court noted that excluding assigned rents from the bankruptcy estate in a single-asset real estate case such as this one would effectively foreclose Chapter 11 relief from these kinds of debtors, but held that Michigan law is clear on the matter.

© Steve Sowell 2017