By Robert S. Kutner, Esq. Partner, Casner & Edwards
Real estate brokers who list properties for sellers and landlords are regularly confronted with the question of whether there is a geographic limit to their disclosure obligations. Must information about conditions outside the four corners of a listed property be obtained or disclosed? Agents representing buyers and tenants face the same question, but with the added burden of the fiduciary duty of due care owed to their clients.
Unfortunately, the legislature has not provided a “bright line” test that limits disclosure to conditions within the geographic boundaries of a property. But guidance has been provided by the Massachusetts Supreme Judicial Court (“SJC”) in Urman v. South Boston Savings Bank, a case decided in 1997, providing insight as to how similar issues should be handled as well as the factors to be considered.
Case in Point
In Urman, South Boston Savings Bank took title to a condominium in Needham through foreclosure. It placed the condo on the market for sale. A year earlier, the Massachusetts Department of Environmental Protection had determined that high levels of a toxic substance, trichloroethylene (TCE), had migrated into groundwater flowing beneath a nearby school and that the vapors presented a danger to the students. In high doses, TCE may cause kidney, heart, respiratory, and nervous system problems.
The school closed for seven months while the TCE was being remediated. The bank had been told by the prior owner of the condo that an unspecified hazardous waste problem at the school had affected marketability, but the bank did not know that TCE was the problem. Before the sale to Urman the TCE cleanup at the school was completed.
When the condo was sold, the buyers were not advised about the TCE in the groundwater beneath the school or that the school had been closed for seven months during remediation. When they learned of the contamination and school closing, the buyers sued the bank, claiming that the non-disclosure violated the Massachusetts Consumer Protection Act, commonly known as “Chapter 93A.” Before trial, the bank filed a motion for summary judgment, asking that the judge rule that the facts were not sufficient to support liability.
No Duty to Disclose
The superior court judge dismissed the case, ruling that the South Boston Savings Bank had no duty to disclose facts about which it had no knowledge, namely, that there was TCE contamination of the groundwater under the school.
There was no evidence that the contaminated groundwater migrated from school grounds to the condominium, nor was there any evidence that the contamination would ever reach the condominium. The trial judge also based his decision on the buyers’ failure to present evidence that the market
value of any homes in the neighborhood had been adversely affected by the levels of toxic waste in the groundwater beneath the school. The judge stated that there was no justification to allow the buyers to assert a claim that they had bought into a “bad neighborhood.”
The decision was appealed to the SJC. The Massachusetts Association of REALTORS® filed a brief in support of the bank, urging that the SJC rule that Chapter 93A did not impose a duty to disclose off-site defects. The SJC issued its decision, upholding the dismissal.
Factors Supporting Nondisclosure
The SJC based its decision on several factors. First, it stated that that there is no liability under Chapter 93A for nondisclosure of defects unless the businessperson subject to Chapter 93A (seller or broker) had actual knowledge of the defect. That precedent was first established in 1993 in Underwood v. Risman, another case in which MAR filed a brief urging the Court to rule that only “facts” known by a person engaged in business are required to be disclosed under 93A.
A second factor cited by the Court was that the limited knowledge the bank had was not of an “ongoing” problem, but a past one. The TCE had been cleaned up and the school reopened by the date of sale. Third, there was no demonstrable evidence that the contamination would ever reach the condominium. The SJC declined, however, to limit the disclosure duty to problems within the boundaries of the property being sold. According to the Court:
In appropriate circumstances, off-site physical conditions, known to a seller who is subject to G.L. c. 93A, may require disclosure if the conditions are “unknown and not readily observable by the buyer [and] if the existence of those conditions is of sufficient materiality to affect the habitability, use, or enjoyment of the property and, therefore, render the property substantially less desirable or valuable to the objectively reasonable buyer.”
The Court cited with approval language in a New Jersey case, Strawn v. Canuso, which stated that there is no need to disclose off-site “transient social conditions” that may affect the market value of a property, but that the duty to disclose applies only to “conditions rooted in the land.”
Based upon the Urman decision, the duty to disclose off-site problems in Massachusetts appears to be limited to: (1) physical conditions; (2) which are known to a business person (seller or broker), but not known and not readily observable by the buyer; and (3) be sufficiently important that they affect the value or use of the property. Because of the SJC’s quotation from the Strawn case, two additional benefits to brokers can be derived from the opinion.
First, the standard for disclosure is whether the matter would affect the decision of a “objectively reasonable buyer,” not the subjective reaction of any particular buyer. Second, while the term “transient social conditions” has not been defined, presumably it includes such matters as the quality of schools, neighbors who are noisy, and the presence of a halfway house in the neighborhood.
Despite the limitation of the duty to disclose according to Urman, the best defense to a potential claim is disclosure even if the buyer fails to ask. When a question is asked by a buyer, the broker must provide all known information. It is also recommended that the broker identify persons or agencies that may be able to provide facts. Be “the source of the source.”
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