The Dirt on Real Estate Disclosures

What must be revealed before a property is sold?

If you have sold a home in recent years, you are familiar with disclosure statements. Such statements list any defects in the property that are known to the seller but that may go unnoticed by the buyer. In some states, these disclosures are required by law, although it may be possible for a buyer to waive this requirement.

Disclosure statements also are common in commercial real estate transactions, including the purchase or sale of church property. A recent case in Indiana illustrates the remedies available to a church that purchased property on the site of a former garbage dump whose existence the seller fraudulently concealed. 924 N.E.2d 682 (Ind. App. 2010).

surprises beneath the surface

In 2003, a married couple (the “defendants”) sold a parcel of land to a church. As part of this transaction, the defendants signed a disclosure statement affirming, in part, that the property “is not, and has not been used, as a landfill or dump.”

Later that year, the church hired a construction company to build a sanctuary on the property. When the construction company began digging footers for the building, it discovered debris and trash beginning three feet under the ground surface. There was brick, concrete, “some tires and logs and pipes.” To prevent problems with the foundation of the sanctuary, the construction company was required to excavate the trash. The excavated materials filled twenty truck loads which had to be hauled to a landfill. When digging trenches for the utilities, the construction company found the “same type of debris … bricks and blocks, and not only that but trash, from tires to pipes to trash in general.”

In 2007, the church decided to build a community center. When trenches were dug for the utilities, more debris was found and the utility companies could not backfill the trenches with the debris. The company hired to build the community center found debris and advised the church that it would have to excavate all of the debris and replace it with clean fill because it could not build over the debris. The debris uncovered at this time included wood materials, fuel tanks, plastics, tires, and a pool cover.

The church sued the defendants, claiming that they had engaged in illegal dumping, breached the purchase agreement for the sale of the property, created a private nuisance, and committed fraud by signing the disclosure agreement in which they falsely claimed to have had no knowledge that the property was ever used as a garbage dump. A trial court rejected the defendants’ claim that the garbage was deposited on their land before they bought it. The court noted that the garbage included a pool cover that was manufactured in 1991 according to a label still affixed to it, and a Coca-Cola Classic can that was manufactured in 1985. Both dates corresponded to the time the defendants were in possession of the property. The court awarded the church $400,000 in damages, and the defendants appealed.

the appeals court’s ruling

A state appeals court affirmed the trial court’s judgment in favor of the church. It noted that the defendants had assured the church that the property had only been mowed and used for clean fill dirt since 1980. However, the church presented evidence that the defendants’ disclosure statement was false, or at least “made in reckless disregard of the truth to induce the church into buying the property.” In addition, the church presented “overwhelming evidence that it was injured by the debris left on the property. Therefore, the evidence supported the trial court’s general judgment on the issue of fraud.”

The court cautioned that “a purchaser of property has no right to rely upon the representations of the seller of the property as to its quality, where it has a reasonable opportunity of examining the property and judging for itself as to its qualities.” But the court stressed that this principle “is expressly qualified to situations where the buyer has a reasonable opportunity of examining the property and judging for itself as to its qualities …. Here, the debris was found beginning in the range of three feet below the surface …. Therefore, we are firmly convinced that a reasonable inspection of the property would not have exposed the subsurface debris.”

relevance to church leaders

Here are several points to note regarding disclosure statements.

  1. If your church sells property, expect to sign a disclosure form. Such forms typically require the seller to disclose the following:
    • Defects in title to the property.
    • The existence of any water rights or easements.
    • The existence of a septic tank.
    • Structural defects, including roof leaks.
    • Defects in the electrical, plumbing, heating, and cooling systems.
    • Environmental conditions, including lead paint, asbestos, standing water, flooding, drainage problems, previous fire or water damage, mold, radon gas, fuel or chemical storage tanks, contaminated soil, and prior use as a legal or illegal dump site.
  2. As this case illustrates, a seller can be liable on the basis of fraudulent misrepresentation for failing to disclose known conditions in a disclosure statement.
  3. When purchasing property, insist on a disclosure statement if one is not required by law or local practice.
  4. When purchasing property, be careful not to inadvertently “waive” your legal right to a disclosure statement from the seller. Such waivers may be buried in the contract. This is one reason why it is advisable to have any real estate contract (whether you are selling or buying property) reviewed by an attorney.
  5. Laws in some states give buyers a short period of time (i.e., three days) to rescind a real estate contract based on the contents of the seller’s disclosure statement. Be sure you are aware of any such provision, promptly review the seller’s disclosure statement, and be prepared to exercise your right to rescind within the prescribed period of time. This is critical. Again, be sure to seek legal counsel before signing a real estate contract.
  6. A seller’s disclosure statement only reflects the seller’s actual knowledge of specified conditions. As a result, churches should never rely solely on a disclosure statement when deciding whether or not to purchase property. It is also imperative to obtain (1) a full title report, and (2) a property inspection that may reveal conditions and defects that were unknown to the seller, or that the seller chose not to disclose. An inspector should be provided a copy of the seller’s disclosure statement.
  7. Sometimes a seller will leave one or more questions blank in its disclosure statement, or provide only a few words in response or simply reply “unknown.” Such responses demand immediate clarification prior to the rescission period deadline.
  8. If you need additional time to obtain acceptable responses by a seller to the questions on a disclosure statement, then insist on having the applicable rescission period suspended until a fully completed form is provided.
  9. Pay special attention to the date of the seller’s disclosure statement. In some cases, a seller that has had property on the market for an extended period of time may attempt to use a disclosure statement that is months or even years old from a prior sales contract that was not finalized. Problems may have arisen since then.
  10. Some real estate contracts provide that if a legal dispute arises, the prevailing party will be entitled to the payment of its legal fees by the losing party. This can be an important protection, especially if your church is buying property. In the case reviewed in this article, a significant portion of the church’s damages represented attorneys fees it incurred in asserting its rights.
  11. The court in this case acknowledged that a purchaser of property may have no right to pursue a negligent misrepresentation claim against a seller that signs a false disclosure statement if it had a reasonable opportunity to examine the property and judge for itself its quality and condition. But the court stressed that this principle is limited to situations where the buyer has a reasonable opportunity to examine the property and judge for itself its condition. In this case, the extensive amounts of buried garbage began three feet underground, and the court concluded that “a reasonable inspection of the property would not have exposed the subsurface debris.” The takeaway point is this—churches may be unable to object to fraudulent representations or omissions made in disclosure statements if a reasonable inspection would have revealed the concealed condition. This is one reason why churches should never sign a sales contract for the purchase of property without first having the property inspected by one or more professionals. Your attorney can assist you in designing a reasonable inspection plan.

This article first appeared in Church Finance Today, April 2011.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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