Court decides another real estate disclosure case

May 1, 2007 | Roger McEowen

In Iowa, sellers of real estate must comply with the Real Estate Disclosure Act (Iowa Code Ch. 558A). The Act requires sellers to disclose certain information about the property relating to the property’s condition and important characteristics, as well as structures located on the property.    Basically, the law requires sellers to disclose any known defects in the property as well as the general condition of the property - important points that can impact the property’s value. But, must the possibility that a hog confinement facility might be constructed nearby be disclosed? That was the issue in this case.

The plaintiffs (buyers) bought the defendants’ (sellers’) home. Less than one month later, the buyers learned of the neighbors’ plans to build a hog confinement unit across the road from their new home. The sellers had petitioned against construction of the unit about three months before they sold their home to the buyers, but did not mention the proposed hog facility in the seller disclosure document (which the seller signed three months before petitioning against the proposed construction of the hog facility). The disclosure document was presented to the buyers about two months after the sellers petitioned against the hog facility, but it was not amended to include any information about the proposed hog unit.  

The buyers sued for damages. Under the statute, a party is entitled to actual damages suffered due, in this case, to the omission of information which would have been pertinent to the buyers’ decision to purchase the property. The sellers’ motion for summary judgment was denied, and the case went to trial. The question for the jury was whether the potential hog facility should have been disclosed as an “area environmental concern” on the disclosure statement (the disclosure form used contained a specific disclosure for “area environmental concerns”). The buyers wanted the court to instruct the jury “that a hog confinement unit is an environmental concern to be disclosed in a disclosure statement.” The judge denied the instruction, and the jury ruled for the sellers.

On appeal, the court noted that the case was, in essence, a case of first impression in Iowa. So, the issue turned on whether the sellers, either at the time they signed the disclosure statement or presented it to the buyers for their signature, had knowledge of an “area environmental concern.”  On that point, the court noted that while the sellers knew about plans to construct the hog unit after they signed the disclosure document and before it was presented to the buyers for their signatures, subsequent inquiries did not provide any information that the neighbor had actually filed an application for construction of a hog unit on his property. The sellers also called the county courthouse to check on the status of the hog facility and were told that nothing had been approved. But, approval did occur within three weeks after the home sale transaction closed and the buyers moved in. So, the court held that the sellers completed the disclosure in good faith, and that the trial court’s jury instruction was a proper statement of Iowa law.

Is the court’s opinion correct?  While the buyers’ requested jury instruction may not be a proper statement of Iowa law, can it really be said that the sellers completed the disclosure form in good faith? That’s a closer call. The court was unwilling to require sellers to disclose potential events that may impact a buyer’s decision to purchase a property. That is probably the correct result with respect to merely speculative events. But, this case seems to go beyond merely the speculative. The application process for the hog facility was underway before closing on the home sale occurred. It wouldn’t have been a stretch for the court to have required disclosure of that fact. What about plans to build an ethanol plant nearby, or construction of a commercial wind farm? Those are also activities that can negatively influence property values and influence a buyer’s decision to buy a particular property.

Perhaps this case should have been tried as a rescission of contract (cancellation) case. Rescission can occur as a result of innocent or fraudulent representation, mutual mistake, undue influence and other reasons. If rescission occurs, the parties are restored to the position they were in economically at the time the agreement was entered into. In a recent New York case (Boyle, et al. v. McGlynn, et al., 814 N.Y.S.2d 312 (2006)), the plaintiff bought the defendant’s farm (including the residence) and sought to have the sale contract rescinded based on the seller’s alleged fraud and misrepresentations for not disclosing that plans were in the works for the construction of large wind turbines on an adjacent parcel. The plaintiffs submitted the affidavit of a neighbor of the defendant who detailed two conversations with the defendant that occurred months before the defendant put his farm on the market during which the wind farm development was discussed. The defendant, at that time, stated that the presence of commercial wind turbines on the adjacent tract would “force” him to sell his farm. When the plaintiff sought to rescind the contract, the defendant claimed he had no duty to the plaintiff and that the doctrine of caveat emptor (“buyer beware”) was a complete defense to the action. The court denied summary judgment for the seller and allowed the case to go to trial.     

While the present case may not have as compelling facts as the New York case, it does point out that sellers must disclose what they know has actually occurred on the property and in the surrounding area, and buyers must ask more questions.Gardner v. Wandersee, No. 7-068/06-0454 (Iowa Ct. App. Apr. 11, 2007).