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Disclosure Lawsuits: Are You Unknowingly Putting Yourself at Risk?

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By Anthony J. Buonicore

The growing number of lawsuits over non-disclosure of land pollution is creating increased liability for real estate brokers. Soil contamination, groundwater contamination and concern surrounding hazardous vapor intrusion into homes is putting real estate brokers on the firing line in debates as to whether or not they properly informed a prospective home buyer that existing environmental contamination on the land on which the home has been built, or nearby contaminated land, has the potential to impact the value of the property and even their health.

For more than 25 years it has been customary practice in commercial real estate transactions to screen properties for environmental contamination on the site or nearby prior to closing the transaction. Most lenders require some form of environmental due diligence and savvy purchasers are quick to order what is known as a “Phase I” report before they put their money into acquiring a property. This type of screening information is useful because environmental contamination on the property or nearby can create liability and significantly devalue the property. Even if there is no environmental contamination on the property itself, it is not unusual for there to be concern about a nearby “offsite” location, such as where a spill or release has occurred. Nearby gas stations, dry cleaners, manufacturing facilities, landfills and hazardous waste sites have been particularly problematic, as well as the more significant Superfund sites. Even former clandestine drug labs or meth labs, of which more than 34,000 have been identified to date, present problems as they could have been operating in the home potentially being purchased.

The Data

In commercial practice, it is customary to search environmental databases on multi-family residential property and the surrounding area, but that has not been the case with single family residential properties. Although all homes would be well served by a search of the available standardized databases of environmental information, this has historically not been common practice.

This type of information does change over time and, what was not a concern at one time may become a concern in the future. A spill can continue to migrate in the groundwater and, in some areas, travel well over a hundred yards in a year. Further, a location where there has not yet been a release may experience one in the future. Therefore, periodic monitoring of properties is a good practice depending on where a residential property is located.

Lawsuits

The number of lawsuits where buyers sued residential brokerage firms for not properly disclosing the presence of potential environmental contamination is growing. The typical scenario is that the buyer finds out after moving into the property that the land or the groundwater is contaminated, and proceeds to name the brokers, on both sides of the transaction, in a lawsuit.

In one of the more well-known cases, Strawn v. Canuso, home purchasers brought a class action lawsuit against the home builders and brokers alleging fraud and negligent misrepresentation arising from failure to disclose the existence of a nearby closed landfill. Most interesting was the fact that the New Jersey Supreme Court ruled:

“the broker…is not only liable to the purchaser for affirmative and intentional misrepresentation, but is also liable for nondisclosure of off-site physical conditions known to it and unknown and not readily observable by the purchaser if the existence of those conditions is of sufficient materiality to affect the habitability, use, or enjoyment of the property and, therefore, renders the property substantially less desirable or valuable to an objectively reasonable purchaser.”

This 1995 ruling set the stage for a number of subsequent lawsuits that followed. The phrase “unknown and not readily observable,” makes a strong case for searching government records of environmental contamination. The other cases involved failure to disclose:

  • Contamination of the groundwater below the property and in the surrounding area;
  • The property had been a landfill that had been covered up;
  • The property was located near a leaking underground gasoline storage tank;
  • An adjacent hazardous waste site;
  • That the home was a former meth lab;
  • A nearby Superfund site.

Interestingly, in the Grube v. Daun case where the broker was sued for failing to disclose gasoline contamination from an underground tank leak, the initial court found the broker to not be negligent because of the “as is” clause in the sales contract. However, the appellate court reversed the decision and stated that the broker could not hide behind the “as is” clause because he made an affirmative representation about the condition of the property, i.e., that “the real estate would be suitable for residential, recreation and family purposes.”

“Conducting an environmental history search on a possible new home or residential lot is a prudent step in the due diligence process for homebuyers,” said Max Cook, an environmental professional with Ranger Environmental Services Inc. “Just as the market requires homebuyers to procure appraisals and home inspections, the natural next step should be to identify impacts to properties or surrounding properties which have nearby contamination reports that could affect home occupants.”

Commonly recorded impacts include contaminated soil or groundwater, and according to Cook, “Facilities such as gas stations, dry cleaners, landfills, former airports and military bases are everywhere and can affect the environmental health of many neighborhoods across the U.S.”

Professionals such as Cook are able to assess a number of factors that come into play when determining if an environmental record poses an actual risk to a property. The following list highlights some of the major parameters that would be evaluated:

  • Type of Record (permit vs. spill)
  • Distance to Property
  • Type of Pollutant (Oil, Gas, Solvent)
  • Amount of Pollutant (5 gallons, 5000 gallons)
  • Amount of Cleanup/Residual Contamination
  • Type of Soil (Clay, Sand)
  • Depth to Groundwater (10 feet, 100 feet)
  • Direction of Groundwater Flow (toward or away)
  • Private vs. Municipal well
  • Mitigating a Brokers Risk

There is no shortage of paperwork in a real estate transaction requiring due diligence. However a simple sheet of paper and a brochure can help to alleviate the risk of disclosing environmental issues that many brokers may be exposing themselves to unnecessarily.

Environmental Data Resources (EDR), has spent the last year working with a number of brokerages and suggested that, at the minimum, brokers provide prospective home buyers and sellers with a brochure that discusses the implications of environmental contamination. This may include both onsite and offsite risks. For additional protection, the company also suggests that prospective home buyers and sellers be asked to sign a waiver in confirmation of receipt. This step would place responsibility squarely on the prospective purchaser to perform their own environmental due diligence prior to acquiring a home, and the seller as part of the seller disclosure when selling a home. This simple step transfers the responsibility of the due diligence to the seller or the buyer early in the transactional process thereby reducing the broker’s liability in the transaction.

Peace of Mind for the Consumer

Unfortunately, environmental information is not always easily interpreted by the layperson and can often lead to unnecessary concerns. While many homes will likely be in the vicinity of a property with an environmental record, the vast majority will not be materially impacted.

Providing buyers with local knowledge is an important aspect of a broker’s offering. However, most brokers are not knowledgeable about property environmental contamination issues. “Right from the start, we had buyers asking questions about the environmental data and what it meant to their potential home,” according to Jack Huntress, Vice President of Residential Services for EDR. If a seller or buyer has questions about the environmental data, EDR recommends that the broker advise the home buyer to speak with an environmental professional.

Enabling Real Estate Transactions

The ultimate goal of the real estate industry is to provide information in a way that helps the buyer and ensures that transactions minimize liability and risk. While non-disclosure lawsuits related to environmental contamination against brokers are growing, potential broker liability may be easily mitigated by pro-actively informing a prospective seller or buyer of the potential risks. A seller or buyer concerned about such risks can then access environmental information, and if need be, speak with an environmental professional to obtain peace of mind on either side of the transaction.

For more information please visit www.edrnet.com or contact EDR Residential Services at ResidentialServices@edrnet.com.

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One thought on “Disclosure Lawsuits: Are You Unknowingly Putting Yourself at Risk?”

  • c.b. says:

    Regarding above info, I realize you are marketing your businesses, however, as I have reason to look into this “disclosure” issue, I’ve attempted to get information related to some of the more esoteric soil and water issues. One would have to have a degree in the sciences to ascertain whether a particular parcel/lot is subject to natural problems that as a home buyer one had not previously been subject to or able to observe. The seller, however, without these scientific data, would certainly have knowledge of from experience of them.

    Purchasers must have full disclosure and cannot, despite due dilgence on their part, research these issues nor should they have to be subject to high fees, such as I’m sure you would charge, if the seller knows and has viewed them.

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