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Make Sure To Disclose All Relevant Property Conditions To Potential Buyers

05 June 2014 By In Blog style

On April 15, 2014, the Eastern District of Pennsylvania issued a decision in Barker v. Hostetter et al. that reinforced the need for real estate developers to disclose all relevant property conditions to potential buyers in order to prevent later potential liability for fraud and/or withholding material information.

The plaintiffs in Barker were a group of homeowners in the Hopewell Ridge Planned Community (Hopewell Ridge), a 29-lot subdivision in East Nottingham Township, Pennsylvania. Plaintiffs sued (1) Wilmer and Joyce Hostetter, the two original owners/developers of Hopewell Ridge; (2) Keystone Custom Homes, Inc. (Keystone), a corporation that managed the Hopewell Ridge Homeowner's Association (HOA) and constructed improvements in Hopewell Ridge; and (3) Willow Creek, LLC (Willow Creek), a corporation that sold homes in Hopewell Ridge to third parties.

The nine-count Complaint alleged that Defendants "withheld material information from the Plaintiffs and misrepresented facts about the sewage system and water supply at Hopewell Ridge." Specifically, Plaintiffs asserted Defendants (1) failed to disclose that the soil and drinking water at the subdivision had elevated nitrate levels and were being served by experimental sewage facilities that could not properly function; (2) misrepresented the quality of the septic systems at Hopewell Ridge and improperly used experimental septic systems called EnviroServers on the subdivision; and (3) failed to ensure that Plaintiffs' properties were connected to public water and sewers, despite being required by law to do so. Plaintiffs claimed the material misrepresentations and omissions were intended to induce them into purchasing lots in Hopewell Ridge.

The Hostetter Defendants filed a Motion to Dismiss, and Keystone and Willow Creek filed a Joint Motion to Dismiss. The Court's Opinion first addressed Plaintiff's allegations that Defendants violated the Interstate Land Sales Full Disclosure Act (the ILSA). The ILSA contains numerous registration and disclosure requirements for developers. Defendants argued that they were not "sellers" and did not qualify as "developers" or "agents" under ILSA, and they felt they fell within one of the ILSA exemptions. The Court rejected those arguments, as the Hostetter Defendants were part of the offers to sell lots and thus constituted "developers," and no ILSA exemptions applied. The Court also denied Defendants' Motions to Dismiss the claims for fraud in the inducement and negligent misrepresentation, holding that the Plaintiffs properly set forth facts supporting each element of claims, and the gist of the action doctrine did not bar claims against the Hostetter Defendants because there was no contract between them and Plaintiffs.

The Court then denied Defendants' Motions to Dismiss the claim under the Pennsylvania Uniform Planned Community Act (UPCA), which contains disclosure and document recording requirements for planned community developments. The Court also denied Defendants' Motions to Dismiss Plaintiffs' claims for Breach of Fiduciary Duty, holding Plaintiffs had sufficiently alleged that (1) the HOA Executive Board, as agents to Defendants, had a fiduciary obligation to ensure that Plaintiffs' properties were connected to public water and sewers, and (2) the Board failed to fulfill that obligation.

Next addressing Plaintiffs' breach of warranty claims, the Court permitted Plaintiffs' breach of express warranty claim against the Hostetter Defendants to proceed, as Plaintiffs alleged the Hostetter Defendants failed to follow through on their guarantee in the Public Offer of Sale that public water would be available as a backup until the EnviroServers were re-designated from experimental status to regular status. The Court dismissed the breach of express warranty claims against the Keystone and Willow Creek Defendants, however, because Plaintiffs' claims did not set forth the contents of the alleged warranties. The Court also dismissed the breach of implied warranty of habitability and workmanship claim against the Hostetter Defendants because they were not the builders or sellers of the homes, but it denied the Keystone and Willow Creek Defendants' Motion.

Next, the Court denied Defendants' Motions to Dismiss the claim under the Pennsylvania Unfair Trade Practice and Consumer Protection Law, which establishes a private right of action for purchasers of goods affected by "unfair or deceptive acts or practices," including "engaging in any other fraudulent or deceptive conduct which creates a likelihood of confusion or misunderstanding." The Court ruled that Plaintiffs qualified as "purchasers" under the act and sufficiently pled facts showing damages with respect to the value of their homes resulting from Defendants' fraudulent and deceptive conduct.

Finally, the Court dismissed Plaintiffs' claims for civil conspiracy. While Plaintiffs' claims for fraud and negligent misrepresentation survived the Motions to Dismiss, with a civil conspiracy the sole purpose must be to injure a plaintiff. Plaintiffs had stated themselves that Defendants' purpose was to benefit themselves, not to harm Plaintiffs, so the civil conspiracy claim was dismissed as a matter of law. Out of the nine counts in the Complaint, each defendant still must defend seven counts after the Court's Opinion.

The Barker case illustrates the need for real estate developers to proactively inform all potential buyers of any conditions on their properties that could possibly affect decisions to purchase them. The most optimal course of action would have been for Defendants to have spent enough money to fix the alleged nitrate level and septic system problems before selling the properties. An unwanted but imperative extra cost before sales occurred would have almost definitely saved Defendants money in the long-run, as they now are faced with expensive litigation and potential significant liability at trial.

If fixing the conditions ahead of sales was not feasible, Defendants still should have disclosed all relevant property conditions to the potential buyers. While it may have been more difficult for Defendants to sell the lots at the prices they wanted had they disclosed all relevant information, Defendants would have avoided what now looks like will be extremely time-consuming and costly litigation as a result of failing to disclose the information.

Barker should serve as a lesson for all real estate developers in Pennsylvania that despite the up-front cost of improving conditions or increased difficulty selling properties if improvement is not economically and/or physically feasible, the benefits to developers of avoiding future costly litigation far outweigh the consequences of paying additional costs before selling properties or having a harder time selling properties after disclosure.

~ Mondaq

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