Can property damage be a material fact even if the damage has been fully remediated?

QUESTION: I have a listing under contract, and the parties are in the Due Diligence Period. Yesterday, the buyer’s agent informed me that his clients requested an insurance quote, and after the insurance company ran a C.L.U.E. report, the insurance carrier informed them that the insurance rate would be much higher than the buyers anticipated. The quote was higher than expected because the sellers recently had a plumbing issue in the kitchen that was fully remediated and paid for by another insurance carrier.

The buyers are now claiming that the kitchen remediation was a material fact that should have been disclosed. They are also demanding a return of their Due Diligence Fee and Earnest Money Deposit. Was the damage in the kitchen a material fact that should have been disclosed?

ANSWER: If a property has been partially destroyed, and the damage has been fully remediated by a licensed professional, then as a general rule the damage itself is not a material fact that needs to be disclosed. (NC REC, Material Facts, pp. 28-29) That said, the North Carolina Real Estate Commission has also said that if a property is “uninsurable or is insurable only at exceptionally high rates,” then the insurance issue related to the property damage is a material fact which must be “affirmatively disclosed to all prospective purchasers.” (NC REC, Material Facts, p. 27)

On the facts you describe, it is not clear whether disclosure was required for several reasons. First, it is not clear whether the rates were simply a little higher than anticipated or “exceptionally high.” The Commission does not offer a bright line rule about how “exceptionally high” rates are to be calculated, so the standard for determining whether the rates were “exceptionally high” is subject to some ambiguity. Second, it is not stated whether you or the seller had any knowledge of the insurance rate issue. If either you or the seller knew that the insurance rates on this property would be “exceptionally high,” then we believe the buyer could argue that they are entitled a refund of their Due Diligence Fee. On the other hand, if neither you nor the seller had any idea that the insurance rates would be so high, the buyer’s refund claim becomes more difficult.

In situations like these, we believe the best policy is for brokers to disclose property damage and remediation so that buyers can effectively conduct their investigation of the property. If the parties in your particular situation cannot resolve this dispute by consent, then you should recommend that your client seek legal counsel.