Michigan Supreme Court Holds That Building Code Violations Do Not Constitute “Encumbrances” Under a Warranty Deed
In a long-awaited decision, the Michigan Supreme Court held that “a building code violation that is in existence at the time a warranty deed is executed and that is not yet subject to any official enforcement action does not constitute an encumbrance” under such a deed.
The court’s ruling in Galvan v. Poon reversed an appellate court decision that sent shockwaves through Michigan’s real estate community by expanding the definition of encumbrance beyond mortgages, mechanics, and tax liens, and easements that directly burdened title to a property. If the court had affirmed the appellate court’s decision, it would have had profound implications for every buyer and seller of real estate in the state who transferred property through a warranty deed by exposing sellers to liability for undiscovered building code violations.
Building Code Violation Leads to Cascading Problems and Liabilities for Purchasers
At issue in Galvan is whether the covenant of title under MCL 565.151, which states that the premises “are free from all incumbrances,” includes a covenant that the structure of the premises conforms to currently applicable building codes. The case arose out of Galvan’s purchase of the defendants’ Ann Arbor condominium unit in 2017 pursuant to a warranty deed. Prior to the purchase, both a home inspection and the seller’s disclosure form did not reveal any problems with the unit.
While making improvements and upgrades to the unit after the purchase, Galvan discovered there had been several previous maintenance visits for leaks and plumbing issues. Galvan also learned that one of the defendants had signed a unit modification responsibility form showing that the upstairs walls had been moved and the neighboring unit encroached on Galvan’s unit. Galvan hired a professional to remediate the moisture and mold found in the unit. While performing its work, the remediation company found no firewall between Galvan’s unit and the neighboring units as required under the Michigan building code.
In January 2018, the City of Ann Arbor sued Galvan and their two neighbors for violating the building code, seeking the installation of firewalls between the units. The trial court ordered that Galvan pay $9,000 to bring one of the neighboring walls into compliance and $9,000 to the other neighbor to compensate her for transferring a portion of her unit to him, as was necessary to install the firewall. Galvan and his partner had to live elsewhere during the firewall installation, and a lien was placed on their unit due to their initial ability to pay for the ordered repairs, among other burdens.
Galvan subsequently sued the defendants for fraud, misrepresentation, and a host of other claims related to the water issues, mold, and a lack of firewalls between units, which violated the City of Ann Arbor’s building codes and condominium bylaws. At trial, the Poons asked the court to hold that the building code violations did not establish an encumbrance under the warranty deed. The trial court agreed and granted the Poons’ motion for a directed verdict. Galvan appealed, and the appellate court reversed.
Building Code Violation Made Property “Unmarketable”
The appellate court noted that defendants were obliged to convey “marketable title” to plaintiffs through the warranty deed. Citing a 1948 Michigan Supreme Court case, the court stated that title is unmarketable “if a reasonably careful and prudent man, familiar with the facts, would refuse to accept the title in the ordinary course of business.”
In this case, the court held, “the violation of the building code ordinance constituted an encumbrance on the title as it immediately opened plaintiffs up to the risk of litigation and made their home unlivable and unmarketable.”
The sellers then appealed the decision to the Michigan Supreme Court. On July 12, 2023, the court issued its decision reversing the appellate court. The court noted that almost no cases “hold that violations of building codes (as opposed to other regulations, like zoning laws) that are not the subject of an enforcement action are encumbrances.” Acknowledging the disruption that would come from holding otherwise, the court then concluded that:
“We agree with the general rule and hold that a violation of building codes, which has not yet been subject to any official enforcement action, is not an encumbrance. Such a violation does not affect the rights to or interests in the property and it is hidden or at least not readily known. It therefore lacks the defining characteristic of an encumbrance. To hold otherwise would not only disregard the longstanding meaning of encumbrance, it would also destabilize our system of conveying real property by inviting title disputes based on violations of building codes that would not be discovered during a normal title search or inspection of the property.”
The court’s decision to uphold long-standing precedent and maintain the warranty deed status quo in Michigan is undoubtedly a relief for sellers who would have otherwise faced the prospect of litigation and liability for a whole new category of putative title defects.
If you have any questions about this decision and its impact, please contact John MacKenzie at Maddin Hauser.