Should Home Sellers Disclose Air Pollution Issues?

Must Portland home sellers and real estate agents disclose the existence of air pollution to potential buyers? Some of the most desirable homes in Portland are located near heavy industry. For instance, the Alphabet District in the Northwest quadrant is bordered on the north side by an industrial district, home to companies like ESCO Corp., which has a steel foundry just blocks from the residential neighborhood.

By some measures, the air quality of the local elementary school is in the top two percent for the most polluted in the country. Residents often report concerns to the Oregon Department of Environmental Quality about toxic smells wafting through the neighborhood.

It is well settled that a seller of residential real estate is obliged to disclose certain conditions to a potential buyer.

State law mandates disclosures in ORS § 105.464. Sellers must disclose if the roof has leaked in the past, if there are drainage problems on the property, and even whether the property has ever been used as an illegal drug manufacturing site.

It’s less clear if the seller’s duty to disclose extends to offsite conditions — such as pollution.

The statutory disclosure statement, under the heading “FULL DISCLOSURE BY SELLERS,” contains a catch-all, which provides: “Are there any other material defects affecting this property or its value that a prospective buyer should know about?”

No Oregon case law has addressed whether this provision creates a duty to disclose the impact of air pollution on the seller’s property. Because of the factual disputes involved in determining whether air pollution is a “material defect,” and whether it “affect[s]” the “property or its value,” these issues probably cannot be resolved by an early, pre-trial motion.

Practically, this means the lawsuit will not be resolved until trial, making it a more expensive case to bring and defend.

Further complicating matters, the disclosure obligation is limited to the seller’s “actual knowledge.”

That means a disgruntled buyer must prove that the seller had actual knowledge of the pollution problem. In addition, the buyer has a “duty to pay diligent attention to any material defects that … can be known … by utilizing diligent attention and observation.”

Given these complex issues, litigating the duty of disclosure will be expensive. The parties will likely need to obtain experts to opine on whether pollution affects the value of the property.

The buyer will need to collect evidence to prove that the seller had actual knowledge of the pollution.

This might include that the seller had an air filter in his house, that he read any of the numerous articles published about the pollution problem, or that it would have been impossible for him not to have noticed the unpleasant industrial smell wafting through the neighborhood.

But the more obvious the air pollution problem is, the more likely the buyer should have discovered it in connection with his own investigation.

The financial risks are significant.

Generally, the disgruntled buyer can either seek to unwind the sale, or elect to recover the damages caused by the non-disclosure. In the case of non-disclosure of off-site pollution, the damages are likely the diminution in value of the property. In addition, the cost of defending a non-disclosure lawsuit to trial could reach six figures.

Standard residential purchase contracts include a prevailing party attorneys’ fees provision, which potentially mitigates the seller’s risk. After all, if he prevails at trial, he can argue that he is entitled to the recovery of attorney fees from the buyer. However, a wily buyer could argue that his suit is based on the disclosure statement, not on the purchase contract, so prevailing party attorney fees are not available.

While this argument has been rejected in other jurisdictions, the Oregon courts have not issued any reported decisions on this issue.

Given the uncertainty in the law and the crushing expense of litigation, a home seller takes on enormous risk by failing to disclose air pollution to potential purchasers.

Anecdotal evidence suggests that sellers are ignorant of this potential duty and risk of liability, and that their real estate professionals are not advising them on this issue.

Of course, the home owner, who likely purchased his home without receiving a disclosure, does not want to be the first in the chain of sales of his home to disclose the pollution problem, since he is concerned he will lose value by disclosing it (which, in itself, is further evidence that it should probably be disclosed). Nevertheless, sellers should be aware that there is a risk associated with non-disclosure.

This column was originally published in the Portland Business Journal's Real Estate Daily E-newsletter on November 11, 2013.