When Flooding Fouls a Deal

 Tracy Rucka  |    October 08, 2018
When Flooding Fouls a Deal

Heavy rain and thunderstorms caused life-threatening flooding conditions last month in several Wisconsin communities. The aftermath following the storms was so significant that Gov. Scott Walker declared a state of emergency for several Wisconsin counties, and Madison Mayor Paul Soglin addressed the media in Madison, calling the flooding in Dane County a “very dangerous and unprecedented situation.” A Wisconsin Public Radio report on September 18 indicated that FEMA is conducting preliminary assessments of the Wisconsin flood damage, and the most recent figures show the storm damage numbers topping $233 million. “Unprecedented” is correct. 

The day after the first round of those storms, I was a teaching continuing education course. Not only were agents in the room personally affected by the storm; they had listings and pending offers on properties in the water-ravaged areas. The following questions and answers originate from the questions asked that day as well as WRA Legal Hotline calls from northern Wisconsin when that region also experienced unprecedented flooding earlier this year. 

Accepted offer with water damage 

The buyer and seller have an accepted offer on a property. As a result of the recent rainstorms, the property sustained flood damage in the basement. Prior to this flooding issue, the seller had no previous issues with water in the basement. The buyer is asking for installation of drain tiles, or the buyer wants out of the offer. What are the rights of the parties moving forward? 

The primary consideration for the seller is personal safety and securing the property to avoid additional damage or secondary environmental or health issues that can arise after flooding events. The seller may work in conjunction with remediation companies to facilitate appropriate property cleanup. As cleanup continues, the seller will consider the Property Damage Between Acceptance and Closing provisions on lines 206-215 of the WB-11 Residential Offer to Purchase. The property damage provisions provide a road map for the parties to follow in the event the property is damaged during the deal. 

The first determination needs to be made: Was property damage in excess of 5 percent of the purchase price? Depending on the extent of the damage, the seller may be required to repair the property and restore it to the same condition it was in on the day of the offer. If the damage is less than the 5 percent threshold, the seller will return the property to the former condition. If, however, the damages exceed 5 percent of the selling price, the buyer has the option to cancel the agreement. 

Practically, after a natural disaster causing significant property damage such as flooding, the parties may choose to amend the offer to a mutually agreeable solution. For example, the parties may agree about remediation work, finishing work, addition of drain tiles, sump pumps or other appropriate work to be completed on site. As necessary, the parties should also be referred in writing to legal counsel. Any drafting to allocate costs or liability, provide for the assumption of risk or create escrows should be done by or under the advice of private legal counsel representing the parties to the transaction. Likewise, if the parties disagree about the amount of damage, or whether the seller’s planned and/or completed repairs are appropriate to restore the property to the condition as of the date of acceptance, the parties may need to consult with legal counsel. 

Amend the RECR in this transaction? 

The buyer and seller in the above transaction decided to move forward. The damage was less than the 5 percent threshold, and the seller is making appropriate repairs. Is the seller required to amend the real estate condition report (RECR) for this buyer given the flood damage after acceptance? 

No, amending a RECR during a transaction is not required by Wis. Stat. 709, Disclosures by Owners of Real Estate. A review of lines 159-164 of the WB-11 Offer to Purchase indicate that the seller’s property condition representations contained in the offer and any accompanying RECR are made as of the date of the offer. If the flooding occurred after acceptance, the Property Damage Between Acceptance and Closing provisions of the offer address such a situation. 

The statute, Wis. Stat. § 709.035, requires sellers to amend the RECR when the seller, prior to the acceptance of a contract, obtains information or becomes aware of any condition that would change a response on the RECR. If a seller provides an amended RECR that discloses new defects during a transaction, the buyer would be given new rescission rights. A seller, consulting with legal counsel, may choose to provide an amended report, understanding the potential for the buyer to rescind the offer. If the seller asks about amending, the broker may recommend the seller consult with legal counsel about the potential advantages or disadvantages of amending the RECR mid-transaction. 

Amend the RECR for transaction No. 2? 

The above transaction later failed to close for reasons unrelated to the flooding. The seller made repairs after the flooding and asked the broker which items to disclose in the RECR for future buyers. Is the seller required to disclose the history of the flooded basement? Is the seller required to disclose damage repaired by the seller? 

According to Wis. Stat. § 709.03, sellers are required to complete the RECR according to their knowledge about defects. As previously mentioned, the seller is required to amend the RECR if the seller becomes aware of defects, between acceptance of an offer, that would change a response. 

Whether the seller describes the damage to the property, and the actions the seller took in an attempt to repair damage, or which damage qualifies as being repaired are case-by-case questions. Some sellers believe they do not have to disclose an item that has been fixed. In this scenario, the seller may believe the flooding in the basement is not required to be disclosed because it is not a defect due to the fact the seller believes it has been repaired and is no longer a defect. This is certainly a matter the seller should be encouraged to discuss with an attorney. The seller or the seller’s attorney — not the agent — decides whether the seller discloses such information on the RECR.

In any context, listing agents should be careful with how they discuss disclosure of items on the seller’s report. The listing agent should not encourage or discourage a seller from making a specific disclosure, thereby avoiding providing legal advice. The seller’s legal counsel may be consulted regarding whether an item needs to be disclosed by a seller on the RECR. Some attorneys believe that sellers should provide a full disclosure: what happened, what actions were taken to repair the issues, and so on; while other attorneys believe sellers are very precise in what they disclose and assist the sellers in drafting the disclosure. Finally, other attorneys believe if the item is not a defect at the time of completing the report, then it is not a defect at all, and disclosure is not required.

Material adverse facts 

The seller above decided not to amend the RECR to disclose the flood damage. What does the broker need to disclose? 

If the broker believes the RECR is inaccurate or incomplete, the broker may have to disclose any items not reported on the RECR that are material adverse facts or information suggesting the possibility of material adverse facts. The broker’s duty to disclose is found in Wis. Stat. § 452.133(1)(c): “Broker’s duties to all persons in a transaction.” A broker who is providing brokerage services to a person in a transaction owes all of the following duties to the person: (c) The duty to timely disclose in writing all material adverse facts that the broker knows and that the person does not know or cannot discover through reasonably vigilant observation, unless the disclosure of a material adverse fact is prohibited by law. Thus, the duty to disclose material adverse facts applies per Wis. Stat. § 452.133(1)(c) to material adverse facts the party does not know about and cannot discover through reasonably vigilant observation. The agent may consult with the broker and, when appropriate, legal counsel. As a risk reduction measure for the agent and the firm, when in doubt, they may disclose any information suggesting material adverse fact. A sample material adverse fact (WRA-DMAF) disclosure letter is available in zipForm.

Flooding and private well water contamination 

The buyer is thinking about purchasing a home with a well. The property was recently flooded. Is a buyer required to have the water tested before purchasing a property with a private well?

Private wells can become contaminated by floodwaters resulting from heavy rains. Floodwater can contain contaminates or bacteria posing a threat to human safety. If the well system has been flooded, the property owner should have the well tested before using the water, regardless of a pending transaction. Information about proper testing and chlorination procedures is available from the Department of Natural Resources at dnr.wi.gov/topic/Wells/flood.html. When a buyer makes an offer, the buyer may consider using the WRA Addendum B, or other addenda for well water testing to negotiate the inspection of their private well system and the testing of the well water.

Water testing is not automatic; it is required for a transaction unless there is a property transfer well inspection. Learn more about property transfer well inspections in the article, “Property Transfer Well Inspections,” in the November 2014 issue of Wisconsin Real Estate Magazine at www.wra.org/WREM/Nov14/WellWater.

Landlord/tenant apartment flooding

The landlord has a rental unit. The tenants occupying the unit were two months into a year lease when the unit flooded after a storm. The landlord responded the night he received the call about the flooding and removed wet carpet, extracted water and set up fans to dry the rest. 

The landlord asked the tenants that night if they wanted the landlord to make arrangements for somewhere temporary for to stay, and the tenants said no. Later, more water damage was discovered, and the landlord promptly removed drywall and carpet. 

The tenants recently complained about the odor and possibility of mold and health concerns. The landlord again offered relocation assistance. The landlord thinks the tenants want to take advantage of the situation and just not pay the rent due while the landlord is taking steps to repair. What is the best course of action for the landlord? 

The responsibilities of the parties are controlled by Wis. Stat. § 704.07(4); see the gray box on the next page. How the rules affect the rights of the landlord and tenant are somewhat fact dependent based on the flood damage and the landlord’s response and repair to the premises. The landlord may need to consult with builders, contractors or water remediation specialists to determine the extent of the damage and the appropriate repairs. The landlord may document in writing the tenant’s notice of water damage and landlord responses in the event there is a later dispute. 

Per the statute, if the landlord fails to make repairs, then the tenant may vacate the premises. Alternately, the tenant may vacate if the nature and period of repair would impose undue hardship on the tenant. If the tenant justifiably vacates, the tenant would no longer be responsible for the rent after the event that caused the untenantability. 

If the tenant chooses to remain in possession during the repair of the unit, the tenant may abate rent if he is deprived of full use of the premises. It would appear to be inconsistent for the tenant to claim the risk to his health is so high but refuses to vacate. If the risk to health and safety is that great, it may be more appropriate to remove from the premises. The landlord may work with legal counsel if there is not a readily available resolution with the tenant. 

The full statute regarding repairs and untenantability can be viewed at https://docs.legis.wisconsin.gov/statutes/statutes/704.pdf.

If the premises become untenantable because of damage by fire, water, or other casualty or because of any condition hazardous to health, or if there is a substantial violation of sub. (2) materially affecting the health or safety of the tenant, the tenant may remove from the premises unless the landlord proceeds promptly to repair or rebuild or eliminate the health hazard or the substantial violation of sub. (2) materially affecting the health or safety of the tenant; or the tenant may remove if the inconvenience to the tenant by reason of the nature and period of repair, rebuilding, or elimination would impose undue hardship on the tenant. If the tenant remains in possession and the condition materially affects the health or safety of the tenant or substantially affects the use and occupancy of the premises, rent abates to the extent the tenant is deprived of the full normal use of the premises. This section does not authorize rent to be withheld in full, if the tenant remains in possession. If the tenant justifiably moves out under this subsection, the tenant is not liable for rent after the premises become untenantable and the landlord must repay any rent paid in advance apportioned to the period after the premises become untenantable. This subsection is inapplicable if the damage or condition is caused by negligence or improper use by the tenant.

Flooded office 

The lower level of a brokerage firm's building flooded, and the flooding was undiscovered for many days. The broker tried to dry files that were soaked but, despite the best efforts, many of the files are now covered with mold. The worst mold damage seems to be confined to the files for previously expired listings. 

The broker knows firms need to generally maintain files two years after the transactions and deadlines. Is there an exemption to this rule for files that would possess a health hazard? How should the firm proceed with those files? 

The firm should consider and balance the health and safety of staff in light of the record retention rules. The first question is whether any of the water- and mold-damaged records need to be retained or may be properly disposed. For example, Wis. Admin. Code § REEB 15.04 record retention rules require retention of exact and complete copies of documents for two years. Other documents may require longer holding periods; for example, tax documents must be retained for six years, and articles of incorporation must be retained indefinitely. For any documents beyond their holding periods, the broker may dispose of them. 

The broker may also determine, upon advice of a water remediation company or other professionals, what can be done to salvage water-damaged documents. Electronic methods of retention are now permitted by Wis. Stat. § 452.42; thus, if the physical documents cannot be “saved,” the broker may copy or photograph the documents in a manner that would allow review if necessary in the future. Finally, the Wisconsin Department of Safety and Professional Services auditor Joe Vosen may be consulted for specific suggestions given the nature and extent of the water damage. 

As the broker works through cleanup of the basement, she may wish to keep health and safety in the forefront. The firm may consider working with a professional remediation company to avoid taking any unnecessary health risks when working with water damage and mold that may occur as a result of the flooding.

Tracy Rucka is Director of Professional Standards and Practices for the WRA. 

More resources

"When Disaster Strikes," in the September 2018 Wisconsin Real Estate Magazine: www.wra.org/WREM/Sep18/Disaster.

Wisconsin Department of Health Services' Flood Hazards and Recovery webpage: www.dhs.wisconsin.gov/flood/index.htm

Minnesota Department of Public Safety's Flood Clean-up and Recovery Information webpage: dps.mn.gov/divisions/hsem/disaster-recovery/Pages/homeowners-renters.aspx.

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