Make Sure To Disclose All Relevant Property Conditions To Potential Buyers

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...

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