Getting Ahead of Storm Surge, Especially in the Era of Climate Change
By J. Wylie Donald, McCarter & English LLP
A rising tide lifts all boats. Storm surge, however, can leave those boats on dry land and dry land inundated. What about a rising storm surge? Does such a thing even make sense?
Unfortunately, it does. As the planet warms due to climate change, a storm surge takes off from a higher point. As stated by one set of researchers:
“In many places, only inches separate the once-a-decade flood from the once-a-century one; and separate the water level communities have prepared for, from the one no one has seen. Critically, a small change can make a big difference, like the last inch of water that overflows a tub.” 1
But even if the researchers are wrong, the science of storm surge has created a new piece of information that real estate brokers, lenders, attorneys and anyone else involved in a transaction near the shore may wish to consider.
Storm surge modeling is now readily available. One can be certain that a purchaser or lessee of property inundated by a storm surge and whose insurance does not pay will be looking for someone to make him or her whole. And who better to target than the professionals that participated in the transaction?2
Storm surge has always been with us. But in an earlier era it was perhaps less appreciated as a separate storm phenomenon. Meteorologists are now able to distinguish storm surge from spring tides and wind-driven waves. The National Oceanic and Atmospheric Administration (NOAA) defines storm surge as follows:
Storm surge is an abnormal rise of water generated by a storm, over and above the predicted astronomical tides. … Storm surge is produced by water being pushed toward the shore by the force of the winds moving cyclonically around the storm. The impact on surge of the low pressure associated with intense storms is minimal in comparison to the water being forced toward the shore by the wind.”3
When this phenomenon is imposed upon rising sea levels and expected more severe weather, it can be a recipe for disaster.
There is a lot of confusing information (some would say disinformation) about the causes of rising sea levels, but one does not need to wade into that melee. The data is unequivocal that sea levels have risen along the East Coast and in the Gulf of Mexico in the last hundred years.4 Climate change exacerbates the problem. Thermal expansion of the oceans is one factor; the melting of land-based ice masses is another.5
On top of this gradual rising is the fact of more severe weather. Consider what Peter Hoeppe, a meteorologist and head of insurance company Munich Re’s Corporate Climate Center, has to say: “Your own perception that there are more storms and more flooding causing damage — that is extremely well documented.” 6
This information is not sequestered in an ivy tower. One can go online, enter a zip code and an anticipated storm severity, and, through the magic of Google Earth®, modeling and good graphics, estimate the flood risk of a piece of property.7
Scientists at Climate Central—a science and media nonprofit group that provides information on the science and effects of climate change—have put together their sea level rise analysis because “the odds of ‘century’ or worse floods occurring by 2030 are on track to double or more, over widespread areas of the U.S.”8 If one wants to leave climate change out of it, NOAA provides a more limited analysis with a map that assesses communities’ vulnerability to storm surge.9
Allocating Risk: New Jersey Case Study
Reported court decisions allocating the risk of storm surge liability to participants in a real estate transactions are hard to find. But it is only a matter of time. Hurricane Katrina spawned dozens of cases dealing with insurance for storm surge. In most, flood exclusions prevailed to deprive insureds of coverage. But this only demonstrates that insurance could not be tapped for that type of loss. It says nothing at all about whether other theories of compensation will be spun.
In that regard, it is useful to look back to the end of the last century and consider one state’s response to the legal issues that arose when a builder and its listing agent sold new homes proximate to a landfill containing soils and groundwater contaminated with hazardous substances, without disclosure of the landfill. Strawn v. Canuso10 concerns a new residential development in the vicinity of the Buzby Landfill in Camden County, New Jersey.
At some point after their purchases, buyers of the new homes learned of the landfill and brought a class-action lawsuit against the builder and its agents alleging, among other things, that the defendants had a duty to disclose the existence of the landfill. Defendants rejected that conclusion and the trial court agreed.11 But on appeal, the plaintiffs prevailed at the Appellate Division12 and then at the state supreme court.
The analysis of the supreme court well summarized the state of the law and easily reached the conclusion that the builder and its agents, by virtue of their status as professional sellers of real estate, coupled with the presumed lack of sophistication and awareness of residential real estate buyers, had a duty to disclose the existence of the landfill.
The court acknowledged that in times past, sellers of real estate could rely on the doctrine of caveat emptor, but that has been steadily eroded.13 As stated in Schipper v. Levitt & Sons, Inc.,14 “[c]aveat emptor developed when the buyer and seller were in an equal bargaining position and they could readily be expected to protect themselves in the deed. Buyers of mass produced development homes are not on an equal footing with the builder vendors and are no more able to protect themselves in the deed than are automobile purchasers in a position to protect themselves in a bill of sale.” 15
In McDonald v. Mianecki,16, the state supreme court found an implied warranty of habitability to include a potable water supply and noted “that the doctrine of caveat emptor ‘as applied to new houses is an anachronism patently out of harmony with modern home buying practices.’ ” 17 And in Weintraub v. Krobatsch,18 the court held that a seller of real estate was required to disclose the existence of a roach infestation unknown to the buyers. “The Court noted that in certain circumstances ‘silence may be fraudulent’ and that ‘relief may be granted to one contractual party where the other suppresses facts [that he or she] under the circumstances, is bound in conscience and duty to disclose to the other party, and in respect to which he cannot, innocently, be silent.’ ” 19
All of that led to this conclusion:
We hold that a builder-developer of residential real estate or a broker representing it is not only liable to a purchaser for affirmative and intentional misrepresentation, but is also liable for nondisclosure of off-site physical conditions known to it and unknown and not readily observable by the buyer if the existence of those conditions is of sufficient materiality to affect the habitability, use, or enjoyment of the property and, therefore, render the property substantially less desirable or valuable to the objectively reasonable buyer.20
The court’s holding, however, was limited. Because of the difference in bargaining power between residential buyers and professional sellers, including that “professional sellers of residential housing and their brokers enjoy markedly superior access to information,” the holding applied only to “professional sellers of residential housing (persons engaged in the business of building or developing residential housing) and the brokers representing them.” 21 It expressly did not apply to “the reseller of residential real estate nor the seller of commercial property.” 22
The New Jersey Legislature picked up the subject of off-site disclosure immediately and delivered the New Residential Construction Off-Site Conditions Disclosure Act (Disclosure Act).23 The act became effective on September 12, 1995, less than six months after the decision in Strawn v. Canuso. The act provided it would apply retroactively, but that provision was excised by the New Jersey Supreme Court in 2001.24
The legislative findings underpinning the act conclude that buying a home is an important decision and that real estate professionals can facilitate transactions “by advising purchasers of the availability of information concerning factors which can reasonably be determined to exist and which may affect the value of the residence.” 25
Nonetheless, such disclosures can “diminish the due diligence efforts of purchasers, or unnecessarily increase the costs of residential real estate transactions.” 26 To prevent this and otherwise promote the public interest, the legislature chose “to define the entirety of the disclosure duties of the sellers of newly constructed residential real estate.” 27 “Relevant off-site conditions” were to be found in mandated public repositories.28
The definitions in the act are critical. While “off-site conditions” are those that “may materially affect the value of the residential real estate property,” they are limited to a defined universe: known contaminated sites and sanitary landfills, certain electricity and gas transmission lines, electric substations, certain sewers and wastewater treatment plants, and airport safety zones.29 Where these are located in a municipality, they are to be identified on a list kept by the municipality.30
A professional seller31 immunizes itself from liability for off-site conditions if it includes in its sales contracts specified language advising the purchaser of the lists kept by the relevant municipality (or municipalities if within half a mile of the property at issue).32
“By providing the purchaser with the notice of the availability of the lists, as required by [46:3C-8], the seller shall be deemed to have disclosed fully the off-site conditions relating to the residential real estate and shall be deemed to have satisfied fully the seller’s disclosure duties pursuant to New Jersey law ….” 33
Further, “[a] seller’s responsibility to disclose those conditions that may materially affect the value of the residential real estate, but which are not part of the project, shall be fully met when notice is provided in accordance with the provisions of [N.J.S.A. 46:3C-1 et seq.].” 34 The act has been interpreted to bar common law and statutory claims (such as under the Consumer Fraud Act) for improper disclosure.35
Strawn, however, did not address only off-site conditions. In summarizing the law, the court also explained disclosure rules for on-site conditions: “By its favorable citation of California precedent, Weintraub [64 N.J. at 454-55] establishes that a seller of real estate or a broker representing the seller would be liable for nondisclosure of on-site defective conditions if those conditions were known to them and unknown and not readily observable by the buyer. Such conditions, for example, would include radon contamination and a polluted water supply.” 36
The court quoted from an earlier trial court decision where the seller did not disclose that recreational facilities at a condominium development were not included in the fee:
The fact that no affirmative misrepresentation of a material fact has been made does not bar relief. The suppression of truth, the withholding of the truth when it should be disclosed, is equivalent to the expression of falsehood. The question under those circumstances is whether the failure to volunteer disclosure of certain facts amounts to fraudulent concealment, or, more specifically, whether the defendant is bound in conscience and duty to recognize that the facts so concealed are significant and material and are facts in respect to which he [or she] cannot innocently be silent. Where the circumstances warrant the conclusion that [the seller] is so bound and has such a duty, equity will provide relief.” 37
New Jersey’s rules are not unique. As noted by the Court, numerous other jurisdictions have likewise eroded the common law doctrine of caveat emptor, strengthened consumer protection laws and imposed duties on buyers to investigate.38 Thus the themes of Strawn v. Canuso and the legislative response can be divined across the United States.
Applying Caveat Emptor?
How will these rules be applied when a storm surge has devastated a home or business and claims are brought for nondisclosure against prior owners and the professionals involved in the transactions? Claims will likely be brought not only by those damaged by the last storm surge, but also by those whose properties are condemned as municipalities proactively address the risk, or even those who wake up one morning and find themselves mapped into a “storm surge zone” with accompanying restrictions and loss of property value.
In New Jersey, storm surge risk will have to be categorized as an on-site or off-site risk; then the scope of the seller’s duty to disclose will have to be assessed, taking into account that the doctrine of caveat emptor has steadily eroded.
Storm surge may not fit neatly into the on-site/off-site categories discussed in Strawn. First, at the time of the sale, it is merely a risk. Indeed, many property owners will never see a storm surge affecting their property. Arguably, the on-site/off-site distinction does not even apply. Second, when the surge is in one’s basement, that is clearly on-site. But if it is in the neighbor’s basement and only one storm away, then is storm surge an on-site or an off-site issue? Third, even without a storm, are the concerns about storm surge more akin to the off-site effects of a landfill (stigma, blight, depression of property values) or the on-site effects (smells, vapors, groundwater contamination)?
If storm surge is an off-site risk, new home developers and their brokers accused of improper nondisclosure in New Jersey will assert they are immunized by the Disclosure Act.39 Non-developers and commercial businesses beset by improper disclosure claims and asserting the act applies will likely be unable to find relief under the act.40
In those cases, analyses similar to that followed in Strawn v. Canuso must be developed to ascertain whether the doctrine of caveat emptor still applies. For example, is a seller “bound in conscience and duty to recognize that the facts so concealed are significant and material and are facts in respect to which he [or she] cannot innocently be silent”?41
If storm surge is an on-site problem, then following the analysis in Strawn, disclosure obligations must be assessed in light of the continuing erosion of the doctrine of caveat emptor. “A seller of real estate or a broker representing the seller would be liable for nondisclosure of on-site defective conditions if those conditions were known to them and unknown and not readily observable by the buyer.” 42 Newcomers to the shore, buying property and subsequently harmed by storm surge undoubtedly will assert sellers, and particularly brokers, would know about the risk of storm surge. Further, they will assert the risk was unknown to them and not readily observable.
Prudent Steps for Property Sellers, Brokers
In conclusion, it may be useful to recast the result reached by the Strawn court in terms of storm surge, and thus provide some prudent steps a seller or broker of property at the shore might take:
Ultimately, a jury will decide whether [storm surge susceptibility] is a factor that materially affects the value of property; whether [storm surge susceptibility] was known by defendants and not known or readily observable by plaintiffs; and whether [storm surge susceptibility] has indeed affected the value of plaintiffs’ property. Location is the universal benchmark of the value and desirability of property. Over time the market value of the property will reflect [storm surge susceptibility]. Professional builders and their brokers have a level of sophistication that most home buyers lack. That sophistication enables them better to assess the marketability of properties [susceptible to storm surge]. With that superior knowledge, such sellers have a duty to disclose to home buyers the location of off-site physical conditions that an objectively reasonable and informed buyer would deem material to the transaction, in the sense that the conditions substantially affect the value or desirability of the property.43
Instead of a jury, however, a professional seller, or any seller, or a broker, can simply reference in its contract the risk of storm surge and note the availability of mapping, taking the issue off the table entirely.
Sellers of property along the shore and their agents should consider whether disclosure of storm surge risk should likewise be routine.
J. Wylie Donald is a partner in the Wilmington, Del., office of McCarter & English LLP. He is a member of the Insurance Coverage practice and is also co-chair of the law firm’s Climate Change and Renewable Energy practice, where he writes a blog titled www.climatelawyers.com. He can be reached at firstname.lastname@example.org.
This article does not represent the opinions of Bloomberg BNA, which welcomes other points of view.
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