What You Need to Know

• Seller's Knowledge and Duty to Disclose: The Court found that because the seller had no actual knowledge of the specific location of the utility lines running through the property, it had no obligation to disclose this information to the buyer. This highlights that, under Montana law, a duty to disclose only arises if the seller has actual knowledge of a defect or issue.
• Mutual Mistake and Contract Rescission: The Court ruled that a mutual mistake could only justify rescission of the contract if the mistake was so significant that it made the property unmarketable or unbuildable. In this case, the underground utility lines did not render the property unbuildable or substantially decrease its value, so rescission was not warranted.
• Implication for Property Buyers: This case underscores the importance of thoroughly investigating all aspects of a property, including easements, utility lines, and their locations, before making a purchase decision..

Introduction

In a recent case from the United States District Court, District of Montana, the Court granted summary judgment in favor of a property seller, where the seller had no knowledge of utility lines running through a portion of the building envelope of the property. Mark R. Kiesel Living Tr. v. Hyde, No. CV 22-109-M-KLD, 2024 U.S. Dist. LEXIS 156712 (D. Mont. Aug. 30, 2024).

Facts

In November 1999, Defendant Thomas Hyde entered into a contract for a deed with Stock Farm, LLC to buy property in Hamilton, Montana (“Lot 31”). Lot 31 was a subdivision located in a gated residential community, which was governed by the Stock Farm Homeowners’ Association (“HOA”). Before he purchased the Lot, Defendant was involved in the founding of Stock Farm, including the formation of the covenants and restrictions governing subdivision development. One of the restrictions was “[n]o building shall be constructed outside of the designated building envelope . . . unless approved by [the HOA].” This was critical to the scheme that was designed to maximize the residents’ views and privacy. In 2002, Defendant hired an architect to design a home on the Lot, and the architect prepared three preliminary designs that depicted a line running through the building envelope of the property, with the first drawing labeling the line as “Sewer L,” the second labeling the line as “S,” and third with the line unlabeled.

Defendant eventually decided not to build on Lot 31, and instead sold it to Plaintiff Mark Kiesel nineteen years later in 2021 for $900,000. After closing, Plaintiff hired architects to design his home, including the same architect that Defendant had hired in 2002. The home was going to be a 7,000 to 8,000 square foot home at a construction cost ranging from $3.5 million to $4.8 million. During the process of planning the construction, Plaintiff discovered that the sewer line, as well as the gas and electrical service lines, ran through the building envelope of the property. That limited the development plans, including the size of the home. It was estimated that: (1) if the lines were not moved, a home encompassing only 5,874 square foot could be built or (2) it would cost $176,995 to move the lines outside the building envelope.

At that time, the architect informed Plaintiff that he had prepared the 2002 preliminary designs for Defendant, showing that sewer line. Plaintiff demanded that Defendant rescind the buy-sell agreement for the property, which Defendant refused.

Plaintiff subsequently filed suit against Defendant, arguing that the existence of the utility lines and their location significantly impacted his ability to use and enjoy the property, and substantially decreased its value. He also alleged that Defendant knew or should have known of the utility lines, and had a legal obligation to disclose them prior to the sale of the property but failed to do so. Defendant moved for summary judgment on all of Plaintiff’s claims, and Plaintiff cross-moved for partial summary judgment.

Decision

The Court laid out the parties’ arguments regarding Plaintiff’s constructive notice of the utility lines, granting summary judgment to the Defendant after weighing the equities as to both parties.

First, Defendant argued that several publicly recorded documents, including the property plat, covenants, and easement, provided Plaintiff with constructive notice that the utility lines ran through the Lot. Both the language of the plat and covenants noted that properties within the Stock Farm subdivisions are “subject to” utility easements. Further, the preliminary title commitments for the property disclosed the above records, as well as the recording of an easement for the benefit of Montana Power Company, which permitted the Company to lay gas lines through the subdivision. Based on these documents, Defendant argued that Plaintiff had constructive notice of the lines and did not do his due diligence as to where they were located.  Thus, he was entitled to summary judgment.

Among other arguments, Plaintiff countered that the language of the recorded documents only stated that the property was “subject to” utility easements, and did not describe the scope and actual physical location of any utility easements on the property.

The Court determined that Plaintiff did not have constructive notice of the lines running through the Lot’s building envelope, as none of the recorded easements or covenants indicated the lines’ actual location. Further, the covenants themselves indicated that lines were not to be installed over, under, or through any dwelling on the Lot, or unreasonably interfere with the use of any Lot. According to the Court, this language would not have put Plaintiff on constructive notice of the lines’ actual location.

However, the Court also found that Defendant did not have knowledge of the location of the utility lines prior to the sale of the property, which was dispositive to Plaintiff’s claims that Defendant knew or should have known of the lines, and failed to disclose them. Specifically, during the discovery process, Defendant testified that he visited the property, but never noticed anything indicating the utility lines ran through any particular place on the Lot. He also testified that he did not recall seeing the architect’s preliminary diagram, where “Sewer Line” was labeled as running through the residential designations.

Plaintiff argued that Defendant’s longstanding involvement with Stock Farm, including his involvement in establishing the covenants, along with the three drawings that the architect said he must have provided the Defendant, proves that Defendant did know about the existence of the utility lines. At minimum, Plaintiff argued that the drawing designs created a genuine issue of material fact as to whether Defendant had knowledge.

The Court disagreed, reasoning that even construing the evidence in the light most favorable to Plaintiff, Plaintiff was unable to raise a genuine issue of material fact. Critical to the Court’s ruling was testimony from the architect that he was not certain, or even concerned about the location of the sewer line when he drew the designs, and the designs did not accurately depict the sewer line’s actual location. Therefore, even assuming Defendant received the architect’s designs, they would not have put him on notice of the actual location of the sewer line. Further, even the covenants, which reserved a utility easement and required that all utility lines be placed underground, did not put Defendant on notice that the actual lines were located underneath the building envelope of the property.

As such, without evidence demonstrating that Defendant knew of the location of the utility lines, Plaintiff could not establish that Defendant owed a duty to disclose the information, as under controlling Montana Supreme Court caselaw, Woodahl v. Matthews, 639 P.2d 1165 (Mont. 1992), knowledge of the defect is necessary for a party to have an obligation to disclose it. This finding ended the Plaintiff’s fraud, constructive fraud, negligence and negligent representation claims.

As to the contract claim, Plaintiff argued that the express terms of the buy-sell contract required that Defendant convey the property free and clear of encumbrances not otherwise described in the title insurance commitment. There, the Court found that even though the title commitment did not specifically notify Plaintiff that the utility lines crossed through the building envelope of the property, the agreement did not require that the commitment provide that level of specificity, so there could be no express breach of the contract.

Under Montana state law, a party may rescind a contract if the consent of a party was given by fraud or by mutual mistake. There, Plaintiff could not successfully make out a fraud claim because Defendant had no knowledge of the lines. As to mutual mistake, rescission is only warranted under Montana case law if the mistake was so substantial as to defeat the object of the transaction. Under that case law, if the property is habitable, then the party has received the property they had bargained for.

Here, the Court found that the undisputed evidence showed the property has not been rendered unbuildable by the existence of the utility lines. The Court determined that the total cost of moving the lines was not so substantial as to render the property unmarketable. Moreover and more importantly, it was undisputable that it was possible to build a residence comparable to other residences in the subdivision. As such, any mutual mistake regarding the utility lines was not so substantial as to warrant rescission.

Takeaway

This case highlights the significance of thorough examination and investigation into a property prior to purchase and understanding exactly where easements run across one’s property.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or Shelley Wu at swu@riker.com.