A recent decision by the Supreme Court of Utah is a cautionary tale to sellers of real property attached to going concerns and prospective development issues. In Shree Ganesh, LLC v. Weston Logan, Inc., 2021 UT 21, the Supreme Court held that the seller of an ongoing hotel concern had both contractual and common law duties of disclosure to the buyer that at least the seller and trial court did not believe existed. Under this holding, in Utah, the seller of an ongoing business enterprise associated with real property should carefully consider whether there is an obligation to reveal any facts or circumstances that the buyer might consider material.
In Weston Logan, the buyer entered into a purchase agreement with the seller to buy a hotel in Logan, Utah. The purchase agreement contained standard real estate purchase contract clauses that required the seller to disclose “all rental agreements, leases, service contracts, insurance policies, latest tax bills and other written agreements, written code violations or other notices which affect the property.” The written purchase agreement also required the seller to obtain the buyer’s consent before entering into any new contracts that make “any material changes to the Property, do any act, or enter into any agreements of any kind that materially changes the value of the Property.”
Subsequent to the agreement being signed and before closing, the seller was developing another hotel within the same hotel market, but miles away. Importantly, the buyer was aware of these plans. The seller’s plans changed, however, when the City of Logan approached the seller with a proposal to build the new hotel at a site directly across the street from the hotel being sold. The seller never disclosed to the buyer prior to closing any plans to build a competing hotel in the new location across the street. Without knowing about the planned hotel across the street, the buyer closed on the sale of the subject hotel. When the buyer learned of the seller’s plans, it sued the seller for failure to disclose the fact that building a competing hotel across the street would significantly reduce the market value of the property under contract.
The trial court granted summary judgment in favor of the seller, ruling that the seller had no contractual or common law obligations to disclose its plans that had nothing to do with the subject property. The Supreme Court disagreed and reversed. In requiring a trial on the issues, the Supreme Court found that the written purchase agreement was ambiguous whether it required the seller to reveal its plans to build a competing hotel across the street. It held further that it was at least a plausible interpretation that the contract required disclosure of “written agreements” that “affect” the property. Prior to this decision, this clause was generally interpreted to be limited to agreements, like leases, and insurance policies, etc., that directly concerned the subject property for sale. And that may be the seller’s testimony at trial. But the language of the purchase agreement was interpreted by the Supreme Court to be broader, such that any written agreement that may “affect” the property could come within the purchase agreement’s disclosure requirements. The Supreme Court noted that Utah common law requires disclosure of “material elements” of a property to be sold when the elements are not easily ascertainable by the buyer and materially affect the value of the property. The Supreme Court rejected the District Court’s view that the prospect of a competing hotel across the street was not a material element of the subject property. The Supreme Court found that because the property being sold included an ongoing concern of an operating hotel, the prospect of a competing hotel business being built across the street concerned a material element of the “Property”. Perhaps the most important language in the opinion was the Supreme Court’s holding that there was a common law duty to disclose a matter when “it encompasses any matter or information that would have been an important factor in a buyer’s decision to purchase the real estate.” Id at ¶ 35. Regrettably, the Supreme Court did not and could not articulate what kind of information would be “important” to a buyer. And it left unsaid whether that importance is a subjective or objective test. What is important to one buyer may not be important to another. These questions will ultimately be left up to the trier of fact, which unarticulated standard may make selling commercial property in Utah a dicier proposition.
This decision highlights the importance Utah courts place upon full disclosure in commercial real estate sales transactions, but leaves a great deal of uncertainty regarding the judgment calls that come with whether information is material or important to a specific buyer or buyers in general. One way to avoid potential liability may be to err on the side of well-documented disclosure, and at the same time consider using protective language against overly broad disclosure obligations and clear up ambiguities in the written agreement that could potentially expand disclosure obligations