Whether “a building code violation, not yet subject to any enforcement action, is an encumbrance under MCL 565.151, breaching” a warranty deed; Scope of the term “encumbrance”

The court concluded that “a building code violation, in existence at the time a warranty deed is executed and not yet subject to any enforcement actions, does not constitute an encumbrance under MCL 565.151.” Thus, the court reversed the Court of Appeals judgment to the contrary and remanded to the trial court for reinstatement of its order granting defendants’ motion for a directed verdict as to the claim at issue in this case. Plaintiffs purchased a condominium from defendants. Defendants transferred title to plaintiffs under a warranty deed. “Pursuant to MCL 565.151, the deed warranted that the property was ‘free from all incumbrances,’ among other things. It turned out that, at the time of sale, the property was in violation of a building code requiring a firewall between condominium units.” The issue was “whether that violation constituted an encumbrance violating the warranty deed.” The case turned upon the scope of the term “encumbrance.” The court agreed with the general rule and held “that a violation of building codes, which has not yet been subject to any official enforcement action, is not an encumbrance. Such a violation does not affect the rights to or interests in the property and it is hidden or at least not readily known. It therefore lacks the defining characteristic of an encumbrance. To hold otherwise would not only disregard the longstanding meaning of encumbrance, it would also destabilize our system of conveying real property by inviting title disputes based on violations of building codes that would not be discovered during a normal title search or inspection of the property. Parties to land transfers are free to allocate the risk of such violations by contract. We decline to do so by expanding the concept of encumbrance.” The court noted that in “reaching a contrary conclusion, the Court of Appeals relied upon various out-of-state cases holding that zoning code violations are encumbrances.” But the court held that “those cases are distinguishable from the present case, which involves a building code violation.” The violation here “was of a building code regulating the building’s firewall, and the City had taken no actions to enforce the code at the time the warranty deed was executed. While the violation impaired the condition of the property, it was not an encumbrance that affected the ownership interests in the land. Therefore, the building code violations did not breach the warranty deed under MCL 565.151.”