Answer. Caveat: I am answering this question as a hypothetical situation, and no intent is made to render a legal opinion about an actual situation. Here are my thoughts:
- Owner No. 1, who had knowledge of the situation has potential liability to the affected residents and Owner No. 2. Intentional non-disclosure of material information is fraudulent and actionable. While it would be important for Owner No. 1 to disclose the condition to residents, it is a habitability situation, and, given the materiality, not waivable. In other words, unless and until the instability issue is resolved, the space should not be rented out, and Owner No. 1’s liability for placing a home on the space is not reduced by disclosing it.
A more difficult issue is whether Owner No. 1 has liability to other residents who are not affected by the unstable ground, but claim that they would not have rented a space in the community had they known of the issue. If, after a thorough evaluation of the entire community, it is determined that the instability is limited exclusively to one area, I submit that disclosure to existing non-affected and new residents is still the wisest course, and likely would entail no liability to Owner No. 1. But non-disclosure leaves open the door for residents, new and existing, to claim that they cannot sell their homes because the community has been stigmatized.
- As for Owner No. 1’s liability to Owner No. 2, it would be based primarily upon the principle of indemnification. Although much depends upon the terms of sale (e.g. how broad was the “AS-IS” clause?), I would like to say that Owner No. 2 should have no liability to the residents, since he was completely unaware of the adverse condition. But law and life are never so simple.
First, Owner No. 2 now has the absolute duty of providing safe and habitable premises to the residents, i.e. the space and common areas. As a landlord, he assumed this risk, and will likely have direct liability to the residents – even though he had no forewarning of the problem. From a public policy standpoint, the law would say he was in the best position to insure against these risks, as they are a cost of doing business.
However, since Owner No. 1’s non-disclosure was a material (e.g. would he have purchased the property had he known?) Owner No. 2 would likely seek recovery against him for the fraudulent concealment.
 Although I have seen very broad “AS-IS” clauses in commercial transactions, they are normally couched in terms of the buyer assuming all risks of loss for matters about which neither side is aware. I do not believe the clause can be used to shield a seller from intentional non-disclosure of material issues. In other words, at the time of agreeing to “AS-IS” language in the sale agreement, a buyer has a right to believe the seller has disclosed all material information.