Tuesday, October 6, 2015

Disclosure of Defects in Residential Sales

     Prior to 1985, Florida subscribed to the legal theory of caveat emptor in connection with the sale of real property, either residential or commercial. However, the law changed as a result of the case of Johnson v. Davis.  In that case, Davis entered into a purchase contract to purchase the Johnson’s home. The contract allowed them to make a full inspection of the home.  Prior to making the second deposit, Davis discovered some peeling plaster around the corner of one window. When asked, Johnson advised that they “had had a minor problem that had long since been corrected and that the stains were wallpaper glue and the result of ceiling beams being moved.” 
    
     Relying on that statement, Davis paid the additional deposit and Johnson moved out. Thereafter, Davis entered the home after heavy rain, and discovered water gushing from the window and the roof. Roofers were brought in by both the seller and buyer and a dispute arose as to whether the roof could be fixed or was fatally defective.  Davis sued, alleging breach of contract, fraud and misrepresentation. Johnson counterclaimed seeking the deposit. At trial, the court awarded the initial $5,000 deposit to Johnson, gave the second deposit back to Davis and awarded no attorney’s fees.
    
     Both sides appealed, and the appellate court affirmed the return of the second deposit to the Davis, but reversed as to the first deposit, ordering same to be returned to the Davis and that Davis be paid attorney’s fees. This decision was appealed to the Florida Supreme Court.  The court concluded that Johnson knew that the roof was defective and their failure to disclose a material fact of a latent defect that they had full knowledge of entitled Davis to rescind the contract.  The court went on to add, “The doctrine of caveat emptor does not exempt a seller from responsibility for the statements and representations which he makes to induce the buyer to act, when under the circumstances these amount to fraud in the legal sense.”
    
     Since that decision, sellers have been obligated to disclose all material facts which affect the value of the property.  In fact, the most common contract used in South Florida specifically states: “Seller knows of no facts materially affecting the value of the Real Property which are not readily observable and which have not been disclosed to Buyer.”
    
     Since the Johnson v. Davis decision, the issue of actual knowledge has become a bone of contention. For years it was not clear whether knowledge meant “should have known” or actual knowledge. Under the theory of should have known, sellers could not put their head in the sand and ignore latent defects. However, recent case law indicates that actual knowledge is necessary in order to impose liability under the Johnson v. Davis standard.
    
     In Jensen v. Bailey, a 2011 case, Bailey sued two years after closing claiming that substantial improvements were done without permits.  Prior to closing, Jensen had completed a disclosure statement which specifically stated, “NO” to the following question of whether they were aware, “of any improvements or additions to the property, whether by you or by others, that have been constructed in violation of building codes or without necessary permits?"
    
     After closing, Bailey discovered that the French Doors installed by Jensen was done without a permit, and further, that the work was not done properly. The trial court accepted the fact that Jensen was not aware of the lack of a permit, but still imposed liability under the Johnson v. Davis standard, and awarded damages, interest and attorney’s fees. In reversing the trial court the District Court found that to recover four elements must exist:  “(1) the seller of a home must have knowledge of a defect in the property, (2) the defect must materially affect the value of the property, (3) the defect must be not readily observable and must be unknown to the buyer, and (4) the buyer must establish that the seller failed to disclose the defect to the buyer.” In the Jensen case, it was clear that three of the elements applied, but that knowledge was required to be actual and not the “should have known” standard. Since the trial court had accepted that Jensen was not actually aware of the lack of permits she could not be held liable for failing to disclose the lack of permits.
    
     The most recent case on this issue is Eiman v. Sullivan.  In that 2015 case, Eiman sold a piece of vacant land to Sullivan based on an “As-Is” vacant land contract. After closing Sullivan discovered that the property “contained a substantial amount of wetlands, swamp lands and/or low lying areas that had been filled-in by Eiman, or by persons working on Eiman’s behalf, and that a layer of muck existed below the fill dirt which would either prohibit the construction of their home or significantly and materially increase the cost for same.”  The trial court agreed with Sullivan and awarded damages in the amount of $65,000.00.  On appeal, Sullivan sought to show that Eiman knew or could have had actual knowledge of the defect by their actions of removing certain trees and their familiarity with the property. However, the appellate court found that there was no evidence that Eiman had actual knowledge of the alleged defect and this lack of this actual knowledge, proven at trial, was fatal to the Sullivan’s case. The decision was reversed and no damages were awarded to Sullivan.
    
     There are two lessons to be learned from the preceding cases. First, perform good due diligence when buying property by hiring appropriate experts to determine the condition of the property as well as the status of all permits (or lack of permits) for any improvements. The second is to ask the right questions and to obtain proper written disclosures from your seller so that if there are latent defects of which they are aware you have a record of whether they disclose same.
    
     Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate law and business law, and can assist buyers and sellers in loans and purchases/sales.  They can be reached at 561.594.1452 or by e-mail at mjposner@warddamon.com
    

     

5 comments:

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