BASIS TO RESCIND A CONTRACT UNDER EQUITABLE REMEDY OF RESCISSION

Posted on July 18, 2020July 18, 2020 by Edward Garber

When a seller of residential real property fails to knowingly disclose defects that are not readily observable and materially affects the value of the real property, this gives rise to a fraudulent nondisclosure or concealment claim, otherwise known as a Johnson v. Davis claim. (See this article that discusses this claim.). This is not the easiest claim to prove because a seller rarely will concede they knew of a hidden defect that they failed to disclose. Thus, discovery is warranted to show they evidently knew but elected not to disclose because doing so would have impacted the sale or the value of the sale. If you believe you have a fraudulent nondisclosure claim, make sure to consult with counsel so that you understand your rights relative to the facts associated with the claim.

In a recent case, Rost Investments, LLC v. Cameron, 45 Fla. L. Weekly D1717a (Fla. 2d DCA 2020), a lessee/potential buyer of residential property entered into a lease with an option to purchase contract. The option to purchase needed to be exercised by the lessee. Immediately after entering into this contract, the lessee claimed the contract should be rescinded based on the lessor’s fraudulent nondisclosure of defects that materially affect the value of the real property and the seller’s refusal to complete warranty-type items on an intake sheet.

First, the lessee claimed that when they moved into the house, the lessor agreed it would repair certain items that were identified on an intake sheet – hot water in the showers, low water pressure, two remote controls for the garage, and the refrigerator needed to be replaced. The lessor did not.

Second, the lessee claimed there were latent defects with the property that the lessor knew about but failed to disclose.

After trial, the trial court granted rescission in favor of the lessee. The Second District Court of Appeals reversed.

Rescission of a contract is an equitable remedy if the party seeking rescission has no adequate remedy at law (such as with a breach of contract claim where monetary damages would be awarded for the breach). Rost Investments, supra (citation omitted).

“[A] party who voluntarily executes a document . . . is bound by its terms in the absence of coercion, duress, fraud in the inducement or some other independent ground justifying rescission.”

***

“While an agreement may be rescinded for fraud relating to an existing fact, as a general rule, rescission will not be granted “for failure to perform a covenant or promise to do an act in the future, unless the covenant breached is a dependent one.” “A covenant is dependent where it goes to the whole consideration of the contract; where it is such an essential part of the bargain that the failure of it must be considered as destroying the entire contract; or where it is such an indispensable part of what both parties intended that the contract would not have been made with the covenant omitted.”

Rost Investments, supra (internal quotations and citations omitted).

The Second District held that the items on the intake sheet that the seller did not address “were [not] so essential to the bargain that [the lessor’s] failure to attend to them destroyed the contracts.” These are items that could have been resolved with money damages through a breach of contract claim, i.e., an action at law. Hence, the lessor’s failure to fix these items did not serve as a basis for the lessee to rescind the contract.

Next, the fraudulent nondisclosure claim for latent defects did not apply because the lessee was leasing the house as the option to purchase the real property had not been exercised. The fraudulent nondisclosure claim applies to buyers of real property. While perhaps the lessee had an argument for fraudulent misrepresentation, the trial court found that the lessor’s nondisclosure of certain defects was not intentional and, without the intent, there was no basis for a fraudulent misrepresentation claim. (Notably, in a fraudulent nondisclosure claim that applies to buyers of real property, a seller’s state of mind is not at-issue– what is at-issue is that the seller had knowledge of a defect not readily observable that materially affects the value of the real property and did not disclose it.) See Rost Investments, supra, n.7.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

FRAUDULENT NONDISCLOSURE / CONCEALMENT AND RESIDENTIAL PURCHASE-SALE CONTRACTS

Posted on March 17, 2016March 17, 2016 by Edward Garber

When it comes to residential purchase-sale contracts, sellers are required to disclose known defective items / facts that materially affect the value of the property. Such residential contracts routinely include language that the “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 the Buyer.” If such fact is not disclosed to the buyer, the buyer may have what is commonly referred to as a fraudulent nondisclosure or concealment claim against the seller (former owner) or a Johnson v. Davis claim named after the Florida Supreme Court opinion that recognized fraudulent nondisclosure claims.

Many sellers try to hang their hat on the fact that the residential contract contains an “as is” provision such that they are selling the property “as is”. Certainly, this is good language. However, an “as is” provision in a residential purchase-sale contract will not waive the duty imposed on the seller to disclose known items / facts that materially affect the value of the property and which are not readily observable. Solorzano v. First Union Mortgage Corp., 896 So.2d 847, 849 (Fla. 4^th DCA 2005).

A buyer (current owner) asserting a fraudulent nondisclosure claim against the seller (former owner) must prove four elements:

1. The seller must have knowledge of a defect [fact] in the property;

2. The defect [fact] must materially affect the value of the property;

3. the defect [fact] must be not readily observable and must be unknown to the buyer;

4. the buyer must establish that the seller failed to disclose the defect to the buyer.

Jensen v. Bailey, 76 So.3d 980, 983 (Fla. 2d DCA 2012).

The first element, “the seller must have knowledge of a defect” is the most challenging for the buyer to prove because the burden requires the buyer to “prove the seller’s actual knowledge of an undisclosed material defect.” See Jensen, 76 So.3d at 983; accord Eiman v. Sullivan, 173 So.3d 994 (Fla. 2d DCA 2015). Keep in mind, though, that this element does not require the buyer to prove the seller’s intent, only that the seller knew of a defect / fact that materially affected the value of the property and failed to disclose the defect / fact to the buyer. To prove actual knowledge, the buyer may need to put on circumstantial evidence establishing the seller knew of the defect / fact (but is perhaps lying about his or her actual knowledge today). See Jensen, 76 So.3d 980; see also Bowman v. Barker, 172 So.3d 1013, 1016 (Fla. 1^st DCA 2015) (“This evidence raises a question of fact about the appellees’ [seller] knowledge, as well as questions about their credibility and the plausibility of their denying knowledge of the property’s substantial defects and what repairs it needed.”) (For more on this case, click here.)

If you believe you have a fraudulent nondisclosure claim, consult a lawyer that can best assist you in (a) proving your claim based on the required elements and (b) understanding your damages associated with the nondisclosure. Typically, this will require engaging an expert to testify as to the costs to repair the undisclosed defect(s) / fact(s) that materially impacts the value of the property.

DID I JUST BUY THE MONEY PIT?

Posted on September 12, 2015September 12, 2015 by Edward Garber

You bought a house. Congratulations! You are all excited. You move in, get settled, and then the dreadful happens. You discover that the new house you bought contains water intrusion or other significant construction defects. You begin to think about the money pit you just bought; hilarious movie, by the way, so I digress with a funny scene from the movie:

Back to the issue. What do you do with the perceived money pit that you know or anticipate will cost you substantial sums to repair. First, assuming this was not new construction, you pull up the seller’s disclosure to see whether the seller (former owner) disclosed any of the water intrusion or construction defects. The seller did not. You believe the seller knew or reasonably should have known of these construction defects. How could they not? So you consult a lawyer (always a good first step) to explore what is known as the Johnson v. Davis line of cases that stand for the proposition that a seller has a duty to disclose known defects with the house they are selling. See Johnson v. Davis, 480 So.2d 625 (Fla. 1985).

A new case, Bowman v. Barker, 40 Fla. L. Weekly D2091b (Fla. 1^st DCA 2015), bolsters a buyer’s claims against a seller for not disclosing known defects in their house. In this case, the sellers apparently purchased a dilapidated house (cheaply) and renovated the house with the intent on flipping the house to another buyer. The house was sold. Defects were not disclosed. After the sale, the buyer discovered numerous construction defects. The buyer sued the seller, amongst others, for failing to disclose these defects that the buyer contended the seller knew about or should have reasonably known about.

The First District explained:

The duty to disclose known defects under Johnson v. Daviscontinues to exist for a home sold “as is.” The sellers do not dispute this principle. Despite selling this house “as is,” the sellers had a duty to disclose what they knew about its condition, and they undertook to make disclosures to Appellant [buyer] about the condition of the house. The record demonstrates triable issues of fact about what that condition was, what the sellers knew about it, what disclosures were made, and whether those disclosures were accurate.

This means the buyer is able to let the trier of fact (jury or judge) determine the issue of whether the seller knew of the construction defects but failed to disclose them to the buyer. This is a good case for a buyer since it supports the argument that these are issues to be determined by the trier of fact, putting pressure on the seller based on how the trier of facts may interpret the facts knowing the house they just sold contains numerous construction defects. For instance, in this case, the First District noted: “This evidence raises a question of fact about the appellees’ [seller’s] knowledge, as well as questions about their credibility and the plausibility of their denying knowledge of the property’s substantial defects and what repairs it needed.”

Consult an attorney if you purchase a house and discover construction defects, especially if you believe you just bought a money pit. An attorney can assist you with potential recourse under the law.