ASSERTING NON-DISCLOSURE CLAIM INVOLVING RESIDENTIAL REAL PROPERTY AND WHETHER FACTS ARE “READILY OBSERVABLE”

Posted on September 6, 2021September 6, 2021 by Edward Garber

Under Florida law, there is a claim dealing with the purchase and sale of residential real property known as a Johnson v. Davis or a non-disclosure claim: “[W]here the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.” Lorber v. Passick, 46 Fla.L.Weekly D1952a (Fla. 4^th DCA 2021). A seller’s duty to disclose extends to a seller’s real estate agent/broker. Id.

A non-disclosure claim is asserted by the buyer of residential real property when the buyer discovers defects or damages with the real property that he believes materially affects the value of the property. While there may be the sentiment these are easy claims to prove, they are not.

Remember, a non-disclosure claim deals with facts that materially affect the value of residential real property and are NOT readily observable. The use of the language “readily observable” has been found to mean:

“[I]nformation [that] is within the diligent attention of any buyer. To exercise diligent attention…a buyer would be required to investigate any information furnished by the seller that a reasonable person in the buyer’s position would investigate and take reasonable steps to ascertain the material facts relating to the property and to discovery them—if, of course, they are reasonably ascertainable.”

Lorber, supra, quoting Nelson v. Wiggs, 699 So.2d 258, 260-61 (Fla. 3d DCA 1997) (internal quotations and citations omitted).

When a buyer asserts a non-disclosure claim, the buyer should also consider adding a negligent misrepresentation claim. “[E]ven when a defect can probably be discovered through the exercise of diligent attention, the requisite level of diligent attention is of less importance in claims involving misrepresentations – especially those involving fraud.” Lorber, supra. The issue appears to be one that involves comparative negligence and despite readily observable defects, a buyer is entitled to rely on a seller’s representations. Id.

Lorber provides a good discussion of a residential real property non-disclosure claim and related claims for a seller’s misrepresentation.

In this case, a buyer did not move through with closing because he smelled an odor in the house and learned, right before closing, the home had experienced substantial water damage/ a prior flood event. The buyer claimed this was never disclosed by the seller, was not readily observable, and materially affected the value of the property.

The seller sued the buyer for failing to close and the buyer countersued for breach of contract, fraudulent inducement, and negligent misrepresentation.

During the course of litigation, the seller moved for summary judgment. Testimony established that the buyer knew there was a musty odor when he first stepped foot in the house and asked about the odor. The buyer was told by the seller’s agent it was due to the air conditioning being off but acknowledged the odor might be mold. Moreover, the buyer’s real estate agent testified the odor was similar to other properties he had seen that had water intrusion; although, the agent testified he did not inform the buyer that water intrusion was possible. Based on this testimony, the seller argued the water intrusion and mold was readily observable thereby defeating a non-disclosure claim. The buyer argued that while he was not denying he smelled the odor from the get-go, the seller’s real estate agent dismissed the odor and there was nothing readily observable that connected the odor to a prior flood, as supported by the seller’s disclosure form which indicated the property suffered no water intrusion or flood damage. In other words, the buyer claimed how could he investigate a flooding condition he did not know existed and was not disclosed to him, and how could he have knowledge the odor’s existence was related to a past flood event.

The trial court granted summary judgment in favor of the seller. The trial court held the fact that the buyer smelled the musty odor that could be mold made the fact there was a prior water intrusion event readily observable. The Fourth District Court of Appeal disagreed.

Buyer’s Breach of Contract Claim

The buyer’s breach of contract claim against the seller was a non-disclosure claim. Thus, the buyer’s failure to exercise diligent attention would be fatal to a non-disclosure claim because the facts would be readily observable. In this regard, the Fourth District Court of Appeal noted that if the buyer’s claim was premised on mold, his non-disclosure claim would fail because he observed the musty odor.

However, the buyer’s claim was not predicated on the existence of mold, but on the existence of a past flood event/damage; the buyer testified “he was unaware of any steps he could have taken to investigate a prior flood about which he was never informed, and he had no knowledge that the mold’s existence was in any way related to a prior water intrusion event.” For this reason, the Fourth District found that there was a genuine issue of material fact as to whether the prior flood event was readily observable. There was also an issue of material fact as to whether the flood event/damage materially impacted the value of the property as the buyer testified the home was worth much less after having suffered a flood.

Buyer’s Fraudulent Inducement Claim

As to the buyer’s fraudulent inducement claim, the Fourth District Court of Appeal held there was a genuine issue of material fact as to whether the seller knew its representations concerning the property were false with the intent to induce the buyer to enter into the purchase-sale agreement.

While a party cannot recover for fraud that is contradicted or covered by the actual contract, the sale of residential real property creates an exception. “The inclusion of an ‘as is’ clause in a contract for the sale of residential real property does not waive the duty imposed upon a seller under Johnson [v. Davis].” Lorber, supra (citation omitted).

Buyer’s Negligent Misrepresentation Claim

As to the buyer’s negligent misrepresentation claim, the Fourth District Court of Appeal held that the “issue was one of comparative negligence.” Lorber, supra. Genuine issues of material fact remained “as to whether Seller knew or should have known about the Disclosure Form’s falsity, whether Seller intended to induce Buyer to rely on the Disclosure Form, and whether Buyer acted in justifiable reliance upon the Disclosure Form, in conjunction with seller’s agent’s statement that the smell was attributable solely to the air conditioning being off.” Id.

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.

CLAIMS BASED ON MISREPRESENTATION MUST BE INDEPENDENT OF CLAIMS BASED ON A CONTRACTUAL BREACH

Posted on March 28, 2020March 28, 2020 by Edward Garber

While misrepresentation-type tort claims (fraudulent inducement, fraudulent misrepresentation, or negligent misrepresentation) sometimes sound like attractive claims, they are oftentimes not appropriate claims, particularly when there is a contract between the parties. The reason being is the the same damages for the breach of contract and misrepresentation-type tort claims are pursued and the claims rely on the same conduct as the breach of contract claim. This is wrong. As explained further in this article, the misrepresentation forming the fraudulent inducement, fraudulent misrepresentation, or negligent misrepresentation claim (1) must be pled with specificity in the operative pleading (complaint or counter-claim), (2) are not a substitute or way to navigate around the burden of proof of a breach of contract claim, and (3) must be based on conduct independent of the breaches of contract, i.e., a breach of the actual contract is not a misrepresentation.

DEMONSTRATING A FRAUDULENT INDUCEMENT CLAIM OR DEFENSE

Posted on January 12, 2020January 12, 2020 by Edward Garber

In a recent case, Florida’s Fourth District Court of Appeal reversed a trial court’s denial of a motion for a temporary injunction sought by an employer due to an independent contractor’s violation of a non-compete and non-solicitation provision in an employment / independent contractor agreement (“employment agreement”). You can find more on this case and the enforcement of the non-compete and non-solicitation clause here.

A worthy discussion in this case centers on the independent contractor’s fraudulent inducement defense. Specifically, the independent contractor, as a defense to the injunction, claimed that he was fraudulently induced into entering into the employment agreement because the employer promised he would make a certain amount of money and he would work predominantly in one geographic location. The employment agreement contained NO such representations. Instead, the employment agreement contained a fee and services schedule and the independent contractor would be compensated based on that schedule. It stated nothing as to the independent contractor only having to work, or predominantly working, in one geographic location, or that the independent contractor would be guaranteed “X” amount of money working in that location. Why is this important?

In order to support a claim or defense of fraudulent inducement, a party must prove the following elements: “1) a false statement concerning a material fact, 2) knowledge by the person making the statement that the representation is false, 3) intent by the person making the statement that the representation will induce another to act upon it, and 4) [justifiable] reliance on the representation to the injury of the other party.” GEICO General Ins. Co. v. Hoy, 136 So.3d 647, 651 (Fla. 2d DCA 2013 (citation omitted); see also Hillcrest Pacific Corp. v. Yamamura, 727 So.2d 1053, 1055 (Fla. 4th DCA 1999). “[T]o satisfy the element of an injury, the claimant must establish that he or she has sustained pecuniary damage or injury by which he or she has been placed in a worse position than he or she would have been absent the fraud.” Hoy, 136 So.3d at 651.

However, and this is a BIG however, “[A] party cannot recover in fraud for oral misrepresentations that are [covered or] later contradicted in a written contract.” Picture It Sold Photography, LLC v. Bunkelman, 45 Fla. L. Weekly D74a (Fla. 4th DCA 2020).

The employment agreement stated it was the entire agreement between the parties. (There is a reason why agreements contain language that states that the agreement is the final and complete agreement between the parties and supersedes prior agreements and representations between the parties. Such provision is not for naught!)

Hence, the independent contractor’s claim that he was induced into entering the agreement based on making a certain amount of money was covered by the agreement that contained a schedule for services and the corresponding fees. As mentioned, the agreement did not promise a certain amount of money and/or the money would be based on the independent contractor working in a certain location. In other words, you cannot claim fraud in the inducement if your contract contradicts what you are claiming or the agreement covers that issue.

Further, even if there was an argument that there were misrepresentations as to money and location, the independent contractor would still need to demonstrate that he justifiably relied on the misrepresentations. “Without justifiable reliance, there can be no actionable fraud.” Bunkelman, supra (citation omitted).