Must Information in the Public Record be Disclosed to Buyers
In many cases of alleged nondisclosures or misrepresentations, where information in the public record is relevant or material, an issue frequently arises regarding what information contained in public records a buyer of residential property should be expected to know, or what information will a buyer be deemed to know by constructive notice. This article will explore Florida law involving concealment or nondisclosure and misrepresentation of matters that may be found in the public records. Accompanying Florida’s staggering growth is litigation that accuses developers, sellers, and brokers of unlawfully failing to disclose, concealing, and misrepresenting matters significantly affecting residential real property. Subjects of alleged nondisclosure or misrepresentations are diverse. Examples include structural problems, termite infestation, flooding problems, soil subsidence, or other adverse subsurface conditions, wetlands or protected species, zoning, land use classification, permit issuance, existing or proposed uses of nearby properties, future roadway plans, code enforcement violations, whether the property is in compliance with law, the existence of hazardous substances on
Must Information in the Public Record be Disclosed to Buyers of Residential Real Property and May it be Misrepresented?
In
many cases of alleged nondisclosures or misrepresentations, where information in the public record is relevant or material, an issue frequently arises regarding what information contained in public records a buyer of residential property should be expected to know, or what information will a buyer be deemed to know by constructive notice. This article will explore Florida law involving concealment or nondisclosure and misrepresentation of matters that may be found in the public records.
Accompanying Florida’s staggering growth is litigation that accuses developers, sellers, and brokers of unlawfully failing to disclose, concealing, and misrepresenting matters significantly affecting residential real property. Subjects of alleged nondisclosure or misrepresentations are diverse. Examples include structural problems, termite infestation, flooding problems, soil subsidence, or other adverse subsurface conditions, wetlands or protected species, zoning, land use classification, permit issuance, existing or proposed uses of nearby properties, future roadway plans, code enforcement violations, whether the property is in compliance with law, the existence of hazardous substances on or near the property, water frontage issues, and even if the owner of the property can build a residence on it.
The legal theories applicable to these cases include fraudulent concealment or fraudulent nondisclosure of a material fact.1
Information contained in the public records of Florida is relevant to many if not most of the examples listed above. Florida maintains an expansive list of what constitutes a public record.2 Public records are defined as:
…all documents, papers, letters, maps, books, tapes, photographs, films, sound recordings, data processing software, or other material regardless of the physical form, characteristics or means of transmission, made or received pursuant to law or ordinance or in connection with the transaction of official business by any agency. “Agency” means any state, county, district, authority, or municipal officer, department, division, board, bureau, commission, or other separate unit of government…, and any other public or private agency, person, partnership, corporation, or business entity acting on behalf of any public agency.3
Although public records include much more than land use regulations, a district court in Metropolitan Dade County v. Fontainbleau Gas & Wash, Inc., 570 So. 2d 1006 (Fla. 3d DCA 1990), held that “owners of real property are deemed to have purchased it with knowledge of the applicable land use regulations.” However, when representations are made to a buyer, the question becomes whether the law “should. . . expect every potential homeowner in every case to root around the bowels of the courthouse for those surveys, plats, and records which would verify or contradict a seller’s representations about the property.”4
Some public records are relatively easy to discern, like matters in a property’s chain of title. Others, however, sink to the level of obscurity, like government soil surveys revealing potential impediments to construction, inclusion of a property within the known range of a protected species, whether wetlands have been identified or documented on a property, whether a property contains a plume that originated from a nearby contaminated former gas station, or whether a home’s floor pad elevation complies with a government permit or other regulatory requirements.
Fraudulent Concealment or Nondisclosure of a Material Fact
Johnson v. Davis, 480 So. 2d 625 (Fla. 1985), created an exception to common law caveat emptoror “buyer beware” in connection with residential real property transactions, which has been referred to as “fraudulent concealment” or “fraudulent nondisclosure.”5 Johnson has also been referred to as the case that abolished caveat emptor for residential properties or noncommercial real estate transactions. The Florida Supreme Court, in Johnson, stated: “(T)he law appears to be working toward the ultimate conclusion that full disclosure of all material facts must be made whenever elementary fair conduct demands it.”6
In Johnson, buyers placed a $5,000 deposit on and entered into a contract for purchase of a three-year-old residence. The contract contained a provision that the roof be watertight, and included a requirement that seller repair the roof to a watertight condition, if necessary. Before paying the remaining $26,000 deposit, buyers asked about stains on the walls which sellers said were from wallpaper glue and from relocating ceiling beams. Buyers then paid the balance, for a total deposit of $31,000. Several days later, one of the buyers entered the house following a heavy rain and found water “gushing” into the house. Seller’s contractor said the roof could be made “watertight” for $1,000, but buyers’ contractor said the roof had failed, necessitating replacement for $15,000, and repairing water damage required another $10,000. Buyers elected not to close and sued sellers for breach of contract, rescission of the contract, fraud and misrepresentation, and sought return of their deposit. Sellers counterclaimed seeking the deposit as liquidated damages but did not demand specific performance.
The trial court awarded $26,000 to the buyers, apparently convinced that they were induced to pay that sum by seller’s fraudulent misrepresentation that there were no problems with the roof, but did not grant rescission based upon breach of contract. The trial court did not return the initial $5,000 deposit to the buyers. However, the Third District affirmed the award of $26,000 to the buyers and reversed as to the $5,000, holding that the initial deposit should also have been awarded to the buyers. The Third District held that sellers were aware of and had a duty to disclose the roof problems to the buyers before entering into the contract and accepting the initial deposit.
The Florida Supreme Court affirmed the Third District, holding “that where 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….” The Supreme Court concurred with the district court that sellers knew of and failed to disclose that there had been roof problems prior to entering into the contract and receiving the initial $5,000 deposit. The court found that not only had there been a fraudulent misrepresentation concerning the condition of the roof, justifying return of the $26,000, but also there had been fraudulent concealment justifying return of the initial deposit. Costs and fees were awarded to the buyers.
In reaching the Johnson decision, the Florida Supreme Court quoted with approval language in a California case regarding information found in the public records. In Lingsch v. Savage, 29 Cal. Rptr. 201 (Cal. Ct. App. 1963), allegations were made, that among other things, the building was “illegal” and that it had been targeted for condemnation by the city:
It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.7 (Emphasis added.)
Obviously, if the facts are “known to or within the reach of the diligent attention and observation of the buyer,” they will not be considered “known or accessible only to” the seller. The operative question then becomes what in the public records is within the “reach of the diligent attention and observation of a buyer,” and what records are beyond that reach?
Does caveat emptor still apply with regard to matters in the public records? The answer appears to be a qualified yes, depending upon the degree of difficulty in identifying and locating the relevant public records. Common sense dictates that potential homeowners will rarely have the knowledge, inclination, or resources to conduct extensive public record examinations. The relevant cases suggest that buyers of residential properties are not expected to conduct the degree of due diligence customarily associated with commercial real estate transactions.
The Fourth District in Solorzano v. First Union Mortgage Corp., 896 So. 2d 847 (Fla. 4th DCA 2005), recently held that a bank/home seller’s allegedly fraudulent nondisclosure of a municipal code enforcement violation on the property, which had resulted in a substantial fine, stated a cause of action under Johnson. The buyer’s complaint alleged 1) that seller knew prior to the sale that the city had determined there were material housing code violations on the property; 2) that the fine was $57,000 and still increasing; 3) that the violations and fine materially affected the value of the property; 4) that the housing code violations were not readily observable by her at the time she purchased the property; and 5) that she purchased the property as a result of the material nondisclosure of the housing code violations. The seller defended, arguing that the code violations were, “open, notorious and readily observable.” The trial court dismissed buyer’s complaint with prejudice for fraudulent nondisclosure under Johnson for failure to state a cause of action. The Fourth District Court of Appeal reversed the dismissal and remanded for a trial, holding that the question of whether the buyer “readily observed” the alleged housing code violations or whether she had adequate time to research the alleged violations was not properly resolvable on the seller’s motion to dismiss. It is unclear from the majority opinion whether the Fourth District expected the buyer to have conducted an in-depth investigation of the public records, or merely a cursory one.
Judge Gross, in his concurring opinion in Solorzano, expressed concern with the following language in the majority opinion: “whether she had adequate time to research the alleged violations….” He was concerned that the majority holding might be read to narrow the holding of Johnson. Judge Gross explained that a fact that is “readily observable” in a Johnson nondisclosure case is analogous to a misrepresentation of a fact as in Besett v. Basnett, 389 So. 2d 995 (Fla. 1980). In both cases, he noted, if the actual facts or the falsity of the misrepresentation may be disclosed by a cursory glance, neither the nondisclosure nor the representation is actionable. Judge Gross stated that he would look to Besett for direction in defining a “readily observable” fact in a Johnson nondisclosure case as one that is obvious from a “cursory examination or investigation.”8 Judge Gross’ position was that extensive research of the public records should not be necessary under the circumstances. All that should be necessary in his view is a cursory glance or a cursory investigation.
In Nelson v. Wiggs, 699 So. 2d 258 (Fla. 3d DCA 1997), the buyers purchased a home in the east Everglades area during the dry season. The property was subject to seasonal flooding, with floodwater usually between ankle and knee-deep. The home was on a dirt road in an agricultural/residential area and was built on a mound. The seller was aware of the flooding but did not disclose it to the buyers, even though the buyers told the seller they wanted to plant trees and raise animals on the property. The trial court denied buyers’ complaint for rescission and the Third District affirmed. Nondisclosure of the seasonal flooding did not amount to a cause of action under Johnson because knowledge of the seasonal flooding was within the “reach of the diligent attention and observation of the buyer.”9 The court reasoned that the buyers could have learned about seasonal flooding by looking at the flood criteria incorporated into county regulations. The buyers’ profession and experience in south Florida were significant to the court: The buyer was a contractor and had obtained a building permit to rebuild the residence from the county’s building department. The building department was where the county’s flood elevation criteria and regulations were maintained. The court cited Metropolitan Dade County v. Fountainbleau Gas & Wash, Inc., for the contention that owners of real property are deemed to have purchased it with knowledge of the applicable land use regulations, and that flood elevation criteria were part of the land use regulations.
Fraudulent Misrepresentations or Fraud in the Inducement
In Johnson, the Florida Supreme Court explained that caveat emptor has never exempted a seller from responsibility for the statements and representations made to induce a buyer to act, when under the circumstances the statements and representations amount to fraud in the legal sense. A buyer may rely on a representation made about real property unless the buyer knows the representation is false, or its falsity is obvious. Unless the representation can be verified or refuted by facts revealed in a property’s chain of title, it is probably not incumbent on a buyer to make an extensive investigation or to resort to the public record to verify or contradict the representations.
In Besett, after purchasing a fishing lodge, the buyers filed a complaint for damages due to fraud and misrepresentation or for reformation of the contract and abatement of the purchase price due to mutual mistake of fact. The buyers alleged that before they purchased the property the sellers and their broker represented that the property was 5.5 acres, that the fishing lodge generated income of $88,000 during one year, and that its roof was new. The buyers further alleged that the land was 1.44 acres; the amount of business was substantially less than the $88,000; the roof was not new, and it leaked. The buyers also alleged that the representations were knowingly made in order to induce them to buy the property and that they relied upon them. However, the buyers did not allege that they had investigated the truth of the defendants’ misrepresentations, nor did they allege any circumstances excusing or explaining their failure to investigate.
On the other hand, sellers argued that the complaint did not state a cause of action because buyers could have learned the truth by the exercise of ordinary care. The sellers noted that, for instance, the buyers could have determined the proper acreage for themselves by examining the plat recorded in the official records.
The trial court denied sellers’ motion to dismiss; the Florida Supreme Court agreed and held that a recipient may rely on the truth of a representation, even though its falsity could have been ascertained had he made an investigation, unless he knows the representation to be false or its falsity is obvious to him. The court held that the complaint set out a cause of action because the court could not determine from the allegations as a matter of law that the misrepresentations were obviously false. The Besett case was later cited with approval in Johnson and more recently in M/I Schottenstein Homes, Inc. v. Azam, 813 So. 2d 91 (Fla. 2002).
In Revitz v. Terrell, 572 So. 2d 996 (Fla. 3d DCA 1990), the buyer bought a home on a canal in the Florida Keys from the home’s second owner. The home had a bedroom and bathroom on the ground floor at an elevation of four feet above sea level. The county had issued a building permit for the home to the original owner/builder based upon his representation that only a garage and storage facilities would be on the ground floor. County regulations required the first habitable floor to be at least 15 feet above sea level. The original owner/builder also had falsified an application for federal flood insurance, which required the first habitable floor to be at least 11 feet above sea level; He represented in his application that the first habitable floor was more than 14 feet above sea level. Consequently, flood insurance was issued for an annual premium of $350.
The second owners, the sellers, continued the fraud by telling their insurance agent that the ground floor was only used for storage and parking, which resulted in the annual flood insurance premium remaining at $350. Before closing, the buyer asked the broker why the other houses on the street were on stilts. The broker’s response was that the house was built prior to the flood elevation regulations. She also represented that the annual flood insurance premium was $350. After closing, the buyer renewed the flood insurance policy. However, the buyer’s lender requested a floor elevation certificate, which confirmed that the first habitable living area elevation level was slightly over four feet. Shortly after that, the buyer learned the flood insurance policy was probably invalid because of the actual floor elevation and that the annual flood insurance premium would increase to $36,000. The buyer then brought action against the seller and the broker for fraudulent misrepresentations and nondisclosure, or mutual mistake, concerning building code violations and the availability of low-price flood insurance. Trial court entered judgment for the sellers and broker on all counts, ruling that because insurance was not a subject covered by the contract, it was not material to the transaction.
The Third District reversed because the buyer testified that he would not have entered into the contract if the facts were known. The court held that any fact which substantially affects the value of real estate is material. The seller and the broker argued that even if the facts not disclosed were material, they were readily observable to the buyer. According to the court, reversal was justified based either on fraudulent nondisclosure of material facts or upon fraudulent misrepresentation.
The court cited with approval out-of-state cases holding that nonconformity of a property to local building ordinances and zoning laws is a material fact which must be disclosed. The court held that, assuming that the broker knew or reasonably should have known that the annual $350 flood insurance premium was based on a habitable elevation level of at least 11 feet, the broker had a duty to disclose that fact to the buyer. Even when there is not a duty to divulge material facts, once a seller makes representations regarding a condition, the seller is under a duty to disclose the complete truth. The buyer’s obligation to exercise reasonable diligence was satisfied when he specifically inquired why other homes on the street were built on stilts and was told that the property in question was “grandfathered” from the flood regulations and that the flood insurance premium was $350. The Third District reaffirmed Besett’s holding that a recipient may rely on the truth of a representation, even though its falsity could have been ascertained had he made an investigation, unless he knows the representation to be false, or its falsity is obvious.
In Fry v. J. E. Jones Const. Co., 567 So. 2d 901 (Fla. 5th DCA 1990), the buyers told the seller’s salesperson that because they enjoyed water skiing they were only interested in a lakefront lot. The seller’s salesperson pointed out several lakefront lots on a site plan and stated that there was a $20,000 premium for such lots. The buyers asked the seller about closely-spaced lines on the site plan that separated the lots from the water and were told that the lines indicated the area where the seller was required to install sod. Based upon these representations, the buyers signed a contract to purchase the lot and for the seller to construct a home.
The recorded plat of the subdivision, which was not revealed to the buyers, showed that the lot ended 100 feet from the water’s edge and that there was a conservation tract between the lot and the water. Before closing, the buyers discovered this information, which would prevent them from obtaining a dock permit. The buyers then filed suit against the seller for rescission based upon fraudulent misrepresentation. The buyers testified that they would not have entered into the transaction but for the representation that the lot was lakefront. The seller testified there were no lakefront lots in his project.
The trial court found that the seller had in fact represented that the lot was lakefront, but denied the buyers’ claim for rescission holding that the representation was not material. The Fifth District reversed, holding that the representation was fraudulent, made without knowledge of its truth or falsity, and that the buyers were justified in relying upon the representation. Significantly, because the plat clearly depicted the conservation parcel between the lot and the water, the Fifth District stated that if the plat had been shown to the buyers, their reliance on the seller’s representations may not have been justified.
If a misrepresentation is made concerning an offsite property, but not about a defect of the property itself, it may still be actionable even though the truth or falsity of the misrepresentation may be determined from matters in the public record. The question of whether a buyer is justified in relying upon the representation is an issue of fact. When a misrepresentation contradicts matters in the public record about an offsite property, recent precedent suggests that a buyer is not required to conduct an extensive investigation into the public records.
In Azam v. M/I Shottenstein Homes, Inc., 761 So. 2d 1195 (Fla. 4th DCA 2000),a developer told buyers that an off-site parcel near the prospective purchase was to be a permanent natural preserve. In fact, a school was to be developed on the parcel. When the buyers found out that the parcel was not going to be used as the developer had represented, they filed for fraud in the inducement, rescission, and negligent misrepresentation. The buyers attached the site plan for the school to their complaint, and alleged that at all times the plan was available to all parties for inspection or review.
The trial court dismissed the complaint with prejudice based upon Pressman v. Wolf, 732 So. 2d 356 (Fla. 3d DCA), review denied, 744 So. 2d 459 (Fla. 1999). In Pressman, the Third District held that statements concerning matters in the public records cannot be the basis for a claim of actionable fraud. Although the Fourth District affirmed the dismissal of the Azam negligence and rescission counts, it reversed dismissal of the fraud count. The Fourth District held that buyers’ complaint established a cause of action for fraud in the inducement because it alleged that: 1) the seller made a misrepresentation of a material fact; 2) the seller knew or should have known of the statement’s falsity; 3) the seller intended that the representation induce the buyers to rely and act on it; and 4) the buyers suffered injury in justifiable reliance on the representation.
The court distinguished Johnson because the fraudulent nondisclosure in Johnson was of a physical defect in the property itself, and not about conditions of an off-property site that do not affect the physical condition of the properties sold. The question of whether there is actionable fraud with respect to matters outside the property being sold is a factual question, even when the status of those matters can be determined from a public record.10 There is no bright-line rule, and the issue of whether a buyer exercises ordinary diligence in discovering the falsity of statements about property is to be determined on a case-by-case basis.11 The trier of fact should weigh such facts as the reasonableness of the evidence, whether the seller is a developer, and the nature of the public record.12 The court noted conflict with Pressman, and agreed with Judge Gross’ concurrence that “the law should not expect every potential homeowner in every case to root around the bowels of the courthouse for those surveys, plats, and records which would verify or contradict a seller’s representations about the property.”13
The Supreme Court approved and affirmed the Azam decision holding that the question of whether a cause of action for fraudulent misrepresentation exists where the putatively misrepresented information is contained in the public record is one of fact that should not be resolved through a motion to dismiss and the use of a bright-line rule of preclusion.14 The Court disapproved of the Pressman propositionthat statements concerning matters in the public records cannot be the basis for a claim of actionable fraud.15
The Court reaffirmed Besett, stating that the question is whether the recipient of the misrepresentation is justified in relying upon its truth. If the recipient knows that the statement is false or that its falsity is obvious, the recipient’s reliance is improper and there can be no cause of action for fraudulent misrepresentation. The factual determination involves a consideration of the totality of the circumstances surrounding the type of information, the nature of the communication between the parties, and the relative positions of the parties.16
In dicta, the Court distinguished Azam from cases in which the matters are revealed in a property’s chain of title. Where fraud is alleged regarding information contained in and clearly revealed through a parcel’s chain of title, reliance is not justified and a cause of action will not exist.17 Because a buyer is expected to examine documents in the chain of title, information contained in those documents is properly imputed to a purchasing party. According to the court, Florida law does, however, prohibit “one who purposely uses false information to induce another into a transaction from profiting from such wrongdoing.”18
Intentional Concealment or Fraudulent Nondisclosure of a Fact Material to the Transaction
In Billian v. Mobil Corp., 710 So. 2d 984 (Fla. 4th DCA 1998), buyers sued a developer for damages due to nondisclosure under Johnson or alternatively, for the equitable remedy of rescission. The buyers claimed that the developer concealed material defects in a condominium property regarding differential settling, exterior stucco delamination, erosion, and sound transmission problems. They argued that these defects greatly depreciated the value of the property and should have been disclosed to them before they contracted to buy and purchased the unit.
A jury found no liability, and the trial court denied the buyers’ request for rescission. The Fourth District reversed because an erroneous instruction given to the jury required intentional nondisclosure for the buyers to prevail. Rather, the instruction should have only required that the developer knew of the defects materially affecting the value of the property and failed to disclose them. The court explained that if the facts of a case give rise to a duty to disclose under Johnson, the seller’s intent is immaterial.
The materiality of a represented fact is measured objectively, not subjectively. A cause of action under Johnson is limited to nondisclosure of a narrower set of facts than would be actionable in a typical case of fraudulent misrepresentation. The undisclosed fact must materially affect the value of the property. The materiality of a fact is to be determined objectively by focusing on the relationship between the undisclosed fact and the value of the property.19 The Fourth District further explained that Johnson carved out of the law of fraud a unique place for nondisclosure cases involving the sale of a home.20 A traditional cause of action for fraud turns in large part on the state of mind of the tortfeasor. For example, in a typical fraudulent misrepresentation case, a plaintiff must prove that a defendant knew a statement was false or that the defendant made a statement knowing he was without knowledge of its truth or falsity. In addition, a plaintiff must demonstrate that in making a false statement, the defendant intended that another rely upon it. An action under Johnson; however, does not require intent. Rather, it creates a duty to disclose when a seller knows of certain facts that may give rise to the duty, even if the seller is in doubt as to whether disclosure is necessary.21
Rescission is available for fraudulent nondisclosure under narrow circumstances when Johnson does not apply. For instance, rescission is proper when there has been intentional concealment of any fact material to the transaction, not just of a fact materially affecting the value of the property as is required by Johnson.22 A concealed fact is material to the transaction if the plaintiff would not have entered into the transaction but for the concealment. The court used as an example that a condominium’s sound transmission problems might not materially impact the value of the unit so that there would be no remedy under Johnson. However, in a case in which a buyer has made his or her desire for silence paramount, a seller’s intentional concealment of noise problems could give rise to a claim for rescission under Stephens based upon fraudulent nondisclosure.
Negligent Misrepresentation
In Gilchrist Timber Co.v. ITT Rayonier, Inc., 696 So. 2d 334 (Fla. 1997), a package of documents the seller gave to the buyers before closing contained the seller’s year-old appraisal that incorrectly stated that the zoning of seller’s 22,641-acre property was “agricultural,” a zoning classification which allowed residential uses. The buyers’ intent was first to cut the timber on the property and then subdivide it and sell it in small tracts for farming or residential development. During negotiations prior to closing, the parties discussed the quantity and quality of timber on the property, but not the property’s zoning. Before closing, the buyers apparently did not confirm the property’s zoning with the local government.
In fact, most of the property was zoned “preservation,” a classification that precluded residential use. Buyers were unable to change the zoning and brought suit in federal court for damages for the misrepresentation. The trial court held that seller was not aware that the zoning classification referenced in the appraisal report was inaccurate, so the representation was deemed a negligent transmittal of false information that the seller did not know was false.
The 11th Circuit Court of Appeals certified the following question to the Florida Supreme Court:
Whether a party to a transaction who transmits false information which that party did not know was false, may be held liable for negligent misrepresentation when the recipient of the information relied on the information’s truthfulness, despite the fact that an investigation by the recipient would have revealed the falsity of the information.
The Florida Supreme Court reaffirmed that a recipient of a fraudulent misrepresentation of fact is entitled to rely on its truth, although he might have ascertained the truth or falsity of the representation had he made an investigation.23 However, a negligent misrepresentation results in liability only if the recipient of the information justifiably relied on the erroneous information and that comparative negligence principles apply in such cases. The recipient of erroneous information cannot hide behind the unintentional negligence of the misrepresenter when the recipient is himself negligent in failing to discover the error. But, a recipient would only have to investigate information that a reasonable person in the position of the recipient would be expected to investigate.
Conclusions
The initial question for consideration is whether a seller or broker of residential property has a duty to disclose facts contained in the public record to a buyer. The answer to this question depends upon the facts of the case. However, based upon the case law, there are some general principles that apply to this situation:
The general rule is when the seller or broker of a residential property knows facts that are contained in the public records which materially affect the value of the property, and the facts are within reach of the diligent attention and observation of the buyer, the seller or broker probably does not have a duty to disclose them.
The seller or broker probably does not have a duty to disclose facts regarding a property that are or may be clearly revealed to the buyer through the property’s chain of title; such knowledge is properly imputed to the buyer because buyer is expected to examine these documents prior to transfer.
Other than facts that are clearly revealed through a parcel’s chain of title, which a buyer is charged with knowing, the question of whether facts in the public record are within reach of the diligent attention and observation of the buyer is a question of fact.
To avoid potential liability for a Johnson nondisclosure, a prudent seller or broker should disclose facts found in the public records of which he or she is aware that materially affect the value of a residential property, unless the facts are clearly revealed through the parcel’s chain of title.
Matters or facts regarding a property that are contained in the applicable land use regulations probably do not need to be disclosed.
The nonconformity of a property to land use regulations is a material fact which should be disclosed.
A cause of action will exist for fraudulent nondisclosure of a fact material to the transaction, even of matters not materially affecting the value of a property, if a buyer specifically inquires about a property and a seller fails to disclose an adverse fact responsive to the inquiry. For example, a cause of action will exist if a buyer expresses the need or desire for quiet, if the seller or broker knows the property has a noise problem and the seller or broker intentionally fails to disclose that fact. However, when disclosure is made, a broker or seller is held to a very high standard of care as to the accuracy of any representations made: A recipient may generally rely on the truth of a representation, even though its falsity could have been ascertained had the recipient made an investigation, unless he or she knows the representation is false or its falsity is obvious.
Whether a fraud claim may lie with respect to misrepresentations about matters outside the property being sold, when the status of those matters can be determined from a public record, is a factual question that involves determining whether the recipient of the representations was justified in relying upon the truth of the representations. This factual examination requires a consideration of the totality of the circumstances surrounding the type of information, the nature of the communication between the parties, and the relative positions of the parties. If the recipient knows that the statement is false or its falsity is obvious, his or her reliance is improper and there can be no cause of action for fraudulent misrepresentation.
When there is a duty to divulge facts, once a seller makes representations regarding a condition or a fact, a seller is under a duty to disclose the complete truth.
A buyer’s obligation to exercise reasonable diligence regarding the property he or she is acquiring is satisfied when he specifically inquires about a condition or a fact.
A recipient of a misrepresentation is probably not justified in relying on the misrepresentation and a cause of action for fraudulent misrepresentation will probably not exist if the truth of falsity of the representation may be determined by information clearly revealed in a parcel’s chain of title.
A negligent misrepresentation results in liability only if the recipient of the information justifiably relied on the erroneous information and comparative negligence principles are applicable to such cases. A recipient of a negligent misrepresentation would only have to investigate information that a reasonable person in the position of recipient would be expected to investigate.
Ascertaining whether a representation is negligent or fraudulent usually requires knowing facts not generally known or knowable when the representation is made. It is probably prudent practice for buyers to investigate information that reasonable people in the position of recipients of the representation would be expected to investigate.
1 Johnson v. Davis, 480 So. 2d 625 (Fla. 1985); Solorzano v. First Union Mort. Corp., 896 So. 2d 847, 848-849 (Fla. 4th D.C.A. 2005); fraudulent misrepresentation or fraudulent inducement — Besett v. Basnett, 389 So. 2d 995 (Fla. 1980); intentional concealment or fraudulent nondisclosure of a fact material to the transaction — Billian v. Mobil Corp., 710 So. 2d 984 (Fla. 4th D.C.A. 1998); and negligent misrepresentation — Gilchrist Timber Co.v. ITT Rayonier, Inc., 696 So. 2d 334 (Fla. 1997).
2 Fla.Stat. Ch. 119; M/I Schottenstein Homes, Inc. v. Azam, 813 So. 2d 91, 92 (Fla. 2002).
3 Fla. Stat. §119.011(11) and (2) (2004).
4 Azam v. M/I Schottenstein Homes, Inc., 761 So. 2d 1195, 1197 (Fla. 4th D.C.A. 2000).
5 Solorzano v. First Union Mort. Corp., 896 So. 2d 847, 848-849 (Fla. 4th D.C.A. 2005).
6 Johnson, 480 So. 2d 625 at 628 (Fla. 1985).
7 Id.
8 Solorzano, 896 So. 2dat 851.
9 Nelson, 699 So. 2dat 260.
10 Azam v. M/I Shottenstein Homes, 761 So. 2d at 1196.
11 Id.
12 Id.
13 Id. at 1197.
14 M/I Shottenstein Homes v. Azam, 813 So. 2d at 94 (Fla. 2002).
15 Id. at 96.
16 Id. at 94-95.
17 Id. at 95.
18 Id. at 96.
19 Billian, 710 So. 2dat987.
20 Id. at 988.
21 Id. at 989.
22 Id. at 989; Stephens v. Orman, 10 Fla. 9, 86-87 (1862).
23 Id. at 995.
E. Lee Worsham is a shareholder with Ruden McClosky Smith Schuster & Russell, P.A., in West Palm Beach. He graduated from the University of Florida School of Law and practices in the areas of environmental, land use, and real property.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Julius J. Zschau, chair, and William P. Sklar and Richard R. Gans, editors.
Must Information in the Public Record be Disclosed to Buyers of Residential Real Property and May it be Misrepresented?
In
many cases of alleged nondisclosures or misrepresentations, where information in the public record is relevant or material, an issue frequently arises regarding what information contained in public records a buyer of residential property should be expected to know, or what information will a buyer be deemed to know by constructive notice. This article will explore Florida law involving concealment or nondisclosure and misrepresentation of matters that may be found in the public records.
Accompanying Florida’s staggering growth is litigation that accuses developers, sellers, and brokers of unlawfully failing to disclose, concealing, and misrepresenting matters significantly affecting residential real property. Subjects of alleged nondisclosure or misrepresentations are diverse. Examples include structural problems, termite infestation, flooding problems, soil subsidence, or other adverse subsurface conditions, wetlands or protected species, zoning, land use classification, permit issuance, existing or proposed uses of nearby properties, future roadway plans, code enforcement violations, whether the property is in compliance with law, the existence of hazardous substances on or near the property, water frontage issues, and even if the owner of the property can build a residence on it.
The legal theories applicable to these cases include fraudulent concealment or fraudulent nondisclosure of a material fact.1
Information contained in the public records of Florida is relevant to many if not most of the examples listed above. Florida maintains an expansive list of what constitutes a public record.2 Public records are defined as:
…all documents, papers, letters, maps, books, tapes, photographs, films, sound recordings, data processing software, or other material regardless of the physical form, characteristics or means of transmission, made or received pursuant to law or ordinance or in connection with the transaction of official business by any agency. “Agency” means any state, county, district, authority, or municipal officer, department, division, board, bureau, commission, or other separate unit of government…, and any other public or private agency, person, partnership, corporation, or business entity acting on behalf of any public agency.3
Although public records include much more than land use regulations, a district court in Metropolitan Dade County v. Fontainbleau Gas & Wash, Inc., 570 So. 2d 1006 (Fla. 3d DCA 1990), held that “owners of real property are deemed to have purchased it with knowledge of the applicable land use regulations.” However, when representations are made to a buyer, the question becomes whether the law “should. . . expect every potential homeowner in every case to root around the bowels of the courthouse for those surveys, plats, and records which would verify or contradict a seller’s representations about the property.”4
Some public records are relatively easy to discern, like matters in a property’s chain of title. Others, however, sink to the level of obscurity, like government soil surveys revealing potential impediments to construction, inclusion of a property within the known range of a protected species, whether wetlands have been identified or documented on a property, whether a property contains a plume that originated from a nearby contaminated former gas station, or whether a home’s floor pad elevation complies with a government permit or other regulatory requirements.
Fraudulent Concealment or Nondisclosure of a Material Fact
Johnson v. Davis, 480 So. 2d 625 (Fla. 1985), created an exception to common law caveat emptoror “buyer beware” in connection with residential real property transactions, which has been referred to as “fraudulent concealment” or “fraudulent nondisclosure.”5 Johnson has also been referred to as the case that abolished caveat emptor for residential properties or noncommercial real estate transactions. The Florida Supreme Court, in Johnson, stated: “(T)he law appears to be working toward the ultimate conclusion that full disclosure of all material facts must be made whenever elementary fair conduct demands it.”6
In Johnson, buyers placed a $5,000 deposit on and entered into a contract for purchase of a three-year-old residence. The contract contained a provision that the roof be watertight, and included a requirement that seller repair the roof to a watertight condition, if necessary. Before paying the remaining $26,000 deposit, buyers asked about stains on the walls which sellers said were from wallpaper glue and from relocating ceiling beams. Buyers then paid the balance, for a total deposit of $31,000. Several days later, one of the buyers entered the house following a heavy rain and found water “gushing” into the house. Seller’s contractor said the roof could be made “watertight” for $1,000, but buyers’ contractor said the roof had failed, necessitating replacement for $15,000, and repairing water damage required another $10,000. Buyers elected not to close and sued sellers for breach of contract, rescission of the contract, fraud and misrepresentation, and sought return of their deposit. Sellers counterclaimed seeking the deposit as liquidated damages but did not demand specific performance.
The trial court awarded $26,000 to the buyers, apparently convinced that they were induced to pay that sum by seller’s fraudulent misrepresentation that there were no problems with the roof, but did not grant rescission based upon breach of contract. The trial court did not return the initial $5,000 deposit to the buyers. However, the Third District affirmed the award of $26,000 to the buyers and reversed as to the $5,000, holding that the initial deposit should also have been awarded to the buyers. The Third District held that sellers were aware of and had a duty to disclose the roof problems to the buyers before entering into the contract and accepting the initial deposit.
The Florida Supreme Court affirmed the Third District, holding “that where 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….” The Supreme Court concurred with the district court that sellers knew of and failed to disclose that there had been roof problems prior to entering into the contract and receiving the initial $5,000 deposit. The court found that not only had there been a fraudulent misrepresentation concerning the condition of the roof, justifying return of the $26,000, but also there had been fraudulent concealment justifying return of the initial deposit. Costs and fees were awarded to the buyers.
In reaching the Johnson decision, the Florida Supreme Court quoted with approval language in a California case regarding information found in the public records. In Lingsch v. Savage, 29 Cal. Rptr. 201 (Cal. Ct. App. 1963), allegations were made, that among other things, the building was “illegal” and that it had been targeted for condemnation by the city:
It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.7 (Emphasis added.)
Obviously, if the facts are “known to or within the reach of the diligent attention and observation of the buyer,” they will not be considered “known or accessible only to” the seller. The operative question then becomes what in the public records is within the “reach of the diligent attention and observation of a buyer,” and what records are beyond that reach?
Does caveat emptor still apply with regard to matters in the public records? The answer appears to be a qualified yes, depending upon the degree of difficulty in identifying and locating the relevant public records. Common sense dictates that potential homeowners will rarely have the knowledge, inclination, or resources to conduct extensive public record examinations. The relevant cases suggest that buyers of residential properties are not expected to conduct the degree of due diligence customarily associated with commercial real estate transactions.
The Fourth District in Solorzano v. First Union Mortgage Corp., 896 So. 2d 847 (Fla. 4th DCA 2005), recently held that a bank/home seller’s allegedly fraudulent nondisclosure of a municipal code enforcement violation on the property, which had resulted in a substantial fine, stated a cause of action under Johnson. The buyer’s complaint alleged 1) that seller knew prior to the sale that the city had determined there were material housing code violations on the property; 2) that the fine was $57,000 and still increasing; 3) that the violations and fine materially affected the value of the property; 4) that the housing code violations were not readily observable by her at the time she purchased the property; and 5) that she purchased the property as a result of the material nondisclosure of the housing code violations. The seller defended, arguing that the code violations were, “open, notorious and readily observable.” The trial court dismissed buyer’s complaint with prejudice for fraudulent nondisclosure under Johnson for failure to state a cause of action. The Fourth District Court of Appeal reversed the dismissal and remanded for a trial, holding that the question of whether the buyer “readily observed” the alleged housing code violations or whether she had adequate time to research the alleged violations was not properly resolvable on the seller’s motion to dismiss. It is unclear from the majority opinion whether the Fourth District expected the buyer to have conducted an in-depth investigation of the public records, or merely a cursory one.
Judge Gross, in his concurring opinion in Solorzano, expressed concern with the following language in the majority opinion: “whether she had adequate time to research the alleged violations….” He was concerned that the majority holding might be read to narrow the holding of Johnson. Judge Gross explained that a fact that is “readily observable” in a Johnson nondisclosure case is analogous to a misrepresentation of a fact as in Besett v. Basnett, 389 So. 2d 995 (Fla. 1980). In both cases, he noted, if the actual facts or the falsity of the misrepresentation may be disclosed by a cursory glance, neither the nondisclosure nor the representation is actionable. Judge Gross stated that he would look to Besett for direction in defining a “readily observable” fact in a Johnson nondisclosure case as one that is obvious from a “cursory examination or investigation.”8 Judge Gross’ position was that extensive research of the public records should not be necessary under the circumstances. All that should be necessary in his view is a cursory glance or a cursory investigation.
In Nelson v. Wiggs, 699 So. 2d 258 (Fla. 3d DCA 1997), the buyers purchased a home in the east Everglades area during the dry season. The property was subject to seasonal flooding, with floodwater usually between ankle and knee-deep. The home was on a dirt road in an agricultural/residential area and was built on a mound. The seller was aware of the flooding but did not disclose it to the buyers, even though the buyers told the seller they wanted to plant trees and raise animals on the property. The trial court denied buyers’ complaint for rescission and the Third District affirmed. Nondisclosure of the seasonal flooding did not amount to a cause of action under Johnson because knowledge of the seasonal flooding was within the “reach of the diligent attention and observation of the buyer.”9 The court reasoned that the buyers could have learned about seasonal flooding by looking at the flood criteria incorporated into county regulations. The buyers’ profession and experience in south Florida were significant to the court: The buyer was a contractor and had obtained a building permit to rebuild the residence from the county’s building department. The building department was where the county’s flood elevation criteria and regulations were maintained. The court cited Metropolitan Dade County v. Fountainbleau Gas & Wash, Inc., for the contention that owners of real property are deemed to have purchased it with knowledge of the applicable land use regulations, and that flood elevation criteria were part of the land use regulations.
Fraudulent Misrepresentations or Fraud in the Inducement
In Johnson, the Florida Supreme Court explained that caveat emptor has never exempted a seller from responsibility for the statements and representations made to induce a buyer to act, when under the circumstances the statements and representations amount to fraud in the legal sense. A buyer may rely on a representation made about real property unless the buyer knows the representation is false, or its falsity is obvious. Unless the representation can be verified or refuted by facts revealed in a property’s chain of title, it is probably not incumbent on a buyer to make an extensive investigation or to resort to the public record to verify or contradict the representations.
In Besett, after purchasing a fishing lodge, the buyers filed a complaint for damages due to fraud and misrepresentation or for reformation of the contract and abatement of the purchase price due to mutual mistake of fact. The buyers alleged that before they purchased the property the sellers and their broker represented that the property was 5.5 acres, that the fishing lodge generated income of $88,000 during one year, and that its roof was new. The buyers further alleged that the land was 1.44 acres; the amount of business was substantially less than the $88,000; the roof was not new, and it leaked. The buyers also alleged that the representations were knowingly made in order to induce them to buy the property and that they relied upon them. However, the buyers did not allege that they had investigated the truth of the defendants’ misrepresentations, nor did they allege any circumstances excusing or explaining their failure to investigate.
On the other hand, sellers argued that the complaint did not state a cause of action because buyers could have learned the truth by the exercise of ordinary care. The sellers noted that, for instance, the buyers could have determined the proper acreage for themselves by examining the plat recorded in the official records.
The trial court denied sellers’ motion to dismiss; the Florida Supreme Court agreed and held that a recipient may rely on the truth of a representation, even though its falsity could have been ascertained had he made an investigation, unless he knows the representation to be false or its falsity is obvious to him. The court held that the complaint set out a cause of action because the court could not determine from the allegations as a matter of law that the misrepresentations were obviously false. The Besett case was later cited with approval in Johnson and more recently in M/I Schottenstein Homes, Inc. v. Azam, 813 So. 2d 91 (Fla. 2002).
In Revitz v. Terrell, 572 So. 2d 996 (Fla. 3d DCA 1990), the buyer bought a home on a canal in the Florida Keys from the home’s second owner. The home had a bedroom and bathroom on the ground floor at an elevation of four feet above sea level. The county had issued a building permit for the home to the original owner/builder based upon his representation that only a garage and storage facilities would be on the ground floor. County regulations required the first habitable floor to be at least 15 feet above sea level. The original owner/builder also had falsified an application for federal flood insurance, which required the first habitable floor to be at least 11 feet above sea level; He represented in his application that the first habitable floor was more than 14 feet above sea level. Consequently, flood insurance was issued for an annual premium of $350.
The second owners, the sellers, continued the fraud by telling their insurance agent that the ground floor was only used for storage and parking, which resulted in the annual flood insurance premium remaining at $350. Before closing, the buyer asked the broker why the other houses on the street were on stilts. The broker’s response was that the house was built prior to the flood elevation regulations. She also represented that the annual flood insurance premium was $350. After closing, the buyer renewed the flood insurance policy. However, the buyer’s lender requested a floor elevation certificate, which confirmed that the first habitable living area elevation level was slightly over four feet. Shortly after that, the buyer learned the flood insurance policy was probably invalid because of the actual floor elevation and that the annual flood insurance premium would increase to $36,000. The buyer then brought action against the seller and the broker for fraudulent misrepresentations and nondisclosure, or mutual mistake, concerning building code violations and the availability of low-price flood insurance. Trial court entered judgment for the sellers and broker on all counts, ruling that because insurance was not a subject covered by the contract, it was not material to the transaction.
The Third District reversed because the buyer testified that he would not have entered into the contract if the facts were known. The court held that any fact which substantially affects the value of real estate is material. The seller and the broker argued that even if the facts not disclosed were material, they were readily observable to the buyer. According to the court, reversal was justified based either on fraudulent nondisclosure of material facts or upon fraudulent misrepresentation.
The court cited with approval out-of-state cases holding that nonconformity of a property to local building ordinances and zoning laws is a material fact which must be disclosed. The court held that, assuming that the broker knew or reasonably should have known that the annual $350 flood insurance premium was based on a habitable elevation level of at least 11 feet, the broker had a duty to disclose that fact to the buyer. Even when there is not a duty to divulge material facts, once a seller makes representations regarding a condition, the seller is under a duty to disclose the complete truth. The buyer’s obligation to exercise reasonable diligence was satisfied when he specifically inquired why other homes on the street were built on stilts and was told that the property in question was “grandfathered” from the flood regulations and that the flood insurance premium was $350. The Third District reaffirmed Besett’s holding that a recipient may rely on the truth of a representation, even though its falsity could have been ascertained had he made an investigation, unless he knows the representation to be false, or its falsity is obvious.
In Fry v. J. E. Jones Const. Co., 567 So. 2d 901 (Fla. 5th DCA 1990), the buyers told the seller’s salesperson that because they enjoyed water skiing they were only interested in a lakefront lot. The seller’s salesperson pointed out several lakefront lots on a site plan and stated that there was a $20,000 premium for such lots. The buyers asked the seller about closely-spaced lines on the site plan that separated the lots from the water and were told that the lines indicated the area where the seller was required to install sod. Based upon these representations, the buyers signed a contract to purchase the lot and for the seller to construct a home.
The recorded plat of the subdivision, which was not revealed to the buyers, showed that the lot ended 100 feet from the water’s edge and that there was a conservation tract between the lot and the water. Before closing, the buyers discovered this information, which would prevent them from obtaining a dock permit. The buyers then filed suit against the seller for rescission based upon fraudulent misrepresentation. The buyers testified that they would not have entered into the transaction but for the representation that the lot was lakefront. The seller testified there were no lakefront lots in his project.
The trial court found that the seller had in fact represented that the lot was lakefront, but denied the buyers’ claim for rescission holding that the representation was not material. The Fifth District reversed, holding that the representation was fraudulent, made without knowledge of its truth or falsity, and that the buyers were justified in relying upon the representation. Significantly, because the plat clearly depicted the conservation parcel between the lot and the water, the Fifth District stated that if the plat had been shown to the buyers, their reliance on the seller’s representations may not have been justified.
If a misrepresentation is made concerning an offsite property, but not about a defect of the property itself, it may still be actionable even though the truth or falsity of the misrepresentation may be determined from matters in the public record. The question of whether a buyer is justified in relying upon the representation is an issue of fact. When a misrepresentation contradicts matters in the public record about an offsite property, recent precedent suggests that a buyer is not required to conduct an extensive investigation into the public records.
In Azam v. M/I Shottenstein Homes, Inc., 761 So. 2d 1195 (Fla. 4th DCA 2000),a developer told buyers that an off-site parcel near the prospective purchase was to be a permanent natural preserve. In fact, a school was to be developed on the parcel. When the buyers found out that the parcel was not going to be used as the developer had represented, they filed for fraud in the inducement, rescission, and negligent misrepresentation. The buyers attached the site plan for the school to their complaint, and alleged that at all times the plan was available to all parties for inspection or review.
The trial court dismissed the complaint with prejudice based upon Pressman v. Wolf, 732 So. 2d 356 (Fla. 3d DCA), review denied, 744 So. 2d 459 (Fla. 1999). In Pressman, the Third District held that statements concerning matters in the public records cannot be the basis for a claim of actionable fraud. Although the Fourth District affirmed the dismissal of the Azam negligence and rescission counts, it reversed dismissal of the fraud count. The Fourth District held that buyers’ complaint established a cause of action for fraud in the inducement because it alleged that: 1) the seller made a misrepresentation of a material fact; 2) the seller knew or should have known of the statement’s falsity; 3) the seller intended that the representation induce the buyers to rely and act on it; and 4) the buyers suffered injury in justifiable reliance on the representation.
The court distinguished Johnson because the fraudulent nondisclosure in Johnson was of a physical defect in the property itself, and not about conditions of an off-property site that do not affect the physical condition of the properties sold. The question of whether there is actionable fraud with respect to matters outside the property being sold is a factual question, even when the status of those matters can be determined from a public record.10 There is no bright-line rule, and the issue of whether a buyer exercises ordinary diligence in discovering the falsity of statements about property is to be determined on a case-by-case basis.11 The trier of fact should weigh such facts as the reasonableness of the evidence, whether the seller is a developer, and the nature of the public record.12 The court noted conflict with Pressman, and agreed with Judge Gross’ concurrence that “the law should not expect every potential homeowner in every case to root around the bowels of the courthouse for those surveys, plats, and records which would verify or contradict a seller’s representations about the property.”13
The Supreme Court approved and affirmed the Azam decision holding that the question of whether a cause of action for fraudulent misrepresentation exists where the putatively misrepresented information is contained in the public record is one of fact that should not be resolved through a motion to dismiss and the use of a bright-line rule of preclusion.14 The Court disapproved of the Pressman propositionthat statements concerning matters in the public records cannot be the basis for a claim of actionable fraud.15
The Court reaffirmed Besett, stating that the question is whether the recipient of the misrepresentation is justified in relying upon its truth. If the recipient knows that the statement is false or that its falsity is obvious, the recipient’s reliance is improper and there can be no cause of action for fraudulent misrepresentation. The factual determination involves a consideration of the totality of the circumstances surrounding the type of information, the nature of the communication between the parties, and the relative positions of the parties.16
In dicta, the Court distinguished Azam from cases in which the matters are revealed in a property’s chain of title. Where fraud is alleged regarding information contained in and clearly revealed through a parcel’s chain of title, reliance is not justified and a cause of action will not exist.17 Because a buyer is expected to examine documents in the chain of title, information contained in those documents is properly imputed to a purchasing party. According to the court, Florida law does, however, prohibit “one who purposely uses false information to induce another into a transaction from profiting from such wrongdoing.”18
Intentional Concealment or Fraudulent Nondisclosure of a Fact Material to the Transaction
In Billian v. Mobil Corp., 710 So. 2d 984 (Fla. 4th DCA 1998), buyers sued a developer for damages due to nondisclosure under Johnson or alternatively, for the equitable remedy of rescission. The buyers claimed that the developer concealed material defects in a condominium property regarding differential settling, exterior stucco delamination, erosion, and sound transmission problems. They argued that these defects greatly depreciated the value of the property and should have been disclosed to them before they contracted to buy and purchased the unit.
A jury found no liability, and the trial court denied the buyers’ request for rescission. The Fourth District reversed because an erroneous instruction given to the jury required intentional nondisclosure for the buyers to prevail. Rather, the instruction should have only required that the developer knew of the defects materially affecting the value of the property and failed to disclose them. The court explained that if the facts of a case give rise to a duty to disclose under Johnson, the seller’s intent is immaterial.
The materiality of a represented fact is measured objectively, not subjectively. A cause of action under Johnson is limited to nondisclosure of a narrower set of facts than would be actionable in a typical case of fraudulent misrepresentation. The undisclosed fact must materially affect the value of the property. The materiality of a fact is to be determined objectively by focusing on the relationship between the undisclosed fact and the value of the property.19 The Fourth District further explained that Johnson carved out of the law of fraud a unique place for nondisclosure cases involving the sale of a home.20 A traditional cause of action for fraud turns in large part on the state of mind of the tortfeasor. For example, in a typical fraudulent misrepresentation case, a plaintiff must prove that a defendant knew a statement was false or that the defendant made a statement knowing he was without knowledge of its truth or falsity. In addition, a plaintiff must demonstrate that in making a false statement, the defendant intended that another rely upon it. An action under Johnson; however, does not require intent. Rather, it creates a duty to disclose when a seller knows of certain facts that may give rise to the duty, even if the seller is in doubt as to whether disclosure is necessary.21
Rescission is available for fraudulent nondisclosure under narrow circumstances when Johnson does not apply. For instance, rescission is proper when there has been intentional concealment of any fact material to the transaction, not just of a fact materially affecting the value of the property as is required by Johnson.22 A concealed fact is material to the transaction if the plaintiff would not have entered into the transaction but for the concealment. The court used as an example that a condominium’s sound transmission problems might not materially impact the value of the unit so that there would be no remedy under Johnson. However, in a case in which a buyer has made his or her desire for silence paramount, a seller’s intentional concealment of noise problems could give rise to a claim for rescission under Stephens based upon fraudulent nondisclosure.
Negligent Misrepresentation
In Gilchrist Timber Co.v. ITT Rayonier, Inc., 696 So. 2d 334 (Fla. 1997), a package of documents the seller gave to the buyers before closing contained the seller’s year-old appraisal that incorrectly stated that the zoning of seller’s 22,641-acre property was “agricultural,” a zoning classification which allowed residential uses. The buyers’ intent was first to cut the timber on the property and then subdivide it and sell it in small tracts for farming or residential development. During negotiations prior to closing, the parties discussed the quantity and quality of timber on the property, but not the property’s zoning. Before closing, the buyers apparently did not confirm the property’s zoning with the local government.
In fact, most of the property was zoned “preservation,” a classification that precluded residential use. Buyers were unable to change the zoning and brought suit in federal court for damages for the misrepresentation. The trial court held that seller was not aware that the zoning classification referenced in the appraisal report was inaccurate, so the representation was deemed a negligent transmittal of false information that the seller did not know was false.
The 11th Circuit Court of Appeals certified the following question to the Florida Supreme Court:
Whether a party to a transaction who transmits false information which that party did not know was false, may be held liable for negligent misrepresentation when the recipient of the information relied on the information’s truthfulness, despite the fact that an investigation by the recipient would have revealed the falsity of the information.
The Florida Supreme Court reaffirmed that a recipient of a fraudulent misrepresentation of fact is entitled to rely on its truth, although he might have ascertained the truth or falsity of the representation had he made an investigation.23 However, a negligent misrepresentation results in liability only if the recipient of the information justifiably relied on the erroneous information and that comparative negligence principles apply in such cases. The recipient of erroneous information cannot hide behind the unintentional negligence of the misrepresenter when the recipient is himself negligent in failing to discover the error. But, a recipient would only have to investigate information that a reasonable person in the position of the recipient would be expected to investigate.
Conclusions
The initial question for consideration is whether a seller or broker of residential property has a duty to disclose facts contained in the public record to a buyer. The answer to this question depends upon the facts of the case. However, based upon the case law, there are some general principles that apply to this situation:
The general rule is when the seller or broker of a residential property knows facts that are contained in the public records which materially affect the value of the property, and the facts are within reach of the diligent attention and observation of the buyer, the seller or broker probably does not have a duty to disclose them.
The seller or broker probably does not have a duty to disclose facts regarding a property that are or may be clearly revealed to the buyer through the property’s chain of title; such knowledge is properly imputed to the buyer because buyer is expected to examine these documents prior to transfer.
Other than facts that are clearly revealed through a parcel’s chain of title, which a buyer is charged with knowing, the question of whether facts in the public record are within reach of the diligent attention and observation of the buyer is a question of fact.
To avoid potential liability for a Johnson nondisclosure, a prudent seller or broker should disclose facts found in the public records of which he or she is aware that materially affect the value of a residential property, unless the facts are clearly revealed through the parcel’s chain of title.
Matters or facts regarding a property that are contained in the applicable land use regulations probably do not need to be disclosed.
The nonconformity of a property to land use regulations is a material fact which should be disclosed.
A cause of action will exist for fraudulent nondisclosure of a fact material to the transaction, even of matters not materially affecting the value of a property, if a buyer specifically inquires about a property and a seller fails to disclose an adverse fact responsive to the inquiry. For example, a cause of action will exist if a buyer expresses the need or desire for quiet, if the seller or broker knows the property has a noise problem and the seller or broker intentionally fails to disclose that fact. However, when disclosure is made, a broker or seller is held to a very high standard of care as to the accuracy of any representations made: A recipient may generally rely on the truth of a representation, even though its falsity could have been ascertained had the recipient made an investigation, unless he or she knows the representation is false or its falsity is obvious.
Whether a fraud claim may lie with respect to misrepresentations about matters outside the property being sold, when the status of those matters can be determined from a public record, is a factual question that involves determining whether the recipient of the representations was justified in relying upon the truth of the representations. This factual examination requires a consideration of the totality of the circumstances surrounding the type of information, the nature of the communication between the parties, and the relative positions of the parties. If the recipient knows that the statement is false or its falsity is obvious, his or her reliance is improper and there can be no cause of action for fraudulent misrepresentation.
When there is a duty to divulge facts, once a seller makes representations regarding a condition or a fact, a seller is under a duty to disclose the complete truth.
A buyer’s obligation to exercise reasonable diligence regarding the property he or she is acquiring is satisfied when he specifically inquires about a condition or a fact.
A recipient of a misrepresentation is probably not justified in relying on the misrepresentation and a cause of action for fraudulent misrepresentation will probably not exist if the truth of falsity of the representation may be determined by information clearly revealed in a parcel’s chain of title.
A negligent misrepresentation results in liability only if the recipient of the information justifiably relied on the erroneous information and comparative negligence principles are applicable to such cases. A recipient of a negligent misrepresentation would only have to investigate information that a reasonable person in the position of recipient would be expected to investigate.
Ascertaining whether a representation is negligent or fraudulent usually requires knowing facts not generally known or knowable when the representation is made. It is probably prudent practice for buyers to investigate information that reasonable people in the position of recipients of the representation would be expected to investigate.
1 Johnson v. Davis, 480 So. 2d 625 (Fla. 1985); Solorzano v. First Union Mort. Corp., 896 So. 2d 847, 848-849 (Fla. 4th D.C.A. 2005); fraudulent misrepresentation or fraudulent inducement — Besett v. Basnett, 389 So. 2d 995 (Fla. 1980); intentional concealment or fraudulent nondisclosure of a fact material to the transaction — Billian v. Mobil Corp., 710 So. 2d 984 (Fla. 4th D.C.A. 1998); and negligent misrepresentation — Gilchrist Timber Co.v. ITT Rayonier, Inc., 696 So. 2d 334 (Fla. 1997).
2 Fla.Stat. Ch. 119; M/I Schottenstein Homes, Inc. v. Azam, 813 So. 2d 91, 92 (Fla. 2002).
3 Fla. Stat. §119.011(11) and (2) (2004).
4 Azam v. M/I Schottenstein Homes, Inc., 761 So. 2d 1195, 1197 (Fla. 4th D.C.A. 2000).
5 Solorzano v. First Union Mort. Corp., 896 So. 2d 847, 848-849 (Fla. 4th D.C.A. 2005).
6 Johnson, 480 So. 2d 625 at 628 (Fla. 1985).
7 Id.
8 Solorzano, 896 So. 2dat 851.
9 Nelson, 699 So. 2dat 260.
10 Azam v. M/I Shottenstein Homes, 761 So. 2d at 1196.
11 Id.
12 Id.
13 Id. at 1197.
14 M/I Shottenstein Homes v. Azam, 813 So. 2d at 94 (Fla. 2002).
15 Id. at 96.
16 Id. at 94-95.
17 Id. at 95.
18 Id. at 96.
19 Billian, 710 So. 2dat987.
20 Id. at 988.
21 Id. at 989.
22 Id. at 989; Stephens v. Orman, 10 Fla. 9, 86-87 (1862).
23 Id. at 995.
E. Lee Worsham is a shareholder with Ruden McClosky Smith Schuster & Russell, P.A., in West Palm Beach. He graduated from the University of Florida School of Law and practices in the areas of environmental, land use, and real property.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Julius J. Zschau, chair, and William P. Sklar and Richard R. Gans, editors.
In many cases of alleged nondisclosures or misrepresentations, where information in the public record is relevant or material, an issue frequently arises regarding what information contained in public records a buyer of residential property should be expected to know, or what information will a buyer be deemed to know by constructive notice. This article will explore Florida law involving concealment or nondisclosure and misrepresentation of matters that may be found in the public records. Accompanying Florida’s staggering growth is litigation that accuses developers, sellers, and brokers of unlawfully failing to disclose, concealing, and misrepresenting matters significantly affecting residential real property. Subjects of alleged nondisclosure or misrepresentations are diverse. Examples include structural problems, termite infestation, flooding problems, soil subsidence, or other adverse subsurface conditions, wetlands or protected species, zoning, land use classification, permit issuance, existing or proposed uses of nearby properties, future roadway plans, code enforcement violations, whether the property is in compliance with law, the existence of hazardous substances on
Must Information in the Public Record be Disclosed to Buyers
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