Commercial Property Buyer Sues Seller for Nondisclosure and Misrepresentation


In August, this blog discussed the Florida Supreme Court case of Johnson v. Davis, which addressed a residential seller's requirement to disclose to the buyer material facts about the residential property that could affect its property value. Today, I discuss Southern Nat. Track Services, Inc. v. Gilley, --- So.3d ----, 2014 WL 5370033 (Fla. 1st DCA 2014) in which a purchaser of nonresidential real estate sued the seller for breach of warranty by failure to disclose and for damages based on fraudulent misrepresentation. The twist in this case is that the representations made included a representation that the modular property located on the commercial property being sold was residential when it was really an improperly converted storage shed. In this case, the buyer contracted to purchase from the seller a piece of property that included a number of small cottages and one larger "modular" structure. The modular structure formed the basis of the dispute. The buyer purchased this property for the purpose of temporary housing for its employees. The buyer claimed that the modular structure in question was advertised as a two-bedroom residence complete with fountain and swimming pool.

The parties' contract included an express warranty by the seller that, as of the time of closing, there existed no violations of "land use plans, zoning, restrictions, prohibitions and other requirements imposed by governmental authority . . . ." The buyer claimed that the structure appeared to be was a two-bedroom residence. The buyer further claimed that, after signing the contract, but before the transaction was closed, buyer walked through the modular structure with the seller and the seller's daughter and discussed how, at various times, the seller and other family members resided in the structure. Other than these walk-throughs, however, the buyer took no steps to have the property inspected or to confirm that the building was built as a residence.

Months after the transaction closed, the buyer noticed water leakage problems that worsened as the rainy season progressed and discovered what appeared to be patches of black mold on some of the walls that had been painted over. A later inspection revealed that the structure was not a modular residence at all, but a large storage shed that had been converted into a residence without compliance with the applicable building codes, permitting regulations, and zoning laws.

In the initial complaint, the buyer included a count based on the disclosure obligations mandated by Johnson v Davis, 480 So. 2d 625 (Fla. 1985). However, on the seller's motion to dismiss, the trial court dismissed that count based on its finding that the property in question was commercial, not residential; therefore, the Johnson disclosure obligations were inapplicable. The remaining claims asserted by the buyer against the seller included, a claim for breach of the warranty as to the property's compliance with applicable codes and regulations, a claim for the seller's failure to disclose that the structure in question was not a residential building, and a claim for damages flowing from the seller's alleged misrepresentations about the true nature of the property.

The seller's defense was based, in part, on the fact the claim involved a contract for commercial property, not residential property, so the seller had no duty to disclose. On this point, the seller relied on Wasser v. Sasoni, 652 So. 2d 411 (Fla. 3d DCA 1995), where the Third District Court of Appeal ruled generally that "an intentional nondisclosure of known facts materially affecting the value of commercial property, is not actionable under Florida law," and that "a misrepresentation is not actionable where its truth might have been discovered by the exercise of ordinary diligence." However, the Wasser court recognized that "exceptions to the general rule could exist under certain circumstances, for example, where specific misrepresentations regarding a latent defect are made to a negligent purchaser."

The seller moved for summary judgment, arguing that there were no genuine issues of material fact regarding whether the buyer failed to have the property inspected until after signing the contract; the buyer performed little or no due diligence; and all of the defects would have been readily discovered, had the buyer "done its due diligence under the contract and pursuant to Florida law" before purchasing and closing on the property. The seller also claimed that she did not have any prior knowledge of the property defects. The trial court granted a summary judgment in favor of the seller, stating that the seller was not held to certain disclosure requirements because the transaction involved a commercial property rather than a residential property. However, the First District Court of Appeal reversed the summary judgment. In reversing the summary judgment entered in favor of the seller, the appellate court pointed out the there were disputed facts from which one could reasonably infer intentional non-disclosure or possible misrepresentations about latent defects (e.g., the non-residential nature of the structure). The appellate court in Southern also observed that even "ordinary diligence" would not have revealed the truth regarding the possible scenarios involved in the subject nonresidential real estate transaction. The appellate court acknowledged that the Wasser court also determined that "a negligent purchaser is not justified in relying upon a misrepresentation which is obviously false, and 'which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.'" However, the First DCA concluded in Southern that there remained a disputed issue of fact as to whether a representation that the structure in question was a residence was "obviously false."

Another ground asserted by the seller in her motion for summary judgment was that her express warranty to the Buyer in the contract providing that, as of the time of closing, there existed no violations of "land use plans, zoning, restrictions, prohibitions and other requirements imposed by governmental authority . . . ." merged with the deed at the time of closing, thereby extinguishing the seller's obligations to the Buyer based on the contractual warranty because the warranty was not stated in the deed. The First District Court of Appeal disagreed with the trial court's conclusion and the application of the merger doctrine to the express warranty in the parties' contract. Instead, the appellate court concluded that there was no evidence that the parties intended for the warranty at issue to merge with the deed or that the buyer could use the modular structure as a residence at the time the deed was executed and delivered. Accordingly, the seller's express warranty that there are no violations of "land use plans, zoning, restrictions, prohibitions and other requirements imposed by governmental authority...." did not necessarily merge into the deed when the "modular house" was actually a storage shed improperly converted into a residence in violation of building codes and governmental regulations when the transaction closed.

A lot can be learned from this real estate litigation matter, including the fact that the disclosure requirement imposed on sellers of real estate is a complex matter, whether the property is residential or commercial. If you are dealing with a fraudulent nondisclosure claim or any other type of real estate dispute, you should consider my law firm, Gregg H. Glickstein, P.A., for legal representation. I am a seasoned Palm Beach real estate litigator who can assist you with your case. You can contact my firm at (561) 953-6662.

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