Residential Sellers Must Disclose

Caveat emptor was killed in residential sales by the Florida Supreme Court in the 1988 case of Johnson v. Davis. Caveat emptor means “let the buyer beware” and relieves a seller from any duty to tell a buyer of defects or problems with a property. The Court explained the old law of caveat emptor absolved a seller from liability when the seller only failed to disclose (passive) as opposed to active misrepresentation. In words of the Court, that concept was “unappetizing” and did not “conform with current notions of justice, equity and fair dealing.”

Johnson v. Davis established a new obligation on sellers of residential property in Florida. A seller must now disclose to a buyer material defects known to the seller that affect the property value, and which are not readily observable or not known by the buyer. Real estate sales agents are under the same duty.

So, what does this mean? First and most important is the seller must actually know of the defect to trigger disclosure. It is not usually enough to prove the seller should have known or even that the seller must have known. Actual knowledge is required to open the mandatory disclosure door. Proving actual seller knowledge can be an insurmountable problem.

In Jensen v. Bailey, the buyer discovered doors in the home did not meet code requirements and sued the seller. The seller had hired a contractor to install new doors, and the contractor did not get a permit. Expert testimony confirmed the doors did not meet code, were defectively installed and would require over $30,000 to correct.

The trial court ruled the seller should have known of the problems and should have disclosed them. The appellate court reversed. The appellate court explained there was no evidence the seller actually knew the contractor failed to get a permit or that the doors were defective. The buyer’s claim failed because the buyer did not prove the seller knew of the defect.

The trial judge awarded damages because the seller “should have known.” The trial judge relied on an earlier decision (by the same appellate court) in the Nystrom case to decide “should have known” was enough for liability. Why did the appellate court not agree “should have known” was still enough?

The court explained its earlier Nystrom decision. Mr. Nystrom acted as his own contractor building the house purchased by the buyer. Although Mr. Nystrom was not a licensed contractor, he had substantial experience in construction and performed all of the carpentry work. The buyer hired an engineer when the buyer discovered problems. The engineer reported the house had so many structural defects it was a hazardous building. The structural defects were all caused by carpentry, so the court agreed the seller was charged with knowledge.

Mr. Nystrom is quite different from a typical seller. Courts have not been willing to extend the “should have known” basis for liability beyond the facts in the Nystrom case. That means a buyer must prove the seller had actual knowledge of a defect to prevail.

Second criteria is the defect must be material. That means it must have a substantial impact on value of the property. An aggrieved buyer must establish market value impact and not buyer unhappiness alone.

Not readily observable has been the criteria receiving the most interesting court treatment. Courts have increasingly ruled that buyers have some duty to exercise due diligence as part of buying a home. Sage v. Pahlavi is a good example.

The Sages bought a condominium home using an “as is” contract as part of the sale. The seller provided a seller disclosure form and checked yes to questions asking (1) Is any portion of the Association’s property seaward of the coastal construction control line? (2) Does any past or present settling of soil movement affect any Association property? and (3) Has any structural reinforcement been added? The disclosure form also added an explanation that the seller paid part of a special assessment related to the foregoing.

After closing, the Sages paid for an inspection that reported significant settlement cracks, shrinkage in walls and cracks in flooring and walls

The Court ruled the Sages lose on two bases. First, the seller disclosed defects. Second, even if the seller disclosure was less than adequate, it placed the Sages on notice and the Sages had a duty to further investigate. A buyer’s failure to exercise “adequate “ (i.e., reasonable) care in pursuing investigation when on notice or a defect could be discovered through such investigation is fatal to a buyer’s claim for seller non-disclosure.

The Sage case also confirms another point. Using an “as is” contract does not excuse a seller from the seller’s obligation to disclose under Johnson v Davis. Just because a buyer buys property “as is” and accepts condition of the property does not mean a buyer accepts undisclosed material defects unknown to the buyer but known to the seller.

First hurdle in these cases is proving the seller knew of a material defect the seller failed to disclose. The second and increasingly problematic hurdle is establishing the buyer would not have discovered the defect through exercise of adequate investigation. Both of these hurdles can prove insurmountable to a buyer. Even though caveat emptor is dead in Florida residential sales, that does not mean sellers guarantee no defects.