A Duty to Disclose
A unit in a twelve-year-old condominium building is sold to a new purchaser. The price of the unit is $450,000. Thirty days after closing, the buyer is told by another owner that there are serious structural deficiencies in the building that are certain to cause very large assessments. In addition, there was an engineering report in the hands of the Board that detailed the deficiencies in the building; the costs of repairs were substantial. To make matters more surprising to the new buyer, both the seller of the unit and her real estate agent were board members at the time of closing.
What right does this buyer have, if any, and against whom?
This example is hypothetical, but very real. Those who attended an introductory business law course may remember the common law rule of caveat emptor, and that that rule means “buyer beware”. The buyer is expected to inspect what he purchases, and if he buys it, then he owns it with whatever flaws exist.
The courts in Florida have changed that common law rule. The courts reasoned that something so large and complicated as a house, to be sold to someone who is not an expert, has too many possible deficiencies for a buyer to have any chance of protecting himself from things he could never be expected to see. The owner who has lived in the house has a serious advantage, because he knows or should know, the condition of the house. As a result of that case (a case called Johnson v Davis), the burden now is on the owner of residential property to reveal to his buyer anything known to the owner that is not obvious to a prospective purchaser if the matter materially affects value. Since Johnson v Davis, the courts have refined the rule in two important ways that also impact the answer to today’s question.
The first is that a condominium unit is to be treated the same as a single-family home. If a condo unit owner knows of something that the buyer is not likely to detect by seeing the unit, and if that thing can reasonably be seen as having a material effect on the value of the unit, then the Johnson v. Davis rule also applies to that transaction. And remember, the definition of a “unit” under the Florida Condominium Act includes not only the three-dimensional space within a unit, but its undivided interests in the Association. So, if the building’s roof, for instance, is falling in, that roof is a part of the unit, even if the roof is several stories above the unit. The pool, the foundation of the building, and other common area improvements are also a part of the unit.
The second decision that also affects a buyer’s rights is a later case that held that the same Johnson v. Davis duty to disclose that applies to an owner, also applies to a real estate agent.
In this case, while the outcome of litigation can never be taken for granted, both the seller and his agent were aware of fairly significant deficiencies in this condominium building that this purchaser was not told about. Since both the seller and the real estate agent sat on the Board of Directors, a very reasonable assumption is that both were aware of the condition of the building, probably of the engineering report, and probably even of the coming assessment.
Anytime property is sold in today’s market, the seller will receive a questionnaire from the owner’s agent regarding the condition of the property. Generally, the answers on that questionnaire will be the limits of that agent’s knowledge of the condition of the property. The owner will not be held to disclose something that he doesn’t know, and neither will the real estate agent. The rule of Johnson v. Davis is exactly the reason that the written questionnaire is given to the buyer, and the fact that the agent is held to the same standard is the reason your realtor will make sure these disclosures are made in writing, and the reason the disclosure statement must be signed off by the buyer, generally at the time of the contract.
The above discussion raises the question whether a property inspection will take the place of these disclosures? If the seller fails to disclose something that will have a material effect on the value of a residential property and thereafter an inspection is done by the buyer or his retained inspector, can the owner be excused from making a disclosure because the buyer got his own inspection? The answer, in a word, is no.
Sometimes an “as-is” contract is used by which a seller states that the condition being accepted by the buyer is “as-is”, implying that the seller is not responsible for anything an inspection reveals that needs to be fixed. Even an “as-is” contract does not excuse the owner from making an express disclosure to the buyer of something the owner knows that will impact the unit’s value.
There are two cautions that need be made. The first is that the courts will not permit a buyer to take advantage of something he can see, or should see, and then to protest after the closing that no one told him of the condition. If it’s obvious, it need not be disclosed. The second caution is that Johnson v. Davis applies only to residential property. Commercial buyers must understand and confirm every jot and every tittle of the deal they get, before closing.
This article was published in the Coastal Homes publication of the Northwest Florida Daily News on Sept. 7, 2019: http://www.coastalhomesfla.com/Olive/ODN/NWFLDNCoastHomes/