Real Estate Disclosures: Avoid the money pit

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A flourishing real estate market not only produces a bumper crop of “for sale” signs, but also sparks a corresponding increase in disputes between buyers and sellers over property defects. While caveat emptor–let the buyer beware–no longer is the norm under Florida law, both buyers and sellers have obligations that must be met to avoid a dispute. A landmark decision in 1986 by the Florida Supreme Court in Johnson versus Davis represented a change in sellers’ obligations and set requirements in cases where buyers claim sellers did not disclose known defects.

“Johnson versus Davis placed an affirmative duty on the seller to disclose issues that were not expected previously. Before that, it was caveat emptor,” said attorney Phil Hammersley, a shareholder of Norton, Hammersley, Lopez and Skokos (941.954.4691/nhlslaw.com), a Sarasota law firm concentrating in business, tax, real estate, trial practice, and dispute resolution.
Hammersley and associates Erik Hanson and Derrick Maginness counsel clients that four requirements must be met to be successful in bringing, or defending against, a nondisclosure claim. “Buyers first have to prove the sellers had knowledge of the defect at the time the house was sold,” Hanson said. “Everything starts with the sales contract, which are commonly as-is contracts, placing the onus on the buyer to get an inspection. Even then, the seller still has to disclose defects known to the seller.”

Sellers should also know that deliberately misleading buyers or not telling them about defects they know about are not the only ways to lose a dispute. Forgetting about an issue that occurred in the past or not having the knowledge to understand that an issue existed are not valid defenses. A problem that has been repaired, and reasonably believed to be resolved, does not have to be disclosed, but sellers may want to do so anyway. “In one case, a seller did not disclose a leak that happened years ago, and the court held that the seller’s belief that the problem was repaired meant they were not required to disclose it,” Maginness said. “Five years later, the buyers pulled the wall apart and brought action against the seller claiming the leak had done damage.”

In certain situations, sellers may not have received a disclosure statement from the previous owner or have extensive knowledge of the property, but can still run into issues if defects are discovered. “This can apply particularly to investors who may never have lived in the house and are not aware of all its quirks. Providing the disclosure, if they received one when they bought the home, is a good idea for investors or any seller for that matter,” Hanson said. “Once a nondisclosure claim is filed, you can get into all kinds of other issues, such as whether the work was done properly by a licensed contractor. Plaintiffs often come in with a laundry list of things that are wrong. Even if the seller eventually agrees to pay, it can be a lengthy and expensive dispute. Many times, it gets to the point where the buyer and seller are arguing more about who pays attorney fees than the defect claim itself.”

Nondisclosure claims also must demonstrate that the defects were not readily observable and that the buyer was unaware of them. “One buyer purchased a home on stilts and then filed a claim against the seller for not disclosing flooding during the rainy season,” Maginness said. “The court said it is no secret that it rains heavily in Florida at certain times of year and that the local regulations required the home to be built on stilts. A buyer must take reasonable steps to ascertain the material facts relating to the property and to discover them if they are reason- ably ascertainable. The court ruled against the buyer in that case.” Misrepresentations and omissions may not be actionable where the exercise of ordinary diligence might have discovered the truth.
Buyers often rely on home inspectors to uncover major defects, but do so without delving into the limits of what home inspectors’ contracts say they will do and the recourse a homeowner has if the inspector misses a major issue. Home inspectors’ contracts often contain limits of liability, which sometimes are limited to the cost of the inspection itself, and waivers of consequential damages. When hiring home inspectors, Norton Hammersley attorneys advise buyers find an inspector who is a licensed general contractor, ask what kind of inspection will be made, check references, and consider having a knowledgeable friend–preferably who is a contractor–accompany the inspector.

The fourth element under Johnson versus Davis is that the undisclosed defect must materially affect the price of the home. In other words, if the defect were disclosed, buyers would pay less for it. “Sellers should not take comfort in that though. My advice is to disclose everything. Keep very good records of upgrades and repairs and consider turning copies over to the buyer,” Hammersley said. “If sellers do not meet their disclosure obligations, that house can become a money pit in more ways than one.”

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