Naples Daily News March 13, 2004
 

Raymond Bowie: To disclose or not to disclose - That is the seller's dilemma

By RAYMOND J. BOWIE, Special to the Daily News
March 13, 2004

"To be, or not to be: that is the question," wrote the Bard of Avon in "Hamlet." But the real dilemma for Florida's property sellers is that posed by the state's courts: To disclose or not to disclose.

The disclosure dilemma has to do with a seller's potential liability for property defects that are known to the seller but perhaps not readily observable to a buyer. Should the seller disclose the existence of such property defects to potential buyers upfront? How obvious does a defect have to be in order to assume that a buyer will notice it himself? Do all known defects in the property, no matter how small, have to be disclosed? What if the seller fails to disclose? And whatever happened to the old rule of "caveat emptor" - buyer beware?

In olden days, which in Florida means prior to 1985, the rule of caveat emptor or "buyer beware" did prevail in the state's real estate transactions. Under the old rules of tort law, Florida courts drew a distinction between sellers who affirmatively misrepresented property conditions on the one hand, and sellers who simply failed to disclose such defects on the other. Sellers engaging in active misrepresentation could be held liable to buyers they deceived, but not sellers who simply kept silent. As late as 1982, in a case where home sellers knew about but failed to disclose a leaky roof, a Florida appellate court reaffirmed that "in Florida, there is no duty to disclose when parties are dealing at arm's length." Under this old rule of law, a property seller could avoid liability for known property defects just by keeping his trap shut.

Then, in 1985 came a judicial event of revolutionary impact. It was one of those events where a high court decisively overturns years of old legal precedent, simply because the old rule no longer serves today's needs. In Florida, this happened on Oct. 31, 1995 when the Florida Supreme Court handed down its decision in the case of Johnson vs. Davis.

The case started out as a fairly typical property condition dispute between a home buyer and seller. Upon discovering a seriously defective roof after signing a sales contract, the buyers refused to close on the property and demanded the return of their deposit. The lower courts sided with the buyers. The sellers appealed to the Florida Supreme Court hoping that the high court would reaffirm the old "caveat emptor" rule in their favor.

Instead, the Supreme Court rejected the old rule and said "these unappetizing cases are not in tune with the times and do not conform with current notions of justice, equity and fair dealing. One should not be able to stand behind the impervious shield of caveat emptor and take advantage of another's ignorance.... The law appears to be working toward the ultimate conclusion that full disclosure of all material facts must be made whenever fair conduct demands it."

The Florida Supreme Court reviewed case law in other states that had broken with the caveat emptor tradition, such as in Illinois (basement flooding), West Virginia (cracked basement walls), Louisiana (termite infestation), New Jersey (roach infestation) and Colorado (soil contamination). The Florida court then concluded: "We are of the opinion... that the same philosophy regarding the sale of homes should also be the law in the state of Florida."

There, on that day in 1985, in one swift action, the law in the state of Florida flip-flopped. Caveat emptor died as regards home sales. The new law, as stated by Florida's Supreme Court, would be: "... 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. This duty is equally applicable to all forms of real property, new and used."

The court has said several conditions must exist for a property seller to have a duty of disclosure to a prospective buyer. First, the sale must involve residential property. Second, the seller must know that a certain adverse condition affecting the property exists as a matter of fact - and not as past history, rumor, superstition, hearsay or speculation. Third, the condition must be a latent defect, meaning that the condition is basically hidden from the ready observation of the average buyer. Fourth, the buyer does not, in fact, personally know about the existence of the defect. And finally, it must be a "material" defect - meaning a defect that would, if known to the average buyer, cause that buyer either not to buy or to offer a lower price for the property.

Since the Florida Supreme Court's landmark Johnson vs. Davis decision, Florida law in this area has continued to evolve as various courts have refined sellers' disclosure duties, sometimes with peculiar twists and turns.

In the Dorton vs. Jensen case, the sellers failed to disclose to buyers a problem with water ponding against the rear of their house, stating it was because they felt the condition was "minor", that is, not a material defect. A Florida appellate court, however, held that the correct disclosure standard was whether the problem was one that would concern the average buyer, not whether the sellers were personally concerned with it or viewed it as minor. "The appropriate test is whether the sellers should have foreseen that buyers would have found the information relevant," ruled the court, "not whether the sellers viewed it as problematic."

The Florida Supreme Court, in Gilchrist Timber Company vs. ITT Rayonier Inc., expanded upon its earlier decision and held that a seller could be liable for negligently providing false information about a property to a buyer who reasonably relies upon it. The high court said: "One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability... if he fails to exercise reasonable care or competence in obtaining and communicating the information." Note that the liable party under this test may be the property seller, his real estate broker, or any other party working for the seller who negligently supplies false information to a buyer about an adverse property condition.

And there is one other very interesting development in the Gilchrist case: While previous disclosure decisions of the Florida Supreme Court had all dealt with residential properties, the property involved in the Gilchrist case was commercial real estate.

In another case (Billian vs. Mobil Corporation), a Florida appellate court ruled on what adverse conditions are deemed to "materially affect" the property and require seller disclosure. The court held that the standard is not based upon each particular buyer's subjective evaluation of what that buyer considers important to know. Rather, a defective condition is "material" only if it would objectively diminish the market value of the property.

Other Florida court decisions have helped define the extent of the buyer's responsibility when a seller fails to disclose or makes a negligent misrepresentation about a material property defect. In Nelson vs. Wiggs, an appellate court held that the buyer in such situations cannot remain passive, but must use his own powers of observation and ascertain the material facts if they are reasonably available. The Florida Supreme Court recently ruled (Schottenstein Homes vs. Azar) on the question of whether a buyer can reasonably be presumed to "know" of all matters recorded in the local public records pertaining to a property. The court stated this might be too much to expect of a buyer as a general rule but should be determined on a case-by-case basis, hinting however that a buyer may be held responsible for knowing those facts revealed in a property's direct chain of title.

While Florida's courts have been over the years developing the law of seller property condition disclosure, Florida's legislature has remained largely silent on the subject. In some two dozen other states, legislatures have enacted statutes requiring residential property sellers to provide buyers with specific property condition disclosures, sometimes on statutory disclosure forms that must be used for that purpose.

The Florida Legislature has instead moved in the opposite direction, legislating only last year that sellers are not required to disclose deaths, suicide or felonies occurring on the property or whether a property occupant has suffered HIV or AIDS.

In the absence of statutory guidance in Florida as to the form and content of required property condition disclosures, real estate professionals around the state have developed their own disclosure forms and contracts for this purpose. The wisdom of sellers utilizing written disclosure forms is underlined by several Florida court decisions holding that sellers cannot avoid their disclosure obligations by attempting to sell a home "as is." In other words, a seller cannot simply have a buyer agree to purchase a home "as is" without first disclosing materials defects known to the seller.

Naples area Realtors and real estate attorneys have, for example, developed a comprehensive Seller Property Disclosure Statement for use in residential transactions, in which sellers are asked to disclose in writing any known defects in the property's site, structure, systems and equipment. While sellers are not legally required to complete any such disclosure form, a seller may protect himself from liability by doing so. If a seller accurately completes a disclosure form and provides the form to prospective buyers in advance of any sales contract, under the terms of the sales contract the buyer will be deemed to accept all the conditions disclosed by the seller - and the seller will be free of any further liability to the buyer.

We've come a long way. In less than 20 years, Florida law has evolved from caveat emptor, buyer beware, to requiring seller disclosure of known material defects, to holding sellers liable for certain negligent disclosures, to defining the level of the buyer's responsibility. Fasten your seat belts. The ride may not be over.

Raymond J. Bowie is a Naples area attorney and civil-law notary, board certified in real estate law, who has practiced law for 24 years in Florida, Virginia and New York, specializing in real estate transactions, representing buyers and sellers in contracts, closings, title insurance, tax-deferred exchanges, land trusts and financing. He is also a licensed real estate broker, mortgage broker, association manager and real estate instructor. Bowie invites real estate-related questions or suggestions for columns to be addressed to him, c/o Real Estate Editor, Naples Daily News, 1075 Central Avenue, Naples, Fla. 34102.