STILL No Duty to Disclose Material Adverse Conditions in Florida Commercial Real Estate Transactions (and Other Fraud Fundamentals)

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The recent case of Thomas J. Duggan, LLC v. Peacock Point, LLC,[i] reminds us of several important principles of the law of fraud and misrepresentation in Florida, as applied to commercial real estate transactions.  First, not every false statement concerning a material fact about real property made by a seller to a buyer gives rise to liability on the seller’s part; (2) the law in Florida remains caveat emptor (“let the buyer beware”) in commercial transactions; that is, subject to a few narrow exceptions, a seller has no implied duty to disclose material adverse conditions affecting real property, be they ever so egregious, and (3) an “as is” clause in a commercial real estate contract powerfully reinforces a seller’s defenses against liability claims based on undisclosed conditions.  None of these principles are really new, but, like most fundamentals, they bear re-emphasizing.

The facts in the Peacock Point case concerned a seller who, according to the court, mistakenly believed that it had accomplished everything necessary to obtain the immediate issuance of building permits for new home construction on six waterfront lots in a Destin, Florida subdivision.  In June, 2007, the seller entered a contract to sell the lots to a buyer who apparently forgot the first rule of real estate development: “take nothing for granted.”  The court found that one of the seller’s representatives represented to the buyer that building permits were immediately available.  Unfortunately, the City of Destin subsequently refused to issue building permits until after a certificate of completion for the entire development had been issued.  This was apparently a problem, perhaps because expensive work on the subdivision remained to be performed.  Thus, in 2008, the buyer sued to rescind the contract, alleging that the seller misrepresented the facts regarding the availability of building permits.  The facts are intuitively appealing from the buyer’s perspective, and one might even have expected a win for the buyer under one of several attractive theories.

But the law doesn’t always bear out our intuition, as we see in this case.  Although the seller’s representative “believed, albeit mistakenly,” that the lack of a certificate of completion didn’t prevent the immediate issuance of building permits for the lots in the subdivision, the trial court had found that the false representation was not a knowing one.  The seller’s representative actually believed the false statement was true.  Thus, the court concluded, the statement couldn’t serve as the basis for a claim of fraud by the buyer, which is an intentional tort requiring knowledge of falsity to create liability for the seller.

But wait, argued the buyer, even if the seller’s representative didn’t know that the statement was false, couldn’t it serve as the basis for a claim of negligent misrepresentation?  After all, Florida courts have long held that even innocently made misrepresentations can justify rescinding a contract (the court mentioned Held v. Trafford Realty Co.[ii] for this proposition).  Perhaps so, reasoned the court, but only if the buyer didn’t know the representation was false, the falsity was not obvious to the buyer, and the seller had “superior knowledge of the condition of the property.”  However, in the Peacock Point case, the trial court had already concluded that the seller did not possess superior knowledge concerning the property, finding that “Mr. Duggan [the buyer] is a sophisticated developer and so he certainly had a great deal of knowledge regarding developments.”  Thus, out goes the negligent misrepresentation claim as a ground for rescission of the contract.

The buyer’s attack on the seller was struggling, but not yet finished.  The buyer next argued that when the buyer’s president asked the seller whether the lots had “all city approvals and if they were ‘buildable’, and the seller, through its agent, answered affirmatively, such “disclosure” by the seller triggered a further duty on the seller’s part to disclose the lack of a certificate of completion for the subdivision.  The buyer’s counsel was clearly aware of the long-standing rule in Florida that sellers of commercial property, unlike sellers of residential property,[iii] have no duty to disclose known material adverse conditions.  Thus, the buyer’s only hope of breaching the seller’s caveat emptor defense lay in arguing that the facts of its case fell within an exception to the general rule.  This narrow exception, mentioned in two earlier Florida appellate cases,[iv] states that even a commercial real estate seller, who has no duty to disclose, must disclose the whole truth germane to any material facts the seller does disclose concerning the property, in order to make the facts disclosed not misleading.

But again the buyer’s argument in Peacock Point fell short.  Not only were both the parties in the Peacock Point case sophisticated parties and able to discover the whole truth for themselves, the previous Florida cases discussing the exception to the caveat emptor rule did not involve contracts that contained strong “as is” provisions, such as the one now before the court.  The “as is” clause in the Peacock Point contract disclaimed, in substance, all express or implied representations or warranties  of any kind regarding the property (including habitability, design, quality, merchantability, condition, environmental status, matters of survey, or fitness for any particular purpose).  Moreover, the “as is” provision stated that the buyer had conducted such investigations of the property as it deemed necessary or appropriate and would rely upon such investigations.

Therefore, the court concluded, citing an earlier DCA case with approval, “a sophisticated purchaser of commercial property who agreed to an ‘as is’ purchase contract, had ample opportunity to conduct inspections, and could have discovered an alleged defect through exercise of ordinary diligence, may be disgruntled, but does not have a cause of action in fraud.”  By the way, the “as is” clause not only eliminated any seller duty to disclose, but, according to the court, shifted the risk of a “mutual mistake” of fact (i.e., that building permits were immediately available for the lots) onto the buyer, thus destroying the buyer’s final argument for rescission of the contract based on a mutual mistake of fact, and ending its chances for success on appeal.

What do we learn from this grim tale of a buyer “who may be disgruntled, but does not have a cause of action in fraud…”?  First, material representations and warranties by a seller of real estate are no substitute for thorough investigations prior to closing, particularly if the buyer is a sophisticated party capable of conducting it, and even more so if the contract contains a strong “as is” clause.  Second, the doctrine of caveat emptor is alive and well in Florida commercial real estate transactions, subject to some troublesome exceptions that make prediction of the outcome in a given case difficult.


[i] 89 So.3d 283, (Fla. 1st DCA, May 23, 2012)

[ii] 414 So. 2d 631 (Fla. 5th DCA 1982)

[iii] The continuing difference in Florida between the duty to disclose between commercial and residential transaction in Florida is confirmed by the Peacock Point case.  For a further discussion of the difference, see e.g., Solorzano v. First Union Mortgage Corp., 896 So. 2d 847 (Fla. 4th DCA 2005), cited in the Peacock Point case.

[iv] The court cited Ramel v. Chasebrook Construction Co., 135 So. 2d 876 (Fla. 2d DCA 1962) and Green Acres, Inc. v. First Union National Bank of Florida, 637 So.2d 363 (Fla. 4th DCA 1994) for this proposition.

 

Published In: General Business Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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