The Return of the Pink Panther or Johnson v. Davis, Redux
You may be old enough to recall the Pink Panther movie scene when Peter Sellers, as Inspector Clouseau, prompted by his observation of a large dog lying on the lobby floor, prudently inquired of the innkeeper prior to entering the lobby, “Does your dog bite?” The innkeeper’s laconic response was “no!” Whereupon the hapless detective entered confidently only to be set upon and soundly bitten by the aforementioned dog. After extricating his body parts from the canine jaws, the inspector confronted the innkeeper with, “I thought you said your dog did not bite,” to which the innkeeper replied with indifference, “That isn’t my dog.”
Whether that scene illustrates the old rule of caveat emptor is certainly open for a difference of opinion.
In 1985, the Florida Supreme Court announced a new rule of law to replace the venerable rule of caveat emptor, at least with regard to residential real estate transactions. Johnson v. Davis, 480 So. 2d 625 (Fla. 1985), was, indeed, one of those decisions unarguably entitled to be included in the list of those anointed as “landmark.” While the court’s relevant holding is succinct and pithy, some recitation of the facts would appear to be helpful before applying the new rule.
It seems that Mr. and Mrs. Davis had offered to buy the three-year-old house that Mr. and Mrs. Johnson had offered for sale, and the agreed price was $310,000. After the contract signing but before the closing, the Johnsons had made statements apparently intended to reassure the Davises with regard to evidence of possible roof damage. Specifically, the Davises had inquired about some plaster damage around a window frame and some stains on the ceiling in a couple of rooms. Mr. Johnson had advised Mr. Davis that the window had had a “minor problem that had long since been corrected,” and that the ceiling stains were wallpaper glue. The Johnsons had also affirmatively advised that there were “no problems with the roof.” The contract contained a provision, which the court described as “crucial,” by which the buyer could, prior to closing, inspect the roof and repair damage at the seller’s expense.
Subsequently, while the sale had not been completed, the buyers had paid all of their deposit and the sellers had vacated the premises. Several days later, in the wake of heavy rainfall, the Davises discovered significant roof leaks which they were advised could be alleviated only by the installation of a new roof at a cost of $15,000.
The Davises, without making demands under the “roof inspection clause,” sued the Johnsons for rescission of the contract and return of their deposits, alleging breach of contract, fraud, and misrepresentation. The court, citing its prior decision in Besett v. Basnett, 359 So. 2d 995 (Fla. 1980), agreed that there had indeed been a misrepresentation that amounted to fraud and ordered the return of the deposit money, but refused to grant rescission. The court stated, 480 So. 2d at 628:
[T]he Davises’ reliance on the truth of the Johnsons’ representation was justified and is supported by this Court’s decision in Besett v. Basnett, 389 So. 2d 995, where we held “that a recipient may rely on the truth of a representation, even though its falsity could have been ascertained had he made an investigation, unless he knows the representation to be false or its falsity is obvious to him.”
However, although unnecessary to its decision in favor of the Davises, the court also created an entirely new cause of action when it stated:
[W]e hold that 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.
480 So. 2d at 629.
Even though the Davises had made a case for fraud, neither they nor subsequent buyers of residential property would henceforth be required to prove the elements of fraud in order to obtain relief. They need only prove that the sellers knew of and failed to disclose that there had been material problems with the roof. There is no requirement to prove that the nondisclosure is either fraudulent or negligent, Billian v. Mobil Corporation, 710 So. 2d 984 (4th DCA 1998). In that case the Fourth District held that
[o]ther than requiring that the seller of a home have knowledge of facts materially affecting the value of the property at the time the contract is formed, Johnson does not specify any state of mind element with regard to the act of non-disclosure for the cause of action it identifies.. . . If the facts of a case give rise to a duty to disclose under Johnson, the seller’s state of mind motivating the failure to disclose is immaterial; the forgetful or unsophisticated seller is just as liable as the knowing dissembler.
Id. at 988.
Caveat emptor go hence and never again mislead unwary buyers by standing silent in front of latent defects (and perhaps dogs that bite).
The new cause of action (now referred to by practitioners as a “Johnson non-disclosure” action) requires that a victim of nondisclosure (i.e., a buyer) show only that the seller knew of a latent, material defect, and failed to disclose it, causing damages to the buyer. “Latent” is defined by Webster’s as “not visible or apparent although present.” It would appear evident (obvious), therefore, that any latent defect is by definition neither obvious nor “readily observable.” If it is not readily observable, the buyer is not obligated to go looking for it.
No Contributory (Comparative) Negligence
In creating the new cause of action, the Johnson court noted that the cases had traditionally held that only an affirmative misrepresentation would create liability for fraud, and as a prelude to its new holding observed: “The law appears to be working toward the ultimate conclusion that full disclosure of all material facts must be made whenever elementary fair conduct demands it.” 480 So. 2d at 628.
Under the new cause of action, a buyer of residential real estate can maintain a cause of action for nondisclosure of latent defects and is not required to prove a false statement by the seller in order to recover. The seller now has an affirmative obligation to disclose known material defects. Since a buyer has no duty to find a latent defect, but only one that is “readily observable,” a nondisclosing seller may not defend on the basis that a “reasonably diligent” inspection would have disclosed the material defect. Billian, 710 So. 2d 984.
However, in Gilchrist Timber Co. v. ITT Rayonier, 696 So. 2d 334 (Fla. 1997), the court observed:
We reaffirm our previous conclusion in Johnson v. Davis. . . that “one should not be able to stand behind the impervious shield of caveat emptor and take advantage of another’s ignorance”.. . . This does not mean, however, that the recipient of an erroneous representation can hide behind the unintentional negligence of the misrepresenter when the recipient is likewise negligent in failing to discover the error. [Emphasis added]
Id. at 339.
That case was certified to the Florida Supreme Court by the U.S. Court of Appeals for the 11th Circuit. The question certified was whether a seller who unintentionally misrepresented facts could be held liable where the buyer relied on the false information without investigating as in Besett, despite the fact that an investigation would have revealed the falsity. The court answered the question with a “qualified affirmative.” According to the court, the similarly situated buyer would “not have to investigate every piece of information furnished.” The buyer would need only to investigate “information that a reasonable person1 in the position of the [buyer] would be expected to investigate.” This does not appear to be new law. Without the Supreme Court’s reference to Johnson, quoted above, Gilchrist would not bear mentioning. Gilchrist, like Besett, was a case of misrepresentation, although in the former case the tort was unintentional, which makes it negligence instead of fraud. Johnson, of course, established a cause of action for nondisclosure, for which, we are advised by the Billian court, “Johnson does not specify any state of mind element,” 710 So. 2d at 988. That same court in the same case then tells us, citing Gilchrist, that the “state of mind requirement under Johnson is analogous to that in a negligent misrepresentation case,” 710 So. 2d at 988, 989, where liability depends on the exercise of reasonable care by the supplier of false information. It seems to me that the two concepts are mutually exclusive. Johnson cannot be indifferent to the seller’s state of mind while at the same time condition the seller’s liability on whether the seller used reasonable care in communicating (or failing to disclose). The problem, of course, is that negligence begets contributory (or comparative) negligence, and allowing it to creep into a Johnson nondisclosure case would diminish the rule to where it was before Johnson, i.e., caveat emptor. Negligence concepts have no place in a Johnson nondisclosure action.
The Fourth District’s analogizing of a Johnson nondisclosure action to a negligence case was unfortunate, and unnecessary to its otherwise articulate and comprehensive opinion in Billian.2 Indeed, the court stated that reversal was “mandated” because “the [trial judge’s] instruction on nondisclosure incorrectly included a state of mind component not required by Johnson,” 710 So. 2d at 989.The trial court had instructed the jury that they must find that the defendant intentionally failed to disclose material facts.
In a fraud action, one must prove, inter alia, that the maker of the false statement had “an intention that the representation induce another to act on it,” Johnson, 480 So.2d at 626; Florida Standard Jury Instruction MI 8. In Billian, 710 So. 2d at 989, that court observed, “Nothing in the Supreme Court’s holding in Johnson indicates that actionable nondisclosure must be accompanied by the same intent to defraud required in other types of fraud cases.”
Therefore, the Billian court correctly and definitively ruled that “[i]f the facts of a case give rise to a duty to disclose under Johnson, the seller’s state of mind motivating the failure to disclose is immaterial; the forgetful or unsophisticated seller is just as liable as the knowing dissembler.” Id. at 988.
The Supreme Court in deciding Johnson did not need to create a new cause of action to provide the Davises a remedy. Indeed, the court, citing Besett, granted the remedy because it found fraudulent misrepresentation. But the court was clearly troubled with the traditional distinction in fraud actions between misfeasance and nonfeasance, and observed in its discussion that the Fourth District in an earlier case had “found that although the sellers had sold a home without disclosing the presence of a defective roof and swimming pool of which the sellers had knowledge, ‘in Florida, there is no duty to disclose when parties are dealing at arms length.’” 480 So. 2d at 628.
The court was clearly unhappy that a misrepresentation of material facts could constitute fraud, whereas a nondisclosure of material facts might not afford the buyer any remedy. It was for that reason that the court created the new cause of action for nondisclosure. It was fraud for the Johnsons to represent that there were no problems with the roof when they knew otherwise, and now a seller has an absolute duty to disclose those same roof problems. Perhaps the Florida Supreme Court was inspired as much by fraud as by negligence when it fashioned the Johnson rule, which should be recognized as a rule of strict liability.
In a more recent case, M/I Schottenstein Homes, Inc. v. Azam, 813 So. 2d 91, 95 (Fla. 2002), the court stated, “In Johnson v. Davis, this Court extended the Besett reasoning from affirmative misrepresentations to the arena of nondisclosure of material facts.” (Emphasis added.) The “Besett reasoning” allows the buyer to rely on a fraudulent representation without a duty to make an inspection, unless the falsity is “obvious.” Extending that reasoning to Johnson means that a buyer, without having to prove intent to defraud, likewise has no duty to make an inspection where the gravamen is nondisclosure. The buyer merely has to observe what is “readily observable.”3 The buyer’s failure to hire a “home inspector” or to perform his own “ordinarily diligent” inspection cannot provide the seller a defense of contributory negligence if the defect is latent, and I do not believe the Supreme Court’s reference in Gilchrist to Johnson, quoted above, was intended to imply otherwise. In that case, the court merely affirmed the availability of contributory negligence in a case of negligent misrepresentation. It did not modify Besett, and it did not modify Johnson. The seller’s duty to disclose known, latent, material defects would appear to be absolute, and the seller’s liability strict.
Seller’s Duty Not Met by Partial Disclosure
So, what constitutes a nondisclosure? Does any suggestion of a specific problem get the seller off the hook? In Hinton v. Brooks, 820 So. 2d 325 (Fla. 5th DCA 2001), it seems that the sellers had executed a disclosure form that represented with regard to termite activity in the previous five years, that the “caretaker reported activity. . . and [the pest control company] had treated same.” However, it was later revealed that the house had been treated for termite infestations a minimum of 12 times in the five-year period. The court found the foregoing facts enough to support fraud in the inducement. The seller’s “disclosure” was merely the tip of the iceberg and not a full disclosure of the real extent of the problem. In the opinion of this writer, the same facts, especially as more completely described in the concurring opinion, would have supported a Johnson nondisclosure action.
Nicholson v. Kellin, 481 So. 2d 931 (Fla. 5th DCA 1985) involved a claim by defrauded investors, but I believe the holding of the court can be applied with a broader brush. The sellers had defended with the argument that they owed no fiduciary duty to the buyers and therefore their “mere nondisclosure” was not actionable. The court shot down that defense with the following statement:
[E]ven assuming that a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquiries respecting such facts, if he undertakes to do so, he must disclose the whole truth.. . . [defendants] had disclosed some facts and thus they were under a duty to do so in a non-negligent or non-fraudulent fashion.
Id. at 936.
If a seller undertakes to disclose any facts, he or she “must disclose the whole truth.” The argument that this applies to a Johnson nondisclosure action, as well as to a fraud count, gains strength from the fact that it is included as one of the traditional exceptions to caveat emptor. In Green Acres, Inc. v. First Union National Bank of Florida, 637 So. 2d 363, 364 (Fla. 4th DCA 1994), the court noted that
Exceptions [to caveat emptor] arise: 1) where some artifice or trick has been employed to prevent the purchaser from making independent inquiry; 2) where the other party does not have equal opportunity to become apprised of the fact; and 3) where a party undertakes to disclose facts and fails to disclose the whole truth. (Emphasis added.)
When a seller has undertaken to disclose some, but not all, facts, by definition he or she has failed to disclose others. The only qualifier is that the undisclosed facts are latent and “materially4 affect the value of the property.” A statement by a seller that “I have had some leaks in the copper water lines but they were fixed,” may be literally true; but the failure to reveal there were 10 such leaks in the previous 12-month period, “fixed” at a total cost of over $8,000, and the seller was advised to re-pipe the building or “keep chasing leaks,” and further represented to the buyers that she was not “aware of any conditions materially affecting the value of the property relating to. . . plumbing,” would appear to be a litmus test for a Johnson nondisclosure case, as well as being actionable for fraud.
The jury should be instructed5 that the defendant’s legal duty to disclose is not met by a partial disclosure. While I have found no cases exactly on point, I find the argument compelling.
Buying the Property “As Is”
The standard FARBAR6 form contract for sale and purchase of residential real estate contains the “Standards for Real Estate Transactions” including “Standard W,” which provides: “Seller warrants that there are no facts known to Seller materially affecting the value of the property which are not readily observable by Buyer or which have not been disclosed to Buyer.” There is also a FARBAR “Comprehensive Rider” to the contract for “as is” purchases. It provides that “[t]his rider does not relieve Seller’s obligations under Standard W for facts known to Seller.” This seems self-explanatory; but suppose that your client has signed a contract to buy an older house “as is,” without utilizing the FARBAR form with its Standard W warranty. The Third District, in Levy v. Creative Construction Services of Broward, Inc., 566 So. 2d 347 (Fla. 3d DCA 1990), in a per curiam decision, rejected an attempt by a seller in such a case to avoid the obligations of disclosure because the property had been sold “as is.” The court dismissed the seller’s proffered defense with the following: “[W]e discern no ‘as is’ contractual exception to the duty imposed on the seller herein by the Johnson decision.” Indeed, Florida law is consistent with that of other jurisdictions. In The S Development Company v. Pima Capital Management Co., 31 P.3d 123 (Ariz. App. 2001), the sellers there had argued that the “as is” provision in the purchase contract relieved them of any duty to disclose the defective plumbing, even if they had actual knowledge of the condition. The court rejected the argument, holding that “latent defects in a property sold ‘as is’ that are known to the vendor must be disclosed to the purchaser.”
Residential or Commercial
The lower courts have uniformly refused to apply the Johnson rule of full disclosure to the sale of commercial property. The transaction in Green Acres involved 63 acres of undeveloped commercial property. The court stated, “We do not agree that Johnson extended the duty to disclose to commercial real estate transactions.” Id. at 637. The court cited the First District’s scholarly opinion in The Haskell Company v. The Lane Company, Ltd., 612 So. 2d 669 (Fla. 1st DCA 1993), in which that court reviewed the history of caveat emptor and concluded “that, if the doctrine of caveat emptor is to be replaced as the law applicable to commercial real property transactions in Florida,. . . that decision should be made by the Supreme Court, rather than by this court,” id. at 675. The issue was then certified to the Supreme Court, which has never addressed it.
The problem for litigants is that there has been no bright line between commercial and residential property provided by the courts for guidance. In some cases it may be too obvious for argument, e.g., 63 acres of undeveloped land, or a downtown office building. But when the transaction involves multifamily dwellings, the question becomes murkier. Perhaps a Miami highrise with over 100 apartment/condo units would be conceded as commercial.7 Perhaps not. But what of a duplex? Or a fourplex? While the courts have not suggested where the line should be drawn, the legislature has provided some help. In F.S. §475.278, real estate brokers and salespersons are admonished that their duties include “[d]isclosing all known facts that materially affect the value of residential real property and are not readily observable to the buyer.” Where have I heard that language before? Then in subsection (5)(a), we are advised:
The real estate licensee disclosure requirements of this section apply to all residential sales. As used in this subsection, the term “residential sale” means the sale of improved residential property of four units or fewer, the sale of unimproved residential property intended for use of four units or fewer, or the sale of agricultural property of 10 acres or less.
Is that line bright enough?
Now there is one issue left hanging for the reader. While granting the Davises the return of all their deposit money, the court found no merit in the Davises’ demand for rescission of the contract. The court simply dismissed the claim without further discussion apparently because there was no breach of the “crucial” roof inspection clause. The result was that the Davises still had to buy the house, presumably at a price reduced by the amount of their refunded downpayments. Why didn’t the court grant rescission? I don’t know, but I recommend reading the discussion by the Fourth District in Billian, 710 So. 2d at 989-991, of “The Relationship Between Rescission and an Action for Damages Under Johnson v. Davis.” q
1 For the definition of a “reasonable man,” I recommend A.P. Herbert, Uncommon Law: Being 66 misleading cases, reprinted 1986 by Redwood Burn Ltd., Great Britain.
2 Perhaps the Fourth DCA was merely paying lip service to the Supreme Court’s unfortunate reference in Gilchrist to the Johnson case.
3 In Pressman v. Wolf, 732 So. 2d 356 (Fla. 3d D.C.A. 1999), the court denied relief to a buyer where the property was likened to a “one-eyed horse,” i.e., the defects were “readily observable.”
4 In a Johnson nondisclosure case, the jury decides whether an undisclosed fact “materially affects the value of the property.” In a fraud case, a material fact is one “of such importance that the buyer would not have entered the transaction but for the false statement,” Florida Standard Jury Instruction MI-8. These two standards are sometimes confused.
5 There is no Standard Florida Jury Instruction for a Johnson nondisclosure count; probably a good thing.
6 Florida Association of Realtors and The Florida Bar. If the form is used, buyer may bring a breach of warranty action, but retains the option to forego the breach claim and bring a Johnson nondisclosure action, which the Fourth DCA suggests could permit the award of punitive damages. Billian, 710 So. 2d at 992.
7 Compare Wasser v. Sasoni, 652 So. 2d 411 (Fla. 3d D.C.A. 1995). If the FARBAR contract form is used for sale of commercial property, caveat emptor is probably waived, RNK Family Ltd. Partnership v. Alexander-Mitchell Associates, 788 So. 2d 1035 (Fla. 2d D.C.A. 2001).
Whilden S. Parker is a sole practitioner in Hobe Sound, focusing on small business counseling and general litigation. He received his J.D., with honors, from George Washington University Law School in 1970.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Louis B. Guttmann III, chair, and William P. Sklar and Richard R. Gans, editors.