OFFERING DOCUMENTS AND REQUIRED PRE-SALE DISCLOSURES. Margaret A. Rolando. Shutts & Bowen LLP, Miami

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1 OFFERING DOCUMENTS AND REQUIRED PRE-SALE DISCLOSURES By Margaret A. Rolando Shutts & Bowen LLP, Miami I. Introduction: The doctrine of caveat emptor ( let the buyer beware ) in residential real estate transactions has significantly eroded over the past 30 years as contrary to modern concepts of justice and fair dealing. Both legislatures and courts have widely recognized a broad exception to the doctrine for sellers and brokers of residential realty. The exception has been coupled with an affirmative duty to disclose facts which materially affect the value of the property, which are not readily observable and are not known to the buyer. Many legislatures have imposed significant disclosure duties on builder-sellers of new units in condominiums and other common interest ownership communities. These expansive disclosure standards go beyond matters which affect the value of the property. In addition to those situations where disclosure is required, there are also circumstances when disclosure may be advisable for prophylactic purposes. II. Sources of Disclosure Requirements; What to Disclose A. Statutory Mandates 1. Interstate Land Sales Full Disclosure Act. 15 U.S.C Requirements in state common interest ownership acts, condominium acts, homeowner association acts, cooperative acts or time share acts. Many states required the developer to make specific disclosures to buyers in a Public Offering Statement (prospectus) or the Purchase and Sale Agreement. (a) For example, Uniform Common Interest Ownership Act ( UCIOA ) lists a series of items to be disclosed in a Public Offering Statement. Even those states which have not adopted UCIOA or its predecessor have statutorily mandated many of these disclosure requirements. See Exhibit A for the text of the proposed amendments to Sections and 4-104, which set forth the UCIOA minimum requirements for a Public Offering Statement. (b) UCIOA also requires disclosure for common interest ownership communities containing time shares, Section 4-105, UCIOA, and disclosure of condition of the building, uncured building code and other municipal regulations violations and the cost of curing the violations in conversion buildings in common interest ownership communities. Section 4-106, UCIOA 3. Disclosure Requirements for Florida condominiums, cooperatives, timeshares and other common interest ownership communities arise under the following statutes: a. Developer disclosure for sale of a residential condominium unit or lease for more than 5 years. Condominium Act et seq., Fla. Stat. 1

2 b. Developer disclosure for sale of a residential cooperative unit or lease for more than 5 years: Cooperative Act et seq., Fla. Stat. c. Subdivided Land. Florida Uniform Land Sales Practice Law et seq., Fla. Stat. d. Time Shares and Interval Ownership. Florida Vacation Plan and Time-Sharing Act, et seq., Fla. Stat. e. Buyer's right to have deposits for purchase of one or two-family dwelling from a builder or developer placed in escrow , Fla. Stat. f. Notice to buyers of pre-suit procedures for claims of defective construction , et seq., Fla. Stat. g. Notice to buyers of homeowner association membership requirement , Fla. Stat. h. Resale of a residential condominium unit by unit owner who is not a developer (2), Fla. Stat. i. Resale of an interest in a residential cooperative by an owner who is not a developer (2), Fla. Stat. B. Additional State Statutory Disclosure. 1. Some states have adopted statutes requiring disclosures of defects, malfunctions, hazards and a variety of other matters affecting the value of residential property. E.g. Alaska, California, Indiana, Iowa, Kentucky, Michigan, Ohio, Pennsylvania, Rhode Island, South Dakota, Texas, Virginia, Wisconsin. 2. In addition to those disclosures which arise because of the subject property being located in a common interest ownership community or being newly constructed, additional disclosure may be required by other state statutes to meet specific concerns. In Florida, statutes requiring additional disclosure include: a. Health risk of radon (8), Fla. Stat. Fla. Stat , Fla. Stat. b. Property located in a Community Development District , c. Property located seaward of coastal construction control line. d. Property tax disclosure , Fla. Stat , Fla. Stat. e. Energy performance disclosure for new residential buildings. 2

3 C. Requirements in local ordinances. Example: Miami-Dade County Florida Ordinance requiring disclosure if improved real estate is located in a coastal high hazard area or a special flood hazard area. See 11C - 17, Miami-Dade County Code. D. Case Law Mandating Disclosure. 1. Seller has duty to disclose defects in residential property not which are not readily observable and are not known to the buyer. Johnson v. Davis, 480 So. 2d 625 (Fla. 1985) approving 449 So. 2d 344 (Fla. 3d DCA 1984). [W]here 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. In the state of Florida, relief for a fraudulent misrepresentation may be granted only when the following elements are present: (1) a false statement concerning a material fact; (2) the representor's knowledge that the representation is false; (3) an intention that the representation induce another to act on it; and (4) consequent injury by the party acting in reliance on the representation. Id. at 627. The doctrine of caveat emptor does not exempt a seller from responsibility for the statements and representations which he makes to induce the buyer to act, when under the circumstances these amount to fraud in the legal sense. Id. The common law rule of disclosure in Florida enunciated in the Johnson case has been extended to contractors and developers of residential real estate. U.S. Home Corporation, Rutenberg Homes Div. v. Metropolitan Property & Liab. Ins. Co., 516 So. 2d 3 (Fla. 2d DCA 1987). In Henson v. James M. Barker Co., Inc., 555 So. 2d 901 (Fla. 1 st DCA 1990), rev denied, 564 So. 2d 487 (Fla. 1990), the court held that the contractor has a duty to disclose latent defects to the developer of a residential condominium project. 2. Disclosure of the following factual situations has been required by various courts. Some of these situations may be present in new construction or in condominium conversions. a. Property Prone to Flooding: Young v. Johnson, 538 So. 2d 1387 (Fla. 2d DCA 1989); Dorton v. Jensen, 676 So. 2d 437 (Fla. 2d DCA 1996); See Annotation, Fraud Predicated on Vendor's Misrepresentation or Concealment of Danger or Possibility of Flooding or Other Unfavorable Water Conditions, 90 A.L.R. 3d 568. b. Unstable Subsoil Conditions; House Built on Muck; Structural Damage: U.S. Home Corporation, Rutenberg Homes Div. v. Metropolitan Property & Liab. Ins. Co., supra; Ramel v. Chasebrook Construction Co., 135 So. 2d 876 (Fla. 2d DCA 1961). c. Roof problems; state of disrepair; not watertight: Johnson v. Davis, 480 So. 2d 625 (Fla. 1985) approving 449 So. 2d 344 (Fla. 3 DCA 1984). 1989). d. Zoning Violation: London v. Brown, 537 So. 2d 612 (Fla. 4th DCA 3

4 e. Non Disclosure of 100' conservation tract/drainage easement: Fry v. J.E. Jones Construction Co., 567 So. 2d 901 (Fla. 5th DCA 1990). f. Soil Defect: Ramel v. Chasebrook Construction Co., supra. 1974). g. Roach Infestation: Weintraub v. Krobatsch, 317 A.2d 68 (N.J. h. Site of Multiple Murders: Reed v. King, 193 Cal. Rptr. 130 (Cal. 3 App. Ct. 1983); Ben-Ezra, Stigma Busters, 19 Probate & Property 59 (June 2005). i. Radioactive Uranium Mine Tailings: Schnell v. Gustafson, 638 P.2d 850 (Colo. App. Ct. 1981) j. Foundation Problems: Ramel v. Chasebrook Construction Co., supra; Thacker v. Tyree, 297 S.E.2d 885 (W. Va. 1982); Artilla Cove Resort, Inc. v. Hartley, 72 S.W. 3d 291 (Mo. App. 2002) k. Construction of Improvements without Building Permit: Revitz v. Terrell, 572 So. 2d 996 (Fla. 3d DCA 1990) l. Building Code Violations: Revitz v. Terrell, supra.; Kovach v. McLellan, 564 So. 2d 274 (Fla. 5th DCA 1990) m. Illegal Elevation: Revitz v. Terrell, supra. n. Excessively Noisy Neighbors: Alexander v. McKnight, 9 Cal. Rptr. 2d 453 (Cal Ct. App. 1992) o. Property unsuitable for construction because of soil conditions unsuitable for septic system: Fimbel v. DeClark, 695 N.E.2d 125 (Ind. Ct. App. 1998) p. Special Flood Hazard Area: Revitz v. Terrell, supra. supra. q. Illegal construction performed by remote owner: Revitz v. Terrell, r. Defect in Plumbing System of Condominium (Common Elements): Sink v. Florida Community Service Corporation of Walton County, 877 So.2d 898 (Fla. 1 st DCA 2004). s. Cracks in Pool: Slitor v. Elias, 544 So. 2d 255 (Fla. 2d DCA 1989); Banks v. Salina, 413 So. 2d 851 (Fla. 4th DCA 1982); Ramel v. Chasebrook Construction Co., supra. t. Termite Damage: Rayner v. Wise Realty Company of Tallahassee, 504 So. 2d 1361 (Fla. 1st DCA 1987); 4

5 u. Termite Infestation: Rayner v. Wise Realty Company of Tallahassee, supra.; See Annotation, Duty of Vendor of Real Estate to Give Purchaser Information as to Termite Infestation, 22 A.L.R. 3d 972. v. Water damage, mold and poor air quality in Condominium Unit: Postregna v. Tanner, 903 So.2d 219 (Fla. 2d DCA 2005). w. Wet Rot: Rayner v. Wise Realty Company of Tallahassee, supra. DCA 1990) x. Wetlands on Property: Field v. Perry, 564 So. 2d 504 (Fla. 5th y. Subsurface Conditions on vacant land (presence of footings from previously demolished buildings): Salt Lake County v. Western Dairymen Cooperative, Inc., 48 P.3d 910 (Utah 2002) z. Environmental Contamination. See Annotation, Vendor s Obligation to Disclose to Purchaser of Land Presence of Contamination from Hazardouse Substances or Wastes, 12 A.L.R. 5 th Matters Appearing in Public Records. See discussion of whether Seller has duty to disclose matters reflected in the public records: Worsham, Must Information in the Public Records be Disclosed to Buyers of Residential Real Property and May it be Mispresented? Fla. Bar J. (March 2006) 4. Disclaimers; As Is Contracts. Provision in a contract for sale of real estate in which the buyer agrees to take the property as is or in its existing condition does not preclude an action by the buyer based on claims of fraud, misrepresentation or nondisclosure. As Is does not generally apply to defective conditions which were not readily observable. As Is clause may protect seller from claims relating to patent defects; may be construed as disclaimer of implied warranties. Rayner v. Wise Realty Co., 504 So. 2d 1361 (Fla. 1st DCA 1987); Levy v. Creative Construction Services of Broward, Inc., 566 So. 2d 347 (Fla. 3d DCA 1990); Syvrud v. Today Real Estate, Inc. 858 So.2d 1125 (Fla. 2d DCA 2003); Solorzano v. First Union Mortgage Corp., 896 So. 2d 847 (Fla. 4 th DCA 2005); See Annotation, Construction and Effect of Provision in Contract for Sale of Realty by Which Purchaser Agrees to Take Property, As Is, or in Its Existing Condition, 8 A.L.R. 5th 312 See Abney, Disclaiming the Implied Real Estate Common-Law Warranties, 17 REAL EST. L.J. 141 (1988). E. Common sense disclosures if not already required by applicable statute or case law: 1. Unusual or adverse site conditions. E.g. noise, unusual weather conditions, undesirable uses in vicinity, lack or shortages of parking, poor or difficult access, possibility of impaired views; former military site 2. Nuisances or objectionable uses adjacent to or near the community, which may generate noise, vibration, lighting, traffic and other conditions caused by daily operations of the facility, such as the following: airports; railroad tracks or station; bus station; 5