By: T. Keaton Turnipseed, Esq.
June 25, 2024
Now that we have a working knowledge of the applicable laws and each actors’ duties, we can move to the causes of action most likely to be alleged in a non-disclosure action. The most common three causes of action are negligent misrepresentation, fraud or intentional misrepresentation, and breach of contract. I have also included a bonus cause of action, breach of fiduciary duty as it applies to real estate agents. Be aware, this is not an exclusive list, but these are the core causes of action at play.
Negligent Misrepresentation
The first cause of action is negligent misrepresentation. The elements are as follows: (1) the misrepresentation of a past or existing material fact, (2) without reasonable ground for believing it to be true, (3) with intent to induce another's reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.
Negligence is likely to be the low hanging fruit, relatively speaking, because the standard is lower than what a plaintiff, a buyer, must prove in a fraud action. Under a negligence theory a buyer must show that the seller acted unreasonably under the circumstances. For example, if the seller checked the box on the TDS stating that the property is hooked up to city sewer without actually verifying that fact, that seller is arguably negligent if it later comes out the property has a septic tank.
Now to be clear, just because a negligent misrepresentation is made does not mean the buyer automatically recovers. If it is noted in the inspection report that the property has a septic tank the buyer is very likely barred from going after the seller, even if the seller was negligent. The idea is that the buyer’s reliance on the seller’s statement was not reasonable when they are presented with contrary information.
Fraud
Next is fraud, sometimes referred to as intentional misrepresentation. The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.
In practice fraud is often more difficult for a buyer to prove because they must show that the seller not only had knowledge of the falsity of the statement but also the intent to deceive the buyer. Classic examples of cases where both knowledge and intent to deceive can be shown are those where the seller has made repairs to the property that cover up the issue. Specifically, installing some kind of sealant over a cracking foundation, painting over cracks or mold, and taping over leaks in pool or AC equipment are all common examples that show both knowledge and intent to conceal the problem.
Again, the buyer’s reliance must be justified, when the buyer sees the duct tape on the pool equipment that buyer may be on the hook for failing to investigate what is going on.
Breach of Contract
The last of the big three is breach of contract. The Residential Purchase Agreement and Joint Escrow Instructions is a contract. That contract requires the seller to disclose material defects with the property. Naturally it is a breach of that contract if the seller does not disclose something material about the property. In large part the analysis for breach of contract tracks the above analysis.
Breach of Fiduciary Duty
I mentioned fiduciary duties in part 1, so I feel obligated to touch on it here as well. The elements of a claim for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) its breach, and (3) damage proximately caused by that breach.
As hinted at in part 1, agents owe a number of duties to their principles, their clients, as fiduciaries. These duties include the duty of loyalty where the agent is required to act in the best interests of the client even if that is not in the agent’s best interest. Examples of breaches of loyalty would be competing with a client to buy a particular property or pushing a transaction through to get a commission at the detriment of the client.
Agents also have a duty to inform clients of material information. For example, when the pest inspection comes back noting rodents and termites, the agent has a duty to pass that information on to the buyer. Similarly, agents must act in the general best interest of their respective clients. Aside from actually transmitting material information, the agent must transmit that information in an appropriate amount of time. An example outside the context of a non-disclosure is when an agent fails to transmit a buyer’s cancellation in the requisite amount of time and the buyer loses their earnest money deposit.
The Applicable Statutes of Limitations
Also worth noting in this section are applicable statutes of limitations. Statutes of limitations limit the amount of time a plaintiff, a buyer for our purposes, can bring an action. The most conservative approach is the statutes of limitations begin to run on the day of closing on the transaction. However, there are doctrines like delayed discovery that, in a pinch, can extend the limitations period running if the facts are applicable. However, delayed discovery doesn’t apply in all situations and is a last-ditch effort that should be avoided if at all possible. The bullet points below list the applicable limitations period for the cause of action most often play in non-disclosure actions.
- Negligence: 2 years
- Fraud: 3 years
- Breach of Contract: 4 years
- Breach of Fiduciary Duty: 4 years
Having explored, at least at a high level, the relevant causes of action we will dive into the practical side of resolving nondisclosures in part 3 and 4.
BPE Law Group has been assisting individuals with non-disclosure issues for more than twenty-five years. Our team of experienced attorneys understand the nuances of these cases and whether you are a seller or a buyer, are here to assist you in dealing with your issues involving claims of non-disclosure.
The information presented in this article is not to be taken as legal advice. Every situation is different. If you are facing a legal issue of any kind, get competent legal advice in your state immediately so that you can determine your best options.