Since 1985, when the Florida Supreme Court decided the seminal case of Johnson v. Davis, 480 So. 2d 625 (Fla. 1985), it has been the law in Florida that when the seller of residential real property 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 is true even when the contract for sale and purchase contains “as is”, waiver, and disclaimer clauses. The standard Florida Bar/Florida Association of Realtors approved residential form of contract for sale and purchase actually contains a clause which closely mirrors the seller’s Johnson v. Davis disclosure duty.
Does the seller of residential property have the Johnson v. Davis duty of disclosure when the seller and buyer only enter into an option to purchase the home, instead of a purchase and sale contract? No, the seller does not, according to the Florida Second District Court of Appeal. In Rost Investments, LLC v. Cameron, 45 Fla.L.Weekly D1716 (Fla. 2 DCA 07/17/20), the buyer and seller entered into a lease of the home and a second contract for an option to purchase the home. The buyer moved into the home under the lease and had not yet exercised the option to purchase when the buyer alleged that the seller had failed to disclose hidden defects materially affecting its value which the seller had known about before the buyer signed the option contract. The buyer sued the seller, in part, for rescission of the lease and option contract based upon the seller’s breach of its duty to disclose the hidden defects.
The District Court of Appeal reversed the trial court’s judgment in favor of the buyer and held that because the buyer had not yet exercised his option to purchase, the Johnson v. Davis duty to disclose was not applicable. In essence, the relationship between buyer and seller was only one of tenant and landlord or optionee and optionor, not buyer and seller. Would the result have been different if the buyer had exercised the option before filing suit against the seller? Perhaps, but the timing of the exercise would have been crucial. If the buyer had exercised the option after he learned about the alleged hidden defects, then arguably the defects would have been “known” to the buyer before the “sale” thereby relieving the seller of liability. In addition, because the buyer took possession of the home under the lease, the “hidden” defects might have become “readily observable” to the buyer before the buyer had exercised the option, again relieving the seller of liability.
Is a lease/option to purchase transaction now a legitimate way for a seller of residential property to circumvent the Johnson v. Davis duty of disclosure? If so, it would seem to eviscerate the strong public policy reasons the Florida Supreme Court considered and relied upon when it decided Johnson v. Davis 35 years ago. The Court then stated in pertinent part:
“These unappetizing [caveat emptor] 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. Our courts have taken great strides since the days when the judicial emphasis was on rigid rules and ancient precedents. Modern concepts of justice and fair dealing have given our courts the opportunity and latitude to change legal precepts in order to conform to society’s needs. Thus, the tendency of the more recent cases has been to restrict rather than extend the doctrine of caveat emptor. 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.”
As of February 4, 2021, the Second District Court of Appeal had denied rehearing and the case is pending before the Florida Supreme Court. The Supreme Court has not yet decided whether it has direct conflict jurisdiction to hear the case.
