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New Decision: Disclosures, Reliance and Construction Defects (Arlington Pebble Creek v. Campus Edge Cd’m)
November 09, 2017

Perversely, could sales disclosures protect the developer, not the buyer? Really, does anyone actually read that all stuff? Apparently not, if “stuff” means condominium sales disclosures. Monday’s decision by the the First District Court of Appeal in Arlington Pebble Creek, LLC v. Campus Edge Cd’m Ass’n, Inc., Case No.: 1D16-1347 (Fla. 1st DCA, November 6, 2017), involving claims of construction defects in a condominium conversion might make you think twice about the value, purpose, and who hides behind the disclosures.

Fraudulent misrepresentation and negligent misrepresentation claims were filed by the Condominium Association against Arlington Property. Arlington Property purchased apartments and created Arlington Pebble Creek to covert the apartments in to a condominium.

Jumping to the end, the appellate court reversed a final judgment based upon a jury verdict. The opinion does not state the judgment amounts, but this writer has been informed that there was a compensatory damage verdict of over $3,000,000, and two separate, independent punitive damage awards each in the amount of $250,000! The reversal was with directions to enter judgment in favor of the appellants/defendants below developer entities!!

What happened? Following transition/turnover, the Association discovered that the Condominium suffered extensive water intrusion damage to common areas. The repair work required a doubling of Association assessments levied upon unit owners.

Fraud or misrepresentation apparently became an issue when the developer entities dueling engineering reports were obtained and compared. The Condominium “Roth” Act conversion engineering report estimated the Condominium’s remaining lifespan at thirty-five to forty-five years, evaluating the structure’s functional soundness as “Good (localized deterioration).” Corresponding, the conversion disclosure budget listed less than $10,000 for building repairs.

As an apparent smoking gun, was Arlington Properties separate “property condition assessment” which it obtained near the time it acquired the apartment building, but not filed with the state or published to others. This report identified moisture intrusion and estimated structure/building estimate repair costs of $290,200.

The Association proceeded on claims of fraudulent misrepresentation and negligent misrepresentation made to the Association. The Appellate Court appeared to have no problem recognizing that there was a false statement of material fact and that the false statement was made knowingly, or that the developer entities should have known that the statement was false.

Nevertheless, the Appellate Court held that the Association did not prove two critical elements: intent to induce; and, injury. This was in spite of the testimony of the current president who owned a unit before turnover.

The catalyst for the Appellate Court was no proof of Association reliance on the false statements in the building report, whether in the turnover Association’s preparation of the budget or otherwise. The Association’s property manager at turnover provided testimony that he did not see the conversion report with the false statement. Further, in terms of damages, the increased assessments occurred without reliance on the misrepresentations.

How could no damages flow from the false statement, especially one concerning moisture intrusion in a Florida condominium? The answer likely lies in two areas: who has actually been damaged; and who relied on the misrepresentations. The Appellate Court noted (fn. 2) the Association acknowledgement that the claim was of misrepresentations to the Association, not unit owners.

The court further noted (fn.3) that the “the existence of a fraudulent statement does not in itself establish reliance on that statement.” While certainly providing a formula to reduce claims, this truism flies in the face of the purpose of the conversion report and the offering statement. The key likely is that reliance would be in the hand and mind of the buyer, now unit owner, not the Association.

How could unit owners have proceeded in a cost-effective manner? Even with the ease of pleading a Fla.R.Civ.P Rule 1.221 class action, there is still the historical reticence of Florida Courts to allow a class action for a fraud claim because of the reliance element of a fraud claim. Would the damaged areas be a subject for converter reserves? Perhaps not, but the opinion did not reach that issue.

One must wonder how did the Association obtain the previously undisclosed engineering report? Good sleuthing? Problem is what to do with the information once it is at hand?

One would presume that there was outrage when the dueling reports were compared. But what to do if the buyers merely used the disclosure statements to prop up the rear of a sofa, or hold down shelves in the rear of a closet? Do we paraphrase Benjamin Franklin, and others “for want of a nail … the horse…battle…war was lost? Now should we proclaim: For want of reading the offering circular, there was no reliance, with no reliance there could be no damages, for no damages, no judgment.

The practical lesson may be to encourage developers to throw everything into the disclosure because who actually reads it? And if there is a claim afterwards, it was disclosed!! Actually, many developer counsels appear to have been suggesting that the risk of losing a sale is well worth the cover from claims provided by a broad disclosure.

So consider what is the purpose of the disclosure?

In In closing, whether we observe Veterans Day by closing our offices or otherwise, take a moment with your families, friends and colleagues to recall those who sacrificed in uniform for our country’s ideals. Recall also the foundations of those ideals including an independent judiciary, and especially what propelled much of early voluntary immigration, seeking to flee the English Civil Wars and the civil strife between wars, based not only upon religious persecution, but also the Crown’s wrongful prosecution and punishment to coerce compliance, a special kind of treachery that our country’s leaders have eschewed for centuries. It is up to you to pass on the traditions of liberty, freedom and democracy, and the independent judiciary necessary to sustain the traditions!

Have a great holiday weekend.

Michael J. Gelfand

Past Chair

Real Property, Probate and Trust Law Section of The Florida Bar

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Note: This article is not legal advice. The decision addressed may not be final, and may be subject to further review. Statements and comments made are not those of The Florida Bar or the RPPTL Section.

© 2017 Michael J. Gelfand

Michael J. Gelfand

Florida Bar Board Certified Real Estate Attorney

Florida Supreme Court Certified Mediator:

Civil Circuit Court & Civil County Court

Fellow, American College of Real Estate Attorneys

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