Jensen v. Bailey

Florida District Court of Appeal
76 So. 3d 980 (2011) (2011)

ELI5:

Rule of Law:

To establish a seller's liability for failure to disclose a material defect in residential property, the buyer must prove the seller had actual knowledge of the defect. Constructive knowledge, or what the seller 'should have known,' is insufficient to support such a claim.

Facts:

Eric and Joyce Jensen hired contractors to perform substantial remodeling work in their master bathroom, kitchen, and a bedroom of their residence.
The contractors hired by the Jensens failed to obtain the necessary building permits for the remodeling work.
The unpermitted work was not performed correctly and did not conform to applicable building codes.
In June 2005, the Jensens entered into a contract to sell their residence to Gene and Cynthia Bailey.
Before the contract was signed, the Jensens completed a property disclosure statement for the Baileys.
On the disclosure form, the Jensens checked the 'NO' box in response to a question asking if they were aware of any improvements constructed without necessary permits.
The sale closed in July 2005, and the Baileys took possession of the property.

Procedural Posture:

Cynthia and Gene Bailey filed a lawsuit against Eric and Joyce Jensen in the circuit court (trial court).
The complaint alleged claims for breach of contract, nondisclosure of material defects, and fraudulent concealment.
After a bench trial, the circuit court found in favor of Mrs. Bailey on the nondisclosure claim.
The circuit court specifically found that the Jensens did not have actual knowledge of the defects but held them liable under a 'should have known' standard.
A final judgment was entered against the Jensens, awarding damages and prejudgment interest to Mrs. Bailey.
The Jensens (appellants) appealed the judgment to the District Court of Appeal, and Mrs. Bailey (appellee) filed a cross-appeal.

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Issue:

Does a seller's liability for failure to disclose a material defect in a residential property require proof of the seller's actual knowledge of the defect, or can liability be based on constructive knowledge?

Opinions:

Majority - Wallace, Judge

No, a seller's liability for failure to disclose a material defect requires proof of actual knowledge. The rule established in Johnson v. Davis and consistently applied by this court requires the buyer to prove the seller's actual knowledge of a defect that materially affects the property's value. The trial court erred by imposing liability on the Jensens based on a 'should have known' standard, which improperly converts a seller into a guarantor of the property's condition. While actual knowledge can be proven by circumstantial evidence, it must be proven nonetheless. The cases relied upon by the trial court, Nystrom and Revitz, are distinguishable because the 'should have known' language used in those opinions was either dicta or a shorthand way of describing actual knowledge established through strong circumstantial evidence, such as the seller personally performing the defective work.

Analysis:

This decision reinforces the high bar for fraudulent nondisclosure claims in Florida real estate transactions by strictly adhering to an 'actual knowledge' standard. It prevents the dilution of the Johnson v. Davis rule into a lower, negligence-based 'should have known' standard, thereby protecting sellers from liability for defects of which they are genuinely unaware. The ruling clarifies that sellers are not guarantors of their property's condition and shifts the primary burden of inspection back to the buyer, absent proof of the seller's actual knowledge of a hidden defect. This maintains a clear distinction between fraud (requiring knowledge) and negligence, and it prevents the cause of action from becoming an implied warranty on used homes.

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