Material Misrepresentation Found in Failing to Disclose Actual Size of Commercial Building

//Material Misrepresentation Found in Failing to Disclose Actual Size of Commercial Building

Material Misrepresentation Found in Failing to Disclose Actual Size of Commercial Building

The California Court of Appeal found there was no miscarriage of justice when the trial court found a misrepresentation occurred in a real estate transaction regarding the size of the property.  Hallett v. Khau provides some insight into a failure to disclose issue for a commercial property.  Here, Plaintiff, the Buyer, filed a lawsuit against Defendant, the Seller, for failing to properly disclose the size of a commercial building.

In 2007, when the Defendant had purchased the commercial property located at 729 Merchant Street in Downtown Los Angeles, he had signed a sales agreement that indicated a total of 6,100 square feet of warehouse space. Previously, the Defendant had rented the space before purchasing it. A few years after purchase, he decided to expand, and thus signed a contract to add 1,200 square feet of warehouse space to the property, which ended up being 1,390 sq. ft. to meet the City of Los Angeles requirements. Ultimately, the total amount of warehouse space following the addition was 7,490 square feet.

In 2013, the Defendant hired a real estate agent to list the property for sale at $2 million dollars. When retrieving public records to verify property information, the records inaccurately indicated 8,450 square feet of warehouse space that the property allegedly had. Defendant testified that he could “never imagine city records could be wrong,” so the listing agent and him advertised the provided square footage as stated on public records.

Plaintiff, who ended up buying this property, was initially searching for a warehouse with at least 10,000 square feet of warehouse space. However, given some advantages that this warehouse had, such as a loading dock and a space for containers, he decided on the property. Although the advertising flyer contained a disclaimer that stated, “this information has been obtained from sources believed reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy,” the buyer did not read it because at the time he was just interested in seeing the property.

After verifying this information through public records, the Buyer’s agent set up an appointment to view the property. The Buyer later testified that if he knew the property had 7,490 sq. ft. of warehouse space and not 8,450 as advertised, he wouldn’t be interested in it as his criteria was closer to 10,000.

During the process of offers and counteroffers, the seller’s counteroffer stated, “the property is sold to be in its ‘as-is’ and ‘where-is’ condition with all faults and all upgrades as they occur. Buyer shall be solely responsible to inspect the property and all property-recorded information, known and unknown to seller, its representative(s) and/or real estate brokers.” While this statement was to apply to the square footage verification as well according to the seller and seller’s agent, the Buyer “had no understanding that paragraph 4 had anything to do with the square footage of the warehouse space on the property.”

After the close of escrow, the Buyer discovered the misrepresentation of square footage space which was also verified by an appraiser, and immediately filed a lawsuit for intentional misrepresentation and breach of contract. The Court awarded Plaintiff $481,000 in compensatory damages. Defendant appealed, and the Court of Appeals was affirmed. The Court found that an “as is” clause, an exculpatory clause, or a the Buyer’s lack of due diligence was not a defense to an intentional misrepresentation. Therefore, the judgment stood.

The California Court of Appeal found there was no miscarriage of justice when the trial court found a misrepresentation occurred in a real estate transaction regarding the size of the property.  Hallett v. Khau provides some insight into a failure to disclose issue for a commercial property.  Here, Plaintiff, the Buyer, filed a lawsuit against Defendant, the Seller, for failing to properly disclose the size of a commercial building.

In 2007, when the Defendant had purchased the commercial property located at 729 Merchant Street in Downtown Los Angeles, he had signed a sales agreement that indicated a total of 6,100 square feet of warehouse space. Previously, the Defendant had rented the space before purchasing it. A few years after purchase, he decided to expand, and thus signed a contract to add 1,200 square feet of warehouse space to the property, which ended up being 1,390 sq. ft. to meet the City of Los Angeles requirements. Ultimately, the total amount of warehouse space following the addition was 7,490 square feet.

In 2013, the Defendant hired a real estate agent to list the property for sale at $2 million dollars. When retrieving public records to verify property information, the records inaccurately indicated 8,450 square feet of warehouse space that the property allegedly had. Defendant testified that he could “never imagine city records could be wrong,” so the listing agent and him advertised the provided square footage as stated on public records.

Plaintiff, who ended up buying this property, was initially searching for a warehouse with at least 10,000 square feet of warehouse space. However, given some advantages that this warehouse had, such as a loading dock and a space for containers, he decided on the property. Although the advertising flyer contained a disclaimer that stated, “this information has been obtained from sources believed reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy,” the buyer did not read it because at the time he was just interested in seeing the property.

After verifying this information through public records, the Buyer’s agent set up an appointment to view the property. The Buyer later testified that if he knew the property had 7,490 sq. ft. of warehouse space and not 8,450 as advertised, he wouldn’t be interested in it as his criteria was closer to 10,000.

During the process of offers and counteroffers, the seller’s counteroffer stated, “the property is sold to be in its ‘as-is’ and ‘where-is’ condition with all faults and all upgrades as they occur. Buyer shall be solely responsible to inspect the property and all property-recorded information, known and unknown to seller, its representative(s) and/or real estate brokers.” While this statement was to apply to the square footage verification as well according to the seller and seller’s agent, the Buyer “had no understanding that paragraph 4 had anything to do with the square footage of the warehouse space on the property.”

After the close of escrow, the Buyer discovered the misrepresentation of square footage space which was also verified by an appraiser, and immediately filed a lawsuit for intentional misrepresentation and breach of contract. The Court awarded Plaintiff $481,000 in compensatory damages. Defendant appealed, and the Court of Appeals was affirmed. The Court found that an “as is” clause, an exculpatory clause, or a the Buyer’s lack of due diligence was not a defense to an intentional misrepresentation. Therefore, the judgment stood.

By |2018-04-16T14:37:20+00:00April 16th, 2018|Real Estate|Comments Off on Material Misrepresentation Found in Failing to Disclose Actual Size of Commercial Building