JUDGMENTS ONLINE

Below are summaries of recent court cases affecting the real estate industry. For more detail and additional cases, visit "The Letter of the Law," NAR's online legal newsletter.

Buyer’s Rep Gets No Commission for Uncompleted Transaction

Mississippi's highest court has ruled that a buyer's representative was not entitled to a commission from her client when the client backed out of a transaction just before the scheduled closing date.

Billy M. Hamilton entered into an agency agreement with Cynthia Pringle, an associate with The Buyer’s Agent. On July 15, 1998, Hamilton entered into an agreement to purchase a home owned by Gerald J. and Gay T. Hopkins, who listed the home with Carolyn Catchot of Century 21 Bay South Realty Inc. The purchase agreement set a closing date of Aug. 31, 1998.

Hamilton commissioned a home inspection, which revealed problems with the property's heating and cooling systems. The Hopkins had the repairs made, and the HVAC contractor issued a report stating that the HVAC systems were functioning normally. Pringle’s office received a copy of the report and notified Hamilton of the results. However, exactly how Hamilton received this information is in dispute. Pringle’s office contends that Hamilton accepted the results of the report and requested to move in by July 24, 1998, if possible. Hamilton claims he told Pringle’s office that he wanted the sellers to either replace the HVAC system or lower the purchase price.

On Aug. 24, 1998, Hamilton informed Pringle’s office that he no longer wanted to purchase the home. Hamilton testified that he tried to contact Pringle at an earlier time to inform her of his decision, but he wasn’t able to reach her. Hamilton also informed Catchot of his decision not to purchase the home.

When Hamilton failed to appear at the closing a week later, the sellers sued. In their lawsuit, they alleged breach of contract and sought execution of the purchase contract or damages and attorney's fees. Pringle’s brokerage intervened in the lawsuit, claiming it was entitled to receive its commission.

The trial court awarded attorney’s fees to the sellers and Hamilton’s earnest money as damages, and Pringle’s brokerage was awarded its commission. Hamilton appealed.

The Supreme Court of Mississippi partially reversed the trial court’s decision.

The trial court had awarded the brokerage a commission because the brokerage had fulfilled all of its contractual duties by procuring a ready, willing, and able buyer. The high court disagreed, finding that the contractual language determined the brokerage’s right to a commission. The purchase contract stated that the brokerage was entitled to a commission “from the proceeds of the transaction,” payable “at the time of closing.” Because the transaction never closed, the court found that the brokerage was not due a commission and reversed the trial court’s decision.

However, the court upheld the award of Hamilton’s earnest money to the sellers because it ruled it would be inequitable to order the sellers to return the earnest money to Hamilton after he unfairly gave late notice to the sellers of his intention to rescind the purchase agreement. Hamilton had argued that he was entitled to get his earnest money back because the inspection had revealed problems with the HVAC system. The sellers argued that he had raised his objections too late. The purchase agreement provided that an unsatisfactory inspection allowed the buyer to recover his earnest money and cancel the agreement—but did not provide a specific time period in which this needed to be done. However, the court ruled that the sellers did not learn of Hamilton’s intention to rescind the agreement until two days before the scheduled closing date and had already moved out of the home at that time. Therefore, they were entitled to the earnest money.

To read the entire summary, click here.

Fraudulent Inspection Report Basis for Suit

The Georgia appellate court ruled that a fraudulent inspection report could serve as the basis for a lawsuit by the buyers against their agent, the seller, and inspector.

Ronald and Terry Smiley entered into an agreement to purchase a home from S&J Investments Inc. Real estate agent, Jack E. Hall Jr., gave the Smileys a copy of the seller's property condition disclosure statement, which did not identify any structural problems or past water leakage in the home.

Prior to the execution of the purchase agreement, the Smileys hired a building contractor to inspect the home. This inspection found that there were structural problems with the house. The contractor's report concerned the buyers, causing S&J to hire another inspector, Hussey, Gay, Bell & DeYoung Inc. Consulting Engineers, to perform a second inspection. S&J’s inspector issued a report that concluded the home had “no signs of structural failures,” and the sale proceeded.

Following their purchase, the Smileys encountered numerous structural problems with their home. Eventually, they filed a lawsuit against S&J, its inspector, and Hall. During the course of discovery, it was learned that Hall was a prior owner of the property and had unsuccessfully attempted to perform extensive repairs on structural elements within the house. Hall failed to disclose the work he had attempted on the property despite allegedly receiving questions from the Smileys related to this topic.

The trial court ruled against the Smileys on all of their allegations, and they appealed. The Court of Appeals of Georgia partially affirmed and partially reversed the trial court, sending part of the case back to the trial court for resolution of factual issues by a jury.

The court affirmed the trial court's ruling that the Smileys’ professional negligence allegations against the inspector should be dismissed because there was no professional relationship between the parties. However, the court found that the Smileys could bring negligent misrepresentation allegations against the inspector and so reversed the trial court on these allegations. The law provides that a third party can bring negligent misrepresentation allegations against professional individuals or entities that provide false information due to lack of competence or failure to exercise proper care in preparing information that a third party is foreseeably reliant upon.

The inspector knew the purpose for which the report was going to be used (i.e., to induce the purchase of the home), and there was expert testimony that the inspector's report was negligently prepared since it failed to find the structural defects found by the Smileys’ expert. Thus, the court reversed the negligent misrepresentation allegations against the inspector and sent these allegations back to the trial court for further proceedings.

The court also found that there was sufficient evidence that could lead a jury to conclude that S&J and Hall had planned to defraud the Smileys so the court also sent the fraud allegations back to the trial court for further consideration. To successfully allege fraud, a suit must allege that a false representation, which is known to be false at the time it is made, was made to induce a party to act. It’s also necessary to allege that the party justifiably relied on the representation, causing damages. The Smileys provided evidence showing that Hall misstated the following: the amount the inspector received for preparation of its report, the work the inspector undertook to prepare the report, and Hall’s knowledge about structural repairs he had attempted on the property.

Finally, the court sent the breach of contract allegations back to the trial court. These allegations were based on the fact that the disclosure statement was incorporated into the contract between the parties. If the jury found that the disclosure statement falsely represented the property as having no structural defects, then S&J would be liable for breach of contract because the disclosure had been incorporated into the contract instead of as a separate document. In the disclosure statement, S&J had warranted that there were no defects except as stated in the disclosure statement. The court found that S&J’s lack of knowledge of the structural defects would not be a defense to the breach of contract allegations because the absence of such defects was a term of the contract.

To read the entire summary, click here.