A Georgia appellate court has considered whether a real estate broker who was selling properties in a newly-developed subdivision was required to disclose to buyers that their home was 119 square feet smaller than model home.
Tammie and Kelvin Middleton ("Buyers") contracted with developer Mike Moon ("Developer") to build a home on lot 74 exactly like the subdivision's model home located on lot 65. Troy Young Realty, Inc. ("Brokerage") was the listing broker for the subdivision development.
The Buyers' home was built a 119 square feet smaller than the model home on lot 65. The Buyers claimed that they were not made aware of this fact until after the closing on their property. The Buyers had requested a copy of the appraisal prior to closing, but did not receive the appraisal until after the closing. The Buyers had also submitted a list of changes which the Developer could not complete prior to closing. In exchange for the inability to make the changes as well as to compensate the Buyers for the reduced square footage, the Developer instructed the Brokerage to offer the Buyers a $1000 reduction in the purchase price and $400 landscaping allowance or the right to cancel the contract entirely.
At closing, the Brokerage simply told the Buyers about the reduced price and the landscaping allowance, allegedly not telling the Buyers why the Developer was giving them a $1000 reduction and allowance due to the reduced square footage nor explaining that the Buyers had the right to cancel the purchase contract. However, an addendum to the purchase contract stated that "sum of $1,000 shall be deducted from Seller's proceeds...due to errors on Lot 65 & 74 difference and delay in closing to any extra expenses" incurred by the Buyers.
Following the closing, the Buyers discovered the square footage difference between the model home and their home. The Buyers filed a lawsuit against the Brokerage alleging fraud, claiming that they were damaged by the Brokerage's failure to inform them of the square footage difference and also the Brokerage's failure to give them a copy of the appraisal for the property prior to closing. The Buyers allegations were based on their argument that the Brokerage was a dual agent, representing both the Buyers and the Developer. The trial court ruled in favor of the Brokerage, and the Buyers appealed.
The Court of Appeals of Georgia affirmed the trial court's ruling. To allege fraud, the Buyers would need to show that the Brokerage made a false representation of material fact with knowledge of the statement's falsity or reckless disregard for the truth, with the purpose of inducing the Buyers to act in reliance on the statement, and where the Buyers justifiably relied upon the misrepresentation and acted upon it, thereby suffering damage.
The court first considered whether the Brokerage had an agency relationship with the Buyers, which would impose certain disclosure duties upon the Brokerage. Looking at the purchase agreement, the court found that it contained a number of disclaimers that should have alerted the Buyers to the fact that the Brokerage was not their representative, such as "Broker has entered into a client relationship with only the seller". Also, in the "selling broker" portion of the purchase agreement, the "transaction broker" box was checked, with that section stating that the "Broker may perform ministerial acts for either party as a Transaction Broker" but that each party was responsible for representing its own interests in the transaction, if the party was not represented by another broker. Based on the explicit language of the agreement, the court ruled that it should have been clear to the Buyers that the Brokerage was not acting on their behalf in this transaction. Thus, the court affirmed the trial court's ruling that there was no dual agency relationship between the parties and thus the Brokerage did not have a heightened disclosure duty that it owed to the Buyers.
Next, the court considered whether the Buyers could allege fraud against the Brokerage, absent an agency relationship with the Brokerage. Looking at the elements for fraud, the court found that the Buyers were not able to show justifiable reliance, as the difference in square footage in the properties was disclosed in the purchase contract and the simple fact that they were receiving a voluntary price reduction from the Developer should have put the Buyers on notice that something was wrong. Thus, the court affirmed the trial court ruling in favor of the Brokerage.
Middleton v. Troy Young Realty, Inc., 572 S.E.2d 334 (Ga. Ct. App. 2002).
Editor's Note: Thanks to the legal department at the North Carolina Association of REALTORS® for alerting NAR Legal Affairs to this decision.