Daily Development for Tuesday, January 28, 2003

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

REAL ESTATE CONTRACTS; MISREPRESENTATION; NEGLIGENT MISREPRESENTATION: Where the sellers under a real estate contract authorize their agent to sign the contract without reviewing its terms, sellers are guilty of negligent misrepresentation when the contract states that the subject property is not subject to flooding and the sellers know that statement to be false.

Staggs v. Sells, 86 S.W.3d 219 (Tenn. Ct. App. 2001).

Plaintiffs sold the defendant a house for $71,000.00. The sellers did not review the sale contract, but nevertheless authorized their agent to sign the sale contract on their behalf. The contract stated "[t]hat [the] Property has not been damaged or affected by flood or storm run-off and that [the] Property does / does not require flood insurance." A box next to "does not" was checked.

The trial court found that this statement constituted negligent misrepresentation on the part of the sellers, based on evidence suggesting the sellers knew that the property had been subject to minor flooding in the past. The trial court assessed damages in the amount of $25,000 (based on the difference between the purchase price and the value of the property in light of the misrepresentation), but reduced the award based on the defendant's comparative fault. The defendant had ordered an appraisal which recommended that a surveyor check for flooding, and a flood certification was obtained stating that the property was in flood zone C.

At closing the buyer had asked the buyer's agent what "Zone C" meant, and the agent responded, apparently accurately, that this meant low lying area that rarely flooded. In fact, however, there had been flooding here, and later there was lots of flooding, turning the house into an island, although never actually invading the house directly.

The Court of Appeals upheld the trial court's decision in its entirety.

Comment 1: One might wonder what the concept of comparative fault is doing in a contract case. The explanation is that the court styled this as a tort case. The wrong committed by the defendant was a tortious negligent misrepresentation.

This seems a bit inconsistent with other cases in which the courts have found that an affirmative representation in a real estate contract constitutes a warranty.

Maybe, due to statute of limitations considerations, the plaintiff deliberately styled this as a tort action. Under the developing rule of economic consequences, however, even if the plaintiff had wanted to sue in tort, the existence of a contract remedy should have precluded a tort claim. Hmmmm.

Comment 2: The "agent" that filled in the contract and executed it on behalf of the sellers apparently was a licensed real estate agent. Under those circumstances, one wonders whether the next shoe to drop shouldn't be a lawsuit against that agent for failing to verify the flood status before making the assumption that everything was hunky-dory and dry.