Commercial Property Issues: 2017 Yearly Update

For the most part, the cases involving commercial properties raise the same legal issues as cases with residential properties, such as breach of fiduciary duty, misrepresentation/fraud, and failure to disclose property conditions.  One issue that arises in the context of commercial properties is whether the property is suitable for a particular commercial use.  Both of the cases below address this issue.  As demonstrated in both of the cases, parties often utilize a contingency clause to protect against uncertainty regarding a particular use of the property.

1.         Hensley v. Duvall, No. 2911 EDA 2015, No. 2967 EDA 2015, No. 3098 EDA 2015, No. 3099 EDA 2015, 2017 WL 1372759 (Pa. Super. Ct. Apr. 13, 2017)

Broker was negligent in drafting contingency clause indicating that sale was contingent upon change of use approval for the property.

The purchasers sought to buy a property that could be used for an overnight dog kennel and dog day care business.  They contracted with a brokerage firm to assist them in locating an appropriate property.  After a potentially suitable property was located, the purchasers, sellers, and the real estate representatives measured the property and determined the purchasers’ intended use of a barn on the property as a kennel violated the zoning setback requirements by three feet.  Thus, the purchasers’ representative added a clause to the purchase contract indicating that the sale was contingent upon change of use approval for the property.  After receiving a permit to operate the kennel on the property, the purchasers bought the property. Ten months later, the township informed the purchasers that their use of the property violated the setback requirement and it would not issue a permit to use the barn as a kennel. 

The purchasers then sued the brokerage firm for negligence in drafting the contingency clause, claiming that the clause improperly indicated that sale was contingent upon the purchasers’ ability to operate a kennel anywhere on the property rather than indicating that the purchase was contingent upon the purchasers’ ability to use the barn as a kennel.  A jury found that the broker and the real estate representative were 75 percent negligent and the purchasers were 25 percent negligent, and awarded damages of $275,000. After deducting the 25 percent due to the purchasers’ negligence, the purchasers’ received a verdict of $206,250.92.  On appeal, the appellate court affirmed the verdict. The court found there was sufficient evidence to support the jury’s finding that the broker breached the contract with the purchasers by drafting a deficient contingency clause and allowing a purchase that was not acceptable to the purchasers.  The broker did not properly assist the purchasers, did not act in their best interests, and drafted a contingency clause with imprecise language.  Judgment was affirmed, and the case was remanded to calculate attorneys’ fees and post-judgment interest to be awarded to the purchasers.

2.         Song v. Macmahon, 2016 WL 7439245 (Ind. Sup. Ct. May 19, 2016)

Licensee and broker settled claims brought by purchaser for alleged misrepresentations regarding zoning of the property.

The plaintiff, a prospective purchaser, alleges that he told seller’s real estate representative that he intended to use the property for a warehouse, light manufacturing and office space, and that he requested a contingency clause in the purchase agreement, making the purchase contingent upon the FAA’s determination regarding land use for the property.  After the plaintiff terminated the purchase agreement by exercising the contingency clause due to concerns about the effect of FAA restrictions on development of the property, he entered into a second purchase agreement for 16 acres of the property.  According to the plaintiff, the sellers and their real estate representative falsely told him there were no FAA restrictions on use of the property.  During the property inspection, however, the plaintiff learned that the property was zoned agricultural, which would require a zoning change to be used for industrial purposes.  The plaintiff sought to terminate the agreement.  When the sellers refused to return his escrow funds, the plaintiff sued the sellers and their representative for fraud, fraud in the inducement, constructive fraud, and breach of contract. 

The sellers argued that they disclosed the agricultural zoning to their real estate representative, but he incorrectly advertised the property as industrial.  Following a jury trial, the jury returned a verdict for the plaintiff in his claims against the seller, finding that he was entitled to the return of his earnest money. With respect to the claims against the real estate defendants, the real estate representative argued that the plaintiff could not reasonably rely on representations about zoning because the plaintiff failed to check publicly available documents to investigate the property’s zoning before executing the purchase agreements.  The plaintiff settled his claims against the real estate representative and brokerage firm; therefore, those claims were not considered by the jury.