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Fraudulent Misrepresentation of Zoning in Real Estate Litigation

Poole Huffman, LLC

The zoning of a parcel can be a critical concern for a buyer when entering into a purchase and sale agreement. In a recent Georgia appellate decision, a buyer appealed from summary judgment in favor of the defendants regarding fraud in the sale of real property. The buyer argued that the question of fraud was one for the jury since the defendants had knowingly misrepresented the zoning and concealed the city’s intent to demolish the property and the buyer shouldn’t be charged with constructive knowledge of demolition orders that were brought outside the chain of title.

The appellate court affirmed the part of the lower court’s order granting the defendants summary judgment for their misrepresentations about zoning, but reversed the lower court’s order granting summary judgment to the defendants with regard to misrepresentations about the city’s planned demolition of the property.

In 2012, the bank (trustee for two loan trust entities) foreclosed on two real property parcels that were sold to the buyer. The city had zoned the property as Urban Rural – Historical Infill. The zoning prevented multi-family housing, and the parcels had been granted a legal non-conforming use status. The city planner believed that a property’s legal non-conforming use could be verified through completion of an Application for Zoning Verification that could be attained by the city.

The city posted a notice of non-compliance with its zoning ordinance and passed resolutions declaring as unsafe buildings and structures on the real estate. The city was authorized to destroy the buildings if the owner didn’t do so in two months. The city placed a notice on the buildings stating they were unsafe, and then posted demolition notices. The city decided that the property hadn’t been used as multi-family housing for more than 6 months.

In 2014, a loan trust entity obtained title to the parcels. A few days later, it entered into a purchase and sale agreement with the buyer. The contract agreed to provide good and marketable title, subject to zoning. The buyer was entitled to examine the title and provide a written statement of title obligations at or before closing. The buyer had a 7-day due diligence period during which time it could decide whether to go forward with the purchase.

The city’s notices on the building stayed in place. The defendants claimed they disclosed these notices to the realtor, but didn’t give details about the disclosure or when the disclosure took place. He submitted an affidavit claiming he showed the property to the buyer’s representative on many occasions, and from the first showing through closing, there were no posted notices. She denied being told about the demolition order or the zoning issue.

The demolition resolutions didn’t have a legal description, and had a mismatched street address and owner identification.

A real estate attorney put forward a buyer’s affidavit claiming he’d reviewed the title abstract used in the closing. Due to the review, he had the opinion that a title search of the parcels using standard title examination methods wouldn’t disclose the demolition orders as being in the chain of title. He believed the resolutions set forth the wrong owner.

The sale closed, and quitclaims deeds were recorded. The seller signed an affidavit during closing stating there were no encumbrances. The city planner noted that the loan trust entity had been told about issues of non-conformance.

The buyer sued several entities, but couldn’t obtain service upon one. He alleged breach of contract, negligent misrepresentation and fraud. He claimed the defendants had misrepresented the property and failed to let him know that the non-conforming use status had been lost. The defendants moved for summary judgment, which was granted.

The appellate court explained that Georgia real estate law is settled that one can’t claim he was deceived by false representations where he could have learned about the trust and could have avoided being harmed through the use of due diligence.

Under OCGA § 23-1-17, ignorance because of negligence is equal to knowledge when determining the rights of the parties. The appellate court found that it could not conclude the buyer had constructive notice about the orders for demolition as a matter of law. It reversed that part of the summary judgment order. It did not find merit in the buyer’s assertion is should be able to proceed on the part of its fraud claim based on the defendants’ misrepresentations about the zoning of the property. The judgment was partially affirmed and partially reversed.

Whether you are preparing to launch a commercial litigation action or defend against one, the experienced Atlanta real estate attorneys at Poole Huffman, LLC are here to help. Our attorneys have spent many years formulating and executing effective business litigation strategies to protect and enhance our clients’ interests. Contact our attorneys online or by calling 404-373-4008 to schedule your confidential consultation.

More blog posts:

Property Investors Beware: “self-Help” Evictions Are Never an Option, Atlanta Business Litigation Attorneys Blog, June 18, 2015

Contract for Deed – Its Background and Purpose – Part 1 of 5, Atlanta Business Litigation Attorneys Blog, March 17, 2015

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