The southeastern condominium glut in markets such as Atlanta and Miami is no secret. You have likely seen the advertisements informing prospective purchasers of the “great deals” to be had. While lenders and distressed asset specialists work to fill projects with eager bargain hunters, many existing homeowners are becoming disenchanted with their purchases. It is not difficult to understand why the disenchantment level runs high with homeowners that purchased during the height of the mid-2000’s real estate boom. Many of these homeowners have 100% financed mortgages for purchase prices that the market is not likely to see again in the near future. There is no hope to sell the unit for anything but a loss. In the meantime the homeowner may be facing a diminishing income and rising homeowners’ association dues. Facing despair and feeling stuck, what does such a homeowner do?
Some homeowners simply walk away or file for bankruptcy. However, others feel wronged and become litigious. This latter category of homeowners set their sights on the real estate brokers and developers that sold the unit in the first place. The grievances that a despondent homeowner can manufacture run the gamut. For example, in present litigation currently before the Supreme Court of Georgia, owners in the Twelve building at the Atlantic Station development in midtown Atlanta contend that the developer committed fraud by marketing “city views” with knowledge that the high rise Atlantic building would be constructed directly across the street. When the Atlantic was built, homeowners in the Twelve building suddenly had an excuse to offset their market related losses with a claim against the developer for active concealment.
Notably, the homeowners’ purchase contract in the Twelve building contained a comprehensive merger clause which states that the homeowners did not rely on any oral representations. While it remains to be seen how the Supreme Court will rule, the Court of Appeals of Georgia held that even more than two years after the purchase, the homeowners could rescind their purchase contract at the time that they discovered the “fraud” thus alleviating the impact of the merger clause and permitting a suit for fraud. This decision by the Court of Appeals is a departure from the more seller-friendly dispositions in the Georgia trial courts.
While the potential impact of the Twelve litigation looms large, regardless of the outcome, the lesson should be that developers and real estate professionals revisit their sales practices. It is critical that sellers of any real estate do not actively misrepresent any conditions related to the property in advertisements or otherwise, keeping in mind that mere salesmanship could later serve as the basis for a fraud claim by a disgruntled homeowner. While it may not seem so at the time, it may be better to lose a sale than to run the risk of litigation down the road. The plaintiffs in the Twelve project case have made no secret of their desire to conduct wide ranging and costly discovery that has the potential to distract the defendants from their core business. Even if the plaintiffs are ultimately unsuccessful in their claims, the litigation will still put a dent in the pocket of the developer in the form of attorneys’ fees and lost time and focus.