When Is the Seller of Real Estate Liable for Misrepresentations Regarding Restrictions on Use?

As a San Antonio lawyer with an active real estate litigation practice, I'm often confronted with scenarios under which a Seller has assured a Buyer of real property that the property is acceptable for the Buyer's intended use.

There are all kinds of scenarios under which these types of representations are made. Some memorable situations I've encountered relate to use of residential property for commercial purposes, construction of certain facilities on the property, the right of the owner to maintain various animals (pit bulls and horses come to mind), and the existence or non-existence of restrictive covenants.

In some situations the Sellers are clearly misinformed or ignorant about whether the Buyer's proposed activities are permissible -- "Sure , you can use the property for anything you want!" These representations are often made without much thought or consideration of the consequences. Other times, Sellers or their agents knowingly make false representations for the purpose of inducing the Buyer to purchase the property. In both situations, Buyers frequently rely on these pre-sale representations to their own detriment.

I'm frequently asked to explain when the Seller liable for these types of misrepresentations about real estate, and when a Buyer be responsible for his own decision to rely on the Seller's representations.

The Answer to this question is not a simple one, and can differ significantly based upon the facts and circumstances surrounding the transaction and the property in question.

Under Texas caselaw, a very simplistic distinction and determination of liability is often tied to the following:

1. Whether the Seller knew facts that were unknown to the Buyer.
2. Whether the Buyer actually relied on the Seller's representations.
3. Whether the Buyer undertook an independent investigation (through inspection, examination, attorney review or even the purchase of a title policy) of facts that may have been covered by the Seller's representation.

The 3rd of these factors -- independent investigation -- is somewhat important. In the context of real estate sales in Texas when a seller makes an affirmative representation, the law imposes a duty upon the seller to know whether such a statement is true. First Title Co. of Waco v. Garrett, 860 S.W.2d 74, 76 (Tex.1993). However, when a Buyer undertakes his own investigation -- regardless of the result --the buyer's decision to undertake such an investigation indicates that he or she is not relying on the seller's representations about the property.

Even in these instances, however, Sellers can be liable for intentionally fraudulent representations, or for facts that could not have been discovered by the Buyer through his own investigation.

Another avenue of potential recovery for a duped Buyer lies with the persons or entities who participated in the Buyer's investigation -- title examiners, attorneys, real estate agents and others who should have but did not discover restrictions on the property's use. Reliance on a title committment issued by a title insurance company and/or on an opinion by an attorney are sometimes easier to prove than reliance on a Seller's representations about the property.

If you are the Buyer or Seller of real estate, you should be careful to fully examine all facts surrounding the property, to conduct a reasonable and diligent investigation, and to limit your affirmative representations to the opposing party. Both Buyers and Sellers of real property are encouraged to involve a licensed Texas attorney experienced in real estate transactions and disputes.