From the Ground Up

by

Published: February 26,2001

Kenneth’s joy at opening his new retail store in the local strip shopping center turned sour when he found out that the owner did not exactly tell the truth about the traffic count. His mood was made worse when he discovered that the small print in his lease required him to pay the property taxes.

“Downright mad” is how Kenneth felt when the owner left town with Kenneth’s down payment, security deposit and first month’s rent.

“It’s all been a pack of lies,” fumed Kenneth.

What Kenneth discovered in one real estate transaction is that lies come in several flavors. Specifically, they can be classified into several categories: (1) puffing; (2) misrepresentation; (3) substantial misrepresentation; and (4) fraud. Two of these are generally considered illegal. The other two are cute, annoying or a breach of faith, depending on the circumstances.

Puffing is a term used to describe a statement of opinion about something that may or may not be true, but has the effect of putting the object of the puffing in a glowing light. Here are some examples of puffing:

• “This is the most desirable space in the shopping center.”

• “This is the best part of town to have a business.”

• “She is the prettiest girl in class.”

These statements tend to “puff up” something. They are not taken as fact, but as an expression of opinion. There is a fair amount of puffing that goes on in the business world. One can scan most daily newspapers and find “ideal for college student,” “for all your securities needs,” and “the best in town.”

These are clearly recognized as puffing, and most people would not rely on them as anything other than things to get attention.

Misrepresentation is a misstatement of fact. If someone said that it was raining outside when in fact it was bright and sunny, then a misrepresentation has occurred. But if no one relied on it, no harm is done. It’s when someone relies on a misrepresentation that problems develop.

Generally, a substantial misrepresentation occurs when one party relies on a misstatement, whether the misstatement is intentional or not. In real estate transactions, owners or landlords are often held to the standard that they knew or should have known that the statement was false. For example, if the buyer told the seller that it was important to be connected to the city sewer system, and the seller told the buyer that the buyer that the property was connected even though it was not, then a substantial misrepresentation has occurred.

Fraud is an intentional misrepresentation that is material to the transaction and causes damage to the buyer. For example, if the landlord in Kenneth’s case represented himself as the owner when he was not, and took Kenneth’s money, then Kenneth relied on an intentional misrepresentation and was damaged by the loss of his money.

Before closing, let’s look at Kenneth’s case.

The first issue is the traffic count. If an owner advertised property for sale or rent, and furnished a traffic count number from the Department of Transportation or other official source, then it would be hard, although not impossible, to prove substantial misrepresentation.

The number is what it is on the date that it is. It sounds like the number might have dropped substantially in Kenneth’s case, and that is his source of concern. What if the owner knew that the traffic count had dropped in half, but was furnishing the number to deceive the prospective tenant? That’s a different story.

What about the small print in the contract about the property taxes? Unless Kenneth can prove that the owner told him otherwise, it will be hard for him to say that he did not know it was in the contract, assuming that he signed the contract.

Finally, if the owner left town with the money, it might be a better case of grand larceny. That’s why an attorney should be contacted.

The purpose of this column has not been to give legal guidance whatsoever, but to point out that there are different degrees of false statements. Before entering into any contract it is wise to consult with an attorney to review the contract itself, as well as the circumstances surrounding the transaction.

Be sure to tell your attorney what statements or promises have been made that are not in the contract. Your attorney can then better protect your legal rights.

Phil Hardwick’s column on Mississippi business appears regularly in the Mississippi Business Journal. His e-mail address is phil@hardwick.com.

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