4.

3 Innocent Misrepresentation
Innocent misrepresentation is one of the three recognized varieties of misrepresentations in
contract law. Essentially, it is a misrepresentation made by someone who had reasonable
grounds for believing that his false statement was true. It is a representation that is made in
good faith and believed to be true by the one making it but that is in fact false. Where a
statement made during the course of negotiations is classed as a representation.

What is innocent misrepresentation in real estate?

A misrepresentation is a false statement of fact or law which induces the representee to enter
a contract. Legally, in real estate, a misrepresentation is when a real estate broker misstates
some material feature of the property. Often lumped in with misrepresentations are failures to
disclose, which is when a broker fails to address or reveal a material feature of the property
entirely. Most often misrepresentation or common undisclosed issues concerns,

 the foundation of the property or crucial structural features

 property boundaries

 easements on the property

 termite or pest problems
 title problems
 environmental problems

The difficult part for home buyers and sellers is identifying these misrepresentations as we
generally think of brokers as the experts, and are not often in a position to question or correct
what they tell us.

What Constitutes Innocent Misrepresentation? 

It will depend on the law of the state where the misrepresentation occurred. However, there
are five basic elements that must be satisfied to prove innocent misrepresentation: 
  Someone must make a false representation that must be false at the time of the
transaction, and remain false.
 The misrepresentation is "material to the transaction," which means it must be about
an important element of the transaction at hand. For example, if someone is selling a
car and they say that it has 15,000 miles on it when it actually has 15,124 miles; the
misrepresentation would like not be material. By contrast, 1,50,000 would be.

  The other party must substantially rely on the misrepresentation. That is, the plaintiff
would not have entered into the contract or transaction if the defendant not made the
representation; if the buyer, for instance, would have bought the item regardless of
what was said about it, the misrepresentation may not count. They must substantially
rely on the falsehood.
 The lie must also proximately because the other party to suffer damages the buyer
must be actually harmed by the final transaction in order to sue.

 The loss of the one party must benefit the other. This is an odd and very vague
requirement, but one that the courts have held up nonetheless. Essentially, if the
misrepresentation made does not benefit the person who made it, or hurts both parties
to the contract, then the courts will not consider it a case of misrepresentation.

How innocent misrepresentation occurs in real estate

In an innocent misrepresentation case, there is no requirement of fault, intentional or careless,
at all; rather, the plaintiff merely needs to demonstrate that a false representation was made
with an intent to induce the plaintiffs reliance thereon, and that the plaintiff did in fact
justifiably rely on the information to his or her detriment. Let’s see some cases related to real
life phenomenon,

Smith v Land & House Property Corp (1884) 28 Ch D 7

The plaintiff put up his hotel for sale stating that it was let to a 'most desirable tenant'. The
defendants agreed to buy the hotel. The tenant was bankrupt. As a result, the defendants
refused to complete the contract and were sued by the plaintiff for specific performance. The
Court of Appeal held that the plaintiff's statement was not mere opinion, but was one of fact.
Solle v Butcher [1950] 1 KB 671
In 1931 a dwelling house had been converted into five flats. In 1938 Flat No. 1 was let for
three years at an annual rent of £140. In 1947 the defendant took a long lease of the building,
intending to repair bomb damage and do substantial alterations. The plaintiff and defendant
discussed the rents to be charged after the work had been completed. The plaintiff told the
defendant that he could charge £250 for Flat 1. The plaintiff paid rent at £250 per year for
some time and then took proceedings for a declaration that the standard rent was £140. The
defendant contended that the flat had become a new and separate dwelling by reason of
change of identity, and therefore not subject to the Rent Restriction Acts. This was held to be
a statement of fact.

Bisset v Wilkinson [1927] AC 177

The plaintiff purchased from the defendant two blocks of land for the purpose of sheep
farming. During negotiations the defendant said that if the place was worked properly, it
would carry 2,000 sheep. The plaintiff bought the place believing that it would carry 2,000
sheep. Both parties were aware that the defendant had not carried on sheep-farming on the
land. In an action for misrepresentation, the trial judge said:

"In ordinary circumstances, any statement made by an owner who has been occupying his
own farm as to its carrying capacity would be regarded as a statement of fact.This, however,
is not such a case. In these circumstances the defendants were not justified in regarding
anything said by the plaintiff as to the carrying capacity as being anything more than an
expression of his opinion on the subject."

The Privy Council concurred in this view of the matter, and therefore held that, in the absence
of fraud, the purchaser had no right to rescind the contract.

Nottingham Brick & Tile Co v Butler (1889) 16 QBD 778

The buyer of land asked the seller's solicitor if there were any restrictive covenants on the
land and the solicitor said he did not know of any. He did not say that he had not bothered to
read the documents. The court held that even though the statement was literally true it was a
misrepresentation. There were restrictive covenants and the contract could be rescinded.
Museprime Properties v Adhill Properties [1990] 36 EG 114
In a sale by auction of three properties the particulars wrongly represented the rents from the
properties as being open to negotiation. The statements in the auction particulars and made
later by the auctioneer misrepresented the position with regard to rent reviews. In fact, on two
of the three properties rent reviews had been triggered and new rents agreed. The plaintiff
company successfully bid for the three properties and discovered the true situation. They
commenced an action for rescission. The defendant company countered with the defence that
the misrepresentations were not such as to induce any reasonable person to enter into the
contract.

It was held that the plaintiff's had established, and indeed that the defendants conceded, that
misrepresentation had occurred and any misrepresentation is a ground for rescission. The
judge referred, with approval, to the view of Goff and Jones: Law of Restitution (see Lecture
p2-3), that the question whether representations would have induced a reasonable person to
enter into a contract was relevant only to the onus of proof. Here the plaintiffs had established
their claim to rescission of the contract on the ground of material misrepresentation because
the inaccurate statements had induced them to buy the properties. They would therefore be
awarded the return of their deposit, damages in respect of lost conveyancing expenses and
interest.

Redgrave v Hurd (1881) 20 Ch D 1

The plaintiff solicitor advertised for a partner who would also purchase his residence. The
Defendant replied and during two interviews, the plaintiff represented that his business was
bringing in either about £300 a year, or from £300-£400 a year. At a third interview the
plaintiff produced summaries of business done, which showed gross receipts below £200 a
year. The defendant asked how the difference was made up and the plaintiff produced a
quantity of letters and papers which, he stated, related to other business which he had done.
The defendant did not examine the books and papers thus produced, but only looked cursorily
at them, and ultimately agreed to purchase the house and take a share in the business for
£1,600. The trial judge came to the conclusion that the letters and papers, if examined, would
have shown business of only £5 or £6 a year. Finding that the practice was utterly worthless,
the defendant refused to complete the contract, and the plaintiff brought an action for specific
performance. The Court of Appeal gave judgment for the defendant. Lord Jessel MR stated:
"If a man is induced to enter into a contract by a false representation it is not a sufficient
answer to him to say, "If you had used due diligence you would have found out that the
statement was untrue. You had a means afforded to you of discovering its falsity, and did not
choose to avail yourself of them." I take it to be a settled doctrine of equity, not only as
regards specific performance but also as regards rescission that this is not an answer unless
there is such delay as constitutes a defence under the Statute of Limitations. That, of course,
is quite a different thing."

Realtor Liability for Innocent Misrepresentation

Whether realtors should be liable for innocent misrepresentation in the sale of used housing is
a controversial question. The question typically arises after a buyer closes a real estate
transaction and then discovers error in the information provided by the realtor or finds a
major defect in the property.

"Realtor" is a copyrighted name applicable to real estate brokers who are members of the
National Association of Realtors. As members of the Association, realtors are subject to a
professional code of ethics.

A recent Vermont case, 5 buyers brought suit against real estate brokers when a basement
wall collapsed. The Supreme Court of Vermont held that a realtor is not subject to liability
for misrepresentation or undiscovered defects unless the realtor provides information to a
buyer which he knows or has reason, to know may be untrue."

California has taken an opposite view.7 Realtors in California were held liable when an
undiscovered landfill condition caused massive earth slides and substantial losses to a buyer.'
The California court found realtor liability for undiscovered defects based on an affirmative
duty to inspect the property.' One reason the opinions on this issue are inconsistent is that
intent to deceive is not an element of a cause of action for innocent misrepresentation.

Therefore, the legal approach adopted by a jurisdiction depends on how the court chooses to
balance the equities between an innocent real estate broker and an innocent buyer."

Although case law on realtor liability for innocent misrepresentation reflects a wide range of
opinion, 2 current views on this issue can be categorized according to three legal approaches.
The most traditional approach protects realtors from all liability for innocent
misrepresentation. The current views on realtor liability for innocent misrepresentation thus
range from complete protection of the realtor.

Realtor’s liability may vary from state to state but the reason for finding the realtor liable is
the same. In each case, the court has held that the buyer may justifiably rely on information
provided by the realtor, and therefore is entitled to recover damages if misinformation causes
the buyer's loss.

Punishments for innocent misrepresentation

Misrepresentations are civil offenses, meaning they can only be heard in civil court. The
general remedy in civil court for all types of misrepresentations is rescission. This means the
court will act like the transaction or contract never existed, and everyone goes back to the
way they were.

Example: Karim sell someone a land for 3 crore taka telling them that it is fully functional,
which Karim thinks is true, and it turns out having a boundary problem. The deal is
rescinded; the buyer returns the land, and Karim returns the money.

One who, in a sale, rental or exchange transaction with another, makes a misrepresentation of
a material fact for the purpose of inducing the other to act or to refrain from acting in reliance
upon it, is subject to liability to the other for pecuniary loss caused to him by his justifiable
reliance upon the misrepresentation, even though it is not made fraudulently or negligently.

Remedies for innocent misrepresentation

The affect of a finding of misrepresentation is the contract is voidable in the contract exists
but may be set aside by the representee. The remedy available depends on the type of
misrepresentation, but generally consists of rescission and or damages. The right to rescind
the contract may be lost in some circumstances. The law relating to misrepresentation is
mainly found in common law with the Misrepresentation Act 1967.

This is putting the parties back in their pre-contractual position. Each party gives back the
benefit which they have received under the contract. However, it is not always possible to
rescind the contract and in some circumstances the right to rescind may be lost.
Under section 2 (2) Misrepresentation Act 1967, the remedies for an innocent
misrepresentation are rescission or damages in lieu of rescission. The claimant cannot claim
both. In other words, this type of misrepresentation primarily allows for the contract to be
cancelled. However the court has discretion to award damages instead of allowing you to end
the contract if it deems it appropriate.

This would be judged on both the nature of the innocent misrepresentation and the losses
suffered by the victim of the misrepresentation.