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Berman v. Gurwicz

Decided: August 21, 1981.


Haines, J.s.c.


The Regency Towers is a large condominium situated at 5200 Boardwalk in Ventnor, New Jersey. The individual plaintiffs purchased condominium units at the Regency; some executed their purchase agreements prior to construction, others afterward. The Regency Towers Condominium Association is a plaintiff composed of all owners of units at the Regency. These units are subject to a lease entitled "Recreation and Health Unit Agreement," entered into between the Regency Towers, as landlord, and the Regency Towers Condominium Association, as tenant. The lease was executed and recorded prior to the sale of any units and therefore at a time when the tenant association was controlled by the landlord-owner. It runs for a term of 90 years and covers a recreation area, including a swimming pool, which is a part of the building complex. The initial annual rent is $30,000, increasing gradually to $48,000 in the seventh year and then remaining at that figure. This rent is collected from the unit owners by the Association in addition to a monthly maintenance fee, and paid to the landlord.

Plaintiffs seek damages and cancellation of the recreation lease; they advance several theories in support of their claims.

A. The Defendants' Nondisclosure

The initial theory advanced by plaintiffs is based upon a claim of fraud, consisting of actual misrepresentation or concealment.

Legal fraud or misrepresentation consists of a material misrepresentation of a presently existing or past fact, made with knowledge of its falsity, with the intention that the other party rely thereon, and that he does so rely to his damage. [Citations omitted.] In equitable fraud, the second element (knowledge)

is not necessary, but the other four are essential. [ Foont-Freedenfeld v. Electro-Protective, 126 N.J. Super. 254, 257 (App.Div.1973), aff'd 64 N.J. 197 (1974)]

Partial disclosure may amount to fraud. The rule is found in Pomeroy, Equity Jurisprudence, (5 ed. 1941), § 901a:

If in addition to the party's silence there is any statement, even any word or act on his own part, which tends affirmatively to a suppression of the truth, to a covering up or disguising the truth, or to a withdrawal or distraction of the other party's attention or observation from the real facts, then the line is overstepped, and the concealment becomes fraudulent The maxim, is Aliud est celare, aliud tacere. Although a party may keep absolute silence and violate no rule of law or equity, yet if he volunteers to speak and to convey information which may influence the conduct of the other party, he is bound to discover the whole truth. A partial statement then becomes a fraudulent concealment, and even amounts to a false and fraudulent misrepresentation. [at 548-549; footnotes omitted]

Silence, in the face of a duty to disclose, may be a fraudulent concealment. The relationship of the parties may create that duty. The parties here were the buyers and the seller of real property. Caveat emptor, the early rule, no longer prevails in New Jersey. The modern rule is set forth in Weintraub v. Krobatsch, 64 N.J. 445 (1974):

Our courts have come a long way since the days when the judicial emphasis was on formal rules and ancient precedents rather than on modern concepts of justice and fair dealing. While admittedly our law has progressed more slowly in the real property field than in other fields, there have been notable stirrings even there. See Schipper v. Levitt & Sons, Inc., 44 N.J. 70 (1965); Reste Realty Corporation v. Cooper, 53 N.J. 444 (1969); cf. Marini v. Ireland, 56 N.J. 130 (1960); Totten v. Gruzen, et al, 52 N.J. 202 (1968). In Schipper we elevated the duties of the builder-vendor in the sale of its homes and in the course of our opinion we repeatedly stressed that our law should be based on current notions of what is "right and just." 44 N.J. at 90 [64 N.J. at 455]

There are three classes of transactions described in Pomeroy, op. cit., § 902, in which a duty to disclose arises. The first class includes definite fiduciary relationships, such as principal and agent, client and attorney; none of which is involved here. The other two classes are described by Pomeroy:

The second class embraces those instances in which there is no existing special fiduciary relation between the parties, and the transaction is not in its essential nature fiduciary, but it appears that either one or each of the parties, in entering into the contract or other transaction, expressly reposes a trust and confidence in the other; or else from the circumstances of the case, the nature of their dealings, or their position towards each other, such a trust and confidence in the

particular case is necessarily implied. The nature of the transaction is not the test in this class. Each case must depend on its own circumstances. The trust and confidence, and the consequent duty to disclose, may expressly appear by the very language of the parties, or they may be necessarily implied from their acts and other circumstances. [Footnote omitted]

The third class includes those instances where there is no existing fiduciary relation between the parties, and no special confidence reposed is expressed by their words or implied from their acts, but the very contract or other transaction itself, in its essential nature, is intrinsically fiduciary, and necessarily calls for perfect good faith and full disclosure, without regard to any particular intention of the parties. The contract of insurance is a familiar example. [§ 902 at 552-554]

The significance of the disclosure requirement is underlined by Pomeroy: "If either party to a transaction conceals some fact which is material, which is within his own knowledge, and which it is his duty to disclose, he is guilty of actual fraud." Op. cit., § 901 at 545-546. The rule is set forth in Jewish Center of Sussex County v. Whale, 165 N.J. Super. 84 (Ch.Div.1978), aff'd 172 N.J. Super. 165 (App.Div.1980):

The fact that no affirmative misrepresentation of a material fact has been made does not bar relief. The suppression of truth, the withholding of the truth when it should be disclosed, is equivalent to the expression of falsehood. The question under those circumstances is whether the failure to volunteer disclosure of certain facts amounts to fraudulent concealment, or, more specifically, whether the defendant is bound in conscience and duty to recognize that the facts so concealed are significant and material and are facts in respect to which he cannot innocently be silent. Where the circumstances warrant the conclusion that he is so bound and has such a duty, equity will provide relief. [at 89; citations omitted]

See, also, Nicholson v. Janeway, 16 N.J. Eq. 285, 287 (Ch.1863).

In this State the seller of real property is subject to disclosure requirements. In Tobin v. Paparone Constr. Co., 137 N.J. Super. 518 (Law Div.1975), a seller of residential property was held liable for failing to disclose the fact that tennis courts, already planned, would be constructed so near the dwelling that they would constitute an annoyance. The court said:

Tobin properly relied on Paparone's representation as to the character of the surrounding neighborhood. Paparone's silence created a mistaken impression on the part of the purchaser which operated to induce the purchaser to buy. This silence was a fraudulent representation and a failure to an implicit condition of sale [at 526]

In Weintraub v. Krobatsch, supra, the Supreme Court held that the seller of a residence had an obligation to disclose to the buyers the existence of insect infestation, if that infestation was known. The court [64 N.J. at 449] quoted from Keen v. James, 39 N.J. Eq. 527, 540 (E & A.1885), in which it was stated that "silence may be fraudulent and that relief may be granted to one contractual party where the other suppresses facts which he, under the circumstances is bound in conscience and duty to disclose to the other party and in respect to which he cannot, innocently, be silent." In McDonald v. Mianecki, 79 N.J. 275 (1979), the Supreme Court provided buyers of dwellings with an implied warranty of habitability. In doing so, it noted that

It is clear from the cited authorities that defendants had a duty to disclose to the buyers those matters which materially and adversely affected the latter when they agreed to purchase condominium units at the Regency Towers. The existence of the recreation lease, which imposed substantial financial burdens upon buyers, was material and adverse. Its existence was not apparent from an inspection of the property. On the contrary, the illustration of the recreation area in the seller's brochure and its physical existence as part of the condominium complex led buyers to believe that it was a part of the common elements which involved no charge except a monthly maintenance fee. Defendants point to the fact that while they did not provide plaintiffs with a copy of the recreation lease or any other condominium documents at the time they executed their agreements of sale, they did provide them with these documents at or prior to settlement. Further, all of these documents were recorded in the Atlantic County Clerk's Office prior to settlement.

Consequently, they claim that there was disclosure. These contentions were addressed in the prior opinion of this court, Berman v. Gurwicz, 178 N.J. Super. 611 (Ch.Div.1980). The pertinent holdings were:

Plaintiffs failed to read the contract documents. As a general rule, one who does not choose to read a contract before signing it cannot later relieve himself of its burdens. However, this rule does not apply when the execution of the contract has been induced by fraud, even though the fraud may have been discovered by reading the document. Nor does it apply when one party has induced the other not to read the contract in full. Furthermore, where one party to an oral agreement entrusts another with the obligation of reducing that agreement to writing, he has a right to assume that it will be drawn in accordance with the oral understanding between them. When the contrary is true, failure to read the agreement is no defense. [at 617, 618; citations omitted]

"The recipient of a fraudulent representation of fact is justified in relying upon its truth, although he might have ascertained the falsity of the representation had he made an investigation." [at 621]

N.J.S.A. 46:8B-15(d) adds further definition to the duty of the seller to disclose the existence and terms of the recreation lease. It authorizes condominium associations to lease recreational facilities and provides that the "fees, costs and expenses of acquiring, maintaining, operating, repairing and replacing . . . such . . . facilities" may be common expenses if "they are fully described in the Master Deed or bylaws." (Emphasis added). The Regency Towers documents did not comply with these requirements.

The disclosure requirement also arises from circumstances involving control of defendant Association. Governors Grove Condominium Ass'n, Inc. v. Hill Development Corp., 36 Conn. Sup. 144,

414 A.2d 1177 (Super.Ct.1980), discusses the problem. In that case the court considered allegations against a developer and a contractor who were alleged to have concealed defective roofs in a condominium development until after the units had been sold. The developer controlled the condominium association's board of directors. The court held:

The power to control the board of directors created a fiduciary relationship between Hill [the developer] and the association which mandated disclosure so that the association could take action to protect itself and the unit owners. . .

In the usual corporate arrangement the directors of a corporation have a fiduciary obligation to shareholders or members. Judson v. Peoples Bank and Trust Co., 25 N.J. 17, 28 (1957); Berkowitz v. Power Mate Corp., 135 N.J. Super. 36, 45 (Ch.Div.1975). In the case of the Regency, defendants remained as directors of the Association after plaintiffs and others acquired their units.

In a condominium setting the developer who controls the association at the beginning of the selling period knows that the purchasers of the condominium units will control the association eventually; the association is designed to be the representative of all unit owners for whom it will manage the common property elements and from whom it will collect revenues with which to meet common expenses. These future owners cannot be

subjected to obligations undertaken by the association on their behalf without disclosure to them. Further, when disclosure has not been made to the unit owners, the association should not be saddled with unusual or unexpected liabilities until it is controlled by the unit owners and has had an opportunity to act independently with respect to them.

From the time plaintiffs executed their agreements of sale to the time they took title, complete control of the Association (the lessee) was in the defendants. This suit was commenced on August 14, 1975. Defendants did not relinquish control of the Association to the purchasers of the condominium units until October 16, 1977. At that time the minute book of the Association was delivered to those owners. It revealed the fact that the first meeting of the Association was held on April 29, 1976, long after the lease was executed and this suit commenced. No minute appears authorizing or ratifying the execution of the lease. The existence of the lease was not disclosed in any other Association record.

(1) Disclosure to Individual Purchasers Not Represented by Counsel

It is obvious that disclosure of the lease should have been made to unit purchasers before their agreements of sale were executed. The appropriate vehicles for disclosure were the agreements of sale themselves. Unfortunately, they came much closer to being documents of concealment than ones of disclosure. They provided that the buyers' rights were "fully and completely subordinate and under and subject to all construction loans, mortgages and related liens heretofore or hereafter made in connection with development of the project by seller . . . without execution of any further legal documents by buyer." Marketable title was to be conveyed subject to these provisions. They also stated that: "Buyer subscribes to the Master Deed and Association By-Laws which are incorporated herein by reference and copies of which will be furnished to Buyer prior to settlement." By signing the purchase agreements the buyers

consented to amendments, not only to the agreements, but also to the master deed, by-laws and other condominium documents, and appointed the seller an attorney-in-fact for the purpose of executing writings which would effectuate such amendments. No specific reference to a recreation lease or a rent obligation is to be found in any sales agreement, although the quoted language was sufficiently broad to permit the subordination of the purchasers' interests in their units to such a lease, regardless of its terms.

Since the agreements of sale were so completely inadequate as instruments of disclosure, defendants were obliged to make the facts concerning the lease known to the purchasers by other means. The delivery of the condominium documents to plaintiffs at or before settlement was not enough. They were not read. The recording of these documents did not provide notice. These conclusions were reached in the earlier opinion in this matter and they have not been changed by the evidence produced at trial. Defendants claim that specific references to the lease were made in various conversations with the purchasers, before the agreements of sale were executed ...

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