Property Defects and the Failure to Disclose

California Real Estate Litigation – Property Defects and the Failure to Disclose in Residential Real Estate Transactions

Sellers of real estate must be upfront and honest about the condition of their property. In California, a seller of residential real estate (and/or the seller’s agent) has a responsibility to disclose all known defects and issues that might affect the value or desirability of the property being sold. If the seller has not fully revealed the extent of the property’s defects, then they may be found liable for fraud, misrepresentation, or deceit.

If you would like to read more about fraud actions in California, please read our introductory article here.

The Transfer Disclosure Statement

Sellers have a duty to disclose under both the Common Law and the Statutory Law of California.

Under the Common Law of California, a seller has a duty to disclose to the buyer all known material facts affecting the value or desirability of property (Lingsch v. Savage (1963)). In the event that the seller breaches this duty, he or she is potentially liable for damages.

Under the Statutory Law of California (specifically, California Civil Code section 1102), the seller must provide the buyer with a Transfer Disclosure Statement in a real estate sale, exchange, installment land sale contract, lease, and other real estate transactions, specifically, one in which "real property of 1 to 4 dwelling units is transferred by sale, exchange, installment land sale contract, ground lease coupled with improvements, lease with an option to purchase, or any other option to purchase" (California Civil Code section 1102(a)).

Importantly, even if the seller fully complies with the statutory duty to provide a Transfer Disclosure Statement, the seller may still be potentially liable under the Common Law. Cases in which there is Common Law liability – but not Statutory liability – may occur as a result of a failure to disclose non-standard, but material defects affecting the value or desirability of property. For example, a buyer may be adamant that the house paint be a certain type or quality. If the seller is aware of the buyer’s expectation and is aware that a different type of paint was used than what the buyer expected, then the seller’s failure to disclose such a fact may be considered a breach of his or her Common Law duty to disclose.

The Transfer Disclosure Statement can be quite extensive. It must include information concerning any easements on the property, physical and contractual burdens on the property, potential legal concerns affecting the property, property tax issues, industrial use issues, dangerous conditions of the property, natural hazard exposure, and the overall condition of the property. It is also worth pointing out that there may be additional local disclosure rules, which require disclosure concerning permit issues, building regulations, zoning issues, and other issues of local concern. The preceding factors are non-exhaustive. As the potential disclosures can be so extensive, it is important that you consult with an experienced real estate litigation attorney so that all the relevant disclosure requirements can be properly assessed.

The Seller’s Awareness of Defects

A seller may not be held liable for failing to disclose a material defect of the property if: 1) the seller exercised ordinary care in obtaining information concerning the defect; and 2) the seller was not aware of the specific defect. In simpler terms, the seller cannot be found liable if the seller did not know about the defect – so long as a reasonable inspection would not have revealed the defect.

For reference, California Civil Code Section 1102.4(a) elegantly summarizes this seller’s defense: "(a) Neither the transferor nor any listing or selling agent shall be liable for any error, inaccuracy, or omission of any information delivered pursuant to this article if the error, inaccuracy, or omission was not within the personal knowledge of the transferor or that listing or selling agent […] and ordinary care was exercised in obtaining and transmitting it."

The Buyer’s Responsibility to Inspect

A buyer cannot assert that a seller has failed to disclose a known defect if the existence of said defect would have been revealed after a reasonable inspection conducted by the buyer. (Loughrin v. Superior Court (1993))

Essentially, a buyer may only hold a seller responsible for failure to disclose a known defect if the buyer would not have discovered the defect even after conducting a reasonable, independent inspection. Thus, for the buyer to bring a legitimate failure to disclose claim against the seller, the defect(s) cannot have been readily visible or observable.

Though this principle may appear to limit liability against the seller, it actually forces the seller to shoulder additional disclosure responsibilities. To avoid liability, the seller must reveal all true facts as to the condition of the property, especially those that are not otherwise visible or observable upon inspection.

‘As-Is’ Provisions

If an ‘as-is’ provision is written into the real estate contract, it basically requires that the buyer accept the property with all of its visible faults. In California, an ‘as-is’ provision doesn’t exempt the seller from having to disclose all known, material defects, and it doesn’t exempt the seller from having to provide a Transfer Disclosure Statement.

Put simply, all that an ‘as-is’ provision really does is establish a baseline as to the seller’s representations so that the buyer cannot later assert that the seller made certain additional representations or promises. The as-is provision allows the seller to force the buyer to accept all visible and readily observable defects, and makes no further representations as to those particular defects. This does not, however, exempt the seller from having to disclose defects that are not readily visible or observable.

Partial or Misleading Disclosure

As explained by the court in San Diego Hospice v. County of San Diego (1995) and Marketing West, Inc. v. Sanyo Fisher Corp. (1992), the seller has a duty to disclose all known facts so as to prevent any misleading representations, and must not to conceal any facts that might lead the buyer to a misleading conclusion.

To better understand the issue of partial, misleading disclosure, consider the following situation…

A seller is showing a residential property to a potential buyer. The potential buyer keeps remarking on the wood panels fitted around the property, telling the seller that he is quite impressed by the "mahogany wood panels." Now imagine that the panels are not, in fact, made with mahogany wood, but instead are made with an artificial wood composite that is intended to resemble real mahogany. If the seller is aware that the wood panels are artificial and not real mahogany, then, given the buyer’s remarks on the wood panels indicating his interest in real mahogany wood, the seller should not conceal the fact that the wood panels are made with artificial composites. If the seller does not disclose this fact, then the buyer may be able to assert that the seller misled him.

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For a free consultation with an experienced real estate litigation attorney, call the Law Offices of Brian O Grady at (650) 318-6131 to set up your appointment today.