Unfortunately for buyers in the Bay Area, we continue to see markets with high demand and/or low supply of coveted residential real estate, which leave buyers with little to no bargaining power. Buyers are forced to furiously outbid their competition, expeditiously transfer their earnest money deposit (EMD), and close escrow without doing sufficient due diligence (and too often accepting the property “As-Is”). What happens thereafter, as dictated by Murphy’s Law, is a belated discovery of the need for very expensive remediation of an issue not disclosed by the seller. After learning of the undisclosed issue, the buyer makes an anxious phone call to his or her real estate agent and is advised to speak with an attorney about how to make the seller pay the full cost of remediation plus damages for the inconvenience and stress caused by the nondisclosure.
The good news for the buyer is that California statutory law imposes a litany of non-waivable disclosure obligations on the seller.[1] Over the years, standard form purchase agreements have included disclosure statements in addition to the Transfer Disclosure Statement (TDS), such as the C.A.R. Seller Property Questionnaire (SPQ) and the PRDS Supplemental Seller’s Checklist (SSC) - both iterations of which now compel the seller to identify and/or produce historical documents.
If the seller fails to answer the questions truthfully and accurately, this would give the buyer grounds to recover damages under both contract and tort theories of liability.[2] In addition to the statutory duty of disclosure, there is also a common law duty to disclose:[3] “[I]t is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property…and also knows that such facts are not known to, or within the reach of, the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.”[4] The buyer who can successfully prove fraudulent nondisclosure may elect either to affirm the purchase agreement (i.e., keep the property) and recover damages, or even rescind the purchase agreement.[5]
Of course, the rub and the not so good news for the buyer is that in any such lawsuit, the buyer bears the burden of proving that the seller knew or should have known about the undisclosed issue.[6] As one can imagine, it is often difficult (and expensive) to prove the subjective knowledge and intent of another. The buyer must also prove that the seller’s misrepresentation or concealment was of a material fact (not just an opinion) and that the buyer’s reliance on such misrepresentation or concealment was both justified and the cause of damages actually suffered by the buyer.
An alternative theory that the buyer should almost always consider alleging is negligent misrepresentation, which is to say that even if the buyer cannot prove what the seller knew, the undisclosed issue was something that the seller should have known under the given circumstances.[7] Two noteworthy distinctions between intentional and negligent misrepresentation:
- Unlike with intentional misrepresentation or concealment, punitive damages are not recoverable for negligent misrepresentation; and
- The buyer’s own failure to do due diligence and reasonable investigation is no defense to intentional misrepresentation but could be used by the seller against a negligent misrepresentation claim.[8]
In spite of the disparity of bargaining power alluded to above, prospective buyers are nonetheless strongly encouraged to do the following: At a minimum, review the TDS, SPQ and/or SSC along with any historical documents with scrutiny. In doing so, find out how long the seller owned the property and determine whether the volume of historical documents is commensurate with the length of ownership. If the property has been rented, look at what information and documents have been disclosed with respect to the tenancy as well as by any prior property management company(s). Most importantly, a buyer or buyer’s agent should have access to a team of professionals that include contractors and an attorney. While having such access is seldom inexpensive, cutting corners here is a suboptimal approach to one of the biggest purchases of your life. An ounce of prevention is worth a pound of cure.
Michael Cheng is a partner in the litigation department at Berliner Cohen, LLP. He can be reached by telephone (408) 286-5800 and via email.
This article is not intended to and does not constitute legal advice or a solicitation for the formation of an attorney-client relationship. Anyone with questions about this topic should consult an attorney.
[1] California Civil Code sections 1102 – 1102.19.
[2] Fraud for contract-based remedies is generally set forth in California Civil Code sections 1571 – 1574. Fraud for tort-based remedies is generally set forth in California Civil Code sections 1709 and 1710.
[3] Assilzadeh v. California Federal Bank (2000) 82 Cal.App.4th 399, 409 - 410.
[4] Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735.
[5] California Civil Code section 3343 allows the buyer to recover the difference between what was paid and the (reduced) value of what was received. California Civil Code section 1692 allows for rescission.
[6]California Civil Code section 1102.4(a) states that no seller may be held liable for an error, inaccuracy, or omission that was not within the personal knowledge of the seller. See also Assilzadeh v. California Federal Bank, supra, 82 Cal.App.4th at 410.
[7] In the past year alone, I have had numerous cases with circumstances under which the seller arguably should have known about an underlying material issue. These include an impending and substantial HOA special assessment, unpermitted additions to a property, underlying water intrusion and plumbing problems.
[8] See Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239-1240: “Negligence on the part of the plaintiff in failing to discover the falsity of a statement is no defense when the misrepresentation was intentional rather than negligent.” (citing Seeger v. Odell (1941) 18 Cal.2d 409, 414.)