Defending Buyer Nondisclosure and Misrepresentation Claims in Real Property Transactions

• Publication year: 2016
• Author: Paul P. DeAngelis

Defending Buyer Nondisclosure and Misrepresentation Claims in Real Property Transactions

Paul P. DeAngelis

Paul DeAngelis, www.ppdlaw.com, has his own firm in San Francisco. Paul concentrates on real estate matters, including litigating buyer and seller disputes arising from purchase and sale transactions, neighbor and HOA disputes, and broker defense issues. He also provides transaction and counseling services to buyers and sellers in transactions, to property owners to resolve neighbor and HOA disputes, and to brokers and agents regarding risk management and BRE compliance issues.

I. INTRODUCTION

This article discusses the law and arguments to consider when defending buyer claims of nondisclosure and misrepresentation arising from the purchase and sale of residential real property with a focused analysis on the element of buyer's reliance.¹ This article addresses developing defenses, whether considered by sellers or real estate brokers,² for common sources of these claims: repairs, improvements, permits, legal use, or deed restrictions. It also offers suggestions for how sellers could mitigate the risks of such claims, including how to disclose material facts to buyers without making conclusions about their effect on value.

Nondisclosure and misrepresentation cases generally have good arguments on both sides. The law imposes independent duties on sellers and buyers in purchase and sale transactions. A seller has a duty to disclose known material facts affecting the value or desirability of his or her real property to buyers when a seller knows such facts are not known to or within a buyer's diligent attention or observation. Sellers must tell and believe the truth, and at least have a reasonable basis for believing their statements. A buyer, on the other hand, has a duty to investigate and make informed decisions about disclosed matters or those matters within a buyer's diligent attention or observation. Close cases often turn on a buyer's reliance (whether a buyer reasonably relied on a seller's alleged misrepresentation or nondisclosure) or a buyer's ability to have discovered the undisclosed fact.

The fair market value of real property is based on what a willing buyer may offer and a willing seller may accept at the same point in time. Sellers generally possess the best information about facts affecting the value or desirability of their properties. Their complete and accurate disclosures provide information to give fairness and certainty to buyers in transactions. Nothing in this article should be read to downplay the importance of a seller's complete and accurate disclosures.

II. SELLER'S DISCLOSURE DUTIES

A. Affirmative Duties to Disclose Material Facts

Sellers of real property have affirmative common law and statutory duties of disclosure.³ At common law, if "the seller knows of facts materially affecting the value or desirability of the property . . . and also knows 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

As to the meaning of material facts, "facts are material if they would have a significant and measurable effect on market value."⁵ For example, material facts include repairs done without necessary permits or in violation of building codes.⁶ The law, however, limits a seller's disclosure duty to material facts: "once the essential facts are disclosed a seller is not under a duty to provide details that would merely serve to elaborate on the disclosed facts."⁷

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By statutory law, unless an exception applies, sellers of residential property (one to four dwelling units) must provide a form specified by statute, known as the Real Estate Transfer Disclosure Statement ("TDS"), to a buyer.⁸ Civil Code section 1102.6 requires its use and sets forth the content of the TDS form. A TDS requires sellers to answer many questions about the condition of the property and other matters affecting its value or desirability, including permits, use restrictions, and nonconforming uses.⁹ The Legislature also requires a seller to make each disclosure on the TDS form in good faith, which means "honesty in fact in the conduct of the transaction."¹⁰

B. No Duty to Explain or Make Conclusions

Sellers have a duty to disclose the actual facts, not a duty to explain the legal or practical ramifications of disclosed facts, or to make conclusions about their effect on value.¹¹ "What must be disclosed by a property seller is the fact or facts affecting value. The seller is not required also to explain to the buyer why that fact affects the property's value."¹² Alfaro v. Community Housing Improvement System &Planning Assoc., Inc.¹³ cited the following instructive examples as to how the rule applies in practice: "once seller disclosed that residence was in flood plain, seller was not required to disclose effect of local ordinance on rebuilding or improving it;"¹⁴ "[t]he material fact that had to be disclosed was the fact that there was a lawsuit for defects, not each and every allegation contained within the court file;"¹⁵ and "once seller disclosed that mobile home park was subject to recorded easements, seller was not required to disclose the location of an oil pipeline easement or how he had accommodated it."¹⁶

C. The "As Is" Clause Does Not Change Disclosure Duties

Some purchase and sale contracts include an "as is" clause, affirming that the buyer is purchasing the property in its present condition. However, an "as is" clause does not excuse the seller's duty to disclose known material facts:

A provision that in effect requires the buyer to accept the property "as is" merely means that the buyer accepts the property in the condition that is visible or observable by him. An "as is" clause does not protect the seller from liability for his or her own negligent failure to disclose a material fact.¹⁷

Nor do exculpatory provisions in a residential real property contract change a seller's disclosure duties. For example, one court confirmed a party could not escape liability by arguing the following exculpatory provision: "No representations, guaranties or warranties of any kind or character have been made by any party hereto, or their representatives which are not herein expressed."¹⁸ The court found a principal, who had a positive duty to disclose, could not rely on such clause to escape liability for nondisclosure because parties cannot contract around fraud.¹⁹

III. BUYER'S DUTIES TO INVESTIGATE AND OBTAIN INFORMATION

A. Affirmative Duty to Use Reasonable Care and Investigate

A buyer has an affirmative "duty to exercise reasonable care to protect himself or herself, including those facts which are known to or within the diligent attention and observation of the buyer or prospective buyer."²⁰ A buyer must investigate and make informed decisions about disclosed matters or matters that are within a buyer's diligent attention or observation.²¹

Miller & Starr explains the effect of a buyer's investigation on the reliance issue:

When the conditions of the property are visible and could be discovered readily by a visual inspection by the buyer, the buyer who inspects the property relies on his or her own investigation regarding those matters that are discovered, or should have been discovered, by the inspection. A buyer is deemed to have knowledge of those conditions that are patent, obvious, and apparent by visual observation by an inspection conducted with ordinary diligence in the context of the buyer's knowledge, intelligence, and experience. A buyer cannot claim reliance on the seller's concealment or representations regarding conditions that are obvious and apparent by a visual inspection.²²

The duty of a buyer to protect himself or herself in a transaction is so significant that the law may treat a buyer who elects to not inspect the property the same as one who inspects it. "A buyer who does not inspect the property may be deemed to have knowledge of those conditions that are patent, obvious, and apparent by visual inspection during an inspection conducted with ordinary diligence in the context of a buyer's knowledge, intelligence, and experience."²³

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B. A Buyer's Duties to Read Disclosures and Advisories

The preprinted forms used in residential transactions often provide recommendations and warnings to buyers. The preprinted forms are sometimes referred to as "boilerplate." But a court may charge a buyer of being aware of the information provided in disclosures and advisories, regardless of whether or not the buyer actually read them.²⁴ Further, courts may hold buyers to the legal effect of advisories and disclosures, regardless of whether or not they read them.²⁵

In deciding what effect to give advisories to investigate and exculpatory and disclaimer clauses found in the preprinted forms, courts apply reasonable reliance principles to evaluate the effectiveness of them.²⁶ "[T]he efficacy of disclaimers is assessed by reference to their context and specificity."²⁷ The more specific the advisory or recommendation applies to the alleged undisclosed or misrepresented fact, or the greater the visibility of such advisory or recommendation, the greater weight a court may give it. For example, a court may consider the purpose and use of an advisory, or the conspicuousness, size, and font of the disclaiming language, or its use and location in the forms.

IV. NONDISCLOSURE AND MISREPRESENTATION CLAIMS

A. A Nondisclosure Claim

This article addresses a seller's nondisclosure liability resting on fraud. While California courts have recognized claims against sellers for negligent nondisclosure liability arising from the purchase and sale of property, these cases appear relatively infrequently.²⁸ "Generally, the decisions involving a seller's liability for failure to disclose a material defect have been based on a fraud theory of liability. However, the failure to disclose a material fact may breach the standard of care...