Mcle Self-study Article: Caveat Emptor? " Caveat Broker" Is More Like It: a Historical Overview of Statutory and Common Law Seller and Broker Disclosure Requirements in California Residential Real Estate Transactions
| Publication year | 2018 |
| Author | Neil Kalin and Lee Kaplan |
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Neil Kalin and Lee Kaplan
Neil Kalin is Assistant General Counsel for the California Association of REALTORS® and is the senior legal advisor to C.A.R.'s Standard Forms Committee. He is the 2018-2019 Co-Chair of the Real Property Law Section of the California Lawyer's Association. Neil is a contributing author of Sections 1:81 — 1:132.80 of Miller and Starr's California Real Estate Forms. Neil frequently speaks to lawyers, REALTORS® and others on real estate legal developments.
Lee Kaplan is Staff Attorney for the California Association of REALTORS®. Prior to joining C.A.R. Lee was an associate at a Los Angeles-based law firm where he advised local governments and public agencies on a range of legal issues. He earned his J.D. from UCLA School of Law in 2016.
Caveat emptor—this oft repeated phrase, Latin for "let the buyer beware,"2 has been a maxim of real estate law for centuries. Under the doctrine of caveat emptor, absent fraud, sellers have historically been protected from lawsuits for failure to disclose facts unknown to the buyer. The doctrine provides that the seller of real property has no duty to disclose facts unknown to the buyer, and has been applied to preclude the recovery of damages when buyers discover defects after a sale has been consummated.3 The doctrine of caveat emptor has been applied in common law jurisdictions since the sixteenth century,4 but what is its application in present-day California?
A review of case law and legislation from the past sixty years or so reveals that caveat emptor has eroded over time, and for at least the last 35 years has had little to no application in California real estate transactions.5 Courts and the state legislature appear to have recognized an inherent injustice of applying the doctrine of caveat emptor to modern real estate transactions. The law-makers (legislators) and law-reviewers (courts) have responded by imposing extensive disclosure obligations on sellers of real property and the brokers and agents who facilitate those transactions.
A. The Common Law Duty to Disclose Material Facts—Pre-Legislation Case Law[Page 7]
Prior to the enactment of legislation that currently imposes certain duties of disclosure on sellers and their agents, California courts recognized a common law duty for sellers to disclose known facts materially affecting the value or desirability of a property that are not within the reach or diligent attention and observation of the buyer.6 Sellers and agents who breach the common law duty of disclosure may be liable for torts, including fraudulent concealment, intentional misrepresentation, negligent misrepresentation or nondisclosure, and simple negligence. The claims brought, and remedies mandated for a breach of common law disclosure requirements, will depend upon the specific facts of a case, including whether a nondisclosure or misrepresentation was made with intent to defraud, or actual knowledge of the relevant material facts.7 It appears that the common law duty of disclosure began to take shape in the early 1940s,8 and was solidified and expanded to brokers by the 1963 landmark case of Lingsch v. Savage.9
In Lingsch, the buyer of a building in San Francisco sued both the seller and the seller's broker for fraud claiming the seller and broker failed to disclose that the building was in a state of disrepair, contained illegal units, and had been slated for demolition by the City.10 The broker filed a demurrer disclaiming any personal liability, which was sustained by a lower court.11 On appeal, the court overturned the judgment in favor of the broker, finding that both the seller and the broker could be held liable for fraud.12
The court stated the established rule that:
where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him 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.13
It then went on to find that this duty of disclosure applied not only to a seller, but also to a seller's broker and agent, stating:
The real estate agent or broker representing the seller is a party to the business transaction. In most instances he has a personal interest in it and derives a profit from it. Where such agent or broker possesses, along with the seller, the requisite knowledge according to the foregoing decisions, whether he acquires it from, or independently of, his principal, he is under the same duty of disclosure.14
The court noted that privity of contract between the buyer and seller's broker is not necessary to sustain an action for fraud, and that liability could be imposed on the broker for "negative fraud" as well as "affirmative fraud," meaning that nondisclosure of material facts is tantamount to misrepresenting such facts.15 The broker's argument that caveat emptor should apply was rejected,16 as was an argument that a provision in the contract stating that the buyer would take the property "as is" abrogated the broker's affirmative duty to disclose material facts.17
The Lingsch opinion is notable in that it appears to be one of, if not the first published opinion in which a California court explicitly extended the seller's common law duty to disclose material facts to the seller's broker. Subsequent cases expanded on and clarified the broker's duty. In Cooper v. Jevne, the court affirmed the decision in Lingsch, relying on the case to find that sales agents for a condominium development could be held liable for failing to disclose the existence of structural deficiencies that the plaintiff purchasers had no knowledge of.18
Subsequently, courts acted to expand the scope of the common law duty of disclosure. In Reed v. King, the court held that a seller and listing broker's common law duty to disclose material facts extends beyond disclosure of physical defects and legal impairments to use.19 Noting that "[r]eputation and history can have a significant effect on the value of realty,"20 the court found that both a seller and his agents could be held liable for the failure to disclose that a woman and her four children had been murdered in the subject property ten years prior to the sale.21
In Easton v. Strassburger,22 a court signaled for the first time that brokers have a common law duty to disclose not only those material facts that they are actually aware of, but also those that they should be aware of. In Easton, a lower court found a listing broker partially liable for the plaintiffs' losses incurred due to a "massive earth movement" at their newly-purchased property.23 The broker had represented the sellers of the property through two of its agents, who had conducted several inspections of the property prior to the sale. Evidence showed that the agents were aware of certain "red flags" that should have indicated soil problems but did not request any soil stability testing or inform the buyer of potential soil problems. In fact, there had been a history of soil problems at the site.24
The lower court found the broker partially liable for the plaintiffs' damages on a negligence theory. The broker appealed, arguing that the trial judge had incorrectly instructed the jury that the broker was under a duty not only to disclose defects, but to discover them. The broker contended that the trial judge's instruction had improperly elevated a broker's common law duty, arguing that it was only obligated to disclose known material facts, and not those which should be known through reasonable diligence. In the broker's view, the trial court had imposed a duty for brokers to conduct a reasonable investigation of property offered for sale, which was not supported by prior case law.25
[Page 8]
The appellate court disagreed, finding that a duty to discover was implicitly established by the prior cases of Lingsch and Cooper,26 thus justifying its ruling that where broker negligence is alleged, a broker's duty of care "includes the duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal."27 In other words, the court found that even where a broker is not actually aware of material facts, such facts are subject to disclosure if they would have been revealed by a reasonable inspection. A broker who fails to competently inspect a listed property will not be immunized from liability for failure to disclose unknown facts which would have been discovered by a reasonable investigation.
The Easton decision laid the groundwork for legislative action to codify current statutory disclosure requirements. A broker's current statutory duty of disclosure to a non-client is remarkably similar to the standard established by Easton. However, as discussed below, common law disclosure duties still exist independent of their statutory counterparts, and courts have continued to define their scope. Additional broader common law duties apply to the fiduciary relationships between brokers and their own clients.
B. Disclosure LegislationFollowing Easton, in 1985 the legislature enacted a series of statutes aimed at codifying and clarifying disclosure requirements in real estate transactions. These statutes included the Visual Inspection and Disclosure Law,28 the Transfer Disclosure Law,29 the Agency Disclosure Law,30 and the Natural Hazard Disclosure Law.31
The Visual Inspection and Disclosure Law is Civil Code Sections 2079—2079.5. Civil Code...
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