What is the Duty of Disclosure in California Real Estate Transactions?
The common law recognized in California imposes duties on sellers of real estate, particularly residential real estate such as homes, to disclose to the buyer any material facts known to the seller affecting the value or desirability of the real estate being sold.
In California, the seller of a residence has both a common law and statutory duty of disclosure to the buyer, and even full compliance with the statutory duty does not excuse the common law duty.
In order to establish a common law claim for nondisclosure of material facts, plaintiff must prove:
(1) that plaintiff purchased real property from defendant;
(2) that defendant knew that information that was not disclosed;
(3) that defendant did not disclose this information to plaintiff;
(4) that plaintiff did not know, and could not reasonably have discovered, this information;
(5) that defendant knew that plaintiff did not know, and could not reasonably have discovered, this information;
(6) that this information significantly affected the value or desirability of the property;
(7) that plaintiff was harmed; and
(8) that defendant’s failure to disclose the information was a substantial factor in causing plaintiff’s harm.
In the context of a real estate transaction, it 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.
Undisclosed facts are material if they would have a significant and measurable effect on market value.
Where a seller fails to disclose a material fact, he may be subject to liability for mere nondisclosure since his conduct in the transaction amounts to a representation of the nonexistence of the facts which he has failed to disclose.
The sale of real property “as is” does not waive potential claims of common-law misrepresentation.
The specification of “as is” serves only to give notice of patent defects (essentially visible defects) and means that the buyer accepts the property in the condition in which it is reasonably observable by him or her.
However, if the Purchase and Sale Agreement is augmented by language indicating that the buyer is relying on his or her own inspection of the property, it may also relieve the seller of the duty to inspect for defects or to disclose matters that the seller should know, but does not.
Where the seller actively misrepresents the then condition of the property or fails to disclose the true facts of its condition not within the buyer's reach and affecting the value or desirability of the property, an “as is” provision is ineffective to relieve the seller of liability arising from the concealed condition.
Sellers owe a common law duty to disclose information materially affecting the value or the desirability of the property.
Generally, whether the undisclosed matter was of sufficient materiality to have affected the value or desirability of the property is a question of fact.
With respect to a seller's statutory obligations, the Legislature enacted article 1.5 of the Civil Code which specifies the information a residential property seller must disclose when transferring the property. In enacting this article, the Legislature made clear it did not intend to alter a seller's common law duty of disclosure. The purpose of the enactment was instead to make the required disclosures specific and clear.
In its statement of legislative intent the Legislature declared it did not intend to affect the existing obligations of the parties to a real estate contract, or their agents, to disclose any fact materially affecting the value and desirability of the property, including, but not limited to, the physical conditions of the property and previously received reports of physical inspections noted on the disclosure form set forth in Section 1102.6 or 1102.6a, and that nothing in this article shall be construed to change the duty of a real estate broker or salesperson pursuant to Section 2079.
The Legislature specified the precise disclosure form which must be used.
Among the items which must be disclosed, the legislatively mandated form requires a seller to answer whether he or she is aware of any "Room additions, structural modifications, or other alterations that may affect your interest in the subject property", Room additions, structural modifications, or other alterations or repairs not in compliance with building codes", Any . . . violations of 'setback' requirements", and "Any notices of abatement or citations against the property".
In addition to mandating the use of the disclosure form, the Legislature also required the seller to make each disclosure in “good faith,” defined as “honesty in fact in the conduct of the transaction.”
Moreover, a partial disclosure is insufficient.
Where one does speak he must speak the whole truth to the end that he does not conceal any facts which materially qualify those stated.
A duty to disclose may also arise in the so-called ‘half-truth’ context – that is, when a speaker makes a representation which, though not false, he knows will be misleading absent full disclosure of additional facts known to him which qualify the initial representation.
Where one undertakes to speak to a matter, he must not only state the truth, he also must not suppress or conceal facts within his knowledge that materially affect those stated.
In other words, when one speaks at all, he must make a full disclosure on the subject.
Thus, a duty to fully disclose may arise from a partial disclosure that is likely to mislead, if other material facts are not also disclosed.
Subjective intent is also insufficient. When conduct falls sufficiently below the acceptable norm to become grossly deficient, the Courts characterize it as imbued with a bad intent which is called willful misconduct. A malicious state of mind may be implied to the actor irrespective of any actual specific intent.
A complaint for breach of contract must include the following: (1) the existence of a contract, (2) plaintiff’s performance or excuse for non-performance, (3) defendant’s breach, and (4) damages to plaintiff therefrom.
There is no dispute that the Residential Purchase Agreement constitutes a contract between buyers and sellers.
Providing a truthful transfer disclosure statement is a statutory requirement that was expressly incorporated into the parties' agreement, and Civil Code § 1102.6 provides that prospective buyers may rely on this information in deciding whether and on what terms to purchase the subject property.
A disclosure statement is a nonwaivable condition precedent to the buyer's performance.
Generally, where one party to a transaction has sole knowledge or access to material facts and knows that such facts are not known or reasonably discoverable by the other party, then a duty to disclose exists.
An "as is" clause in a purchase and sale agreement does not insulate the seller from the common law duty to disclose defects or the requirements of Civil Code §§ 1102, et seq.
"As is" language serves to give notice of patent defects and means that the buyer accepts the property in the condition in which it is reasonably observable by him or her. If augmented by language indicating that the buyer is relying on his or her own inspection of the property, it may also relieve the seller of the duty to inspect for defects or to disclose matters that the seller should know but does not.
However, the benefits of Civil Code §§ 1102 et seq. are not waived merely by the buyer’s acceptance of "as is" language in the purchase agreement, and the seller remains liable for any failure, whether negligent or intentional, to reveal known concealed defects not apparent from an inspection of the property. Similarly, "as is" language in a real property sale agreement does not shield a seller from liability for fraud.
To state a cause of action for fraud, the plaintiff must prove a false representation, actual or implied, or concealment of a matter of fact material to the transaction which defendant had a duty to disclose, defendant's knowledge of the falsity, defendant's intent to deceive, plaintiff's justifiable reliance thereon, and resulting damage to plaintiff.
Section 1710 of the Civil Code in relevant part provides: "A deceit, within the meaning of the last section, is either: 1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true; 2. The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true; 3. The suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact.
Nondisclosure is tantamount to a misrepresentation.
Failure of the seller to fulfill the duty of disclosure constitutes actual fraud.
Civil Code § 1102.13 provides: “No transfer subject to this article shall be invalidated solely because of the failure of any person to comply with any provision of this article. However, any person who willfully or negligently violates or fails to perform any duty prescribed by any provision of this article shall be liable in the amount of actual damages suffered by a transferee.”
The wrongful failure to perform a contract or a material promise in a contract, where the nonperformance is not excused or justified, is a breach. The failure to perform any contract obligation subjects the defaulting party to liability for damages, regardless of the extent of the breach and whether or not it also excuses performance of the non-breaching party.
If fraud is involved in the purchase, sale, or exchange of real property, Civil Code § 3343 may govern the measure of damages, and the out-of-pocket measure is expanded to compensate for out-of-pocket losses and additional damage arising from the transaction where there is fraud in the acquisition or disposition of property.
Similarly, where the defrauded party has been induced by reason of the fraud to purchase or otherwise acquire the property, that purchaser is entitled to an amount that will compensate him or her for any loss of profits or other gains that might have been earned from the use or sale of the property had it possessed the characteristics fraudulently attributed to it.
However, this recovery is only allowed where all of the following apply: (1) the defrauded purchaser acquired the property to resell it for a profit; (2) the defrauded purchaser reasonably relied on the fraud in entering into the transaction and in anticipating profits from the subsequent sale; and (3) the lost profits for which damages are sought were proximately caused by the fraud and the defrauded purchaser’s reliance on it.
LESSONS:
1. 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.
2. Undisclosed facts are material if they would have a significant and measurable effect on market value.
3. The sale of real property “as is” does not waive potential claims of common-law misrepresentation. The specification of “as is” serves only to give notice of patent defects (essentially visible defects) and means that the buyer accepts the property in the condition in which it is reasonably observable by him or her.
4. Moreover, a partial disclosure is insufficient. Where one does speak he must speak the whole truth to the end that he does not conceal any facts which materially qualify those stated.
5. Failure of the seller to fulfill the duty of disclosure constitutes actual fraud.