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Before diving into the world of nondisclosures, it is worth taking a moment and becoming familiar with the “rules of the game,” i.e. the applicable law. You don’t step onto the field without knowing the rules of the game.

The Seller’s Duty:

Beginning with the seller’s duty, at a high level, sellers have a duty to disclose all known material defects in a property to the perspective buyer. This rule comes from the common law. The seller also, applicable California statute, has a duty to provide an accurate Transfer Disclosure Statement (“TDS”). (Civil Code Section 1102 et seq.) On a practical note, while there is significant overlap in the common law and statutory disclosure requirements, they are distinct, and a seller must comply with both.

Practically the most important words at play in a non-disclosure are “material” and “known.” Starting with “material,” the law defines material as something that would affect the price or desirability of the property. For example, as we near winter and people turn on their HVAC systems to heat the home, a home with a functional HVAC is more valuable and more desirable than a home without one, likely meeting the materiality requirements. The same can be said for properties with leaks and or mold which often come to light in the rainy season.

On a pragmatic level the materiality of a claim is often not the point of contention, you don’t go talk to an attorney if there isn’t money on the line. In the rare instance materiality is litigated the perceived problem is hard to quantify in terms of dollars. The case all first-year law students suffer through involved a seller who did not disclose the property at issue was haunted. Yes, that is a real case and most first year property students read it. While maybe not something that would jump to mind in a non-disclosure, it serves a good example of when materiality is litigated.

Turning to what is the far more litigated issue, “known.” The seller must have actual knowledge of the problem or should have known about the problem. Take the HVAC example, if the seller never ran the HVAC system in the time they owned the home, however, ridiculous that may be, that seller may be insulated from liability because they did not actually know about the problem. The litigated issue would be should the seller have known.

Another example is the seller who did not own the property during the rainy season and did not experience any leaking. This makes some practical sense; the law cannot hold someone responsible for something they did not know or should not have known. Again, talking practically, in litigating these issues we always look for repairs, patches, or past work on the area in question which is indicative of the seller’s knowledge of the problem. For example, electrical tape around the leak in the HVAC unit or patches placed over cracks in the foundation.

Again, on a practical level the best course of action is when there is a question whether or not to disclose, a seller should disclose. Sellers often push back and point out, likely correctly, that if they disclose something the purchase price of the property may go down. However, the answer from a legal point of view is that effecting the purchase price is the definition of materiality and goes to show why disclosure is required.

The Buyer’s Duty:

At the same time the buyer also has a competing duty, to do a reasonable investigation and to exercise reasonable care to protect themselves. Going with a water intrusion example, if a buyer can see the 3 by 3 discoloration on the ceiling, indicating water damage, that buyer is on notice of a problem and cannot go after the seller for failing to disclose that issue if the buyer fails to investigate further. The same can be said if the buyer notices large cracks in the walls which may be indicative of foundation problems.

Also relevant here are inspection reports, which may contain information related to defects in the property. A buyer will be deemed to have knowledge of the information contained in those inspections regardless whether or not that buyer actually read or understood their contents. Every real estate attorney can think of a potential client who comes into their office crying foul when the issue the client is attempting to raise is plastered all over the inspections. As such, a buyer should not only read all inspection reports but also do follow up investigations if there are problems noted or they do not understand something. This would include both speaking to the investigator and/ or getting further reports.

The Agent’s Duty

Seller’s agents also have a duty to disclose known material defects in a property during the sale process in the same way that a seller does. In practice this is a more limited duty when compared to that of the seller simply because the agent has less knowledge about the property. None the less, the duty exists when the agent knows about the defect in the property and the agent should disclose accordingly.

While technically not within the scope of a non-disclosure lawsuit, buyers agents, as fiduciaries, have a duty to advise their clients regarding the transaction generally. First, it is worth defining fiduciaries. A fiduciary is a fancy legal word for someone who owes a higher duty of care to another based on some kind of special relationship. This higher duty includes the duty of loyalty, care, and the duty to inform to name a few. Issues with regard to fiduciary duties can arise when an agent pushes through a transaction or does not properly advise a client regarding the transaction.

Turning to the Buyer’s agents, buyer’s agents do not have a duty to disclose in the same sense as the seller and seller’s agents do in that they are not governed by disclosure law. However, as a fiduciary the buyer’s agent must tell the buyer of all information the agent possesses that is material to the buyer’s interests. This rule functions the same way as a disclosure requirement. For example, when the buyer’s agent sees the brown spot on the ceiling from the leaking roof, they must note that to the buyer, usually in the Agents Visual Inspection and inform the buyer that the spot should be investigated by a professional. The same rule applies to situations where the defect is not visible.

Just to add one more wrinkle because I can, agents, you are not inspectors no matter how smart you are, or you think you are. For that reason, note the brown spot on the ceiling and move on, do not explain the spot or qualify it in some way. If you try to explain the spot’s origine and are wrong, you risk liability. For example, the agent who tells a buyer the foundation cracking is from a tree root that later turns out to be caused by settling of the property may be liable for negligent misrepresentation and breach of fiduciary duty. So agents let the inspectors determine the cause.

In the next Part we will take a quick look as especial rules that apply to flippers.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.

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