In 2014, a California appellate court in the case of Peake v. undergrowth provides a lesson on why a real estate buyer should not base claims of non-disclosure of defects on the bare reasoning that non-disclosure of the extent to those who had home repairs done when a physical inspection report shows that the same type of defect existed in the property.
The Sellers had purchased a home in 2007 and were represented by a real estate agent in the transaction. The Sellers sold this home to Buyer approximately one year later and the Sellers were once again represented by their previous agent. The buyer was represented by his own real estate agent.
Two years after purchasing the home, the Buyer sued multiple parties, including the Seller’s agent. The buyer alleged that “standing water was caused to seep into the foundation…causing the foundation and attached floor structures to deteriorate.” The buyer claimed that it “only realized the extent of the [water-intrusion] damage” after she bought the house and the seller’s agent did not disclose this problem.
The crux of Buyer’s allegations was that Seller’s agent (i) was aware of the unremedied water damage and deteriorated floor structure at the time of the sale, but failed to disclose these facts, and (ii) knew or should have known, and not to disclose that the repairs made to the property “were not adequate and did not comply with applicable building codes and standards.” Buyer claimed that this failure meant that Seller’s agent had violated disclosure laws required by California law by failing to conduct a competent and diligent inspection pursuant to sections 1102 and 2079 of the California Civil Code.
Not long after Buyer filed her complaint, Seller’s agent’s attorney sent Buyer’s attorney a series of communications explaining the factual and legal deficiencies in Buyer’s claims against Seller’s agent and encouraged the attorney to consult with an expert in real estate care standards. The Seller’s agent’s attorney emphasized that the Seller’s agent had provided Buyer with all information in their possession, including documents showing possible problems with the subfloor, noting that an agent’s legal duties are limited to a visual inspection. . The Seller’s agent’s attorney reminded the attorney of their continuing duty to reassess the merits of Buyer’s claim and advised that if Buyer did not dismiss their claim, the Seller’s agent would seek sanctions from Buyer and attorney pursuant to Section 128.7 of the Seller’s Agent. California Civil Procedure.
Approximately one year after the lawsuit was filed, Seller’s agent served Buyer and her attorney with a section 128.7 sanctions motion. Seller’s agent argued that the cited statutes under which Buyer claimed liability (Civil Code sections 2079 and 1102) required a real estate agent to disclose only visible defects and that the rotten subfloor problem not be visible upon reasonable inspection. He also argued that the statutes did not require the seller’s agent or broker to independently verify the seller’s representations.
In support of his motion, he submitted the three-page legal transfer disclosure statement (TDS) provided to Buyer during escrow which indicated that Seller was not aware of any.”[f]flooding, drainage, or grading problems” at the property. This form clearly states that the representations on it were made by Sellers, not Seller’s agent.
Second, Seller’s agent submitted a copy of the Visual Inspection Checklist stating “VIEW INFORMATION ABOUT DRAIN UPDATES BY PREVIOUS OWNER.” This checklist form also noted a “WEAK SPOT IN THE UNDERGROUND OF A ROOM”. Finally, this form noted: “SEE PREVIOUS INSPECTION REPORTS, DRAINAGE UPDATE REPORT, AND WORK BY CIVIL ENGINEER, KENNETH DISCENZA [phone number] AND CONSTRUCTION OF BONDS. THE DRAINAGE IMPROVEMENTS WERE DONE ON TWO SEPARATE PROJECTS.”
Finally, the Seller’s agent presented evidence that the Buyer received the aforementioned inspection report from a previous sale of the property that revealed substantial problems and deterioration in the subsoil of the home.
Given these facts, the court ruled that Buyer’s claim was frivolous and that both Buyer and her attorney were aware of the complete lack of merit of the claims against Seller’s agent. The court gave little or no weight to the allegation that it was not specifically conveyed to Buyer that the previous owners did not complete all repairs (ie, repair of rotten subfloor structure). The appeals court quickly concluded that the fact that the subsoil is not visible and its exact condition cannot reasonably be determined by visual inspection. Because of this, the broker is not charged with investigating this particular condition.
The court addressed Buyer’s claims that Seller’s agent committed fraud by failing to disclose knowledge of the unrepaired condition of the subfloors. It is a well-established California law that when the seller knows facts that materially affect the value or desirability of real property and also knows that such facts are not known to, or within the scope of the diligent attention and observation of the buyer, the seller’s agent has a duty to disclose them to the buyer. Failure to do so may subject the seller’s agent to fraud claims.
The court noted that even assuming that Seller’s agent knew more about the incomplete repairs and the extent of subfloor damage than was actually disclosed, Buyer herself was notified of the subfloor’s defective condition. The buyer knew of the property’s drainage problems and had received old photographs of rotting subfloors. These facts meant that Buyer was aware to investigate whether any necessary repairs remained after the drainage problem was fixed. The court held that Buyer was unreasonable to conclude that because the drainage system was repaired, this also meant that the subfloor was repaired.
Ultimately, the trial court awarded Buyer and her attorney $60,000, which was incurred by Seller’s agent to defend himself in the action.
This case is a warning to eager plaintiffs and their attorneys that they will be accused of having knowledge of substandard property conditions revealed in inspection reports issued years before a buyer buys a home. The court found that Buyer’s argument recounting representations that the drain was repaired as being the functional equivalent of saying the subfloor was repaired was simply untenable. In other words, they are two different defects and Buyer cannot claim that it was somehow led to believe that all defects were repaired.
In the absence of a prior physical inspection report specifically mentioning some rotten subfloors, one wonders if all the references to drainage and repair issues would also have supported the court’s conclusion that the complaint was frivolous. Even though the drainage problem caused the subfloor to rot, would a buyer be notified to investigate the subfloor if he or she only had prior knowledge of a previous drainage problem? That answer is not so clear cut and would involve other issues like buyer sophistication and the reasonableness of, say, not hiring a home inspector. That is a case for another day.
This case is a good reminder to pay close attention to any and all facts in any inspection report done on the property because the facts in it can bring into play the heart of nondisclosure claims.
