In 2014, an appeals court in California in the case of Peake v. Underwood provides a lesson on why a real estate buyer should not base claims of non-disclosure of defects on fine reasoning that the non-disclosure of the degree to which home repairs were made when a physical inspection report shows that the same type of defect existed on 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 the Buyer approximately one year later and the Sellers were again represented by their previous agent. The buyer was represented by his own real estate agent.
Two years after they purchased the home, the Buyer sued various parties, including the Seller’s agent. The buyer alleged that “standing water was caused to penetrate 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 you 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) had been aware of the unrepaired water damage and deteriorating floor structure at the time of sale, but did not disclose these facts, and (ii) knew or it should have known, and failed to disclose, that the repairs made to the property “were not appropriate and did not meet applicable building codes and standards.” The Buyer alleged that this failure meant that the Seller’s agent had violated the 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.
Shortly after the Buyer filed its complaint, the Seller’s agent’s attorney sent the Buyer’s attorney a series of communications explaining the legal and factual deficiencies of the Buyer’s claims against the Seller’s agent and encouraged the attorney to consult with an expert. in real estate care standards. Seller’s agent’s attorney emphasized that Seller’s agent had provided Buyer with all the information in its possession, including documents showing potential subfloor issues, and noted that an agent’s legal obligations are limited to a visual inspection. The Seller’s agent’s attorney reminded the attorney of his continuing duty to reassess the merits of the Buyer’s claim and cautioned that if the Buyer did not dismiss his claim, the Seller’s agent would seek sanctions from the Buyer and the attorney under section 128.7 of the Code of Procedure. California Civil.
Approximately one year after the complaint was filed, Seller’s agent served Buyer and his attorney with a motion for sanctions under section 128.7. Seller’s agent argued that the cited statutes under which Buyer requested liability (Civil Code Sections 2079 and 1102) required a real estate agent to disclose only visible defects and that the rotten subfloor problem was not visible on reasonable inspection. . It also argued that the statutes did not require the seller’s agent or broker to independently verify a seller’s representations.
In support of his motion, he submitted the three-page Legal Transfer Disclosure Statement (TDS) provided to Buyer during escrow, stating that Seller was not aware of any “[f]flooding, drainage or grading problems “on the property. This form clearly indicated that the representations on the form were made by the Sellers, not the Seller’s agent.
Second, the seller’s agent presented a copy of the visual inspection checklist that said “VIEW INFORMATION ON DRAINAGE UPDATES BY PREVIOUS OWNER.” This checklist form also noted a “SOFT PLACE ON THE SUBFLOOR IN A BEDROOM.” Finally, this form noted: “SEE PAST INSPECTION REPORTS, DRAINAGE UPDATE REPORT AND CIVIL ENGINEER WORK, KENNETH DISCENZA [phone number] AND CONSTRUCTION OF BONDS. THE DRAINAGE IMPROVEMENTS WERE MADE IN 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 subfloor of the house.
Given these facts, the court ruled that the Buyer’s complaint was frivolous and that both the Buyer and his attorney were aware of the utter lack of merit of the claims against the Seller’s agent. The court gave little or no weight to the allegation that the Buyer was not specifically advised that all repairs (i.e., repair of the rotten subfloor structure) were not completed by the previous owners. The appeals court very quickly concluded that the fact that the subfloor is not visible and its exact condition cannot be reasonably 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 law in California that when the seller knows facts that materially affect the value or suitability of the real property and also knows that such facts are not known, or within the reach of the diligent attention and observation of the buyer, the seller’s agent has the obligation to communicate them to the buyer. Failure to do so may subject the seller’s agent to fraud claims.
The court noted that even assuming that the seller’s agent knew more about the incomplete repairs and the extent of the subfloor damage than was actually disclosed, the Buyer herself was notified of the defective condition of the defective subfloor. The buyer was aware of the property’s drainage problems and had received old photographs of rotten subfloors. These facts meant that the Buyer was in the know to investigate whether any necessary repairs remained after the drain problem was repaired. The court held that the Buyer was not reasonable to conclude that because the sewer system was repaired, this also meant that the subfloor was repaired.
In the end, the trial court fined the Buyer and his attorney $ 60,000, the amount incurred by the 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 faulty property conditions revealed in inspection reports issued years before the buyer purchases a home. The court found that Buyer’s argument that it relied on statements that the drain was repaired as the functional equivalent of saying that the subfloor was repaired was simply untenable. In other words, they are two different defects and the Buyer cannot claim that he was somehow convinced that all the defects were repaired.
In the absence of a previous physical inspection report specifically mentioning some rotten subfloors, one wonders if all the references to the drainage and repair issues would also have supported the court’s conclusion that the complaint was frivolous. While the drainage issue caused the subfloor to rot, would the buyer be contacted to investigate the subfloor if they only had prior knowledge of a prior drainage issue? That answer is not as clear cut and would involve other issues like the sophistication of the buyer and the reasonableness of, for example, not hiring a home inspector. That is a case for another day.
This case is a good reminder to pay attention to each and every fact in any inspection report done on the property because the facts in it can put the heart of nondisclosure claims at stake.