Forry Law Group: Real Estate and Civil AttorneysQ:        I purchased a home that has a pool and the seller’s agent informed me that there did not appear to be any visual defects, and my own agent told me that he was not aware of any problems with the pool that I should insist on being repaired before the close of escrow, even though the pool was only half full of very dirty water and it did not appear to have the filter equipment operating for some time.  I did not insist on filling the pool up or checking its operation and after I purchased the house, I learned that the overflow pipe discharged onto the slope below my house that is off my property, and the city has required me to install a sump pump overflow system at significant cost.  Do I have any rights against the seller’s agent or my own agent?

A:        Although both the seller’s agent (aka listing agent) and the buyer’s agent (aka selling agent) have duties of inspection and disclosure to the buyer, and they are confirmed on the Real Estate Transfer Disclosure Statement, those duties arise from different sources and they vary based upon the circumstances involved in the transaction.  The duties can give rise to causes of action for negligence and even fraud, but they are limited and do not relieve the buyer from inspecting the residence, either personally or with the use of a home inspector or other professionals.  The duties of the seller’s agent and buyer’s agent are limited to defects that are known or that can be discovered through a reasonable visual inspection, and a buyer should remain vigilant to determine defects that the agents have no duty to disclose.

In the seminal case of Easton v. Strassburger, the Court of Appeal held in 1984 that real estate brokers and their agents have an “affirmative 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.  A broker who breaches this duty to inspect and disclose defects discoverable through reasonable diligence may be liable to the buyer for negligence.”

The Easton court limited its holding to residential property, expressing “no opinion here whether a broker’s obligation to conduct an inspection for defects for benefit of the buyer applies to the sale of commercial real estate.”  Unlike the residential home buyer who is often unrepresented by a broker, or may be effectively unrepresented because of the problems of dual agency, a purchaser of commercial real estate is likely to be more experienced and sophisticated in his dealings in real estate and is usually represented by a broker who represents only the buyer’s interests.

The California Legislature codified the holding in Easton, adding sections 2079-2079.6 to the Civil Code, which include the statement that it is the duty of a real estate broker or agent, who has a written contract with the seller to find or obtain a buyer, to a prospective purchaser of residential real property comprising one to four dwelling units to conduct a “reasonably competent and diligent visual inspection of the property” offered for sale and to disclose to that prospective purchaser all facts materially affecting the value or desirability of the property that such an investigation would reveal.  The standard of care is the degree of care that a reasonably prudent real estate licensee would exercise and is measured by the degree of knowledge through education, experience and examination that is required to obtain a real estate license.  There is no exception to the statutory duty to inspect, and even property sold “as is” requires compliance with the statute.

However, sections 2079 and 2079.3 statutorily limit the duty of inspection recognized in Easton to one requiring only a visual inspection, and the statutory scheme expressly states a seller’s broker has no obligation to investigate areas that are reasonably and normally inaccessible to such an inspection (e.g., wall cavities), nor an affirmative inspection of areas off the site of the subject property, or public records or permits pertaining to title or use of the property.  Also, with respect to condominiums, there is no duty to inspect more than the unit offered for sale.  If the property is both residential and part commercial (e.g., a farm with a house), then the duty to perform a reasonably diligent visual inspection only applies to the residence, and not the commercial part.

Moreover, section 2079.5 makes it clear that nothing in the stature relieves a buyer or prospective buyer of the duty to exercise reasonable care to protect himself or herself, including those facts which are known to or within the diligent attention and observation of the buyer or prospective buyer.  It is apparent that under this statutory scheme, once the sellers and their agent make the required disclosures, it is incumbent upon the potential purchaser to investigate and make an informed decision based thereon.

Although the duty of the seller’s agent is currently set forth in the Civil Code, a duty of disclosure is also owed to the buyer by his own agent.  But the duty of the buyer’s agent arises out of the fiduciary duty owed by the agent to the buyer, and depending on the circumstances, a broker’s fiduciary duty may be much broader than the duty to visually inspect and may even include a duty to inspect public records or permits concerning title or use of the property, a duty which is expressly excluded from section 2079.

In Field v. Century 21 Klowden-Fforness Realty, the Court of Appeal held in 1998 that the fiduciary duty of a broker, who contracts to exclusively represent a purchaser of real property to investigate for its client, is independent of the separate obligation imposed on a seller’s broker to conduct a reasonable visual inspection of the marketed property for a buyer’s protection, as announced in Easton.  Under the common law, unchanged by Easton and section 2079, a broker’s fiduciary duty to his client requires the highest good faith and undivided service and loyalty.

“The broker as a fiduciary has a duty to learn the material facts that may affect the principal’s decision.  He is hired for his professional knowledge and skill; he is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal’s decision, and he has a duty to counsel and advise the principal regarding the propriety and ramifications of the decision.  The agent’s duty to disclose material information to the principal includes the duty to disclose reasonably obtainable material information. . . .  The facts that a broker must learn, and the advice and counsel required of the broker, depend on the facts of each transaction, the knowledge and the experience of the principal, the questions asked by the principal, and the nature of the property and the terms of sale.  The broker must place himself in the position of the principal and ask himself the type of information required for the principal to make a well-informed decision.  This obligation requires investigation of facts not known to the agent and disclosure of all material facts that might reasonably be discovered.”

A fiduciary must tell its principal of all information it possesses that is material to the principal’s interests.  A fiduciary’s failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent.  A real estate agent, as a fiduciary, is liable to his principal for constructive fraud even though his conduct is not actually fraudulent.  Constructive fraud is a unique species of fraud applicable only to a fiduciary or confidential relationship.  As a general principle, constructive fraud comprises any act, omission or concealment involving a breach of legal or equitable duty, trust or confidence that results in damage to another even though the conduct is not otherwise fraudulent.  Most acts by an agent in breach of his fiduciary duties constitute constructive fraud.  The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud.

Breach of a real estate agent’s fiduciary duty to his or her client may constitute negligence or fraud, depending on the circumstances of the case.  A careless misstatement may constitute constructive fraud even though there is no fraudulent intent.  It is clear, therefore, that whether a fiduciary duty has been breached, and whether conduct constitutes constructive or actual fraud, depends on the facts and circumstances of each case.

Under the facts presented in the question, it is not apparent that a visual inspection would have revealed that the overflow pipe from the pool discharged the water onto that portion of the slope that was off of the property being purchased, and there is no indication that either of the agents had actual knowledge, or should have known, of this condition.  It is possible that the seller knew of the condition and as a result, the seller may have liability for failing to disclose that condition to the buyer, but there is no indication that the seller disclosed the condition to either of the agents.  But a seller or his agent must have actual knowledge in order to be liable for failure to disclose a material fact.

What this fact pattern illustrates, given that the pool was half full and the pool equipment was apparently not in operation for some time, is that a buyer of real property should be proactive in inspecting and examining all conditions at the property to the greatest extent reasonably possible.  A pool is always problematic because of the need to maintain it on a daily basis and the variety of problems it can present (e.g., leaks, equipment malfunction, etc.), and a comprehensive investigation by a qualified pool inspector should be considered, in addition to any home inspection.  However, under the minimal facts presented, it appears that neither of the agents breached their duty of inspection and disclosure to the buyer, and they do not appear to have liability for the overflow pipe condition.

The opinions expressed in this article are those of the author, and they do not create an attorney-client relationship or constitute legal advice.  Individual circumstances may vary and professional advice is recommended before making any decisions concerning legal matters. 

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Forry Law Group: Real Estate and Civil Attorneys

15501 San Fernando Mission Blvd., Suite 309
Mission Hills, CA 91345
Office: (818) 361-1321
Fax: (818) 365-6522

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