Q: My real estate agent has told me that I have a duty to disclose to prospective buyers information about defective conditions in my house, but why do I need to disclose such conditions when the buyer is hiring a home inspector and has viewed the house during an open house?
A: Under California’s Civil Code and common law, a seller of real property has a duty to disclose any fact that materially affects the value or desirability of the property, including, but not limited to, the physical conditions of the property. If the seller is found to have breached the duty of disclosure, the seller may be held liable for actual fraud, negligence, and breach of contract, and may have to pay punitive damages and attorneys’ fees in addition to compensatory damages. The buyer does not need to ask about such conditions of the property; instead, the seller has the affirmative duty to volunteer the information. The duty of disclosure exists after the purchase contract is signed and continues until the escrow closes. In addition to the common law duty, completion by the seller of a transfer disclosure statement is required for all sales of residential property, and it provides a check list of the most commonly experienced conditions and required disclosures.
Two issues should be kept in mind by a seller regarding the duty of disclosure. First, the conditions of the property that “materially” affect the value or desirability of the property may be one specific fact (roof leak), or a more general condition (land subject to flooding). Whether the matter is of sufficient materiality to affect the value or desirability depends upon the unique characteristics of the property, and may even require a decision by a jury based upon expert testimony. Materiality may be found if the buyer contends that he would not have agreed to conclude the purchase if the buyer had known of the true fact or condition that was not disclosed.
Typically, the undisclosed condition must affect the value of the property or desirability to a reasonable person, or to the particular buyer when the seller knows that the particular fact is important to the buyer. Examples of facts that may be found to be material are unstable soil or fill, improvements with structural defects, building code violations including unpermitted improvements, termites or dry rot, leaks allowing water intrusion, and conduct by neighbors that is offensive, noisy or illegal.
A more difficult issue is whether a seller must disclose a previous defect when the seller believes in good faith that it has been repaired or corrected. Prior landslides may still be required to be disclosed, even if the seller believes that the cause of the last landslide has been corrected, if the circumstances that caused the landslide may reoccur. However, a gas leak or roof leak that was corrected before the close of escrow may be found to not be material.
Second, the seller must disclose those conditions that it has actual knowledge of, and that it knows the buyer is unaware of. For example, if the property has an underground septic tank that was installed before the seller purchased the property, and which the seller had no knowledge about because the plumbing had been connected to the city sewer system during the seller’s ownership, then the seller is not liable for disclosing the condition that it had no knowledge about.
The common law duty applies to new and used property, whether residential, commercial or industrial. There are limited exceptions for transfers that require public reports, pursuant to court orders, foreclosure sales, by a fiduciary in administering an estate or trust, from one co-owner to another co-owner, between spouses (typically in divorce proceedings), and other non-typical situations.
Claims by a buyer that a seller did not comply with the duty of disclosure is a frequent subject of buyer lawsuits because there is frequently a difference of opinion concerning what materially affects the value or desirability of the property, and it is easy for the buyer to claim that a sale would not have been completed if the buyer had been informed of the conditions of the property. Therefore, a prudent seller should disclose every fact or condition that might reasonably affect the value or materiality of the property to avoid a future claim based upon nondisclosure.
The opinions expressed in this article are those of the author. Individual circumstances may vary and professional advice is recommended before making decisions.
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