Duty Of Disclosure Depends On Knowledge Of Defects

Many buyers have become aware of defects in their purchase after the close of escrow, and wonder if they can sue the seller for failure to disclose material defects.  In California, the duty of disclosure of a seller depends on the extent of  knowledge regarding the alleged defects.

The elements of a cause of action for fraud based on concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.

A real estate seller has both a common law and statutory duty of disclosure.  In the context of a real estate transaction, it is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property, and also knows that such facts are not know to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. 

Undisclosed facts are material if they would have a significant and measurable effect on market value.  Where a seller fails to disclose a material fact, he may be subject to liability for mere nondisclosure since his conduct in the transaction amounts to a representation of the nonexistence of the facts which he has failed to disclose.

However, the obligation to disclose only arises if the defendant had actual or constructive knowledge of the deficiencies.

It is not unusual that there is a lack of direct evidence of a defendant's knowledge, as issues of mind can seldom be proved by direct evidence.  Actual knowledge can, and often is, shown by inference from circumstantial evidence.  Actual knowledge can be inferred from the circumstances only if, in the light of the evidence, such inference is not based on speculation or conjecture.  Only where the circumstances are such that the defendant "must have known", and not "should have known", will an inference of actual knowledge be permitted.

Sometimes deficiencies in a structure are only discovered during the process of demolition.  In the recent case of RSB Vineyards, LLC v. Bernard A. Orsi, the appellate court affirmed summary judgment in favor of the seller because the defects in the house would have been apparent only to a professional who was familiar with structural engineering and commercial building code requirements.  In order to create an inference of actual knowledge, circumstantial evidence must suggest that the defendant "must have known" of the matter to be disclosed.  In the absence of some evidence that defendants had reason to know of the defects, their sheer numerosity does not allow an inference of knowledge.

In California, case law and statutes place important and significant limitations concerning the circumstances under with the principal is chargeable with and bound by the knowledge of his agent.  Not all contractual relationships in which one person provides services to another satisfy the definition of agency. 

An agent is one who represents another in dealings with third persons.  If a service provider, such as a contractor, simply furnishes advice and does not interact with third parties as the representative of the recipient of the advice, the service provider is not acting as an agent.

Any knowledge acquired by the defendant's construction professionals about the renovated residence is not necessarily imputed to the defendant unless there is evidence to suggest those professionals were acting in the role of agent when they acquired that knowledge. For example, an architect preparing plans and specifications acts as an independent contractor, and ordinarily only acts as an agent and representative of the defendant when he is performing supervisory functions with respect to a building under construction.

In RSB Vineyards, the court held that any knowledge acquired by the seller's construction professionals about the renovated residence is not imputed to the seller because there is no evidence to suggest those professionals were acting in the role of agent when they acquired that knowledge.  Because the seller offered evidence that he had no knowledge of the various deficiencies in the building, the seller could not be held liable for nondisclosure in the absence of evidence that he had actual knowledge of the facts to be disclosed.

Lessons:

1.         Buyers need to be very proactive in investigating a residence before purchasing it.

2.         Buyers should not assume that sellers will be held liable for any defects the buyer learns about after the escrow closes because it may be difficult to prove the sellers, or their agents, had actual knowledge of the defects.