Real Estate Broker Agent Misrepresentation Liability Law Elements Defenses Damages Remedies Lawyer – Intentional Nondisclosure of Material Facts

Definition. A real estate seller/broker is liable to a buyer of real property if the broker fails to disclose material facts that are unknown to the buyer, intending to induce the buyer to purchase the property and resulting in damage to the buyer. (Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858; see also Cal. Civ. Code, § 1710(3); Cal. Bus. & Prof. Code, § 10176, subd. (i) [brokers have a general duty to deal fairly and honestly with all parties to any real estate transaction, including those not his principals].)


Elements of Broker’s Liability Nondisclosure of Material Facts, CACI 1910

Paula claims that Daniel failed to disclose certain information, and that because of this failure to disclose, Paula was harmed. In order to establish this claim, Paula must prove all of the following:

(1) that Paula purchased real property (ex. a home) from Daniel, a real estate seller/broker;

(2) that Daniel knew that the house had toxic mold;

(3) that Daniel did not disclose this information to Paula;

(4) that Paula did not know, and could not reasonably have discovered, this information;

(5) that Daniel knew that Paula did not know, and could not have discovered, this information;

(6) that the information about the toxic mold significantly affected the value or desirability of the property;

(7) that Paula was harmed; and

(8) that Daniel’s failure to disclose the information about the toxic mold was a substantial factor in causing Paula’s harm.

 

 

Element 1: Real Estate Broker

A “broker” is a person who, for compensation or in expectation of compensation, carries on negotiations on behalf of another person with respect to real property. Covered activities include offers to buy, sell, rent, lease, or exchange, and soliciting, negotiating or collecting loans secured by real property. (Cal. Bus. & Prof. Code, § 10131.)


The broker is under the same duty of disclosure as the seller, whether the broker acquires the information from the owner or independently. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 736.)


A homeowners’ association had no duty to disclose to purchasers the existence of construction defects or litigation regarding such defects. (Hoffman v. 162 North Wolfe LLC (2014) 228 Cal.App.4th 1178; Kovich v. Paseo Del Mar Homeowners’ Ass’n (1996) 41 Cal.App.4th 863, 866-67 [discussing Civil Code, §§ 1365, 1365.5 and 1368 specifically enumerate duties of homeowners’ associations].)

Element 2: Purchaser

The plaintiff must be the purchaser of the property, or a person whom defendant intended or reasonably should have foreseen would rely on the broker’s representations or nondisclosures regarding the property. (Coldwell Banker Residential Brokerage Co. v. Superior Court (2004) 117 Cal.App.4th 158.)


Brokers are “suppliers of information in a commercial context” and their duty extends only to “intended beneficiaries” of their advice, who are persons to whom brokers’ representations were made with the intent to induce the plaintiff, or a class of persons to which plaintiff belongs, to act in reliance upon such representations in a specific transaction, or specific type of transaction, that defendant intended to influence. (Coldwell Banker Residential Brokerage Co. v. Superior Court (2004) 117 Cal.App.4th 158.)

Subsequent Purchasers:

Property developer who failed to disclose serious soil conditions to original purchaser was liable to subsequent purchasers with whom developer had no contact because it was foreseeable that there would be subsequent purchasers and that they would be the ones to suffer damages. (Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 191-92 [an intervening resale of property should not cut off liability for the initial nondisclosure which is necessarily passed on to each property owner]; see also Geernaert v. Mitchell (1995) 31 Cal.App.4th 601.)


A relocating employee who sold property to his employer and gave the employer a blank grant deed was liable to a subsequent purchaser for failure to disclose noisy neighbors. (Shapiro v. Sutherland (1998) 64 Cal. App. 4th 1534, 1548-49.)

Subsequent purchaser must plead ultimate facts showing that the defendant either intended or expected that the misrepresentation would be repeated and/or the nondisclosures would be transmitted to the subsequent purchasers. (Geernaert v. Mitchell (1995) 31 Cal.App.4th 601, 608 [prior owner was liable to subsequent purchaser for nondisclosure of significant structural and foundation problems where property had two intervening owners); see also BAJI 12.50 (modified in response to Geernaert].)

Lessees:

Broker had duty to warn lessee of dangerous condition involving basement door and stairway, even though broker did not represent either owner or prospective lessee, because the broker, who was showing lessee the house in the course of the broker’s regular business, stood to gain a commission upon the rental, and public policy dictates such a duty. (Holmes v. Summer (2010) 188 Cal.App.4th 1510.)

Element 3: Broker’s Knowledge

To be liable, the broker must have actual or constructive knowledge of the material facts and know that the facts are unknown to, or beyond the reach of, the buyer. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735; BAJI 12.36.)

Agents’ knowledge of structural deficiencies, and their knowledge that the purchasers were unaware of such deficiencies, supported a cause of action for nondisclosure (negative fraud) where the agents did not disclose such deficiencies to the purchasers. (Cooper v. Jevne (1976) 56 Cal.App.3d 860, 866.)

Element 4: Breach of Duty to Disclose Material Facts

The broker owes a duty to the buyer to disclose facts materially affecting the value or desirability of the property. (RSB Vineyards, LLC v. Orsi (2017) 15 Cal.App.5th 1089; see also Cal. Civ. Code, §1710(3).)

Contract Provisions:

An “as-is” provision in a sales contract does not relieve the seller or his broker of liability for failure to disclose known material facts affecting value or desirability of property. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 742.) However, the “as-is” provision is a factor to be considered with all other circumstances in determining if a buyer has been misled. (Driver v. Melone (1970) 11 Cal.App.3d 746, 753.)

A contract provision stating that no party or party representative has made representations, guaranties or warranties of any kind or character, does not relieve broker or seller of liability for nondisclosure. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 743.)

What Constitutes Material Facts:

Whether the facts are sufficiently material to affect the value or desirability of the property depends on the facts and circumstances of the particular case. (Reed v. King (1983) 145 Cal.App.3d 261, 265; Lingsch v. Savage (1963) 213 Cal.App.2d 729, 737.)

The duty is only to disclose all factual matters bearing upon the quality of the property that might be detrimental to value, including, e.g., that the property is on filled land; the structure violates building codes or zoning ordinances; the building had been condemned; or the structure was termite-ridden. (Sweat v. Hollister (1995) 37 Cal.App.4th 603, 608-09, disapproved on other grounds.)

A seller has a duty to disclose past or present conditions causing progressive destruction or substantial impairment, notwithstanding the seller’s reasonable belief that the progression has been halted. (Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 191 [preexisting seeps, springs and slides on property were material facts requiring disclosure, even though seller informed buyers that their lots had been filled and believed that such conditions had been permanently repaired].)

Plaintiff stated a cause of action against the seller’s broker for failing to disclose that the building was in disrepair; units in the building were illegal; and the building had been placed for condemnation by the city. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 738.)

The fact that the house was the site of a multiple murder of a woman and her four children was a material fact that was required to be disclosed to potential purchasers. (Reed v. King (1983) 145 Cal.App.3d 261, 267-68; but see Cal. Civ. Code, § 1710.2.)

The fact that a neighborhood contained an overtly hostile family who tormented neighbors with unexpected noises and long parties was a material fact that was required to be disclosed to potential purchasers because it would not ordinarily come to the attention of a buyer viewing the property at a time carefully selected by the seller. (Alexander v. McKnight (1992) 7 Cal.App.4th 973, 977.)

Where broker told buyers that some units in the condominium development had suffered moisture intrusion, but that the specific unit being purchased had not, and an inspection of the unit revealed no signs of water intrusion, the broker had no additional duty to disclose her receipt of thirty-one documents chronicling the progression of water intrusion problems within the development, her awareness of severe water intrusion problems in three units, or the fact that she had read the Association’s complaint against the developer in a lawsuit known to the buyer, as these facts merely elaborated on the basic water intrusion problem. (Pagano v. Krohn (1997) 60 Cal.App.4th 1, 8-10.)

Element 5: Intent to Induce Purchase

 The purpose of the nondisclosure must be to induce the buyer to purchase the property. (RSB Vineyards, LLC v. Orsi (2017) 15 Cal.App.5th 1089; see also Lingsch v. Savage (1963) 213 Cal.App.2d 729, 739, 739 n.6; BAJI 12.35(3).)


The element of intent was met where jury could have inferred that the defendant failed to disclose faulty soil conditions in order to induce plaintiffs to purchase the property. (Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 191.)


In nondisclosure cases, this item can be pled in terms of “inducement” rather than “reliance,” which is more common in intentional misrepresentation cases. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 739 n.6; see also BAJI 12.35(3).)

Element 6: Reliance

 The plaintiff must show that he would not have purchased the property if the disclosure had been made. (Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 191; BAJI 12.35(4).)



Plaintiffs’ testimony that they would not have purchased their homes if they had known of the faulty soil conditions was sufficient to meet the element of reliance. Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 191.)

A general allegation of inducement or reliance is probably sufficient, as long as the complaint also sets forth enough facts to show that plaintiff’s conduct was consistent with normal prudence and reasonable under the circumstances. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 739 n.6.)

Disclosure of potential costs for resolving neighborhood groundwater problems would not have affected plaintiff’s decision to buy the property because plaintiff had determined to buy the property even knowing that the groundwater level was high and that there was a landslide risk. (Vaill v. Edmonds (1991) 4 Cal.App.4th 247, 262-63.)

Seller was not liable for failing to disclose information about problems with the property, including building code violations, where the buyer was an engineer skilled in real estate investments, and this information was either in buyer’s possession or was readily accessible to the buyer. (Driver v. Melone (1970) 11 Cal.App.3d 746, 753.)

Element 7: Resulting Damages

The buyer must have suffered damage as a result of the nondisclosure. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 738; BAJI 12.35(5).)


Remedies

 

Compensatory Damages

Defrauded plaintiff may recover the difference between the actual value of that with which he or she parted and the actual value of that which he or she received, plus additional damages arising from the transaction. (Cal. Civ. Code, § 3343.)

Lost Profits

Defrauded purchaser who is induced to purchase property is entitled to lost profits if: (1) he acquired the property for purposes of reselling it for a profit; (2) he reasonably relied on the fraud in buying the property and anticipating profits from the resale; and (3) any loss of profits was proximately caused by his reliance on the fraud. (Cal. Civ. Code, § 3343, subd. (a)(4); see also Cory v. Villa Properties (1986) 180 Cal.App.3d 592, 603 [plaintiff suffered no out-of pocket loss because value of property at time of purchase was equal to or greater than the purchase price, but was still entitled to recover any damages for loss of profits or other gains plaintiff reasonably anticipated in subdividing and selling the property which did not actually exist due to broker’s misrepresentation]; Stout v. Turney (1978) 22 Cal.3d 718, 728.)

Punitive Damages

Defendant’s knowledge and deliberate concealment of termite infestation justified punitive damage award. (Godfrey v. Steinpress (1982) 128 Cal.App.3d 154, 181.)

Joint and Several Liability

Broker is jointly and severally liable with seller for full amount of damages where both broker and seller knew the material facts and failed to disclose them. (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 736.)
 

Rescission May Be Available

Buyer may join broker in broker’s action for rescission against seller in which buyer also seeks consequential damages, and broker may be held jointly and severally liable for full amount of such damages. (Sharabianlou v. Karp (2010) 181 Cal.App.4th 1133.)

Attorneys’ Fees Generally Not Available

Attorneys’ fees are not recoverable if there is no contractual agreement between seller’s broker and purchaser and do not become available to defendant broker merely because plaintiff seeks attorneys’ fees in its complaint. (Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 711 [broker could not recover attorneys’ fees under lease because tort claim for breach of duty of disclosure was not an action to “declare rights under the lease,” as provided in the attorneys’ fees clause in the lease].)

Statute of Limitations

 The statute of limitations is three years from the date of discovery of the facts constituting the fraudulent concealment. (Cal. Civ. Proc. Code, § 338, subd. (d).) The statute begins to run after plaintiff has notice of circumstances sufficient to make a reasonably prudent person suspicious of the fraud. (City of Hope National Medical Center v. Genentech, Inc. (2008) 43 Cal.4th 375; Stevens v. Marco (1956) 147 Cal.App.2d 357, 381.)

The two-year statute of limitations under California Civil Code section 2079.4 does not apply to actions against the broker for intentional fraud. (Williams v. Wells & Bennett Realtors (1997) 52 Cal.App.4th 857, 861-62.)

Affirmative Defenses

Buyer Failed to Exercise Reasonable Care

Buyers have duty to exercise reasonable care to protect themselves from known defects and facts “within [their] diligent attention and observation.” (Cal. Civ. Code, § 2079.5; Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735.)

Defect Disclosed in Third Party Report and Not Within Defendant’s Personal Knowledge

Neither the seller nor any seller’s agent or buyer’s agent shall be liable for any error, inaccuracy, or omission of any information delivered pursuant to this article if the error, inaccuracy, or omission was not within the personal knowledge of the seller or that listing or buyer’s agent. (Cal. Civ. Code, § 1102.4, subd. (a).)