Real Estate Broker Agent Negligence Duty to Inspect & Disclose: Law Liability Elements Remedies Defenses Lawyer

Definition.

A real estate broker representing a seller of residential real property has a duty to a prospective purchaser to conduct a reasonably competent and diligent visual inspection of the real property and to disclose to the prospective purchaser all facts materially affecting the value or desirability of the property that such an investigation would reveal. (Ryan v. Real Estate of the Pacific, Inc. (2019) 32 Cal.App.5th 637, 645; Cal. Civ. Code, § 2079 et seq. [codifying Easton v. Strassburger (1984) 152 Cal.App.3d 90].)

Note: This cause of action differs from Intentional Nondisclosure of Material Facts, which requires specific intent to induce action by the buyer and the broker’s actual or constructive knowledge of the material fact.

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Breach of Broker Duty to Purchaser to Inspect and Disclose California Law: Civil Code § 2079

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Element 1: Broker Representing Seller

This duty applies to real estate brokers and salespersons licensed under Division 4 of the Business and Professions Code. (Cal. Civ. Code, § 2079, subd. (a).) The broker must have a written contract with the seller to find or obtain a buyer or be a broker who acts in cooperation with the listing broker to find a buyer. (Cal. Civ. Code, § 2079; Easton v. Strassburger (1984) 152 Cal.App.3d 90, 98 n.2.)

The duty under Civil Code § 2079 does not extend to an attorney representing a seller where the attorney is not acting as a real estate broker, did not attempt to persuade the buyer to purchase, made no effort to interfere with the buyer’s investigation, and made no representations regarding the property. (Los Angeles Memorial Coliseum Com. v. Insomniac, Inc. (2015) 223 Cal.App.4th 803, 831; Heliotis v. Schuman (1986) 181 Cal.App.3d 646, 650.)

The “cooperating broker” to whom the § 2079 duty applies is one who acts in cooperation with the seller’s broker to find a buyer, not a broker who contracts directly with the buyer to act as the buyer’s sole agent to find him a residence. (Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25.)

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Element 2: Residential Real Property

This statutory duty applies to sales of residential real property comprising one to four dwelling units, leases of such property that include an option to purchase, and ground leases of land on which one to four dwelling units have been constructed. (Cal. Civ. Code, § 2079.1.)

The duty applies only to brokers selling residential real property of four or fewer dwellings. (Cal. Civ. Code, § 2079, subd. (a); Smith v. Rickard (1988) 205 Cal.App.3d 1354, 1362.)

The broker’s duty to investigate under California Civil Code § 2079 did not include a duty to inspect the commercial portion of the property. (Smith v. Rickard (1988) 205 Cal.App.3d 1354, 1363 [Cal. Civ. Code § 2079 did not apply where subject property had 25 acres of income producing fruit trees, which buyer intended to continue to grow for commercial purposes, where defect in property concerned only commercial portion of property, not residence, even though existence of residence on commercial property may have motivated buyer to purchase property].)

The presence of a residence on property did not transform commercial property into residential property for purposes of California Civil Code § 2079. (Smith v. Rickard (1988) 205 Cal.App.3d 1354, 1363.)

If the property is a unit in a condominium project, planned unit development, or stock cooperative, the broker is not required to inspect any part of the project other than the unit being sold. (Cal. Civ. Code, § 2079.3.)

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Element 3: Duty to Prospective Purchaser

 The plaintiff must be a prospective purchaser of the property in question. No privity of contract between the broker and the prospective buyer is required. (Cal. Civ. Code, § 2079; Easton v. Strassburger (1984) 152 Cal.App.3d 90, 98 n.2.)

The duty arising under California Civil Code § 2079 runs only to prospective purchasers of the subject property, not to third party trespassers or bystanders on the property. Lucas v. Pollock (1992) 7 Cal.App.4th 668, 674 [migrant workers living in temporary structures on landowner’s property who were injured by fire on property were not entitled to any disclosure under § 2079 from landowner or broker who was aware of danger].)

The duty under California Civil Code § 2079 does not extend to buyer’s social guests who are not themselves prospective buyers and who are not in privity with any broker, seller, or potential buyer. (FSR Brokerage, Inc. v. Superior Court (1995) 35 Cal.App.4th 69, 72 [broker not liable to buyer’s social guests who were injured when balcony on property collapsed].)

In enacting California Civil Code § 2079 et seq., the Legislature intended only to codify and clarify the court’s holding in Easton v. Strassburger, not to modify or restrict any existing duties owed by brokers and other real estate licensees. (Cal. Civ. Code, § 2079.12.)

A broker’s fiduciary duty to a purchaser-client is substantially more extensive than the non-fiduciary duty owed under California Civil Code § 2079. (Field v. Century 21 Klowden-Forness Realty (1997) 63 Cal.App.4th 18, 25-26.)

Duty to disclose dual agency under California Civil Code § 2079.16 runs to both buyer and seller and must be in writing to seller “as soon as practicable” prior to presenting seller with offer to purchase. (Brown v. FSR Brokerage, Inc. (1998) 62 Cal.App.4th 766, 777-78 [where dual agent did not call seller’s attention to dual agency and seller accepted less than his asking price, agent’s disclosure of dual agency in papers signed by the seller at closing without his reading them did not bar seller’s claim for breach of agent’s duty of disclosure].)

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Element 4: Broker Breach of Duty to Inspect

 The broker must conduct a “reasonably competent and diligent visual inspection.” (Cal. Civ. Code §2079 et seq.; Easton v. Strassburger (1984) 152 Cal.App.3d 90.) This standard is the degree of care a reasonably prudent real estate licensee would exercise, as measured by the degree of knowledge through education, experience, and examination required to obtain a license. (Cal. Civ. Code, § 2079.2; Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 305.)

The broker is not required to inspect areas that are “reasonably and normally inaccessible” to a visual inspection, nor is broker required to inspect areas off the site of the subject property or to inspect public records or permits concerning the title or use of the property. (Cal. Civ. Code, § 2079.3; see also Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 308.)

Brokers had no duty to call homeowner’s association of a planned unit development to inquire about any common area construction defects or any pending litigation where the brokers had no knowledge of any such defects or litigation, and the home inspection showed no defects. (Padgett v. Phariss (1997) 54 Cal.App.4th 1270, 1282.)

The broker is not obligated to investigate or discover hidden problems not visually apparent from an inspection. (Wilson v. Century 21 Great Western Realty (1993) 15 Cal. App. 4th 298, 308 [broker was not liable for failure to discover absence of steel reinforcements or “J” bolts connecting foundation with house where plaintiff only discovered such defect by fishing around under the house between the foundation concrete and some concealing wood with a flat steel bar and testified that defects were “hidden” and “covered up”].)

The broker has a duty to investigate further to determine what problems exist if the broker observes “red flags” indicating potential problems with the property. (Easton v. Strassburger (1984) 152 Cal.App.3d 90, 104 [broker should have requested a soils report or taken other significant steps to determine if soil problems existed because broker knew that residence was built on fill soil and knew that settlement and erosion problems are commonly associated with such soil, and broker observed uneven floors]; but see Robinson v. Grossman (1997) 57 Cal. App. 4th 634, 642-45 [where broker disclosed information provided by seller regarding stucco cracks, water stains and peeling paint and buyer had conducted an inspection and was aware of “red flags,” broker’s duty under Section 2079 did not include a duty to independently verify or disclaim the accuracy of the seller’s representations].)

California Civil Code § 2079 does not relieve the prospective purchaser of his duty to investigate the property himself. (Cal. Civ. Code, § 2079.5; see also Pagano v. Krohn (1997) 60 Cal.App.4th 1, 10; Sweat v. Hollister (1995) 37 Cal.App.4th 603, 608, disapproved on other grounds; Santisas v. Goodin (1998)17 Cal.4th 599, 609 n.5; Mediterranean Constr. Co. v. State Farm Fire and Cas. Co. (1998) 66 Cal.App.4th 257, 266.)

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Element 5: Breach of Duty to Disclose Material Facts

The broker must disclose “all facts materially affecting the value or desirability of the property that [the] investigation would reveal.” (Ryan v. Real Estate of the Pacific, Inc. (2019) 32 Cal.App.5th 637, 645; Cal. Civ. Code, § 2079 et seq; Easton v. Strassburger (1984) 152 Cal.App.3d 90.)

This cause of action is based on negligence, and there is no knowledge requirement. The plaintiff need only show that the broker failed to disclose facts that a reasonably competent and diligent inspection would have revealed. (Ryan v. Real Estate of the Pacific, Inc. (2019) 32 Cal.App.5th 637, 645.)

The broker need not disclose the legal ramifications of the facts or conclusions as to how they may adversely impact the property’s value. (Sweat v. Hollister (1995) 37 Cal.App.4th 603, 608-09, disapproved on other grounds; Santisas v. Goodin (1998) 17 Cal.4th 599, 609 n.5; Mediterranean Constr. Co. v. State Farm Fire and Cas. Co. (1998) 66 Cal.App.4th 257, 266 [broker’s disclosure that property was in a flood plain was sufficient; broker did not need to advise buyer of detrimental aspects of such location].)

Broker who had disclosed that the development had a water intrusion problem that had resulted in a lawsuit against the developer had no duty to disclose additional facts regarding water intrusion in other units within the development. (Pagano v. Krohn (1997) 60 Cal.App.4th 1, 8-10.)

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Remedies

 As of the publication date, no cases were found under California Civil Code § 2079 that specifically discuss the remedies available for this cause of action.

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].)

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Statute of Limitations

 The statute of limitations is two years from the date of possession, measured from the date the grant deed was recorded, the date escrow closed, or the date the property was occupied by the purchaser, whichever is earlier. (Cal. Civ. Code § 2079.4; Loken v. Century 21-Award Properties (1995) 36 Cal.App.4th 263, 273.)

Note: Courts have been reluctant to apply the two-year statute of limitations under § 2079.4 to other types of actions against brokers. (See, e.g., Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25 [two-year statute under § 2079.4 did not apply to claims based on breach of fiduciary duty]; Williams v. Wells & Bennett Realtors (1997) 52 Cal.App.4th 857, 861-62 [two-year statute under § 2079.4 did not apply to action against broker for intentional fraud]; West v. Superior Court (1994) 27 Cal.App.4th 1625, 1631-35 [two-year statute under § 2079.4 did not apply to seller’s action against broker for implied contractual indemnity].)

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Affirmative Defenses

 

Buyer Failed to Exercise Reasonable Care

Buyers and prospective 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; Easton v. Strassburger, 152 Cal. App. 3d 90, 103.)

Defects In Inaccessible Area

The inspection to be performed pursuant to Section 2079 does not include or involve an inspection of areas that are reasonably and normally inaccessible to this type of an inspection. (Cal. Civ. Code, § 2079.3; Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 308.)

Defects Off-Site or In Public Records

The inspection to be performed pursuant to Section 2079 also does not include or involve an affirmative inspection of areas off the site of the subject property or public records or permits concerning the title or use of the property, and, if the property comprises a unit in a planned development as defined in Section 11003 of the Business and Professions Code, a condominium as defined in Section 783, or a stock cooperative as defined in Section 11003.2 of the Business and Professions Code, does not include an inspection of more than the unit offered for sale, if the seller or the broker complies with the provisions of Sections 4525 to 4580, inclusive. (Cal. Civ. Code, § 2079.3; Padgett v. Phariss (1997) 54 Cal.App.4th 1270, 1282.)