Seller Lied on Disclosure – California Real Estate Failure to Disclose
In California, the seller has a legal responsibility to provide “meaningful disclosures” regarding the property for sale. If the seller fails to disclose known issues and defects that will affect the property’s desirability or value, the seller and their agent will have substantial liability. A seller cannot just list a property “as-is.”
Due to the “boom and bust” nature of the California property market, California has enacted laws to protect buyers of residential real estate. As a home is often the most expensive thing a person will buy, laws were deemed necessary to protect the public.
The law protects buyers by requiring sellers to disclose certain details of their property condition. This article will cover what must be disclosed and what a buyer can do if the details were not disclosed.
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California Law Requiring Disclosure in Real Estate Purchase and Sales
California law requires sellers of residential real estate to disclose certain details to buyers. The disclosures required under law fall into two categories:
- Physical defects in the fixtures, appliances, or features of the property.
- Structural or site hazards, noncompliance with building codes and permits, and environmental hazards.
The law regarding these disclosures is found in California Civil Code 1102 et seq.
In this law, the seller and their agents must be clear about the property itself but the neighborhood and any other factors that may affect the use and enjoyment of the property.
California sellers must provide buyers with the Real Estate TDS or Transfer Disclosure Statement. This comprehensive document must be provided to the buyer as far in advance of the close of transaction as possible. Often, the seller will complete the TDS before entering into an agreement of purchase. If the seller does not provide it before, the buyer has a legal right to cancel the contract.
If the TDS has been provided to the buyer in person, the buyer has three days to cancel the contract. If the TDS has been sent by mail, the buyer has five days to cancel the contract.
To avoid allegations of misrepresentation, deceit, or fraud, the sellers must disclose everything in the TDS. Everything from cracks in the foundations and plumbing, to operational issues with appliances, should be disclosed in this form. The seller should also note:
- Previous damage to the property and repairs made
- Additions and improvements
- Mold and mildew
- Noises and odors in the neighborhood
- Deaths on the property in the last three years
Note, commercial transactions and multi-unit transactions have different guidelines and standards.
What Should I Do If I Discover an Issue the Seller Has Not Disclosed?
First, note that the buyer can only hold the seller liable for failure to disclose if the buyer did a home inspection before they bought the property.
If you notice an issue with the property that the seller or their agents did not disclose, then you must seek legal advice immediately. There are statutes of limitations that may hamper your lawsuit if you wait to take action.
A seller who fails to disclose issues with the property may be held liable for any damages the buyer bears. Any failure to disclose is considered a breach of the seller’s duties of fair dealing and acting in good faith. California real estate brokers and agents owe buyers a duty of care and therefore will be held to the same standards as a seller.
A buyer can claim damages, which are a financial award for any costs the buyer bears to repair the issue. The buyer may also claim damages for any difference in the property value because of the issue. Your real estate litigation attorney can advise you if you have a case and the value of your damages. You may even charge for fraudulent misrepresentation if you can prove the seller knew about the issue and concealed it from you.
What Types of Damages May I Claim in a California Failure to Disclose Case?
Failure to disclose damages are considered in three main categories:
Compensatory Damages – These cover out-of-pocket expenses the buyer bears to repair the issue or defect. These also cover any decreases to the property value based on the specific issue or defect not disclosed.
Punitive Damages – If your lawyer can prove that concealing the defect was an act of malice by the seller or their agents, then you may recover punitive damages. Punitive damages punish offenders for their malicious actions and to deter the behavior in the future.
Rescission – In rare cases, the buyer may be able to rescind the contract, thus forcing the seller to take the property back and return the buyer’s money.
If you believe the seller failed to disclose information about the property or knew of hidden defects, speak to an experienced real estate litigation lawyer. If the seller or their agents are found guilty, you may recover maximum financial damages.
What Types of Damages May I Recover If the Seller Fraudulently Failed to Disclose?
California law states that a seller who willfully or negligently fails their duty to the seller shall be liable for the amount of damages suffered by the buyer.
The remedies California law offers for the buyer are:
- Damages
- Specific performance (if the seller is forced to fix the error rather than pay money for it)
- Damages for fraud
- Recission
- Cancellation
In most cases, the court will deem monetary damages fair and not require specific performance. The buyer can seek rescission or cancellation to nullify the purchase and give up ownership of the property.
Damages for fraud are calculated as the difference in what the buyer paid and the actual value of the property now the issues have come to light. It is vital to remember that in a rapidly appreciating market, the value of the property might now be higher than the buyer’s purchase price. If so, the buyer will not be awarded damages. The buyer may still be awarded damages to fix the undisclosed issues and any loss of profits or gains anticipated by the buyer when purchasing the property.
Recovering lost profits from the resale or use of the property relies on these conditions:
- The property was bought for the profit anticipated through use or resale.
- The fraud was a key factor in the calculation of anticipated profits, and the buyer reasonably relied on it to make a purchasing decision.
- The damages (loss of profit) was caused by the fraud.
The first condition means that if the property was bought for the buyer to live in, rather than as an investment property, these damages cannot be sought. However, when fraud damages are unavailable, the buyer may seek damages for breach of contract instead. The buyer must specify whether the breach is:
- In a promise to convey the property
- In a collateral promise to the condition of the property
Can the Buyer Claim Lost Profits as Damages? Can the Buyer Claim Loss of Rental Income as Damages?
The court will evaluate this case by case, and in the past, some courts have allowed loss of rental income to be claimed as damages, and some have not. In Saunders v. Taylor (1996) 42 Cal. App. 4th 1538, 1543, the court allowed the claimant to claim future damages. In Chatterley v. Bongiovanni (In re Chatterley) (B.A.P. 9th Cir. May 23, 2005) [*12], citing Stout v. Turney, (1978) 22 Cal. 3d 718, 721, ruled that under Civil Code 3343, lost rent can be included as lost profits.
The buyer must prove in fraud claims that the undisclosed fact is not discoverable by the buyer through diligent efforts.
Conclusion
Both the buyer and seller must understand the need for complete and full disclosure. If the seller is wise, they will protect themself from liability by disclosing any known issues in writing and ensuring it is initialed by the buyer. Real estate sale documents are comprehensive and will have pages prompting disclosures and space for the buyer to initial and sign. Sellers are advised to go through their records to ensure they have not forgotten any issues. They may also wish to seek a professional to check for any issues they may not be aware of.
As a rule, we advise our clients when selling property to put in writing every defect they have reason to believe exists and have the buyer initial the disclosure. This way, your protection is maximized. Even though this may lower the sale price a little, it will save you money long term.