Realtor not Liable for Non-disclosure of Non-conforming use of Property

On July 28, 1995, the California Court of Appeal for the Fourth Appellate District (the greater San Diego area) handed down a decision which held that Sellers of property and their Listing Broker were not liable to Buyers of property located in a flood plain for failure to disclose that local ordinances prevented the home from being remodeled or expanded.

In Sweat v. Hollister, the Buyers purchased a home located in Poway, California. They were represented by a Selling Broker during the transaction. The Sellers and their Listing Broker disclosed to the Buyers that the property was located in a designated flood plain. However, the Buyers were unaware that the Poway Municipal Code barred homes located in designated flood plains from being enlarged or otherwise altered.

When the Buyers became aware of the terms and effect of the City's code, they sued the Sellers and their Listing Broker for damages for alleged failure to disclose, deceit, negligent misrepresentation, and suppression of fact, claiming that the concealed defect reduced the value of their property by $215,000.00.

The Sellers and Listing Broker moved for summary judgment (a written request for entry of judgment without the necessity of trial). The trial court granted the motions and awarded the Sellers and Listing Broker their costs of suit, including attorney's fees.

The Court of Appeal affirmed the entry of the summary judgments in favor of both parties. The Court held that the Sellers and Listing Broker fulfilled their duty to disclose the relevant factual matter, i.e., that the property was located in a flood plain. The terms and effect of the City's code were not a factual matter which was not discoverable by the Buyers, but rather were legal consequences of the flood plain, and thus non-disclosure of the relevant code provision did not raise a claim in their favor. As the Court stated, "It is not the obligation of the seller to research local land use ordinances and advise a buyer as to their effect on the realty."

The Court also affirmed the award of attorney's fees in favor of the Sellers, but reversed the award of attorney's fees in favor of the Listing Broker. The language of the attorney's fee clause in the purchase contract stated: "In any action, proceeding or arbitration arising out of this agreement, the prevailing party shall be entitled to reasonable attorney's fees and costs." Under this language, the Listing Broker was not a party to the contract and thus could not be a "prevailing party" entitled to enforce an award of fees.

This decision reached a common sense result. Realtorsx and Sellers do not generally consider that Buyers of a single family residence may, after close of escrow, consider enlarging or changing the property. The parties to such a sale transaction are involved in the conveyance of the house as built, not as it may be potentially enlarged. It should also be noted that most current forms of purchase contracts expressly include the Broker as a person authorized to recover attorney's fees as a prevailing party in litigation.

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