California requires disclosures of defects and deficiencies when selling residential property, but how much disclosure is enough? When you sell your home or condo? What problems do you have to tell the buyer about? What does your realtor have to disclose? How about the buyers' realtor?
An appellate court decision sheds light upon California's complicated real estate disclosure law. In Pagano v. Krohn, 60 Cal.App.4th 1 (1997), the Paganos purchased a condo from Ms. Krohn. Shortly after the Paganos moved into the condo, they became aware of damage from water intrusion. They filed suit alleging fraud and misrepresentation for failing to disclose a severe water intrusion problem that affected the entire condo complex. However, the Court, in effect, said that Ms. Krohn, her real estate agent and the Paganos' agent disclosed all they needed to under the circumstances.
The facts were undisputed. The condominium complex had a water intrusion problem which effected some of the units. The condominium association (Blackhorse Homeowners Association) had filed a lawsuit alleging construction deficiencies against the Developer. It was an ongoing case at the time of the Paganos purchase. A fact that had been disclosed to the Paganos and because of the litigation, they had lowered their purchase price. The Paganos hired a home inspection company to inspect the property prior to sale. Neither the Paganos nor the professional inspector noticed any sign of water intrusion. As far as anyone knew at the time of purchase, the condo in question had no problems.
In addition, the Court noted the following facts:
- Ms. Krohn told the Paganos that a lawsuit existed;
- A consultant that the Paganos' hired told them that downspouts and gutters were recommended to help with drainage;
- The Krohn's agent told the Paganos that the lawsuit involved water intrusion problems; and
- The buyer's agent gave them a letter from the Board of Director's explaining that the lawsuit had been filed against the Developer to toll the statute of limitations, and the Association was hoping to work out a settlement regarding downspouts and gutters with the Developer.
The Paganos became aware that their condo had water intrusion problems during the installation of a sound system shortly after they moved in. The sound engineer showed them damage from dryrot and dampness in an area where the carpet and baseboard had been removed for the speaker installation. The Paganos sued the seller, her agent and their agent on various theories relating to failure to disclose water intrusion problems. They sought to rescind the purchase contract as well as for money damages.
The Appellate Court said that the seller and both agents disclosed all relevant information. The lawsuit had been disclosed to the Paganos prior to them making an offer on the property. The seller had experienced no water intrusion before selling her unit. None was apparent through a visual inspection and there was no reason to believe that the unit would suffer from water intrusion. The Court noted that while disclosures are required under Civil Code §2079, buyers also have a duty. A prospective buyer has a duty under CC §2079.5 to exercise reasonable care to protect themselves by collecting facts that are known or can be known through diligent attention or observation.
The Court found that the Paganos had enough information to make an informed decision whether or not to purchase the condominium. They had enough facts to decide whether to conduct further investigation about potential water intrusion problems.
The moral of this story is: Don't blame anyone but yourself if you are on notice of a potential problem and in the face of it, go ahead with the purchase. The Court will not help you.
Disclosure if Condominium Complex or Housing Development is in a Lawsuit
If your condominium association or housing association has been or will be involved in a construction defect lawsuit with the builder or developer, you will need to disclose that to prospective buyers. There are several items that should be collected and information obtained prior to the sell of your property.
- Ask your homeowner association board of directors or property management company if the Association's attorneys provide a current Real Estate Disclosure Statement.
- Obtain a copy of the Summons and Complaint, if a Disclosure Statement is not provided or is not current.
- Ask your property management company if the homeowners association has filed a Notice of Claim against the developer and, if so, get a copy of the Preliminary Defect List for the development. (Required under Civil Code §910)
- Pay special attention when completing the Seller's Standard Real Estate Disclosure Statement. Err on the side of over-disclosure.
- Hire an independent home inspection during escrow from an insured inspection company with liability or errors and omissions coverage.
- Ask your immediate neighbors if they are having any problems.
- Find out if the Board is planning on filing a claim/lawsuit relating to construction defects any time soon. Get copies of any board correspondence to developer.
Yes, the fact that your home or condo has been involved or will be involved in a construction defect lawsuit will probably affect the purchase price of your property. However, the price reduction will be nothing compared to the litigation costs for failing to disclose the information.