It is elementary law that owners/sellers of real property are required to disclose to buyers all facts about the property within their knowledge which could materially affect its value and desirability. Buyers who discover material defects in the property, which the sellers failed to disclose during the course of the purchase transaction, may have claims against the sellers for damages arising from fraud and deceit.
A current example involves flooding. Any owner/seller whose property was materially affected by the recent flooding and who fails to disclose that information to buyers could have exposure to liability for damages for fraud, for example, if the flooding caused damage to the property which could have been investigated if disclosure had been made, or if flooding recurred and the buyers would not have purchased the property at all if they had received adequate disclosure.
Traditionally, however, buyers only had claims for fraud against their own sellers, i.e., the parties from whom they directly purchased the property, and who omitted or concealed facts or made false representations of fact in connection with the purchase/sale transaction. Buyers could not hold remote prior owners of the property liable for damages.
This traditional view is based upon the premise that remote prior owners of the property had no relationship to the buyers, had no contact with them, did not omit or conceal facts from them and made no representations to them at all about the property.
Caselaw on the Issue
A recent appellate court decision appears to have changed the traditional view.
The decision in Geernaert v. Mitchell, from the California Court of Appeal for the First Appellate District, was handed down on January 13, 1995. The case involves residential property which was built on uncompacted fill dirt, an unfortunate but common scenario.
In 1984, Plaintiffs, Mr. and Mrs. Geernaert, purchased a single family home in Walnut Creek from Ms. Cynthia Payne. Ms. Payne had purchased the property in 1983 from Mildo Construction, Inc., which had purchased the property in 1982 from Mr. Robert J. Mitchell.
In 1991, a soils engineering report disclosed the following facts: the house was built on unconsolidated fill; substantial soil subsidence had occurred; and perimeter piers and metal jacks had been installed underneath the house to support the foundation. None of those measures had succeeded in stabilizing the house.
The Geernaerts filed a complaint commencing a lawsuit against Mr. Mitchell and Mildo Construction. They alleged in their complaint that Mitchell knew, at the time he sold the house, of the various defects in it, concealed the defects and made false representations that there were no problems with the house. They further alleged that Mitchell intended or expected that his concealments and representations would be repeated to later buyers of the property who would rely on them when buying the house, as the Geernaerts had done.
Alternatively, the Geernaerts alleged that Mr. Mitchell did disclose the defects in the house to Mildo Construction, and it was Mildo which concealed the defects and misrepresented the facts with the intent or expectation that its representations would be repeated to later buyers.
Mr. Mitchell and Mildo Construction each filed a demurrer to the Geernaerts' complaint (a challenge to the legal sufficiency of the lawsuit.) The trial court sustained the demurrers ("throwing out" the complaint), relying on the traditional view that a buyer has no claim for fraud against a remote prior owner of property who made no statements to those buyers, on which they could have relied in purchasing the property.
The Court of Appeal reversed the decision of the trial court, stating that the traditional view of non-liability of remote prior owners to subsequent buyers for damages for fraud is "out of step" with current California law. In doing so, the Court held that remote prior owners have a duty to subsequent buyers of property and can be liable to them for nondisclosure, where the prior owners have reason to expect that false statements made to a successor will be repeated to later buyers who will act on the misrepresentations in purchasing the property.
The Outcome and Import
This case does not mean that Mr. and Mrs. Geernaert prevailed against the prior owners of their property. The Court of Appeal merely reinstated the lawsuit, permitting them to take the case to trial. As the Court stated, "Plaintiffs must still convince a trier of fact that each defendant not only defrauded his purchaser but intended or had reason to expect that the fraud would be transmitted to them."
However, the Court's decision means that buyers now have a cause of action for damages for non-disclosure of defective conditions in property against not only their sellers but also against remote prior owners. This decision underscores the importance of full and complete disclosure and should be taken to heart by sellers of property materially affected by the recent flooding in the greater Sacramento area.
*article courtesy of Brigit S. Barnes & Associates, Inc.