Seller Beware: Disclosing Construction Defects and Lawsuits in the Sale of a Residence

By: Lance A. Adair

The old saying "let the buyer beware" is of little relevance to California real estate transactions. If you are contemplating the sale of your home in California and have had construction defects or a prior lawsuit involving defects in your home, you should be aware of the basic disclosure requirements under California law.

Sellers of real property in California have a general duty to disclose all material facts that might adversely affect the value of the property, and which the seller knows are not known by the buyer or within the buyer's diligent attention and observation. A failure to fulfill that duty is a form of fraud.

With regard to sales involving from one to four residential units, California Civil Code Section 1102.6 goes a step further in mandating disclosure of all "significant defects/malfunctions" in a variety of construction components, including, among others, interior and exterior walls, roofs, windows, concrete slabs and foundations, and plumbing. If you are selling your home, you either have been or will be presented with a "Real Estate Transfer Disclosure Statement" requiring the disclosure of problems with these construction components, and others. Another part of the disclosure form requires disclosure of known lawsuits affecting the property, "including any lawsuits alleging a defect or deficiency" in the property or in the common areas, if the property is part of a condominium or townhome development.

The disclosure statute is silent on whether to disclose only pending lawsuits or all known lawsuits, including those that have been concluded by settlement or otherwise. However, in 2009, the California Court of Appeal strongly suggested, without squarely deciding, that a seller should disclose even prior lawsuits. (See Calemine v. Samuelson (2009) 171 Cal.App. 4th 153.) In the Calemine case, the seller disclosed a known, prior problem with water intrusion, but did not disclose the fact that two separate lawsuits involving that issue had been filed in court. The buyer promptly sued. The trial court initially found that the seller had adequately disclosed the water intrusion problem. The Court of Appeal, however, disagreed, sending the case back to the trial court to determine whether the seller also should have disclosed the prior lawsuits. Among other things, had the buyers known of the prior lawsuits, they could have obtained the court records and investigated further.

A failure to comply with the disclosure requirements embodied in the Real Estate Transfer Disclosure Statement does not invalidate a sale. However, anyone who willfully or negligently fails to comply is liable for actual damages suffered by the buyer. In addition, compliance with the Civil Code requirements does not relieve a seller of the general, common law duty to disclose anything that might affect the value of the property. The available remedies for a breach of the common law duty include not only damages, but, in an appropriate case, a judgment unwinding the sale.

In the Calemine case, the better course of action for the seller, without question, would have been to disclose the prior lawsuits, even though the underlying problem of water intrusion had been disclosed.

Lance A. Adair is Of Counsel with Kring & Chung, LLP's Irvine, CA office. He can be contacted at (949) 261-7700 or ladair@kringandchung.com.

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