This 4-part article series will discuss the typical steps for a California real estate buyer when defects are not disclosed in a real estate sale, which are likely similar to the steps you may encounter for other real estate disputes as well. Disputes over nondisclosure allegations are one of the most common causes of costly legal battles in real estate deals. However, such disputes do not always have to land in a courtroom, and the process is designed to avoid litigation when possible. This article series will take you through the process, beginning with what a valid nondisclosure allegation is, and then explaining the typical resolution process, which typically begins with mediation and, should mediation fail, then moves to either arbitration or litigation.
The California Civil Code holds the seller significantly responsible for disclosure: the seller, and the seller’s agents, are required “to disclose any fact materially affecting the value and desirability of the property” (Civ. Code §1102.1). The duty of disclosure is covered by both statute and common law, and even complying fully with the statutory requirements does not release the seller from the common law duties.
In California, the seller is required to provide the buyer with a “Transfer Disclosure Statement” (TDS), a 3-page comprehensive document on which the seller represents to the buyer to the best of their knowledge any defects to the property with specific details, and the seller’s agent(s) certify their own corresponding disclosure. This disclosure is necessary even if the property is being sold “as-is.” The seller and the seller’s agents open themselves to allegations of fraud if they fail to make a full disclosure, and mere ignorance is not necessarily an excuse: a good faith attempt must be made by the seller to examine the property and fill out the TDS accurately. Willful ignorance or knowingly misleading statements that are not technically false are still breaches of the seller’s duty to disclose.
The seller cannot be held liable unless the buyer took steps to have the property inspected prior to purchase, but a property inspection does not release the seller from their duty to disclose, and the seller (as well as the seller’s agents) can be held liable for damages related to such defects and the contract subject to rescission (see below). If the buyer does not receive the TDS prior to signing the purchase agreement, the buyer can cancel the contract without breach (within 3 days if delivered in person or within 5 days if delivered by mail).
Unfortunately, defects can take time to emerge, and the buyer might live on the property for some time before they discover a nondisclosure issue. There are statues of limitations for making a nondisclosure allegation, so it is important that you consult a real estate attorney immediately if you believe you have detected a hidden defect.
If the seller is found to have breached their duty to disclose, the buyer will probably be awarded some combination of the following:
Compensatory damages: The seller may be required to pay the buyer for out-of-pocket costs as a result of the defect. These damages might include the cost of correcting the hidden defect, or the seller may be forced to compensate for the decreased property value.
Punitive damages: If the buyer’s real estate attorney is able to prove that the seller or agents’ fraudulent misrepresentation involved malice, the buyer may receive punitive damages on top of the compensatory damages. Punitive damages, as the name implies, aim to punish deliberate misdeeds and deter future wrongdoing.
Rescission of contract: In rare cases, the buyer may be awarded the ability to rescind the contract. The seller will be forced to return the buyer’s money for the sale and the property will be returned to the seller. It will be as if the contract never existed.
Before filing for damages, however, there may be easier means to handle the defect. Legal means of redress are expensive and slow. If you discover a defect, consider these questions first:
Is it a defective item that may still be covered under warranty? There is no need to get the seller involved if the warranty will cover repairs.
Is your property governed by an HOA? If the defect affects a common area, the HOA might contribute to repairs.
Will your homeowner’s insurance cover the repair? As a preexisting condition, probably not, but it’s definitely worth checking to save yourself more hassle in the long run.
Can you work it out with the seller directly? Write a letter calmly and specifically describing the issue and demanding payment for repairs or replacement. You may want to consult a real estate attorney on the wording of such a letter, and whether to send a copy to the seller’s agents as well.
If you can find redress by any of these means, even if the compensation is partial, it may be preferable to a long court battle. But if the defect is something that cannot simply be repaired and involves significant depreciation of the alleged value of the property, you may have no choice. In that case, the first step is typically an attempt to reach an equitable agreement with the seller through structured mediation. We will cover the next step in this process in the next article in this series, Nondisclosure 2: Mediation.