Nondisclosure – Litigation

This is the last installment in our 4-part series discussing 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.

If you encounter a material defect on your property that the seller and their agents failed to disclose, and which your inspection of the property failed to catch, the seller may be liable for the cost of fixing the defect or the resultant depreciation of the property’s value (see our previous article). However, you shouldn’t run out and file a lawsuit immediately—any good California real estate attorney will tell you that the first step in a dispute of this kind is likely mediation, also covered previously in this series. If mediation fails, and you have not agreed to binding arbitration in your contract, it is time to file with the court. (Check your dispute resolution clause carefully, and see our previous post covering arbitration.)


Litigation

At the outset, we should say that filing a lawsuit in a nondisclosure case is a last resort when parties cannot remain calm and come to an agreement between themselves. A lawsuit is very costly, and even if the other party ends up paying your court costs in damages (see below), it will likely tie you up in litigation for years. Especially if the financial stakes are not extremely high, it is often better to agree in mediation, whether you are a buyer who feels defrauded, or a seller who feels that the facts are being misrepresented. Often both parties feel this way, but having a good real estate attorney can ensure that cooler heads will prevail.

If you discover a defect that you believe the seller should have disclosed to you, before filing a lawsuit, ensure that you have tried all other means of redress. (Be sure you have tried all the options in our previous articles in this series.) Whether you’re the buyer or seller, if you don’t already have an experienced California real estate attorney working with you by this point, make sure you do going forward. Real estate law is intricate and high-stakes, and you need someone working for you who knows the procedures and pitfalls.

A nondisclosure suit is typically considered “fraud by misrepresentation” or “fraud by concealment.” The buyer is alleging that the seller or their agents knew or should have known about the defect. As outlined in the first installment, under California and common law, the seller and the seller’s agents have a good-faith duty to disclose any issues that may impact the use or value of the property, but the buyer also has a duty to reasonably inspect the property. Thus, the law requires the buyer to prove that the seller and/or seller’s agents know of the fact of the defect and know that that fact is not “within reach of the diligent attention” of the buyer (Lingsch v. Savage, 213 Cal. App. 2d 735). It can be extremely hard to prove that the seller in fact knew that the defect existed, and even if the buyer is convinced that the seller knew, it may turn out otherwise.—For example, what if you discover that shoddy carpentry hiding termite damage. The house was certified free of termites, but at some point, they caused substantial damage to the home, and someone seems to have covered it up. Perhaps they did, or perhaps they simply hired cheap carpenters for some renovations and the carpenters didn’t bother to let the owner know that there was termite damage. In this case, you would need to see if the carpenters had been hired in fact to cover up damage or if the seller could be tied to paying for termite treatment.

While ignorance is a clear defense in a nondisclosure suit, that doesn’t mean the seller can be willfully ignorant. At a certain point, a seller will be held responsible if the seller took no good faith action to be aware of the state of the property, just as the buyer has a responsibility to reasonably inspect the property.

If the seller is found to have breached their duty to disclose, the seller may be forced to pay damages, possibly including the other party’s legal fees, or in some cases, the contract may be rescinded entirely. See the first installment of this series, in which we cover damages and recession.


Before you sell

On a final note, nondisclosure is clearly a potential headache for both buyers and sellers. However, nondisclosure cases essentially concern fraud. California has some of the most stringent laws regarding nondisclosure, requiring a 3-page “Transfer Disclosure Statement” (TDS) to cover many possible defects. So long as the seller fills out and submits the TDS in good faith and the property undergoes typical inspections before the sale by qualified inspectors, both parties should be able to rest secure in the transaction, and real estate agents can guide the parties through this process. However, as a seller, always err on the side of disclosure and avoid liability. For any real concerns, you should always contact an experienced California real estate agent.

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