Real Estate: Failure to Disclose

Buying a home, or some other piece of real estate is a complicated process. It involves, among other things; offers, counteroffers, contracts, escrow and a number of different disclosures. The latter item, disclosures, is an area where a number of problems can arise.

If there is a problem with the property, such as a structural defect, the seller has an obligation to honestly disclose that defect to any potential buyer. As you can imagine, the seller has an incentive to conceal any type of structural defect or other problem with the property because those kinds of things tend to reduce the value of the property. For this reason, California law mandates that seller formally disclose anything that adversely affects the value or desirability of the property.

If a seller fails to disclose, or actively conceals, problems that affect the value of the property; they are violating the law, and may be subject to a lawsuit for recovery of damages based on claims of fraud and deceit, misrepresentation and/or breach of contract.

In the case of homes or "dwellings" of up to four units, California law also requires the seller to provide what is called a "Transfer Disclosure Statement." This a fairly lengthy statement, required by California Civil Code section 1102, that must fully disclose a long list of things that may adversely affect the value of the property.

Of course, in order for a seller to be required to disclose an issue with the property, they must be aware of it. California law requires either actual or constructive knowledge of that issue. The former, "actual knowledge" is exactly what is sounds like; the seller is actually aware of the issue. The latter, "constructive knowledge" essentially means that the seller should have known about the issue, and would have known about it had they conducted a fairly reasonable inspection of the property.

Constructive knowledge, however, is something of a double-edged sword as the buyer will not be able to sue the seller if the buyer also had constructive knowledge of the issue with the property. So, under many circumstances, any issue with the property that is readily observable will not give rise to a claim for failure to disclose unless there is some sort of concealment, or abnormal circumstances that allow the seller to be aware of the issue, but not the buyer.

If you find yourself in a situation where you have bought or leased a property, and discover an undisclosed issue or defect; it is likely in your best interests to consult with an experienced attorney who can assess the situation and determine whether you have a potential case to bring against the seller. 

Common Law Requirement to Disclose:

While California law now requires a "Transfer Disclosure Statement" for the sale of homes or 1-4 unit dwellings; the common law of California also requires a seller to disclose anything that affects the desirability or value of a property; provided that they are, or should be aware of it, and it is not readily apparent to the buyer. This can be important, especially for properties that do not require the Transfer Disclosure Statement.

This common law requirement comes from a very long list of court cases going back decades. There are different circumstances and nuances to each case, but the general rule that emerges from them is that if a seller is required to disclose and does not do so, they are committing fraud, and the buyer can sue them for recovery of damages or, in some cases, additional remedies such as breach or recision of contract or unjust enrichment.   

Transfer Disclosure Statement:

In the case of the sale of a home, or a "dwelling" with between one and four units, California law, specifically Civil Code section 1102, requires the seller to provide a Transfer Disclosure Statement. This is a complex, and usually lengthy, document which details a very long list of issues which may affect the value or desirability of the property. Just a few of these issues are:

  • Easements on the property;
  • Natural hazards, such as soil contamination or subsidence;
  • Issues with property tax;
  • Structural damage;
  • Zoning restrictions; and
  • Dangerous conditions, such as a boarded up well on the property.

The question of whether or not an item needs to be included in the Transfer Disclosure Statement is not always easy to answer. For this reason, often times, a seller will consult with a real estate attorney when preparing it. However, just because a seller enlists an attorney when preparing the statement, that does not mean they cannot be sued by the buyer if material facts were omitted.  

The seller's responsibility to report issues on the Transfer Disclosure Statement is conditioned on what is called either constructive knowledge or actual knowledge. The latter means that the seller was actually aware of the issue, and thus is required to report it. The former, constructive knowledge, means that whether or not the seller was actually aware of the issue, they should have been aware of it. Typically, this means that the issue readily apparent upon inspection. While the buyer will also be considered to have constructive knowledge of most physical issues, such as cracks in the foundation, or physical hazards; for things like property tax issues or easements, it is usually only the seller that will have constructive knowledge of these types of issues unless they have the relevant documentation available for inspection.

If a seller fails to disclose any issues required by the Transfer Disclosure Statement, and the buyer learns of the issue after the sale is completed (assuming they do not have constructive knowledge;) they may have viable claims to bring in a lawsuit against the seller under various theories of recovery, including but not limited to, fraud and deceit, negligent or intentional misrepresentation and/or breach of contract. If you find yourself in this situation, it is generally a good idea to consult with an attorney to determine if it is a good idea to pursue your claims.   

Responsibilities of the Buyer to Inspect the Property:

Just because the seller has obligations to disclose issues with the property does not mean that the buyer does not need to exercise reasonable care and judgment when purchasing a property. The buyer has the obligation to conduct a fairly reasonable inspection of any property they intend to purchase. So, even if a defect was not disclosed to them, the buyer cannot hold the seller liable if that defect was readily apparent had the buyer conducted a reasonably thorough inspection. That said, there may be cases where a seller intentionally conceals a defect that would otherwise be observable, or only partially discloses a defect by downplaying its severity. In those cases, the seller can still be held liable.

Selling the Property As-Is:

As mentioned earlier, the seller has the obligation to disclose any issue with the property that can adversely affect the desirability or value of the property, provided that they have actual or constructive knowledge of those issues, and provide the buyer with a Transfer Disclosure Statement. This must be done regardless of whether the property is being sold "as-is" or not.

If the property is being sold "as-is," the seller is essentially making it so the buyer must take the property with all its observable and disclosed faults. If, however, the property is sold "as-is" and the buyer later discovers an issue with the property that was neither disclosed or readily observable, then that issue is not covered by the "as-is" provision of the sale. In such a case, the seller may be liable for the loss in value or desirability, provided that the seller was aware, or should have been aware, of the issue at the time of the sale.

How We can Help:

Failure to Disclose is when a seller(s) and real-estate agent(s) do not inform the buyer of a home or other real property of something wrong with the property or title.  There are many protections for buyers of real property in California.  The seller and the brokers involved in the sale transaction are contractually and statutorily obligated to disclose all known material defects to the buyer.

If you have purchased a home in the last four years and only became aware of a deficiency in the property after the close of escrow, we would like to help.  Please call us at (916)7793500 for a free consultation.


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