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Disclosures In The Sale of Property

Anyone who has sold a home is familiar with the requirement for disclosures to the buyer. Those disclosures should cover not only things wrong with the property, but also any facts affecting the value or desirability of the property. The facts must be "material"; that is, having a significant and measurable effect on the market value. In the case of residential property (one to four units), the seller must complete a transfer disclosure statement in the form prescribed by statute. (Civil Code, section 1102.) Significantly, the central question to be answered in the disclosure statement - "Are you (Seller) aware of. . . " - reads in the present tense.

I have long been troubled by the fact that the law gives us no guidelines about disclosures in the past tense. To what depth, both in time and in detail, must a seller go in order to make an adequate disclosure? Remarkably, California case law has not thrown more than a few glimmers of light on that question. To give a common example, must a seller disclose a defect in the property that once existed, but has been long since corrected?

A recent case decision plunges into this twilight realm of partial disclosure. In Calamine v. Samuelson (2/17/09) the Court of Appeal overturned a summary (pretrial) judgment in favor of the seller on the ground that, by omitting part of the history from his disclosures, the seller may have concealed something "material" to the buyer.

The case involved flooding in a garage below a condominium. The seller disclosed the flooding, but that was not enough. Let's compare what the seller did disclose with what he did not disclose.

The seller told the buyer about: 1. Water having come through the garage slab five or six times over the past 20 years. 2. A repair done by the homeowners association to eliminate the flooding. 3. The fact that, after the repair, the flooding did not recur. "Problem solved," said the seller.

What the seller did not disclose was: 4. The homeowners' association had filed a lawsuit against the developer for various defects, including the flooding. 5. The association had later sued the company which had undertaken the first repair. 6. After the second lawsuit, the association had another repair undertaken, but not a complete one. 7. The company performing the second repair had warned that its work would not solve the problem entirely.

Needless to say, the buyers experienced a new flood in the garage about 2 ½ years after their purchase. They sued the seller for fraud.

The buyers did not challenge the seller's sincerity in telling them that he had not suffered water intrusion for several years and that he believed that the repairs had solved the problem. So the seller's veracity was not at issue. But the scope of his disclosure was.

The Court of Appeal did not fault the seller for not having elaborated on the type and scope of repairs made by the association. What, then, was the seller's sin? According to the Court of Appeal his sin consisted in not having mentioned the two prior lawsuits leading up to the repairs.

Thus what the seller had considered to be dead issues turned out to be very lively, biting issues. The Court felt that a buyer would want to know not only about the flooding and the repairs, but also about the lawsuits and how they turned out.

I cannot help feeling that the Court went overboard. I can understand a rule under which a seller must disclose a repair, even though the defect which the repair addressed no longer exists. But I do not understand a rule which requires a seller to explain how he got to the point of making the repair; that is, by suing someone and receiving money in a settlement. Why should a buyer care whether the seller tapped someone else for the money or funded the repair out of his own pocket?

Deciding what to disclose and how to disclose it can prove to be an agonizing exercise for sellers and their real-estate agents. Legal requirements and economic consequences conflict with each other. While it is easy enough to say "disclose anything and everything," one never knows which disclosure will kill a sale or, at minimum, cut the price paid.

Both in federal and state law I see a disposition towards expansive disclosure. "Transparency" becomes the greatest of virtues. No detail is too trivial to be divulged. Yet, in my mind, there is a difference between a fact that every buyer should know before buying and a fact that some buyer, out of the multitude of potential buyers, might want to know. I would draw the limit well short of disclosing the latter category of facts.

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