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.