Common Defects That Lead to Disclosure Disputes

Non-Disclosures Disputes by Kathryn L. Holt

The number one piece of advice we give to sellers is disclose, disclose disclose! With most home sales, the devil is in the details. A dispute over a non-disclosed defect is the most common type of legal issue related to real estate transactions in California. For buyers and sellers alike, the disclosure process can be quite burdensome. It involves filing out and reviewing lengthy paperwork, and for sellers, remembering details about property issues and repairs dating as far back as to when they purchased the property. However, as taxing as the disclosure process can be, it is an important protection for both buyers and sellers in a real property transaction.

The disclosure requirement in California has been well established by the Courts. A seller has a duty to disclose when he knows facts that materially affect the value or desirability of a property, when those facts are only known or accessible to the seller, and when the information is otherwise not known to or within the reach of the diligent buyer. (See Shapiro v. Sutherland (1998) 64 CA4th 1534 and Lingsch v. Savage (1963) 213 CA2d 729). In plain English, this means that sellers must disclose any defect that would affect the value of — or decision to purchase — a property. In some cases, a seller must disclose certain conditions, even if they believe they have been corrected or mitigated. Conditions that require disclosure include everything from a defect in the foundation of the house, to a pending lawsuit, to a noisy or difficult neighbor. When in doubt, our recommendation is simple: disclose.

Disclosure forms often include many checklists, with additional space to note defects or detail any issues beyond that of checking a box. We commonly have our clients write any additional details or information on attachment pages should the need arise. While sellers do not necessarily have to disclose every cabinet ding or floor scratch, sellers must disclose conditions that are material or important enough that they would impact a potential buyer’s decision to put an offer on the property. It is always better to disclose than not, as a non-disclosure can lead to cancellation of the contract — or worse, money damages when they are discovered after the closing. Further, what may not be material to one person may be material to another, so use caution in deciding whether to withhold information.

The National Association of Certified Home Inspectors has stated that the top 10 most common home defects include foundation problems, electrical defects, roof issues, heating combustion problems, improperly completed do-it-yourself (“DIY”) repairs, structural damage, plumbing problems, air or water infiltration problems, inadequate ventilation in attics or crawlspaces, and construction defects. This article will focus on a couple of issues surrounding some of these common defects.

In 1982, the California Court of Appeals made a ruling in the matter of Barnhouse v. City of Pinole. The Court established that a seller has a duty to disclose any conditions of “progressive destruction or substantial impairment” that he knows about, even if the seller reasonably believes that these conditions have been corrected. Some of the defects that fall under this include landslide risks and foundation repairs. If any of these problems that indicate “progressive destruction” are present, even if it is believed that they have been fixed, they must be disclosed.

In addition to conditions causing progressive destruction, DIY repairs are also a big pitfall for sellers relating to disclosures. For many types of construction or renovation work at a property, a permit is required from the appropriate local agency. If a property contains unpermitted work, the seller usually has one of three options. First, they can remove the unpermitted work or renovation. Second, they could seek a retroactive permit. Finally, the house can be sold ‘as-is’. However, a very important distinction to make is that an ‘as-is’ sale does not absolve the seller of liability for a non-disclosure. If your property has unpermitted or DIY repairs, it will likely become a problem for a buyer after close and should be disclosed or addressed in the appropriate disclosure forms. Further, we typically recommend sellers to provide any and all invoices, construction contracts or bids, and other repair documentation as part of their disclosure package. The more information regarding any work done at the property provided to the buyer, the better.

In today’s market, most transactions are non-contingent concerning a buyer’s inspection of the property, meaning buyers enter into transactions already having received and reviewed all of the seller’s disclosures and investigating the property’s condition. In these transactions, the buyer typically does not have the ability to cancel the transaction based on the property’s condition or the information in the disclosures. However, there are some exceptions to note. Statutorily, when a buyer discovers a defect that seller knew about but was not disclosed during a transaction, the buyer gets 3 to 5 days to cancel the transaction based on that non-disclosure, even if the deal is non-contingent. (See Civil Code Section 1102.3) For sellers, ensuring that their disclosures are made completely, timely, and accurately is essential.

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