What Really is Required for a Failure to Disclose Claim?

Non-Disclosures Disputes by Simon Offord, Esq.

Failure to disclose cases are something we deal with on an extremely regular basis. A case I recently litigated confirmed the standard required in order to prevail in such a case.

In such case, we represented a seller of a residence in San Mateo County. The seller used to live in the home, but had been renting the property for a couple years prior to the sale. The seller had a few occasions of past water intrusion issues, but took action that he believed prevented further intrusion. The seller disclosed the prior issues and the remedial action.

The buyers then alleged to have had water intrusion issues soon after close of escrow. The buyers then opened up the walls of the property and discovered water damage and dry rot, which they claimed necessitated re-doing all of the exterior stucco at the property and substantial dry rot repair. They sued for hundreds of thousands of dollars in damages.

The buyers argued that the seller failed to disclose the dry rot and water damage. The sellers argued they had no knowledge of said issues, and disclosed everything they knew, including the fact that there was some prior water intrusion noted. So, what does the law say in a situation like this?

A seller of residential real property must make specified disclosures about the property to the purchaser, unless a statutory exception applies. The required disclosures are set forth in Civ. Code §1102, et. seq. California law provides a mandatory format for the required disclosures, with the express caveat that the making of said disclosures is not a warranty that such conditions do not exist outside the knowledge of the seller. Civ. Code §1102.6. In addition to the specific disclosures provided for by code, a seller is also required to disclose any known facts affecting the “value and desirability of the property.” Sellers are not liable for any non-disclosure and/or inaccurate disclosure where sellers were not aware of the true facts at the time of disclosure. See, Civ. Code §1102.4(a).

Moreover, generally, a seller is not required to “elaborate” as part of their duty of disclose. Instead, a seller is merely required to disclose what they know in good faith. An example of this is found in Calemine v. Samuelson (2009) 171 Cal.App.4th 153. In that case, a seller disclosed that there was past water intrusion. The water intrusion, to seller’s knowledge, was no longer an active issue. The court held that the seller was not under a duty to go into more detail than simply disclose the existence of past water intrusion issues.

Thus, in our recent case, we argued that the buyers were required to establish that the sellers had actual knowledge of the issues complained of (in other words, what was only discovered after removing the exterior stucco and exposing the insides of the walls). We cited to a recent case that held that actual knowledge can be inferred from the circumstances only if, in the light of the evidence, such inference is not based on speculation or conjecture. The case goes on to state that only where the circumstances are such that the defendant “must have known” and not “should have known” will an inference of actual knowledge be permitted, giving rise to liability. RSB Vineyards, LLC v. Orsi (2017 )15 Cal. App. 5th 1089, 1098.

The seller testified that they never opened up the walls of the property or removed stucco, and thus had no knowledge of the condition of the inside of the walls. We argued that no credible evidence was presented to suggest otherwise.

Ultimately, the arbitrator determined that the buyers were unable to prove actual knowledge of the allegedly undisclosed issue. There were several other issues argued by us, including want of damages arguments and failure of the buyers to perform adequate due diligence, however the most significant finding by the arbitrator appeared to be the lack of actual knowledge.

This case reaffirmed the importance of ensuring that a buyer is able to establish such information if one is to pursue a failure to disclose claim. There are many ways to do this, and some of these ways require “discovery” of third parties, however it is crucial to obtain such proof. In the instant case, the buyers ended up losing on all of their claims, and being ordered to pay our clients’ attorney fees.

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