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Court Affirms that Liability for Failure to Disclose Requires Relationship

Breach of Contract, Real Estate Law, and Real Estate Law Litigation by Simon Offord, Esq.

The recent case of Hoffman v 162 North Wolfe LLC confirmed the statutory requirement that in order to prevail on a fraud claim for suppression of a material fact, the defendant must have a legal duty to disclose the fact to Plaintiff.

The Hoffmans (“Buyer”) purchased a commercial property in Sunnyvale, California.  Prior to their purchase, Buyer complained to one of the owners of the neighboring property (“Neighbor”) that vehicles servicing Neighbor’s property were using Buyer’s property. Neighbor allegedly claimed he would “take care of it.”

After escrow closed, Buyer notice that Neighbor’s vendors and employees were still using Buyer’s property to access Neighbor’s property.  Neighbor thereafter sent a letter to Buyer, claiming Neighbor held a prescriptive easement over Buyer’s property.  The parties thereafter sued one another, with Buyer suing for fraud for failure to disclose and Neighbor suing for a prescriptive easement.  Neighbor thereafter filed a motion for summary judgment, alleging that it had no duty to disclose the existence of the prescriptive easement to Buyer.  The trial court granted the motion.

THE DECISION

The appellate court affirmed the trial court’s decision.  The appellate court noted that failure to disclose constitutes fraud in only four circumstances: “(1) when the defendant is in a fiduciary relationship with the plaintiff, (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff, (3) when the defendant actively conceals a material fact from the plaintiff and (4) when the defendant makes a partial representation, but also suppresses some material facts.”

The court found there could not be any liability for nondisclosure unless there was “some sort of transaction” or “relationship” between Buyer and Neighbor. Buyer made the creative argument that there was a relationship by virtue of their “mutual interest” in the properties.  The court of appeal was not convinced.

The appellate court also affirmed that Buyer failed to establish justifiable reliance.  The court reasoned that since Neighbor continued to use the Buyer’s property for 8 months prior to Buyer closing escrow, despite the allegation that Neighbor would “take care” of the issue, there was no reliance.

WHY THIS DECISION IS IMPORTANT

This decision confirms the long-standing principle that in order to prevail in a failure to disclose lawsuit, the buyer must have either a contractual or fiduciary relationship with the defendant.  Here, since Neighbor was not a party to the transaction, Neighbor could not be found liable for failing to disclose the potential easement to Buyer.  Therefore, before filing suit for failure to disclose, one must first establish whether there was a duty to disclose in the first place.

COMMENT

It would be interesting to find out what, if anything, the seller disclosed to Buyer about this dispute.  It is not surprising that the Court found no duty as to Neighbor, but one must wonder if the seller was aware of these issues.  The case makes no mention of what the seller did or did not disclose.

That being said, one would imagine that Buyer would have had an uphill battle against the seller as well, as Buyer was clearly on notice of the issue but decided to close escrow anyway.

Brewer Offord & Pedersen LLP litigate failure to disclose cases regularly, and are here to help.  If you have any questions about this issue, or any real estate legal issues, please contact us at (650) 327-2900, or on the web at www.brewerfirm.com.

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