By: Richard E. Korb
Fraud and Non-Disclosure of Defects
Fraud occurs when one person or business uses intentional deceit or trickery, misrepresentation or concealment to obtain value or gain an unfair advantage over another. In California, courts also recognize “negligent” misrepresentation as a form of fraud in some cases. For example, under California Real Estate law, a seller who negligently fails to disclose defects or problems concerning the property to be sold—can be liable for serious damages. Real Estate Purchase-Sale
Real Estate Disclosure Law
If you are considering selling your house, you need to be aware of the disclosure laws and any potential problems. If you bought a house and you have discovered a problem that you think should have been disclosed, we will counsel you as to whether you have a valid claim and the best strategy that fits your situation.
Seller’s Duty to Disclose Structural Defects and Other Problems
If you have ever purchased or sold real estate in California, you know that duty of full disclosure, particularity as far as sellers are concerned, is a large part of the process. Sellers have extensive state and local disclosure obligations, as do agents for both buyers and sellers, and the subject has been an area of ongoing tension in the courts.
Most residential real estate agents use standard form California Association of Realtor (“CAR”) purchase and sale agreements and disclosure forms,– which, if properly completed, satisfy most of the seller’s disclosure obligations. We say “most” and not “all” because typically a form contract will anticipate most but not all of the property conditions that should be disclosed. Basically, the form asks the seller to disclose any problems with the roof, pests, structure, basement, attic, heating, cooling and any “latent” material defects or problems that could adversely affect the value of the property. For example, California requires the seller to disclose the presence of lead based paint in homes built before 1978 and any asbestos and radon.
The most important non-disclosure rule in California (which stems from a 1984 Contra Costa County case called Easton vs. Strassburger, 152 CA 3d 90) is that a seller must disclose any condition that could “materially” affect the buyer’s decision to buy the property. When you think about it, this is a very subjective and vague standard. Even something as innocuous as a crack on your bedroom wall could mean nothing or it could be an indication of settlement problems. And just because you think a problem may have been fixed, e.g. damage from a prior flood, doesn’t mean you need not disclose it. Some Examples of Problems That Require Disclosure Include:
· Disclosure of Structural Defects: Sellers are required by law to disclose defects that they knew about or should have known about, including structural defects such as leaky roofs, bad furnaces, or busted plumbing.
· Disclosure of Regulatory Defects: Furthermore, they are required to disclose other material defects which may affect inspections, appraisals, and future resale value. This may include, for example, noncompliance of a building with applicable permit laws. If any remodeling or other major modifications were done without a permit, that fact should be disclosed to purchasers.
The key point is—when in doubt, Disclosure it. The potential consequence of non-disclosure is simply not worth the risk. And if you’re unsure whether to disclose, call Richard Korb for a free consultation. Richard has represented clients for over 30 years in fraud, concealment, and nondisclosure cases. Richard will review your documents, discuss the details of your situation with you and, if appropriate, visit the property before advising you. Richard will help you decide a clear strategy for either pursuing your rights or defending you against allegations of non-disclosure. Richard will guide and represent you each step of the way—in or out of court.
We represent buyers and sellers with integrity, commitment and aggressive advocacy in matters of real estate and non-disclosure litigation. Our goal is to achieve the best possible results in each and every case. To discuss any type of fraud-related concern with an attorney from our firm — call or contact us to make arrangements for a free initial consultation.
One of the key differences between KORB/LAW and other business litigation firms in the Bay Area is that Richard Korb is a proven litigator with over 30 years of court experience. In fraud and non-disclosure litigation, this experience and history of success tends to foster a more reasonable tone during negotiations with the other side and increases the chance of settling the matter in a fair and efficient manner, outside of court.
Whether it is your business property or your home, we understand the uniqueness of real property and take every step necessary to protect your interests and enforce the terms of your purchase agreement.
What if You Or The Other Party Want To Back Out of The Deal?
When the seller or buyer backs out of the deal without a valid legal excuse it is considered a breach of the contract. For example, most purchase and sale contracts for real property contain contingencies, which the parties must remove in writing and let the escrow holder know they have been removed before the purchase becomes final. The contingencies may be inspection contingencies, repair contingencies, and/or financing contingencies. This is called removing or waiving the contingencies.
If the seller backs out of the deal after the buyer has satisfied all contingencies, e.g. demonstrating financing, ability to purchase, this would normally constitute a breach of contract. The seller cannot back out of the sale of the property simply because he or she gets cold feet and does not want to sell the house or because the seller gets another offer that is better than the original offer. In these situations, the buyer can enforce the purchase contract by pursuing mediation or arbitration, or if that does not work, filing a suit for specific performance.
A suit for specific performance is a suit in equity where the buyer asks the court to order the seller to sell the property as previously agreed. The seller may also be required to pay the buyer damages based on the buyer’s out of pocket expenses and attorney’s fees.
Similarly, if a buyer backs out without a valid legal excuse, the seller may pursue mediation, arbitration or a lawsuit requesting the buyer pay damages including the costs incurred, a forfeiture of any purchase deposit, attorney’s fees etc. Since the seller has a duty to try to limit or “mitigate” his or her losses by continuing to try to sell the house to someone else, often the measure of damages is the difference between what the buyer who backed out was supposed to pay and the actual sales price to a subsequent buyer—assuming it was lower.
Because the amount of damages is often speculative or uncertain, many purchase contracts provide a liquidated damages clause—which contains a specific dollar amount for the seller’s maximum damages in the event of the buyer’s breach of the contract. However, these clauses are not always enforceable.
Also keep in mind, that there are situations where a deal may fall through without either side having violated the law—for example, where you (the buyer) try to fulfill the financing contingencies in good faith, and you are simply unable to get approval. In such situations, don’t assume that you will be sued or that you will owe the seller damages for backing out. But clearly, every case is different, and you should consult with a qualified attorney as soon as you encounter or anticipate a problem that could lead to a legal dispute. To paraphrase a well-known saying, “an ounce of prevention on the front-end is worth thousands of dollars on the back-end.”
 RICHARD E. KORB is a seasoned attorney with 30 years of legal practice in real estate, business, family law and more. Over his legal career, Richard has successfully litigated, negotiated and resolved over 300 cases for individuals and companies of all shapes and sizes. Richard leverages his big firm experience to now assist individuals, realtors and smaller companies with a broad spectrum of legal matters. In addition to his legal practice, Richard is also court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2011 RICHARD E. KORB.