Daily Development for
Thursday, May 9, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

OWNER'S ASSOCIATIONS; DUTIES TO PROSPECTIVE PURCHASERS: Association has no duty to disclose information to prospective unit purchasers concerning defects in units, even if association is currently pursing lawsuit against builder concerning such defects. Kovich v. Paseo Del Mar Homeowner's Assoc., 48 Cal. Rptr. 2d 758 (Cal. App. 1996).

The development was a "common interest ownership" townhouse development, and not a condominium. The court does not disclose whether the defects in question were in the commonly owned area or in the individually owned units (the defects were cracks in slabs and foundation walls). The court apparently doesn't care where the defects existed. The association had no duty to prospective purchasers, period.

An interesting "twist" here is the fact of the existing lawsuit. Even though there could be little question of whether the Association knew of the defects, or that it viewed the existence of them as private information, it still had no responsibility to disclose them. The court talks about the fiduciary duty of the Association to the unit owners themselves as a factor in its conclusion, but presumably this does not mean that the Association could have denied the existence of any problems if asked.

Note: The plaintiff tried to allege that the Association had breached its duty to keep "adequate books and records." But the court dismissed this claim because there was no indication that the prospective purchaser, or anyone else, had sought to examine those books and records prior to the purchase.

Comment: This lawsuit primarily dealt with whether there is an affirmative duty to disclose information concerning defects. It is difficult to know where that duty would come from, or how it would be implemented. Under California statute, the unit owner, and not the association, is given the responsibility to provide information about the Declaration and other association details to the prospective purchaser. Under that scheme, it was difficult for the plaintiff to find a "niche" from which to build any kind of disclosure duty.

But if the custom or practice is that the Association does provide general information concerning its affairs to prospective purchasers, there might be a duty not to withhold significant negative facts in the course of providing the other, more general and positive detail about the development.

Comment 2: As to the "books and records" requirement, the argument that the lawsuit agains the builder ought to have been reflected in the minutes is probably off target. Even the largest corporations don't include discussion of such things in their minute records. But there are other business records of the Association might disclose attorney's bills or other documents that reflect the existence of a lawsuit. Certainly an association would have to maintain regular and orderly records disclosing such information. But this is a far cry from having any duty to make disclosures.

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