Daily Development for
Monday, April 27, 1998

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

VENDOR/PURCHASER; MISREPRESENTATION; SPECIFICITY OF DISCLOSURES: Where seller and buyer's agent disclose general information about pending lawsuit involving construction defects in condominium development that may affect unit that is subject of sale agreement, buyer has duty of inquiry to ascertain such further information as may be available from public record, and nondisclosure of this information by seller or buyer's agent is not actionable.

Pagano v. Krohn, 70 Cal. Rptr. 2d 1 (Cal. App. 1997)

At time of contract, there was a lawsuit pending brought by the condominium association against the builder concerning certain drainage problems. The association had sent a letter to homeowners reassuring them that the developer had agreed to resolve the problems, which primarily dealt with guttering and drainspouts, but that the lawsuit had been filed to avoid the running of the statute of limitations. The court indicated that this letter might have been "overly optimistic." Seller gave this letter to Buyer's broker, who passed it on to buyer. Buyer's broker recommended an inspection and Buyer indeed conducted an inspection.

Buyer alleged that Seller over time had received over 30 pieces of correspondence concerning the construction problem and had read the complaint in the association's lawsuit. The court found no credible evidence, however, that anything in any of this material indicated a direct problem with the unit, or that seller believed there was such a problem. The water problem, however, admittedly could have led to an overall depreciation of values in the development. Further, there was nothing in any of this material that was not available to Buyer through an inspection of the public records.

Held: Once the Buyerwas put on notice of the lawsuit through the disclosure of the letter the Buyer had a duty of inquiry to review publicly available information, and has no claim that either Seller or Buyer's broker was liable for failing to provide such information.

With respect to the Buyer's broker, the court emphasized that the broker did no more than pass on information provided to him by the Seller. Under such circumstances, California precedent states that the broker has no independent duty of verification so long as he discloses that the information is just being passed on from the seller.

The court also pointed out that even if the broker did have a duty to investigate, there likely would be no liability, because the real cause of the Buyer's loss here was the buyer's own failure to make a reasonable investigation.

Comment 1: Lawsuit fever is rampant in California on these issues. On the surface, this looks like a case that never should have been brought, much less appealed. Of course we only know the facts as the court reports them in rejecting the Buyer's claim. There might have been more. In the editor's view, however, the court properly injects an element of responsibility when it tells the Buyer either to be cautious in reviewing available information or suffer the consequences.

The Buyer's position here was that the seller had a duty to disclose facts that the Buyer could readily discover. If the courts leave to the juries factual disputes over what a seller reasonably should disclose concerning discoverable defects, the response by a cautious industry is to take an expensive and often needless "information bath" in every deal. This leads to cumbersome and expensive delays in processing every home sale, and may bring about greater information only in a few. Individual condominium sales transactions are not like offerings of public securities, and it is unnecessary to weigh down every such transaction with costs associated with massive disclosure duties. The editor would not reach the same conclusion, necessarily, in the case of transfers of newly constructed units by builders. But when a consumer unit owner sells to another consumer, there is no reason to shift the burden of investigation to the seller.

Comment 2: The editor feels somewhat differently about the duties of a buyer's broker. A buyer's broker should carry out or recommend all reasonable investigations that such a broker, with a professional's level of knowledge and experience, would carry out in purchasing his or her own home. The editor sees no reason to permit the buyer's broker to "hide behind" the excuse that the broker was simply passing on information. If that information suggested that a reasonable inquiry into the public records was appropriate, the buyer's broker should have suggested such investigation. As the court here concludes that such an inquiry was a reasonable response to the transmission of the letter, there is reason to believe that the broker should at least have recommended such an investigation.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org

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