Real Estate Transactions: Failure To Disclose Lawsuits

Real estate litigation attorneys may call it “fraud by concealment” or “fraud by misrepresentation”.  You may know them as failure to disclose lawsuits.  Buyers of real estate–often homes but also commercial and industrial buildings–often feel that they have been the victim of an unscrupulous seller.  An experienced real estate litigation attorney can help evaluate the probability of success in a lawsuit over these claims, and this post will highlight some of the issues than often arise.

“In the context of a real estate transaction, ‘[i]t is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property…and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.’  Undisclosed facts are material if they would have a significant and measurable effect on market value.  A breach of this duty of disclosure will give rise to a cause of action for both rescission and damages.  The seller or his or her agent must have actual knowledge in order to be liable for failing to disclose a material fact.”  In California there are also statutory duties of disclosure and a mandated real estate transfer disclosure statement that must accompany the sale in the case of residential sales.

In Los Angeles real estate litigation attorneys face real estate failure to disclose questions on a regular basis.  The evaluation of these claims is not as simple as it might first appear.  Here are some questions to ask when determining whether you have a failure to disclose lawsuit regarding your real estate purchase.

Is there a duty to disclose?

You can only sue a person for non-disclosure if he or she in fact had a legal obligation to disclose something to you.  Usually this is not an issue since these lawsuits typically arise in the context of a purchase and sale.  The seller has a legal duty to the buyer due to the existence of their contractual relationship.  However, see my previous post on the case where a neighbor sued the adjoining property owner, claiming he had an obligation to disclose a potential easement during the purchase and sale process (even though he was not a party to the contract).

Are their facts which effect the truth and accuracy of a seller’s representations?

A seller may have made a true statement.  But there may be additional facts that effect the truth and accuracy of that statement.

Does the seller know that the buyer is suffering under a mistaken belief?

When the seller knows the buyer is suffering under a mistaken belief (and especially if the mistaken belief is induced by the seller), the seller has a duty to correct that mistake.

Does the contract require disclosure?

Obviously disclosure is required when the contract specifically calls for disclosure.

Is the fact ‘material’?

A non-disclosed fact must be ‘material’ in order to create liability.  Whether the fact is material is likely to involve a trier of fact (jury, judge or arbitrator).

Did the seller know the fact?

Let’s suppose that the roof leaks and it was not apparent on walk throughs or during inspection.  A common problem in a failure to disclose lawsuit is establishing that the seller actually knew that it leaked prior to the sale.

Did the buyer know the fact?

A fraud by concealment cause of action often fails when the buyer knew or should have known of the supposedly concealed fact.  This is usually because it is mentioned in one of the documents but may also be something that was discussed with a neighbor, a contractor or someone else.  This may undermine any claim of ‘reasonable reliance’ on any purported misrepresentation.

Los Angeles attorneys, especially those who are not experienced in real estate transactions, often find one element of a fraud by misrepresentation or concealment claim but fail to fully evaluate all of the other elements.  Examples include:  A seller may make a representation about square footage which the buyer believes is a misrepresentation.  However, a review of the case file may show that the buyer signed a Certificate of Occupancy which shows a different square footage number.  At this stage the buyer has a duty to investigate prior to the expiration of the inspection contingency period.  This may destroy any lawsuit for a misrepresentation.  A seller may misrepresent the rent roll on a commercial building.  However, further investigation may uncover that the buyer actually talked to the tenants and knew that some tenants had actually vacated their space, were not paying rent or had been given a rent reduction.  Attorneys often find that their clients fail to mention these facts but they are important aspects of the case and may doom the case.  Fraud by concealment (failure to disclose) and misrepresentation cases are often more difficult than they appear.

Los Angeles real estate litigation attorney Laine T. Wagenseller specializes in real estate and partnership litigation.  He is the founder of Wagenseller Law Firm in downtown Los Angeles.  For more articles on fraud, failure to disclose and real estate transactions, visit www.wagensellerlaw.com.