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Real estate fraud and non-disclosure law explained

Feb 15th, 2015 | By | Category: Real Estate Litigation

What to do when the Seller fails to disclose material defects in the property being sold.

Attorneys to seek damages for non-disclosure real estate

Introduction

It’s an exciting time in your life.  You are buying a new piece of property, or even a business opportunity.  The seller makes you what you think is a pretty good deal and you sign the purchase and sale agreement, perform your inspection, and review the seller disclosures.  Your real estate broker might also have performed a inspection of the property.  Then, after the deal closes you find new things out about the property that were not disclosed to you and which cause the property to be much less valuable than you originally thought it would be.  Do you have grounds to file a lawsuit?  A real estate arbitration?  Do you just take the loss and move on?  This blog hopes to explore some of these legal issues.

Non-disclosure defined – Lingsch v. Savage

Here are the facts of Lingsch v. Savage, 213 Cal. App. 2d 729, 732-33, 29 Cal. Rptr. 201, 203 (Ct. App. 1963):

“The complaint filed February 13, 1962, alleges in substance as follows: ‘That plaintiffs are and, at all times since July 10, 1961, were the owners of certain real property located in San Francisco; that prior to plaintiff’s acquisition thereof the defendants Nicholas Kotoff, Nell Kotoff and certain fictitious defendants were the owners, and the defendant Savage a real estate broker represented said owners; and that ‘said defendants entered into a uniform agreement of sale and deposit receipt, a copy of which is hereto attached as Exhibit 1, on the dates therein referred to, and that the consideration as indicated therein was fully paid.’ It is further alleged: that at the time of the sale, the defendants and each of them specifically knew that the building was in a state of disrepair, and that units contained therein were illegal and that the building had been placed for condemnation by the proper officials’ of San Francisco; that the plaintiffs did not know the foregoing matters and did not discover them until November 1961; that ‘the defendants and each of them wilfully and fradulently failed to reveal said information’ to the plaintiffs; that the plaintiffs purchased the property ‘justifiably relying on said defendants’ nondisclosure, as aforesaid, and in the belief that said property was in legal tenantable and properly repaired condition, as required by law’; that the defendants ‘knew that plaintiffs relied on their non-disclosure and intended that they should so rely, and that said non-disclosure was in fact and law misrepresentation of a material fact’; and that the actual market value of the property was $5,000 less than what it would have been in the condition as represented. The complaint sought $5,000 general and $10,000 punitive damages.”

The Court discussed the Seller’s duty to disclose: 

“It is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him 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.  Failure of the seller to fulfill such duty of disclosure constitutes actual fraud. See Cal. Civ.Code, § 1572.

California Civil Code Section 1572

1572.  Actual fraud, within the meaning of this Chapter, consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:
1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
3. The suppression of that which is true, by one having knowledge or belief of the fact;
4. A promise made without any intention of performing it;
or,
5. Any other act fitted to deceive.

What is need to state a cause of action for real estate non-disclosure fraud in California?

The Linsch court discussed the elements:

“The elements of a cause of action for damages for fraud based on mere nondisclosure and involving no confidential relationship would therefore appear to be the following:
(1) Nondisclosure by the defendant of facts materially affecting the value or desirability of the property;
(2) Defendant’s knowledge of such facts and of their being unknown to or beyond the reach of the plaintiff;
(3) Defendant’s intention to induce action by the plaintiff;
(4) Inducement of the plaintiff to act by reason of the nondisclosure; and
(5) Resulting damages. (See 2 California Pleading, Chadbourn, Grossman, Van Alstyne, §§ 990 et seq., pp. 91 et seq.; 2 Witkin, Cal.Procedure, Pleading, § 348, pp. 1326–1327; § 352, pp. 1330–1331; § 356, p. 1334.)”

Typical items a seller may not disclose in a residential real estate transaction

The list of things that might not be disclosed in a residential or commercial real estate transaction include:

1.  Water leaks caused by neighbor properties

2.  Septic tank problems

3.  Plumbing issues

4.  Termite issues

5.  Dangerous chemicals on the property that cause serious health problems

6.  Gas leaks that create explosion risks

7.  Electrical problems

8  Hidden problems in the kitchen

9.  Mold

10.  Other problems

This is just a small list.  Almost anything can be the subject of non-disclosure lawsuits.

What types of damages can you recover in a real estate non-disclosure case

Civil Code section 1102.13 provides: “No transfer subject to this article shall be invalidated solely because of the failure of any person to comply with any provision of this article. However, any person who willfully or negligently violates or fails to perform any duty prescribed by any provision of this article shall be liable in the amount of actual damages suffered by a transferee.”

Here is the California Jury Instruction for Real Estate Fraud Non-Disclosure.

Contact a California real estate fraud law firm

If you need to arbitrate your real estate case or file a civil lawsuit in the Arizona superior courts (including in Pinal, Pima, Coconino, Maricopa,     ) counties, call us to discuss your case.  We are real estate civil ligation and land use lawyers and we can help you identify and fight for your legal rights.

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