A brand new court decision has just been published in which California’s Second Appellate District Court held that there may be an obligation to disclose the existence of prior lawsuits alleging non-disclosure of real property conditions even if those property conditions themselves have already been disclosed. This case has significant implications for commercial real estate brokers handling both leasing and sales, and it may well open a virtual Pandora’s Box of secondary concerns which need to be addressed by any prudent broker.
In Calamine v. Samuelson (Cal.2d February 17, 2009; B194461), the appellate court held that a homeowner’s failure to disclose to prospective buyers that certain construction defects in the property had been a subject of prior litigation could spell liability for the homeowner even if a signed Transfer Disclosure Statement had generally described the conditions and had urged the buyers to get their own inspection. According to the Court, disclosure of the litigation would have enabled the buyers to examine the specific allegations of the legal actions and hence to learn information beyond the existence of the defects.
Though the Calamine case dealt with the sellers’ failure to disclose in a residential transaction, the implications of this new decision seem to clear the way for parallel allegations against all real estate brokers as well, including those involved in either sales or leasing transactions. Since there is a duty to disclose known material facts by both the seller and the broker, irrespective of whether the transaction involves a lease or a sale, prudent brokers will review their internal procedures in respect to a number of potential issues.
One of those issues is whether to ask the sellers/lessors/owners specifically about lawsuits. Another is what to do about situations where correspondence—or even oral discussions—refer very generally to undescribed litigation which might even have been long resolved by the time of the listing. And what if the claim isn’t actually a filed complaint but rather a nasty letter from lessee’s attorney, or perhaps even a response from a liability carrier acknowledging receipt of an ancient tender from its insured?
As we have mentioned in the numerous talks we have given to our commercial real estate broker clients over the years, there are many “expert witnesses” who are prepared to testify that the standard of care for commercial brokers involves an independent investigation of the property’s condition. They may now feel emboldened by this recent decision to suggest that there is a duty to check Court records, many of which are online. We have been successful so far in defending against these claims in trials—and this coming summer we will be defending yet another trial on the issue. But decisions like Calamine may render our task more challenging this time, and we will keep you posted.