The recent California Court of Appeal decision William L. Lyon & Associates, Inc. v. Superior Court ((2102) 204 Cal.App.4th 1294) may have a large impact on the application of liability limitation provisions in broker agreements. In Lyon, the buyers sued their residential broker (Lyon) almost three years after the closing for breach of contract,
breach of fiduciary duty, negligence and fraud. The buyer-broker agreement had a limitation
provision requiring any related claim be brought within two years after
representation. The broker, who
represented both seller and buyer in the transaction, argued that the claims
were time-barred both by statute and the contract. The Court of Appeal held that the statute of
limitations for all of the claims had not expired despite the expiration of the
agreement’s time limit of liability.
The buyers’ claims arose because the broker allegedly failed
to disclose that the sellers had intentionally covered up defects in the
house. Lyon argued that the claims were not
timely raised pursuant to Civil Code Sections 2079 and 2079.4. Those statutes provide that a seller’s broker
can be held liable to the buyer for up to two years after the closing for failing
to disclose facts related to a reasonably diligent inspection of residential
property. Since the claims were filed almost
three years after the closing, Lyon argued that the claims were not timely. The Court of Appeal decided that this statutory
provision did not apply because these issues arose out of the broker’s
obligation to buyer as its own broker, not as the seller’s broker.
The breach of contract claim was based on the allegation
that Lyon failed to conduct an adequate inspection prior to the sale. The statute of limitations for a contract
claim is normally four years, but parties may contract around this, provided
the timeframe is deemed reasonable as a matter of law. Although there was a reasonable two year
timeframe in the agreement, the buyers argued that they did not discover this
latent defect until later due to the other parties’ fraud so the two year term
of liability should not be triggered until such discovery was made. Generally, a cause of action arises when the
wrongful act is committed, not when it is discovered by the plaintiff. However, in certain cases the courts will
apply the “discovery rule”, in which the statute of limitations does not start
running until the breach is discovered. In
this case, the Court of Appeal held that because the buyers were unable to see
or appreciate the breach when it occurred (as it was a latent defect), the two
year time period was tolled until the discovery of the breach was made. The court also mentioned that the application
of the “discovery rule” was appropriate here as the relationship between the
parties was that of a special trust.
Finally, Lyon argued that the remaining “tort” claims like
breach of fiduciary duty and negligence were not timely filed due to the
two-year contractual limitation. As the
buyers’ broker, Lyon owed a fiduciary duty to the buyers requiring the highest
good faith and undivided service and loyalty.
The court highlighted that even if the buyer-broker agreement had not
been signed, Lyon would still owe such a common law duty to the buyers. As a result, the Court of Appeal held that
the contractual limitations time period in the buyer-broker agreement did not
apply to the breach of fiduciary duty claims, like fraud, negligence and
negligent misrepresentation. As those
remaining claims have longer statute of limitation periods (for example, breach
of fiduciary duty not amounting to fraud is four years) the statute of
limitations had also not elapsed on those claims.
Lyon illustrates that although parties may contract around
statute of limitation periods for certain claims, the courts will consider the
type of breach in determining whether the “discovery rule” should be applied to
possibly extend the timeframe. Further,
buyers, sellers and brokers should be aware that claims based on fiduciary
duties are not usually governed by contractual limitations set forth in a
contract. Therefore, all parties should
be cognizant of statute of limitation timeframes for those particular causes of
action.
The
issues discussed in this update are not intended to be legal advice and no
attorney-client relationship is established with the recipient. Readers
should consult with legal counsel before relying on any of the information
contained herein. Reuben & Junius, LLP is a full service real estate
law firm. We specialize in land use, development and entitlement
law. We also provide a wide range of transactional services, including
leasing, acquisitions and sales, formation of limited liability companies and
other entities, lending/workout assistance, subdivision and condominium work. Copyright 2012
Reuben & Junius, LLP. All rights reserved.
