What happens if you are a seller of real property and the purchase contract puts the full onus on the buyer to do its own due diligence and includes no affirmative representations by seller as to the condition of the property? Are you exculpated from liability if a defect is discovered later by the buyer of which you actually knew or must have known? A recent case RSB Vineyards, LLC v. Orsi (“RSB Vineyards”) discusses the potential liability of sellers of real property, whether commercial or residential, with respect to knowledge or imputed knowledge of material defects in such property. (15 Cal.App.5th 1089 (2017)).
In RSB Vineyards, Orsi (“Seller”) sold a property which had originally been a residential home and thereafter converted to a tasting room. The conversion had occurred during the Seller’s ownership pursuant to plans approved by the County of Sonoma and a certificate of occupancy for a “winery/tasting room” was issued. In advertising the property to potential buyers, Seller stated that the property had a vineyard vested winery permit and an active tasting room. RSB Vineyards LLC (“Buyer”) entered into contract with Seller to purchase the property. The purchase contract required that Seller deliver a property statement questionnaire (“PSQ”) to Buyer which required responses to certain questions regarding the condition of the property. However, the PSQ was never delivered to Buyer and Buyer ultimately waived all contingencies and closed on the purchase. Upon its ownership, Buyer’s architect discovered that the renovated residence was structurally unsound for commercial use and Buyer was forced to demolish it. Buyer brought an action against Seller for, amongst other things, breach of contract, intentional misrepresentation, and fraud. The lower court granted summary judgment in favor of Seller and Buyer appealed.
The Court in RSB Vineyards reiterated that a real estate seller has both a common law and statutory duty to disclose. 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, such that a seller is required to disclose them in a real estate transaction if they would have a significant and measurable effect on market value. When a seller fails to disclose a material fact, they may be subject to liability for nondisclosure since the conduct amounts to a representation of the nonexistence of the facts they have failed to disclose.
In RSB Vineyards, Buyer’s architect alleged that the many deficiencies in the property should have been known by the Seller’s constructional professionals when completing the renovation and that this knowledge should be imputed to Seller. The Court held that yes, if Seller was aware of these deficiencies, it had a duty to disclose. However, the Court found the obligation to disclose only arose if Seller had actual or constructive knowledge of the deficiencies. Since there was no evidence of direct knowledge by Seller, it must be proven that Seller “must have known” rather than “should have known”, in order to impute actual knowledge to Seller. The Court found that the defects were not so apparent that Seller, as a layperson and not a construction professional, “must have known”. The Court also considered whether knowledge of the deficiencies could be imputed to Seller through its architects and construction team, but ultimately found that such professionals were not acting as Seller’s agents in such capacities. In light of the foregoing, the Court held that no fraud was committed by Seller.
Buyer also alleged that Seller made affirmative misrepresentations about the property in the offering memorandum by implying the property was suitable for a commercial tasting room. The Court held that the statements regarding the winery permit and active tasting room were those of fact and not a warranty about the propriety of the activities at the site. Therefore, since there was no affirmative assertion by Seller, there could be no cause of action for misrepresentation.
Finally, Buyer alleged a claim for breach of contract based upon Seller’s failure to deliver the PSQ to Buyer. The Court held that this claim too failed because Buyer could not establish a causal connection between the alleged breach and its claimed damages. The PSQ only required disclosure of “known” problems. Therefore, the failure to provide such document, although required by the contract, would not have prevented the Buyer’s loss. Regardless, the Court determined that Buyer waived Seller’s failure to provide the PSQ when Buyer waived all contingencies prior to its receipt.
The Court in RSB Vineyards did not find that this seller of real property was culpable, but the Court did reiterate that such liability could be imposed, depending upon the facts. This case highlights that a seller could be held liable for failing to disclose known defects (or those that they “must have known”, including through an authorized agent), even if there are no affirmative representations about the property by seller in the purchase contract and the buyer is solely responsible to do its own due diligence on the property. Sellers may be well served to contemplate what matters about its real property are incapable of being discovered by potential buyers and consider disclosure to avoid any potential damages.
Authored by Reuben, Junius & Rose, LLP Attorney, Lindsay Petrone
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 & Rose, 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.