A recent unpublished appellate court decision shows how costly it can be for a seller to willfully fail to disclose to the buyer material defects in a residence. In this case, not only did the Sellers end up with a judgment against them for millions of dollars in favor of the Buyer, but the Court also ordered the Sellers to pay Sellers’ broker over $300,000 as reimbursement for attorneys fees.
This litigation arose out of the sale of a $6.5 million home located in the Pacific Palisades area of Los Angeles. Sellers purchased a home in 2004 and were told before they purchased the home that the house contained active water leaks. In fact, Seller experienced water leaks while they resided at the home for a few years. Sellers hired Broker and eventually sold the house to Buyer using the standard residential purchase agreement used by brokers. This agreement was created by the California Association of Realtors (C.A.R.), the trade association for California real estate brokers.
Pursuant to the agreement, as well as required under California law, the Sellers were obligated to “disclose known material facts and defects affecting the Property” to the Buyer. The Sellers did not disclose the water leaks to their Broker or to the Buyer and did not provide the reports the Sellers had received prior to their purchase of the property.
After he bought the home, the Buyer experienced several leaks and sued the Sellers for breach of contract, negligence per se, intentional misrepresentation, negligent misrepresentation, concealment, rescission, and negligence for Sellers’ failure to disclose the water leaks. The Sellers denied any wrongdoing and filed a cross-complaint against their Broker for equitable and implied contractual indemnity, alleging Broker was negligent and breached its fiduciary duties to the Sellers in connection with the sale of their home to Buyer.
According to court files, the Sellers claimed that they had disclosed water defects. In the section of the Property Questionnaire pertaining to “Water Related and Mold Issues” the Sellers indicated “yes” and separately itemized the following known issues: (I) “small cracks and bubbles in paint at ceiling in home have been repaired, (ii) sealed and repaired outside travertine walls,” (iii) “proper waterproof caulking has been applied and water stains might still be visible under decks,” (iv) “skylight removed and properly resealed, with necessary drywall replaced and painted,” and (v) “balconies off bedrooms-tile has been re-grouted with waterproof grout.” Noticeably absent from these disclosures is any specific mentions of water leaks. While some of these facts suggest past water intrusion and water damage, this simply was not sufficient or the same as identifying specific, active leaks.
A jury found that the Sellers committed fraud against the Buyer and awarded the Buyer damages including punitive damages. The jury also found that Broker was not liable for any claim asserted by the Sellers against their broker. The Broker then asked the Court to award Broker over $360,000 in attorney’s fees it had incurred in defending itself against the Sellers’ cross-complaint. The purchase agreement contained the following language regarding indemnity:
“Seller further agrees to indemnify, defend and hold Broker harmless from all claims, disputes, litigation, judgments, and attorney fees arising from any incorrect information supplied by Seller, or from any material facts that Seller knows but fails to disclose.”
Pursuant to California Civil Code section 2772, “Indemnity” is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person. The Seller argued that the contract language meant that the indemnity was limited to damages Broker incurred to a third party. Seller asserted that in this case Broker was not liable to a third party but was instead in a direct dispute with the Seller. It is noteworthy that If the indemnity is against claims, demands, damages, or costs, then the indemnified person is not entitled to recover without payment pursuant to California Civil Code sections 2778(1) & (2).
The Court held that the language holding Broker harmless from “all claims, disputes, litigation, judgments, and attorney fees arising from any incorrect information supplied by Seller, or from any material facts that Seller knows but fails to disclose” was broad enough to cover the attorneys’ fees incurred in litigation against the Sellers. The Court stated that it was the expectation of the parties that if Broker was drawn into litigation as a result of the Sellers’ misrepresentations, Broker would be reimbursed for its costs.
This case did not involve a situation in which it was questionable whether the defects were material. Clearly water leaks and water intrusion in general is a material fact that must be disclosed. The jury essentially found that the Sellers knew the defects were significant and that Seller’s intentionally concealed the defects. A review of the above-mentioned disclosures suggests that the Seller tried to dance around the topic of water damage by mentioning symptoms of water damage (e.g., stains, paint bubbles) and their remediation of possible water problems (e.g., sealing various areas) without actually mentioning existing leaks.
This case is another good case illustrating the negative ramifications of deliberate non-disclosure.