DISCLOSURE DEBACLE - "IF THERE IS A QUESTION IN YOUR MIND, THERE IS NO QUESTION IN YOUR MIND."
By Gregory V. Ruzicka, LL.M, Esq., and Earl R. Wallace, Esq.
In a recent lawsuit, a broker's "duty to disclose material facts" again was the issue.
After vacant property listed on the Multiple Listing Service for almost a year had gone unsold, the sellers' broker changed the MLS listing to provide that "County states 1 acre...could be split." The broker had apparently spoken to someone at the County to confirm, but could not remember the name or even the gender of the person with whom he spoke. Relying on the MLS listing as well as other assurances made by the broker, a group of two couples purchased the 2.62 acre property in order to subdivide it into two lots to build two homes. Thereafter, an engineer hired by the buyers notified the buyers that while the property was zoned "RR1", the general plan had designated it as "impact sensitive," which required a minimum of 4 acres, which meant that they could not subdivide the property as intended.
The buyers thereafter filed a lawsuit against the broker for misrepresentation and related causes of action. The trial court entered summary judgment (judgment without trial) in favor of the broker. The trial court concluded that the MLS listing contained a knowing or negligent misrepresentation. However, the Court of Appeal also found that the exculpatory provisions in the form California Association of Realtors ("CAR") contract shielded the broker from liability for the misrepresentation. The contract provided, among other things, that the buyers are advised to investigate the property. Moreover, the broker had penned into the contract that the buyers were to satisfy themselves as to the use of the property.
The buyers appealed the trial court's judgment to the Court of Appeal. The Court of Appeal reversed the judgment. The Court of Appeal pointed out that California law (Civil Code section 1668) prohibits a party from contracting away his or her liability for fraud or deceit based upon intentional misrepresentation. The Court of Appeal also cited a provision of the CAR contract that states that the brokers are not parties to the contract. Hence, the broker could not rely on the exculpatory provisions of the contract. The Court of Appeal also rejected the broker's claim that buyers could not have justifiably relied on the statement in the MLS listing because the buyers undertook their own investigation of the property. The Court of Appeal concluded that negligence on the part of the buyers is no defense when the misrepresentation is intentional.
The morale of the story? Do your homework and disclose, disclose, disclose. Failure to disclose can result in liability as well as very expensive and time consuming litigation.
