The Great Disclosure Obligation Dilemma

Special to the San Diego Daily Transcript

Question: When we purchased our home in 1998, we paid for a professional home inspection that revealed drainage problems with the property. These problems were fixed before we bought the home. We recently sold our home, and the buyers are now claiming that they have drainage problems and they are trying to hold us responsible. They say that we “failed to disclose” the drainage problems to them, but as far as we knew there was no problem because we had it fixed. Anyway, we sold the property “as is”, so we should have no problem, right?

Your obligation to disclose facts about the property being sold, and whether or not you sell the property “as is”, are two different questions.

My short answer is: you have a problem. My longer answer explores the seriousness of your problem.

A contract which states that a property is being sold “as is” means that the property is being sold and will be transferred to the buyer in its present condition. “As is” means that the seller assumes no responsibility for making any repairs or improvements to the subject property. It means that the obvious deficiencies in the property, such as broken windows and the like, are the buyer’s problem. But, “as is” does not mean: “what you see is what you get.” “As is” does not mean that you, the seller, can avoid disclosing to your buyer all that you know about the condition of the property you are selling.

You, as a seller of real property, are required to disclose to your buyer any facts materially affecting the value or desirability of the property you are selling that are known or accessible only to you, and which are not known to or within the reach of the diligent attention and observation of the buyer. This language is a paraphrase of a long history of Court decisions in the State of California. It means that sellers must tell buyers facts about properties being sold when those facts are known only to the seller (they are not obvious) and would be important to the buyer in making their decision to buy.

If it would be important to you to know that at one time there were drainage problems on a property you are considering buying, then it is fair to conclude that your buyer would want to know that information also. Even information about your property that seems to you to be trivial can be important to your buyer, or can become important when circumstances change, like when it rains.

Sometimes the failure of a seller to disclose what they know about a property can constitute actual fraud. If a buyer is able to prove in a lawsuit or arbitration that a seller committed actual fraud in a real estate transaction by failing to disclose or by covering up important facts about a property, then that seller could be held liable for paying repair costs and damages equal to the difference in value (if any) between the purchase price paid and the true value of the property at the time of sale. In cases of intentional fraud, punitive damages might be available to a buyer. In most disputes involving real estate purchase and sale agreements, attorneys fees will be available to the prevailing party because most real estate purchase and sale agreements include an agreement that the losing party will be required to pay the prevailing party’s attorneys fees and costs after any legal action.

You believe, in your case, that there was no need to disclose your prior drainage problem to your buyer because the problem had been repaired. Unfortunately, the fact of your repair does not make the information about your prior drainage problem, or the repair, potentially any less important to your buyer in making their decision to buy your property. The decision about the condition of a property being purchased is the buyer’s decision to make, not the seller’s. The buyer is entitled to make their decision to purchase based upon all of the facts that they, the buyer, can observe about the property, together with all of the material facts about the property known to the seller.

You, as a seller, have a legal obligation to disclose what you know. This obligation is not reduced by the fact that you are selling your property “as is.” The buyer is still entitled to know what “as is” means.

You now have the initial problem of responding to your buyer’s complaint, either formally or informally. Whether you will ultimately have the larger burden of paying to help resolve your buyer’s complaint can only be determined after a full analysis of all of the facts, for which you should consult legal counsel of your choosing. My response here is only offered as a general discussion of some of the applicable law based upon the facts contained in your question.

Tuesday, November 26, 2002 Source Code: 20021126tdb

Copyright © 2002 by Kevin K. Forrester. All rights reserved.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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