Let's imagine that you were interested in purchasing house in Beverly Hills -- just for fun, let's call it the Hansel and Gretel house. Let's also imagine that you found a local broker to represent you in the negotiations with the seller. In our fairytale, the broker had competed unsuccessfully for the listing on the house and in the process learned that it required significant structural repairs. After the house was put on the market, your broker fails to tell you about all of the problems with the house he previously learned about. You do not learn of the structural problems until after the close of escrow. Can this story have a happy ending for the non-disclosing broker?The Court of Appeal recently answered "no" in Michel v. Moore & Associates, Inc. (2007) 156 Cal. App. 4th 756. In that case a real estate agent, Larry Kirkpatrick of Moore & Associates, conducted a walk through of a house in the hopes of getting a listing. In the process, the agent Kirkpatrick took notes about problems with the house that would have to be disclosed by a listing broker to a buyer, including symptoms of structural problems (cracks in the pool, sliding doors that don't close properly, hardwood floors that are separating and damaged stucco). After another broker got the listing, Kirkpatrick showed the house to the eventual buyer. The buyer learned from the Transfer Disclosure Statement that there were interior cracks, but did not learn the other information contained in Kirkpatrick's notes.
Following the close of escrow and significant rains, further cracking appeared in the interior walls of the house. The buyer conducted an investigation and discovered the floor was out of level and there was a major soil instability problem. The buyer sued Moore & Associates.
At trial the jury returned a verdict in favor of Moore & Associates on the grounds that Kirkpatrick did not fail in his duty under Civil Code section 2079 to conduct reasonably competent inspection and did not fraudulently conceal any facts.
The Court of Appeal reversed, holding that Moore & Associates owed a fiduciary duty to the buyer that is broader than the more limited, non-fiduciary duty under Civil Code section 2079. Under the broker's fiduciary duty, he must inform the buyer of all information in his possession that is material to the buyer's interests, regardless of how the information is obtained. The failure to make such disclosure is actionable as "constructive fraud," which is easier to prove than actual fraud because the latter requires proof of intent to defraud.
The moral to our fairytale -- when in doubt, disclose. Non-disclosure cases are quite common in residential real estate transactions. I have handled a number of them in my law practice, including a six week trial of a case involving a crack in a closet. It is up to the seller to tell the broker everything that it is material about the house, but the buyer's broker also has a duty disclose all material, adverse information about the property.
