BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
We frequently receive inquiries regarding whether prior litigation has to be disclosed, particularly, if it occurred years ago and was resolved. The answer is yes, it must be disclosed no matter how long ago it occurred and whether it settled.
Please consider the following scenarios:
- Seller filed a lawsuit against his builder for negligent repair of a slide 35 years ago. He settled the suit. He recently sold the property, but did not disclose the lawsuit. After a significant rain, the property had another slide. The buyer researched the history of the property and learned of the prior slide and litigation. He sued the seller for non-disclosure. The seller paid a significant amount of money to the buyer at a mediation. Had the seller disclosed the lawsuit, the buyer would have had the opportunity to research the slide issue, likely would have purchased the property anyway and a lawsuit would not have been filed.
- Seller is selling a condominium. Seller is disclosing various repairs known to her that were made to her unit and to other units and the common area for leaks around windows. These repairs were made with money from the settlement of a lawsuit by the HOA against the developer who built the condo building. A question arose as to whether the seller must disclose the prior litigation, as well as the repairs.
In the California case of Calemine v. Samuelson, the court held that it was not sufficient for a seller to disclose the repairs made; but the seller should have also disclosed the lawsuit against the developer and repair contractor.
The court felt that the failure of the sellers to disclose the prior lawsuit prevented the buyer from fully investigating the adequacy of the repairs in light of the fact that in that case: (1) Water intrusion had existed since the condominiums were built; (2) there were extensive repairs throughout the complex; and (3) the repairs were made on a budget that had been dictated by the amount recovered in the lawsuit; in other words, perhaps all needed repairs had not been completed.
The court went on to point out that, once the lawsuit had been disclosed, it was then within the buyer’s “diligent attention.”
The prior 1997 case of Pagano v. Krohn also touched on disclosure of lawsuits in an HOA. In that case, the seller did disclose the existence of a lawsuit but, after close of escrow, the buyer felt that the seller or agents should have made a disclosure of the extent of the lawsuit and how it would affect the subject property. The court in Pagano stated that neither the seller nor the agents had a duty to explain the legal effect of a lawsuit.
Combining these two cases, there are several lessons for agents when there has been a lawsuit affecting a property, whether or not it is in a HOA:
PRACTICE TIPS:
SELLERS’ AGENTS:
- Always advise your seller on all properties to disclose the existence of any present, past or threatened lawsuits known to them that affect the property, or the HOA or common areas. An example of a threatened lawsuit would be a notice from the HOA that they are planning on filing a lawsuit against the developer or some other third party.
- Point out question C.16 on the TDS and tell your sellers that they should answer that question “Yes” if they are aware of any past, present or threatened lawsuits. The seller should disclose the name of the suit, where it is/was venued (court) and the case number, if available. For example: Smith v Jones, Los Angeles County Superior Court, Case No. 1234567
- If you, as seller’s agent, are aware of any such lawsuits, include those in your Agent Visual Inspection Disclosure (“AVID”).
BUYERS AGENTS:
- The disclosure of a lawsuit could be made in a TDS, or in the seller’s agent’s AVID, or even in the HOA documents, such as the minutes of the Board of Directors talking about a potential claim by or against a third party.
- If you, as buyer’s agent, are aware of any such lawsuits, disclose them in your AVID.
- Once a lawsuit affecting the property has been disclosed then, as the fiduciary for the buyer, you should bring this disclosure to the attention of your buyer. Recommend in writing that the buyer retain a qualified California real estate attorney to investigate the lawsuit, underlying claims and whether the claims currently affect the property.
- To find out more information, you could contact the seller’s agent to obtain additional information from the seller or HOA (many HOA’s will not deal with a prospective buyer or their agent). The HOA may even have a copy of the complaint for your review. If not, your buyer can go to the local county’s Clerk of the Court and look up the complaint by plaintiff or defendant index and review the file (you can go with buyer, but don’t go alone).
- Do not call the HOA yourself or go to the courthouse looking for information. This investigation is beyond your standard of care.
- Do not give your client advice as to how the litigation impacts on the Property. That is providing legal advice, which is beyond your training and expertise.
- The same is true in the sale of a single-family home or investment property. As buyer’s agent, you should recommend that buyer take those steps necessary to understand the nature of the suit, and what it means to your buyer as a property owner, before they remove the contingencies.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices
Copyright© Broker Risk Management 2022 07/08/22