BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Disclosing Lawsuits that Affect the Property
Q: I am a listing agent on a condominium. My 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. I know we have to disclose the repairs that have been made, but do we also have to disclose the prior lawsuit?
A: Yes. In the recent 2009
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: (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:
LISTING AGENTS:
1. 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.
2. 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.
3. If you, as listing agent, are aware of any such lawsuits, include those in your Agent Visual Inspection Disclosure (“AVID”).
BUYERS AGENTS:
4. The disclosure of a lawsuit could be made in a TDS, or in the listing agent’s AVID, or even in the HOA documents, such as the minutes of the Board of Directors talking about a potential claim against a third party.
5. If you, as buyer’s agent, are aware of any such lawsuits, disclose them in your AVID.
6. 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, ask them if they are concerned about it, and recommend they obtain more information about the lawsuit before they remove contingencies.
7. To find out more information, you could contact the listing agent to obtain additional information from the 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).
8. If Buyer needs further information as to what effect this lawsuit could have, buyer could call the attorneys representing the HOA – some will talk to a prospective buyer in the condo complex, others will not. Some attorneys will have prepared a more detailed summary for just this purpose.
9. If buyer still is confused, you should recommend that buyer retain their own attorney to advise them as to the effect of the suit. Because lawsuits for and against a seller or HOA can have material adverse financial consequences, buyers need to understand what the suit is about and, in many cases, get professional assistance from their own counsel as to what it means.
10. 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.
DO NOT FORWARD TO SELLERS OR BUYERS. This Weekly Practice Tip is 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. 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.