Takeaways

  • Always ensure that material known facts and defects are disclosed to the buyer; and pursuant to Article 2 of the NAR Code of Ethics, avoid exaggerating, misrepresenting, or concealing pertinent facts related to a property or to a transaction.
  • Review the seller’s disclosure to ensure all questions are answered, and if the seller refuses to disclose a material fact or defect that you know about, you should make the disclosure.
  • Refrain from completing a required disclosure form on behalf of a seller client.
  • Advise clients to consult with experts regarding applicable zoning codes, potential use restrictions and municipal ordinances for buyer’s future intended use.
  • Preserve in writing all records of disclosures and communications between the parties, including answers about the condition of the property, in accordance with applicable state and local laws.

On April 17, 2024, the California Court of Appeal affirmed dismissal of a lawsuit filed by condominium purchasers against the listing agent in the transaction for allegedly failing to disclose homeowners association (HOA) rules that prevented them from leasing units for two years. The court held that the listing agent did not have a legal duty to disclose the HOA rental restriction because it did not significantly affect the condominium’s market value. Additionally, the court focused on contradictory evidence indicating that purchasers intended to occupy the condominium following the sale.

Section 2079.16 of California’s Civil Code requires listing agents to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known or within observation of the parties. A non-disclosed fact is material if the fact has a significant and measurable effect on the property’s market value.

In August 2019, Mehdi Moghadam and Parvin Mirabadi (“Plaintiffs”), executed a standard form residential purchase agreement for a condominium in Sherman Oaks, California. Plaintiffs claimed they communicated with all parties an intention to use the condo for rental income. The transaction closed in September, and in October 2019, Plaintiffs listed their property for rent. Shortly after, Plaintiffs were informed that leasing their unit was prohibited due to the HOA restriction. Plaintiffs withdrew the rental listing, and the condo unit remained vacant.

In December 2020, Plaintiffs filed a lawsuit in the Superior Court of Los Angeles County against their own agent, the sellers, the listing agent and listing brokerage alleging monetary damages in several causes of action related to non-disclosure of the HOA rental restriction. Plaintiffs claimed each defendant had a duty to disclose because they knew or should have known that the rental restriction was material to the transaction.

The listing agent successfully persuaded the court to dismiss the complaint. The trial court concluded the listing agent had no duty to inspect the HOA covenants or disclose facts revealed from such an inspection. Plaintiffs appealed the dismissal, arguing Civil Code Section 2079.16 establishes a broad duty on the listing agent to disclose facts that materially affect the property’s desirability beyond a visual inspection. Plaintiffs’ own agent and the sellers were not parties to the appeal.

The California Court of Appeal analyzed the causes of action dismissed by the trial court, ultimately ruling in favor of the dismissed listing defendants.

The court partially agreed with Plaintiffs that rental restrictions would be material and desirable facts requiring disclosure by listing agents to prospective purchasers specifically looking to lease the property. But California case law is well established that lawsuits based on non-disclosure of material facts must also claim the non-disclosure significantly and measurably affected the property’s market value. The court analyzed how Plaintiffs only sought loss of their expected rental income and did not allege the HOA rental restriction significantly reduced the condo’s market value; therefore, the court affirmed dismissal of Plaintiffs’ lawsuit alleging professional negligence.

Additionally, the court focused on contradictory evidence in the purchase agreement in which Plaintiffs indicated an intention to occupy the unit as their primary residence. Based on the lack of allegations establishing market harm and the contradictory evidence, the court held that Plaintiffs failed to establish a claim for professional negligence against the listing defendants and affirmed their dismissal.

The court also affirmed dismissal of Plaintiffs’ remaining claims of fraudulent concealment, breach of contract, negligent infliction of emotional distress, and negligent misrepresentation. The court determined Plaintiffs failed to allege adequate facts to legally maintain claims under those theories, centering its analysis around the lack of a legal duty owed in disclosing the restrictive HOA rules and the evidence indicating Plaintiffs’ intention to occupy the unit.

On July 10, 2024, the Supreme Court of California denied Plaintiffs’ petition for review.

Moghadam v. Rodeo Realty, No. B319620 (Cal. App. 2d Dist. Apr. 17, 2024)
The opinion is not published in any official reporter; there may be citation or authoritative restrictions.