ShareIn Padgett v. Phariss, the California Court of Appeal addressed fraud, negligence, and breach of fiduciary claims by residential purchasers against licensees for failure to disclose litigation involving a property development. The court held that neither the buyer's representative nor the seller's representative had a duty to inspect the common areas, nor was there a duty to disclose such litigation without knowledge of it.
Padgett (the "Buyer") signed a real estate contract with Sellers to purchase a unit in a planned unit development. The Buyer's representative was Hodgson and the Seller's representative was Phariss. Under the contract, the Sellers were to provide copies of the governing documents and to disclose any pending litigation affecting the property. The Sellers provided a transfer disclosure statement stating that there were no lawsuits pending. Hodgson and Phariss each performed a visual inspection of the property. Each filled out their portions of the disclosure statements, noting no evident problems with the property. Shortly before the Buyer signed the contract, the homeowner's association filed a construction defect lawsuit (alleging soil subsidence) against the developer. The property manager, by letter and newsletter, notified all owners of the lawsuit. The Sellers denied that they had knowledge of the lawsuit at the time of the closing. The Sellers did not inform Phariss of the alleged soil subsidence or of the litigation.
After obtaining title to the property, the Buyer learned about the pending litigation. The Buyer sued the Sellers for rescission and damages and sued both licensees for damages. The Buyer won his rescission suit against the Sellers and there was no appeal. The licensees were granted summary judgment on Buyer's allegations of fraud and negligence against both of them, and on the breach of fiduciary duty claim as to Buyer's representative. The Buyer appealed.
The California Court of Appeal noted that real estate licensees are governed by two sets of duties, those imposed by statute, and those arising from the general law of agency. Under the statutory scheme, the Buyer alleged that both licensees failed to investigate and disclose the soil subsidence and litigation. California Civil Code §1102.13 provides a remedy in damages for a willful or negligent failure to perform the disclosure duties imposed by statute. Also, §2079 codifies the duties of a real estate licensee toward a prospective buyer, i.e. to inspect and disclose pertinent facts about the property offered for sale in a transaction in which that licensee is involved. The duty imposed is to conduct a reasonably competent and diligent visual inspection of the property and to disclose to the prospective purchaser all facts materially affecting the value or desirability of the property.
The court found that the licensees met their statutory duties of inspection and disclosure. Regarding inspection, the court cited Wilson v. Century 21 Great Western Realty 15 Cal. App. 4th 298, 18 Cal. Rptr. 2d 779 (1993) for the proposition that there is no statutory or state common law basis for an "intrusive, speculation-based duty of inspection and disclosure." In Wilson, the court rejected a claim that a licensee had a duty to investigate a foundation to discover an absence of steel reinforcement and bolts by using x-ray methods. Regarding disclosure, the Buyer was not able to show that the licensees knew of any defects in the common areas or of any pending litigation. The court also noted that the statutory scheme did not require a search of public records by the licensees. Thus, the court affirmed summary judgment for the licensees on these claims.
The Buyer's common law claims rested on misrepresentation, negligence, and breach of fiduciary duty. The California Court of Appeal found that a licensee is required to perform a reasonably competent and diligent visual inspection. Regarding the misrepresentation claim, the court found no showing by the Buyer that the licensees made representations based on their knowledge of matters (subsidence or litigation) affecting the property. As for the negligence claim, the court found no duty by real estate licensees to study court files to determine whether a particular property was in litigation. Further, the existence of a fiduciary relationship between the Buyer and Hodgson did not require Hodgson to go beyond the statutory standard of care, i.e. reasonable visual inspection and disclosure thereon. For these reasons, the court affirmed summary judgment for the licensees.
Padgett v. Phariss, 63 Cal. Rptr. 2d 373 (Cal. Ct. App. 1997).