Agent Obligations to Visually Inspect Property

On February 23, 2012, the Second District Court of Appeal (in California) announced its decision in Glen Oaks Estates Homeowners Association v. Re/Max Premier Properties, Inc.

Factual Background

The Glen Oaks Homeowners Association (HOA) filed suit against two Real Estate brokers: (1) Re/Max Premier Properties and (2) Dilbeck Realtors®. The complaint alleges that the Realtors® acted as the sellers’ agent for the developers of Glen Oaks Estates and assisted the developers in selling the parcels. Both Re/Max and Delbeck acted as dual agents because they also represented the HOA members as buyers’ agents.

In January of 2005, a significant slope failure occurred along parts of the common slope and driveway. After the landslide, a negligence lawsuit was filed against the HOA and two of its members. The HOA filed a cross-complaint against the developers for indemnity and contribution.

In the discovery process, the developers produced a letter dated December 28, 2000 from Re/Max to the developers. The letter stated that the DRE did not require a homeowners association for the Glen Oaks development, and that the developers should lower the amount of HOA monthly dues to help with the sales. The HOA alleges that Re/Max and the developers collaborated to present a false and misleading budget to the HOA members.

The HOA alleges that the Realtors® received multiple reports from a Soil Engineering company, which included analyses of soil in common areas, forming the basis of the construction of the common roadway and common area slopes. The HOA further alleged that the Realtors® received material information that the Soil Engineers (1) were not validly licensed; (2) their reports were illegal or unreliable; (3) they did not have errors and omission insurance; (4) certain soil reports lacked a signature by an engineer or geologist; (5) the testing or one or more soil reports referenced the investigation and grading of a property in Fullerton rather than at Glen Oaks Estates.

The HOA alleges that the Realtors® either did not provide these soil reports to the HOA members, or gave them soil reports without any warning as to their potential defects. The basis of the complaint is that had the Realtors® acted fairly, honestly, and in consistency with their fiduciary duties, the buyers would have received an accurate budget, would have received the disclosures and reports required by law and DRE regulations, and would have known the soil reports were illegitimate. In light of this information, they would likely have not purchased their homes.

Trial Court Findings

The Realtors® demurred (objected) to the causes of action against them. The trial court sustained the demurrers without leave to amend, which means the Realtors® were dismissed from the lawsuit. The court stated: (1) “The action against the demurring defendants Re/Max and Dilbeck is barred by the statute of limitations….the purchase occurred prior to February 2001…the slope failure occurred in 2005. The complaint was filed on February 25, 2010, after the expiration of the statute of limitations set forth in CCP 338 and CC 2079.4” and (2) the HOA lacks standing to assert a claim against the Realtors® for concealment and/or misrepresentation (i.e. failure to provide a final public report, DRE approved budget, and required disclosures). Such claims belong to the individual homeowners, not to the HOA.

The HOA appealed the ruling on the demurrer.

The Appellate Court first addressed the Standing issue (i.e., the right to bring a cause of action)

On appeal, the HOA relied on the Davis-Stirling Common Interest Development Act (CIDA); Civil Code Section 1350. That section states the following: “An association established to manage a common interest development has standing to institute, defend, settle, and intervene in litigation in its own name as the real party in interest and without joining with it the individual owners of the common interest development in matters pertaining to damage to the common area…..”

The appellate court reversed the trial court and stated “these allegations are sufficient to show the matter pertaining to damage to the common area. Section 1368.3 therefore confers standing.”

Re/Max and Dilbeck argued that the HOA may have grounds to sue the developer but not the Realtors®, because they owe no duties to third parties who were not parties to the contract of sale, and the HOA was not a party to the contracts between the Realtors® and the HOA members.

The appellate court disagreed and stated that CC 1368.3 does not contain a limitation on who the HOA may sue.

The Appellate Court then turned to the issue of the Statute of Limitations

The Realtors® argument on appeal was that CC 2079.4, which provides a two-year statute of limitations for claims against real estate licensees in a purchase and sale transaction, applies to this case. The appellate court determined that this argument is “unavailing” (ineffective).

Section 2079 requires that a real estate broker or salesperson has a duty “to a prospective purchaser of residential real property…to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal, if that broker has written contract with the seller to find or obtain a buyer or is a broker who acts in cooperation with that broker to find and obtain a buyer.”

The appellate court found CC 2079 imposes a limited duty on real estate licensees. A seller’s agent has an obligation to visually inspect the property and disclose the results of that inspection to the buyer.

Courts have consistently characterized the duty stated in section 2079 as a nonfiduciary obligation of a seller’s agent to a buyer, not of the buyer’s agent to the buyer. The court went on to state “the statute of limitations in section 2079 should only apply in negligence or negligent misrepresentation actions brought against a nonfiduciary broker for failure to visually inspect or disclose. It should not apply to actions brought against a fiduciary broker…”

The court set forth a series of appellate cases from various appellate districts, which confirm this opinion.

Salahutdin v. Valley of California (1994) 24 CA4th 555; Field v. C-21 Klowden-Forness

(1998) 63 CA4th 18; Assilzadeh v. California Federal Bank (2000) 82 CA4th 399; Michel v. Moore & Associates (2007) 156 CA4th 756.

All of these cases make it abundantly clear that the fiduciary duty of the buyer’s agent to the buyer is separate and “substantially more extensive than the nonfiduciary duty codified in section 2079”.

Final Results

This case clarifies that (1) Realtors® can be sued by HOAs; (2) the doctrine of fraudulent concealment applies to any cause of action; (3) the statute of limitations on fiduciary claims is not controlled by the two-year limitation stated in section 2079.

The appellate court reversed the trial court as to the demurrers filed by Dilbeck and Re/Max. The court let stand the causes of action of unfair business practices claims against both Realtors®.

This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.

Originally Published February 10, 2012

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