CA real estate, disclosure, and a buyer’s duty

Is a seller required to disclose when a property is involved in current litigation?

California law requires sellers disclose certain defects present in the property listed for sale. In addition to obvious defects, like leaks in the roof or cracks in the foundation that are visible with the naked eye, state law also requires disclosure of certain nontraditional defects. One example: the required disclosure of any litigation involving a developer.

Purchase of condominium or housing unit that is part of a larger development is commonplace in California. As such, it is not uncommon for a buyer or seller to find themselves navigating a situation where the development or condo association is in the midst of a lawsuit with a developer while attempting to negotiate a real estate transaction. In these situations, state law puts specific duties upon each party to the negotiation.

A recent court case provides an example . Pagano v. Krohn involved the sale of a condominium unit in California. In this case, the buyer discovered water damage after moving into the unit. The buyer filed suit against the seller, stating the seller failed to disclose a "severe water intrusion problem" during negotiations. The sellers contended the buyers only discovered the damage after the buyers removed carpet and baseboards to install a sound system. The sellers further argued that they revealed the fact the property was part of ongoing litigation against the developer for construction deficiencies that resulted in water damage to some units within the complex.

What duties were present? Under California state law, both the seller and buyer have legal duties in this situation. The seller is required to disclose the presence of litigation. Although the seller did not disclose their unit was one that suffered the damage, the court held disclosure of the litigation was enough to satisfy the seller's obligation - especially since the water damage was not clearly visible or discoverable during an inspection.

The buyer also had a legal duty in this situation. California Civil Code §2079 requires buyers exercise reasonable care to gather information about the property. In this case, the buyer could have gathered more information about litigation and discovered the likelihood that this unit was exposed to potential water damage.

Ultimately, the court held in favor of the seller in this case.

What can buyers and sellers in CA learn from this case? The laws regulating defect disclosures during real estate negotiations in CA are complex. State law requires both parties to play an active role in the process, and a failure to do so can result in costly litigation. It is also important to note CA state law places a duty of disclosure upon the real estate agent or broker. As such, the parties to litigation can include more than just the buyer and seller.