Having practiced real estate law in Southern California over the past 30 years, I have represented a variety of clients in real estate fraud cases. These clients, both plaintiffs and defendants, have run the gamut from individuals, families, investors, homebuilders and developers. Buyers of both residential and commercial properties oftentimes complain that they were unaware of certain facts when entering into their purchase transaction, and if they had known such facts, would have negotiated a lower price or, possibly, walked away from the transaction. Such disgruntled buyers learn of these “material” facts (facts that arguably affect the value or desirability of the property) during escrow, shortly after closing, or years later. Upon “discovery” of such undisclosed/misrepresented material facts, the buyer feels cheated and seeks justice, usually in the form of a court or arbitration proceeding for damages. Potential targets include not only the seller, but the seller’s broker/agent and, sometimes, even the buyer’s agent, each of whom has different duties of disclosure.
As the seller, full disclosure is essential, and one cannot insulate himself merely by selling “as is” or hiding behind exculpatory clauses and disclaimers. Further, even full disclosure will not absolve the seller from liability if he/she should have known of and disclosed material facts that only his agent knew of, since such knowledge by the seller’s agent can be imputed to the seller (principal). Thus, ignorance of facts affecting the value or desirability of the property is not an absolute defense to compensatory damage claims. The trend is approaching strict liability (although the courts have yet to impose such burden), whereby the seller can be held liable for any nondisclosure or misrepresentation of material fact. [Note: The theory of strict liability against a general contractor or homebuilder exists in other related claims, such as the implied warranty of habitability which has evolved from product liability case law, but such claims are typically limited to mass-produced housing involving a defect that was caused or created by the defendant builder/contractor.]
For realtors representing one or both sides, professional standards are imposed and duties to investigate and disclose material facts are heightened. Listing agents representing the seller typically rely upon their client’s disclosures and knowledge of the property, which is sometimes incorrect. It is oftentimes a triable issue of fact as to whether the agent/broker representing the seller should have known the accuracy of such facts, or was aware of other facts that would arguably lead a qualified professional to investigate and discover the correct facts or other undisclosed facts. Further, an opinion expressed by a real estate professional can constitute an actionable misrepresentation of fact, and it is oftentimes a question for the judge or jury to determine if a statement made to a buyer is mere “puffery” by a salesman (e.g., “this is a nice neighborhood”), which is not actionable, versus an actionable opinion of fact made without a reasonable basis (e.g., “the foundation is well built”). These professional duties are particularly heightened if there is a dual agency (whereby the agent represents both seller and buyer in the transaction), which is oftentimes not worth the extra commission given the potentially-conflicting fiduciary duties owed to the buyer (in addition to the seller).
Rarely in my experience is there conclusive evidence of active fraud: the type whereby the seller (or seller’s agent) intentionally misrepresents or conceals a substantial defect or material fact affecting the property. In one case where we represented a couple that purchased a multi-million dollar ocean view home, only to discover that there was mold inside the structure when they later remodeled the house, there was some circumstantial evidence of active concealment. When the seller’s broker noticed an odor emanating from one room, the seller assured him that it was odor from pet urine that remained in the carpeting. The seller’s agent burned candles and baked cookies during an open house, allegedly to mask the smell. When such facts were learned through discovery, a substantial settlement was obtained.
Conversely, we have represented homebuilders, real estate auctioneers and other brokers accused of overreaching sales tactics. In one such case, our real estate auction client allegedly placed “shills” in the live auction audience to bid and artificially “stimulate” bidding activity. In another case, the agents working at a new home sales office were accused of “plugging” the sales office relief map (by placing markers on lots indicating that they were either in escrow or sold, when in fact they were not). The plaintiff homebuyers’ theory was that potential buyers (including plaintiffs) who visited the sales office were more likely to make an offer if only a few lots remained for sale.
In another case involving a new home development, our developer client was sued on the theory that it (through its sales agents) should have disclosed to new home buyers that it was planning to reduce prices or offer buyer incentives in the (then) near future. (This occurred during a housing recession.)
However, these cases of (alleged) intentional wrongdoing are the exception rather than the norm. The general advice we give to a seller, agent or developer is a version of the Golden Rule: If you were the buyer, would you consider this information (that is being withheld or misrepresented) relevant to your buying decision? If so, it should be disclosed or, if you are making a representation, make sure your statements are accurate and you disclose everything within your knowledge (or accessible by diligent inquiry). [Note: While out of an abundance of caution, full disclosure is prudent, disclosing the obvious to a buyer is generally not actionable. In one case where we represented the seller of a large rice farm north of Sacramento, who was sued by an investor who bought the acreage in hopes of a new freeway extension, we prevailed on summary judgment on the grounds that there was no triable issue of fact as to whether the seller could incur liability for failing to disclose that the rice farm (which requires substantial water) was in a flood plain (a matter of public record).]
Much more common is the case of a misrepresentation or nondisclosure that is not intentional or, oftentimes, an incorrect disclosure based on faulty information. Although punitive damages may be avoided by the seller and his/her agent, compensatory and consequential damages can be substantial even if the purchase agreement contains disclaimers and exculpatory language inserted for the purpose of protecting those on the seller’s side and/or shifting the duties of investigation to the buyer. Therefore, having a purchase and sales agreement attorney is crucial to ensuring proper handling of the legal complexities involved.
The Furla v. Jon Douglas Co. Case
An exemplary case in point is the landmark decision of Furla v. Jon Douglas Co. (1998) 65 Cal.App.4th 1069, in which my firm represented the plaintiff buyer (Furla). George Furla had a lot of facts stacked against him in his lawsuit against the seller and the seller’s broker/listing agent, defendant Jon Douglas Co., yet ultimately prevailed in obtaining a generous settlement.
Mr. Furla was a self-described “grave dancer,” looking to invest/buy distressed properties for below-market value. Furla, a stock trader with a business administration degree from the University of Southern California, could hardly be described as a naïve homebuyer, particularly since he had a history of bidding on Beverly Hills’ foreclosure properties. His investment criteria was to research property values in a particular area, determine a bargain price per square foot value, and then make an offer based on the product of this square foot value multiplied by the residence’s (living area) square footage. Furla’s research and investigation (with assistance from his broker, Fred Sands Realtors) led him to bid on (and subsequently purchase) a hillside home in Los Angeles’ Mt. Olympus area.
At an open house, Furla picked up a flyer about the property (which did not mention the square footage of the house) along with a copy of the Multiple Listing Service listing, which described the home’s size as “APX: 5500” (or approximately 5,500 square feet). In typical fashion, at the bottom of the listing was a disclaimer: “Information Deemed Reliable But Not Guaranteed.”
Defendant broker obtained the information that the house was 5,500 square feet from the seller’s daughter (the seller did not speak fluent English), who had the custom home built and believed the house was 5,500 square feet based on the architectural plans. The seller’s broker relied on this information, and testified that she saw no indication that the house was other than 5,500 square feet after several visual inspections of the property. In short, everyone on the seller’s side believed that the house was approximately 5,500 square feet.
The parties negotiated the price at a meeting inside the home, and according to Furla, he pulled out a large calculator, declared “okay, 5,500 square feet, I’ll pay $170 a foot,” and he then entered those numbers into his calculator and held up the calculator with the resulting computation of $935,000 (stating that was his final and best offer, which was then accepted). [Note: This number calculation was important because by Furla showing the numerical result to limited-English speaking Krasinski, seller Krasinski could not claim he misunderstood Furla’s understanding (reliance).]
Subsequently, the parties signed a purchase and sale agreement, which contained several disclaimers and exculpatory-type clauses. For instance, there was express language that buyer Furla was “aware that Broker makes no representations with respect to ‘square footage of the subject lot or the improvements thereon.’” Further, “square footage provided in the Multiple Listing Service, including, without limitation room sizes, and information materials concerning the Property are approximations only.” Further, the contract stated that by “having a professional appraiser measure the Property, Buyer may verify actual. . . square footage.”
Elsewhere in the purchase agreement were recommendations and advisory provisions to Buyer, including in capital letters: “BROKER STRONGLY RECOMMENDS THAT BUYER EMPLOY . . . PROFESSIONALS AT BUYER’S EXPENSE TO INSPECT AND INVESTIGATE THE PROPERTY. . ..”
Furla also acknowledged in the contract: “BUYER IS ADVISED THAT UNDER CIVIL CODE SECTIONS 2079.5, BUYER HAS AN INDEPENDENT LEGAL DUTY TO USE REASONABLE CARE TO PROTECT BUYER CONCERNING FACTS ABOUT THE PROPERTY WHICH ARE KNOWN TO BUYER, OR WITHIN BUYER’S DILIGENT ATTENTION AND OBSERVATION.”
Despite these written disclaimers and exculpatory clauses, at no time during escrow did Furla measure the house’s square footage. In fact, had Furla obtained a copy of his own lender’s appraisal, he would have learned that the appraiser measured the house as 4,311 square feet. Nevertheless, the loan was approved and Furla closed on the house.
Two years later, Furla decided to sell his home and, in the process, interviewed several local realtors. When Furla showed the house to one local realtor (John Parks at Prudential California Realty) and stated that the house was 5,500 square feet, Parks expressed doubt and casually stepped off the interior area at approximately 4,130 square feet.
Furla was understandably upset because he had believed his home contained substantially more living area (5,500 vs. 4,130 sq. ft.), and he based his purchase offer on a price per square foot. He then went out and retained two real estate appraisers to measure the square footage. One appraiser measured the gross living area at 4,437 square feet, and the other at 4,615 square feet. [Note: In my experience having both retained appraisers and also having examined opposing appraisal expert witnesses, the calculation of “gross living area,” particularly when dealing with unusual hillside or irregularly-shaped custom homes, is not an exact science.]
After receiving this information and confronting the seller’s broker (with no success), Furla retained our firm and sued the seller and seller’s broker (listing agent that exclusively represented seller) for fraud and deceit, alleging, among other things, that defendants should have known the house was actually smaller than represented to Furla.
What followed was a civil procedure journey that took several dramatic turns. After extensive discovery, defendants brought a motion for summary judgment contending there was no triable issue of fact in that, as a matter of law, plaintiff did not reasonably rely upon the misrepresentations and, further, unreasonably failed to exercise due care for his own interest as buyer in not investigating and affirming the square footage.
Defendants presented substantial evidence that plaintiff was repeatedly warned in the purchase agreement and in the disclaimer language of the MLS that all statements concerning square footage were approximations only, not to be relied upon, and to be confirmed by buyer if he chose to do so (which he did not during escrow). Further, the broker defendants claimed that they reasonably relied on the square footage information provided to them by seller’s daughter, who built the home and had architectural plans. Defendants also pointed out that the Los Angeles County Assessor, the appraiser who did the “Freddie Mac” appraisal for seller and the property profile for the house all stated that it contained 5,500 square feet. Defendants argued that they reasonably relied on such information and should not be held liable for its inaccuracy.
The trial court (Hon. Alexander H. Williams III) agreed with defendants and granted summary judgment in their favor. Undeterred, plaintiff appealed, which resulted in lengthy briefing, including amicus briefs from the California Association of Realtors and numerous defense firms, including the distinguished appellate firm of Haight, Brown & Bonesteel. After considering all of these briefs and hearing lengthy oral argument (albeit predominately by me and appellate counsel Roy Weatherup for defendants), the Court of Appeal (Charles S. Vogel, Presiding Justice) reversed the summary judgment and gave George Furla a hard-fought victory (defendants ultimately settled with Furla for a substantial amount).
The Court of Appeal published its decision that has since been frequently cited in legal treatises and lawyer’s briefs. Among other holdings, the Furla decision held that a buyer is ordinarily entitled to rely on the representations of the owner or the owner’s agents regarding the size of the property without having to hire his own experts to affirm such representations. Further, a statement expressed as an opinion, by one having superior or special knowledge (a broker) can be an actionable misstatement of fact if the opinion is incorrect. The issue as to whether a statement is actionable is a question of fact for the jury to decide, as opposed to being summarily disposed of by summary judgment or other procedural pre-trial tactic.
Understandably, the seller and his agents need to be concerned about making any representations of fact, particularly if they are not absolutely certain of the accuracy of such representations. “As is” clauses and similar exculpatory provisions are oftentimes ineffective. Even a purchase agreement’s inclusion of an integration clause stating that there are no promises, representations, understandings or agreements outside of the written agreement are oftentimes ineffective.
Miller & Starr, California Real Estate 3d summarizes the law and pitfalls for sellers and their agents (Section 1:153) in the following excerpts:
Many times the prospectus, brochure, or broker’s statement describing the property contains a disclaimer provision stating that “the information contained herein is based upon information from sources deemed reliable and which we believe to be correct, but we cannot assume responsibility for errors or omissions therein,” or words of similar effect.
These types of provisions are intended to protect the seller from liability for intentional or negligent misrepresentation, or the failure to disclose some fact to the buyer, but they have only a limited effect.
A principal who utters a false statement is not relieved of liability merely because the contract contains an integration or exculpatory clause. . . .[A] party who has induced the other party to enter into the contract based on either an intentional or negligent misrepresentation cannot be relieved of liability by any integration or exculpatory clause, or other clause waiving liability, contained in the contract. See Herzog v. Capital Co. (1945) 27 Cal.2d 349.
The buyer may rely on the misrepresentations of the seller even if the contract contains an integration clause stating that there are no other representations [other than those expressly stated in the contract] that have induced the buyer to enter into the contract. See Ron Greenspan Volkswagen, Inc. v. Ford Motor Land Development Corp. (1995) 32 Cal.App.4th 985.
Despite an integration clause stating that there are no other representations other than those contained in the contract, parol evidence of fraudulent misrepresentations is admissible. See Oak Industries, Inc. v. Foxboro Co. (S.D. Cal. 1984) 596 F.Supp. 601.
The general principle that an integration or exculpatory clause does not protect a party against his or her own fraud applies equally to a seller who has an affirmative duty to disclose known material facts to the buyer. A seller who has a duty to disclose a known material fact to the buyer who fails to make the disclosure can be personally liable for fraud regardless of an integration or exculpatory clause in the contract. See Civil Code §1668; Lingsch v. Savage (1963) 213 Cal.App.2d 729.
An integration clause does not protect a broker or other agent from liability for his or her own fraud. In re Jogert, Inc. (9th Cir. 1991) 950 F.2d 1498, 1505-1506.
A principal [i.e., seller] who ratifies the conduct of the agent may be held liable for damages resulting from an agent’s fraud, despite an exculpatory clause or integration clause when the agent’s fraudulent conduct is within the course and scope of his or her authority. Therefore, where the principal is innocent and does not participate in the fraud but accepts the benefits of the transaction and fails to disaffirm the contract after discovery of the agent’s fraud, the contractual provisions do not relieve the principal from personal liability for damages. See Crawford v. Nastos (1960) 182 Cal.App.2d 659.
Generally, an innocent seller is liable to the buyer for his or her agent’s failure to disclose a material fact. An integration clause or exculpatory clause does not protect the innocent seller from damages liability when he or she does not know of the defect, but the seller’s agent has knowledge of the defect and fails to disclose it to the buyer. Because the agent’s knowledge is imputed to the principal, the seller is deemed to have knowledge of the defect and, therefore, has a duty to disclose the defect even though his or her nondisclosure is not with fraudulent intent. The seller is liable for damages for the [agent’s] failure to disclose the defect just as if he or she had failed to disclose a known defect.
In conclusion, the parties to a real estate transaction, whether residential or commercial, are well advised to seek legal counsel through a real estate attorney concerning their respective duties, obligations and rights in the transaction. To minimize liability, everyone on the selling side should disclose, investigate, and continue to disclose before and during escrow.
In the event a dispute subsequently arises between the parties or their brokers, experienced real estate litigators are necessary to advise the parties as to their options, and to oftentimes settle or resolve a dispute at an early stage. Sometimes however, like in the Furla case, there are disputed facts and strong arguments to be made by both sides of the dispute, and experienced litigators are required to argue the case at both the trial and appellate level in order to obtain a favorable outcome. [Note: While a contractual arbitration provision may sometimes streamline the process, the liability issues and legal analysis remain the same.]
John S. Gleason is an attorney with the Newport Beach law firm Bridgford, Gleason & Artinian, and has been practicing real estate and business litigation throughout California for 30 years. Mr. Gleason received his law degree from U.C. Hastings College of Law, his MBA from U.C. Berkeley, and a degree in Business Economics from U.C. Santa Barbara. He also received hands-on experience in sales as a registered stockbroker and investment advisor at the regional firm of Bateman Eichler, Hill Richards. Contact: John.Gleason@Bridgfordlaw.com.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.