No free looks in California real estate contracts

Posted on September 6, 2009 by Kevin Forrester

In the buying and selling real estate, "unconditional" offers to purchase are a rarity. An offer to purchase is nearly always "conditional," in the sense that a buyer's obligation to buy depends upon - is conditioned upon - the occurrence of certain events, such as the buyer obtaining financing, receiving seller disclosures, performing inspections and the like. It would be a mistake, however, to believe that the right to inspect is the same thing as a "free look."

The California Residential Purchase Agreement and Joint Escrow Instructions (Form RPA-CA Revised 11/07) (the "California RPA") sets forth buyers' inspection and investigation rights as follows:

Paragraph 7 states that "[u]nless otherwise agreed . . . the Property is sold . . . subject to Buyer's investigation rights." (Paragraph 7A(i)(b))

And,

Paragraph 9 states that "Buyer's acceptance of the condition of, and any other matter affecting the Property, is a contingency of this Agreement as specified in this paragraph and paragraph 14B. Within the time specified in paragraph 14B(1), Buyer shall have the right at Buyer's expense unless otherwise agreed, to conduct inspections, investigations, tests, surveys and other studies ("Buyer Investigations"), including, but not limited to, the right to: (i) inspect for lead-based paint and other lead-based paint hazards; (ii) inspect for wood destroying pests and organisms; (iii) review the registered sex offender database; (iv) confirm the insurability of Buyer and the Property; and (v) satisfy Buyer as to any matter specified in the attached Buyer's Inspection Advisory (C.A.R. Form BIA)." (Paragraph 9A, emphasis added.)

And,

The Buyer's Inspection Advisory (made part of the California RPA through Paragraph 9, above) describes a vast array of components, conditions, restrictions, hazards, locations and other matters that the Buyer is advised to inspect or investigate and, effectively, approve before being obligated to buy the property.

And,

Paragraph 14 provides that the Buyer has 17 (or other "fill in the blank" number of) days to complete all Buyer Investigations (Paragraph 14B(1)), and either remove the applicable contingency, or cancel the agreement (Paragraph 14B(3)).

It might appear from the above contract language that a buyer has 17 (or other specified number of) days to "investigate" every conceivable aspect of the property that the buyer has conditionally agreed to buy, and, thereafter, to decide, in the buyer's absolute and unrestricted discretion, to either remove the "Buyer Investigation" contingency, or cancel the agreement. These imagined buyer rights to cancel are commonly, and mistakenly, referred to by agents as the buyer's "17-day free look."

Buyers, however, do not have unrestricted rights to "change their minds" under the California RPA.

When buyers and sellers enter into agreements to buy and sell real property, their agreements include, as a matter of law, an implied covenant (promise) of good faith and fair dealing, which means that each party will do everything reasonably contemplated by the terms of their agreement to accomplish its purpose, and that no party will do anything to impair or destroy the rights of the other to realize the benefits of their agreement. (See Brown vs. Superior Court (1949) 34 Cal.2d 559, 564-565; and Frommoethelydo vs. Fire Insurance Exchange (1986) 42 Cal.3d 208, 214.) This implied promise operates to fill gaps in agreements between buyers and sellers, where their agreement is silent or ambiguous, and has no effect upon terms that are explicit.

Because the California RPA does not explicitly say that the buyer has an absolute and unfettered 17-day right to cancel, and because it can fairly be argued that an agreement giving the buyer an unrestricted right to change their mind would be "illusory" (that it would be no agreement at all), the implied covenant of good faith and fair dealing steps in to supply the missing term: Each party's promise to work in good faith to realize the benefits of their written agreement is implied as a matter of law.

Buyers and sellers are, in other words, required by the implied covenant to act reasonably. And it is unreasonable to believe that a seller has an obligation to sell while a buyer has no obligation to buy under the terms of a California RPA.

As part of an overall form revision, the California Association of REALTORS is considering adding the following "good faith" language to Paragraph 14 of the California RPA:

"Any removal of contingencies or cancellation under this paragraph by either Buyer or Seller must be exercised in good faith and in writing."

This new language would make explicit the good faith obligations of the buyer and seller to each other under the California RPA, which obligations are already implied by the covenant of good faith and fair dealing. The further beneficial effect of this amendment would be to reduce or eliminate the suggestion that the California RPA provides buyers with a 17-day "free look."

Buyers and sellers are now as a matter of law, and will under the amended California RPA be explicitly required to deal with each other at arm's length and in good faith for their mutual benefit.
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Partial disclosures to not protect sellers

Posted on February 23, 2009 by Kevin Forrester

Walter Samuelson and his wife became the first owners of a three-story condominium in Woodland Hills in 1983, and during the period of their ownership, until 1999, observed intermittent events of water intrusion into their unit and at other places within the condominium complex. This water intrusion and flooding led to two lawsuits, the first by the homeowner's association and individual unit owners against to the developer, alleging design and construction defects, and the second against the company conducting repairs, for ineffective repairs.

Rural church flooded by a riverMr. Samuelson served on the homeowner's association board from 1993 until 2001, and had knowledge of these lawsuits. By the end of 1998, the second lawsuit was settled, and the repairs conducted pursuant to the second lawsuit were completed. Mr. Samuelson observed no further serious water intrusion problems thereafter.

When Walter Samuelson sold his condominium in the fall of 2001, he disclosed, on a real estate transfer disclosure statement, the flooding and drainage problems that occurred during heavy rains, his listing agent noted and disclosed water damage in the garage, and advised the buyer to obtain a physical inspection from a licensed contractor, and the home inspection service hired by the buyers reported leakage, moisture and staining problems at the property. When asked by the buyers about these problems, Mr. Samuelson described the repair measures that had been taken to correct the problems, but did not disclose the two lawsuits.

The buyers then purchased Mr. Samuelson's condominium in July of 2002, experienced flooding (and first learned of the two lawsuits) in January of 2005, and sued Mr. Samuelson, the homeowner's association, and others, for breach of contract, misrepresentation, and related actions in August of 2005.

Mr. Samuelson moved for summary judgment, arguing that he had disclosed to the buyers, and the buyers were aware of all material facts concerning water intrusion in his unit. And the trial court agreed, finding "that there was sufficient disclosure of defects" by Mr. Samuelson, and that no triable issue of material fact existed concerning his alleged misrepresentation or failure to disclose.

The court of appeal agreed only that Mr. Samuelson's disclosures concerning the water intrusion and repairs were legally sufficient, but disagreed that Mr. Samuelson had no other disclosure obligations. The court held that there was a triable issue of fact "as to whether disclosure of the prior lawsuits would have been material" to the buyers, and therefore should have been disclosed.

Specifically, the California Second District Court of Appeal found that Mr. Samuelson "owed a common law ‘duty to disclose information materially affecting the value or desirability of the property.' (Kovich v. Paseo Del Mar Homeowners' Assn. (1996) 41 Cal.App.4th 863, 866, 48 Cal.Rptr.2d 758.) " and held that the question of whether Mr. Samuelson should have disclosed the two lawsuits was an issue suitable for trial. Calemine v. Samuelson (2009) (PDF) 171 Cal.App.4th 153, 165, emphasis added.

Calemine v. Samuelson, decided February 17, 2009, is a reminder of the critical importance to residential real property sellers and their agents of disclosing all known facts about the condition and history of the property for sale.  We've considered the "The Great Disclosure Obligation Dilemma" before on this site and have learned that buyers are entitled to base their buying decision upon no less than all of the facts about a property that they and their agent can observe, and all of the facts that a seller and their agent know.

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The Great Disclosure Obligation Dilemma

Posted on October 27, 2007 by Kevin Forrester

Special to the San Diego Daily Transcript

Question: When we purchased our home in 1998, we paid for a professional home inspection that revealed drainage problems with the property. These problems were fixed before we bought the home. We recently sold our home, and the buyers are now claiming that they have drainage problems and they are trying to hold us responsible. They say that we “failed to disclose” the drainage problems to them, but as far as we knew there was no problem because we had it fixed. Anyway, we sold the property “as is”, so we should have no problem, right?

Your obligation to disclose facts about the property being sold, and whether or not you sell the property “as is”, are two different questions.

My short answer is: you have a problem. My longer answer explores the seriousness of your problem.

A contract which states that a property is being sold “as is” means that the property is being sold and will be transferred to the buyer in its present condition. “As is” means that the seller assumes no responsibility for making any repairs or improvements to the subject property. It means that the obvious deficiencies in the property, such as broken windows and the like, are the buyer’s problem. But, “as is” does not mean: “what you see is what you get.” “As is” does not mean that you, the seller, can avoid disclosing to your buyer all that you know about the condition of the property you are selling.

You, as a seller of real property, are required to disclose to your buyer any facts materially affecting the value or desirability of the property you are selling that are known or accessible only to you, and which are not known to or within the reach of the diligent attention and observation of the buyer. This language is a paraphrase of a long history of Court decisions in the State of California. It means that sellers must tell buyers facts about properties being sold when those facts are known only to the seller (they are not obvious) and would be important to the buyer in making their decision to buy.

If it would be important to you to know that at one time there were drainage problems on a property you are considering buying, then it is fair to conclude that your buyer would want to know that information also. Even information about your property that seems to you to be trivial can be important to your buyer, or can become important when circumstances change, like when it rains.

Sometimes the failure of a seller to disclose what they know about a property can constitute actual fraud. If a buyer is able to prove in a lawsuit or arbitration that a seller committed actual fraud in a real estate transaction by failing to disclose or by covering up important facts about a property, then that seller could be held liable for paying repair costs and damages equal to the difference in value (if any) between the purchase price paid and the true value of the property at the time of sale. In cases of intentional fraud, punitive damages might be available to a buyer. In most disputes involving real estate purchase and sale agreements, attorneys fees will be available to the prevailing party because most real estate purchase and sale agreements include an agreement that the losing party will be required to pay the prevailing party’s attorneys fees and costs after any legal action.

You believe, in your case, that there was no need to disclose your prior drainage problem to your buyer because the problem had been repaired. Unfortunately, the fact of your repair does not make the information about your prior drainage problem, or the repair, potentially any less important to your buyer in making their decision to buy your property. The decision about the condition of a property being purchased is the buyer’s decision to make, not the seller’s. The buyer is entitled to make their decision to purchase based upon all of the facts that they, the buyer, can observe about the property, together with all of the material facts about the property known to the seller. 

You, as a seller, have a legal obligation to disclose what you know. This obligation is not reduced by the fact that you are selling your property “as is.” The buyer is still entitled to know what “as is” means.

You now have the initial problem of responding to your buyer’s complaint, either formally or informally. Whether you will ultimately have the larger burden of paying to help resolve your buyer’s complaint can only be determined after a full analysis of all of the facts, for which you should consult legal counsel of your choosing. My response here is only offered as a general discussion of some of the applicable law based upon the facts contained in your question.

Tuesday, November 26, 2002 http://www.sddt.com/ Source Code: 20021126tdb

Copyright © 2002 by Kevin K. Forrester. All rights reserved.
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