The Art Of Disclosure: To Tell Or Not To Tell
By Jan A. Gruen
After receiving a flyer regarding neighborhood defect claims, the Johnsons decided to join a lawsuit against their builder and those involved in the construction of their 6 year old home claiming it suffered from pervasive defects including roof leaks, stucco cracks, window failures, and water intrusion. Papers filed with the court covered everything but the kitchen sink which apparently continues to function defect-free. During the suit, the Johnsons' lawyers prepared a detailed defect list and sought over $100,000 to "fix" the home. After a visual inspection without and destructive testing, the Johnsons settled for $10,000, one-tenth of claimed repair costs. Why this radically discounted settlement? Perhaps in reality, there was little wrong with the home.
As is customary, in exchange for payment, the settlement agreement released all known and unknown construction claims, past, present and future. The agreement purported to bind future purchasers, but will it? Builders, design professionals, and subcontractors are not protected from future third party defect claims until the 10 year statute of repose runs. A future buyer can make claims unless provided with notice that prior defect claims were forever settled with the property sold subject to this information.
A year later the Johnson's, having made no repairs, but sporting an awesome new sports car equipped to tow the new boat (they also inherited some extra cash), decide to sell their home. Must they tell the prospective buyer of the settled defect lawsuit? After all, the defects were minor. A scratch here; a nick there. Nothing worth impacting the sales price of a perfectly well built home.
In California, a seller has both a common law and statutory duty to disclose all material facts affecting the value or desirability of real property. Civil Code sections 1102 et seq. and 2079 govern the breadth of disclosure and even provide forms to assist the seller in the art of thorough disclosure. The "are you aware of" boxes prompt the seller to advise of whether the home was built without permits, violates the uniform building code or has ever suffered from settling, flooding, drainage, grading and/or other select problems. There is also a box that asks if the seller is aware of "any lawsuits by or against the seller threatening to or affecting the real property, including any lawsuits alleging a defect or deficiency. ..." Against this backdrop, surely a future buyer would know of both pending and settled suits.
However, Calemine v. Samuelson (Feb., 2009) 171 Cal. App 4th 153, 164 - 66, highlights the problems of leaving the disclosure of resolved defect litigation to sellers. Examining the very language quoted above, the Calemines argued they were only required to disclose currently pending or highly probable future litigation. The court of appeal disagreed noting that (1) the form language does not limit disclosure to pending or future litigation, and (2) the common law duty to disclose facts affecting the value or desirability of property would impose a duty to disclose a prior suit regarding defects.
Good attorneys will incorporate specific settlement provisions to protect their clients from future construction defect suits and bypass reliance on sellers to disclose settled lawsuits. Nonetheless, revision of the civil code and associated forms to ensure full disclosure of any "past, present or future" construction defect suits will squelch the temptation to opt for a more creative disclosure approach. Better yet, why not statutorily require a "Notice of Settlement" to be recorded against involved property upon settlement. Recordation would provide notice to prospective purchasers and provide necessary protection to both sellers and the building industry.
It makes sense. When you get in an accident causing damage in excess of $750 you must report the accident to the DMV so that subsequent buyers know the car was involved in a crash. Shouldn't a home, which is far more costly, be subject to the same rules? Maybe then the number of questionable suits filed for profit would decrease, and the building industry would be protected from future defect litigation involving the same home.
Jan A. Gruen is the Managing Partner of the Walnut Creek Office of Newmeyer & Dillion LLP, a statewide business and real estate law firm. Ms. Gruen has more than 19 years of litigation experience in day-to-day risk management, construction defect claims, real estate, business, and insurance matters. Ms. Gruen can be reached via e-mail at jan.gruen@ndlf.com.
May 2009 Builder Architect Edition Issue