Dimitry Tsimberg, Esq.

California law on duty to disclose defects in real estate transactions, and liability of sellers and agents / brokers for fraud and negligence

Common Home Defects and Problems:  

- foundation / slab instability, cracks or leaks
- water drainage issues
- electrical problems
- roof problems (drainage, leaks, or rot) 
- heating or air conditioning system issues
- improperly done owner repairs
- illegal additions or improvements (no permit obtained)
- structural damage
- plumbing and sewage problems 
- infiltration by water (flooding) or air 
- termites, insects, pests or rot infestations
- toxic mold 
- inadequate ventilation of attic or crawlspace 
- construction defects
- problems with legal title to the property (such as easements)
- neighbor disputes (such as with fences, trees or bushes)
- boundary / encroachment issues
- improper lot or home size valuations
- City or County Code violations

A. Duties of Disclosure in Real Estate Transactions

The common law has for decades imposed duties on sellers of real estate, particularly residential real estate such as homes, to disclose to the buyer any material facts known to the seller affecting the value or desirability of the real estate being sold.  In California, the seller of a residence has both a common law and statutory duty of disclosure to the buyer, and even full compliance with the statutory duty does not excuse the common law duty. 1 Miller & Starr, California Real Estate (3d ed. 2005) § 1:140.

In 1985 the California General Assembly added an article to the Civil Code § 1102 et seq., entitled "Disclosures Upon Transfer of Residential Property." (Stats. 1985, ch. 1574, § 2, p. 5788.)  Before execution of a residential sales contract, the seller or his or her broker is now required to deliver the statutory real estate transfer disclosure statement to the buyer, which contains a checklist to give notice of problems or potential problems with the property. Civil Code §§ 1102.3, 1102.6.  

The form Transfer Disclosure Statement (“TDS”) disclosure must be made in "good faith," which is expressly defined to mean "honesty in fact in the conduct of the transaction." Civ. Code § 1102.7.  But the matters to be disclosed in the TDS was not intended to limit or abridge any obligation for disclosure by law which may exist to avoid fraud or deceit in the transfer transaction. Civ. Code, § 1102.8, 1572(3), 1710(3); Shapiro v. Sutherland (1999) 64 Cal. App. 4th 1534, 1545.

1.  Common law duty

Under the common law, "where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer."  Lingsch v. Savage  (1963) 213 Cal.App.2d 729, 735.  "A breach of this duty of disclosure will give rise to a cause of action for both rescission and damages.”  Shapiro v. Sutherland, supra, 64 Cal.App.4th at p. 1544; Karoutas v. HomeFed Bank (1991) 232 Cal. App. 3d 767, 771.

"A duty to disclose may also arise in the so-called ‘half-truth’ context – that is, when a speaker makes a representation which, though not false, he knows will be misleading absent full disclosure of additional facts known to him which qualify the initial representation." San Diego Hospice v. County of San Diego (1995) 31 Cal.App.4th 1048, 1055, fn. 4.  Where one undertakes to speak to a matter, he must not only state the truth, he also must not suppress or conceal facts within his knowledge that materially affect those stated.  Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal.App.4th 603, 613.  In other words, when one speaks at all, he must make a full disclosure on the subject.  Jacobs v. Freeman (1980) 104 Cal.App.3d 177, 192.  Thus, a duty to fully disclose may arise from a partial disclosure that is likely to mislead, if other material facts are not also disclosed.  Marketing West, Inc. v. Sanyo Fisher (USA) Corp., supra, 6 CaLApp.4th at 613; Lacher v. Superior Court (1991) 230 Cal. App. 3d 1038, 1046-1047.

Neither an "as is" sale nor the buyer's independent inspection exonerates a seller or the seller's agent from fraudulent misrepresentations concerning known defects not otherwise visible or observable to the buyer.  Loughrin v. Superior Court (1993) 15 Cal.App.4th 1188, 1195; Shapiro v. Hu (1986) 188 Cal. App. 3d 324, 333-334; Lingsch v. Savage (1963) 213 Cal.App.2d 729,740-742; Greenwald & Asimow, Cal. Practice Guide: Real Property Transactions (The Rutter Group 2005) § 4:3 52, p. 4-86.10; 1 Miller & Starr, California Real Estate supra, §1:154.

"[W]here the seller actively misrepresents the then condition of the property or fails to disclose the true facts of its condition not within the buyer's reach and affecting the value or desirability of the property, an ‘as is' provision is ineffective to relieve the seller of liability arising from the concealed condition."  Lingsch v. Savage, supra, 213 Cal. App. 2d at 742; Galen v. Mobil Oil Corp. (C.D. Cal. 1996) 922 F. Supp. 318, 324.

“When and where the action by the purchaser is based on conditions that are visible and that a personal inspection at once discloses and, when it is admitted that such personal inspection was in fact made, then manifestly it cannot be successfully contended that the purchaser relied upon any alleged misrepresentations with regard to such visible conditions.  But personal inspection is no defense when and where the conditions are not visible and are known only to the seller, and ‘where material facts are accessible to the vendor only and he knows them not to be within the reach of the diligent attention and observation of the vendee, the vendor is bound to disclose such facts to the vendee.’ ” Buist v. C. Dudley De Velbiss Corp. (1960) 182 Cal.App.2d 325, 331.

2. Statutory duty

The seller of a one-to-four unit residential property completes and delivers to a prospective buyer a statutory form called a Condition of Property Transfer Disclosure Statement, commonly known as a Transfer Disclosure Statement (TDS). Civil Code §§1102(a), 1102.3.  The seller’s use of the TDS form, with a few non-conventional sales exceptions, is mandated for use when making disclosures about improvements.  The seller is required to prepare a TDS with honesty and in good faith, whether or not the seller retains an agent to review its content before handing it to prospective buyers.  Civil Code §1102.7.

The TDS can be quite extensive.  It must include information concerning any easements, physical and contractual burdens on the property, potential legal concerns affecting the property, property tax issues, industrial use issues, dangerous conditions, natural hazard exposure, and the overall condition of the property.  There may be additional local disclosure rules, which require disclosure concerning permit issues, building regulations, zoning issues and other issues of local concern. These factors are not exhaustive.

The TDS disclosures in residential sales are required to be delivered “as soon as practicable before transfer of title.”  Civil Code § 1102.3(a).  The listing broker has the responsibility for the timely transmittal of the TDS form to the buyer.  Civil Code § 1102.12(b).

When preparing the TDS, the seller sets forth any property defects they know or suspect to exist. Defects to be disclosed in the TDS include any conditions known to the seller which might negatively affect the value and desirability of the property for a prospective buyer, even though they may not be an item listed on the TDS. Thus, disclosures to the buyer are not limited to classic conditions preprinted on the form.  Civil Code  §1102.8.

Further, the buyer cannot waive the seller’s delivery of the statutorily-mandated TDS.  Any attempted waiver, such as the use of an “as-is” clause in the purchase agreement, may be deemed unenforceable.  Loughrin v. Superior Court (1993) 15 Cal.App.4th 1188.  The words “as is” should not be used in the context of residential real estate transactions.  “As is” implies a failure to disclose something adverse known to the seller or their agent, a prohibited activity.  In contrast, “as disclosed” is the condition of the property as known by the buyer when the seller accepts their purchase agreement offer.  Civil Code §1102.1(a).

Thus, all buyers purchase residential property:

“as disclosed” by the seller, the seller’s broker and the broker’s agents; and
“as actually observed” by the buyer prior to entering into the purchase agreement.

While it is the seller who prepares the TDS, it is delivered to the prospective buyer by the agent who directly handled the buyer’s purchase agreement offer.  When the sales transaction is negotiated principal-to-principal (directly between the seller and buyer without the participation of a transaction agent) the seller remains obligated to deliver the TDS directly to the buyer.  Civil Code  §1102.12.

The failure of the seller or any of the agents involved to deliver the seller’s TDS to the buyer does not invalidate a sales transaction once it has closed.  However, the seller and the seller’s broker are both liable for the actual monetary losses incurred by the buyer due to an undisclosed defect known to them or unknown to them due to their negligence at the time the offer was accepted by the seller.  Civil Code  §1102.13.  Thus, the buyer is best served when they receive and review the TDS before the seller accepts their purchase agreement offer.

When the TDS is delivered to the buyer after the seller enters into a purchase agreement (the delivery being untimely and contrary to the spirit of TDS rules) the buyer may:

-  cancel the purchase agreement on discovery of undisclosed defects known to the seller or the seller’s agent and unknown and unobserved by the buyer or the buyer’s agent prior to acceptance (Civil Code § 1102.3);

-  make a demand on the seller to correct the defects or reduce the price accordingly before escrow closes (RPI Form 150 §11.2); OR

-  close escrow and make a demand on the seller for the costs to cure the defects.  Jue v. Smiser (1994) 23 Cal.App.4th 312 [purchaser of real property who learns of potential material misrepresentations after execution of a purchase agreement, but before consummation of the sale / close escrow, may proceed with purchase and then sue for damages].

B. Real Estate Broker / Agent Liability

1. Broker is personally responsible and cannot use corporate shield

A supervising broker at a real estate firm is there to protect the public.  The officer/broker designated by a corporate broker shall “ be responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees as necessary to secure full compliance with the provisions of this division, including the supervision of salespersons licensed to the corporation in the performance of acts for which a real estate license is required.”  Bus. & Prof. Code § 10159.2(a).

Among the officer/broker's obligations for supervision is "the establishment of policies, rules, procedures and systems to review, oversee, inspect and manage . . . familiarizing salespersons with the requirements of federal and state laws relating to the prohibition of discrimination." Cal. Code Regs. Title X, § 2725.  For a corporate real estate broker to operate lawfully, it must "conduct its brokerage business if at all under the active aegis of its designated broker." Milner v. Fox (1980) 102 Cal. App. 3d 567, 575.

The designated officer/broker, not the corporate entity itself, is charged with the responsibility to assure corporate compliance with the real estate law.  Norman v. Dep't. of Real Estate (1979) 93 Cal. App. 3d 768, 776-77 ["Such a real estate broker must reasonably be charged with responsibility for the corporate compliance with the Real Estate Law, for otherwise with no such fixed responsibility, the statutory purpose would be frustrated."] 

The statutory provisions regulating the real estate profession places a direct, personal responsibility on the designated officer/broker of a real estate corporation to supervise the salespersons to assure compliance with the state and federal laws.  This personal obligation is independent from that of the normal responsibilities of a corporate officer or of the corporation itself.  This is a direct personal responsibility on the part of the officer/broker that is subject to disciplinary action affecting that officer/broker's personal broker's license.  Holley v. Crank (9th Cir. 2004) 400 F.3d 667, 673, reversed on other grounds Meyer v. Holley, 537 U.S. 280, same decision on remand Holley v. Crank (9th Cir. Cal. 2004) 386 F.3d 1248, 1255; Valdez v. Downey S&L Ass'n,  (N.D. Cal. Apr. 16, 2007) 2007 U.S. Dist. LEXIS 31290.

Where a corporate owner or officer knows or has reason to know of the corporation’s illegal and wrongful acts and allowed them to continue with a goal of monetary gain, he has personal liability for those actions. PMC, Inc. v. Kadisha (2000) 78 Cal. App. 4th 1368, 1386; Michaelis v. Benavides (1998) 61 Cal. App. 4th 681, 688.

2. Fiduciary duty to own client (including dual agents)

Listing and selling brokers or agents (salespersons) representing buyer and seller owe higher “fiduciary” duties to their clients, or to both buyer and seller if there is a dual or joint agency.  “A broker has a fiduciary duty to its client. Civil Code, § 2079.24; Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25 [“a broker's fiduciary duty to his client requires the highest good faith and undivided service and loyalty”].) The fiduciary duty is greater than the negligence standard of due care under section 2079.  Civil Code § 2079.2 [standard of care is of a “reasonably prudent real estate licensee”].  Thus a broker can be professionally competent under section 2079 without satisfying the greater duty of a trusted fiduciary. As Field explained, “the fiduciary duty owed by brokers to their own clients is substantially more extensive than the nonfiduciary duty codified in section 2079.”  Field, at p. 25.

“A fiduciary must tell its principal of all information it possesses that is material to the principal's interests.  L. Byron Culver & Associates v. Jaoudi Industrial & Trading Corp. (1991) 1 Cal.App.4th 300, 304; 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 794, p. 1149; 2 Miller & Starr, Cal. Real Estate (3d ed. 2000) §§ 3:25, p. 120, 3:27, p. 149, 4:17, p. 41.  A fiduciary's failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent.  Civil Code § 1573.  Michel v. Moore & Associates, Inc. (2007) 156 Cal. App. 4th 756, 762.

3. Aiding and abetting

"Liability may . . . be imposed on one who aids and abets the commission of an intentional tort if the person . . . knows the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act."  Saunders v. Superior Court (1994) 27 Cal.App.4th 832, 846; Richard B. LeVine, Inc. v. Higashi (2005) 131 Cal.App.4th 566, 579. "California courts have long held that liability for aiding and abetting depends on proof the defendant had actual knowledge of the specific primary wrong the defendant substantially assisted."  Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1145.  Aiding and abetting liability may “‘be imposed on one who aids and abets the commission of an intentional tort if the person (a) knows the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person's own conduct, separately considered, constitutes a breach of duty to the third person.’ ”  Richard B. LeVine, Inc. v. Higashi, supra 131 Cal. App. 4th at 579.

4. Statutory duty to independently inspect

A real estate broker or agent representing the seller must complete the TDS disclosure form, stating his or her observations based on an independent inspection of the property.  Civil Code § 1102.6; Robinson v. Grossman (1997) 57 Cal. App. 4th 634, 642; Civil Code §2079.  The disclosures and acts required by the statutes "shall be made in good faith," which means "honesty in fact in the conduct of the transaction."  Civil Code § 1102.7; Robinson v. Grossman, supra, 57 Cal. App. 4th at 641-642.  

"[T]he duty of a real estate broker, representing the seller, to disclose facts . . . includes the affirmative duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal."  Robinson v. Grossman, supra, 57 Cal. App. 4th at 640.  

“‘Real estate agents hold themselves out to the public as professionals, and, as such, are required to make reasonable use of their superior knowledge, skills and experience within the area of their expertise.  Because such agents are expected to make use of their superior knowledge and skills, which is the reason they are engaged . . . .’” Robinson v. Grossman, supra, 57 Cal. App. 4th at 640.  "[T]he dual nature of this duty does not sound exclusively in negligence.  While the first prong of the obligation (inspection) embodies traditional negligence concepts, breach of the second prong (disclosure of material facts) encompasses actionable conduct associated with both negligence and negligent misrepresentation."  Loken v. Century 21-Award Properties (1995) 36 Cal. App. 4th 263, 271.

Defects for which recovery is available are those observable by a reasonably competent broker/agent during a visual on-site inspection, but of only “accessible” areas (not “inaccessible” to this type of an inspection or an inspection of areas off site, or public records or permits concerning the title or use of the property).  Civil Code § 2079.2-3.  A seller’s agent is expected to be as competent as their broker in an inspection.  The standard is that of a “reasonably prudent real estate licensee would exercise and is measured by the degree of knowledge through education, experience, and examination, required to obtain a license.”  Civil Code § 2079.2.  Thus, there is no liability if the seller’s broker or agent inspected the property as a reasonable competent broker, did not observe the defect and did not actually know it existed.  Civil Code §2079;  Civil Code §1102.4(a).

5. Both broker and agent are potentially responsible for own conduct

"One who assumes to act as an agent is responsible to third persons as a principal for his acts in the course of his agency, in any of the following cases, and in no others . . . 3, When his acts are wrongful in their nature."   Civil Code § 2343.  An agent or employee is always liable for his own torts, whether his employer is liable or not.' " Holt v. Booth (1991) 1 Cal.App.4th 1074, 1080, fn. 5; accord, Michaelis v. Benavides (1998) 61 Cal.App.4th 681, 686 .  "In other words, when the agent commits a tort, such as ... fraud..., then ... the agent [is] subject to liability in a civil suit for such wrongful conduct."  Mottola v. R.L. Kautz & Co. (1988) 199 Cal. App. 3d 98, 108; accord, Crawford v. Nastos (1960) 182 Cal. App. 2d 659, 664-665.

“[I]f a tortious act has been ommitted by an agent acting under authority of his principal, the fact that the principal thus becomes liable does not, of course, exonerate the agent from liability.' ... The fact that the tortious act arises during the performance of a duty created by contract does not negate the agents liability."  Bayuk v. Edson (1965) 230 Cal. App. 2d 309, 320; Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal. App. 4th 4, 68-69.  And "a principal who puts an agent in a position that enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is [also] subject to liability to such third persons for the fraud."  Bayuk v. Edson (1965) 236 Cal. App. 2d 309, 315. 

Conversely, "[if] a tortious act has been committed by an agent acting under authority of his principal, the fact that the principal thus becomes liable does not of course exonerate the agent from liability."  Perkins v. Blauth (1912) 163 Cal. 782, 787; Rest. 2d Agency, §§ 343, 344 et seq. The fact that the tortious act arises during the performance of a duty created by contract does not negate the agent's liability.  Mechem, Outlines of the Law of Agency (4th ed.) §§ 343, 346, pp. 232, 234; Bayuk v. Edson, supra, 236 Cal. App. 2d at 320.

Further, any person (regardless of whether they own any interest in the subject property) is liable in fraud for a false statement, misstatement, failure to disclose, or incomplete disclosure. 1 Miller & Starr, California Real Estate (3rd Ed. 2005) § 1:146, p. 578; Civil Code § 1572, 1710; CACI § § 1900, 1901.  Deceit under Civil Code § 1572 does not even require a contractual relationship or privity.

6. Buyer’s Responsibility to Inspect

Civil Code §2079.5 provides: “Nothing in this article relieves a buyer or prospective buyer of the duty to exercise reasonable care to protect himself or herself, including those facts which are known to or within the diligent attention and observation of the buyer or prospective buyer.”

“Cases will undoubtedly arise in which the defect in the property is so clearly apparent that as a matter of law a broker would not be negligent for failure to openly disclose it, as he could reasonably expect that the buyer's own inspection of the premises would reveal the flaw. In such a case the buyer's negligence alone would be the proximate cause of any injury he suffered.” Easton v. Strassburger (1984) 152 Cal.App.3d 90, 103.

An inspection report delivered to the buyer may insulate the seller or his agent from liability.  Civil Code §1102.4 provides:  

“(a) Neither the transferor nor any listing or selling agent shall be liable for any error, inaccuracy, or omission of any information delivered pursuant to this article if the error, inaccuracy, or omission was not within the personal knowledge of the transferor or that listing or selling agent, was based on information timely provided by public agencies or by other persons providing information as specified in subdivision (c) that is required to be disclosed pursuant to this article, and ordinary care was exercised in obtaining and transmitting it.

(b) The delivery of any information required to be disclosed by this article to a prospective transferee by a public agency or other person providing information required to be disclosed pursuant to this article shall be deemed to comply with the requirements of this article and shall relieve the transferor or any listing or selling agent of any further duty under this article with respect to that item of information.

(c) The delivery of a report or opinion prepared by a licensed engineer, land surveyor, geologist, structural pest control operator, contractor, or other expert, dealing with matters within the scope of the professional’s license or expertise, shall be sufficient compliance for application of the exemption provided by subdivision (a) if the information is provided to the prospective transferee pursuant to a request therefor, whether written or oral.  In responding to such a request, an expert may indicate, in writing, an understanding that the information provided will be used in fulfilling the requirements of Section 1102.6 and, if so, shall indicate the required disclosures, or parts thereof, to which the information being furnished is applicable.  Where such a statement is furnished, the expert shall not be responsible for any items of information, or parts thereof, other than those expressly set forth in the statement.”

However, 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.  Furla v. Jon Douglas Co. (1998) 65 Cal.App.4th 1069.

C. Damages

1. Out-of-pocket loss

In a real estate fraud case, Civil Code § 3343(a) allows difference between the price paid and the actual value of the property with the undisclosed defects, which is the amount the buyers overpaid for the property, taking into account the true or “actual value” of the property with the undisclosed defects.  "One defrauded in the purchase, sale or exchange of property is entitled to recover the difference between the actual value of that with which the defrauded person parted and the actual value of that which he received . . . ."  Civil Code § 3343(a); Saunders v. Taylor (1996) 42 Cal. App. 4th 1538, 1542.

This statute “limits recovery to the difference between the actual values, intrinsic and economic, of that which the defrauded person gave up and that which he or she received in return, plus sums expended in reliance on the fraud.”  Small v. Fritz Companies, Inc. (2003) 30 Cal. 4th 167, 195; Auerbach v. Great W. Bank (1999) 74 Cal. App. 4th 1172, 1185.  "The unqualified language of section 3343 indicates that the plaintiff should receive as damages the difference in value between everything with which he parted and everything he received.” Buist v. C. Dudley De Velbiss Corp. (1960) 182 Cal. App. 2d 325, 334.

The “actual value” of property may be determined by the trial court from evidence of the reasonable market value or of actual or intrinsic value.  Herzog v. Capital Co. (1945) 27 Cal.2d 349, 354; Zinn v. Ex-Cell-O Corp. (1944) 24 Cal.2d 290, 297; Bagdasarian v. Gragnon (1948) 31 Cal.2d 744,753-754; Martin v. Tully (1941) 44 Cal.App.2d 226, 234.  The “actual [market] value” of the property they received - with the undisclosed defects - for use in this calculation or formula may be proven by the testimony of an expert such as an appraiser, but the owner may testify as to the value of his property without qualifying as an expert. See Sanders v. Park Beverly Corp. (1952) 109 Cal.App.2d 698, 702-703.  

Further, Civil Code section 1102.13 provides: “No transfer subject to this article shall be invalidated solely because of the failure of any person to comply with any provision of this article.  However, any person who willfully or negligently violates or fails to perform any duty prescribed by any provision of this article shall be liable in the amount of actual damages suffered by a transferee.”  In enacting [Civil Code section 1102 et seq.], the Legislature made clear it did not intend to alter a seller’s common law duty of disclosure.  The purpose of the enactment was instead to make the required disclosures specific and clear.  Calemine v. Samuelson (2009) 171 Cal.App.4th 153, 161-162.

2. Incidental damages

In addition, “pursuant to Civil Code section 3343, amounts paid for escrow fees, moving to and from the property, building permits, telephone connections, fences, yard cleaning, garage materials, door locks, shrubbery, taxes, rent and labor are examples of recoverable damages when reasonably expended in reliance on the fraud.”  Cory v. Villa Properties (1986) 180 Cal.App.3d 592, 603.

3. Lost profits

Civil Code section 3343(a)(4) provides: “Where the defrauded party has been induced by reason of the fraud to purchase or otherwise acquire the property in question, an amount which will compensate him for any loss of profits or other gains which were reasonably anticipated and would have been earned by him from the use or sale of the property had it possessed the characteristics fraudulently attributed to it by the party committing the fraud, provided that lost profits from the use or sale of the property shall be recoverable only if and only to the extent that all of the following apply:

(i) The defrauded party acquired the property for the purpose of using or reselling it for a profit.

(ii) The defrauded party reasonably relied on the fraud in entering into the transaction and in anticipating profits from the subsequent use or sale of the property.

(iii) Any loss of profits for which damages are sought under this paragraph have been proximately caused by the fraud and the defrauded party’s reliance on it.”

“The Legislature removed all doubt concerning the recovery of loss of profits resulting from the fraudulently induced property acquisition.  Clearly and specifically, lost profits proximately caused are recoverable.  The cases cited, the arguments made concerning Civil Code section 3343 limitations are simply not relevant to post-1971 proceedings, where profits are the claimed loss.  Civil Code section 3343 as amended, in so many words, authorizes recovery of lost profits.” Hartman v. Shell Oil Co. (1977) 68 Cal.App.3d 240, 247.

4. Benefit of the bargain rule

There is a split of authority regarding whether benefit-of-the-bargain damages can ever be recovered for intentional misrepresentation in the sale or exchange of property. It is settled that in a nonfiduciary relationship, damages are limited to the out-of-pocket measure, even if the misrepresentation is intentional.  See Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240; Civ. Code, § 3343.  However, there is disagreement on the proper measure if there is a fiduciary relationship.

“There are two measures of damages for fraud: ... The ‘out-of-pocket’ measure of damages ‘is directed to restoring the plaintiff to the financial position enjoyed by him prior to the fraudulent transaction, and thus awards the difference in actual value at the time of the transaction between what the plaintiff gave and what he received.  The “benefit-of-the-bargain” measure, on the other hand, is concerned with satisfying the expectancy interest of the defrauded plaintiff by putting him in the position he would have enjoyed if the false representation relied upon had been true; it awards the difference in value between what the plaintiff actually received and what he was fraudulently led to believe he would receive.’ ‘In California, a defrauded party is ordinarily limited to recovering his “out-of-pocket” loss …’ ” (Alliance Mortgage Co. supra, 10 Cal.4th at p. 1240.

However, several cases hold:  “The measure of damages for a real estate broker’s intentional misrepresentation to a buyer for whom he acts as agent is not limited to the out-of-pocket losses suffered by the buyer.  Because the broker is a fiduciary, damages for intentional fraud may be measured by the broader benefit-of-the-bargain rule.”  Fragale v. Faulkner (2003)110 Cal.App.4th 229, 232.  “Unlike the ‘out of pocket’ measure of damages, which are usually calculated at the time of the transaction, ‘benefit of the bargain’ damages may appropriately be calculated as of the date of discovery of the fraud.” Salahutdin v. Valley of California, Inc. (1994) 24 Cal. App. 4th 555, 568.

D. Statute of limitations

1. Fraud

A fraud (deceit, intentional misrepresentation) lawsuit is required to be filed within three years before plaintiff either discovered facts constituting the fraud or with reasonable diligence could have (should have) discovered those facts, whichever comes first. Sun'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 701; Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 808; Kline v. Turner (2001) 87 Cal.App.4th 1369, 1374.

The delayed-discovery rule in fraud cases applies and is codified in California Code of Civil Procedure § 338(d):  “Within three years: (d) An action for relief on the ground of fraud or mistake…[is] not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.”  “This discovery element has been interpreted to mean ‘the discovery by the aggrieved party of the fraud or facts that would lead a reasonably prudent person to suspect fraud.’ ” Doe v. Roman Catholic Bishop of Sacramento (2010) 189 Cal.App.4th 1423, 1430.

Usually the defendant has the burden to plead and prove that the statute of limitations has run.  But when the delayed discovery rule is at issue, such as with fraud causes of action, plaintiff has the burden of pleading and proving that he or she did not make the discovery until more than three years after the filing of the complaint. Samuels v. Mix (1999) 22 Cal.4th 1, 14.

2. Statutory liability against broker/agent

A buyer of a one-to-four unit residential property has two years from the date of “possession” (recordation, close of escrow or occupancy, whichever comes first) to pursue the seller’s broker and agent to recover losses caused by the broker’s or agent’s negligent failure to disclose observable and known defects affecting the property’s physical condition and value.  Civil Code § 2079.  However, where the broker or agent also represents the buyer (dual agency), the 2-year statute does not apply.  William L. Lyon & Associates, Inc. v. Superior Court (2012) 204 Cal.App.4th 1294.

E. Other hurdles - mediation, arbitration, etc.

Most real estate contracts (including the California Association of Realtors form) require the parties to first attempt mediation of the dispute before commencing legal proceedings.  Further, the parties may also have agreed in the contract to submit their dispute to binding arbitration before a neutral arbitrator or panel of arbitrators instead of having their case tried in Court.  Thus, before a lawsuit can be brought, these dispute resolution hurdles must be attempted and exhausted.

This post is for educational and information purposes only. It is not legal advice on any particular case, and merely a general opinion of one California lawyer. You should not rely on it without consulting a competent attorney in your area about your specific case and facts. It is not intended to, and shall not, create an attorney-client relationship. 

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