But The Seller Lied...

By David Hamerslough

June 5, 2018

Buyers have closed escrow and are introducing themselves to their new neighbor. The neighbor asks the buyers whether the sellers disclosed that during the listing of the property, a garden hose was run from inside the house out through the front window to discharge water from the crawlspace.

The buyers review the sellers' disclosures, but there was no mention made of this event. The sellers' TDS disclosed that with very heavy rain, the back patio could collect water, but a

sump pump would drain it and that there was a drainage system to the street that was adequate in all but very heavy ongoing rains (once every 20 years). The sellers' supplemental disclosure stated that there was water standing on the back patio and under the house during extreme wet weather but added that most years, it was not a problem at all.

The home inspection report indicates that there is efflorescence on the crawlspace walls but does not identify any issue with the foundation itself.

The buyers start to investigate and learn that during the sellers' 30 years of ownership, they had five or six other instances when they needed to run a garden hose from the crawlspace access opening through the front window of the home in order to discharge water that had collected in the crawlspace, similar to what had occurred during the listing.

The buyers retain a geotechnical engineer, who advises them that a subsurface drainage system across the rear of the property is necessary so that any water that might reach the rear wall, the foundation of the house, or the crawlspace can be collected and then discharged with drain lines on the sides of the house. The geotechnical engineer tells the buyers that the drainage system the sellers disclosed only ran on the right-hand side of the house, not across the rear of the house, and discharged only water that collected at the right rear corner of the house where the pipe started.

The buyers make a claim against the sellers for misrepresenting the history of the property with respect to water issues, the alleged adequacy of the sump pump and drainage system, and failing to disclose the history of having water enters the crawlspace and the need to discharge that water using a garden hose running from the access opening out through the front window, etc.

The sellers respond to the buyers' claim by making the following arguments: (1) the essential facts related to water collecting at the rear of the property and under the house in very significant rainfall and how the sellers addressed that situation were disclosed; (2) this disclosure, along with the identification of efflorescence in the crawlspace, indicated that historically water had entered the crawlspace, and the buyers, therefore, had an obligation to investigate this issue; (3) the buyers failed to investigate this issue, failed to make any inquiry of the sellers regarding any of the facts that were disclosed, and failed to retain the services of a geotechnical engineer before escrow closed as recommended in the advisories they received; and (4) a letter the buyers submitted with their offer indicated that the buyers had owned a home previously that had drainage issues and they would be comfortable purchasing the home.

Based on these facts, it certainly appears that the sellers have liability for failing to make a full and complete disclosure of all material facts relating to water and drainage issues. The buyers are demanding to be compensated for all costs associated with the installation of the new drainage system, as well as their attorneys' fees and costs.

The buyers also argue that they would never have bought this property had they known all of the facts or would have requested a price reduction equal to the cost of the necessary drainage work. The sellers respond by stating that there were multiple offers, the buyers were very motivated because they had previously lost out on purchasing a home, and that the buyers accepted the drainage issues on the basis of the letter they submitted with their offer. The sellers also point out that the property has increased in value since the purchase and that if the buyers really would not have purchased this property had they known these facts, then they should demand rescission.

The sellers also learn that the buyers have some experience in construction, they previously owned a home with a sump pump and acknowledge that a sump pump is not a permanent solution to any issue of water intrusion, and they acknowledge that a permanent solution to water intrusion is a properly engineered and installed subsurface drainage system. The sellers also argue that the buyers would not have done anything different had they been told the additional information because the buyers never investigated any of the information they were provided or any of the issues they knew about. The sellers contend that the buyers would not have changed their position in reliance on any additional information.

Other facts and arguments were raised and asserted by each party, but the foregoing gives you a general flavor of the positions being taken by the buyers and sellers. Cases of this nature can be challenging, especially when the buyer and seller lock in on only one of four elements of a misrepresentation claim.

There are four elements to a claim for misrepresentation: (1) liability, (2) reliance, (3) causation, (4) damages. Each element is of equal weight; that is, a case can be won or lost if a party does not carry its burden of proof with respect to each element.

Here, the buyers' focus is on the liability element; all of their arguments relate to those material facts that the sellers knew and failed to fully and completely disclose. The buyers' perspective is summed up in the title of this article.

On the other hand, the sellers want to ignore the shortcomings of their disclosures and focus entirely on the element of reliance. The sellers' perspective is that they put the buyers on notice of the essential facts and the buyers failed to investigate or follow up in any way. The sellers also want to emphasize the buyers' knowledge and experience with drainage system and their willingness to accept the risks associated with that issue per their letter accompanying their offer.

It can be difficult to predict how an arbitrator or trier of fact will view each of the parties once all of the history comes out. Will the sellers be viewed as intentional deceivers or merely as ones who made a good-faith effort to fill out the disclosures but inadvertently failed to include all of the history they were aware of? To what degree will an arbitrator or trier of fact fault the buyers for failing to ask any questions, retain any engineers, etc.? Will the decision-maker rule against the party who could have discovered the additional information if they had asked more questions or against the party who had the additional knowledge but did not disclose it?

Ultimately, an arbitrator or trier of fact has to decide who should bear the risk in this situation. That decision is challenging because the law in this area generally does not allow for the concept of comparative fault. That is, the arbitrator or trier of fact can't allocate fault to each party, as they have the ability to do in a case of negligence. This means that these cases often become what are known as "all or nothing cases." Either the buyer is going to prevail because the liability issues carry the day, or the seller is going to prevail because the reliance issues carry the day. Alternatively, does an arbitrator or trier of fact split the baby by finding liability but not awarding the buyer all of the damages they are seeking? This can occur where a seller retains experts who opine that the drainage problem can be solved for a figure that is less than that quoted by the buyer's experts.

Another factor that can make these cases even more difficult to settle is the attorneys' fees and costs. If those fees and costs become disproportionate to the amount in dispute, then the only way a buyer and seller can attempt to come out whole is to arbitrate or litigate the dispute and hope that they prevail and are awarded their attorneys' fees and costs. One more factor that can drive a case to arbitration or litigation is the emotions of the buyer and seller, one who feels victimized and the other who feels their integrity is being attacked.

There are a number of other facts and issues that may impact the outcome of this type of case - for instance, the statements or conduct of the listing and selling agents, the credibility of the buyer and seller, and the elements of causation and damages, etc.

What is important is to recognize that we tend to focus more on the strengths of our respective positions and those elements of a cause of action that support the conclusion we want to reach, rather than thoroughly evaluating all of the elements of a cause of action, including those that might not be as favorable to our position. Maintaining this balance when evaluating a claim early in the process is important so that a disproportionate amount of attorneys' fees and costs are not spent before a resolution can be reached.

In this case, the dispute was resolved at a mediation. Both sides felt that they were without fault or liability, but at the end of the mediation, a compromise was reached that didn't necessarily thrill either side. Often, that is the indicia of a good settlement.

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