The Duty To Learn

Under California law, as a fiduciary, a real estate broker/agent must, among other things, disclose to his or her client all material information that the broker/agent knows or could reasonably obtain regarding the property or relating to the transaction. The broker/agent must place himself or herself in the position of the client and consider the type of information required for the client to make a well-informed decision.

While this standard is expressed in the law, applying it to a transaction and a particular set of facts can be challenging. This article will provide a hypothetical transaction and identify some of the facts that brokers/agents might learn in the course of addressing the duty set forth in the preceding paragraph. After reading the hypothetical but before moving on to the discussion of those facts in relation to this hypothetical, go through the exercise of asking yourself what facts you might have wanted to learn in order to make a more informed decision about the property.

The facts in this hypothetical are the following:

1. The TDS and SPQ do not indicate any current or historical defects or issues with the foundation. Question M1 in the SPQ is answered in the negative.

2. The home inspection report identifies a number of cracks in various locations of the foundation and foundation repairs in a number of locations. The report recommends an additional evaluation by a structural engineer.

3. Buyers attend an open house and speak with the sellers' agent, who allegedly states that sellers had the foundation checked out a few months back and had done extensive repairs and modifications to it. Buyers report this conversation to their agent.

4. Buyers' agent contacts sellers' agent, reporting the conversation, noting the issues raised in the home inspection report, and requesting any paperwork.

5. Sellers' agent provides buyers' agent with the invoice from the foundation work performed one year ago. Invoice states "releveling front portion of structure - installing seven underpinning; upgrading the interior post at the area of work; surface drain system in the front of the structure, new vents, $16,000.00." Invoice indicates that the company performing the work is a general building contractor and that the principal holds an MAE.

6. Sellers' agent forwards buyers' agent an additional proposal from the foundation contractor to epoxy and brace with hardware 10 vertical fractures on the east foundation wall at a cost of approximately $2600.00. Agent's email states "so pretty light repairs still needed to finish off the job."

7. Buyers submit a non-contingent offer, which is accepted, and escrow closes.

8. Two years later, buyers start a remodel and contact the foundation contractor to repair the cracks in the foundation. The contractor allegedly states, "I am not surprised, I told the sellers they needed a comprehensive structural repair to the entire foundation in order to effectively address the settlement issues with the foundation. I do not have any plans or permits for the work that I did."

9. Buyers contact an engineering contractor, who provides a bid of $200,000 plus to complete the repairs and address the resulting interior damage.

10. The buyers are upset and claim that the sellers did not make a full and complete disclosure regarding the foundation. The sellers deny that the contractor told them that the repair work was not adequate or that their disclosure was not full and complete. The sellers claims that both brokers/agents did not fulfill their fiduciary duties to sellers and buyers.

The following are some of the facts (in no particular order) that the brokers and agents, as well as the buyers and sellers, might learn as part of making an informed decision about the property.

· What conditions in the house caused the sellers to re-level the front portion of the house (e.g., sheetrock and/or stucco cracks, uneven or sloping floors, windows and/or doors that did not operate or were out of alignment, cracks in the foundation or the exterior hardscape, etc.)?

· What actually caused the issues/conditions that necessitated any of the repairs (e.g., expansive soil, drainage or lack thereof, inadequate construction, etc.)?

· Why was only the front portion of the structure re-leveled as opposed to the entire house?

· Was re-leveling actually a permanent solution to the issues/conditions? If not, why was a more thorough repair not completed?

· Why didn't the sellers make any disclosures regarding these issues/conditions?

· Should the sellers be asked to amend their disclosure documents regarding these issues/conditions?

· Were permits pulled and finaled for any of the work that was done?

· Did any plans, reports, and/or engineering specifications exist for any of the work that was done or any of the issues/conditions that prompted the work?

· Should the contractor who performed the work be contacted to follow up on any of these issues/conditions?

· Was the contractor in fact qualified to perform the work that he did?

· Did the scope of work in the invoice from the contractor address all of the cracks and repairs identified by the home inspector?

· Why didn't the sellers provide any documentation regarding any of the work or any of the issues/conditions?

· Did any photographs or videos of any of the issues/conditions exist?

· How long had the issues/conditions existed?

· Had the issues/conditions been previously repaired (and, if so, had they recurred, and to what degree, what repair efforts, if any, were made, etc.)?

· Why did the sellers' agent believe that only "pretty light repairs" were needed to finish off the job?

· Who was qualified to evaluate these issues/conditions (e.g., geotechnical engineers, engineering contractors, structural engineers, etc.)?

· Was epoxying and bracing the vertical fractures on the east foundation wall a permanent solution to the cracking or simply a temporary one?

Whether the aspect of a fiduciary duty discussed in this article has been met turns on, among other things,(1) the facts of the transaction, (2) the knowledge and experience of the client, (3) the questions asked by the client, (4) the nature of the property, and (5) the terms of the sale. Each of these in turn vary from transaction to transaction and are often disputed between the parties. The outcome of any such dispute can also be impacted by, among other things, (1) the credibility of the witnesses, (2) the knowledge, training, skill, and experience of the brokers/agents, (3) agency relationships, (4) the motivations of all of the parties, (5) what other claims or issues are in dispute between the parties, and (6) what documentation exists substantiating a party's claim.