– By James R. McCormick, Jr., Esq. (originally published in April, 1998)

In real estate sales transactions, if the seller knows of facts that would have a material affect on the value or desirability of the property, the seller is under a duty to disclose those facts to the buyer. Failure to disclose these facts could result in a lawsuit.

California Civil Code Section 1102 provides that in selling real estate, the seller must complete a form designed to disclose these material facts. This form includes a provision for the seller to indicate whether he or she is aware of any “neighborhood noise problems or other nuisances.” If a seller “willfully” or “negligently” fails to disclose these items, that seller may be liable for any actual damages suffered by the buyer.

While you might not necessarily think your noisy next-door neighbors are a “neighborhood noise problem,” a recent California case held that you might have to disclose this fact.

In Shapiro v. Sutherland (January 5, 1998) 98 Daily Journal D.A.R. 137, Mr. Sutherland worked for IBM. As part of his employment, IBM had an employee relocation program, providing that if an employee was forced to move and could not sell his or her house, a banking company would purchase the home, backed by IBM. In this case, the Sutherlands could not sell their house so they entered into a home purchase agreement with Prudential. As part of the transfer, the Sutherlands completed the required disclosure form, indicating that they were not aware of any neighborhood noise problems.

Prudential had possession of the property for almost a year before selling it to Mr. Shapiro, however Prudential never occupied the property. About a month after moving into their new home, the Shapiro family wanted out! It turns out that the owner who lived next door was extremely loud and created disturbances. In fact, the Sutherlands had previously called the police on various occasions because of the disturbances. Since Prudential did not offer to buy back the house, Mr. Shapiro filed a lawsuit.

The trial court decided that neither the Sutherlands nor Prudential owed a duty to disclose any noise problems to Mr. Shapiro and ruled against Mr. Shapiro before scheduled trial. Mr. Shapiro appealed and the appellate court thought differently.

Since the Sutherlands were aware of the problems, the appellate court felt that they had a duty to disclose these facts to a potential buyer. On the other hand, the court held that since there was no evidence of deceitful or negligent conduct by Prudential (since it was not aware of any noise problems), they could not be held liable. Furthermore, the Court held that Prudential did not have a duty to investigate the property. The court placed emphasis on the fact that Prudential expressly stated that it had no personal knowledge with respect to the property and solicited and received Mr. Shapiro’s express agreement to conduct his own investigation. Despite this fact, the Court held that Prudential was still a “necessary” party and should remain in the lawsuit so that if Mr. Shapiro was able to prove his case, he might be able to have Prudential buy back the house.

The Sutherlands attempted to argue that they were “remote sellers” and could not be held liable. The Court disagreed and stated that the Sutherlands could not shield themselves from liability because it was Prudential which ultimately sold the property to Mr. Shapiro. The Court characterized the Sutherland’s actions as falling within the “indirect deception doctrine”, in that the Sutherlands could be held liable if they were aware that a misrepresentation they made to one person would be relied upon by another later on. The appellate court determined that a trial was necessary to determine if the facts which the Sutherland’s were aware of constituted a “neighborhood noise problem” such that they should have been disclosed.

While this was an interesting case because of the parties involved and the roles they played, this case may be important if you are thinking of selling your home. Disclosure requirements set forth by California law are taken seriously. The legislature and the courts see the disclosure statutes as a way to ensure that a potential buyer will be fully informed on matters affecting the value of the property. When trying to sell a home, the seller should carefully review and respond to the disclosure form, and should include any facts the seller is aware of that might “affect the value of the property.”