Disclosures:

I've been a REALTOR for 10 years now and in order to keep my license current and active I have to complete approved DRE (Department of Real Estate) courses. After 4 years as a REALTOR I had to complete a 15 hour course. At 10 years, the DRE makes it's REALTORS take a 45 hour course. That's where I am at right now.

At first I thought "What a pain!" However, I have to say I am actually enjoying it. it. Call me a REALTOR geek I guess. Anyways, I came across this case law study that I think epitomizes what I focus on--especially as a buyer's agent. As YOUR loyal agent, it is my fiduciary duty to look for things wrong with the property. Every property has something wrong, and it's my job to point things out as I see them and get these issues followed up on by experts. This allows you to have all the information you need to make a informed buying decision. One thing I do that the DRE says I shouldn't is offer my opinion as well. I've represented lots of buyers and bought quite a few homes myself. I consider myself well informed and when I can I share my insight, I do. Anyways, here is the case: (courtesy of Chamberlain Real Estate School)


Easton vs. Strassburger

The following discussion of the Easton vs. Strassburger decision should make it clear that anything about a transaction, that might remotely affect the present or future value of the property, must be disclosed by the agent to the buyer if a reasonably diligent inspection by the agent would uncover said material facts.


Disclosure Responsibility of The Real Estate Agent

On February 22, 1984, the California Court of Appeal decided the case of Easton vs. Strassburger, 152 C.A.3d 90. On May 31, 1984, the California Supreme Court denied the requests of the appellant, the National Association of Realtors, The California Association of Realtors and several other organizations and the Easton case is now judicial precedent in California. It may be cited by attorneys as authority in posing what is becoming known as Easton liability.




The Facts of The Case
The property was a one-acre parcel of land located in the City of Diablo. The property was improved with a 3,000 square foot home, a swimming pool, and a large guest house. Easton purchased the property for $170,000 from the Strassburgers in May of 1976 and escrow closed in July of that year.

Shortly after Easton purchased the property, there was a massive earth movement on the parcel. Subsequent slides destroyed a portion of the driveway in 1977 or 1978. Expert testimony indicated that the slides occurred because a portion of the property was fill that had not been properly engineered and compacted. The slides caused the foundation of the house to settle, which in turn, caused cracks in the walls and warped doorways. After the 1976 slide, damage to the property was so severe that although experts appraised the value of the property at $170,000 in an undamaged condition, the value of the damaged property was estimated to be as low as $20,000. Estimates of the cost to repair the damage caused by the slides and avoid recurrence ranged as high as $213,000.

During the time that the property was owned by the Strassburgers, there was a minor slide in 1973 involving about 10 to 12 feet of the filled slope and a major slide in 1975 in which the fill dropped about eight to ten feet in a circular shape 50 to 60 feet across. The Strassburgers did not tell the agents anything about the slides or the corrective action they had taken. Easton purchased the property without being aware of the soils problems or the past history of slides.

Employees of the agency inspected the property several times during the listing period and, according to the appellate court, there was evidence that the agents "were aware of certain red flags which should have indicated to them that there were soils problems." Despite this, the agents did not request that the soil stability of the property be tested and did not inform Easton that there were potential soil problems.

Some of the facts were:

1. At least one of the listing agents knew the property was built on fill (red flags) and that settlement and erosion problems are commonly associated with such soil.

2. The listing agents had seen netting on a slope (red flags) which had been placed there to repair a slide that had occurred recently.

3. One of the listing agents testified that he had observed that the floor of the guest house was not level (red flag).
It does not require an expert to explain the relationship between uneven floors and the possibility of unstable soil or the relationship between past slide activity and the likelihood of future slide activity.

The Results of The Legal Action

Easton filed suit against Strassburger, the agency and others. The agency was charged with fraudulent concealment, intentional misrepresentation and negligent misrepresentation. The jury found against the agency only under a simple negligence theory. It returned a joint and several judgment against the defendants and apportioned comparative negligence.

The jury's special verdict found all named defendants had been negligent, and assessed damages of $197,000. Negligence was apportioned among the parties under the principles of comparative negligence in the following percentages:

65% - Strassburgers
15% - Builders
5% - Listing agency
5% - Cooperating broker
10% - Other defendants

The seller became insolvent following the sale of the property. The agency appealed the trial court judgment relying principally upon an asserted error by the trial judge in giving the following instructions to the jury:
"A real estate broker is a licensed person or entity who holds himself out to the public as having particular skills and knowledge in the real estate field. He is under a duty to disclose facts materially affecting the value or desirability of the property that are known to him or which through reasonable diligence should be known to him."
The agency contended that a broker's duty to a prospective buyer was only to disclose known facts about the property, not facts which should be known in the exercise of reasonable diligence.

Although the evidence did not establish actual knowledge of the property's past history of slides and soils problems, actual knowledge was not necessary to establish liability for negligence. The jury merely had to conclude that a reasonably competent and diligent inspection of the property would have uncovered the past history of soils problems.

The Court of Appeal rejected the agency's contention. In its opinion, it pointed out that the law of California has long required both the seller of real property and the broker to inform a prospective buyer concerning material defects known to them, but unknown or unobservable by the buyer. It pointed out that a broker in a transaction is liable for the intentional tort of fraudulent concealment or negative fraud if he or she fails to disclose material facts about the property that are not known to, nor within the reach of the diligent observation of the prospective buyer. The court acknowledged the fact that no California appellate decision had expressly held that a broker is under a duty to disclose material facts about a property that he should have known. It then went on to declare that the purpose of assuring that a prospective buyer was provided with sufficient information to make an informed decision on whether to purchase "would be seriously undermined if the rule were not seen to include a duty to disclose reasonably discoverable defects."

The court's reasoning appears to be summed up in the following observations:
"If a broker were required to disclose only known defects, but not also those that are reasonably discoverable, he would be shielded by his ignorance of that which he holds himself not to know. The rule thus narrowly construed would have results inimical (adverse, harmful) to the policy upon which it is based. Such a construction would not only reward the unskilled broker for his incompetence, but might provide the unscrupulous broker the unilateral ability to protect himself at the expense of the inexperienced and unwary who rely upon him." In any case, if given legal force, the theory that a seller's broker cannot be held liable for undisclosed defects would inevitably produce a disincentive for a seller's broker to make a diligent inspection. Such a disincentive would be most unfortunate, since in residential sales transactions the seller's broker is most frequently the best situated to obtain and provide the most reliable information on the property and is ordinarily counted on to do so."

What is a Red Flag?
This is a question that is impossible to answer without leaving some item out. What is important to you, may not be important to me. Whatever the answer, it's now the law! Therefore, let's look at some of the more obvious red flag warnings. Some red flag examples include:

• Water stained ceilings.
• Cracks in ceilings, walls and floors.
• New additions, for whatever reason, such as new walls, rooms, garage modifications, roof, gutters and eaves, retaining wall, wall paneling, floors, etc.

Now, consider the situation where an agent is listing an older home. Does the possibility of termites, dry rot, or other types of infestation fall within the Easton case? If so, it appears that no sale, especially the sale of an older home, can safely conclude without a structural pest control inspection.

What about major appliances? Forced-air furnaces, air conditioners, lawn sprinkler systems, swimming pools, saunas, fences, plumbing, solar unit installations, etc.

The above is obviously not an all-inclusive list of potential red flags. Brokers must be aware of the facts and circumstances unique to each property, follow their instincts and point out potential red flags. They should not hesitate to recommend to buyers that they should, when red flags appear, seek professional assistance.


Should The Broker Offer An Opinion?
Once the broker is aware of the red flag, and following a reasonably competent and diligent inspection, what should the broker do? One thing that he/she should not do is venture an opinion as to what problem underlies the red flag. If the broker lacks the expertise and his or her opinion amounts to nothing more than a guess, the broker may give the appearance of possessing the expertise that in fact he or she does not possess. If the broker presents such an impression, he would invite a court to judge the broker by the standard of expertise so represented.
NOTE: Whether the opinion is based on guesswork or expertise, all disclosures should be in writing. A written disclosure may protect the broker involved.

A Written Disclaimer Won't Work
The question will undoubtedly arise, "Is it possible to utilize a written disclaimer to avoid liability under the Easton decision?" The answer is "probably not."

Throughout the court's opinions on the Easton decision are statements expounding the liability of the broker due to his superior knowledge. It seems most unlikely that negligence liability can be avoided by a disclaimer. (A disclaimer is a written statement in which the broker states that he or she is not responsible or liable for his or her acts or failures to act.) There is no simple way to avoid Easton liability.

It would also be unwise for an agent to rely on the Hold-Harmless Clause of the listing agreement to provide protection.

To What Properties Does Easton Apply?
It appears that the Easton decision applies only to residential properties of one to four units, including a manufactured homes as defined in Section 18007 of the Health and Safety Code. In fact, only to personal residences. The decision referred to the fact that "a purchaser of commercial real estate is likely to be more experienced and sophisticated in his dealings in real estate and is usually represented by an agent who represents only the buyer's interests." [C.C. § 2079].

Easton applies to properties offered for sale. [C.C. § 2079] It also applies with equal force and effect to leases that include an option to purchase, ground leases of land on which one to four dwelling units have been constructed, or real property sales contracts, as defined in C.C. § 2985, for that property. [C.C § 2079.1].

In a Court of Appeals case, Smith vs. Rickard, the Court of Appeal ruled that the Easton duty to inspect applies only to residential properties of one to four units, not commercial property. The mere presence of a residence on a commercial property does not transform the whole property into a residence.

In Smith vs. Rickard, two brokers (serving as dual agents) had listed a ranch which included a residence and avocado orchards that were cultivated commercially. When the buyer was inspecting the property, he noticed that some of the trees did not look well. The buyer and the brokers took the seller's word for the condition of the trees (too much water). Only after close of escrow did the buyer discover that the trees were afflicted with root rot. The buyer had to destroy hundreds of trees which resulted in a reduced cash flow, default on the loan, and eventually foreclosure and loss of the property. The buyer sued the brokers and the owner. It took the Court of Appeals to get the brokers off the hook. How easy it would have been for the brokers to call upon the expertise of an agricultural expert.

It seems obvious that preventing legal problems is preferable to solving them. The Easton case started in May of 1976, the day the agents failed to exercise their duty to both the buyer and seller. The action was settled in 1984. The above Smith vs. Rickard was decided in 1988. Who knows how the court will rule in the future. It may very well be decided, by a heretofore unknown and probably obscure case, that Easton applies to every transaction under 140 stories tall.

Play it safe—if something looks suspicious, disclose. If it can be lived in—disclose. If you don't disclose something out of the ordinary, the buyer always sues the seller and the agent.

What Kind of Inspection Must The Broker Conduct?
The broker (agent) must conduct a reasonably competent and diligent visual inspection of the property offered for sale. [C.C. Section 2079]

What Must The Broker Reveal From The Results of His or Her Inspection?
The broker must reveal all facts materially affecting the value or desirability of the property that such an inspection would reveal. [C.C § 2079]

To Whom Must The Broker Reveal The Results?
The broker must reveal the results of his/her inspection to the prospective purchaser of residential real property comprising one to four dwelling units. [C.C. § 2079]

When Must The Broker Conduct The Inspection?
The broker must conduct the inspection whenever he or she has a written contract with the seller to find or obtain a buyer. This also applies to another broker who acts in cooperation with such a broker to find and obtain a buyer. [C.C § 2079]

Scope of Inspection
The duty of inspection does not include or involve areas that are reasonably and normally inaccessible to such inspection, nor to inspection of common areas in common interest subdivisions if the seller or broker supplies the prospective buyer with documents and information specified in C.C. § 1360 (Declaration of restrictions, bylaws and articles of incorporation). [C.C. § 2079.3]

Standard of Care of Inspection
The standard of care owed by the broker to a prospective purchaser is the degree of care 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 real estate license under California law. [C.C. § 2079.2]

Buyers Or Prospective Buyers A Duty of Reasonable Care
The law provides that a buyer or prospective buyer has the duty to exercise reasonable care to protect himself or herself, including knowledge of adverse facts which are known or within the diligent attention and observation of a buyer or prospective buyer. [C.C. § 2079.5]

Statute of Limitations
The law provides for a two-year statute of limitations which runs from the date of recordation, close of escrow or occupancy, whichever occurs first. [C.C. § 2079.4]
Example: Broker Brown called upon Mr. and Mrs. Jones to list their personal residence for sale. During the interview, broker Brown noticed water stains on the sheet rock wall in the family room. He asked the Jones' about the stains and they told him that the roof had leaked the previous winter and that they would have the roof repaired and the wall fixed. The broker made no reference to this matter in the listing. Shortly thereafter, broker Brown showed the home to Mr. and Mrs. Smith. Upon entering the family room, broker Brown noticed the water damaged wall was now a nicely paneled wall. Presuming the repairs had been made as Mr. Jones said they would, he did not mention this to the Smiths. Several months after the Smiths had purchased the property there was a heavy rain. And, as it had done before, in poured the water, causing considerable damage to some furniture, the carpets and the paneled wall. The seller was no where to be found. A discussion with the neighbors revealed to Mr. and Mrs. Smith that it was an old leak that was covered over and not repaired.
Question: If Mr. Smith sued broker Brown, how would the courts most likely rule?

Answer: Judgment most likely in favor of the plaintiff, Mr. and Mrs. Smith, with damages to be paid by broker Brown. Brown should have suggested that Mr. and Mrs. Smith have the roof and wall inspected by a qualified inspector before closing escrow. The broker should have been suspicious when he saw the paneled wall. A reference about the damaged wall should have appeared in the listing agreement as a warning to other brokers. The broker cannot use the hold-harmless clause as a defense.



Easton Conclusion

The more we think about the Easton decision, the more we wonder how real estate sales survived before it became law. Although this is said with "tongue in cheek," there is some truth in the statement. For too many years, the buying public has had to deal with poorly prepared licensees who treated a real estate transaction like a clerk in a store. "Take the order and let the manufacturer worry about quality problems." The manufacturer in this case would be the title company, escrow company and the buyer's lack of knowledge as to his rights. No doubt his attorney will tell him his rights.