With rising real estate values, and recent changes in how California taxes certain residential properties, many older homes are hitting the market. Unsurprisingly, many of these homes include unpermitted repairs and/or renovations. Buyers of such properties, seemingly unaware of the permit issue, are increasingly getting cited for permit violations either during a routine city inspection or when the buyers themselves attempt to renovate the property. These disgruntled buyers then turn around and sue everyone involved in their purchase of the property. So whose responsibility is it to disclose the fact a residential property listed for sale contains unpermitted improvements?
In every residential real estate transaction, a seller is required to fill out a Seller Property Questionnaire ("SPQ") and a Transfer Disclosure Statement ("TDS"). The SPQ and TDS are designed to provide buyer with information regarding the property, including whether any unpermitted work was performed. Oftentimes, however, the seller neglects to disclose unpermitted work either because it occurred years prior and is not remembered, or because it occurred when the property was owned by another person. The blame for lack of discovery of the permit issue is then hoisted onto the buyer's real estate agent for failing to investigate the property's permit status before escrow closed.
Every buyer's agent will tell you that they do not have a statutory duty to investigate public records and confirm permit status for residential properties. They are right. Civil Code section 2079.3 states that an agent is not required to investigate public records concerning title or use of property. This statutory rule is confirmed in several standard California Association of Realtor ("CAR") forms including the Agent Visual Inspection Disclosure ("AVID") form and the Residential Purchase Agreement ("RPA") form.
A problem arises, however, in failing to consider the buyer's agent's fiduciary duty to the buyer. Separate from an agent's statutory duties, a buyer's agent owes a fiduciary duty of utmost care, integrity, honesty, and loyalty to the buyer. This common law duty has been unchanged over the years and is confirmed in Civil Code section 2079.16.
The agent's fiduciary duty includes a duty to learn material facts that may affect the buyer's decision to buy the property. Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25-26. Field is a Fourth District Court of Appeal case relied on heavily by lawyers bringing claims against a buyer's agent. The Field court specifically held that a buyer's agent's fiduciary duty may include a duty to inspect public records or permits, even though that duty is expressly excluded from Civil Code section 2079. Whether an agent must inspect public records will depend on the facts of the transaction, the knowledge and experience of the agent, the nature of the property, and the terms of the sale.
In reaching its holding, the Field court relied on an earlier First District case called Salahutdin v. Valley of California (1994) 24 Cal.App.4th 555. In Salahutdin, the buyers advised their agent on multiple occasions of how important it was that the property they buy be capable of being subdivided. Their agent located a property and represented to the buyers that it could be subdivided. The agent's representation to the buyers was solely based off of representations made in the property's listing. The agent did not conduct any independent investigation into the ability of the property to be subdivided. Unfortunately, it turned out the listing was incorrect.
The Salahutdin court did not conclude that the agent necessarily needed to investigate public records regarding the ability to subdivide to satisfy his fiduciary duty to the buyer. However, the court did conclude that, at the very least, the agent was required to tell the buyer that he had not verified the information he was passing on to them. Id. at 563.
With these guidelines in mind, how does a buyer's agent insulate themselves from a potential claim regarding unpermitted work at a residential property their client is interested in buying? The agent first must consider what is important to the client in purchasing the property. Do they intend to renovate? If so, ensuring the property is properly permitted at the time of purchase, or that financial concessions are made during the sale of the property to accommodate for possible future citations or costs to bring the property up to code, are probably of utmost importance to the client. Best practice though would be to assume that a fully permitted property is always important to a client. In fact, by including permit information in the SPQ and TDS, CAR has seemingly deemed permit status of residential properties to be an inherently important factor to the buyer.
The agent must then either (1) investigate public records pertaining to permits and provide them to the buyer; or (2) expressly advise the buyer in writing that the agent will not be investigating public records and that any information conveyed by the agent regarding permits has not been independently verified. Many brokerages have a policy in place that their agents are not allowed to investigate permits because of the potential liability of the agent misunderstanding the permits, or not pulling all appropriate permits. This type of policy is more than reasonable. Agents are not expected to be experts in permitting.
However, to mitigate the potential for liability in failing to investigate permit records deemed material to the buyer's decision to purchase, the agent should expressly advise each buyer they represent that they will not be investigating permit records and are solely relying on information provided by others. It is important this disclosure be in writing and that receipt by the client is confirmed. This will be a key exhibit in any subsequent litigation brought by the buyer.
Jennifer E. Newcomb focuses her practice on civil litigation defense, with an emphasis in professional liability. Ms. Newcomb's insurance coverage experience includes review and analysis of insurance policy language, drafting of coverage opinions, communication with insureds and insurers, conducting time on risk analyses, and attending mediations as insurer representative. She also works with insurance carriers in prosecuting declaratory relief, contribution and rescission actions, and defends bad faith claims. She can be contacted at [email protected].
These views are the author's own.