Legal Update

CONTRACT LANGUAGE ADVISING BUYER TO INVESTIGATE CONDITION OF PROPERTY BEFORE RELYING UPON AGENT’S STATEMENTS DOES NOT PROTECT AGENT FROM LIABILITY

  • June 26th, 2010
  • Print

SUMMARY: The California Court of Appeal for the Fourth District on January 24, 2007 ruled that a real estate broker can be liable for fraud by telling the buyers that the County told him the property could be subdivided when in fact the property could not be subdivided. Manderville v. PCG&S Group Inc.   146 CA4th 1486 (2007)

FACTS: A husband and wife, along with their adult daughter and son-in-law entered into a contract to purchase a 2.6 acre parcel of land in El Cajon, CA with the intention of subdividing the property and building adjacent homes.  They first became interested in purchasing the property because the listing agent stated in the MLS listing:  “County states 1 acre min. lot size could be split”.  Before making the offer, the selling agent called the listing agent to ask about the lot split and was allegedly told the lot could be split.

The buyers submitted an offer on the CAR standard form Vacant Land Purchase Agreement which includes language which stated that Buyers had the right to conduct inspections and investigations, and strongly advised Buyers to investigate the condition and suitability of all aspects of the property, as well as all matters affecting the value or desirability of the property, including ordinances affecting the future development and zoning of the property.  In a counter-offer, the Sellers wrote:  “Buyer[s] to satisfy themselves to use of property with warranties or representation to use.”

After closing escrow on the purchase, the buyers hired a civil engineer to subdivide the property.  He told them the zoning allowed a minimum lot size of 1.0 acre, but the general plan had a slope dependent lot size criteria and the minimum lot size was 4.0 acres. Since both elements had to be satisfied, the 2.6 acre lot could not be subdivided.

Buyers sued the listing broker for fraud for falsely representing that the property could be split.  The broker’s motion for summary judgment was granted by the trial court and the case was dismissed on the grounds that the buyers contractually assumed a duty to investigate zoning and land use limits on the future development of the property, and as a matter of law buyers could not show they justifiably relied on statements the broker made in connection with the listing of the property.

DECISION: The Court of Appeal reversed.  It ruled that neither the exculpatory clauses contained in the CAR form agreement, nor buyers’ alleged lack of due diligence in exercising their right to investigate the zoning and other laws restricting the development and use of the property, barred the buyers’ cause of action against the broker for intentional misrepresentation.  The Court reminded the parties of Civil Code §1668 which states:  “All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”    Therefore a party who has induced the other party to enter into the contract based on an intentional misrepresentation cannot be relieved of liability by any exculpatory clause, or other clause waiving liability, contained in the contract because the fraud renders the entire contract voidable.

The broker argued that the buyers contractually undertook to, and did, investigate the broker’s representations concerning the buyers’ ability to obtain County approval of a lot split, but failed to diligently perform that investigation, and thus buyers must be charged with all the knowledge they might have obtained had they pursued the inquiry to the end with diligence and completeness.  The Court of Appeal responded with the observation: ‘[n]o rogue should enjoy his ill-gotten plunder for the simple reason that his victim is by chance a fool.’   The fact that an investigation would have revealed the falsity of the misrepresentation will not alone bar recovery, and it is well established that the buyer is not held to constructive notice of a public record which would reveal the true facts.  Buyers had the contractual right, not the contractual obligation, to conduct an investigation.

The judgment of dismissal was reversed and the case sent back to the lower court for trial.

ANALYSIS: It is a common practice for real estate agents to make a representation of fact about a property, which the agent attributes to some other source and then recommends that the buyer verify its accuracy.  The Manderville case demonstrates the peril of this practice.  The standard language of the C.A.R. contract advising the buyer to thoroughly investigate the property before purchasing, does not provide refuge for an agent’s representation about the property which is later determined to be false.