Court of Appeal Weighs In On Real Estate Broker Duty to Inspect and Disclose
The February 26, 2019 Court of Appeal decision Ryan v. Real Estate of the Pacific, involving the sale of a house in La Jolla, California for $3.86 million, is instructive reading for real estate brokers, buyers, and sellers.
Daniel and Patricia Ryan listed their house with the help of their broker, David Schroedl, Sotheby's Realty. While Schroedl was hosting an open house, the Ryans' next door neighbor informed Schroedl that he intended to remodel his home, which would permanently obstruct the Ryans' ocean view, move the neighbor's house within five feet of the Ryans, create a two story wing of windows overlooking the Ryans' pool, involve extensive construction and excavation, and take two years to complete. Schroedl never informed his clients (the Ryans), nor the buyers of the Ryans' house (the Marinhos). The day after escrow closed, the Marinhos' interior decorator talked to the neighbor and discovered the remodel plans.
The Marinhos asked to rescind the sale, which the Ryans refused, in part based on their brokers' advice. The dispute proceeded to arbitration where, after extensive litigation, the arbitrator ordered the return of the $3.86 million purchase price to the buyers, plus interest and attorney's fees of over $1 million, with the property returned to the Ryans. The arbitrator questioned the broker's motivations: "One is left to speculate whether a 21-day, all cash escrow, involving buyers from thousands of miles away, that would garner a $95,500 commission, were considerations."
That's all by way of backstory. After the arbitration, the Ryans sued their broker for failing to disclose the neighbor's remodel plans. In California, the general rule in professional negligence cases is that expert testimony is required to prove that a professional met or did not meet the standard of care. But the Ryans failed to designate an expert witness. The trial court ruled that, without an expert, the Ryans could not establish an essential elements of their claims (whether defendants breached the standard of care), and it ruled against them on summary judgment.
The Court of Appeal reversed, because the above is only half the rule: expert testimony is required to prove professional negligence, except in instances where the negligence is within the "common knowledge" of a layperson. The defendants failed to show it was impossible for the Ryans to prove negligence without an expert, or that the lack of an expert was fatal to the Ryans' claims.
The broker defendants advanced another argument, which the Court quickly dispatched. California's Civil Code, section 2079(a), establishes that a real estate broker or salesperson is under a duty to "conduct a reasonably competent and diligent visual inspection of the property offered for sale and … disclose … all facts materially affecting the value or desirability of the property …." The defendants argued their duty to investigate and disclose is limited to the property being sold (i.e. the Ryans' home), not to a neighboring property. The Court of Appeal was unpersuaded. True, it was the neighbor's house that was being remodeled, however it was clear that the information, if disclosed, would have an adverse impact on the value of the Ryans' property.
Laine Mervis is a litigator specializing in contract disputes, commercial transactions, and business and investment frauds. He can be reached at email@example.com.