Disclosure obligations of sellers in California real estate sales transactions, and disclosure obligations and investigative obligations of real estate licensees, have gone through a significant evolution since Lingsch vs. Savage, 213 Cal.App.2d 729 (1963) and Easton v. Strassburger, 152 Cal.App.3d90 (1984).

Lingsch held that in all California real estate sales transactions, including "as is" sales, a seller must disclose all material facts affecting the subject property’s value or desirability of which he is aware. Before Easton, a real estate broker was only bound by the Lingsch duty – that is, merely to disclose the actual knowledge that the real estate licensee had concerning the property being sold.

Effectively, Easton imposed a "should have known" standard on real estate licensees, placing upon them a duty of investigation so that they must now disclose what a reasonably competent real estate investigation should have revealed. If the agent doesn’t investigate, and a court or jury later finds that an investigation probably would have revealed material information, the agent can still be found liable.

The Legislature responded to Easton. Civil Code Section 1102, et seq. and Civil Code Section 2079, et seq. modified and clarified seller obligations and real estate licensee obligations. Four key cases emanated from this: Alexander v. McKnight, 7 Cal.App.4th 973 (1992); Wilson v. Century 21, Great Western Realty, 15 Cal.App.4th 298 (1993); Salahutdin vs. Alcantara, 24 Cal.App.4th 555 (1994); and Sweat v. Hollister, 37 Cal.App.4th 603 (1995).

Alexander imposed a duty on sellers to disclose non-physical defects, including neighborhood conditions. In this case, a seller obtained an injunction against noisy neighbors, who then abated the noise. He sold his house without disclosing this to the buyer. The court held that the seller can’t imply that the neighborhood is quiet when it is "otherwise oppressive." The court said that a noisy neighbor who is consistently a nuisance is a material fact within Lingsch and must be disclosed. The court also said that under Civil Code Section 1102.6, the seller should have marked this on the Transfer Disclosure Statement.

Wilson seems to insulate real estate licensees from liability for alleged non-disclosure of material facts of conditions other that the subject property. Here, a buyer sued a real estate brokerage firm when he discovered foundation problems in the house he purchased. Even though a neighbor told the broker that area properties had foundation problems, the broker wasn’t found liable for failure to disclose that allegation, or the fact that the subject house had foundation problems – no "steel reinforcements" joining the foundation and house.

The court seemed to pin its reasoning on Civil Code Section 2079(e), which states that a real estate licensee need only conduct a competent visual inspection of accessible areas that are readily observable. The court felt that to hold otherwise would overburden the real estate licensee with unreasonable investigatory obligations "where the only visual apparent problems with the foundation were some cracks that were disclosed in a termite repair report."

Salahutdin, and Civil Code Section 2079, seem to indicate that the licensee is responsible for doing a thorough investigation of the "physical condition of the subject property and may not guess" at anything resulting there from. In this case, the plaintiffs told their agent they intended to subdivide the subject raw land for their children and could only do so if they had one acre, per local zoning rules.

Their agent failed to tell them that he only "eyeballed" the property line, relying on the existing old fence and multiple-listing information. He didn’t investigate or seek confirmation of the lot size. The property actually contained only 0.998 acres, which prevented the plaintiffs from subdividing their property to build homes for their children.

The court found that a careless misstatement may constitute constructive fraud even thought there is no fraudulent intent. The agent should have verified the information or disclosed to his client the fact that he wasn’t certain before making statements on which his clients foreseeably would rely to their detriment. The lesson: A licensee should say that he doesn’t know and recommend that a buyer consult the appropriate expert.

Sweat, the last key case of the four mentioned above, held that the sellers and their brokers, having disclosed that the house was in the flood plain, had no further obligation to disclose that the property was subject to restrictions on improvement or alteration in the event of partial destruction. In other words, the brokers had no legal duty to disclose legal ramifications of a disclosed non-conforming use of a property.

In summary, sellers have a greater obligation to disclose than brokers. There has never been a court case or statute imposing on a broker a duty to disclose nonphysical defects as was imposed on sellers, unless the broker has actual knowledge of such a material fact. See, e.g., Reed v. King, 145 Cal.App.3d 261 (1983). The dual-agency concept can affect a real estate licensee’s disclosure obligation to his principal that can have significant legal ramifications in terms of broker liability. See, e.g., Civil Code Sections 2079.13-2079.24.

The four cases discussed here, when read in conjunction with previous case law, Civil Code Section 1102 et seq. and Civil Code Section 2079 et seq., illustrate that a seller’s obligation to disclose nonphysical defects is rather broad, as is the obligation of a licensee to conduct a competent and diligent visual inspection of accessible areas and reveal to the buyer all material facts that an investigation revealed or should have revealed. Whether courts expand or limit these obligations on sellers and licensees will be seen as this century unfolds.