EASTON V. STRASSBURGER
DISCLOSURE RESPONSIBILITY OF REAL ESTATE AGENT

In February of this year, Division Two of the First District Court of Appeal rendered a decision in a case entitled Easton a. Strassburger, 152 C.A. 3d 90. On May 31, 1984, the California Supreme Court denied the requests of appellant, the National Association of Realtors, California Association of Realtors and a host of other organizations and persons for a hearing or decertification of the opinion. The opinion is therefore judicial precedent in future litigation involving the alleged failure of a real estate licensee to disclose information about a residential property to a prospective purchaser.

The Easton case stands for the proposition that a real estate broker acting as an agent in the sale of a residential real property has a duty to the prospective buyer, not only to disclose facts about the property known to the broker that may materially affect the value or desirability of the property to the buyer, but also a "duty to conduct a reasonably competent and diligent inspection of property . . . in order to discover defects ... " to be disclosed to the buyer.

Briefly stated, the facts of the case are that Easton, the plaintiff, purchased a single-family residence from Strassburger for $170,000 in 1976. Valley Realty (Valley) was the listing broker in the transaction. During the three years immediately preceding the sale to Easton, there had been two landslides on the property. Strassburger had taken corrective action to prevent further subsidence of the soil, but did not inform Valley of the soil problems nor of the corrective action taken. Valley's agents inspected the property several times during the listing period and, according to the appellate court, there was evidence that Valley's agents "were aware of certain 'red flags' which should have indicated to them that there were soils problems." Earth movements and land slides occurring soon after Easton occupied the property virtually destroyed its value.

Easton filed suit against Strassburger, Valley and others. Valley was charged with fraudulent concealment, intentional misrepresentation and negligent misrepresentation. The jury found against Valley only under a simple negligence theory. It returned a joint and several judgment against several of the defendants and apportioned comparative negligence 5 percent to Valley, 5 percent to the cooperating broker who had not been named as a defendant, 65 percent to the seller and 25 percent to other defendants. While the opinion does not reflect the fact, Valley's monetary exposure far exceeded 5 percent of the $197,000 awarded to Easton as a result of the seller's having become insolvent following the sale of the property.

Valley appealed the trial court judgment relying principally upon an asserted error by the trial judge in giving the following instruction 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."

Valley 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.

The Court of Appeal rejected Valley'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 and 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 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 the 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 out to know. The rule thus narrowly construed would have results inimical 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."

The opinion in this case leaves a host of unanswered questions, not only for the practitioner who wants to avoid liability, but also for the practitioner who wants to do what the law tells him is the right thing to do. For example, is there a duty of a cooperating broker to inspect and discover defects in the property? For reasons that are not apparent from the opinion itself, the selling broker was not named as a defendant in the Easton case and the holding of liability was against the listing broker who was undeniably the agent of the seller. The rationale underlying the decision suggests that if a listing broker and selling broker were both named as defendants in a suit by a buyer, both would be jointly and severally liable if the court or jury found a negligent failure-to-detect and failure-to-disclose set of circumstances. That conclusion, however, cannot be stated with certainty since the opinion does include an observation that "seller's broker" (listing broker) is the agent "most frequently . . . best situated to obtain and provide the most reliable information on the property ... " to the prospective buyer. While that statement by the court is undoubtedly true in the abstract, defects in the property that have not been disclosed by the seller but are discoverable through an inspection of the property are equally discernible to listing broker and selling broker in most cases.

If a defect is not one that is readily discernible through a careful walk-through inspection of the property, this decision could portend future decisions holding that either a listing broker or selling broker has a duty to hire professional persons to inspect the property and its component systems to discover defects that are not readily discernible. If the law does develop along those lines, then the duty that the listing broker owes to a prospective buyer could transcend that owed by the seller.

As the law now stands, it is not possible to specify how far a broker must go in any particular set of circumstances to discover existing defects to be pointed out to a prospective buyer or to give reasonable assurance that no significant defects exist. For the present, however, both listing brokers and selling brokers will be well advised to spot "red flags" that signal possible defects and to follow up as necessary to minimize the possibility that a buyer will enter into a contract to purchase the property without having at least as much information about the apparent defect as the broker has or can readily obtain