A Court of Appeal ruling last week serves as a timely reminder for real estate buyers and their brokers of the importance of effective due diligence before closing escrow – particularly when the buyer plans to develop the property. It is crucial to know each party’s respective obligations during the due diligence process. Moreover, understanding that the buyer is ultimately responsible for completing thorough and accurate research, regardless of whether a broker is involved, is key to minimizing risk and ensuring that the buyer’s plans for the property can be realized.
In Saffie v. Schmeling, the Court of Appeal in Riverside shed light on several aspects of due diligence. The case involved a listing broker who posted a property on the Multiple Listing Service (MLS) with a statement that the property was in an earthquake study zone, but “has had a Fault Hazard Investigation completed and has been declared buildable by the investigating licensed geologist.” After closing escrow, the buyer learned that the parcel was unbuildable because of changes in earthquake regulations after the “investigation,” which took place in 1982.
Ultimately, the court’s rulings placed the responsibility for thorough due diligence on the buyer and his or her brokers/agents.
• The buyer’s broker was found liable to the buyer for over $200,000 in damages for not investigating the matter more thoroughly.
Rule: A party’s own broker has a fiduciary duty to his or her client. Fiduciary duties require effort, not merely checking boxes.
• The listing broker who posted the MLS listing was found not liable.
Rule: The main duty of the listing broker, when posting on a multiple listing service, is generally limited to factual accuracy.
• The buyer argued that the age of the “investigation” made the MLS statement misleading. Although the court rejected that theory in this case, it reaffirmed earlier decisions holding that in some situations a statement might not be “factually accurate” if its accuracy depended on missing information.
Rule: Given the cost of litigation, the best approach in dealing with real property is always disclose the whole truth.
• The court ignored the buyer’s expert, who had opined that the MLS statement was misleading.
Rule: Don’t rely on after-the-fact experts for trial, particularly given that your opponent can probably find an equal-but-opposite expert.
• The court held that any misleading effect of the MLS comment was cured when the buyer received a copy of the 1982 report.
Rule: If you are in the business of property acquisition and development, California holds you primarily responsible for doing your own research and investigations. The court expressly confirmed earlier court decisions that a seller need not “research local land-use ordinances” to advise the buyer on their effect.
We at HechtSolberg regularly help buyers perform due diligence successfully, and we can help you with your real property purchase. If you face a problem after a purchase, contact Jerry Goldberg, Josh Sonné, Amanda Allen or Richard Schulman of our Risk Management/Litigation Department.