Real Estate Licensee’s Duty to Inspect Residential Property – AVID

Introduction

The California law requires that all real estate licensees who deal with residential property containing one-to-four dwelling units must conduct a “reasonably competent and diligent visual inspection” and to disclose to a prospective purchaser any facts that affect “the value or desirability of the property that such an investigation would reveal.”

California Civil Code Sections 2079-2079.6 were enacted to define more clearly the duties imposed on real estate licensees-—both listing agents and selling agents. The case of Easton v. Strassburger, which preceded the enactment of the Civil Code Sections 2079 et seq., held that a real estate licensee has a duty “to disclose to a buyer material defects known to the broker but unknown to and unobservable by the buyer.” If a broker fails to disclose known material facts he or she is liable for fraudulent concealment or for negligent misrepresentation. It was the intent of the legislature to codify and make precise the holding of Easton in Civil Code Sections 2079-2079.6.1

However, subsequent case law, such as Field v. Century 21 Klowden-Forness (1998) has also had a tremendous impact on defining a real estate licensee’s duties to his or her client. Field imposes greater fiduciary duties on the selling agent than those required by Civil Code Sections 2079 et seq.

Q1. Where can I find the law requiring a real estate licensee to inspect the property?

A1. Civil Code Sections 2079 through 2079.6.

Q2. What types of properties are covered by this law?

A2.  This law covers residential real property with one-to-four units, and personal property manufactured homes including mobilehomes.2 This includes transactions even when exempt from the TDS such as probate or REO. The visual inspection is not required on commercial, vacant land or 5+ residential property.

However, a licensed real estate broker or salesperson does not have a statutory duty to conduct a visual inspection of residential property sold as part of a subdivision in which a DRE public report is required (5 or more units). In addition, a broker need not conduct a visual inspection for a unit in a new subdivision in which a public report is not required because it is a subdivision of improved, single-family homes, in which all improvements are complete, there are no common areas, and whose units are located entirely within the boundaries of a city.3

Despite the fact that this law limits the real estate licensee’s inspection duty to residential one-to-four units, it is important to keep in mind that under agency law, a licensee’s fiduciary duty to his or her buyer may require the licensee to note “red flags” even in residential 5 or more unit properties or other types of properties.4

Q3. What types of transactions are covered by this law?

A3. Sales, leases with an option to purchase, ground leases of land on which one-to-four dwelling units have been constructed, or real property sales (installment land sale) contracts.5

Q4. Is a salesperson, like a broker, required to do a visual inspection of residential property offered for sale, lease, or exchange?

A4. Yes. Salespersons as well as brokers must do visual inspections of the residential property.6

Q5. Do real estate licensees have to conduct an inspection in “as is” sales?

A5. Yes. There is no exemption in the law for this kind of transaction. Thus, while a seller may effectively limit his or her liability as far as not warranting the condition of the property, the licensee must still conduct a reasonably competent and diligent visual inspection with the appropriate disclosures to the buyer.

Q6. What is the real estate licensee’s standard of care that the law imposes?

A6. A real estate licensee must use the degree of care that a “reasonably prudent real estate licensee would exercise and is measured by the degree of knowledge through education,experience, and examination, required to obtain a real estate license.” 7

Q7. Does a licensee have a duty to inspect inaccessible areas?

A7. The required inspection “does not include or involve an inspection of areas that are reasonably and normally inaccessible . . .” 8 There is no requirement to climb up hillsides, onto the roof or into the attic; move or look under or behind furniture or into cabinets; or open locked doors.

Q8. What about transactions where the property includes common areas, such as the sale of a condominium or stock cooperative?  Do Civil Code §§ 2079 et seq. require a licensee to inspect all the common areas as well?

A8. No. The law specifically states that the duty applies only to the unit offered for sale, and not to common areas or other units, as long as the buyer is provided with the information about the subdivision property that is already required by law. 9

Q9. Is a licensee required to inspect property that is part residential and part commercial, such as a farm with a house on it?

A9. Yes, but only the residential part. That is, the licensee is required to do areasonably diligent visual inspection of the residence, but not the commercial part, such as farmland, or an adjoining store or restaurant. 10

Q10. Must the licensee disclose material facts personally known by the real estate licensee to a buyer?

A10. Yes. This law does not alter the requirement that a licensee must disclose material facts that the licensee is aware of, such as the existence of nuisances or defects or a lack of permits or other conditions that may affect the value or desirability of the property offered for sale to a buyer.

Q11. What is the buyer’s responsibility under this law?

A11. The law specifically states that nothing in this law “relieves a buyer of . . . the duty to exercise reasonable care to protect himself or herself, including those facts which are known to or are within the diligent attention and observation of the buyer…” 11

Q12. In a transaction where both a listing and a selling agent are involved, which licensee must conduct the inspection?

A12. Both. If both a selling and listing agent are involved in a transaction covered by this law, both licensees must conduct an inspection. The Real Estate Transfer Disclosure Statement (TDS) provides space for both the listing and selling agents to state what their inspections have revealed. Either C.A.R. Form TDS (when seller must provide the TDS) or C.A.R. Form AVID (when seller is exempt from providing the TDS) may be used.

Q13. What about residential transactions where the seller is not required to provide a TDS (such as probate sales, or REO’s), but the licensee is required to visually inspect the property? What procedure should the licensee use to document this inspection?

A13. Remember that the licensee’s duty is to conduct a competent and diligent visual inspection of the property and disclose any “red flag” indicators of potential problems to prospective buyers regardless of whether or not the seller is exempt from providing the TDS. Even though in such transactions the TDS is not required, it would be prudent for the licensee to document the results of the inspection in writing and provide this to the buyer. C.A.R. Form AVID may be used for this purpose.

Q14. What information should be included in this written report of the licensee’s visual inspection?

A14. Generally, the report to the buyer should include the following:

  • The date(s) of the visual inspection.
  • The results of the inspection including any obvious “red flags” or defects.
  • Recommendations for further inspections, if warranted, by appropriate professionals concerning the condition of the property.

Q15. So how does an agent conduct a visual inspection?

A15. An agent should conduct a reasonably competent and diligent visual inspection of the property to disclose all facts materially affecting its value or desirability that such an inspection would reveal. Above all, the agent should identify “red flags.” In this regard, anything such as cracks, stains, discolorations, spots, peeling paint, popcorn ceilings, hillside netting and uneven flooring or warping floors, etc…., should be disclosed.

There are a number of rules of thumb which can assist the agent. In general, the agent should stick to facts. Do not speculate. For example, you may say, “green and black discoloration in bathroom #1.” Do not say mold of the “toxic variety” (you don’t know if it is toxic); or “surface mold” (you don’t know how deeply it penetrates); or “easily cleaned” (you don’t know exactly what remediation effort is necessary); or “caused by leak in the calking” (you’re not offering an opinion as to cause).  In fact, it is better to not state “mold” at all. As an agent, you should not assume the role of environmental toxicologist to make the determination whether the subject property contains mold or asbestos or other environmental hazards.

Moreover, do not guess at the adequacy of repairs such as saying the “repair work looks solid.” Stay away from loose language such as “no problems whatsoever” (obviously, there could be) and “remodeled all over” (Really? Was it truly remodeled everywhere?). Do not attempt to use the visual inspection for marketing or puffery. The house is already sold.

When identifying cracks, stains, paint damage, spots, etc…., do not attempt to quantify or otherwise describe size, significance or degree of a defect. For example do not say “hair-line crack,” “small crack,” or “severe crack.”

You can certainly be specific by indicating the location of a material defects (such as “crack near upper left corner in wall facing door”). But don’t be so specific that you’re going beyond the scope of your expertise (ex: “3/16th of an inch slope in entry way”).

Lastly, the agent should not simply say, ” I agree with the seller’s portion of the TDS” or make other remarks such as, “I do not see anything which contradicts seller’s statements.” This type of statement allows creative plaintiff’s attorneys to argue that the agent has endorsed and/or adopted the seller’s own negligent statements as their own.

Q16. When must the visual inspection be delivered to the buyer?

A16. Within seven days under the default terms of the C.A.R. purchase agreements. For example, the RPA-CA under paragraph 10A(2) ties delivery of the visual inspection (whether written on the 3rd page of the TDS or on a separate AVID form) to the seller’s obligations to provide to the buyer “fully completed” disclosures.

As such, failure to deliver the visual inspection within the required time frames (seven days by default) creates a contractual cancellation right under item 10A.(6) and (7) of the RPA. Thus, it is imperative that the agent stick strictly to the required time frames for delivery.

Even where the transaction involves a residential 1 – 4 property but is TDS exempt, there may still be a contractual cancellation right based upon delivery of the visual inspection. Item 10.A.(7) of the RPA states that if any “subsequent” disclosure is delivered to the buyer after the offer is signed, the buyer retains a cancellation right. It is not entirely clear that the visual inspection constitutes a “subsequent” disclosure, but it could.

Q17. Is there a cancellation right associated with delivery of the visual inspection based upon statute?

A17. Yes. Commencing January 1, 2019, whenever a TDS is required then the statutory cancellation right adheres to completion and delivery of both the TDS and the listing agent’s visual inspection. (Cal Civ. Code Sec. 1102.2(c)). So, even if a non-C.A.R. purchase agreement was used in a transaction or even if the buyer had already removed all contingencies, the buyer would still retain a three or five-day cancellation right based upon delivery of the visual inspection separate and apart from what the contract stated.

However, if the property is a residential 1 – 4 property but is TDS exempt, then no statutory cancellation right would attach to the delivery of the visual inspection even though an agent might still be required to complete and deliver one.

Q18. Would a buyer have a right to cancel based upon delivery of their own buyer’s agent’s visual inspection?

A18. No. The cancellation right is based only upon the delivery of the listing agent’s visual inspection.

Q19. Can the visual inspection be delivered electronically?

A19. Yes. Commencing January 1, 2019, the TDS, and the attached visual inspection whether on the third page of the TDS or on a separate AVID form, are specifically authorized by law to be delivered electronically.

Q20. How many days does a buyer have to cancel under law after delivery of the visual inspection?

A20. Assuming the TDS or visual inspection is not delivered in advance of execution of the purchase agreement, the buyer will have three days to cancel if the listing agent’s visual inspection is delivered in person, or five days if delivered by either by mail or electronically.

Q21. Is this statutory cancellation based upon delivery of the visual inspection waivable by the buyer?

A21. No. Just as the TDS cancellation right is not waivable, neither is the buyer’s right to cancel based upon delivery of the visual inspection.

Q22. Is there a statute of limitations for an alleged breach of this duty to inspect and disclose?

A22. Yes. A lawsuit alleging a breach of a licensee’s duty under this law must be filed within two years from the date of occupancy, the date of recordation of the deed to the buyer, or the date of close of escrow, whichever occurs first.

12  However, in Field v. Century 21 Klowden-Forness (1998), the court held that the three-year statute of limitations controls a buyer’s suit for breach of fiduciary duty against an exclusive buyer’s broker, rather than the two-year statute of limitations under Civil Code § 2079.

Q23. Can you provide a list of cases that discuss the visual inspection law?

A23. Yes. Here is a list of nearly all the cases which directly cite the visual inspection law Civil Code  § 2079 along with a summary of the case:

Fact that claim for breach of fiduciary duty, brought by real estate purchasers against broker that exclusively represented them in transaction, was based in part on broker’s failure to determine correct acreage of property and extent of easement that burdened it did not bring claim within purview of limitations period for claims against sellers’ brokers for failure to make diligent visual inspection and disclose material facts to purchasers. Field v. Century 21 Klowden-Forness Realty (App. 4 Dist. 1998) 73 Cal.Rptr.2d 784, 63 Cal.App.4th 18, as modified, review denied.

 

Child could not establish that a duty of care was owed to him by a real estate broker who sold a home to the child’s mother, based on the mere fact that it was foreseeable that the child would be living in the house and would suffer injury from the alleged failure to disclose known defects in the house; the mere existence of foreseeability of harm to persons other than parties to the real estate transaction was, for public policy reasons, not sufficient to impose liability on the broker. Coldwell Banker Residential Brokerage Co., Inc. v. Superior Court (App. 4 Dist. 2004) 11 Cal.Rptr.3d 564, 117 Cal.App.4th 158.

 

When two or more parties have an obligation to discover and disclose the same defect to a home purchaser, the failure of each to do so may be a proximate cause of a single indivisible injury to the purchaser, in which case the parties will be jointly and severally liable to the purchaser for the injury. Leko v. Cornerstone Building Inspection Service (App. 2 Dist. 2001) 103 Cal.Rptr.2d 858, 86 Cal.App.4th 1109, rehearing denied, review denied.

 

Seller’s real estate broker, and broker’s employee, satisfied their statutory duty of inspection and disclosure by disclosing to buyer of condominium unit that homeowners’ association had filed a lawsuit for construction defects and that the suit had been settled, where broker and employee did not have any of the documents pertaining to the litigation. Assilzadeh v. California Federal Bank (App. 2 Dist. 2000) 98 Cal.Rptr.2d 176, 82 Cal.App.4th 399.

 

Real estate broker’s fiduciary duty to disclose material facts about the property arises upon the creation of the principal-broker relationship. Exxess Electronixx v. Heger Realty Corp. (App. 2 Dist. 1998) 75 Cal.Rptr.2d 376, 64 Cal.App.4th 698.

 

Vendor’s real estate broker, who disclosed fact to purchaser that some condominium units in development had suffered moisture intrusion, did not breach his duty by failing to elaborate on that disclosure by providing further details on various manifestations of water intrusion throughout development or disclosing precise allegations made in condominium association’s lawsuit against developer, where there was no evidence at time disclosure was made that vendor’s unit showed signs of moisture intrusion, and purchaser was aware of water intrusion problem which resulted in litigation. Pagano v. Krohn (App. 4 Dist. 1997) 70 Cal.Rptr.2d 1, 60 Cal.App.4th 1.

 

Statutes governing inspections and disclosures incident to sales of real property did not impose duty on real estate sales agents to inspect more than unit offered for sale, such as common areas to planned development. Padgett v. Phariss (App. 4 Dist. 1997) 63 Cal.Rptr.2d 373, 54 Cal.App.4th 1270, review denied.

Duty of disclosure of real estate broker representing seller includes affirmative duty to conduct reasonably competent and diligent inspection of residential property listed for sale and to disclose to prospective purchasers all facts materially affecting value or desirability of property that such investigation would reveal. Loken v. Century 21-Award Properties (App. 4 Dist. 1995) 42 Cal.Rptr.2d 683, 36 Cal.App.4th 263, review denied, certiorari denied 116 S.Ct. 912, 516 U.S. 1113, 133 L.Ed.2d 843.

Purchasers stated fraud cause of action against broker-vendor by alleging that vendor represented that residential structure on property which he was offering for sale was in a sound condition and adequate repair, and that he knew that foundation under house on property was so defective that house could not legally or safely be occupied. Prichard v. Reitz (App. 2 Dist. 1986) 223 Cal.Rptr. 734, 178 Cal.App.3d 465.

Seller’s agent did not breach seller-disclosure duties in real estate transactions, requiring reasonably competent and diligent visual inspection of property and disclosure to prospective purchaser of all material facts from investigation, by not discovering absence of steel reinforcements or “J” bolts connecting foundation with house, where only visually apparent problems with foundation were some cracks that were disclosed in termite repair report and through purchaser’s repeated inspections of property. Wilson v. Century 21 Great Western Realty (App. 1 Dist. 1993) 18 Cal.Rptr.2d 779, 15 Cal.App.4th 298, rehearing denied, review denied.

Real estate broker for seller of property containing residence and avocado groves had no duty to inspect that portion of property containing avocado groves in order to disclose to buyer facts that would affect value or desirability of property; even if property was purchased as residence, with agricultural income important only to keep up payments, defect which inspection would have disclosed affected only value of avocado grove, i.e., the commercial portion of the property. Smith v. Rickard (App. 2 Dist. 1988) 254 Cal.Rptr. 633, 205 Cal.App.3d 1354, review denied.

Home sellers’ listing broker and real estate agent had no duty to independently verify accuracy of sellers’ representations or to disclaim knowledge of accuracy of such representations. Robinson v. Grossman (App. 4 Dist. 1997) 67 Cal.Rptr.2d 380, 57 Cal.App.4th 634.

“As is” language in realty sales contract does not shield seller or its agent from liability for affirmative or negative fraud. Wilson v. Century 21 Great Western Realty (App. 1 Dist. 1993) 18 Cal.Rptr.2d 779, 15 Cal.App.4th 298, rehearing denied, review denied.

Claim that real estate agent breached statutory duties to disclose defects by failing to disclose alleged defective condition of subfloors was objectively unreasonable; agent had duty only to disclose visible defects, alleged defect was not visible and would not have been apparent during a reasonable property inspection, and there was no statutory authority or reason to expand the scope of agent’s duty to include anything known about the property which could materially affect the value or desirability of the property. Peake v. Underwood (App. 4 Dist. 2014) 173 Cal.Rptr.3d 624, 227 Cal.App.4th 428, modified on denial of rehearing.

Jury’s determination that purchasers’ real estate broker did not violate the statutory duty imposed on a vendor’s real estate agent to visually inspect residential property and disclose material information to buyers was not a determination of whether purchasers’ real estate broker could be liable for common law negligent nondisclosure, as might render trial court’s error in nonsuiting the constructive fraud claim harmless; the cause of action for negligent nondisclosure rested on the broker’s fiduciary duty to disclose material information within its possession regardless of how it obtained the information. Michel v. Palos Verdes Network Group, Inc. (App. 2 Dist. 2007) 67 Cal.Rptr.3d 797, 156 Cal.App.4th 756.

Genuine issue of material fact as to whether vendor’s real estate agent had reasonable basis to believe house was 5,500 square feet precluded summary judgment dismissal of purchaser’s negligence and negligent misrepresentation claims against agent; purchaser’s expert declared that reasonably competent real estate agent should have known from visual inspection that house was substantially less the 5,500 square feet. Furla v. Jon Douglas Co. (App. 2 Dist. 1998) 76 Cal.Rptr.2d 911, 65 Cal.App.4th 1069, rehearing denied. Judgment 185.3(7)

Evidence in proceeding for restoration of real estate agent’s license supported conclusions that dangers of high groundwater and landslides were conveyed to purchasers and that vendor’s agent was not negligent or incompetent; ?purchasers were aware of water problems experienced by neighbors two lots down the street, high groundwater problems were confirmed in geological reports, vendor disclosed groundwater problem, and agent disclosed groundwater and landslide problems suffered by neighbors. Vaill v. Edmonds (App. 2 Dist. 1991) 6 Cal.Rptr.2d 1, 4 Cal.App.4th 247.

Real estate listing salesperson owed a fiduciary duty to purchaser; broker acted as the dual agent of the purchaser and vendor, disclosure form explicitly stated that a dual agent has a fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with either party, and salesperson executed the forms on behalf of broker as an associate licensee and owed an equivalent fiduciary duty to that owed by the broker. Horiike v. Coldwell Banker Residential Brokerage Company (App. 2 Dist. 2014) 169 Cal.Rptr.3d 891, 225 Cal.App.4th 427, rehearing denied, review granted and opinion superseded 174 Cal.Rptr.3d 294, 328 P.3d 1035.

 

Q24. Where can I obtain additional information?

A24. This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.’s legal products and services, please visit Member Legal Services.

This legal article is just one of the many legal publications and services offered by C.A.R. to its members. The information contained herein is believed accurate as of the revision date above.  It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney. For a complete listing of C.A.R.’s legal products and services, please visit Member Legal Services.

Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.’s Member Legal Hotline at (213) 739-8282, Monday through Friday, 9 a.m. to 6 p.m. and Saturday, 10 a.m. to 2 p.m.  C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739-8350 to receive expedited service. Members may also submit online requests to speak with an attorney on the Member Legal Hotline by visiting Legal Hotline on car.org.  Written correspondence should be addressed to: CALIFORNIA ASSOCIATION OF REALTORS®, Member Legal Services, 525 South Virgil Avenue, Los Angeles, CA 90020.

Copyright© 2018 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Permission is granted to C.A.R. members to reprint this material in hardcopy or PDF format only for personal use or with individual clients. This material may not be used or reproduced for commercial purposes. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R Legal Department. All rights reserved.

 

ENDNOTES

  1. Cal. Civ. Code § 2079.12
    2.  Cal. Civ. Code § 2079.
    3.  Cal. Civ. Code § 2079.6.
    4.  Compare the holding of Field v. Century 21 Klowden-Forness(1998) (agent’s fiduciary duty to his/her own client is substantially more extensive than the non-fiduciary, statutory, Civil Code Section 2079 duty to perform a reasonably diligent visual inspection) with Smith v. Rickard (1988) (no duty to inspect agricultural portion of real property with house on it)
    5.  Cal. Civ. Code § 2079.1
    6.  Cal. Civ. Code § 2079.
    7.  Cal. Civ. Code § 2079.2
    8.  Cal. Civ. Code § 2079.3
    9.  Cal. Civ. Code § 2079.3
    10. Smith v. Rickard , 205 Cal. App. 3d. 1354 (1988)
    11. Cal. Civ. Code § 2079.5
    12. Cal. Civ. Code § 2079.4

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