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RSB Vineyards, LLC (RSB) bought a vineyard including a residence and a wine tasting room.  After the sellers had bought it, they hired design professionals to renovate the property.  The buyers claimed that the renovations were defective, causing the renovated buildings to be structurally unsound, requiring them to demolish it.  RSB sued the sellers for misrepresentation and concealment.  The sellers filed a motion to dismiss which was granted.

When the property was offered for sale, it advertised it as “’vineyard – vested winery permit’ and an “active tasting room.’”  It also described the property as “exceptional nine acre vineyard parcel with operating tasting room, vested 20,000 case winery permit and 12 acres planted to vineyard.”

To support their motion to dismiss, the sellers filed a declaration stating that before the sale they did not know of any violation of building codes or standards or that the work was deficient or substandard.  In fact, they stated that they believed the work met all applicable codes.

Even the buyer representative testified that she had no information to suggest that the sellers had actual knowledge of the deficiencies.  She could also not recall any “false representations that were made to her by the sellers.”

In view of the sellers lack of direct knowledge, the buyer took the position that the design and work performed by the architects and contractors was so deficient that they must have known it was substandard, and that their knowledge was therefore imputed to the sellers.

The court in ruling for the sellers listed the elements of an action for concealment including:

  1. The seller must have concealed a material fact;
  2. The seller had a duty to disclose this fact to the buyer;
  3.  The seller must have intentionally concealed or suppressed the fact with the intent to defraud the buyer;
  4.  The buyer must have been unaware of the fact and would not have acted as he did if he had known of the concealed fact; and
  5.  As a result of the concealment the buyer sustained damage.

The court defined material facts as those which “have a significant and measureable effect on market value and explained that the seller must disclose materials facts which are “not known to, or within the reach of the diligent attention and observation of the buyer.   The court also explained, “only where the circumstances are such that the defendant ‘must have known’ and not ‘should have known’ will an inference of actual knowledge be permitted.”

The question addressed was whether sellers’  architects’ knowledge could be imputed to the buyer.  Under the law knowledge of an agent is imputed to the principal.  As an example, a real estate agent’s knowledge, where acting on behalf of a principal, will be imputed to the principal.  However, this case makes interesting distinctions with respect to the imputation of knowledge from an agent.

Here, the court recognized that an agent’s knowledge is imputed to the principal, but distinguished whether the design professionals, i.e., architect and engineers, were in fact acting as agents when they gained the alleged knowledge of the defective conditions. The court found that an architect who is preparing plans and specifications is acting as an independent contractor (and therefore not the agent of the seller), but only acts as the agent for the client/seller if performing “supervisory functions with respect to the building under  construction . . . .”  The court cited Civil Code Section 2295 which defines an agent as, “One who represents another . . . in dealings with third persons.”  Citing a comment in the “Restatement 3rd  Agency” which provides, “If a service provider simply furnishes advice and does not interact with third parties as the representative of the recipient of the advice, the service provider is not acting as an agent.”  The court then cited a case entitled Trane Co. v. Gilbert (1968) 267 Cal.App.2d 720, for the proposition that, “An architect, as far as the preparation of plans and specifications is concerned acts as an independent contractor but so far the performance of his supervisory functions with respect to a building under construction is concerned, he ordinarily acts as an agent and representative of the person for whom the work is being done.”

The buyer contended that  a professional acts as an agent “if he or she merely acts ‘for the benefit’ of the . . . principal . . . “ the court rejected this argument confirming again that the agent must “act for the benefit of another in dealings with third persons.”

The court commented that it could be inferred that the seller’s architect when interacting with local planning officials during the process of renovations could have been performing as an agent for the seller, but noted that there was no evidence presented by the buyer that this took place.  Presumably too the evidence would have to show that the agent would have gained this knowledge of substandard construction during that interaction.  In other words, the court made a further distinction that if an architect learns of material information while serving as an independent contractor, as opposed to an agent (i.e., when dealing with third persons), then that knowledge, despite being in the mind of the architect during his entire tenure of providing services, will not be imputed to the principal:  “Because the professional’s knowledge of the building’s structure would have been acquired while acting in this role [as a designer or planner] rather than while acting as defendant’s agents, it is not imputed to defendant’s [seller’s].”

The court cited a real estate broker case entitled Herzog v. Capital Company (1945), 27 Cal.2d 349, which the buyer relied upon.  In that case, the buyers purchased a defective building from the sellers and the sellers’ real estate agent represented it as being in “sound condition” and “perfectly intact.”  The agent, however, had been told by the prior owner that it leaked in heavy rains and saw the leaks for himself.  The agent then caused the watermarks on the plaster to be painted over and only told the buyer that “there had been some leaks”  but that the house had been repaired and was “in perfect condition in all respects.”  Under those  facts, the court found that the agent’s knowledge was imputed to the seller because “It is clear that [the agent] knew of the defective condition of the house and that he was acting within the scope of his authority when he caused it to be refinished and newly painted, thereby effectively concealing the structural defects.  “The knowledge of an agent, which he is under a duty to disclose to his principal, is to be imputed to the principal, and accordingly, defendants are charged with [the agent’s] knowledge. In these circumstances they had a duty to reveal the hidden and material facts concealed by their agent and of which they had knowledge, and their failure to disclose them constituted fraud.”

This case has some interesting nuances for brokers.

For example, since knowledge of an agent is only imputed where the agent gains the knowledge while acting with third-persons, when does a real estate agent’s knowledge become imputed to his principal?  Further, does the knowledge of one real estate agent in a large brokerage automatically impute it to other real estate agents in the same office?  As an example, if an agent handles a transaction on property where a seller buys the property, and then another agent from the same office represents that seller when he sells the property, is the new agent on the second transaction charged with the knowledge of the original agent?  One would argue under this case, since the first agent was not working as an agent for the second agent at the time he discovered this information, it should not be imputed to the second agent.  In response, a plaintiff would argue that since Agent No. 1 was working for same brokerage, it doesn’t matter if the agent as working on behalf of the second agent because it is corporate knowledge which is imputed to all agents.  This by itself is a very sticky issue, and one which still has no
easy answer.

Another interesting part of this case involves the misrepresentation claims.  The property was represented as “of having a vineyard vested winery permit” and an “active tasting room.”  The court found that the buyer did not provide evidence to support the contention that these representations were false; but instead, apparently the sellers did obtain a winery permit and were actively operating a wine tasting room at the time of the sale.  The buyer RSB argued that these statements constituted a representation the property was suitable for use as a commercial tasting room, but the court disagreed. .  Instead, the court found  “these are simple statements of fact about:  (1) an ongoing activity at the property; and (2) the issuance of a regulatory permit by the county.”  The court found neither of these statements constituted a warranty about the propriety of the activities on the site.  In an important sentence the court states “that a property is being used for a particular activity does not necessarily imply that the property satisfies all regulatory requirements for the activity. . . .”  The court also found that under these facts the sellers would not be liable for breach of contract for failing to disclose “no material facts and defects” and make “other disclosures required by law.”

Two other interesting points about this case is that the buyer complained that the seller failed to provide a Seller Property Questionnaire (SPQ), and had they done so it would have disclosed the defects about which they complained.  The court found that since the sellers did not have this knowledge, it would not have been disclosed in the SPQ, and therefore, as the SPQ only requires disclosure of known problems.  As such, the failure to provide an SPQ didn’t cause the buyers damages.

Of equal significance, the court stated that the buyer “waived defendant’s provision of a SPQ (which was required per the contract) when it removed the sale contingencies before being provided with the SPQ.  The court noted that the contingency removal included specific contingencies to be removed by the buyer, including “reports/disclosures.”  The court found that once the buyer released a contingency for reports and disclosures, it waived the seller’s obligation to provide the SPQ.  The court also found that this contingency removal form was not a “prohibited exculpatory clause” which means it was not a contractual term which exempted the sellers from liability for their own fraud.  Instead, the court distinguished that form as a waiver of the obligation of the seller to provide any further disclosures that would have otherwise been required under the contract.

This case therefore is significant as it makes distinctions with respect to the imputation of knowledge, and clarifies that representations of ongoing activity, if true, will not be the grounds for a misrepresentation action, even if the activity is being performed illegally (i.e., operating a tasting room when the tasting room is not permitted as a tasting room).

Published by the Norco College Real Estate Program with the support of the Real Estate Programs of Saddleback College and Mount San Antonio College and the California Community College Real Estate Education Center.

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