Alfaro v. Community Housing Improvement System & Planning Assn., Inc.
171 Cal.App.4th 1356 (2009)
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Rule of Law:
A seller's duty to disclose a material fact affecting a property's value, such as an affordable housing deed restriction, is not excused by the buyer's constructive notice from a recorded instrument. However, the three-year statute of limitations for a fraudulent nondisclosure claim begins to run when the buyer receives actual notice of the restriction, such as through its explicit reference in a grant deed.
Facts:
- Monterey County approved the Moro Cojo housing development subject to a condition that all units must remain affordable for very low, low, and moderate-income households.
- This affordability condition was recorded as a permanent deed restriction in 1997 by the property owner, Community Housing Improvement System & Planning Association, Inc. (CHISPA).
- Plaintiffs, a group of low-income families, participated in a 'sweat equity' program run by nonprofit developers CHISPA and South County Housing, Inc. (South County), contributing hundreds of hours of labor to build their homes in lieu of a cash downpayment.
- CHISPA and South County did not disclose the existence or effect of the affordable housing deed restriction to the plaintiffs before they invested their time and labor.
- Between 2000 and 2001, after completing their labor, plaintiffs received their grant deeds.
- All grant deeds issued by CHISPA and two issued by South County explicitly referenced the recorded affordable housing deed restriction; several other grant deeds from South County did not.
- In April 2004, plaintiff Rebecca Pineda attempted to sell her home and was informed by CHISPA that due to the restriction, she could only sell it for a price significantly below its fair market value.
Procedural Posture:
- Homeowners (plaintiffs) filed a complaint against CHISPA, South County, and the County of Monterey in the Monterey County Superior Court (trial court).
- The trial court sustained demurrers to the plaintiffs' original complaint and first amended complaint.
- The ruling on the first amended complaint dismissed all claims against the County of Monterey with prejudice.
- Plaintiffs filed a second amended complaint against only CHISPA and South County.
- The trial court sustained demurrers to the second amended complaint, granting leave to amend only a constructive fraud claim.
- Plaintiffs declined to amend, and the trial court subsequently entered a judgment of dismissal of the entire action with prejudice.
- Plaintiffs (appellants) appealed the final judgment of dismissal to the California Court of Appeal, Sixth District.
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Issue:
Does a nonprofit housing developer's failure to disclose a recorded affordable housing deed restriction to purchasers before they invest labor give rise to a valid claim for fraudulent nondisclosure, even if the purchasers had constructive notice from the recording or later received actual notice in their grant deeds?
Opinions:
Majority - Rushing, P. J.
Yes, a nonprofit developer's failure to disclose a recorded affordable housing deed restriction can support a claim for fraudulent nondisclosure, as constructive notice from recording does not automatically bar such claims, although actual notice from a grant deed will trigger the statute of limitations. The affordable housing deed restriction is a valid and reasonable restraint on alienation because it serves the strong public policy of providing affordable housing. While its recording provided constructive notice and made the restriction legally enforceable against the properties, constructive notice from public records is not a defense to a fraud claim. Sellers of real property have a duty to disclose material facts affecting value, and the restriction's impact on resale value is clearly material. However, the statute of limitations for fraud is three years from the discovery of the facts. Those plaintiffs who received grant deeds explicitly referencing the restriction were put on actual notice at that time, and by waiting more than three years to file suit, their claims are time-barred. The fraud and contract claims of the plaintiffs whose deeds did not reference the restriction are not barred on the face of the complaint and are permitted to proceed.
Analysis:
This decision clarifies the relationship between the enforceability of recorded covenants and a seller's common law disclosure duties. It establishes that while a properly recorded affordable housing restriction is a valid restraint on alienation due to public policy, sellers cannot use the doctrine of constructive notice as a shield against claims of fraudulent nondisclosure. The ruling distinguishes between the validity of the restriction on the property itself and the seller's liability for failing to disclose it. By tying the start of the statute of limitations to the moment of actual notice (e.g., mention in a grant deed), the case underscores the importance of timely legal action while still protecting buyers from active or passive concealment by sellers.
