Lingsch v. Savage
29 Cal. Rptr. 201, 213 Cal. App. 2d 729, 8 A.L.R. 3d 537 (1963)
Rule of Law:
A seller or real estate broker has a legal duty to disclose facts materially affecting the value or desirability of property if those facts are known to them but unknown to and unobservable by the buyer, and an 'as is' provision in the contract does not relieve them of liability for fraudulent nondisclosure.
Facts:
- Plaintiffs purchased a piece of real property in San Francisco from the Kotoffs, who were represented by real estate broker George Savage.
- The defendants knew specifically that the building was in a state of disrepair, contained illegal units, and had been condemned by city officials.
- These adverse conditions were not visible to the plaintiffs, nor were they discoverable through diligent observation.
- The defendants willfully failed to disclose this information to the plaintiffs, intending for the plaintiffs to rely on this silence.
- The parties signed a Uniform Agreement of Sale which stated the property was sold 'in its present state and condition' and included a clause stating no other representations were made.
- Plaintiffs purchased the property in reliance on the belief that it was in legal, tenantable condition.
- The actual market value of the property was $5,000 less than the price paid due to the undisclosed defects.
Procedural Posture:
- Plaintiffs filed a complaint for damages for fraud against the sellers and the broker in the Superior Court (trial court).
- Defendant Savage (the broker) filed a demurrer to the complaint, arguing it failed to state a cause of action due to the 'as is' contract language.
- The trial court sustained the demurrer without leave to amend, effectively dismissing the case.
- Judgment was entered in favor of Defendant Savage.
- Plaintiffs appealed the judgment to the District Court of Appeal.
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Issue:
Does a real estate broker or seller owe a duty to disclose known, material, latent defects to a buyer, and is this duty negated by the inclusion of an 'as is' provision in the sales contract?
Opinions:
Majority - Sullivan, J.
Yes, a duty to disclose exists for known latent defects and cannot be waived by an 'as is' clause. The court reasoned that fraud may consist of negative nondisclosure just as much as affirmative misrepresentation. When a seller (or their broker) possesses knowledge of material facts affecting the property's value that are accessible only to them and not the buyer, a duty to disclose arises. The court determined that an 'as is' clause serves to disclaim liability for defects that are visible or observable, but it does not grant immunity for the concealment of known, hidden defects (such as illegal units or condemnation orders). To allow an 'as is' clause to shield a seller from liability for active concealment would violate the Civil Code's prohibition against contracting away liability for one's own fraud. Consequently, the broker can be held jointly and severally liable for the fraud.
Analysis:
This case is a landmark decision in real estate law because it significantly limits the doctrine of caveat emptor ('buyer beware') in California. It clarifies that 'as is' clauses are not shields for fraud; they only protect sellers regarding patent (obvious) defects, not latent (hidden) ones known to the seller. The ruling establishes that silence can constitute actionable fraud when there is a duty to speak, which arises from superior knowledge of material facts. This decision places a higher ethical and legal burden on sellers and brokers to be transparent about legal impediments and physical defects that a buyer could not reasonably discover on their own.
