Realtors' Duty to Question Homeowners Association as to Pending Construction Defect Litigation.

In a recent California case entitled Padgett vs. Phariss, et al., the California Court of Appeal held that during a sale of real property, a realtor is under no affirmative duty to inquire of the seller's Homeowners Association whether there are construction defects in the common areas of the property or whether there is pending or proposed litigation concerning construction defects.

In the Padgett case, Gordon and Mary Padgett (collectively the Padgetts) contracted to buy a residence in the Stone Point Development. Unbeknownst to the Padgetts, the Association had filed a construction defect suit against the developer approximately one month before the Padgetts signed the contract.

After obtaining title to the property, the Padgetts learned of the pending litigation concerning alleged defects in the common areas. Two years later the Padgetts initiated a lawsuit for rescission and damages against the sellers and for damages against the two sets of real estate agents involved.

Although the real estate agents had no actual knowledge of the defect litigation, the Padgetts contended that because the subject property was located in a planned unit development, the real estate agents were subject to a higher standard of fiduciary duty. With particularity, the Padgetts contended that the agents were subject to a duty of inquiry to learn specifically of any litigation concerning the common areas of the development.

The Court of Appeals ultimately held that the fiduciary duty owed to a principle by a real estate agent is governed and limited by Civil Code, '2079, and the common law doctrine of agency. Civil Code, '2079 requires that real estate brokers conduct a reasonably competent and diligent visual inspection of the property offered for sale and disclose to that prospective purchaser all facts materially effecting the value or desirability of the property . . . The statute does not specifically require an agent to affirmatively investigate whether any defects exist at the common areas of the project or whether there is pending litigation concerning the same.

The Court of Appeals held that the existence of a fiduciary relationship does not require the agent to go beyond the statutory standard of care as provided for by Civil Code, '2079. Specifically, the agent is under no obligation to affirmatively inquire of the Association as to the existence of pending litigation concerning the Association's common areas. Nor is the agent under an affirmative duty to investigate court files in order to determine whether the property is currently involved in litigation concerning the common areas. In a related ruling, the Court in the case of Kovich v. Paseo Del Mar Homeowners Association, held that a Homeowners Association is under no obligation to disclose to a potential buyer, the existence of defects in the Association's common areas or pending litigation concerning defects in the common areas. Therefore, it is imperative that the potential home buyer investigate the issue of defects of the common areas or proposed or pending litigation concerning the same prior to buying real property.