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Feldsott Lee Pagano & Canfield
Orange County Homeowners Association Law Firm

A Duty to Disclose Construction Defects to Prospective Buyers?

In a case from 1996, Kovich v. Paseo Del Mar Homeowners' Assn., 41 Cal.App.4th 863; 48 Cal.Rptr. 2d 758, a homeowner bought a townhouse, but soon after moving in, he discovered cracked walls and slabs. The association was engaged in a construction defect case against the developer during that time, but never provided a disclosure of it in the escrow packet. The homeowner was upset at the discovery of these defects after moving in and naturally decided to sue the association, even though the association was not a party to the transaction. The homeowner's position was that the association knew about the construction defects and had a duty to disclose such information.

Kovich v. Paseo Del Mar Homeowners' Assn., 41 Cal.App.4th 863; 48 Cal.Rptr. 2d 758 disagreed and held that the Association owes no duty to prospective purchasers about construction defects or the existence of a civil action against the developer to repair the defects. The Court in this case took a strict view of privity of contract. It was unwilling to extend the disclosure obligations between a seller and a buyer onto a third party homeowners association. While the seller has a duty to disclose information materially affecting the value or the desirability of property to a buyer, the homeowners association only has a fiduciary relationship with its members.

The Appellate Court also agreed with the trial court in that the Davis Stirling Common Interest Development Act, specifically Civil Code §1365, 1365.5 and 1368 (now amended Civil Code §5300, 5500 et seq., and 4525), already lists the escrow disclosure requirements of the homeowners association, and that such laws do not require a voluntary disclosure of the existence of construction defects or pending litigation.

Notwithstanding Kovich v. Paseo Del Mar Homeowners' Assn., homeowners associations are still under the obligation to disclose construction defects and pending litigation to its members. If a member is selling his/her separate interest, it is his/her duty to disclose to the buyer. The buck stops with the seller with this disclosure burden.

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