Flaws in just-purchased home are the responsibility of previous owner 

James from Orinda asks this week’s question:

Q: “My wife and I just bought our first house. After we moved in, we found out the septic system was in failure. We know because when we called a septic tank cleaner, they said that the system had been in failure for years and he had told the previous owners to replace it. They didn’t disclose it to us. We feel we were ripped off. What are our rights?”

A: James, what a disappointment to have the excitement of your new home tempered by feeling cheated. As part of a property sale the owner executes what is commonly referred to as a transfer disclosure statement, which must accurately represent the condition of the property at the time of sale.

California Civil Code 1102.7 states that the seller must act in good faith and be honest in their disclosures. A purchaser of property is entitled to rely upon the representations provided in the transfer disclosure statement. A 1924 case, Sullivan v. Helbing, found the following: “A purchaser has the right to rely on the representations of the seller as to facts not within the purchaser’s knowledge, and the seller cannot escape responsibility by showing that the purchaser might have ascertained upon inquiry that the representations were untrue.”

Even though you may have hired a standard home inspector, who does not inspect septic systems, the Sullivan case states that “the mere circumstance that one makes an independent investigation or consults with others does not necessarily show that he relied on his own judgment rather than upon the representations of the other party, nor does it give rise to a presumption of law to that effect.”

In cases dealing with the misrepresentation of the status of land and property, the courts have held that the purchaser is under no duty to make an independent investigation as to the representations of the seller, despite visits to and visual inspection of the property. California Civil Code 3343 states that one defrauded in the purchase, sale or exchange of property is entitled to recover the difference between the actual value of what you thought you bought and the actual value of what you received, together with any additional damage arising from the transaction. This includes amounts you actually, and reasonably, expended upon the misrepresentation and money to compensate you for loss of use and enjoyment of your property because of the fraud.

The courts have held that Section 3343 must be applied realistically to give the defrauded person their actual out-of-pocket loss and, in circumstances where the house was going to be resold at a profit, the loss of profits if appropriate. (For example, if the market turned downward before the house could be sold.)

If you had intended to buy and then rent the property, and lost rental income, then you would be entitled to recover the rental income lost during the period that the property is uninhabitable. If you can prove that the prior owners deliberately concealed this fraud, then under California Civil Code Section 3294 you may, in addition to your actual damages, be entitled to recover punitive damages. Punitive damages act as a deterrent against people acting fraudulently because, in addition to having to repay the ill-gotten gains, there can be a exemplary damages up to nine times the underlying value of the fraud.

In the case of Dvorak v. Latimer, a landowner was found to have committed fraud by the sale of a property that, despite representations to the contrary, did not have a viable water supply. As in this case, the evidence that led to the finding of liability came from the testimony of a former employee who testified that the previous owners knew that the well was in failure.

If the seller’s broker was knowledgeable about the well but also failed to disclose it, or deliberately concealed it, she or he may be liable. California Civil Code Section 2709 states that it is the duty of a licensed real estate broker or salesperson to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal if that broker has a written contract with the seller to find or obtain a buyer. The standard of care owed by a broker is the degree of care that a reasonably prudent real estate licensee would exercise.

My suggestion is that you contact the seller’s agent with the information you have, show them this article and request that the seller pay to fix or repaid the septic system promptly. If they don’t act appropriately, then hire a lawyer to represent you.

Christopher B. Dolan is owner of the Dolan Law Firm. Email questions to help@dolanlawfirm.com.

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