Suppose that, in the past, your homeowner association (HOA) brought a lawsuit against the developer claiming some kind of construction defect. It happens, of course, all the time. Regardless of when the suit occurred, or what its outcome might have been, is the fact of the suit something that needs to be disclosed to a prospective buyer? A recent case from California's Second Appellate District (Calemine v. Samuelson) gives us some guidance.

In 1983, the seller, Walter Samuelson, and his wife became the original owners of a condominium unit in the Jared Court development. The lower level of the three-story condominium consisted of a garage and "bonus room" that Mr. Samuelson used as an office. Subsequent to the Samuelsons' purchase there were intermittent incidents of water intrusion and flooding in that lower level. Similar water intrusion was experienced in other units.

In 1986 the Jared Court HOA brought a lawsuit against the developer alleging design and construction defects. Later, the HOA hired Westar Flooring to repair and waterproof the affected areas. After that work was done, Samuelson did not experience any further water intrusion problems in the bonus room portion of the lower level. However, there were continued problems in other areas of Jared Court. So the HOA sued Westar. A consultant estimated the cost of needed waterproofing repairs to be somewhat more than $1 million. The lawsuit was settled in 1998, with the association receiving $410,000 after payment of attorney fees.

Another company, CHI, was hired to make further repairs. CHI completed its work in 1998, but cautioned the HOA that they had only done one phase of the work that was needed. Further work was needed, said CHI, and they could not guarantee that there would not be further dampness issues in the garage/storage areas. Samuelson was aware of CHI's caveat, inasmuch as he had been a board member of the HOA from 1993 – 2001, and he was the "point man" in the dealings with CHI.

After the work CHI completed in 1998, Samuelson "did not observe any further flooding or water intrusion into the garage area of the condominium, though occasionally damp spots would appear on the garage floor during periods of heavy rain."

Later, Samuelson undertook to sell the unit. An escrow with Larry and Camille Calemine closed in July of 2002. During the negotiations and sale Samuelson made disclosure of the water problems in a variety of ways. He noted on the Transfer Disclosure Statement that he was aware of "flooding, drainage, or grading problems" and he added the notation "heavy rains below ground walls & slab." His agent wrote "Water damage noted in garage" and he urged the buyers to obtain a physical inspection. The inspector also noted signs of water intrusion, and recommended the buyers make further investigations to determine if repairs had been made. A termite control company also noted moisture damage as well as the fact that other contractors in the past had installed additional concrete and drainage.

The buyers discussed the issue with Samuelson. He told them of the past problems, of the repairs that were made, and said, "Haven't had a problem since. Problem solved." He did not mention the lawsuits.

In January 2005, two and one-half years after the Calemines moved in, the garage flooded. At that time they first learned of the lawsuits against the developer and the first repair company (Westar). Flooding recurred in March of 2005 and in January and April of 2006.

Naturally, a lawsuit was filed. Among other things, it alleged that Samuelson had breached his duty to make full and complete disclosure. The trial court found that Samuelson had made sufficient disclosure of the defects and that there was "no triable issue of material fact regarding a misrepresentation or failure to disclose as to water intrusion." Granting summary judgment, it dismissed the case. The Calemines appealed, arguing that, while Samuelson had made adequate disclosure regarding the water intrusion itself, he should have disclosed the prior lawsuits because they, too, were material facts.

The appellate court observed that a seller's disclosure duty is "limited to material facts; once the essential facts are disclosed, a seller is not under a duty to provide details that would merely serve to elaborate on disclosed facts. "Generally, whether the undisclosed matter was of sufficient materiality to have affected the value of desirability of the property is a question of fact."

In this case, the appellate court said that disclosure of the lawsuits did not fall under the category of mere "elaboration" which would not have been required. It said that "the existence of the two lawsuits was the very type of material information that a potential buyer could find seriously affected both the desirability and the value of the property." It sent the case back for trial.

Now, there is some good news for sellers in all this. For one thing, the court certainly did not say that a seller has the affirmative duty to find out whether his HOA had ever filed such a suit. If you don't know, you don't have to go looking. Secondly, the court made clear that there was no duty to disclose the details of the lawsuits. "Disclosure of the litigation would have enabled appellants [Calemine] to examine the details of those actions …" Given knowledge of the suits, it becomes the buyer's burden to find out the details.

Bottom line, if you know of any lawsuits – past as well as pending – you had better disclose them.

Published: August 4, 2009

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .