Real Estate Fraud and Nondisclosure – Technical v. Physical Defects

Our Los Angeles Real Estate Attorneys have briefed an issue in one of our real estate fraud and nondisclosure cases as to whether defects of a technical nature, (i.e., not visible to buyer or through inspection), as opposed to physical defects that are visible to a buyer, are the responsibility of the buyer to have knowledge or investigate.

Based upon the cases we have researched, it appears that California courts are well settled that a buyer of real estate is not charged with investigating matters of a technical nature as to which the seller has full knowledge and the buyer none. In Hefferan v. Freebairn, (1950) 34 Cal. 2d 715, the California Supreme Court affirmed a judgment in favor of a plaintiff buyer of a coffee shop and against a defendant seller. The buyer inspected the books and records of the coffee shop prior to entering into the purchase contract. Id. at 717-18. The inspection revealed a discrepancy between the coffee shop’s records regarding its profitability and the seller’s representations about profitability. Id. The defendant seller attempted to rely on Carpenter v. Hamilton, (1936) 18 Cal. App. 2d 69, 71, arguing that the buyer could not rely on the seller’s representations since he had conducted his own investigation.

The Supreme Court rejected the seller’s argument, holding that the exceptions set forth in Carpenter governed the outcome of that case, not the general rule:

“In the Carpenter case, however, the defects in the property conveyed were immediately visible upon the most cursory inspection by one taking possession of the realty. The misrepresentations of earnings in the present case fall into a category for which the Carpenter case makes a specific exception, i.e., ‘that a buyer is not required to employ experts to investigate matters of a technical nature as to which the seller has full knowledge and the buyer none, and if for this reason the investigation is incomplete, he may show that he relied upon the representations as to matters which he did not investigate.”

Hefferan supra at 720. (Emphasis added.) See also Brownlee v. Vang, (1965) 235 Cal. App. 2d 465, 478 (noting that Carpenter “has been held applicable only to visible defects”); see also Sanfran Co v. Rees Blow Pipe Manufacturing Co. (1959) 168 Cal. App. 2d 191, 203; see also Stanley v. Limberys (1958) 74 Nev. 109, 112 (refusing to apply Carpenter, and noting that “[b]y inspecting the premises the purchasers cannot be held to have satisfied themselves that the structural condition of the building was such as to meet the city requirements.” (Emphasis added.)

Thus, based on the cases cited herein, it would appear that California courts distinguish defects that are of a physical nature and those that are of a technical nature, i.e., defects not visible such as city requirements or the profitability of a business. Of course, as sound as legal arguments may be, trial court judges can and do interpret the case law and facts differently from court to court.

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