Dan

Welcome to Sound Business Insights. I’m Dan Watkins. This episode’s about real estate disputes. This podcast is not intended to provide legal advice.

Neil

Dan, as we start our discussion on real estate and neighbor disputes, I think probably one of the best places to start is just let’s talk about the generic buckets, if you will, of typical real estate disputes. Let’s start with defects. That seems to be a pretty common one.

Dan

It’s the biggest fear, right? When you buy or sell real estate, you are always worried you’re going to be buying something with major defects, or you’re going to be selling something and be accused of not disclosing a major defect, That you had no idea was there, I mean, it’s everywhere. Yes. And at times, your buyer, your unscrupulous buyer will come and say, I think there’s a defect, and try to pinch you for money after the sale or before the close, or it happens everywhere. So yeah, it’s good to know about defects.

Neil

And then associated with that is the failure to disclose. So what’s the Difference?

Dan

Let’s go back. Yes. There’s two types of defects. Okay? There’s the obvious and there there’s the hidden patent and latent defects. You’re responsible for both, but the standard of care is different between the two. If it’s an obvious defect, you’re more likely going to be in trouble if you don’t disclose it. But if it’s so obvious, then the other side can’t say they didn’t know about it. And if it’s hidden, then how hidden is it and should you have known? And is it hidden to such an extent that the other side, the buyer, let’s say, couldn’t have known about it.

Neil

So in a typical real estate dispute where there’s an issue with defects or hidden defects, what is the level of awareness that a buyer needs to have? And then what’s the level of awareness a seller needs to have?

Dan

In residential, there’s something called a transfer disclosure statement. Yes. And that is governed out of civil code section 1100, I believe. And that talks about what the actual legal requirement is for disclosure. And this form has grown from one page to six pages. And you have to be honest on that. So when I get real estate defect case today, I’ll go right to that document because somewhere in there, if the seller’s a bad guy, they lied on the TDS. And that’s where you have a problem because it’s hard to sell a house with a big defect and you don’t want it, and you can’t afford the house anymore. So you get tempted to just kind of skimp on your disclosures,

Neil

Hide it and pass it on,

Dan

And you just hope nobody, they just let it go. So where’s that fine line between you knew about this versus, okay, maybe you really didn’t know about this, but we have a problem. Let’s talk about carpet and big old cracks in the concrete. We live on clay soil. This is desert and clay. So, that concrete cracks, clay is expansive, and your thickest most reinforced concrete is no match for expanding clay. It’s brutal. Let’s talk about slope creep. They have a lot of slopes, a lot of not clay environments where you have just sand and dirt that the bluffs are always falling off erosion. All those things can cause a crack in your slab that needs support, but it’s hidden by carpet and furniture and all kinds of things. And usually there’s been evidence of repair and somebody had to repair it and it’s covered up. So yeah, they have big trucks with concrete pumpers that go in there and try to reinforce an engineering and huge bills for a crack slab. That’s a bad situation right there.

Neil

As attorneys with 40 years of experience, we can usually tell what’s covered up, what’s been attempted to be repaired before versus what’s an honest, I had no idea.

Dan

Right. There’s also a mold.   We learn more and more every year about these studies on mold. And it seems like none of it comes back as, oh, mold’s good for you. And so there’s a whole thing, You see these poor kids going to the emergency room and they got these flesh eating viruses all over ’em. And they’ve lived in a mold house that goes for commercial landlord tenants and residential landlord tenants and homeowners and everything. Sometimes it’s related to a crack in the slab. So on top of that, we’ve had litigation in construction defect in San Diego County for 50 years. Construction defect litigation was invented here, and then our construction improved. And everyone would think that’s great. They are making houses better and better. Yes. But no. What happened when they made ’em really good to keep the moisture out, kept the moisture in. So you get any kind of mold, it becomes like a Petri dish. It grows it even better. And so now they have problems with ventilation and you name it, they got problems. And when you buy a house, you want to know that you haven’t been ripped off. And when you sell a house, you want to make sure that you disclosed all you knew. Yes. And that’s key. But sometimes that doesn’t happen.

Neil

There are disputes when one of the parties fails to hold up their end of the bargain. What’s a failure to perform action and how common are they?

Dan

Real estate in California and everywhere else is unique. And I say that on purpose. It’s unique, meaning a Rembrandt is unique. Yes. And according to the law, art and residential real estate is unique. Meaning you can’t just give somebody a bunch of money saying, I’m sorry, I’m keeping your property, or I’m not selling the property because here’s the money, it’s irreplaceable. It’s unique. So if you have a contract with somebody to buy their property and you performed all the obligations, you can get something called specific performance. You can get a judge to order. No, no, you can’t buy your way out of this. You have to give them the property. This kind of thing happens. Let’s say you have this real estate, you’re at escrow to sell it. You got 10 acres and then you find out before close that oh my gosh, they’re changing where the road’s going now there’s going to be a freeway here and half of yours commercial, and then it’s worth 10 times as much. So you don’t want to sell. It’s unique. You do have to sell, but you’re going to fight like heck, that chains the price and switch it. It’s not even that dramatic. It happens all the time. You have people in escrow, I get ’em five, 10 times a year, you’re in escrow to buy a piece of property and that the seller says, I’m not selling to you. And it turns out they had another offer for a hundred thousand dollars more and they just say, Nope, Sue me.

Neil

That specific remedy is somewhat unique to real estate.

Dan

Yes. It’s called specific performance.

Neil

Yes. And then another area that’s kind of like that is they also have the power to undo, to put the buyer back into the situation where they were before the transaction ever began. Can you talk about that type of decision?

Dan

Restitution you have a right if the other side is made whole and you don’t want to buy the property or the property turns out to be not they Lied, they failed to disclose whatever, And you want to just reverse and turn everything over and take money damages. So you’re entitled to your benefit of the bargain. You’re entitled to restitution. You’re entitled to damages, interest costs, fees, escrow fees, everything you went through, you’d be entitled to that. If you can prove a breach when you sue somebody for breach of contract real estate or not, that usually comes with about four or five other causes of action based on different statutes, different laws, different cases. Yes. They’d give you full remedies. And then you get to pick the remedy you want based on what you choose as the plaintiff to make you whole again.

Neil

And that’s quite different from a business dispute. There’s a lot more power to make things right In real estate.

Dan

Yeah. Because again, it’s unique. There’s specific performance and most disputes, unless there’s specific performance, we’re fighting over money.

Neil

So Dan, we’ve been talking about defects and basically construction issues. So let’s take that a little bit deeper. What happens when you discover these defects before you inhabit, when the construction’s being accomplished upfront and what are your options?

Dan

That’s a whole new kind of construction defects. Let’s say everybody’s doing this. You’re building an A DU, you’re building a new unit on your house or you’re having construction done. Brand new homes have different laws than older homes. The tenanted improvement, your remodel has different laws than you buying a brand new house. Let’s say at the development. Yes. We had so much construction defect litigation against brand new housing projects that the legislator finally gave these builders a break. It’s not much of a break, but they have to. Two things. You can’t have class actions for construction defect and residential developments anymore. It’s been a while since you could, but now you have joint actions. It’s similar, but everybody’s house is unique and everybody’s house gets different kinds of relief for damages. And so a bunch of homeowners get together and let’s say 50 of them say, we’re all going to sue and you’ll hire experts and there’ll be a lot of similar problems.

None of the windows have flashing. Those are things I’ve run across and they got to be repaired. On the flip side, you’re doing a remodel, you have different set of rules, new construction, you go find something before you sue, you got to give ’em a chance to repair. You got to give them notice and you have to say, we’re going to do this, we’re going to do that, or you need to do all these things. And if they fix it, then after they don’t fix it. Right. It’s almost like a lemon law for cars. You got to give ’em a chance to repair the house, the construction, a reasonable chance before you can file a lawsuit. Good. Other than that, you’re on the same path. You are going there to try to get the benefit of your bargain because number one, it’s your biggest investment.

Yes. And if you have a defect, you have something besides the defect. It’s called stigma. In all brokers know what it is. Real estate attorneys like myself, know what it is. Stigma is a bad reputation for construction defect on your house. So let’s say you’ll have 10 houses in a row that are all selling for a million bucks, except for this one with stigma because it had a slab leak, slab crack, it’s been repaired, but for some reason the market doesn’t want to buy the house with the big old repaired crack and you lose a hundred thousand dollars in value. That’s a real that you should be aware of before you go on and just take the cost to repair. And that’s it. Interesting. There’s stigma and it is real. And another gruesome stigma is somebody gets killed in your house. That dies in your house.

That’s stigma. That is a reputation the house has. I don’t think it’s haunted, but some people do. And it definitely drives away buyers. It’s going to change the market. Market price is going to go down. So yeah, in construction it can be defective or it can be incomplete. And then another bucket would be a dispute over quality or workmanship. So do you have a pro tip that you had offered? How do you make sure that there is a clear agreement as to the quality of work that’s going to be done and the materials they’re going to use? Well, I’ll give you the tip, but very few people follow this. You go to the doctor, they say, we’re going to take out your kidney. You might want to go get a second opinion. You go to your contractor and you say you want to put a half a million dollars into a new construction on your house.

Dan
You don’t get a second opinion. You don’t have anyone else look at it. There are all kinds of skilled tradesmen out there that can tell you about whether that’s quality work or not. Get a second opinion. When you come to us with your problem, first thing we’re going to do is have you get a second opinion. If you don’t have an expert in that area, we’ll help you find one. After doing this for 35 years, we know quite a few whose opinions we respect. Yes. That second opinion, know whether you’re getting what you paid for, because the standard of care for a contractor is simple. It’s whatever the standard in the industry says is. Right. Interesting. So we have a higher standard. It’s the most expensive city in the country to live in. Yes, sir. So the type of construction you’re paying for and the value and the cost means it should be higher quality. So you don’t want to have construction standards based on places where they’re still using plywood for the outside of the house. Is breach of contract a common issue in real estate? Yeah. Breach of promise, yes. It’s real estate contract and it’s usually a CAR, California Association or realtor form. But yeah, it’s very common

Neil

In California real estate. There’s a covenant of good faith and fair dealing. Tell us a little bit about what that really means and how does that come into play when there’s a dispute with the real estate contracts

Dan

they’re governed by the statute of frauds. It’s not about fraud, it’s about everything has to be in writing and real estate contract by law has to be in writing. So you sue on a contract and they say, evidentially, the judge can’t look anywhere out, but the four corners of that contract. But what if it’s some ambiguities and it’s vague, and what do we do? So the lawyer sues you for breach of the covenant of good faith and fair dealing. All of a sudden, the judge can look at everything inside the contract and how the parties behaved with respect to performance of the contract and give you a ruling on whether they breach that duty. Because with every contract as an implied covenant of good faith and fair dealing, it’s easier to prove. You don’t have to prove the standard of fraud or actual lying to you deceit. You just got to prove that they really didn’t act in good faith and that caused you damage. Did these things stack up Dan? Yes and no. There’s no duplicative type of damages. You get one set of damages, yes, and you pick your remedies and it all kind of washes out based on what the judge rules on which causes of action. But you come up with a total amount. It’s usually really the remedy is what makes you whole and how much did you lose?

Neil

Is that part of the art of being a good real estate attorney?

Dan

Well, you got to balance all of these possible remedies and ways in which you can get your client made whole again, or you can forecast for your developer client what risks they’re going to be taking into account when they sell to the public.

Neil

Thank you, Dan.

Dan

Thank you. You can learn more about the Watkins firm at https://watkinsfirm.com or call our office at (858) 535-1511.