Anne Manderville et al. v. PCG&S Group, Inc. et al. (January 24, 2007, D047285) __ Cal.App.4th__; http://www.courtinfo.ca.gov/opinions/
In this case, the Court of Appeals determined that exculpatory clauses contained in a purchase contract are against public policy to the extent such clauses exempt any individual from liability for his own fraud and therefore do not preclude a buyer of real property from showing that he justifiably relied on a broker’s intentional misrepresentation about the character of the property. The court also found that any lack of due diligence by a buyer in investigating zoning and other laws restricting the use of property, even if negligent, does not preclude the buyer from establishing justifiable reliance if (a) there has been an intentional misrepresentation; and (b) the purchase contract only permits, but does not require, the buyer to undertake his or her own due diligence.
Background
Anne and William Manderville, together with Roseanne and Rick Reiner, (“Buyers”) sought to purchase property that the two couples could subdivide and build adjacent homes on. Buyers, through their agent Marilyn Fowler, found a multiple listing service (MLS) advertisement for property located in El Cajon, California. The listing stated in part: “All useable 2.62 acres county states 1 acre min. lot size could be split.” However, Buyers and Fowler found a previous MLS listing for the same property that did not state that the property could be subdivided.
As a result of the discrepancy in the two MLS listings, Fowler telephoned the seller’s brokers (“Brokers”), and asked for confirmation that Buyers could subdivide the property. During her deposition, Fowler testified that although she lacked a specific recollection of the Brokers’ answer, her handwritten notes made during the call indicated that the Brokers stated that the County of San Diego already approved a subdivision of the property to some extent and that a purchaser could subdivide the property. In fact, the Brokers knew that the county classified the property as “RR1” with a general plan designator of “24.” This classification meant that, while zoning ordinances permitted a minimum lot size of 1 acre, the general plan required a minimum lot size of 4 acres. As a result, the property could not be subdivided.
Several days after the telephone call, Buyers submitted an offer to purchase the property on a standard CAR purchase agreement form. The finalized purchase agreement executed by Buyers contained three exculpatory clauses: (1) paragraph 7 stated that Buyers had the “right” to conduct inspections and investigations and strongly advised Buyers to investigate the condition and suitability of all aspects of the property, including ordinances affecting the zoning and development of the property; (2) paragraph 26 contained an integration clause stating that the agreement embodied all understandings with respect to the agreement and could not be contradicted by evidence of any prior agreement or contemporaneous oral agreement; and (3) a handwritten term from the seller’s counteroffer stating that “Buyer[s] to satisfy themselves to use of property with warranties or representation to use.”
After the close of escrow, Buyers discovered that they could not subdivide the property because the general plan mandated a minimum lot size of 4 acres. Based on the representation of the Brokers that the property could be split, Buyers filed a claim against the Brokers alleging three counts of deceit for intentional misrepresentation, negligent misrepresentation, and suppression of facts. The trial court granted summary judgment in favor of the Brokers, finding that Buyers contractually assumed a duty to investigate limitations on the future development of the property and, as a matter of law, Buyers could not show justifiable reliance on the Brokers’ statements.
Exculpatory clauses in real estate purchase agreements do not prevent a buyer from showing justifiable reliance on a broker’s intentional misrepresentation.
The Court of Appeals held that Buyers could maintain a claim for intentional misrepresentation notwithstanding the Brokers’ claim that the three exculpatory clauses in the purchase agreement prevented Buyers from showing that they justifiably relied on the Brokers’ misrepresentation that a purchaser could subdivide the property. The court noted that all contracts that exempt anyone from responsibility for his own fraud, willful injury to another, or violation of a law are against public policy. That the Brokers were not parties to the contract did not preclude the court from finding that the exculpatory clauses, as applied to the Brokers’ liability for their intentional misrepresentations, were invalid. Since the trial court had found that a fact-finder could reasonably determine that the Brokers intentionally misrepresented the feasibility of subdividing the property and that Buyers reasonably relied on this misrepresentation, the Court of Appeals found that summary judgment on Buyers’ intentional misrepresentation claim was inappropriate.
A buyer’s failure to diligently investigate a broker’s representations does not bar a claim for intentional misrepresentation.
Finally, the Court found that Buyers’ negligence in investigating the Brokers’ misrepresentation that Buyers could subdivide the property did not bar their claim for intentional misrepresentation. The court noted that a plaintiff’s negligence in discovering the falsity of a misrepresentation is never a defense when the misrepresentation was intentional. Moreover, the court found that the purchase agreement did not impose a contractual duty on the Buyers to investigate whether they could subdivide the property, but instead only conferred on them the right to do so. Thus, Buyers’ failure to further investigate whether they could subdivide the property did not bar their claim against the Brokers for intentional misrepresentation.
For more information please contact Katharine Allen. Katharine Allen is an associate in the Real Estate, Environmental and Land Use and Natural Resources Practice Group in the firm’s San Francisco Office.