Technical Vs. Physical Defects – What Constitutes Nondisclosure and Real Estate Fraud?

Gholian Law’s Los Angeles Real Estate Attorneys recently briefed an issue in an ongoing real estate fraud and nondisclosure case. The matter in question was whether a buyer is responsible for uncovering and investigating “technical defects.” Technical defects are defined as defects not visible to a buyer or obvious through basic inspection. Technical defects stand in contrast to physical defects, which are clearly visible to a buyer, and at their discretion to further investigate.

According to our case research, California courts appear to be well settled on the notion that a real estate buyer is not responsible to investigate matters of a technical nature that are known to the seller, but of which the buyer is ignorant. In Hefferan v. Freebairn, (1950) 34 Cal. 2d 715, the California Supreme Court affirmed a judgment in favor of a plaintiff, who was the buyer of a coffee shop. The buyer inspected the coffee shop’s books and other administrative records before tendering a purchase offer. [Id. at 717-18.] A subsequent inspection, however, revealed a discrepancy between the business’s actual profits and the seller’s representations of the business’s profits. The defendant, the coffee shop seller, attempted to rely on Carpenter v. Hamilton, (1936) 18 Cal. App. 2d 69, 71, asserting that the buyer could not depend on the seller’s representations because he had conducted his own investigation.

The Supreme Court rejected the seller’s argument, stating that the exceptions noted 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.)]

Based on cited cases above, it appears that California courts distinguish defects of a physical nature from those of a technical nature. This is evident in the case study outlined above, which presented defects not visible to the buyer, such as city requirements or the profitability of a business. But all of this said, it’s important to note that in the face of sound legal arguments, trial court judges can and do interpret the case law and facts differently from court to court.