Summary of the parties' contentions
Ten months ago, the Smiths bought the Blacks' vacation home at 1234 View Road, Lake Magnificent, for $2,200,000. Soon after the purchase, the Smiths found that the Property had water damage and associated defects that have cost or will cost more than $100,000 to remedy, over and above the Smiths' planned remodelling costs. The defects include (1) rotting trellis support and beams; (2) leaking exterior doors with rotten sills and fungus-damaged framing; (3) floor damage under wall-to-wall carpeting, caused by leaks where exterior walls did not meet floors; and (4) reverse-sloping patio, draining toward the house instead of away from it. These defects and the remedial costs are outlined in an April 18, 2002 letter to the Smiths from their remodeling contractor, Sally White Construction (SWC).
The Blacks allege that all the defects they knew of were disclosed to the Smiths. The Smiths deny that the Blacks disclosed any significant defects. They further maintain that, as owner-builder, Mr. Black impliedly warranted that the Property had been designed and built in a good and workmanlike manner, and that the defects they found breached those warranties.
FACTS
A. Disclosures
Mr. Black, although not a licensed contractor, is believed to have acted as his own general contractor in building and selling at least ten buildings "on spec," including the Property. He built the Property in 1995-1996 and listed it for sale with Resin Realtors in July 1996 at $2,500,000. The original listing remarks describe the Property as "Stunning vacation home on 1/2 acre in North Lake Magnificent. Expert construction, unusual floor plan, many hand-crafted features and convenient lake access . . . ."
When the Property did not sell quickly, Mr. Black's sister moved in and occupied it as her principal residence until the Blacks ultimately sold it to the Smiths. He relisted it at $2,250,000 in February 2001 with a Topp Properties office owned by John Jones, and the listing agent was George Green. Sara Smith, a real estate licensee in John Jones' office, learned about the Property from her colleague George Green and acted as buyer's agent for herself and her husband. The Smiths found the Property suitable for their summer home and offered $2,200,000 on October 2, 2001. The Blacks accepted their offer within the week.
The Blacks' November 27, 2000 transfer disclosure statement (Section A-2) noted cement cracks in the drive but no other significant defects. George Green's update (section B, September 9, 2001) noted a weathered door sill and some broken roof tiles. Sara Smith (Section C, September 9, 2001) noted: "The property appears to be in excellent condition." Both agents included the customary home inspection recommendation. The Blacks acknowledged receipt of a copy of the statement, as did the buyers and agents.
The Blacks' only oral disclosure that the Smiths recall was a comment that sealant had to be applied to the door sills to keep some of the doors from leaking. But if the doors were improperly hung no amount of sealant would prevent leaks.
Frank Lee, of Inspector Holmes, inspected the Property on September 9, the same date as the transfer disclosure. His lengthy report noted a number of areas for attention but no major current problems.
Sally White, the remodelling contractor, visited the Property during pre-sale to estimate feasibility and cost on a few specific items but did not inspect it for purchase. She did make estimates to correct two code violations Inspector Holmes discovered: patio concrete covering the weep screed where it abutted the house, and the lack of an anti-siphoning device on the water softener. The Blacks denied that either of these conditions had caused any problems in the past but allowed $2,000 credit (2/3 of the Smiths' $3,000 request).
The Smiths accepted this concession and released the inspection contingency on September 19. Escrow closed in due course and the Smiths moved into their new home.
B. Post-sale dispute
On November 8, the day after the first rain of their occupancy, the Smiths discovered that all the exterior French doors were leaking. They wrote to John Jones, as head of the listing office, asking him to contact the Blacks about repairs. Their letter also noted that SWC, pulling back the master bedroom carpet for remodelling, had found evidence of previous leaking (presumably from the heavy rains of the previous winter). The Blacks disclaimed responsibility for any leaks.
The Smiths proceeded with remodelling and discovered the additional problems summarized in SWC's letter written March 17. On March 31 they wrote to the Blacks, attaching a copy of the letter and asking them to pay the $100,000 that remedies had cost, over and above planned remodelling costs. The Blacks did not respond.
On July 16, the Smiths' attorney wrote to the Blacks, requesting that they commit to reimbursing the Smiths. The Blacks retained Jack Armstrong. In an August 7 letter, Mr. Armstrong set forth the Blacks' position on the disputed items and requested mediation. The Blacks' comments and the Smiths' response are summarized below.
Trellis support
(a) The Blacks say: The home inspector noted that the lack of venting and flashing for the support beams could cause water damage and suggested opening them for inspection and venting. The Smiths viewed this observation as a suggestion for post-sale, not a way of satisfying an inspection contingency. As it turned out, the support beams were totally rotted out and had to be removed and replaced.
(b) The Blacks say: The remodelling involved replacing the trellis over the patio with a whole new roof covering, for which they can't be responsible. But SWC had intended to use the existing structure to support the new roof. The Smiths' request was for the cost to replace the support, not including any charge for the roof itself.
Leaking doors
(a) Mr. Black says he disclosed the leaks and commented that he wouldn't install French Doors again because of them. The Smiths do not recall such a comment. They recall only the suggestion that the doors should be sealed to prevent leakage. The Smiths did attempt to seal the doors before the winter rains. But because the doors were mis-installed, that sealing did not prevent leakage; nor, evidently, had it prevented leakage in the past.
(b) The Blacks say the home inspector didn't find damage to the doors, which he offers as proof that he didn't know of it. But the Smiths note that five outside doors had to be completely replaced because the support frames and sills were rotten. Four more outside doors had to be rebuilt, reflashed, and rehung. None of these doors was properly installed. The fact that the damage wasn't obvious to the home inspector does not mean the Blacks are not liable for it, since Mr. Black himself installed these doors or contracted for them. A home inspector is not obligated to tear down door framing and sills, any more than to open stucco with a dement saw.
Other leak damage (Master Bedroom, Garage room, Bar)
Mr. Black attributes this damage to the French door issues he said he disclosed. The Smiths reject this excuse for reasons already stated. In addition, they observe that other doors also leaked, and that water entered the garage room through gaps where the wall ended half to three-quarters of an inch above the floor.
Patio drainage & weep screed
The Blacks observe that they credited the Smiths $2,000 toward correcting the weep screed problem. But this response overlooks the patio's negative slope. The home inspection report did not flag this problem. As general contractor, Mr. Black is responsible for having created it. Moreover, his sister lived in the home during the heavy rains. She must surely also have experienced and told him about the large, deep, persistent puddles that have had to be remedied. Yet he specifically checked "No" on the TDS line for flooding, drainage or grading problems.
Legal contentions
By taking part in this mediation, the Smiths do not waive their right to litigate this case in court if mediation fails. See Purchase Agreement, ¶ 16(A), Exclusions from mediation and arbitration, clause (b): "An action for . . . latent or patent defects to which Code of Civil Procedure § 337.1 or § 337.15 applies." Since Mr. Black acted as general contractor in building the property, this exclusion applies to the present dispute.
Although the facts are disputed, the Smiths believe the evidence will favor them, making the Blacks liable for damages under Civil Code § 3343. As damages, the Smiths claim the difference between the value of the Property as the Blacks knew or should have known it to be (with rotting trellis, leaking doors, damaged floors, and negative drainage) and its value as represented. The best measure of this difference is the cost to remedy the defects.
A developer of unimproved land assumes a duty to the public to improve it properly, in a careful manner, and without defects. 8 Miller & Starr, California Real Estate 2d (1989), "Defective Construction," § 25:16, pp. 270-271; see Siders v. Schloo (1987) 188 Cal.App.3d 1217, 1222-1223. The developer is liable to the purchaser for any damages substantially caused by a breach of this duty. The measure of damages includes correction of defects and repair of other parts of the property that the defect causes to be damaged. Sabella v. Wisler (1963) 59 Cal.2d 21, 28; Conley v. Bull (1968) 258 Cal.App.2d 183, 197. See also Del March Beach Club v. Imperial Contracting Co. (1981) 123 Cal.App.3d 898, 913 (liability for resulting damage to non-defective parts of the plaintiff's property).
Support beams open to rain at the top, doors installed so badly they leak, walls that don't meet floors, and flat or reverse-sloping patios next to houses are defects for which the Blacks are liable to the Smiths for negligence unless they can show that they were aware of those defects and of the damage that had resulted from them before they cleared the physical contingencies on their purchase of the home. The Smiths do not believe they can make that showing.
Since the Smiths bought the home that Mr. Black built directly from the Blacks, they are also liable to them for breach of his implied warranty on all aspects of the Property. See Pollard v. Saxe & Yolles Development Co. (1974) 12 Cal.3d 374, 377-380. The warranty imposed on a builder of improvements is based on the public policy that, since he built them, he is in a better position than the buyer to know of defects. 8 Miller & Starr, supra, §25:18, at 275-276. The implied warranty does not apply to "pre-owned" properties (i.e., properties bought from intermediate owners). Shapiro v. Hu (1986) 188 Cal.App.3d 324, 332-333. But to be consistent with the policy, the implied warranty does apply to properties, occupied or not, that are sold by the original builder. 8 Miller & Starr, supra, at 276. Thus the Blacks, as owner-builders of the property, impliedly warranted to the Smiths that the property was without any of the serious defects it later proved to have.
CONCLUSIONS
The Smiths have documented costs of $100,000 to fix defects and resulting damage they say were not disclosed to them. They paid the Blacks $2,200,000, only $50,000 less than the list price (at which the Property had been listed, unsold, for many months). This history supports their claim: if the defects had been disclosed, they would surely have paid substantially less or left the Blacks to try to sell the Property to another buyer.
If mediation fails, the Smiths are prepared to litigate the matter to judgment, exposing the Blacks to potential liability for their attorney's fees (the Purchase Agreement has a fees clause) as well as punitive damages for failure to disclose defects they must have known of and must have realized were material.
In a spirit of accomodation, the Smiths are willing to settle their claims and release the Blacks from further liability for $__,___.