In Glen Oaks Estates Homeowners Association v. Re/Max Premier Properties, Inc., et al., No. B229946, filed February 23, 2012, the Court of Appeal held that a homeowners association (“HOA”) has standing to sue real estate agents/brokers (“agents”) in a representative capacity for fraud involving common area defects and disclosures. This case has significant implications for developers of common interest developments as well, and not just agents.
Glen Oaks arose out of a January 9, 2005 landslide in the HOA common area. During discovery in an action by the association members against the HOA arising out of the landslide, documents were produced which allegedly evidenced the failure of the agents to make material, and statutorily mandated, disclosures regarding soils reports before the sales. Significantly, many of the agents also acted as dual agents, representing both sides of the transaction. The HOA then sued the agents for unfair business practices, breach of fiduciary duty, and fraud. The trial court held the HOA lacked standing to sue for fraud, sustaining demurrers without leave to amend.
The Court of Appeal reversed the order on standing, finding that the HOA could sue in a representative capacity for fraud as it relates to the common areas of the project. Pursuant to California Civil Code section 1368.3, an HOA has standing to sue on behalf of its members in matters pertaining to “damage to the common area.” The HOA claimed standing to assert such damage because it alleged that (i) if the agents disclosed the information, the members would not have purchased their homes; and, thus, (ii) would not have incurred costs resulting from the damage to common areas by the landslide.
Glen Oaks does not change existing law with respect to disclosure obligations of real estate agents, but the case has major implications for real estate agents – and developers – as it expands liability exposure to homeowners associations on matters relating to common area non-disclosure. Developers of common interest developments should anticipate that this case will be cited in lawsuits involving common area defects and related disclosures. However, this ruling is limited to whether the HOA had standing to make a claim. The Court of Appeal did not determine there was any factual basis for the claim. Expect that in round number two.
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