Recently, in RSB Vineyards LLC v. Orsi, the First Appellate District Court of Appeal confirmed the long-standing rule in California: sellers must disclose all known material matters.  While this affirmed rule was not surprising, the court was very helpful  in providing the first detailed framework for what it means for a seller to have “knowledge” of such material matters.  The devil, as they say, is in the details, and that is no different in a failure to disclose dispute.  Although a number of cases addressed the “type” of disclosures a seller must make and what is required of a seller when selling real estate (which we addressed in our prior blog article), no previous court addressed in any great detail what exactly constitutes “knowledge” for purposes of a seller’s disclosures and representations.

Here, the plaintiff purchased a vineyard property that included a residential building that had been renovated in 2010 to be used as a wine tasting room. Shortly after closing, the plaintiff discovered that the building had structural defects that were not disclosed by the sellers.  The plaintiff sued, and the sellers claimed that they had no knowledge of the building’s flaws and submitted declarations to demonstrate that the four members comprising the sellers had no such information.  According to the evidence, the sellers had previously hired an architect to prepare the plans for the building and the county approved such plans, and the construction work was completed by a licensed contractor.  The work was subsequently inspected and approved by county officials and a certificate of occupancy was issued before the property was sold to the plaintiff.  In the plaintiff’s deposition, its own representatives admitted that they had no information to suggest that the sellers had actual knowledge of the defects.  However, the plaintiff hired its own civil engineer who evaluated the property and concluded that (a) the building floor was defective and (b) the various deficiencies were substandard for commercial construction.  The trial court rejected the plaintiff’s argument and held in favor of the sellers, stating that the plaintiff had not established that the sellers had actual knowledge of the undisclosed defects.

On appeal, the plaintiff’s primary theory was that the sellers possessed imputed knowledge of the defects because the construction professionals were agents and had acquired knowledge of the defects. In analyzing the allegations, the court provided the framework for determining when knowledge will be imputed to a seller as a result of information acquired by such seller’s consultants or professionals.  In its detailed analysis and ruling, citing to Trane Co. v. Gilbert (1968) 267 Cal.App.2d 720, 727, the court stated that the general rule established in California provides that “the principal is chargeable with, and is bound by the knowledge of, or notice to, his agent, received while the agent is acting within the scope of his authority, and which is in reference to a matter over which his authority extends.”  However, this rule is subject to significant limitations concerning the circumstances when the principal will be bound by his or her agent’s knowledge.  First, not all professional services result in an agency relationship.  Thus, if a professional simply furnishes services or advice to a principal and does not interact with third parties as a representative of the principal then such professional is not acting as an agent.  Second, a professional merely acting “for the benefit” of the principal is not an agent for imputed knowledge purposes because such consultant must also act in such manner in his or her dealings with third persons.  Therefore, an architect who merely provides architectural services to the principal and nothing more is not an agent of the principal until and unless such architect acts for the benefit of the principal in his or her dealings with third persons.  In that instance, knowledge acquired by a professional while not acting as an agent will not be imputed to the principal.  Third, such professionals must actually acquire knowledge of the defect or misrepresented matter while they are acting as an agent of the principal.  So, if a professional is deemed to be an agent, then before knowledge will be imputed to the principal such agent must have acquired knowledge of the defect or misrepresented matter (i.e., an architect would not have knowledge of how a general contractor constructed a building unless he or she was hired to perform inspections that revealed the defect, and thus structural defects would not be imputed to the architect as a matter of course).  In affirming the trial court, the appeals court concluded that in the present case the professionals who worked for the sellers did not act as agents, and the sellers did not have actual or constructive knowledge of the defects because the defects were only discovered when the wine tasting room was demolished by the plaintiff.

While the court also analyzed other aspects of the case, the discussion on imputed knowledge and what constitutes an agency relationship for such knowledge will have a lasting impact on how both buyers and sellers proceed in California real estate transactions.