Smith v. Rickard

• Decision Date: 18 November 1988
• Citation: 205 Cal.App.3d 1354,254 Cal.Rptr. 633
• Court: California Court of Appeals
• Parties: Daniel SMITH, Plaintiff and Respondent, v. Marilyn and James B. RICKARD, Defendants and Appellants. Civ. B027316.

Page 633

254 Cal.Rptr. 633

205 Cal.App.3d 1354

Daniel SMITH, Plaintiff and Respondent, v.Marilyn and James B. RICKARD, Defendants and Appellants.

Civ. B027316.

Court of Appeal, Second District, Division 6, California.

Nov. 18, 1988.

Review Denied Feb. 1, 1989.

Matsinger & Blakeboro and Diane M. Matsinger and Harrison E. Bull & Associates, Santa Barbara, for plaintiff and respondent.

Price, Postel & Parma and J. Terry Schwartz and Robert S. Patterson, Santa Barbara, for defendants and appellants.

William M. Pfeiffer, Steven A. Sokol and Gov Hutchinson, Los Angeles, and Miller, Starr & Regalia and Harry D. Miller, Oakland, as amicus curiae on behalf of defendants and appellants.

GILBERT, Associate Justice.

A real estate broker represents a seller of a 50-acre parcel of commercial property.On the property is a residence and lemon and avocado groves.Here we hold that the broker has no duty to inspect that portion of the property containing the lemon and avocado groves in order to disclose to the buyer facts that would affect the value or desirability of the property.

This appeal is from a judgment stemming from the jury's special verdict finding that real estate agents, defendants Marilyn and James Rickard, were negligent in fulfilling their duty to inspect and to disclose material defects in an avocado orchard on property sold to plaintiffDaniel Smith.The orchard was afflicted with the phytopthera cinnamommi fungus, also known as avocado root rot, a disease which destroys the feeder roots of the avocado tree, preventing it from receiving necessary moisture and nutrients.The disease, common in Santa Barbara orchards, is incurable and eventually kills the afflicted tree.

The trial court instructed the jury that the Rickards, as real estate brokers, had a duty to inspect the property and to disclose to Smith any material defects affecting the value or desirability of the property.The Rickards contend the court erred in giving this instruction because a duty arises only when the broker offers to sell a residential property (seeCIV.CODE, § 2079¹ et seq.), and that the property here is agricultural or commercial in nature.Supporting the Rickards' position in this appeal, as amicus curiae, is the California Association of Realtors(Realtors).

Smith replies that the property is residential in nature, and that in any event, the Rickards owed him a fiduciary duty of care as they were his agents.

FACTUAL AND PROCEDURAL BACKGROUND

In 1983 George and Margaret Love listed with the Rickards their 50-acre property located in Santa Barbara's Glen Annie Canyon.The property included a residence, 12 acres of lemons and a 13 acre avocado orchard which the Loves cultivated commercially.

Prior to listing the property, the Rickards toured the property with Mr. Love.Mr. Rickard noticed several avocado trees which appeared "stressed."He asked about them, and Mr. Love explained that the trees were suffering from too much water.Mr. Love told him that some other avocado trees "might have drowned."Mr. Rickard, who himself owned two acres of avocados and was familiar with the problem of root rot, asked Mr. Love if he knew whether there was root rot on his property.Mr. Love answered, "Not to my knowledge."Mr. Rickard did not ask the Loves to conduct a root analysis (which is the only method of positively diagnosing root rot) nor did he pursue the matter in any other way.

PlaintiffDaniel Smith, a computer engineer who owned several investment properties, but had no farming experience, learned that the Love property was for sale.He called Mrs. Rickard and she and Mr. Love showed Smith the property.Mrs. Rickard gave Smith a descriptive flier which included estimated income from sales of the avocados and lemons over the previous three years.Smith told Mrs. Rickard that he was interested in buying the property as a residence for himself, and that he would need the income from the avocados to make the payments.

During this and other tours of the property, including a final inspection tour before the closing of escrow, Smith saw stressed avocado trees and those which had been "stumped" or removed.Mr. Love explained that the trees suffered from too much water and that some had drowned after heavy rains during the previous winter.At no time did the Loves or the Rickards mention to Smith that the avocado trees were or might be afflicted with root rot, nor did the Rickards advise Smith to obtain a laboratory analysis to determine if root rot were present.

Smith told Mrs. Rickard that he usually hired his own broker to represent him as buyer in real estate transactions, and he asked whether she thought that necessary in this instance.She said no, and offered to "take care of the job."Mrs. Rickard helped Smith obtain "creative financing" for his purchase of the property, including partial financing by the Loves.

Escrow closed on December 30, 1983.At the end of January, Smith and his foreman, Edward Gil-Gomez, noticed that about 250 avocado trees lacked vigor, were defoliated at the top, and were changing in color.They also discovered, in a storage shed, cans of a chemical called Terrazole, used to control root rot.

Smith consulted with George Goodall, the local farm advisor, who inspected the avocado grove and found 30 to 40 trees "in difficulty."On Goodall's recommendation, Smith contracted a laboratory to test root samples.Of the 41 samples analyzed, 40 percent tested positive for root rot.

Smith removed and destroyed hundreds of avocado trees, reducing his expected income flow.He fell behind in his mortgage payments, and in November 1984 his lenders (including the Loves, who held a deed of trust on one of Smith's other properties) served notices of default and later foreclosed.Smith filed for bankruptcy and was forced to sell the property for $150,000 less than he paid for it.

Smith filed suit for negligence and breach of contract against the Loves and the Rickards.He also alleged breach of fiduciary duty and constructive fraud against the Rickards, and fraud against the Loves.All causes of action were based on the defendants' failure to disclose to Smith that the avocado trees were or might be afflicted with root rot.

Following a lengthy trial, the jury returned special verdicts finding that the Loves breached their contract with Smith and that the Rickards negligently fulfilled their duty as real estate agents to "conduct a reasonable and diligent investigation of the property and to disclose to [Smith] all facts that materially affected the value or desirability of the property that such an investigation would reveal[.]"The jury awarded Smith $72,928 in damages for the Rickards' negligence.The jury found in favor of the defendants on the fiduciary duty and fraud causes of action, finding inter alia that none of the defendants were liable for negligent or intentional misrepresentation or concealment.The trial court entered judgment in accordance with the jury's findings.The Rickards appeal.

DISCUSSION

The trial court instructed the jury that a real estate broker or salesperson "is under a duty to a buyer to conduct a reasonably competent and diligent inspection of the property and to disclose to a buyer all facts that materially affect the value or desirability of the property that such an investigation would reveal.In exercising this duty, a real estate broker or salesperson is required to exercise the degree of skill that a reasonably prudent real estate broker or sales agent would exercise, and the failure to do so is negligence."²

The Rickards contend on appeal that the trial court committed reversible error because the inspection and disclosure duty of real estate brokers described in the instruction applies only to residential property, and not to commercial agricultural property.(SeeCiv.Code, § 2079.)The Rickards contend that because the defect in the property related to its commercial value, their only duty to Smith was to disclose defects of which they had actual knowledge, and that they had no duty to inspect the property.The Rickards assert that because there is no evidence in the record that they had actual knowledge of the root rot, they were not negligent.(SeeCooper v. Jevne(1976)56 Cal.App.3d 860, 866, 128 Cal.Rptr. 724;Lingsch v. Savage(1963)213 Cal.App.2d 729, 735-736, 29 Cal.Rptr. 201.)³

I.

In Easton v. Strassburger(1984)152 Cal.App.3d 90, 199 Cal.Rptr. 383, the Court of Appeal held for the first time that real estate brokers have an "affirmative duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal.[Fn. omitted.]"(At p. 102, 199 Cal.Rptr. 383.)A broker who breaches this duty to inspect and disclose defects discoverable through reasonable diligence may be liable to the buyer for negligence.(Id. at p. 103, 199 Cal.Rptr. 383.)

The Easton court limited its holding to residential property, expressing "no opinion here whether a broker's obligation to conduct an inspection for defects for benefit of the buyer applies to the sale of commercial real estate.Unlike the residential home buyer who is often unrepresented by a broker, or is effectively unrepresented because of the problems of dual agency [citations], a purchaser of commercial real estate is likely to be more experienced and sophisticated in his dealings in real estate and is usually represented by an agent who represents only the buyer's interests.[Citation.]"(Easton v. Strassburger, supra, 152 Cal.App.3d 90, 102, fn. 8, 199 Cal.Rptr. 383.)

The Legislature codified the holding in Easton, adding Civil Code sections 2079--2079.5, which states in part that "[i]t is the duty of a real estate broker ... to a prospective purchaser of residential real property comprising one to four dwelling...