MEMO TO:
Alexsei Demo US
RESEARCH ID:
#40005331ac037d
JURISDICTION:
State
STATE/FORUM:
California, United States of America
ANSWERED ON:
December 23, 2021
CLASSIFICATION:
Torts
Real property

Issue:

Does the seller of residential property have a duty to disclose that an infamous murder occurred at the property 70 years prior to the sale, after which the house has developed a local reputation for being haunted?

Facts:

The plaintiffs are a young family who recently moved to a small California town from another state who purchased a 100-year-old house from the defendant seller with the intention of making the home their primary residence. After moving in, the plaintiffs began having strange experiences. Doors keep opening on their own, their dog won’t go upstairs, and they hear scratching and growling sounds in the attic throughout the night. Upon disclosing these experiences to a neighbor, the neighbor informed the plaintiffs that in 1948 the adult son of a family that lived on the property had murdered every other member of the family, then killed himself. The neighbor told the plaintiffs that the home had a reputation in the town for being haunted and that it had been vacant and on the market for several years before the plaintiffs purchased it. The plaintiffs were completely unaware of this information before the neighbor informed them. The plaintiffs no longer wish to live in the home and are seeking rescission of the sale agreement.

Conclusion:

Cal. Civ. Code § 1710.2 provides that a seller of real property is not required to disclose the occurrence of deaths that have occurred at the property if the death occurred more than three years prior to the transferee's offer to purchase unless directly asked by a potential purchaser.

However, sellers of real property have a duty to disclose facts materially affecting the value or desirability of the property. Caveat emptor has little or no application in California real estate transactions. Whether information is of sufficient materiality to affect the value or desirability of the property depends on the facts of the case. (Reed v. King)

The duty to disclose arises when the material fact is known to (or accessible only to) the defendant and the defendant knows the plaintiff is unaware of the fact and cannot reasonably discover the undisclosed fact. (Reed v. King, Belasco v. Wells)

Reputation and history can have a significant effect on the value of real property. While irrational and fanciful harms cannot be a basis for rescission, there is no principled basis for making the duty to disclose information that could have a material effect on the market value of the property turn upon the character of the information. (Reed v. King)

In Reed v. King, the purchaser of a house only learned after the sale that the home had been the site of a quintuple homicide 10 years prior. However, the seller did not disclose the murders to the plaintiff before she purchased the home. The purchaser sued the seller seeking rescission and damages under causes of action sounding in contract and the tort of concealment of a material fact (fraud). For the purposes of the defendant seller's demurrer for failure to state a cause of action, the Court of Appeal accepted that the seller and his real estate agent knew about the murders and that the murders materially affected the market value of the house. The Court found that there was nothing inherently wrong with this allegation that required dismissal for failure to state a cause of action.

No other California decisions were identified that discussed whether a seller has a duty to disclose that a property was the site of a murder that occurred more than three years prior to the sale or that a property had a reputation for being haunted.

In Stambovsky v. Ackley, the Appellate Division of the Supreme Court of New York, First Department held that New York's strict adherence to the doctrine of caveat emptor meant that a real estate broker was under no duty to disclose that a property was haunted "as a matter of law." However, the Court granted equitable relief to allow the plaintiff purchaser rescission of the contract of sale and recovery of his down payment on a property that was infamous for allegedly being inhabited by a poltergeist. The plaintiff was from New York City and not familiar with the home's reputation in the small village in which it was located. While the recovery of damages against the vendor for mere concealment of facts was not permitted due to the doctrine of caveat emptor, equity did not permit the enforcement of a contract that was not fair and open. The contract was not fair and open because the seller had deliberately fostered the public belief that her home was possessed by a poltergeist, but then did not inform the purchaser. She took unfair advantage of the purchaser's ignorance and enforcement of the contract was offensive to the court's sense of equity.

In Milliken v. Jacono, the Pennsylvania Supreme Court held that the occurrence of a murder/suicide inside a house does not constitute a material defect, and further, that sellers do not have a duty to disclose "psychological stigma" associated with a property. The Court also found that the murder/suicide in issue was a "patent" event because it was well-publicized and the purchaser could have discovered it if they had investigated certain curious aspects of the sale. Therefore, even under the modern view of caveat emptor, which requires disclosure of serious and dangerous latent defects, there was no duty to disclose the murder/suicide.

Law:

Cal. Civ. Code § 1710.2 provides that a seller of real property is not required to disclose the occurrence of deaths that have occurred at the property if the death occurred more than three years prior to the transferee's offer to purchase unless directly asked by a potential purchaser:

(a)

(1) Subject to subdivision (d), an owner of real property or his or her agent, or any agent of a transferee of real property, is not required to disclose either of the following to the transferee, as these are not material facts that require disclosure:

(A) The occurrence of an occupant's death upon the real property or the manner of death where the death has occurred more than three years prior to the date the transferee offers to purchase, lease, or rent the real property.

(B) That an occupant of that property was living with human immunodeficiency virus (HIV) or died from AIDS-related complications.

(2) As used in this section:

(A) "Agent" includes any person licensed pursuant to Part 1 (commencing with Section 10000) of Division 4 of the Business and Professions Code.

(B) "Transferee" includes a purchaser, lessee, or renter of real property.

(3) No cause of action shall arise against an owner or his or her agent or any agent of a transferee for not disclosing facts pursuant to paragraph (1).

(b) It is the intent of the Legislature to occupy the field of regulation of disclosure related to either of the following:

(1) Deaths occurring upon real property.

(2) The HIV-positive status of a prior occupant in situations affecting the transfer of real property or any estate or interest in real property.

(c) This section shall not be construed to alter the law relating to disclosure pertaining to any other physical or mental condition or disease, and this section shall not relieve any owner or agent of any obligation to disclose the physical condition of the premises.

(d) This section shall not be construed to immunize an owner or his or her agent from making an intentional misrepresentation in response to a direct inquiry from a transferee or a prospective transferee of real property, concerning deaths on the real property.

However, in Reed v. King, 145 Cal.App.3d 261, 193 Cal.Rptr. 130 (Cal. App. 1983) ("Reed") the California Court of Appeal for the Third District explained that sellers of real property have a duty to disclose facts materially affecting the value or desirability of the property. Caveat emptor has little or no application in California real estate transactions. Whether information is of sufficient materiality to affect the value or desirability of the property depends on the facts of the case (at 265-266):

In general, a seller of real property has a duty to disclose: "where the seller knows of facts materially affecting the value or desirability of the property which are

Page 132

known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. 3 [Emphasis added; Citations omitted.]" (Lingsch v. Savage, supra, 213 Cal.App.2d at p. 735, 29 Cal.Rptr. 201.) This broad statement of duty has led one commentator to conclude: "The ancient maxin caveat emptor ('let the buyer beware.') has little or no application to California real estate transactions." (1 Miller and Starr, Current Law of Cal.Real Estate (rev. ed. 1975) § 1:80.)

Whether information "is of sufficient materiality to affect the value or desirability of the property ... depends on the facts of the particular case." (Lingsch, supra, 213 Cal.App.2d at p. 737, 29 Cal.Rptr. 201.) Materiality "is a question of law, and is part of the concept of right to rely or justifiable reliance." (3 Witkin, Cal.Procedure (2d ed. 1971) Pleading, § 578, p. 2217.) Accordingly,[145 Cal.App.3d 266] the term is essentially a label affixed to a normative conclusion. 4 Three considerations bear on this legal conclusion: the gravity of the harm inflicted by non-disclosure; the fairness of imposing a duty of discovery on the buyer as an alternative to compelling disclosure, and its impact on the stability of contracts if rescission is permitted.

In the more recent decision of Belasco v. Wells, 234 Cal.App.4th 409, 183 Cal.Rptr.3d 840 (Cal. App. 2015), the Court of Appeal for the Second District explained that the duty to disclose arises when the material fact is known to (or accessible only to) the defendant and the defendant knows the plaintiff is unaware of the fact and cannot reasonably discover the undisclosed fact (at 852):

“We ‘independently construe the writing to determine whether the release encompasses the present claim[s]’ for negligent misrepresentation and fraud. (Winet v. Price, supra, 4 Cal.App.4th at p. 1166 [6 Cal.Rptr.2d 554].)” (Salehi, supra, 200 Cal.App.4th at p. 1159, 132 Cal.Rptr.3d 886.) “A party seeking rescission based on fraudulent nondisclosure must show (1) the defendant failed to disclose a material fact which he knew or believed to be true; and (2) the defendant had a duty to disclose that fact. (Welch v. State of California (1983) 139 Cal.App.3d 546, 556 [188 Cal.Rptr. 726].) The duty to disclose arises when two elements are present: (1) the material fact is known to (or accessible only to) the defendant; and (2) the defendant knows the plaintiff is unaware of the fact and cannot reasonably discover the undisclosed fact. [Fn. omitted] (Reed v. King (1983) 145 Cal.App.3d 261, 265 [193 Cal.Rptr. 130]; Karoutas v. HomeFed Bank (1991) 232 Cal.App.3d 767, 771 [283 Cal.Rptr. 809].)[¶] Since the second prong giving rise to an affirmative obligation to disclose rests on the defendant's knowledge of significant facts the plaintiff needs but does not have, we conclude the duty cannot arise when, as here, such significant facts are not actually known to the defendant.” (San Diego Hospice, supra, 31 Cal.App.4th at p. 1055, 37 Cal.Rptr.2d 501.)

In Reed, supra, the purchaser of a house only learned after the sale that the home had been the site of a quintuple homicide 10 years prior. However, the seller did not disclose the murders to the plaintiff before she purchased the home. The purchaser sued the seller seeking rescission and damages under causes of action sounding in contract and the tort of concealment of a material fact (fraud). For the purposes of the defendant seller's demurrer for failure to state a cause of action, the Court of Appeal accepted that the seller and his real estate agent knew about the murders and that the murders materially affected the market value of the house. The Court noted that no prior cases had addressed the issue of nondisclosure of a fact that was not related to a physical defect or legal impediment in real property. However, the Court found that reputation and history can have a significant effect on the value of real property. While irrational and fanciful harms cannot be a basis for rescission, there is no principled basis for making the duty to disclose information that could have a material effect on the market value of the property turn upon the character of the information. The Court declined to speculate on a scenario where the premises were rendered useless for the purchaser but the market value was not affected (at 266-268):

Numerous cases have found non-disclosure of physical defects and legal impediments to use of real property are material. (See 1 Miller and Starr, supra, § 181.) 5 However, to our knowledge, no prior real estate sale case has faced an issue of non-disclosure of the kind presented here. (Compare Earl v. Saks & Co., supra; Kuhn v. Gottfried (1951) 103 Cal.App.2d 80, 85-86, 229 P.2d 137.) Should this variety of ill-repute be required to be disclosed? Is this a circumstance where "non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing [?]" (Rest.2d Contracts, § 161, subd. (b).)

The paramount argument against an affirmative conclusion is it permits the camel's nose of unrestrained irrationality admission to the tent. If such an "irrational" consideration is permitted as a basis of rescission the stability of all conveyances will be seriously undermined. Any fact that might disquiet the enjoyment of some segment of the buying public may be seized upon by a disgruntled purchaser to void a bargain. 6 In our view, keeping [145 Cal.App.3d 267] this genie

Page 133

in the bottle is not as difficult a task as these arguments assume. We do not view a decision allowing Reed to survive a demurrer in these unusual circumstances as endorsing the materiality of facts predicating peripheral, insubstantial, or fancied harms.

The murder of innocents is highly unusual in its potential for so disturbing buyers they may be unable to reside in a home where it has occurred. This fact may foreseeably deprive a buyer of the intended use of the purchase. Murder is not such a common occurrence that buyers should be charged with anticipating and discovering this disquieting possibility. Accordingly, the fact is not one for which a duty of inquiry and discovery can sensibly be imposed upon the buyer.

Reed alleges the fact of the murders has a quantifiable effect on the market value of the premises. 7 We cannot say this allegation is inherently wrong and, in the pleading posture of the case, we assume it to be true. If information known or accessible only to the seller has a significant and measureable effect on market value and, as is alleged here, the seller is aware of this effect, we see no principled basis for making the duty to disclose turn upon the character of the information. Physical usefulness is not and never has been the sole criterion of valuation. Stamp collections and gold speculation would be insane activities if utilitarian considerations were the sole measure of value. (See also Civ. Code, § 3355 [deprivation of property of peculiar value to owner]; Annot. (1950) 12 A.L.R.2d 902 [measure of damages for conversion or loss of, or damage to, personal property having no market value].)

Reputation and history can have a significant effect on the value of realty. "George Washington slept here" is worth something, however physically inconsequential that consideration may be. Ill-repute or "bad will" conversely may depress the value of property. Failure to disclose such a negative fact where it will have a forseeably depressing effect on income expected to be generated by a business is tortious. (See Rest.2d Torts, § 551, illus. 11.) Some cases have held that unreasonable fears of the potential buying public that a gas or oil pipeline may rupture may depress the market value of land and entitle the owner to incremental compensation in eminent domain. (See Annot., Eminent Domain: Elements and measure of compensation for oil or gas pipeline through private property (1954) 38 A.L.R.2d 788, 801-804.)

[145 Cal.App.3d 268] Whether Reed will be able to prove her allegation the decade-old multiple murder has a significant effect on market value we cannot determine. 8 If she is able to do so by competent evidence she is entitled to a favorable ruling on the issues of materiality and duty to disclose. 9 Her demonstration

Page 134

of objective tangible harm would still the concern that permitting her to go forward will open the floodgates to rescission on subjective and idiosyncratic grounds.

A more troublesome question would arise if a buyer in similar circumstances were unable to plead or establish a significant and quantifiable effect on market value. However, this question is not presented in the posture of this case. Reed has not alleged the fact of the murders has rendered the premises useless to her as a residence. As currently pled, the gravamen of her case is pecuniary harm. We decline to speculate on the abstract alternative.

No other California decisions were identified that discussed whether a seller has a duty to disclose that a property was the site of a murder that occurred more than three years prior to the sale or that a property had a reputation for being haunted.

In Stambovsky v. Ackley, 572 N.Y.S.2d 672, 169 A.D.2d 254 (N.Y. App. Div. 1991), the Appellate Division of the Supreme Court of New York, First Department held that New York's strict adherence to the doctrine of caveat emptor meant that a real estate broker was under no duty to disclose that a property was haunted "as a matter of law." However, the Court granted equitable relief to allow the plaintiff purchaser rescission of the contract of sale and recovery of his down payment on a property that was infamous for allegedly being inhabited by a poltergeist. The plaintiff was from New York City and not familiar with the home's reputation in the small village in which it was located (at 674-675):

Plaintiff, to his horror, discovered that the house he had recently contracted to purchase was widely reputed to be [169 A.D.2d 256] possessed by poltergeists, reportedly seen by defendant seller and members of her family on numerous occasions over the last nine years. Plaintiff promptly commenced this action seeking rescission of the contract of sale. Supreme Court reluctantly dismissed the complaint, holding that plaintiff has no remedy at law in this jurisdiction.

The unusual facts of this case, as disclosed by the record, clearly warrant a grant of equitable relief to the buyer who, as a resident of New York City, cannot be expected to have any familiarity with the folklore of the Village of Nyack. Not being a "local," plaintiff could not readily learn that the home he had contracted to purchase is haunted. Whether the source of the spectral apparitions seen by defendant seller are parapsychic or psychogenic, having reported their presence in both a national publication ("Readers' Digest") and the local press (in 1977 and 1982, respectively), defendant is estopped to deny their existence and, as a matter of law, the house is haunted. More to the point, however, no divination is required to conclude that it is defendant's promotional efforts in publicizing her close encounters with these spirits which fostered the home's reputation in the community. In 1989, the house was included in a five-home walking tour of Nyack and described in a November 27th newspaper article as "a riverfront Victorian (with ghost)." The impact of the reputation thus created goes to the very essence of the bargain between the parties, greatly impairing both the value of the property and its potential for resale. The extent of this impairment may be presumed for the purpose of reviewing the disposition of this motion to dismiss the cause of action for rescission (Harris v. City of New York, 147 A.D.2d 186, 188-189, 542 N.Y.S.2d 550) and represents merely an issue of fact for resolution at trial.

While I agree with Supreme Court that the real estate broker, as agent for the seller, is under no duty to disclose

Page 675

to a potential buyer the phantasmal reputation of the premises and that, in his pursuit of a legal remedy for fraudulent misrepresentation against the seller, plaintiff hasn't a ghost of a chance, I am nevertheless moved by the spirit of equity to allow the buyer to seek rescission of the contract of sale and recovery of his downpayment. New York law fails to recognize any remedy for damages incurred as a result of the seller's mere silence, applying instead the strict rule of caveat emptor. Therefore, the theoretical basis for granting relief, even under the extraordinary facts of this case, is elusive if not ephemeral.

The Court explained that equitable relief was available to the plaintiff because, while the recovery of damages against a vendor for the mere concealment of facts is not permitted due to the doctrine of caveat emptor, equity would not permit the enforcement of a contract that was not fair and open (at 675-676):

Caveat emptor is not so all-encompassing a doctrine of common law as to render every act of non-disclosure immune from redress, whether legal or equitable. "In regard to the necessity of giving information which has not been asked, the rule differs somewhat at law and in equity, and while the law courts would permit no recovery of damages against a vendor, because of mere concealment of facts under certain circumstances, yet if the vendee refused

Page 676

to complete the contract because of the concealment of a material fact on the part of the other, equity would refuse to compel him so to do, because equity only compels the specific performance of a contract which is fair and open, and in regard to which all material matters known to each have been communicated to the other" (Rothmiller v. Stein, 143 N.Y. 581, 591-592, 38 N.E. 718 [emphasis added]. Even as a principle of law, long before exceptions were embodied in statute law (see, e.g., UCC 2-312, 2-313, 2-314, 2-315; 3-417[2][e], the doctrine was held inapplicable to contagion among animals, adulteration of food, and insolvency of a maker of a promissory note and of a tenant substituted for another under a lease (see, Rothmiller v. Stein, supra, at 592-593, 38 N.E. 718 and cases cited therein). Common law is not moribund. Ex facto jus oritur (law arises out of facts). Where fairness and common sense dictate that an exception should be created, the evolution of the law should not be stifled by rigid application of a legal maxim.

The contract in issue was not fair and open because the seller had deliberately fostered the public belief that her home was possessed by a poltergeist, but then did not inform the purchaser. She took unfair advantage of the purchaser's ignorance and enforcement of the contract was offensive to the court's sense of equity (at 677):

In the case at bar, defendant seller deliberately fostered the public belief that her home was possessed. Having undertaken to inform the public at large, to whom she has no legal relationship, about the supernatural occurrences on her property, she may be said to owe no less a duty to her contract vendee. It has been remarked that the occasional modern cases which permit a seller to take unfair advantage of a buyer's ignorance so long as he is not actively misled are "singularly unappetizing" (Prosser, Law of Torts § 106, at 696 [4th ed. 1971]. Where, as here, the seller not only takes unfair advantage of the buyer's ignorance but has created and perpetuated a condition about which he is unlikely to even inquire, enforcement of the contract (in whole or in part) is offensive to the court's sense of equity. Application of the remedy of rescission, within the bounds of the narrow exception to the doctrine of caveat emptor set forth herein, is entirely appropriate to relieve the unwitting purchaser from the consequences of a most unnatural bargain.

In Milliken v. Jacono, 628 Pa. 62, 103 A.3d 806 (Pa. 2014), the Pennsylvania Supreme Court held that the occurrence of a murder/suicide inside a house does not constitute a material defect, and further, that sellers do not have a duty to disclose "psychological stigma" associated with a property. The Court concluded that recognizing such a duty was a slippery slope and that such a duty should only be imposed by the legislature with a clear definition (at 68-70):

Regardless of the potential impact a psychological stigma may have on the value of property, we are not ready to accept that such constitutes a material defect. The implications of holding that non-disclosure of psychological stigma can form the basis of a common law claim for fraud or negligent

[628 Pa. 69]

misrepresentation, or a violation of the UTPCPL's catch-all, even under the objective standard posited by appellant,6 are palpable, and the varieties of traumatizing events that could occur on a property are endless. Efforts to define those that would warrant mandatory disclosure would be a Sisyphean task. One cannot quantify the psychological impact of different genres of murder, or suicide—does a bloodless death by poisoning or overdose create a less significant “defect” than a bloody one from a stabbing or shooting? How would one treat other violent crimes such as rape, assault, home invasion, or child abuse? What if the killings were elsewhere, but the sadistic serial killer lived there? What if satanic rituals were performed in the house?

It is safe to assume all of the above are events a majority of the population would find disturbing, and a certain percentage of the population may not want to live in a house where any such event has occurred. However, this does not make the events defects in the structure itself. The occurrence of a tragic event inside a house does not affect the quality of the real estate, which is what seller disclosure duties are intended to address. We are not prepared to set a standard under which the visceral impact an event has on the populace serves to gauge whether its occurrence constitutes a material defect in property. Such a standard would be impossible to apply with consistency and would place an unmanageable burden on sellers, resulting in disclosures of tangential issues that threaten to bury the pertinent information that disclosures are intended to convey.

Moreover, considerations such as the time that has passed since the event, and changes and renovations made to the property, have a significant effect on the impact of the event. Some graphic events, having matured into historical curiosities, may even increase the value of the property. The

[628 Pa. 70]

possible fact patterns are endless and lead down a slippery slope—a slope we are not willing to descend. If there is to be a newly created duty to disclose psychological stigma, it should only be imposed with clear definition by the legislature after careful consideration of all aspects and ramifications of the issue.

The Court also found that the murder/suicide in issue was a "patent" event because it was well-publicized and the purchaser could have discovered it if they had investigated certain curious aspects of the sale. Therefore, even under the modern view of caveat emptor, which requires disclosure of serious and dangerous latent defects, there was no duty to disclose the murder/suicide (at 70-71): 

Lastly, this event was not latent. The murder/suicide was well-publicized, with coverage appearing in print and on the internet. Even under caveat emptor, there was no duty to disclose as the murder/suicide was patent. See Anderson v. Harper, 424 Pa.Super. 161, 622 A.2d 319, 323 (1993) (citation omitted) (noting modern view of caveat emptor “ ‘holds that where there is a serious and dangerous latent defect known to exist by the seller, then he must disclose such defect to the unknowing buyer or suffer liability for his failure to do so’ ”). Appellant possessed the tools to discover the murder/suicide and did not do so, even after suspecting some other factor was involved.7

[628 Pa. 71]

We hold that purely psychological stigmas are not material defects of property that sellers must disclose to buyers. As the remainder of appellant's claims are premised on the murder/suicide being a material fact to the sales transaction, those claims must also fail. Accordingly, there were no genuine issues of material fact, and summary judgment was proper.

No other decisions were identified that discussed whether sellers of real property have a duty to disclose a property's macabre reputation to prospective purchasers.

Authorities:
Cal. Civ. Code § 1710.2
Reed v. King, 145 Cal.App.3d 261, 193 Cal.Rptr. 130 (Cal. App. 1983)
Belasco v. Wells, 234 Cal.App.4th 409, 183 Cal.Rptr.3d 840 (Cal. App. 2015)
Stambovsky v. Ackley, 572 N.Y.S.2d 672, 169 A.D.2d 254 (N.Y. App. Div. 1991)
Milliken v. Jacono, 628 Pa. 62, 103 A.3d 806 (Pa. 2014)