Court Holds Sellers of a Vineyard Cannot Be Liable For Nondisclosure

Without Actual or Constructive Knowledge of Defects

In RSB Vineyards, LLC v. Bernard A. Orsi, et al., a California appellate court held that sellers of a vineyard could not be held liable for the failure to disclose alleged defects in the absence of actual or constructive knowledge of the defects.

The sellers originally purchased the property and converted the building from a single family home to a wine tasting room.  The sellers hired an architect to design a remodel and applied for a commercial use permit.  The use permit was issued and the County of Sonoma approved the design plans for the remodel.  The construction was performed by a licensed contractor and inspected and approved by County officials.  The sellers received a final certificate of occupancy for the winery/tasting room. 

Soon after commencing business in the tasting room, the sellers decided they wanted to sell the property.  The plaintiff submitted an offer to purchase the property and the sellers accepted subject to a counter-offer.  After receiving advisories and other disclosures, the plaintiff waived its contingencies and the sale closed shortly after.   

Following the purchase, the plaintiff discovered alleged structural defects and other problems with the property that were not disclosed by the sellers prior to the close of escrow.  The plaintiff sued the sellers claiming misrepresentations and omissions in connection with the plaintiff’s purchase of the property.  The sellers moved for summary judgment offering evidence that they had no knowledge of the alleged defects and the plaintiff could not provide evidence to show otherwise.  The trial court granted summary judgment reasoning that the sellers could not be held liable for nondisclosure in the absence of evidence that they had actual knowledge of the alleged defects.

On appeal, the plaintiff argued that the “sheer number and severity” of the structural defects “could well give rise to an inference that [the sellers] knew that there were multiple defects with the Property.”  The plaintiff’s expert declaration detailed the alleged deficiencies discovered and stated that each of the deficiencies was substandard for commercial construction and “should have been known by an engineer, contractor and architect who holds him or herself out as qualified to engage in commercial construction.”  The Court held that in order to create an inference of actual knowledge, evidence must suggest that the defendant must have known of the matter to be disclosed.  Although the expert declaration detailed a wide range of problems, all of the issues were technical and would not be apparent to a person unskilled in construction or structural engineering, and most of the issues became visible only upon demolition. 

The plaintiff also argued that the seller’s construction professionals knew of some or all of the defects and, because the professionals were the sellers’ agents, their knowledge should be imputed to the sellers.  However, the Court determined that there was no evidence to suggest that the sellers’ construction professionals acquired information about any defects at the property while acting as the sellers’ agents.  While the sellers had a contractual relationship with the construction professionals for the provision of services, they were not representing the sellers in dealings with third persons, a requirement to be acting as an agent.  The construction professionals’ knowledge of the alleged defects would have been gained while the professionals were planning or carrying out the work of renovating the residence.  The construction professionals were not acting as an agent of the sellers in that capacity, and therefore, the knowledge acquired while acting in this role is not imputed to the sellers. 

The plaintiff also claimed that the sellers breached the purchase agreement by failing to provide the plaintiff with a Seller Property Questionnaire (“SPQ”).  However, the Court determined that the plaintiff could not demonstrate a causal connection between the alleged breach and its claimed damages because the SPQ only requires disclosure of defects which the seller is aware.  Because there was no evidence that the sellers were aware of the alleged defects, the failure to provide an SPQ would not have prevented the plaintiff’s damages.  Further, the Court determined that the plaintiff waived the sellers’ requirement to provide an SPQ when the plaintiff removed its contingencies prior to being provided with an SPQ.       

Mark Chuang, Associate