Easton v. Strassburger: A 40-Year Legacy for the Law of Disclosure in Residential Real Property Transactions
In May 1976, Leticia Easton purchased a home in the Contra Costa County community of Diablo for $170,000 – a substantial price at the time. Soon after the sale closed escrow, earth movement led to foundation settlement and cracking and warping of walls and doorways of the home. Ensuing landslides caused further damage and also partially destroyed the driveway.
It turned out that portions of the property were constructed on fill that had not been properly engineered or compacted. The costs of repair were more than $200,000. As a result, Mrs. Easton sued the sellers, Mr. and Mrs. Strassburger, as well as the real estate brokerage that represented the sellers, Valley of California, Inc., along with two sales agents employed by Valley and several other parties.
Trial evidence showed that Valley’s sales agents had inspected the property and observed certain “red flags” that should have indicated to them that there were soils problems. They did not, however, request an engineer’s testing of the soil, nor did they inform Mrs. Easton that there were indications of soils problems. The Strasburgers themselves had made repairs due to earlier slides, including a major slide in the year preceding the sale, but they had not disclosed any of these facts to Valley, its agents, or Mrs. Easton.
The jury found against all defendants, including the brokers, on claims for negligence and negligent misrepresentation. As the party with “deep pockets” potentially liable for the full amount of the judgment, Valley alone appealed.
The primary issue on appeal – leading to the most significant holding in Easton v. Strassburger case[1] – was whether a real estate broker representing the seller owed a duty of care to disclose to the buyer facts that a reasonable inspection by the broker would have revealed – even if the broker, such as Valley in this case (a) did not represent the buyer, (b) had no actual knowledge of problems, and (c) did not represent that the property was problem-free. This was an issue of first impression in California.
The brokerage company argued that there was no duty to investigate facts not actually known to it or disclosed to it by the seller, while Easton argued that a real estate broker holds itself out as having special skills and knowledge and could be expected to conduct a reasonable inspection where there were visible indications of issues (“red flags”) warranting inspection.
Easton’s argument prevailed, among other reasons, because California case law already imposed a duty on the seller’s agent to disclose to the buyer all material defects known to the broker, even where the broker had no agency relationship or privity of contract with the buyer. Prior case law had not covered facts the broker reasonably should have known, but did not know, but the court of appeal considered a duty to discover and disclose adverse facts to be “implicit” in the general duty of disclosure. Among other things, the National Association of Realtors’ Code of Ethics, admitted into evidence at trial, imposed both a duty to disclose known facts as well as a duty “to discover adverse factors that a reasonably competent and diligent inspection would disclose.” This was essentially the duty that the Court of Appeal found to have been breached by Valley and its agents.
The Court of Appeal issued its decision in February 1984. The California Supreme Court denied review later that year. The decision caused immediate and widespread consternation in the California real estate brokerage community. Despite the language of the NAR Code of Ethics, it was felt that to impose an affirmative duty to “investigate and disclose” created obligations beyond the scope of expertise and usual role of a real estate agent, creating a risk of liability that could not be avoided without a professional inspection by an engineer or other qualified expert.
The real estate industry sought a legislative response, which was granted in 1985 with the enactment of a new article of the Civil Code, entitled “Disclosures Upon Transfer of Residential Property. “This legislation did not overrule the Easton decision. Instead, it created the “Transfer Disclosure Statement” (TDS) requirements that have now been in existence for nearly 40 years and apply to virtually all residential real estate transactions in California.
Under the statute (Civil Code section 1102 et seq.), the seller and the seller’s agent have a duty to provide the buyer with a detailed statement of known or suspected issues in the statutory form (the TDS) when the sale contract is executed. The TDS includes numerous “check-the-box” items with additional open-ended disclosure questions, many of which cannot safely be answered by the homeowner or their broker without a contemporaneous professional inspection. The buyer has a right to rescind the transaction within a limited period of time if the TDS (or a later supplement to the TDS) reveals material issues with the property.
The broker’s inspection duty, as articulated by the Easton case, was not eliminated by the statute, but the seller’s broker was made a party to the TDS and required to certify as to the absence of other defects based on the broker’s own “reasonably competent and diligent inspection” of the accessible areas of the property. The TDS requirement, in turn, has spawned a whole industry of “home inspection professionals,” whose reports form the basis for preparation of the TDS and are usually conducted before the home is listed for sale. As a practical matter, this gives the broker some assurance that even if the broker’s direct client, the seller, has not disclosed known or suspected problems, there has been a reasonable inspection by a competent third party that should have disclosed the issues and been embodied in the TDS provided to the eventual buyer.
The Easton decision remains good law and is often cited as a seminal decision on broker liability and seller disclosure law in California. But the statutory response directly precipitated by Easton arguably had a more pervasive effect than the decision itself. Due to the explicit disclosure documentation required from sellers and their agents, the law removed grey areas from the sales process, effectively compelling the parties to conduct meaningful inspections and make honest representations about the condition of the property or risk serious statutory liability.
In short, the TDS law precipitated by Easton v. Strassburger has affected the mechanics of transactions for purchase and sale of residential real estate in California probably more than any other piece of legislation before or since. The statute also has been the model for similar disclosure laws enacted in other states. In this sense, the lawsuit Mrs. Easton first brought in Contra Costa County in 1976 had repercussions far beyond the borders of Contra Costa County and the State of California. It is an enduring legacy that likely will continue long after the case itself is forgotten.
1. Easton v. Strassburger (1st Dist. 1984) 152 Cal.App.3d 90, 199 Cal.Rptr.383, 46 A.L.R. 4th 521