As more and more people work from home and as the number of Internet users per household increases, along with different types of uses (e.g., email, streaming, gaming, etc.), it was only a matter of time before disputes arose between buyers, sellers, and real estate licensees regarding the existence and quality of Internet service at properties being bought and sold.
Over the last month, I became involved with three claims involving Internet service. These claims were in three different counties. This article will examine some of the facts and issues that arose in these three claims and make some observations as to how they might have been avoided.
In this transaction, the marketing material indicated that there was “high-speed Internet access.” Each party had a different understanding of this term (e.g., cable access with no understanding of the download and upload speeds vs. the FCC definition of high-speed access, which is a download speed greater than 25mbps and an upload speed of 3mbps). Escrow closed, and a dispute arose regarding the Internet access speed.
In this transaction, the marketing material indicated that there was “Internet access” but did not specify the provider or give any other details. The buyer was interested in working from home. Prior to writing a non-contingent offer, the buyer asked the seller for the identity of the service provider and assumed that the existing service (satellite) would be adequate for the buyer’s needs. When the buyer learned that the existing service was in fact inadequate for his needs, the buyer then investigated the cost of installing adequate cable Internet access and claimed that that cost was going to be somewhere between $15,000 and $100,000. The buyer attempted to cancel the contract, claiming that the type of Internet service was a material fact and that the transaction should be rescinded on the basis of fraud or mutual mistake.
In this transaction, there was no discussion of Internet access in the marketing material, but the buyer asked the seller to identify the service provider. The seller responded by stating that the provider was Verizon and that the download speeds they had at the property were 25mbps and upload speeds were 3mbps. The seller’s statements were qualified with the recommendation that the buyer verify these claims for themselves. In that instance, it was later discovered that the Internet provider was actually AT&T and, according to a neighbor, Internet speeds in that neighborhood were inadequate for home business use.
The buyer in that transaction, who intended to work from home, was facing competition from other prospective purchasers and claimed that they did not have time to investigate the seller’s statements before writing a non-contingent offer. Once in contract, the buyer started to investigate these issues and discovered the inaccuracy of the sellers’ statements. The buyer attempted to rescind the contract, and a dispute arose over the deposit. The seller claimed that they had in fact worked from home and did not have any Internet access issues; they also claimed that the fact that the service provider was AT&T instead of Verizon was an immaterial, simple mistake. The seller argued that the existence or quality of Internet access was not a material fact; they also that claimed even if Internet access was a material fact, the download and upload speeds at the property met the FCC’s definition of high-speed Internet access.
The Disclosure Documents
Each of these transactions involved a C.A.R. contract; all of the sellers completed a TDS and the C.A.R. Seller Property Questionnaire (“SPQ”). Neither the TDS nor the SPQ (including the recently revised SPQ that is being released in December 2021) has any specific questions about Internet service; however, one buyer claimed that information regarding the quality and type of Internet service should have been provided in response to Question 17(C) of the SPQ that asks about “any past or present known material facts or significant items affecting the value or desirability of the Property not otherwise disclosed to Buyer.”
Unlike the SPQ, the PRDS Supplemental Seller’s Checklist (“SSC”) has a section concerning Internet access. The SSC asks specific questions regarding the phone and Internet service providers and whether there have been any ongoing or recurring issues, conditions, and/or problems with any of the items or systems and whether there are any limitations or restrictions applicable to the installation/wiring, availability, number and location, and use of any of these items or systems. The SSC also asks for a detailed description and requests that the seller attach all documents related to that issue.
The Legal Positions/Arguments
All three of the sellers in these cases defended their positions by focusing on the four elements for a claim for misrepresentation/concealment: (1) misrepresentation/concealment of a material fact that the seller had actual knowledge of, (2) the buyer did not reasonably and justifiably rely on the statements made by the seller, (3) causation, and (4) damages.
Whether Internet service is or is not a material fact will turn on how significant a seller and buyer consider that service and/or whether a reasonable buyer would use the existence and/or quality of internet service as a basis to make the decision regarding buying the property or in establishing the price.
Some of these sellers argued that the absence of any questions regarding Internet service in the disclosure documents supported their claim that it was not a material fact. These sellers also argued that they did not have actual knowledge of any issue or problem with their Internet service. In one claim, however, the seller had actually determined the download and upload speeds of their service and provided that information to the buyer. This investigation led the buyer’s attorney to ask why the seller had conducted that speed test and why that information had been offered to the buyer. Was this test run because the seller had had some problems with the reliability of the property’s Internet service? Was the seller trying to make the property more appealing by giving this information to the buyer?
The sellers in each claim also argued that it was the responsibility of the buyers to investigate these issues if they were important to their decision-making process. This defense introduces several legal concepts that might have an impact on the outcome of each case: First, to what degree is a buyer entitled to rely on a statement made by the seller without an obligation to investigate that statement? There is a conflict in California law between the right of a buyer to receive a full and complete disclosure of all material facts that the seller is aware of and the buyer’s duty to investigate the consequences and ramifications of an essential fact disclosed by the seller. Second, the sellers argued that disclosing that there was Internet access was an essential fact, but it was the buyers’ duty to determine any ramifications of that access and whether it was sufficient for the buyers’ personal needs. In each claim, the buyers responded that the sellers knew additional material facts regarding the speed and/or quality of the Internet access and had failed to disclose those facts, thus misleading the buyers into believing that further investigation was unnecessary.
Another legal concept that came into play was the absence of comparative fault in claims involving misrepresentation or concealment. The concept of comparative fault allows the trier of fact (arbitrator, judge, or jury) to allocate fault between all of the parties on a percentage basis. In misrepresentation claims, that allocation is not made, and the case turns on establishing actual knowledge on the part of the seller and whether the buyer reasonably and justifiably relied upon the information that was disclosed. The upshot is that such disputes become all-or-nothing propositions – either the seller or the buyer prevails, and there is no offset for comparative fault.
Ultimately, whether a buyer reasonably and justifiably relied on information provided by the seller may be impacted by just how significant an issue this was for the buyer. For example, a buyer is the only one who knows their intended uses unless those details are communicated to other parties involved in the transaction. Therefore, where the issue is Internet access, the number of users, the type of use, and the amount of use that the buyer anticipates may be important factors that the buyer should learn about, and the buyer needs to make an adequate inquiry of the seller regarding the buyer’s ability to achieve the buyer’s intended uses. If the buyer is interested in the availability of a particular type and/or quality of Internet service and/or the cost of that service is a concern, then the buyer should inquire about those subjects as well.
In each of these disputes, the seller also argued that the buyer could not recover any damages under the out-of-pocket component of Civil Code § 3343. That Code section requires that the buyer demonstrate that the property was not worth what they paid for it on the date of sale, given what they now know. This is a factual dispute that would need to be resolved by expert testimony. Normally, lawyers would look to the lender’s appraisals to see if the issue was even addressed in determining fair market value and, if so, what adjustments were made by the appraiser given the absence of Internet access in comparison with other comparable properties. I have yet to see a lender’s appraiser take Internet access into consideration when evaluating a property, but that did not preclude an attorney for one of the buyers from retaining an appraiser who provided such an opinion. A separate issue that might be raised is whether damage could be established under the consequential damage component of Civil Code § 3343 if the property was represented as having the specific feature of Internet access and that feature was not actually available or present.
The last legal theory involved was the concept of rescission. Rescission of a contract can be based upon, among other grounds, fraud or mutual mistake. One of the buyers argued that rescission was appropriate because of a mutual mistake regarding the quality of Internet access.
Claims Against The Brokers And Agents
All three disputes included claims by both principals against their brokers/agents. A broker/agent faces potential liability for the language that is used in any marketing material and/or the MLS. Liability under Civil Code § 1088 exists for the latter. Disputes arose between the brokers/agents and the seller over whether the advertised language had been provided by the seller or a broker/agent and whether the seller had read and approved the marketing material.
The brokers and agents also had potential liability for using terminology (“high-speed Internet access”) when they did not have an understanding of what that might mean to various parties; they did not know the standards set by the FCC or any other government agency (which may be less than what the FCC has determined). Brokers and agents also face potential liability for transmitting information to their buyer without disclosing whether they have verified the information and/or failing to recommend that the client independently investigate and confirm the information.
The brokers/agents for each of the buyers in these transactions also claimed that they were not aware that Internet access was a material issue to their clients’ decision to buy property. How a broker/agent learns those material facts that may impact the decision of their client is often left to oral discussions rather than a written exchange. Of course, the absence of a writing allows either party to have a different “recollection” of what was and wasn’t discussed.
Observations On How These Claims Might Have Been Avoided
Here are some suggestions:
(1) When describing the type, quality, and/or speed of Internet service (whether in any advertisement or in response to questions by clients), agents should choose their words carefully and understand all of the relevant terminology before using it. If you do not personally understand these issues, do not use those terms;
(2) When using technical terminology, define what you mean by that terminology (e.g., “high-speed Internet access”) so that it has the same meaning to all parties, or, alternatively, clearly state that you do not know the definition of that terminology. Whether or not you believe you understand the terminology, always encourage buyers, in writing, to verify the information and to determine for themselves whether the internet access at the property meets the buyers’ present needs and future intended uses;
(3) If you represent a seller and are using the C.A.R. SPQ, consider providing the seller with a sample copy of the PRDS SSC to enable the seller to think about issues not covered in the SPQ, such as Internet access and service; alternatively, advise your seller that the TDS and SPQ do not contain any specific questions about this subject but that a buyer might consider that information to be material. Be sure to warn sellers not to “oversell” the quality of any aspect of the property;
(4) If you represent a buyer, find out what the buyer’s needs and wants are with respect to their intended use of the property, including Internet access and service. Make sure that you confirm that information in an email to your client, if possible, and then make it clear who is going to learn about or further investigate these issues (preferably the buyer) to make sure the buyer is making a fully informed decision;
(5) If you represent a buyer, suggest that your client ask the seller (preferably in writing with a request for a written response) if they have had any issues with the speed or quality of the Internet service at the property (although the answer to this question may depend on the number of users, type of use, etc.) and whether they have ever had the speed tested. Regardless of the seller’s responses, warn the buyer that they should not assume that the seller’s information is accurate and/or that what worked for the seller will necessarily meet the buyer’s needs;
(6) If your buyer wants a particular type of Internet access and/or cost is a potential issue, then add these items to the list of inquiries the buyer will make of the seller and/or the list of issues that the buyer will further investigate by contacting Internet service providers; and
(7) If you represent a buyer, consider including the availability, quality, and/or cost of Internet service as a standalone investigation contingency in the buyer’s offer, in much the same way as investigating the availability and cost of insurance is a separate part of the buyer’s investigation contingency in the 12/2021 C.A.R. RPA and is a completely separate continency in the PRDS REPC.
Above all, if a dispute arises, no one should lose sight of the buyer’s and seller’s true objectives (purchasing and selling a home); this is often forgotten in the heat of these legal battles. In one of these claims, the solution (installing cable Internet access) was going to cost $36,000.00, but the transaction was cancelled, and the parties then fought over the deposit of $54,000.00 in the sale of a $1.8 million dollar property. The property was later resold for a lower amount than the original price; the seller suffered a financial loss that was significantly greater than the 3% deposit but, because the liquidated damages provision in the purchase contract was initialed, the seller’s recovery was limited to $54,000.00. The buyer and seller collectively spent tens of thousands of dollars on legal fees and costs. Last month, through mediation, the parties agreed to split the deposit so that each side received $27,000; this settlement was primarily reached so as to stop the parties from having to incur further legal fees and costs. Sadly, each side lost sight of the fact that the original transaction could have easily been saved with a compromise regarding installation of cable Internet access. For example, had the parties agreed to split the $36,000 cost to provide access (e.g., decrease the purchase price by $18,000.00), that resolution would have had far less of a financial impact on both parties than what each party ultimately lost and/or paid.
About David Hammerslough
In his 40 years of practice, Dave Hamerslough has litigated and arbitrated residential and commercial real estate disputes on behalf of brokers and agents, buyers and sellers, and landlords and tenants. He teaches courses and writes articles on these subjects for brokers, agents, attorneys, and consumers. Dave also acts as mediator and arbitrator of real estate disputes. He is admitted to practice in all California courts.
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