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By:  Gordon Rees, L.L.P. (Each of the three articles in this issue were written by attorneys with the law firm of Gordon Rees.  Contact information may be found at the conclusion of the third article).

Property owners and managers are increasingly faced with claims due to actual and potential indoor mold problems, raising the dilemma of what needs to be disclosed when leasing and selling properties.  Although California’s Toxic Mold Protection Act, signed into law on October 1, 2001, includes mold disclosure requirements for building owners, the requirements do not go into effect unless and until a California Department of Health Services taskforce first determines objective “permissible exposure levels,” which has not yet been done.

The Department of Health Services cites a lack of funding to explain its inability to convene the taskforce and address the threshold question of whether permissible exposure levels for indoor molds are feasible.  Despite the lack of regulations mandating mold-related disclosures, the California Association of Realtors recently added a specific question to its standard CAR disclosure form to inquire about the presence of mold.  Moreover, given the media attention and substantial jury awards, the number of real estate non-disclosure actions involving mold has increased substantially.

Under California law, buyers and tenants of commercial property are traditionally deemed to be sophisticated and able to freely negotiate contracts with owners.  As long as there are no material or fraudulent misrepresentations, commercial owners generally only need to be concerned with disclosing any “known material facts” that affect the value or desirability of the property, and there is no obligation to repair defective conditions.

Residential sellers and landlords generally need to be more wary of rendering complete written disclosures because even if they have no actual knowledge, residential owners are also required to disclose any condition that they “should have known.”  [See, California Civil Code §§ 1102, et seq. for more information.]  Therefore, when in doubt, disclose, disclose, disclose!

For example, Owner X wants to sell his single family residence and is not aware of having any mold problems during the ten years he occupied the home.  However, five years earlier, a pipe had burst; the kitchen had flooded; and water had leaked into the crawl space and other parts of the home.  Professional contractors repaired the damage, and Owner X had no further problems.  Now that Owner X is selling his home, should he disclose the prior flood?  Yes.  Should he disclose the repairs and subsequent inspections that were done?  Yes.  Should he disclose any reports he obtained?  Yes.  Should he even disclose the minor flooring defect he discovered when repairing the flood damage?  Yes.  And in the mold context, these same answers would also generally apply to a commercial property transaction.

The tricky question is whether to disclose the “potential” for mold due to the extensive water intrusion into the crawl space, wall cavities, etc.  Although the parties in a commercial setting typically would be deemed to be equally aware that water intrusion can lead to mold growth, buyers and tenants may nonetheless claim ignorance and pursue a claim for non-disclosure.  In the residential context, plaintiffs often claim ignorance as to the connection between water intrusion and indoor mold growth.  Such plaintiffs may sue based on the lack of disclosure of water intrusion and/or mold and seek damages such as remediation and repair of personal and real property, bodily injuries, fraudulent concealment and misrepresentation claims, “stigma” and resultant “diminution of the home’s value and/or breach of contract.  These cases can be quite expensive to defend, and owners and/or realtors may not have applicable or adequate insurance to cover the costs of defense or judgments.  Therefore, it is typically advisable to err on the side of disclosing all past water intrusion and mold-related events as well as the investigation and repairs made, if any, when selling either commercial or residential property.

ConstructionRisk.com Report, Vol. 5, No. 8 (Sep 2003)