Material Facts Unknown to the Buyer/ Tenant

Updated on July 6, 2022

Recently, a non-disclosure case involving eminent domain was decided in favor of the landlord and its real estate agents (collectively the “Defendants”). Somehow the court gave Defendants a pass for not disclosing the government’s intentions of condemning a portion of the subject property to the entering tenants.  Nevertheless, it is always best for owners and agents to disclose all material facts not known by the other party in connection with the purchase and sale of residential or commercial real property, or a long-term commercial lease.

Normally, an impending eminent domain proceeding is a material fact that landlords must disclose to potential tenants. Indeed, it is well-settled law in California that a property owner is under a duty to disclose material facts affecting the value or desirability of the property, if it is known that such facts are not known to or within the reach of the diligent attention and observation of a buyer. (Calemine v. Samuelson (2009) 171 Cal.App.4th 153, 161; Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1382.) This duty applies equally to commercial transactions (Stevenson v. Baum (1998) 65 Cal.App.4th 159, 165) and to leases of more than one year (10 Miller & Starr, Cal. Real Estate (4th ed. 2016) § 34.111, pp. 34-346–347 [“[a] leasehold interest with a term in excess of one year is an estate in real property”]; see also Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858, 868 [analyzing agent’s duty to disclose in a commercial lease transaction] ).

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As mentioned above, however, in DNI Food Service, Inc., v. Kim, the appellate court ruled in favor of the Defendants. There, the landlord’s broker/agent advertised a portion of the subject property for rent. Prior to the advertisement, the landlord and the agent knew that the State of California, Department of Transportation (“Caltrans”) planned to take a portion of the subject property through eminent domain. Nevertheless, the agents purposefully concealed this fact from the advertisement. The tenants eventually entered into a long-term lease and remodeled the premises for their restaurant business. Several months later, Caltrans served the tenants with its complaint for eminent domain.

In ruling for the Defendants, the appellate court seemingly took a post-hoc approach and refused to charge Defendants with a duty to disclose because the taking was “not material.” (DNI Food Service, Inc., v. Kim (2017) 2017 WL 87055, *4.) In doing so, the appellate court emphasized that Caltrans decided to take only a small portion of the subject property and that this “was minimal and unlikely to have a negative impact on plaintiff’s business.” (Id.) Thus, there was no duty to disclose.

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The purpose of this blog is not to encourage Defendants’ behavior. Indeed, the Defendants were fortunate that the court deemed the taking immaterial. That will not always be the case. In fact, it is better to err on the side of caution and consider a notice of an eminent domain a material fact that must be disclosed to either potential buyers or long-term tenants. For those landlords worried that the pending government project will make it impossible to lease the premises or force the landlord into accepting below market rent there is always the option of entering into a lost rents agreement with the public agency or to consider seeking a higher amount for the taking when it eventually occurs.

For help with your commercial lease or eminent domain matter, please contact Schorr Law. You can text us at (310) 706-2265, call us at (310) 954-1877, or send us a message by using our Contact Form.

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By Randy Aguirre, esq.