The Morrison Law Journal
A thorny issue that often arises with respect to the sale of real property with significant improvements concerns disclosures with respect to the adequacy of the original design and construction, as well as permitting, of the improvements for the property. Very often, sophisticated sellers of real property will include release language in the purchase agreement which calls for the buyer to be solely responsible for all inspections, that there are no representations by the seller as to the adequacy of the improvements, and a release of the seller for any alleged misrepresentation with respect to the adequacy or condition of the improvements.
An issue, however, is whether such release language will be effective given Civil Code section 1648, which prohibits releases for fraud or statutory violations.1 In the case of SI 59 LLC vs. Variel Warner Ventures, LLC (2018) WESTLAW 5993816 ("SI 59 case"), the Court of Appeal dealt directly with this issue. In the SI 59 case, Variel Warner Ventures, LLC and other related entities entered into a contract with Verdugo Management & Investment, Inc. ("Verdugo"), a general contractor, to construct an 85 unit apartment building. Under the terms of the general construction contract, Verdugo agreed to construct the improvements in a good and workmanlike manner in strict compliance with all drawings and specifications. Verdugo also agreed to comply with all laws. Verdugo proceeded to construct the improvements. In doing so, it employed subcontractors to construct the structural concrete slab and then waterproof it. The City of Los Angeles issued a Certificate of Occupancy for the Property on December 6, 2007.
Later on in December 2007, Variel entered into a purchase agreement to sell the property to Sobrato Interests III ("Sobrato"). Prior to close of escrow, Variel “represented...that final completion of construction had occurred and that all requirements of the General Construction Contract for final completion had been satisfied.” The purchase agreement also contained a general release stating that Sobrato “shall rely solely upon [its] own knowledge of the Property based on its investigation of the Property and its own inspection of the Property in determining the Property’s physical condition, except with respect to . . . [the] representations, warranties and covenants [made by Variel in the Purchase Agreement]. . . .” Sobrato released, inter alia, Variel
1 Civil Code section 1668 establishes that a contract that exempts anyone from responsibility for his or her own fraud or violation of the law is against public policy.
Warner, Variel Builders, Troxler, Troxler Venture, and Verdugo (except to the extent of Verdugo’s general contractor warranty) from all claims arising out of any condition of the Property, including construction errors, omissions or defects. Excluded from the release were any claims that Sobrato may have against Variel Warner for breach of the representations, warranties and covenants in the Purchase Agreement or for fraud.