Morrison Law Journal


The Morrison Law Journal November 2018 Volume XIII, Edition 11 A Win for Sellers of Real PropertyWith Significant Improvements: Court Upholds Contractual Clause Exempting Seller From Fraud Or Statutory Violations Arising From Construction Defects Where The Elements Of The Tort (Defective Construction) Are Based On Past Events By: Edward F. Morrison, Jr., Esq. Larry A. Schwartz, Esq.
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. 1 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. In 2008, Sobrato assigned all of its interests in the property to SI XX, LLC. In 2015, SI XX, LLC assigned all of its interests to SI 59 LLC ("SI 59"). That same year, it was alleged that water leaking from the podium and pool deck into the parking garage had caused damage. Suit was then filed by SI 59 alleging causes of action for negligence (including negligent misrepresentation), breach of contract and declaratory relief After filing the Complaint, Variel demurred on the basis that the release language in the purchase agreement barred any claim for negligence, negligent misrepresentation or breach of contract. The Trial Court ultimately sustained the demurrer without leave to amend ruling that Civil Code section 1668 did not apply. On appeal, the Court of Appeal affirmed, holding that the claims of statutory violation did not come within Civil Code section 1668 given that they occurred in the past and the claims arising from poor construction involved prior torts (even though some of the damage manifested after the sale of the property) which are not within the ambit of Civil Code section 1668. The SI 59 case provides some clarity with respect to the sale of commercial and large residential apartment style building properties, at least with respect to transactions involving sophisticated entities. About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com. Publication Note: The Morrison Law Group wishes to disseminate this publication to all clients and colleagues of the Firm who wish to receive it. Should any recipient desire to be removed from the distribution list, or wishes to have a colleague added, please contact Jim Van Dusen at The Morrison Law Group at 213 356-5504 or vandusen@morrisonlawgroup.com. Disclaimer Note: The legal article presented above is intended to provide general information which may be of interest or use to clients and colleagues of The Morrison Law Group and should not be construed as legal advice on any matter. 2

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.

In 2008, Sobrato assigned all of its interests in the property to SI XX, LLC. In 2015, SI XX, LLC assigned all of its interests to SI 59 LLC ("SI 59"). That same year, it was alleged that water leaking from the podium and pool deck into the parking garage had caused damage. Suit was then filed by SI 59 alleging causes of action for negligence (including negligent misrepresentation), breach of contract and declaratory relief

After filing the Complaint, Variel demurred on the basis that the release language in the purchase agreement barred any claim for negligence, negligent misrepresentation or breach of contract. The Trial Court ultimately sustained the demurrer without leave to amend ruling that Civil Code section 1668 did not apply. On appeal, the Court of Appeal affirmed, holding that the claims of statutory violation did not come within Civil Code section 1668 given that they occurred in the past and the claims arising from poor construction involved prior torts (even though some of the damage manifested after the sale of the property) which are not within the ambit of Civil Code section 1668.

The SI 59 case provides some clarity with respect to the sale of commercial and large residential apartment style building properties, at least with respect to transactions involving sophisticated entities.

About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.

Publication Note: The Morrison Law Group wishes to disseminate this publication to all clients and colleagues of the Firm who wish to receive it. Should any recipient desire to be removed from the distribution list, or wishes to have a colleague added, please contact Jim Van Dusen at The Morrison Law Group at 213 356-5504 or vandusen@morrisonlawgroup.com.

Disclaimer Note: The legal article presented above is intended to provide general information which may be of interest or use to clients and colleagues of The Morrison Law Group and should not be construed as legal advice on any matter.