Realtor Tips: Duty to Disclose
I see a lot of buzz on the internet lately Realtors and real estate agents covering and commenting on topics like "risk", "liability" or even "fraud". Guess that's due to buyers starting to come out, showing interest in homes after a lower-than-average show of winter activity and the advent of spring. See more Realtor Tips, or topics for Buyers & Sellers.
Buyers & Sellers Benefit from Disclosure
When in doubt, disclose. That's the general safe thinking attached to most parts of real estate process. There are, however, some instances where disclosure can violate a client or a customer's trust and confidence. A seller's agent has a duty of confidentiality towards their seller, as does a buyer's agent for his or her buyer client.
Examples and a Case Study;
Let's say a Buyer's Agent is representing a buyer interested in a Listing Agent's listing. Listing agents promise to net the highest price possible for sellers, while buyer's agents work to get the best price for their home-buying clients.
Now, let's say the Buyer's agent asks the listing agent for the lowest acceptable price, and the listing agent confides their seller is quite anxious to sell and move, and would probably take $5,000 less.
In the meantime, the Listing Agent doesn't know what the Buyer's agent has learned of and concerned that the buyer's financing may fall through and not be able to complete the transaction but withholds that information from the Listing Agent.
Both agents are now in error and have crossed the line. Statutes and common real estate law that has evolved greatly since the 1950's in the U.S. is replete with examples of protecting consumers and high standards on ethic matters and trust issues. In this case, both agents were anxious to make a sale and get a commission and placed their interests above the clients and customers.
The Listing Agent should never have disclosed his/her client's state of mind or circumstances or sense of urgency. It didn't say "motivated seller" in the listing description or remarks, thus, the agent didn't have permission to disclose.
The Buyer's Agent should have informed the Listing Agent of the possibility of the buyer clients finances falling through, which protects the Buyer Agent's "customer" who is the seller, and also the Listing Agent. A customer is not a client, an individual or entity with no "agency" created in a transaction. A client on the other hand is who an agent officially represents and a form of legal "agency" is created or implied from a legal standpoint.
Even though the Listing Agent and seller are only "customers" of the Buyer Agent, the Ohio's real estate standard is still reasonable care and skill, and more still for your client who's interests come before customers and agent's personal interests. State law varies somewhat with exact standards but relatively the same in most cases, check with yours.
Before any agent balks at this, here is an actual court case study to consider;
Lombardo v. Albu, Arizona Supreme Court (2000)
Now, this is interesting because you'll see that two courts ruled in favor of a buyer's agent who did not disclose his buyer's possibility of financing falling through. Two courts upheld the Buyer Agent's motion to dismiss, but the Arizona Supreme Court turned a lot of opinions on their heads with the case receiving a lot of publicity over the years.
This was the case where a buyer's agent failed to disclose what was later determined to be a material fact.
The Lombardo’s, delinquent on their house payments, decided to list their home for sale. Ms. Albu was the Buyer Agent for the Codneys. Albu put together an offer for the Codney's and delivered it to the Listing Agent for the Lombardo’s who accepted, grateful because of their predicament. After acceptance of the offer, Codney informed Albu that he (Codney) was going to have some trouble obtaining financing to purchase the home. Albu did not inform the Lombardo’s Listing Agent of this fact. Codney, unfortunately, was unable to obtain financing.
The Lombardo’s ended up loosing their equity when foreclosure followed through.
Resultingly, the Lombardo’s sued Buyer Agent Albu for negligent misrepresentation, alleging that her failure to disclose the Codney's financial difficulties to them caused them to lose their equity. The trial court granted Albu's motion for summary judgment. In essence, that means that the buyer's agent (Albu) owes no legal duty to the seller. That was a motion that the buyer's agent made to the court.
The Lombardo’s then appealed to the Arizona Court of Appeals and they upheld the first trial court.
Two courts said that, in this particular case, Albu did not have to tell the Lombardo’s that the buyer was going to have financing issues. The court of appeals noted that the relevant statutes created no duty to disclose but that a regulation of the Arizona Real Estate Commission requires an agent to disclose the buyer's inability to perform. The appellate court held that the administrative regulation does not necessarily create a duty, which if breached, gives rise to liability. The appellate court also stated that recognizing duties to other parties to the transaction potentially places the agent in conflict between the duty to a principal (a client) and the duty to a third party (a customer), dividing her loyalties between a principal and the other parties. Finally, the court held that a real estate agent generally has no duty of disclosure to non-clients.
There is an old principle in law known as "caveat emptor" which is: let the buyer beware. In a majority of the states today, the caveat emptor principle does not apply, though it does make for sound advice.
The Lombardo’s disagreed with the court of appeals judgement, so they took it to the Arizona Supreme Court. Their findings stated that the administrative regulation that the Arizona Real Estate Commission had either constitutes the standard of care, or it formed the basis for a private cause of action directly on the regulations.
To put it more simply; there is a rule in Arizona requiring the disclosure of a buyer's inability to perform. The rule was violated (Albu) and the Lombardo’s had not only action before the Arizona Real Estate Commission; they had an action in court. Again, you better check with your state and be up on this.
The Arizona Supreme Court agreed with them and they said, in reversing the appellate court, that the buyer and seller had legal duties to each other, including the covenant of good faith and fair dealing. Agents may have fiduciary duties only to their clients, but they have non-fiduciary duties to other parties. Among those is the duty to disclose any information relating to their principal's inability to perform. The court went on to say the ability of the buyer to perform goes to the heart of the transaction and thusly is not confidential information. Even if it is confidential information, the agent must reveal such information in the protection of a superior interest. The Arizona Real Estate Commission's regulations recognized that the agent's non-fiduciary duty to other parties to the transaction and therefore may form the basis for a standard of conduct.
Trust me, running my real estate business for over 20 years, I've seen some whoppers with disastrous effect regarding disclosure issues. Being a real estate agent and acting as a buyer or listing agent can really put you in the pickle jar, and cause for some mighty due diligence at times.
Juanita Limes - Your Greater Dayton Area Ohio Realtor - Give me a shout for all your real estate needs,
937-776-6903 or just email me.