Daily Development for Friday March 24, 1995

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Note: Today's daily development is in honor of the several broker's lawyers who have "jumped in early" to our discussion group. I'm still waiting, however, for someone to challenge my commentary on these developments. I'm being as outraged and outrageous as I can be. Surely someone is being provoked.

Here's some "good news, bad news" for my friends who represent brokers (beginning with the bad news):

BROKERS; MISREPRESENTATION; DUTY TO DISCLOSE: Existence of an off site landfill containing hazardous waste substances is a condition which requires disclosure by a builder and selling broker of new homes to potential buyers if defendants knew or should have known of the problem. Strawn v. Canuso, 638 A.2d 141 (N.J.Super.App.Div. 1994). The existence of potentially hazardous substances on the landfill site was known, or should have been known, by the builder at the time of the sales. In promotional literature, including brochures and advertisements, the builder had used offsite amenities as a selling point. All of the purchasers who were parties to the suit claimed that they relied upon these representations.

The court found several reasons why both builder and brokers were guilty of fraudulent non-disclosure: first, the condition was known or should have been known by them, was unknown to the buyers, and could reasonably be expected to materially effect the value of the properties being sold; second, use of the off site environment to induce sales obligated them to disclose the existence of the landfill, which could have a substantial negative impact on the value of the homes and quality of life in the area; third, as to the brokers, they had a regulatory obligation to disclose pursuant to a directive of the state Real Estate Commission. The court noted that strict application of the doctrine of caveat emptor could not be applied rigidly in this circumstance. Modern concepts of justice and fair dealing lead to the conclusion that purposeful concealment can be as destructive as an affirmative false statement. There also was a body of evidence to the effect that migration of the off site contamination had taken place, and contaminated several of the properties in the development itself.

Comment: This is an important case. It squarely confronts and rules upon all of the difficult disclosure issues, including the duty of brokers to investigate and disclose. The language of the case contains dicta that all broker's lawyers should study. Here, there is a complicating factor in that the state real estate commission had affirmatively stated that this particular landfill posed a problem requiring disclosure. But it is unclear whether the individual brokers actually knew of this statement or of the landfill. The court does say that the brokers can point out to the jury that they asked the developer for any information about landfill problems in the vicinity and he did not disclose to the brokers information he had about this landfill. But it is clear that the court does not view the seller's nondisclosure as a complete defense for the brokers. It is only an issue for the jury to evaluate.

BROKERS; DUTY TO DISCLOSE: Seller's broker not liable to seller for negligence in preparation of disclosure statement if seller signs it after opportunity to review. Barta v. Kindschuh, 518 N.W.2d 98 (Neb. 1994). Seller became dissatisfied with the initial agent and substituted another from within the same office. During the interim, leaks developed in the roof of seller's property, which condition seller duly reported to the new agent. The new agent neglected to change the "Property Disclosure Information" form, initially completed by the preceding agent, stating the roof to be in good condition. Prior to completing the sale of the subject property, the seller signed the unchanged form and when later sued by the buyers, alleged in a third party petition the liability of the brokers. The court observed that an agent is normally liable for losses suffered by the agent's failure to fulfill his agency duties. However, when the principal is less than blameless or free from any wrongdoing and his behavior indicates some authorization for the acts in question, the agent will not be held liable. While the broker clearly violated a duty by not changing the form, the sellers were given the form to read and sign. This behavior acquiesced and ratified the acts of their agent. Since the law will not afford sellers protection for ignoring the obvious, the broker was released from liability.

Comment on above cases: Broker disclosure law has been in a state of constant flux for the past ten years. Some states, particularly states in the Southeast, have held steadfastly to a caveat emptor standard - insulating both brokers and their seller clients. States with a stronger consumer bent have viewed buyers as entitled to a consumer protection standard in dealing with brokers. This has led to a significant erosion of the caveat emptor rule, and in some places imposed upon brokers a duty to investigate.

Although there is undoubtedly some impact on the conduct of brokers (and buyers) resulting from the legal rules, the real impact of the new "consumerist" cases has been to shift the risk of problems that arise after closing. In many of these states (Kansas, for instance), brokers have roared back in the legislature, overturning the new court rulings with statutes that absolve the broker from the duty to investigate and permit the broker to avoid liability entirely by passing on to the buyer a written disclosure statement from the seller.

Should brokers have greater responsibility for transmitting accurate information to buyers? Your answer probably depends upon your experience with brokers. Do they "walk the line," covering up or diverting attention from problems in order to get an easy closing? Or do they press the buyer to get full information, making sure the buyer knows (where relevant) that the broker is the seller's agent and that the buyer is on his own.

Remember that, unlike lawyers, brokers do, under their own ethical standards, have a duty to see to it that all parties are treated fairly in the transaction, perhaps because in most cases only the seller has an agent, and the buyer's interests are essentially unrepresented. (There is a possible exception in some eastern and midwestern states where lawyers play a greater role in residential closing.)

Many of the residential agents with which this commentator has dealt seem to be more "closing oriented" than most lawyers would like. They believe, probably sincerely, that most problems will work out all right in the end and that everyone's best interest is served by getting the deal done. Your commentator doesn't quarrel too much with this attitude, but, if it indeed controls real estate agent behavior, why shouldn't the broker's insurance provide some protection when things really do go wrong? Your commentator would prefer a rule that holds the broker liable for knowing misrepresentations or nondisclosure of known material defects, even when discoverable (but not actually known) by the buyer. Clearly, the broker is in a good position to insure that the buyer does conduct a thorough inspection, and this would absolve the broker of liability in most cases.

Your commentator does not support a "duty to investigate," however. This is too much of a Pandora's box, and the cases in which the rule has been applied are the best evidence of how far afield such a rule can carry us. See, for example, Hopkins v. Fox & Lazo Realtors, 625 A.2d 1110 (N.J. 1993) (agent liable for failing to discover and disclose dangerous step in home where agent - subbing for the listing agent - had conducted open house for about an hour).

Next Daily Development will address dual agency issues.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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