Daily Development for Monday, March 27, 2000

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

BROKERS; DUTY TO DISCLOSE: Failure of dual agent broker representing to disclose to potential buyers and, later, to sellers, existence of restrictive covenant limiting dogs, despite broker's knowledge that potential purchasers owned four dogs, coupled with broker's subsequent failure to use best efforts to obtain waivers of covenant or otherwise resolve problem, constituted breach of fiduciary duty and duty of good faith owed by broker.

Bazol v. Rhines, 600 N.W.2d 327 (Iowa App. 1999).

Broker and its affiliated companies had developed the subdivision in which sellers owned a home, and consequently sellers selected broker as their agent to sell their home. Palma, an agent for broker, identified a buyer. Both buyer and seller then signed a dual agency consent and the brokerage appointed another of its agents to serve as seller's agent. At the time Palma was well aware that the buyers had a need for a place suitable for their four dogs, and in fact identified seller's home in part because of its suitability for this purpse.

A few weeks later, a lawyer examining title determined that a restrictive covenant existed limiting dog ownership to one per dwelling. The lawyer notified broker and suggested that the broker (which, remember, had developed the subdivision through an affiliate) obtain a waiver of the restriction or find another solution to the conflict. Instead, broker took the position that buyers' reluctance to close was based upon other factors and that they were raising the dog restriction as a subterfuge. In the end, the sale did not close.

By this time it was mid October and the selling season in Iowa was nearing an end. Although sellers relisted with broker, the home was not sold until mid-March, and for a price $10,000 less than the prior sale. In the meantime, sellers had moved into a new home and were carrying the two properties.

Sellers sued broker for the reduced selling price and the cost of paying interest and taxes on the usold property.

The trial court found, and the Iowa Court of Appeals agreed, that the brokerage and the selling broker were liable for a breach of fiduciary duty. (The listing broker appointed at the time of the dual agency was not a named party because he was deceased.) The court makes no mention of any agency statute, and thus it appears that, at least in 1995, when these facts arose, there was no controlling statute. The court relies on ethical duties established by the National Association of Realtors as well as the language of the listing agreement itself to establish that the broker had a duty of disclosure both to buyers and sellers of problems known to it that affected the transaction.

The broker argued that even it had breached a duty by failing to disclose the dog restriction, there were no damages for the lost sale because the buyers would not have agreed to buy the house had the broker disclosed the restriction. Without the existence of a lost sale, the damages claims for the interest and tax costs on the unsold house also fall.

The court responded that the failure to disclose resulted in the property being taken off the market for a period of over two months in prime selling season. Further, the court reasoned that sellers might have found a solution to the problem with the dog restriction had they known of the problem when it first arose, and that in any event the broker itself had a duty to seek a waiver of the restriction. Since it had not done so, and we therefore cannot know whether it might have been successful, the broker cannot raise the defense that the restriction would have blocked the sale.

Comment 1: It is the damages discussion that makes this case most interesting to the editor. Although it must be noted, the broker in this case was the original developer of the subdivision, and therefore might have had a greater ability to obtain a waiver of the covenant, it is still the fact that the obtaining of a waiver of the covenant is always a "long shot."

Comment 2: Note that the problem turned up when a careful lawyer searched the title and actually read the restrictions. In Iowa, which does not use title insurance, lawyers are involved in every closing.

In the editor's "home turf," Missouri, this would almost never happen. Brokers do not advise buyers to seek title advice, and the typical title report that buyers receive will mention the existence of covenants but will not deliver the covenants unless the buyer specially requests. Many commonly used contract forms require the buyer to accept title "subject to recorded covenants, conditions and restrictions" and state specifically that "normal restrictive covenants" are not deemed to affect marketability. Where the brokers routinely use form documents that steer the buyer away from any understanding of these restrictions, should the broker have a duty to be familiar with the restrictions itself and to warn both buyer and seller of restrictions that may prove objectionable to buyer or may make it likely that the buyer will be unlikely to close?

Comment 3: The court does not indicate that any attempt was made to collect damages from the buyer for failing to close. In Iowa, it is likely that the buyer was entitled to withdraw from the sale on the basis of a title defect such as that shown here. But even if the buyer wrongfully wihtdraws, in many jurisdictions the damages are limited, either practically or legally, to forfeiture of earnest money. Although a broker whose negligence led to a failed sale may be entitled to a credit against damages for any earnest money forfeited, the damages themselves may well exceed such amounts, as is the case here.

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

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