April 11th, 2012 at 6:55 pm
In 2010, a lawsuit was brought by the buyer of a property against a broker for negligent misrepresentation including failure to disclose. The facts of the case involved a buyer who had an accepted contract with a seller in the amount of $749,000. Absent from the contract was the crucial information that the seller had encumbered the property with three mortgages totally $1,141,000. This information had not been relayed to the listing agent at the time of listing nor at the time of accepted contract; thus, it was not listed as a short sale. The information regarding the encumbrances was relayed to the buyer before close of escrow but not before the buyer had sold his current residence in order to complete the purchase of the subject property. The lawsuit claimed that the agent was responsible for the buyer’s damages because of the agent’s failure to disclose the financial encumbrances on the property. The court initially ruled in favor of the agent; however, this decision was overturned on appeal with the court stating that a broker is obligated to disclose to the buyer before the purchase contract was signed that there was a substantial risk that the seller could not transfer title free and clear of all monetary liens and encumbrances. In other words, a broker’s duty to disclose extends beyond the physical aspects of the property to the financial obligations on the property.
The court concluded that when a real estate agent is aware that the amount of existing liens on the property exceeds the sales price so that either the seller will have to put cash into escrow to close the transaction or obtain cooperation from the lender to complete the transaction, the agent has a duty to the buyer to disclose this information so that the buyer can evaluate the risk before entering into the purchase contract.
This case is a reminder to all that when you take a listing make sure that you obtain sufficient information from the seller as to all encumbrances on the property and possibly run a title report to document this information. The duty to disclose the financial aspects of the property, while not new, is an issue which is coming up more regularly in today’s real estate market and places a duty of disclosure to the buyer on the listing agent.
As always, let us know if you have any questions.
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