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Defining the Scope of the Real Estate Agent’s Duty to a Client
There has been significant commentary recently about whether a real estate licensee (“Agent”) is obligated to verify all representations and discover adverse facts about a property on behalf of a client, by physical inspection or otherwise. Some of this commentary evidences a lack of understanding of the services that an Agent provides to the client.
For sellers, using such strategies as flyers, ads, open house, and tours, as well as listing the property on the MLS.
For buyers, which almost always involves driving the buyers to numerous properties and viewing each one until a property is located that meets the buyer’s needs.
The purchases contract in accordance with the client’s instructions and submitting all offers and counteroffers promptly.
With the other party to obtain the best price on the best terms for the purchase or sale of the property.
The client’s questions about the transaction and providing the client with resources for information about all aspects of relocating, from loans to moving companies.
Inspections and walkthroughs of the property and guiding the client to sources of information pertaining to the property and the surrounding area.
Keeping the client informed as to the status of the transaction while it is in escrow and assisting in facilitating close of escrow.
And, generally, an Agent performs all of these services, and more, on a contingency basis. If the house does not sell, the buyer does not buy, or the transaction does not close, the Agent does not receive payment for the costs advanced or the services rendered.
Because of the type of services provided, an Agent must have expertise in the “general purpose and legal effect of any real estate practices, principles and related forms, including agency contracts, real estate contracts, deposit receipts, deeds, mortgages, deeds of trust, security agreements, bills of sale, land contracts of sale and property management, and any other areas that the commissioner deems necessary and proper.” A.R.S. §32-2124(E)(2). Must an agent also possess the expertise of a home inspector, plumber, roofer, appraiser, surveyor or industrial hygienist to discover defects in a property or to verify representations? Of course not.
Agent must have expertise in the ________ and legal effect of any real estate practices
The adverse effect of imposing an imprecise duty on an Agent to verify all representations and conduct inspections
Consideration should be given to the adverse effect of imposing an imprecise duty to verify representations and to discover property defects upon real estate agents. For example, the case of Easton v. Strassburger expanded broker liability in California by imposing an overly broad duty on the listing broker to conduct an inspection of the property to discover property defects, leading to increased litigation. The Easton decision also strained the errors and omissions insurance (“E&O”) market as insurance companies abandoned California. 28 Pac. L.J. at 677. As a result, the cost of E&O insurance increased dramatically. In response, the California legislature passed Cal. Civ. Code § 2079.12, which states in pertinent part:
The Legislature hereby finds and declares all of the following:
That the imprecision of terms in the opinion rendered in Easton v. Strassburger, 152 Cal. App. 3d 90, and the absence of a comprehensive declaration of duties, standards, and exceptions, has caused insurers to modify professional liability coverage of real estate licensees and has caused confusion among real estate licensees as to the manner of performing the duty ascribed to them by the court.
Thus, an Agent’s duty to the client in this regard must be precisely defined to avoid similar consequences in Arizona.
Suggested guidelines for defining the Agent’s duty to the client
If the Agent has actual knowledge of a material defect – the Agent must disclose it.
Whether representing a buyer or seller, an Agent is under a general duty to disclose to the client information that the Agent possesses pertaining to the transaction. E.g., Jennings v. Lee, 105 Ariz. 167, 461 P.2d 161 (1969); Coldwell Banker v. Camelback Office Park, 156 Ariz. 214, 751 P.2d 530 (App. 1987), aff’d in part, vacated in part, 156 Ariz. 226, 751 P.2d 542 (1988). Therefore, if the Agent has actual knowledge of a material defect, the duty to disclose is clear-cut.
If the Agent notices a suspicious condition – the Agent should point it out to the client and recommend the appropriate technical or professional investigation. No Arizona Court has required an Agent to inspect property to discover defects. However, in the event that such a duty is imposed on Arizona Agents, the duty to “discover” defects should be limited only to defects that are reasonably discoverable by a reasonably prudent real estate agent through an ordinary viewing of a home undertaken for the purposes of its potential sale. See, Hopkins v. Fox & Lazo Realtors, 625 A.2d 1110, 1115 (N.J. 1993). In other words, if an Agent is aware of facts giving rise to a reason to know of a defect, such as obvious discoloration of the ceiling evidencing a roof leak, a duty to act may arise. In such a case, the Agent should bring the condition to the client’s attention and recommend that the client obtain the appropriate technical or professional investigation of the situation.
If the client asks about an aspect of the property, the Agent should not respond “yes’ or “no” when the answer should be – “ I don’t know, but I know where we can find out.” Specific inquiries by a client place a duty upon the Agent who ventures to respond. See, Lopata v. Miller, 712 A.2d 24, 30 (Md. App 1998). In other words, when the client asks about an aspect of the property, unless the Agent can answer the question with personal knowledge, the Agent should advise the client to have the question answered by the appropriate technical or professional person. For example, if a client asks whether the property is connected to the sewer, the Agent should not imply that the Agent has personal knowledge of the sewer connection (unless the Agent does, in fact, have personal knowledge). The Agent should explain to the buyer that the seller has represented that the property is connected to the sewer, and the buyer can verify the seller’s representation by employing a plumber.
If the Agent is passing along information – the Agent should identify its source. Finally, when passing along information from a third party to a client, the Agent should make sure the client understands that the Agent has not verified the veracity of the information. No Arizona case addresses any duty of a broker to independently verify information on behalf of a client. The California courts have addressed this issue and held that a buyer’s agent is not required to verify information if the client understands that the information in unverified. See, Assilzadeh v. California Federal Bank, 82 Cal. App. 4th 399 (2000). As the court in Pangano v. Krohn, 60 Cal. App. 4th 1 (1997) stated: “[w]hen the buyer’s agent transmits material information from the seller or others to the buyer, the agent must either verify the information or disclose to the buyer that it has not been verified.” Citing Salahutin v. Valley of California, Inc., 24 Cal. App. 4th 555, 562-563 (1994). “Accordingly, a buyer’s agent is not required to verify information received from the seller and passed on to the buyer if the buyer understands the agent is merely passing on unverified information.” Id. at. 563.
Holding real estate agents liable for discovering property defects and verifying all representations in a transaction does not protect the public
As one commentator stated: “[o]ne of the preliminary issues to be addressed is whether a real estate broker has the ability to conduct a diligent search for material defects. Although educated in the basic conveyance of property, real estate brokers are typically far from being experts in assessing the integrity of a residence. What may be a ‘red flag’ to a plumber or a mason, may be nothing more than a bump or noise to an inspecting broker.” 28 Pac. L.J. 671 (1997). Therefore, to protect the public, a discovery of defects should be left to the professional inspectors, not the real estate agent. In circumstances in which there are no suspicious conditions and no specific inquiries by the buyer, the real estate agent should have no duty to discover defects or verify representations. See, Harkala v. Wildwood Realty, 558 N.E. 195, 201 (Ill. App. 1990) (“nothing in the record suggests that the brokers should have been looking for termite problems or damage when neither the sellers nor the appearance of the home gave evidence of infestation.”).
Some advocate holding real estate agents strictly liable for any conceivable property defect or inaccurate representation, all in the name of protecting the “ignorant” public. However, rather than protecting the public, such a view adds layers of litigation, paperwork, and cost to the already complex and expensive process of buying or selling a house. Such a view would also require an Agent to act as a professional home inspector, without the necessary training or education, which is impractical and unreasonable.
real estate broker has the ability to conduct a diligent search for ____
1The Arizona Court of Appeals in Aranki v. RKP Investments, Inc., 194 Ariz. 206, 979 P.2d 534 (App. 1999) held that the listing broker is not liable to the buyers for passing along information from the seller without proof that the listing broker knew or should have known that the information might be false. Therefore, at common law, the listing broker has no duty to the buyer to verify such information absent a “red flag” indicating the information is inaccurate.