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A Real Estate Broker’s Disclosure Obligations to the Client

A real estate broker’s disclosure obligations to the client arise from the broker’s fiduciary duty to the client, which is imposed by common law. Part of that fiduciary duty is the obligation to make a complete and full disclosure of all material facts that might affect the client’s decision to sell or buy a property. See e.g., Jennings v. Lee, 105 Ariz. 167, 461 P.2d 161 (1969). For example, in Morley v. J. Pagel Realty & Insurance, 27 Ariz. App. 62, 550 P.2d 1104 (1976), the listing broker presented an offer to the seller that provided for carry-back financing, but no deed of trust. The sellers accepted the offer. After the close of escrow, the buyers deeded the property to a third party for cash, defaulted on the note, and went bankrupt. The sellers then sued their broker for failing to inform them that they should require security for the buyers’ performance. The Morley court stated that the broker had a duty to effect a sale for the client on the best terms possible and to disclose to the client all the information the broker possesses pertaining to the prospective transaction. Thus, the broker was obligated to inform the sellers that they should require security for a carry-back. The Court also indicated that a broker should make all explanations commensurate with the education and understanding of the client, and if the broker is unable to give competent advice, the broker should allow the client the opportunity to obtain advice elsewhere.

Obviously, the specific disclosures, advice, and counsel required of the broker depend on the facts of each transaction, the knowledge and the experience of the client, the questions asked by the client, the nature of the property and the terms of sale. The specific disclosures that a broker must make to a client also differ depending on whether the client is the seller or the buyer.

Quick Quiz

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A real broker’s disclosure obligations to the client arise from the broker’s fiduciary duty to the client, which is imposed by common .

Some of the specific disclosure obligations of a listing broker to a seller imposed by common law, as reflected by the Arizona Department of Real Estate (“ADRE”) Commissioner’s Rules, include the obligations to:

  • Disclose all offers. A.A.C. R4-28-802 (B)
  • Disclose any information that the buyer is or may be unable to perform. Mason v. Bulleri, 25 Ariz. App. 357, 543 P.2d 478 (1975); A.A.C. R4-28-1101 (B)
  • Disclose if the broker, broker’s family or a business entity in which the broker has an interest is the buyer. Kimmell v. Clark, 21 Ariz.App. 455, 520 P.2d 851 (1974); A.A.C. R4-28- 1101(E)
  • Disclose (and obtain written consent) if the broker is receiving any compensation, rebate or profit for the transaction. A.A.C. R4-28-1101 (G)
  • Disclose the name of each employing broker receiving compensation from the transaction. A.A.C. R4-28-701 (disclosure required to all parties)

Identifying the disclosure obligations to the seller client is relatively straightforward. Unfortunately, identifying the specifically required disclosure obligations to the buyer client is more problematic and most non-disclosure complaints come from the buyer. Buyer brokerage has only been widely practiced since about 1994. Therefore, few widely accepted specific standards of care or duties have been established in Arizona, or even nationwide. There are proponents of holding the buyer’s broker liable for inspection of the property and discovery of defects, which would then be disclosed to the buyer, ignoring the role of the professional home inspector in the transaction process. These proponents apparently would like to see the litigation rates in Arizona rival that of California, where the real estate industry continues to struggle with the adverse effects of imposing inspection and discovery duties on real estate agents.

Despite some uncertainty, there are identifiable disclosure duties that a buyer’s broker owes to a buyer, such as:

  • Disclose all known material defects existing in the property. A.A.C. R4-28-1101 (B)(3)
  • Disclose any information that the seller is or may be unable to perform. A.A.C. R4-28-1101 (B)(1)
  • Disclose the possible existence of a lien or encumbrance on the property. A.A.C. R4-28-110 (B)(4)
  • Disclose if the broker, broker’s family or a business entity in which the broker has an interest is the seller. A.A.C. R4-28-1101(E)
  • Disclose (and obtain written consent) if the broker is receiving any compensation, rebate or profit for the transaction. A.A.C. R4-28-1101 (G)
  • Disclose the name of each employing broker receiving compensation from the transaction. A.A.C. R4-28-701 (disclosure required to all parties)

Complicating the disclosure issue is the question of whether a broker may rely on the statements of others when disclosing information to the client. In other words, is the broker obligated to independently verify all information provided to the client? The ADRE addresses this issue in Substantive Policy Statement Number 2005.13, which explains the scope of the broker’s duty in this regard:

A licensee is a real estate professional with a fiduciary duty to his or her client to act in the client’s best interests as described in R4-28-1101(I). Reasonable care or competence may include recommending that a client seek professional or technical advice when the matter is beyond the expertise of the agent.

Quick Quiz

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A is a real estate professional with a fiduciary duty to his or her client to act in the client’s best .

Licensees are expected to take reasonable steps to assist their clients in confirming or verifying information under circumstances in which a reasonably prudent real estate professional has reason to question the accuracy of the information being provided in a transaction, or where the client has questioned the accuracy of the information.

This Substantive Policy Statement reflects the obligations imposed by common law.

In addition to referring the buyer to other professionals to assist in investigating and inspecting the property, the broker may also want to provide the buyer with some tools to encourage the buyer to take an active role in the investigation of the property and the verification of information. For example, the buyer may be provided with access to the Buyer Advisory and the ADRE Property Buyer’s Checklist. These documents provide the buyer with a wealth of information and resources to assist the buyer in becoming more informed about the property being purchased.

Disclosure in a real estate transaction is becoming an increasingly complex matter and it encompasses a wide range of issues. However, the following ten guidelines should assist brokers in fulfilling their disclosure obligations and show reasonable care in obtaining and communicating information to the client.

  • If you have knowledge of a material defect, disclose it.
  • If in doubt about whether a fact is a material, disclose it.
  • If you notice a suspicious condition, point it out to the client and recommend an investigation.
  • If you or the client questions the accuracy of information provided about the property, assist the client in verifying it.
  • If the client asks about an aspect of the property, direct the client to a reliable source for the answer.
  • If passing along information, identify its source.
  • Utilize the AAR Seller’s Property Disclosure Statement.
  • Recommend a property inspection by a qualified professional.
  • Educate your clients about their disclosure and investigation duties.
  • Document all your disclosures, verifications and recommendations in writing.

Quick Quiz

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in a real estate transaction is becoming an increasingly complex matter and it encompasses a wide of issues.

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