Honest disclosure key to reducing brokers' liabilities

Randell Wallace is a partner at Lathrop & Gage in Springfield, Mo. and is a member of the firm's real estate, financial institutions and corporate practice groups. Don Dagenais is a partner at Lathrop & Gage in Kansas City and practices real estate law.

What's the primary job of a real estate broker or salesperson hired by a customer to sell a piece of real estate? To sell the property, of course. A broker's responsibility is to identify the potential class of purchasers; attempt to reach them through listing services, contacts with other brokers, locating companies needing additional real estate, advertising, etc.; and then to try to focus on an interested party and negotiate a deal.

The real estate contract itself will be between the seller and the buyer, the broker should have little involvement in the actual sale except to assist with the arrangements and collection a commission check.

When the property is found to be defective, however, the courts have sometimes held the broker accountable to an extent he or she never anticipated when the original listing was taken.

It's important for brokers to know that in recent years, court decisions indicate that brokers are under several duties of which they should be aware.

Brokers cannot lie. If a broker knows something negative about a piece of property and is specifically asked about it, he has to tell the truth. Covering up or lying about a property defect is an invitation to trouble. This is legal fraud.

Brokers cannot misstate the extent of their knowledge. If the buyer asks the question and the broker knows something about the answer, he cannot say he doesn't know. Or, conversely, if a buyer asks a question to which he does not know the answer, he cannot say that he does.

A broker cannot stand by and let the seller lie. If he knows a seller is giving a buyer bad information, he must correct the misstatement, or else be an accomplice in the seller's fraud.

For many years, brokers felt themselves to be immune from suit because, after all, they were merely agents. It was the parties themselves, not the brokers, who had the contractual obligations. Recent cases, however, held that a broker may have duties to both parties. This is particularly true where the buyer is unsophisticated. The broker cannot act to a party's detriment contrary to the party's expectations, no matter how unfounded those expectations may be.

These principles sound abstract, but consider their real-life implications: A few years ago, a California broker was held liable to some buyers for failing to disclose that a house that the broker was listing for sale had been the scene of a gruesome murder a few years earlier.

The innocent out-of-town buyers were shocked to discover that fact in conversations with neighbors, a few days after they had closed. Guess who was sued and found liable? The broker. (Of course, this case might have a different outcome in Missouri, where a statute protects a broker from liability for not disclosing that a property was such a "psychologically impacted" property.)

Suppose a broker is asked a question to which he or she has no answer. A few courts have held that a buyer's inquiry creates an obligation on the broker's part to investigate and find out the answer. These cases mostly focus on the sophistication of the buyer if the buyer is an experienced purchaser with his or her own resources of information, the duty on the broker may be minimal. If the buyer is unsophisticated and inexperienced, however, the broker will be under a greater duty to help the buyer ascertain the true facts.

In 1994 an illustrative case arose in our neighboring state of Kansas involving a house and farm property. The broker was asked about the quality of well water to the house, and made a casual assurance that an innocent buyer took as truth, only to discover later that the water quality was poor.

The buyer sued the broker, and recovered damages on the ground that the broker made a "negligent misrepresentation," or was negligent in making a false statement upon which another relied.

A 2000 Arizona case represented the flip side of this problem. The broker was representing a buyer who fell into financial difficulties between the signing of the contract and the closing of the deal. The broker did not disclose anything to the seller. The buyer had insufficient funds, and could not complete the purchase. The seller, who was in default on the mortgage loan, lost the property in foreclosure. The seller's only hope to save the property had been a property sale to this particular buyer.

The seller sued the broker for the loss of his property, claiming that it was caused by the broker's nondisclosure, which thereby prevented the seller from seeking another buyer. The broker pointed out that the seller could easily have found out this information for himself by checking the buyer's credit, but the court held that the fact that the information is available through other means does not relieve a party (in this case, the broker) from its obligation to disclose. The broker was held liable.

In another 2000 case involving financial disclosures, an attorney for a landlord did not disclose to the tenant the landlord's financial difficulties during a lease negotiation. The tenant leased the property, but ended up being evicted when a prior mortgage on the real estate was foreclosed.

The tenant sued the landlord's attorney for the substantial sums it lost on leasehold improvements and the like. The court held the landlord's attorney liable to the tenant for failing to disclose his client's financial troubles.

This last case involved an attorney rather than a broker, but would surely apply to brokers in the same situation (perhaps even more so, because brokers, unlike attorneys, are not bound by strict duties of confidentiality).

What are the lessons here? To be honest, forthright, and to err on the side of over-disclosure if necessary. The broker may lose a deal here and there, but a lost commission will pale to insignificance beside the amount of a court judgment if the broker is found liable for fraud or complicity in it. Broker beware!