Material facts and your opinions – liability exposure minimized

The duty owed to clients

A seller’s broker and their agents have a special fiduciary agency duty, owed solely to the seller, to diligently market the listed property for sale. The seller’s agent owes a prospective buyer and their agent a limited, non-client general duty to voluntarily provide critical factual information on the listed property when they first seek additional property information — the conduct which commences negotiations.

What is limited about the general duty is not the extent or detail the seller’s agent undertakes to provide property information for prospective buyers. Rather, it sets forth a minimal quantity of fundamental information and data about the listed property the prospective buyer or their agent are to be handed before the seller enters into a purchase agreement.

In the pursuit of transparency in property information between sellers and buyers, the seller’s agent is obligated to voluntarily inform prospective buyers about the fundamentals of the listed property. The public policy here is to eliminate asymmetry and power relationships by requiring seller’s agents to create a level field of knowledge between seller and buyer and their agents when marketing a property.

Thus, the seller’s agent is severely limited in their ability to engage in any conduct which exploits the prospective buyer’s lack of knowledge about property conditions.

The seller’s agent may not:

• deliver less than the minimum level of information to notify the buyer on material facts affecting the property’s value;
• give unfounded opinions or deceptive replies in response to inquiries; or
• stifle inquiries about the property in a vigorous pursuit of the best financial advantage possible for the seller or themselves.

Gathering facts on adverse features

The methods for gathering adverse facts about a property’s fundamental characteristics require the seller’s agent to actively take steps to make specific disclosures and state the source of the information when marketing a one-to-four unit residential property for sale.

These actions include:

• conducting a competent visual inspection of the property to observe conditions which might adversely affect the market value of the property and enter them on the Transfer Disclosure Statement (TDS) when not already noted by the seller or inconsistent with the seller’s disclosures [See RPI Form 304; Calif. Civil Code §2079];
• providing the seller with statutory forms at the listing stage for the seller to prepare and the agent to include in the marketing package to assure the seller complies with the seller’s duty to deliver statements to prospective buyers;
• reviewing and confirming information and data in the seller’s disclosures are consistent with information and data known to the seller’s agent, and if not, clarifying or disclosing uncertainty about the information to the seller and the prospective buyer;
• advising the seller on risk-avoidance procedures by recommending they obtain a home inspection to reduce the exposure to claims by a buyer who might discover deficiencies in the property not known to the seller or the seller’s agent, or worse, known and not disclosed prior to acceptance of a purchase agreement, and make a demand on the seller (and their broker) to correct the defects before closing or reimburse the buyer for costs incurred after closing to correct them; and
• responding to the prospective buyer’s or their agent’s inquiries about any adverse conditions relating to any aspect of the property with a full and fair answer of related facts known to the seller’s agent, and doing so without suppressing further investigation or inquiry by the buyer or their agent since the inquiry itself makes the condition a material fact about which the prospective buyer wants more information before completing negotiations or acquiring the property.

When an opinion becomes a guarantee

The statutory duty a seller’s agent owes prospective buyers and their agents to disclose facts about the physical condition of a listed one-to-four unit residential property is limited to their prior knowledge about the property and observations while conducting their mandatory visual inspection.

Occasionally, a buyer will ask an agent what they “believe,” “contemplate,” “anticipate” or “foresee” will occur if they acquire a particular property.

An honest response to such questions without further investigation is naturally limited to the agent’s knowledge and expertise on the subject. The opinion given will always be speculation, based on the agent’s observations, knowledge and beliefs about the likelihood an event or condition will occur in the future. Thus, the agent’s statements will be either:

• couched in words such as “anticipate,” “estimate,” “predict” or “project,” denoting their statement is an opinion about an uncertain future event; or
• worded as an assurance the events and conditions, as presented, will occur — a response equivalent to a guarantee.

The difference between the wording used by an agent to express an opinion versus the wording for a guarantee exposes the agent to liability when:

• the buyer acts in reliance on the information by making an offer to acquire property or eliminating a contingency; and
• the event or condition fails to occur.

In an opinion, the event or condition expressed:

• is not a factual representation;
• has not occurred; and
• does not exist at the time the opinion is given.

Alternatively, a fact is an existing condition:

• presently known by the agent; or
• knowable due to readily available data or information.

Facts are the subject of disclosure rules, not the rules of opinion. However, “guesstimates” and wishful assumptions are not opinions as they are unreasonably held by the agent.

Special circumstances may impose liability

An opinion is a belief honestly held. An opinion given is based on a reasonable, although sometimes faulty, analysis by the agent about property information known or readily available. The opinion does not by itself create any liability if the event does not occur.

However, several special circumstances may create an environment which raises an agent’s opinion to the status of a misrepresentation, when a projected event does not occur.

When special circumstances exist, the broker and their agent are exposed to liability for the losses caused by the failure of the predicted event, activity or condition to occur.

Special circumstances which may cause a failed prediction to be an actionable misrepresentation include:

• an opinion given by an agent to a person they owe a special duty of disclosure, such as between the seller’s agent and the seller or the buyer’s agent and their buyer [Ford v. Cournale (1973) 36 CA3d 172];
• an opinion given to a buyer by a seller’s agent who holds themselves out as specially qualified or possessing expertise about the subject matter of the transaction [Pacesetter Homes, Inc. v. Brodkin (1970) 5 CA3d 206];
• an opinion given by a seller’s agent or seller who claims they have superior knowledge on the subject matter, implying they have inside information not available to the buyer [Borba v. Thomas (1977) 70 CA3d 144]; or
• an opinion given to a buyer by a seller’s agent who could not honestly hold or reasonably believe the truth of their opinion due to facts known or readily available to them. [Cooper v. Jevne (1976) 56 CA3d 860]

Conclusions drawn from opinions

An opinion given by a seller’s agent predicting the future occurrence of an event when the buyer is aware of the relevant facts supporting the agent’s opinion does not impose liability on the seller’s agent for erroneous conclusions.

A buyer who has knowledge of and equal access to the same information relied on by the seller’s agent as the source of their opinion cannot later claim they acted in reliance on the seller’s agent’s opinion. This is especially relevant when the buyer has sufficient time to conduct their own independent investigation to ascertain the accuracy of the agent’s opinion.

Opinions of the buyer’s broker 

A seller’s broker and their agent have only a general duty to deal honestly and in good faith with a prospective buyer. As for a buyer, the seller’s agent’s opinions are those of an adversary.

Thus, a seller’s agent’s opinion cannot be reasonably relied upon by a prospective buyer as having a high probability of occurring, unless special circumstances exist.

In contrast, a buyer’s broker and their agent have a special duty to handle a buyer with the same fiduciary level of care and protection a trustee exercises on behalf of their beneficiary.

This special duty a buyer’s agent owes to their buyer raises their opinion given to the buyer to a higher level of reliability than had the same opinion been expressed by a seller’s agent acting solely on behalf of a seller. Thus, as the buyer’s fiduciary, the opinion of the buyer’s agent becomes an assurance the condition or event which is the subject of the opinion will occur, unless the buyer’s agent conditionalizes their opinion.

A buyer’s agent who gives the buyer their opinion needs to take steps to assure the buyer investigates and expertly analyzes relevant information to confirm their opinion and keep it from becoming an actionable assurance if the event fails to occur as predicted. Further, to mitigate these risks, a further-approval contingency provision covering the condition or event that is the subject of the opinion needs to be included by the buyer’s agent in any offer made by the buyer. [Borba, supra]

Expertise of the broker or agent 

Agents often hold themselves out as experts with superior knowledge about a particular type of transaction, such as high-end residential properties, apartment projects, or industrial buildings. Prospective buyers or tenants, aware of a seller’s agent’s specialty, often ask the agent for their opinion about some anticipated future use or operation of the property.

Due to an agent’s experience, special training and education, seller’s agents may find their opinions are given extra weight by a buyer. An agent’s special qualifications suddenly become reasonable justification for the buyer to rely on their opinion as an assurance the predicted event, activity or condition will be experienced as stated. Thus, a prudently risk-averse agent will express their opinion as only their belief or thought.

Inducing reliance by assurances 

All agents give opinions to buyers. However, when the opinion is coupled with advice expressing no further need for the buyer or others to investigate and confirm the prediction, the opinion is elevated to the level of a guarantee.

The level of assurance equivalent to a guarantee also arises when the buyer indicates they are relying on the agent to:

• analyze a qualifying property to determine the property’s ability to be used or operated as the buyer has indicated; and
• advise on whether the property is suitable and will meet the buyer’s expectations.

Further, any affirmative activities or statements of any agent designed to suppress the buyer’s inspection of the property are considered assurances which make the conclusion drawn in the opinion the equivalent of a fact.

Facts not supporting the conclusion 

An agent’s opinion is to be honestly held when giving the opinion if they are to avoid liability when the predicted event or condition does not occur.

For an agent to hold an honest belief, the opinion is to be based on a due diligence investigation and knowledge of all readily available facts which have a bearing on the probability of the event or condition occurring.

When facts affecting the conclusion drawn by the agent are known or readily available to the agent, the test of an honestly held opinion is whether the agent giving the opinion should have known better than to give such an opinion.

An agent who fails to conduct a due diligence investigation to determine the facts before expressing an opinion, which an investigation might have influenced, is liable for their opinion when the event fails to occur. The agent is liable no matter their wording to limit the prediction to a mere speculative opinion.

Without first having the facts on which to base an opinion, the agent’s opinion is either an unfounded guess or an unreasonable assumption.

Estimates as projections or forecasts 

Nearly every transaction offers agents the opportunity to provide estimates for their clients or the other principals involved. In practice, estimates may be part of the services provided. Estimates include:

• approximations;
• predictions;
• pro-forma statements;
• anticipated expenditures; and
• contemplated charges.

Estimates relate to income and/or expenditures, such as exist in:

• seller’s net sheets [See RPI Form 310];
• buyer’s cost sheets [See RPI Form 311];
• operating cost sheets for owner-occupied properties;
• Annual Property Operating Data Sheets (APODs) on income properties [See RPI Form 352];
• loan origination or assumption charges;
• lender impounds;
• rent schedules (rolls) [See RPI Form 352-1];
• repair costs for clearances; and
• any other like-type predictions of costs or charges.

Estimates by their nature are not facts. The amount estimated has not yet actually occurred, the requisite for having a fact. The amount estimated will become certain only if it occurs in the future. The amount actually experienced is unlikely to be identical to the amount estimated.

A document entitled an “estimate” of a future expectation is typically based on the actual amount currently being experienced by the seller. Further, estimates are expected to be fairly accurate in amount, not the product of guesswork or assumptions. Words used in titles such as “contemplated,” “pro-forma,” “anticipated” or “predicted” indicate something less than an accurate estimate, and provide less basis on which a buyer can rely than had they been titled “estimated.”

Making projections

Opinions voiced by agents about an income property’s future performance are either projections or forecasts.

A projection is prepared by a seller’s agent on an income property to represent its annual operations. The data is set out in an APOD sheet handed to prospective buyers to induce them to purchase the property. The data entered on the APOD may be a projection based exclusively on the income and expenses actually incurred by the owner/seller of the property during the preceding 12-month period. [See RPI Form 352]

The amounts experienced by the seller during the past year are projected to occur again over the next year. However these amounts need to be adjusted by the agent for any trends in income and expenses reflected by information known or currently available to the agent.

No estimations, contemplations or figures other than those experienced by the owner are to be used as a basis to prepare a projection, except for adjustments to reflect changed conditions which are known, or should be known, due to facts readily available to the agent.

Conversely, a forecast requires the knowledge and analysis of an anticipated change in circumstances which will influence the future income, expenses and operations of a property. These anticipated changes are distinct from trend factors used for projections.

Forecasts anticipate future changes in income and expense the preparer of the forecast believes will probably occur under new or developing circumstances, such as rent increases up to current market rates or new construction adding to the supply of competing income properties.