This two-part article series analyzes the due diligence obligations of the seller’s and buyer’s broker.
Part II of this Brokerage Reminder series describes the duties owed a buyer by the buyer’s agent and the seller’s agent.
For insight into the agency duty a seller’s agent owes to their seller, and the due diligence to be performed under an exclusive listing, see Part I of this Brokerage Reminder series.
Advice and its consequences
In a real estate transaction, brokers and their agents need to be certain who their client is. Likewise, agents need to determine who is not their client, but is a customer with whom the broker is directly negotiating or who is represented by another broker. The seller’s broker only owes a customer a general duty to deal fairly and honestly.
A seller’s broker and their agents have a special fiduciary agency duty owed solely to the seller who has employed the broker. The fiduciary agency duty requires the broker or agent to diligently market the listed property for sale. The objective of this employment is to continually and conscientiously work to locate a prospective buyer who is ready, willing and able to acquire the property on the listed terms.
On locating a prospective buyer, either directly or through a buyer’s agent, the seller’s agent owes the prospective buyer a limited, non-client general duty to voluntarily provide substantive information affecting the value of the listed property, collectively called disclosures.
The information disclosed by the seller’s agent need only be sufficient in content to place the buyer on notice of material facts which may have an adverse effect on the property’s value or the buyer’s use of it.
Thus, the disclosure obligations of the seller’s agent to voluntarily inform prospective buyers about the fundamentals of the listed property limit the seller’s agent’s ability to exploit the prospective buyer. The seller’s agent may not:
- deliver less than the minimum level of information to put the buyer on notice of the property’s fundamentals for determining its value;
- give unfounded opinions or deceptive responses when replying to the buyer’s inquiries; or
- stifle buyer inquiries about the property in the pursuit of the best financial advantage obtainable for the seller (or the seller’s agent).
The passthrough of filtered information
The statutory duty a seller’s agent owes to prospective buyers to disclose facts about the physical condition of a one-to-four unit residential property is limited to their:
- prior knowledge about the property; and
- observations made while conducting their mandatory visual inspection.
To complete the disclosure process, the seller’s agent filters property information provided by the seller before it is provided to the prospective buyer.
Accordingly, all property information received from the seller is reviewed by the seller’s agent for inaccuracies or untruthful statements known or suspected to exist by the seller’s agent. Corrections or contrary statements by the seller’s agent necessary to set the information straight are entered on the disclosure forms before the information is used to market the property and induce prospective buyers to purchase, called fair and honest dealings.
The extent to which disclosures about the physical condition of the property are to be made is best demonstrated by what the seller’s agent is not obligated to provide. Everything else adversely affecting value and known to the seller’s agent are to, as a matter of law, be brought to the attention of prospective buyers.
No duty under the “dumb agent” disclosure rules
A seller’s agent on a one-to-four unit residential property owes no affirmative duty to a prospective buyer to gather or voluntarily provide any facts unknown to the seller’s agent about:
- the property’s title conditions, consisting of encumbrances such as easements, CC&Rs, legal descriptions, trust deed provisions, etc.;
- the operating expenses and any tenant income the buyer will experience during ownership, such as utilities and property taxes;
- the zoning or other use restrictions which may affect the buyer’s future use of the property, except for the existence of industrial zoning which affects the property, and nearby military ordnance locations;
- the income tax aspects of the buyer’s acquisition of the property, such as limitations on interest deductions;
- the suitability of the property to meet the buyer’s objectives in the acquisition; and
- information or data on any mixed use of the property, such as acreage included in the purchase for use as subdividable lands, groves or other farming operations, or for use for tenant income or as a vacation rental.
No duty to advise prospective buyers
Further, the seller’s agent owes no duty to prospective buyers to:
- give advice;
- make recommendations;
- offer suggestions;
- comment on the extent of any adverse facts disclosed;
- state an opinion;
- explain the effect on the buyer of any facts about the property’s physical, natural or environmental conditions which have been provided by the listing agent; or
- explain the consequences of the customer’s failure to further investigate or analyze adverse facts sufficiently disclosed by the agent to put the buyer on notice of the condition.
However, when asked by the prospective buyer or buyer’s agent about any aspect, feature or condition which relates to the property or the transaction in some way, the seller’s agent is duty-bound to respond fully and fairly to the inquiry. The response is to include material facts known to the seller’s agent about the subject matter of the inquiry and not contain misleading statements.
Distinguished from advice due from a buyer’s agent
Conversely, the buyer’s broker and their agents have a duty to care for and protect the buyer’s best interests.
The buyer’s agent, not the seller’s agent, is to determine what due diligence efforts are necessary to ascertain whether the facts disclosed by the seller’s agent interfere with the buyer’s expected use and enjoyment of the property.
A buyer is entitled to far more assistance from their agent than the naked suggestions or recommendations contained in preprinted advisory disclosures about the availability of various enumerated services. The duty of the buyer’s agent goes well beyond the seller’s agent’s limited fundamental factual disclosure obligations they owe to the buyer and the buyer’s agent.
Here, the buyer’s broker and their agent limit their use of an advisory statement of recommended investigations to that of a checklist of activities to be considered. From this checklist, the buyer’s agent is to identify those services they believe the buyer needs to undertake for the buyer to best protect their interests in the proposed transaction.
More importantly, services the buyer’s agent has reason to believe the buyer needs to engage in are made the subject of contingency provisions included in the purchase offer. Thus, the buyer’s agent provides their buyer with the opportunity to investigate and analyze the agent’s concerns prior to closing. If the investigation discloses unacceptable conditions, the buyer may cancel and avoid the transaction.
For example, a buyer’s agent has an affirmative duty to protect their buyer by pointing out why a recommended activity needs to be undertaken when the activity may uncover a situation which, if it exists, is to be dealt with before closing.
Part I of this Brokerage Reminder series discusses the agency duty a seller’s agent owes to their seller, and the due diligence to be performed under an exclusive listing.