A seller’s broker listed a single family residence (SFR) encumbered by liens in amounts exceeding the asking price. A prospective buyer inquired about the property and the seller’s broker responded but did not disclose his listed property was encumbered by liens which affected the seller’s ability to sell and convey the property at the asking price. The prospective buyer made a cash-to-new-loan offer on the property, which the seller rejected. The seller’s broker then prepared a counteroffer on behalf of the seller to bargain for a better price. The seller’s broker did not disclose in the counteroffer that the balance due on the liens exceeded the contract price, nor did he include a contingency provision in the counteroffer allowing the seller to cancel in the event the lenders would not accept the net sales proceeds in satisfaction of their liens. The buyer accepted the counteroffer. Relying on his right to acquire the seller’s home, the buyer sold his home and incurred expenses. The seller’s broker later disclosed the clouded title condition to the buyer in a preliminary title report (prelim) containing lien information. Ultimately, the seller was unable to close escrow as agreed since the lenders would not accept the seller’s net sales proceeds in full satisfaction of their trust deed liens. The buyer made a demand on the seller’s broker for his money losses, which the broker rejected. The buyer claimed the seller’s broker was liable for his losses since he had a duty as a licensed real estate broker acting as the seller’s listing agent to disclose the existence of liens encumbering the property when the loan amounts are in excess of the agreed-to price and do so prior to acceptance of the offer. The seller’s broker claimed he was not required to disclose the status of the seller’s title condition as encumbered with mortgage liens prior to the acceptance of an offer since to do so would require the broker to breach his fiduciary duty owed to the seller by revealing confidential financial information. A California court of appeals held the seller’s listing broker is liable for the buyer’s losses due to his failure to disclose the existence of liens on the property with balances exceeding the purchase price, and do so prior to acceptance of an offer, since a seller’s listing broker has a general duty owed to prospective buyers before an acceptance occurs to disclose information regarding risks that may affect the seller’s ability to perform on conditions as disclosed. [Holmes v. Summer(2010) 188 CA4th 1510]
Editor’s note — Listing agents! You better start Holmes-proofing yourself and your seller. Holmes v. Summer is the agency case of the decade — the legacy of boom-time attitudes. The only way for you, as a listing agent, to Holmes-proof yourself and your seller: comply with your duty to put prospective buyers on notice of conditions known or information readily available to you as the listing agent that might affect the buyer’s decisions regarding the listed property by preparing and handing the buyer a complete marketing package — and do so before your seller accepts an offer. The property aspects to be disclosed in a marketing package include:
- physical condition (the seller’s transfer disclosure statement (TDS) and a home inspection report);
- title condition (property profile information and documents);
- property operations (monthly ownership expenses, any rents);
- property location (natural hazards and neighborhood security); and
- environmental conditions (man-made conditions hostile to human sensitivities).
Although all listing agents have the general duty to provide buyers with these disclosures before an offer is accepted, the buyer’s selling agent must be diligent and ensure the listing agent follows through with his duty to “Holmes-proof” himself and his seller.