This article reviews a broker’s use of unverified information when marketing real estate.
Sold “as-is” is a prohibited disclaimer – sell property “as-disclosed”
A broker and his sales agents must disclose the physical nature and condition of a property when soliciting an offer to purchase.
Brokers and agents have a duty to timely disclose to all parties involved in a real estate transaction any significant physical aspects of a property that may affect the property’s market value.
To comply with this duty, the listing broker (or seller) of a one-to-four unit residence must provide the buyer with a Transfer Disclosure Statement (TDS) prior to making an offer and disclose all defects then known to the broker or the seller. [Calif. Civil Code §§1102 et seq; See first tuesday Form 304 accompanying this article]
To be effective, property disclosures must be made to the buyer before offers are prepared and prices agreed to. If not, the buyer may:
- Cancel on discovery of the broker’s failure to previously disclose the property’s condition. OR
- Close escrow and seek recovery of the costs to cure the belatedly disclosed and previously known defects, unless a contingency exists in the purchase agreement for further approval of the property’s condition.
Any attempt to have the buyer waive his right to the mandated property disclosure statement is unenforceable. Failure to disclose property conditions is against public policy. [CC §1102]
The seller of one-to-four unit residential property must always prepare and deliver a Transfer Disclosure Statement (TDS).
Further, a broker has a general duty to all parties in any type of sales transaction to disclose his awareness of any property defects at the earliest possible moment.
For example, a seller’s listing broker is aware the residence fails to conform to building and zoning regulations, a defect that might affect the price a buyer is willing to pay.
The broker knows a buyer who is interested in making an offer but is not aware of the building and zoning violations and might reconsider the price he is willing to pay for the property if he learns of the violations. The broker decides not to disclose his knowledge of the zoning defect.
In an attempt to cover the omission, the broker writes an “as-is” disclaimer provision into the purchase agreement, stating the buyer accepts the property in an as-is condition and has satisfied himself as to the property’s conditions.
After the buyer acquires the property, the city refuses to provide utility services to the residence due to the building and zoning violations.
The buyer demands his money losses from the broker, claiming the broker breached his agency duty to disclose the building and zoning violations he was aware of.
The broker claims the buyer waived his right to collect money damages when he signed the purchase agreement with the “as-is” disclaimer (as is done with car sales).
Does an “as-is” disclaimer shield the broker from liability for the buyer’s losses caused by the building and zoning violations?
No! The listing broker has a general duty, owed to all parties to a transaction, to disclose all property conditions that affect the value and marketability of the property which, due to an inspection, were or should have been known to the broker. This duty is not excused by writing an “as-is” disclaimer into the purchase agreement in lieu of making the factual disclosures. [Katz v. Department of Real Estate (1979) 96 CA3d 895]
Finally, public policy prohibits the sale of one-to-four unit residential property “as-is,” causing most form publishers to eliminate boilerplate “as-is” clauses. [CC §1102.1]
Real estate size and boundaries must be accurately represented
Consider a broker who is the exclusive agent of a buyer in the purchase of a one-to-four unit residential property. Without first receiving a survey or title report to verify his representations, the broker advises the buyer about the property’s acreage and the extent of an easement on the property. A further-approval contingency calling for the buyer to confirm the representations is not included in the purchase agreement. The buyer purchases the property, relying on the broker’s size and easement representations of the property.
More than two years after closing, the buyer discovers the acreage and easement representations made by the broker are false. The property is worth less than the price paid.
The buyer seeks to recover the difference in property value from the broker. The broker claims the buyer’s recovery is barred by a two-year statute of limitations for breach of a broker’s agency duty to inspect and disclose defects on one-to-four unit residential property.
The buyer claims his action is not time-barred since the two-year statute of limitations only applies to negligent misrepresentations, not to the recovery of losses caused by the broker’s intentional misrepresentations about facts related to the property’s physical condition.
Here, the buyer is entitled to recover his loss in property value. The broker misrepresented the property’s size and easement without first confirming what they consisted of, an intentional misrepresentation. The two-year statute of limitations only applies to a broker who inspects the property and, as a result of the inspection, negligently fails to disclose facts that a reasonably diligent on-site inspection would have revealed.
The broker made representations as fact without first verifying the information or advising the buyer of his source of information and that the information was not verified. Thus, a three-year statute of limitations for intentional misrepresentation applies, beginning on the date the buyer discovers the falsity of the broker’s representation. [Field v. Century 21 Klowden-Forness Realty (1998) 63 CA4th 18]
Now consider a broker who markets real estate through a Multiple Listing Service (MLS) publication. The property’s square footage is listed in the MLS publication as an approximation based on unverified information. The broker conducts a visual inspection of the property.
A buyer enters into a purchase agreement for a price based on the square footage printed in the MLS publication. The purchase agreement includes a disclaimer that states the MLS marketing information is an approximation and advises the buyer to obtain an appraisal of the property. A further-approval contingency provision is not included in the purchase agreement that allows the buyer to confirm the disclosure or cancel the transaction.
The buyer closes escrow without first obtaining an appraisal of the property as advised. Later, the buyer discovers the property has significantly less square footage than approximated in the MLS marketing information. The price paid for the property exceeded the value received.
The buyer seeks to recover his lost property value from the broker, claiming the broker should have known based on his visual inspection that the square footage listed in the MLS marketing information was an exaggeration, not an approximation.
The broker claims he is not liable for the buyer’s reduction in property value since the buyer has a responsibility to determine the exact square footage and property value before closing, as advised in the purchase agreement.
However, the broker is responsible for the difference in property value due to his misrepresentation of the square footage that was stated as an approximation in the MLS marketing information. The broker should have known his representation of the square footage was an exaggeration that would be relied on by a buyer to set the price for the property. [Furla v. Jon Douglas Company (1998) 65 CA4th 1069]
Further, buyers and sellers have no duty to comply with a broker’s advisory disclaimer. A contingency to be satisfied by an appraisal should have been provided, not a disclaimer.
Knowingly misrepresenting potential use
A broker and his agents must accurately represent the title restrictions (CC&Rs) and potential use (zoning) of real estate to a prospective buyer or tenant.
For example, a seller’s residence has a detached garage which has been converted into an apartment. The seller lists his property for sale with a broker.
The seller built and rents out the garage apartment in violation of zoning ordinances. The broker does not visually inspect the property to assure himself the apartment is up to building codes nor does he confirm that the rental activities comply with zoning ordinances.
The broker induces a buyer to pay a higher price than the residence alone is worth, representing as an incentive the existence of rental income from the apartment. The purchase agreement does not contain a further-approval contingency to confirm that the rental income will be available, and if not, to cancel the agreement.
After escrow closes, the city notifies the buyer the garage apartment is being rented in violation of zoning ordinances. The buyer is forced to quit renting out the apartment, suffering a loss in value of the property.
Here, the broker is liable for the part of the purchase price the buyer paid in excess of the fair market value of the residence. The broker failed to determine the accuracy of his rental income disclosure by first determining whether zoning conditions limited the buyer’s use of the property. [Barder v. McClung (1949) 93 CA2d 692]
In another example, an owner contacts a broker to arrange an exchange of his property for other real estate he seeks to purchase.
The broker locates replacement property, but does not disclose his knowledge that the second trust deed encumbering the replacement property contains a due-on-sale clause that allows the trust deed loan to be called due and payable after the closing of a sale.
The owner agrees to take title to the replacement property subject to the existing second trust deed. No contingency exists for the further approval of a beneficiary statement and trust deed conditions or cancellation of the agreement.
After escrow closes, the second trust deed lender discovers the transfer to the owner and calls the loan under the due-on-sale clause.
The owner fails to pay the loan balance that is now due on the second trust deed. Ultimately, the owner loses the property at the second trust deed lender’s foreclosure sale.
Here, the broker is liable for the owner’s loss of equity due to the foreclosure. The broker failed to disclose his knowledge about the existence and legal consequences of the due-on-sale clause in the second trust deed taken over by the owner. The broker’s liability is the value of the equity lost in the replacement property as established by the price he set in the exchange agreement, not the (lesser) fair market value of the property. [Pepitone v. Russo (1976) 64 CA3d 685]
The due-on-sale clause is a title condition that may affect a buyer’s ability to retain ownership and use of the property.
The broker, marketing property other than a one-to-four unit residential property, must determine and disclose to the buyer any use restrictions on the property, such as zoning ordinances, easements, CC&Rs or title conditions, which may interfere with the buyer’s intended use of the property as disclosed to the broker.
For example, a buyer is interested in purchasing undeveloped property for commercial development that is located next to a maintenance yard owned by the state.
The seller’s broker has been previously contacted by the state regarding its intent to acquire the property to expand the maintenance yard when funds for the acquisition become available.
During purchase negotiations, the buyer asks the seller’s broker if the state is interested in the property. The broker informs the buyer the state has no interest in acquiring the property.
The buyer enters into a purchase agreement with the seller. During escrow, the buyer has plans for construction drawn and obtains the necessary permits for development and construction on the property.
Just before escrow closes, the buyer discovers the state intends to acquire the property – by condemnation if necessary.
The buyer proceeds to take title to the property and later grants the property to the state in a condemnation proceeding.
Here, the broker is liable for the out-of-pocket losses incurred by the buyer for his lost use of the property, as well as punitive damages for his intentional failure to disclose the state’s interest in acquiring the property. The buyer relied on the broker’s information regarding the state’s activities when he determined whether the property was suitable for his future development plans. [People v. Grocers Wholesale Co. (1989) 214 CA3d 498]
Consider a buyer who makes an offer to purchase a residence. The broker is aware of a large structural crack in the foundation of the residence that is not apparent on a visual inspection. The broker delivers a “clean” condition of property statement (TDS) to the buyer stating the residence has no defective conditions.
More than two years later, the buyer discovers the crack. The buyer claims the broker is liable for the cost of repairing the foundation since he knew of and failed to disclose the crack in the foundation. The broker claims the buyer’s action is barred by the two-year statute of limitations for misrepresentation since he only owed the buyer the statutory duty to disclose defects which would have been revealed by a visual inspection.
Is the broker liable to the buyer for intentionally misrepresenting the existence of the crack in spite of the two-year statute of limitations for negligent misrepresentations?
Yes! The buyer’s claim is not time-barred under statutes requiring the broker to visually inspect and disclose observable defective property conditions. Liability is imposed on the broker for his intentional misrepresentation, by omission, of his actual knowledge of the condition of the property when he stated defective conditions did not exist on the property when he knew they did. [Williams v. Bennet Realtors (1997) 52 CA4th 857]
Marketability disclosure
A broker and his agents must advise a prospective buyer or tenant of any known facts that will affect the value or desirability of the purchased or rented property.
Four categories of conditions contribute to or detract from the value of property:
- Physical condition of soil and improvements.
- Land use and title conditions.
- Operating income and expenses.
- Location hazards and surrounding area impact.
For example, a buyer seeks property for the purpose of increasing his personal income and wealth.
A broker recommends an apartment complex as the source of additional spendable income and equity buildup for the buyer.
The property’s scheduled rental income is represented to be far greater than its actual income. Additionally, the broker contends the property is in excellent physical condition with no deferred maintenance. It is not.
The broker makes these representations based on information he received from the seller. The broker does not investigate maintenance, expense and income records of the property to check the accuracy of the seller’s representations. More importantly, the broker does not advise the buyer that the seller is the source of the property information and that he has not confirmed the information.
At the urging of the seller, the broker discourages the buyer from inspecting the property.
Relying solely on the broker’s representations as to the operating income and condition of the property, the buyer purchases the property.
After closing, the buyer realizes the operating income is far less than the scheduled income stated on the property operating statement. The buyer discovers tenants are delinquent in the payment of rent and incurs deferred maintenance expenses, all of which seriously reduce the projected net spendable income.
Eventually, the buyer defaults on his trust deed and loses the property in foreclosure.
A broker marketing property as an income-producing investment owes a duty to the buyer to research whether the property produces adequate income to meet expenses. Alternatively, the broker may include a contingency provision in the purchase agreement calling for the buyer to confirm the representations or cancel the agreement prior to closing.
The broker cannot merely pass on the statements made by the seller as to the property’s condition and income and expenses generated by the property. The broker must advise the buyer about the source of the information and the need for further investigation. Thus, the broker is liable to the buyer for the buyer’s lost property value. [Ford v. Cournale (1973) 36 CA3d 172]
A broker analyzes the suitability of income property by preparing or having the seller prepare an Annual Property Operating Data Sheet (APOD) and reviewing it with the buyer. [See first tuesday Form 352]
A completed APOD should be prepared when listing income property and attached to the listing agreement as an addendum signed by the seller.
In addition to income and expense information provided in the APOD, the broker should inspect the property for quality of income, deferred maintenance and desirability of location, as well as check for any title or zoning conditions which might interfere with the buyer’s intended use of the property.
Another fact affecting the value and desirability of the property is the existence of due-on-sale clauses in new or existing trust deeds and whether the lender will call or recast the loan by adjusting rates and rescheduling payments.
A broker has a duty to investigate the accuracy of all representations he makes to buyers or lenders regarding a property’s physical condition, use and operating expenses, unless he discloses the source of his information and the fact he has not investigated or confirmed the representations.
However, a broker of one-to-four unit residential property is relieved of the responsibility of verifying the representations regarding property conditions he receives from others and passes on to buyers as long as the source of information is disclosed to the buyer. The source of information is typically the seller, the seller’s broker or a home inspector. [CC §§2079 et seq.]
For example, a seller’s broker hands a buyer of one-to-four unit residential property a condition of property statement signed by the seller. The statement includes an additional comment by the broker on observable cracks in the walls, noting the seller identified them as cosmetic. The broker does not know they are not just cosmetic.
After closing, the buyer of the property incurs repair costs due to unstable soil. The buyer claims the seller’s broker is liable for the costs since he failed to independently verify the seller’s claims regarding the cracks in the walls. The broker claims he is not liable since he had no duty to verify the seller’s representations of property conditions unknown to him.
Here, the broker is not liable for the buyer’s losses. The broker only has a duty to inspect and disclose material facts observable or known to him, not to independently investigate the unverified claims of the source of his information. [Robinson v. Grossman (1997) 57 CA4th 634]
Public record investigations
Now, consider a buyer who purchases a unit in a common interest development (CID) after receiving literature about the unit’s fair market value and the development’s potential for appreciation in value. The seller of the property does not disclose to the brokers or the buyer the existence of pending litigation between the homeowner’s association (HOA) and the developer of the CID regarding soil subsidence in the common area.
Both the buyer’s broker and the seller’s broker conduct visual inspections of the property. Neither broker discovers any visible defects nor are any defects known to either of them.
After purchasing the property, the buyer learns of the litigation and the soil subsidence in the common areas. The buyer claims the brokers’ failure to discover and disclose the pending litigation and the reasons for it is a breach of their statutory duty to investigate and disclose the condition and marketability of the property. The brokers claim they did not breach their duty to investigate and disclose since they were unaware of both the pending litigation and the soil subsidence.
Are the brokers responsible for their failure to investigate the records and disclose these material facts to the buyer?
No! The brokers of a one-to-four unit sale have no duty to investigate public records and disclose any pending litigation or soil subsidence not known to them. Further, the brokers were unaware of the existence of either the litigation or the soil subsidence. While a broker has a duty to investigate and confirm all representations he makes about a property or provide for the buyer to do so, the broker is not held accountable for representations by sellers which are outside his realm of knowledge. [Padgett v. Phariss (1997) 54 CA4th 1270]
Disclosures by interim title holders
Now consider a broker who acts as a relocation agent. The broker purchases the seller’s one-to-four unit residence and later resells the property to a buyer, as anticipated by himself and the seller.
The broker hands the buyer the seller’s condition of property disclosure that the broker received from the seller. In it, the seller does not disclose the existence of noise conditions in the surrounding area that affect the property’s value. The broker is not aware of the noise conditions and does not add them to the disclosure statement.
On occupying the property, the buyer discovers the undisclosed noise conditions. As a result of the noise, the value of the property is less than the price paid.
The buyer seeks to recover the lost value from the broker who sold him the property. The broker claims he is not obligated to the buyer for the lost value since he was unaware of any noise conditions. The buyer claims the broker is liable for the lost value since he has a duty to investigate and verify the representations made by the seller on the condition of property statement.
Here, the broker is not liable to the buyer for the lost value resulting from undisclosed noise in the area surrounding the property. The existence of the condition was outside the realm of the broker’s knowledge. [Shapiro v. Sutherland (1998) 64 CA4th 1534]
Now consider a buyer’s broker who hands his prospective buyer of a unit in a residential condominium project (CID) a copy of the HOA’s letter. The letter reviews the HOA’s lawsuit against the developer regarding water intrusion in the condominium complex. The broker advises the buyer he has no further knowledge about the litigation and has not conducted an investigation into the background or status of the lawsuit.
After purchasing the property, the buyer discovers water intrusion in his unit that was not noticeable on prior inspections. The buyer claims the broker breached his agency duty to investigate and disclose the existence of the defects since the broker failed to verify the contents of the letter and provide him with a copy of the lawsuit.
However, a buyer’s broker does not have a duty to investigate or deliver documents to the buyer concerning public records if the buyer knows his broker is merely passing on unverified information he received from others. [Pagano v. Krohn (1997) 60 CA4th 1]
