This article discusses the general duty the seller’s broker owes buyers when marketing one-to-four unit residential property, and how the primary duty of the buyer’s broker to his client goes beyond mere property disclosures.
Let the buyer’s broker beware
A broker lists a condominium unit for sale. The broker is aware other condominium units in the development have suffered water intrusion damage.
The broker conducts a visual inspection of the property, but finds no water damage to the unit.
A buyer is located who is not represented by a broker. The broker informs the buyer of the existence of water intrusion damage in other units.
The broker’s statement on the property’s physical condition is handed to the buyer. The statement discloses the broker’s inspection revealed no water intrusion damage in the seller’s unit.
Before the buyer makes an offer, the broker discloses the homeowners’ association (HOA) has filed a lawsuit against the developer to recover the cost of repairs for water intrusion damage in several units.
The buyer makes an offer to purchase the property. The offer acknowledges the existence of the HOA’s lawsuit and receipt of the condition of property statement, also called a transfer disclosure statement (TDS).
The broker acts as the exclusive agent for the seller, never undertaking an agency duty to advise the buyer and thereby becoming a dual agent.
Later, the broker receives newsletters and minutes from the HOA’s meetings which document the water intrusion problems. The broker also reads the HOA’s complaint against the developer. The documents are not brought to the attention of the buyer.
Escrow closes and the buyer moves into the unit. Later, the buyer discovers water intrusion damage to the unit.
The buyer claims the seller’s broker breached his duty to conduct a reasonably diligent visual inspection of the unit and reveal his findings, since the broker failed to pass on to the buyer the documents concerning water intrusion damage in the development, such as the newsletters, the minutes from HOA meetings and a copy of the lawsuit filed by the HOA.
The buyer claims the seller’s broker, by not passing on the additional documentation, failed to disclose the full extent of the water intrusion damage in the condominium development.
Did the seller’s broker sufficiently inform the buyer of the water intrusion problem?
Yes! The seller’s broker disclosed the essential facts which were sufficient to put the buyer on notice concerning the water intrusion. Once informed of the potential problem, it was the buyer’s duty (or his broker’s) to exercise reasonable care to protect himself. Any additional details concerning water intrusion were readily ascertainable by the buyer on request. [Pagano v. Krohn (1997) 60 CA4th 1]
The seller’s broker
A broker, employed by a seller under a listing to locate a buyer for a one-to-four unit residential property, has a duty to conduct a reasonably diligent visual inspection of the property. On completing the inspection, the broker must disclose to potential buyers any defects observable or known to the broker. [Calif. Civil Code §§2079 et seq.]
However, the visual inspection of one-to-four unit residential property by the seller’s broker and disclosure of his observations excludes:
- areas reasonably and normally inaccessible to the broker;
- areas offsite and surrounding the property; and
- public records or permits concerning title or use of the property. [CC §2079.3]
Further, the one-to-four unit visual inspection requirement eliminates the need for the seller’s broker to investigate and disclose:
- title conditions;
- the economic consequences of owning the property, such as the property’s operating costs; or
- the tax aspects of the transaction.
For example, prior to the codification of the one-to-four unit rule, a seller’s broker could be held liable for failure to advise a buyer about:
- the legal consequences of recorded documents affecting the use of the property [Pepitone v. Russo (1976) 64 CA3d 685];
- the operating expenses and any income [Ford v. Cournale (1973) 36 CA3d 172]; or
- the tax aspects of a sale. [Carleton v. Tortosa (1993) 14 CA4th 745]
Purpose of inspection
The one-to-four unit rule serves only to put the buyer and the buyer’s agent on notice of physical defects in the property which are observable or known to the seller or the seller’s broker.
For example, a real estate broker lists a residence located on a hillside. The property is subject to geological hazards, including a high groundwater level, landslides and a fault line.
A buyer for the property is located. The seller’s broker tells the buyer a neighboring owner has had a problem with water on his property and had to install a pump to handle the high water level. The broker also tells the buyer the neighbor’s property previously suffered landslide damages.
The broker provides the buyer with a geological report regarding the property. The report indicates the property lies within a geological hazard area and is susceptible to landslides and groundwater buildup.
The buyer reviews the disclosures and makes an offer to purchase the property.
The seller’s broker includes a further-approval contingency in the agreement calling for the buyer to further investigate by obtaining a geological report and approving it prior to closing.
The buyer obtains a report stating the property shows signs of instability and confirming the existence of a high groundwater level. The report also notes the house does not show signs of cracking or distress.
The buyer is also informed a back fence was removed since the erosion of soil caused it to slide down the hillside. When asked by the buyer, the seller also discloses the pool is located in the front yard since a fault line runs through the backyard.
During the escrow period, the broker attends a meeting between area homeowners and county officials in which the geological hazards of the area and possible solutions are discussed.
The broker does not disclose the meeting and its discussions to the buyer since nothing new is learned.
Sometime after escrow closes, the residence slides down the hillside, and is condemned by the county as uninhabitable.
Pursuant to a complaint filed by the buyer, the Department of Real Estate (DRE) attempts to revoke the broker’s license, claiming the subject matter of the meeting was a fact that should have been disclosed to the buyer since it would have affected the buyer’s decision to buy.
However, as a licensee, the broker who was the exclusive representative of the seller of one-to-four residential units need only:
- provide the buyer with all existing geological reports;
- advise the buyer of his ability to obtain an independent geological study of the property; and
- disclose groundwater and landslide problems known to the broker which occur on the property or in the neighboring area.
The seller’s broker properly disclosed the geological hazards of the property by alerting the buyer to potential problems. The homeowners meeting was not required to be brought to the buyer’s attention since the meeting was a review of the geological hazards already disclosed to the buyer. Also, the buyer’s independent investigation did not deter the buyer from proceeding with the purchase of the residence.
Thus, the seller’s broker did not violate his limited duty to the buyer to disclose property conditions, and the DRE cannot revoke his license. [Vaill v. Edmonds (1991) 4 CA4th 247]
Beyond observable physical defects and any related information of which the seller’s broker has knowledge, the buyer cannot expect any further disclosure or advice from the seller’s broker who does not become a dual agent, undertaking the responsibility of also being the buyer’s agent.
On one-to-four unit residential property, the seller’s broker need only perform for the buyer those duties imposed by statute. The statutory scheme sets the standards of conduct owed a buyer by the seller’s broker, not the buyer’s broker.
Editor’s note — Aside from the condition of property disclosure, brokers must also hand buyers of one-to-four unit residential property a hazard disclosure when the property is located in:
- a Zone A special flood hazard area designated by the Federal Emergency Management Agency (FEMA);
- an area of potential flooding as shown in an inundation map;
- a very high fire hazard severity zone;
- a wildland area that may contain substantial forest fire risks and hazards;
- an earthquake fault zone; or
- a seismic hazard zone. [CC §1103.2]
The buyer’s broker
Now consider a broker who represents the buyer either as an exclusive agent or as a dual agent. The broker locates rural residential property that is suitable to the buyer.
A water district holds an easement on the property, a fact known to the buyer’>s broker. The broker tells the buyer the easement is for the water district’s use of the driveway without investigating the extent of the easement. No advice is given regarding a further approval contingency to allow for the buyer to investigate and approve or disapprove of the easement prior to closing.
Actually, the easement is more extensive and includes the water district’s right to flood water onto the property, including the area where the residence is located.
Also, the buyer’s broker presents the acreage of the property based on the acreage stated in the multiple listing service (MLS). However, the water district owns a portion of the land represented as belonging to the seller. The broker does not review the preliminary title report prior to closing, nor does he provide for a further approval of the preliminary title report by the buyer.
In addition, the location of the residence violates setback requirements, a fact known to the broker. The broker does not investigate whether permits and variances were obtained, nor does he advise the buyer to do so.
By the time escrow closes, the broker acting as the buyer’s agent has failed to:
- inquire into the scope and nature of the easement;
- explain to the buyer that the buyer could have the title company mark the easement prior to purchase;
- verify the status of permits or variances for the setback violations;
- verify the acreage represented in the MLS; and
- check the preliminary title report to determine the exact acreage of the property and the extent of the easement.
More than two years after closing, the buyer discovers the defects not disclosed by his broker. The defects have reduced the value of the property to below the price paid.
The buyer makes a demand on his broker for the price paid in excess of the fair market value of the property.
The broker claims the buyer’s recovery is barred by the two-year statute of limitations for breach of a broker’s limited duty to visually inspect one-to-four unit residential property and report the findings. The broker further claims a broker marketing one-to-four unit residential property does not have a duty to investigate public records or permits pertaining to title or use of the property.
The buyer claims the one-to-four unit visual inspection statutes do not apply since the broker was the agent representing the buyer, not the seller, and breached a primary agency duty a broker owes his client to investigate or to advise the client to investigate.
Is the buyer’s recovery barred by the two-year statute of limitations which applies to a broker’s limited duty to conduct a visual inspection of the property being marketed?
No! A buyer’s broker owes a primary agency duty to his client to refrain from making representations of facts that affect the client’s decision to buy without informing the buyer the broker is merely passing on information received from the seller or the seller’s broker.
The duty a broker owes his buyer, while acting as an exclusive agent of the buyer or as a dual agent, is outside the property disclosure scheme and is not limited to a visual inspection of the property sold and a disclosure of the observations. [Field v. Century 21 Klowden-Forness Realty (1998) 63 CA4th 18]
A difference in disclosure exists between the limited general duties imposed on the seller’s broker under the one-to-four unit visual inspection rules for marketing the property and the primary agency duty each broker owes his client.
The property inspection rules do not relieve the buyer’s broker of his primary duty to properly advise his client on matters which a prudent buyer would be concerned with on the purchase of real estate.
The buyer’s broker must determine what information his client needs to be able to make an informed decision to buy, and either provide that information to the buyer or advise on the need for more information before the offer to buy is signed and submitted. The broker acting as the exclusive agent of the seller owes no such agency duty to the buyer – the duty being general and limited by statute to his observations and knowledge disclosed in the condition of property statement. [Fields, supra]
However, a buyer’s broker can operate on a “subpar” level by informing the buyer the broker is acting only as a conduit for information received from other sources, and has no independent knowledge of the accuracy of the information and will conduct no investigation into their accuracy.
For example, a broker represents the buyer as an agent in the purchase of a condominium unit.
Other units in the condominium development have been damaged by water intrusion. The homeowners’ association (HOA) has sued the developer for the water intrusion damages.
The buyer’s broker hands the buyer a copy of the HOA’s letter which reviews the lawsuit against the developer.
The buyer’s broker states he has no further knowledge regarding the lawsuit, and has not conducted an investigation into the nature and status of the lawsuit.
The buyer purchases the property and later discovers water intrusion damage in his unit.
The buyer claims the broker breached his agency duty to investigate and disclose the accuracy of information passed on to the buyer since the broker failed to verify the content of the letter and provide the buyer with a copy of the lawsuit.
However, the buyer’s broker is not required to verify the information given the buyer on the lawsuit since the buyer was advised the broker was merely passing on unverified information received from the seller or the seller’s broker.
When the buyer’s broker transmits information upon which the buyer might act, the broker must either:
- verify the information as correct; or
- disclose the source of the information and the fact the information is not verified. [Pagano, supra]
Thus, the buyer’s broker is not required to verify property information received from the seller or the seller’s broker – provided the buyer understands the broker is merely acting as a conduit for the information and does not know whether it is true or false.