Occasionally, a client will ask you what you, as the agent, “believe, contemplate, anticipate or foresee” will occur in the future regarding ownership of a particular property. This is the first part in a two-part article series discussing how to properly handle requests for opinions to mitigate your liability exposure.
For continued discussions on guarantees based on agent expertise, assumptions, estimates and forecasts, see Mistaking the belief as fact, the second part of this two-part series.
When an opinion becomes a guarantee
Clients often ask their agents for input or opinions when making decision regarding their transactions. Honest responses to such questions are 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 that an event or condition will occur.
Thus, statements by the buyer’s agent will be either:
- couched in words such as “anticipation,” “estimation,” “prediction” or “projection,” 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 reaching the level of a guarantee.
The difference between the wording used by an agent to express an opinion or 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. The event or condition expressed has not occurred and does not exist at the time the opinion is given. Alternatively, a fact is an existing condition, presently known or knowable by the agent, due to the ready availability of data or information.
Facts are the subject of disclosure rules, not the rules of opinion. However, “guesstimates” and wishful assumptions are not opinion.
Special circumstances may impose liability
An opinion is a belief that is honestly held. It is based on a reasonable, although sometimes faulty, analysis by the agent giving the opinion of 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 raise an agent’s statement to the status of a misrepresentation.
If 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 fiduciary duty, such as between the agent and their seller or 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 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 has implies 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].
An opinion based on facts
Consider a prospective buyer interested in acquiring a lot within a subdivision and constructing a home on it.
The subdivider’s agent, based on subdivision maps and discussions with the subdivider, advises the buyer all the lots are going to be the same size and subject to the same use restrictions. Further, all homes built on the lots are to be worth at least $400,000.
The buyer purchases the lot and builds their home in accordance with the use restrictions.
Due to an economic downturn, the subdivider resubdivides the remaining unsold lots and removes the use restrictions. The resubdividing is intended to increase the marketability of the unsold lots in the tract.
The buyer now seeks to rescind the purchase and recover their entire investment claiming the subdivider’s agent made false representations about the subdivision on which the buyer relied.
The subdivider’s agent claims they honestly believed their representations that the subdivider will not alter the lots remaining to be sold.
Here, the agent’s representations about the lot size were made truthfully. There was no intent to deceive the buyer. Both the agent and the subdivider had a reasonable basis for believing changes were not necessary at the time of the purchase. However, a later shift in the economy warranted the changes as necessary to prevent the tract from deteriorating in its marketability.
The seller’s agent’s statements about the future were honest at the time they were made. Thus, their statements qualify as an expression of their opinion.
Further, the buyer did not require the deed from the seller to include a grant of the promised rights that all the lots will be the same size with the same restrictions on minimum value. Thus, the buyer did not take proper action in reliance on the seller’s agent’s opinion when they agreed to purchase the property. [Meehan v. Huntington Land & Improvement Co. (1940) 39 CA2d 349]
Conditional opinions
Consider a developer of a residential duplex subdivision who provides their agent with a schedule of projected rents. The agent is instructed to inform prospective buyers these rents are estimates of the amounts obtainable from the duplexes.
The developer has not developed properties in the area prior to this project. Also, they have no actual knowledge of the rents a comparable duplex might obtain in the area.
A buyer with minimal investment property experience contacts the agent asking for more information.
The buyer is advised by the agent that “if you receive the rents we contemplate, it will be a good investment.”
The buyer purchases a duplex, but is unable to locate tenants willing to pay the rental amounts represented in the agent’s opinion. Ultimately, the buyer loses the property to foreclosure.
The buyer makes a demand on the agent for the loss of their invested funds. The buyer claims the agent’s statements about the property’s future rental income were misrepresentations since the buyer relied on their superior knowledge about rental conditions in the area when purchasing the duplex.
The agent claims the statement was a mere opinion since it conditioned the investor’s success on collecting the represented rent amounts.
Here, the agent’s statement was only an estimate or opinion held about future anticipated rental income. As no operating history existed to draw on when making the projections, the agent’s opinion was based entirely on readily available information.
Further, the developer’s lack of prior rental experience in the area or knowledge of rents actually attainable by the duplexes made the statement an opinion. Thus, the buyer may not rely on the rent projections given by the adversarial seller’s agent as a fact which might reasonably motivate their decision to buy. [Pacesetter Homes, Inc., supra]
Conclusions drawn from opinions
An opinion given by a seller’s agent predicting the future occurrence of an event does not impose liability on the seller’s agent for erroneous conclusions if the buyer is aware of the relevant facts on which the agent’s opinion is based.
A buyer who has knowledge of and equal access to the same information relied on by the seller’s agent cannot later claim they acted in reliance on the seller’s agent’s opinion. This is especially true when the buyer has sufficient time to conduct their own independent investigation to ascertain the accuracy of the agent’s opinion.
Consider a leasing agent acting on behalf of a prospective commercial tenant in percentage rent lease negotiations. The commercial landlord is experienced and has not retained the services of a real estate agent.
The leasing agent tells the landlord that “in my opinion” the tenant’s annual gross sales receipts will be in excess of $5,000,000. A lease agreement is entered into. The lease rent is a base monthly amount plus a percentage of annual gross sales receipts over $5,000,000. The landlord pays the leasing agent’s fee.
A dispute erupts between the landlord and the tenant. The landlord wants to recover the fee paid to the tenant’s agent, claiming the agent represented the potential gross sales receipts as exceeding $5,000,000, an amount much higher than the sales the tenant might ever experience during the leasing period.
Here, the tenant’s agent prefaced their statements with the words “in my opinion.” Also, a landlord cannot reasonably rely on the representation of future gross sales as a condition which will actually occur.
Thus, the landlord should have known the gross receipts prediction was just an estimate honestly made by the agent who represented the tenant. They cannot treat the estimates of the adversarial agent as fact.
Further, the landlord had ample time and the means to make their own inquiries and analyze their findings. Since the landlord was not represented by an agent, they needed to conduct their own due diligence investigation if they intended to eliminate the uncertainties of estimates made on behalf of the tenant by the tenant’s agent. [Foreman & Clark Corporation v. Fallon (1971) 3 C3d 875]
Opinions of the buyer’s broker
A seller’s agent has only a general non-agency 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 fiduciary duty to handle a buyer with the same level of care and protection a trustee exercises on behalf of their beneficiary.
This special agency duty owed to a buyer raises an opinion given to a buyer by the buyer’s broker or their agent 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 a fiduciary, the opinion of the buyer’s agent becomes an assurance the condition or event which was the subject of the opinion will occur, unless the buyer’s agent conditionalizes their opinion.
For the buyer’s agent to give their opinion to their buyer and keep it from rising to an actionable assurance when the predicted event fails to occur, the opinion will include a recommendation to investigate and expertly analyze relevant information to confirm the agent’s opinion. Further, to mitigate risks, a further-approval contingency provision covering the condition or event that is the subject of the opinion needs to be included in any offer made by the buyer. [Borba, supra]
Assurance of suitability without a contingency
Consider a buyer’s agent who represents a prospective buyer looking for rental income property, whose primary purpose for acquiring property is to receive spendable income from the investment.
The agent locates a multi-unit apartment complex. The agent assures the buyer:
- monthly vacancies will only be three or four units since the apartment complex is the only complex in the area which allows children and pets;
- the complex will require very little expense to maintain; and
- the buyer will receive the amount of spendable income sought from the investment.
Even though the seller’s books and records are readily available for inspection on request, the buyer’s agent does not verify the accuracy of the seller’s projected income and expense statements, or confirm the maintenance costs. The agent fills out and hands their buyer an Annual Property Operating Data (APOD) sheet restating the representations already made to the buyer about the agent’s projections of future income. [See first tuesday Form 352]
The buyer, in reliance on their agent’s predictions about the property’s future operations, enters into a purchase agreement with the seller. No contingency provisions are included to confirm the integrity of the improvements or to investigate the income and expenses experienced by the seller.
After the buyer acquires the property, the buyer encounters higher maintenance costs and significantly lower rental income than represented by their agent. Also, the property has a high turnover rate and a large number of tenants are constantly delinquent in the payment of rent.
The buyer does not receive the sought-after spendable income projected by their agent. Soon, the property is lost to foreclosure.
The buyer makes a demand on their agent for their lost investment, claiming the agent misrepresented the operations of the property. The buyer’s agent rejects the demand, claiming their comments on the property’s performance were opinions, not guarantees.
Here, the buyer had the right to rely on their agent’s unconditional statements of facts about the property. The buyer was further correct to treat the representations as true without concern for their verification as a fiduciary relationship existed between the buyer and their agent. Thus, the buyer’s agent’s predictions were misrepresentations since they did not come to be, and the basis for the buyer’s recovery of the value of the lost investment. [Ford, supra]
For continued discussions on guarantees based on agent expertise, assumptions, estimates and forecasts, see Mistaking the belief as fact, the second part of this two-part series.
