Why this matters: Learn the difference between a broker’s specific agency duty owed only to their client and the limited general duty they owe to others in a transaction and how to observe and disclose conditions adversely affecting value and qualify statements when they are opinions, not facts.
Follow along with an audio reading of this article adapted as a chapter from our upcoming Real Estate Practice course update.
General duty to disclose adverse conditions to buyers
A seller broker and their agents owe a special fiduciary agency duty to a seller who enters into a representation agreement employing the broker to market the property for sale. The objective of the employment is to locate a prospective buyer who is ready, willing and able to acquire the property on the terms stated in the seller representation agreement.
On the other hand, a seller broker locating a prospective buyer, either directly or through a buyer broker, owes the prospective buyer and the buyer broker a non-client general duty of fair dealing. To fulfill this obligation, a seller agent on their own volition provides buyers with information on property conditions adversely affecting value and use of the property offered for sale. This property information is called disclosures of material facts.
The seller agent’s duty is to provide prospective buyers no less than the minimal quantity of fundamental information about the property for sale, sufficient for the buyer to make purchase decisions. The method for delivering property information is a marketing package delivered to each prospective buyer or buyer agent on their first inquiry into additional information.
The information the seller agent discloses need only be sufficient in its content to place the buyer on notice of facts which may have:
- an adverse effect on the property’s value; or
- interfere with the buyer’s intended use.
To comply with public policy for consumer protection through symmetry of property information between sellers and buyers, a seller agent voluntarily informs prospective buyers about the decision-making fundamentals of the property marketed for sale.
For symmetry of knowledge of property information, the seller agent’s disclosures must:
- deliver no less than the minimum level of information to put the buyer on notice of the property’s fundamentals adversely affecting value or use;
- avoid unfounded opinions or deceptive responses in response to inquiries; and
- avoid stifling inquiries about the property while vigorously pursuing the best financial advantage possible for the seller.
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Gathering facts on adverse features
A seller broker on entering into a seller representation agreement promptly gathers facts on the property offered for sale aimed at compliance with disclosure rules. The initial purpose for gathering property information is inclusion in the marketing package prepared for delivery to prospective buyers or buyer agents.
The methods and procedures a seller broker uses for gathering the information include:
- Handing the seller a blank statutory Transfer Disclosure Statement (TDS), a Condition of Property Disclosure form, on entering into the seller representation agreement. The seller is requested to enter the condition of each item listed and environmental hazards known to the seller. The seller completes, signs and returns the TDS to the broker before the broker inspects the property [See RPI Form 304; Calif. Civil Code §2079]
- Conducting a visual inspection of the property to observe conditions adversely affecting the value or use of the property. The broker uses the seller-prepared TDS during their inspection to confirm items the broker observes as valuation or use issues to confirm their entry on the seller-prepared TDS form. The inspection is performed whether or not a home inspector’s report is obtained for use in preparing the TDS;
- Advising the seller on risk avoidance procedures available in a sale by acquiring third-party inspection reports on the property’s condition, primarily a home inspection report (HIR). When the TDS is prepared in reliance on an HIR, liability for unknown and undisclosed defects shifts to the home inspection company. In turn, the seller and the seller broker reduce their exposure to claims by a buyer which remain undisclosed prior to acceptance of a purchase agreement; and
- Responding to inquiries by the prospective buyer or buyer broker into conditions relating to the property, fully answering based on facts known to the seller broker. The responses cannot suppress the buyer’s further investigation or inquiry into property conditions.
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The pass-through of filtered seller information
Further, the seller broker as the seller’s representative is a conduit for property information received from the seller and filtered — passed on — to the prospective buyer or buyer broker.
The rule for delivery of property information to a buyer or buyer broker is:
- The seller broker reviews all property information received from the seller used to market the property. The review corrects for any inaccuracies or untruthful statements the seller broker knows or suspects to exist.
- The seller broker’s corrections or contrary statements necessary to set the information straight are included in the TDS delivered to prospective buyers.
Conversely, a buyer broker has no duty to investigate or confirm any of the property information or data received from the seller or the seller broker. However, when a defect is disclosed or known to the buyer broker, they have an affirmative duty to advise their buyer to take steps to determine the consequences of property conditions interfering with value or use.
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The dumb agent rule for single family residences (SFRs)
A seller broker on a one-to-four unit residential property owes no affirmative duty to a prospective buyer to gather or voluntarily provide the prospect with any facts unknown to the seller broker about:
- the property’s title conditions, consisting of encumbrances which a preliminary title report (prelim) discloses, such as easements, Covenants, Conditions and Restrictions (CC&Rs), legal descriptions, trust deed provisions, etc., other than assuring seller compliance with disclosures about liens for improvement district bonds such as Mello-Roos bonds, short sale mortgage conditions, and that all residents vested as owners of the property interest have entered into the purchase agreement;
- the operating expenses for the property (and any rental income) the buyer can expect during first 12 months of ownership, such as utilities, sanitation, property taxes, yard and pool maintenance, insurance, etc., including the statutory disclosures the seller makes about any fire hazard clearance requirements which exist due to the property’s location (NHD) [See RPI Form 314];
- the zoning or other use restrictions which may affect the buyer’s future use of the property, except for any neighboring industrial zoning and nearby military ordnance locations as itemized on the TDS [See RPI Form 304];
- the income tax aspects of the buyer’s acquisition (or seller’s disposition) of the property, such as limitations on interest deductions experienced on high-tier priced property, avoidance of profit tax by exclusion or exemption on the sale of other property (contingent on the purchase of the property for sale);
- the suitability of the property to meet the buyer’s financial, legal and use expectations when acquired based on the facts disclosed before entering into a purchase agreement; and
- information or data on any mixed use of the SFR 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.
Further, the seller broker owes no duty to prospective buyers to:
- give advice;
- make recommendations;
- offer suggestions;
- comment on the extent of the adverse effect of any facts disclosed;
- offer assistance (locate boundaries);
- investigate;
- state an opinion; or
- explain the effect on the buyer of any facts about the property’s physical, natural or environmental conditions the seller broker disclosed.
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Respond fully and fairly
However, a seller broker when asked by the prospective buyer or buyer broker about any property aspect, feature or condition, is duty-bound to respond fully and fairly to the inquiry. The response includes material facts known to the seller broker about the inquiry and contains no half-truths or misleading statements.
Conversely, the buyer and the buyer broker have a duty to care for and protect the buyer’s best interests in the purchase of property. The buyer broker, not the seller broker, determine what due diligence efforts are needed to learn the extent of the consequences for facts disclosed which might interfere with value or the buyer’s intended use of the property.
The buyer broker makes this due diligence determination before allowing the buyer to make the decision to purchase, when practicable. If not before contracting, contingency provisions are included in the purchase agreement for approval of the condition or cancellation before close of escrow.
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Opinions in lieu of factual investigations
A seller broker is directly asked by a buyer responding to a “For Sale” advertisement to point out the location of the boundaries of the parcel for sale. The seller broker does not provide a metes and bounds description, a subdivision map or deeds for the parcel. Further, the buyer is not told to investigate the location of the boundaries themselves.
Instead, the seller broker tells the buyer the fence surrounding the property is located on the boundaries. Thus, the broker makes an absolute statement indicating a fact about the boundaries, not a mere opinion or one attributed to another — like the seller.
The buyer further indicates they intend to build a pool for their use of the property.
The seller broker does not respond to the buyer’s statement about their intent to build a pool. The broker has no actual knowledge of easements or zoning ordinances which may adversely affect implementation of the buyer’s intended future use of the property.
Without further investigation by anyone, both the prospective buyer and the seller enter into a purchase agreement.
The purchase agreement offer the seller broker prepares does not include a contingency provision for the further approval of the boundary line or ability to build a pool. When a contingency provision exists in the purchase agreement, the buyer has an opportunity to verify the boundaries and confirm a pool can be built as a condition approved before closing escrow.
Prior to closing, the title company does not ask for, nor does a surveyor establish, the boundaries. The participants do not consult the local planning department or a pool contractor about the ability to obtain a permit to build a pool. They rely solely on the representations of the seller broker.
In fact, the physical location of the rear fence is several feet beyond the boundary line, leaving insufficient room to accommodate a pool. Further, a non-observable easement for utilities runs the entire length of the rear boundary line.
Failure to condition an opinion
Continuing the previous example, the buyer acted in reliance on the seller broker’s (and seller’s) unqualified opinion about the location of the boundaries in their decision to close escrow. As a result, the seller broker’s failure to condition their statement — opinion — about the location of the boundaries imposes liability on the broker for the buyer’s lost value in the property.
The broker by failure to qualify their statements misrepresented the location of the boundaries. A broker advising on boundary lines needs to either:
- identify the source of the information as, in this case, coming from the seller; or
- include a contingency provision for the buyer’s further approval of the location of the boundary and ability to build a pool.
The seller broker conducted a visual inspection of the property and observed nothing which indicated the existence of an easement. Further, the broker knew nothing about any easements. Here, the broker marketing an SFR property has no duty to investigate the condition of title or zoning and is not liable for the existence of the undisclosed easement.
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Read more about determining boundary lines.
Reliance on unconditional statements
Here, the buyer’s inquiries alerted the seller broker to include a contingency provision in the purchase agreement to cover the broker’s duty to respond to a property condition. Thus, the buyer with a contingency provision either approves and closes the transaction or disapproves the condition and cancels the transaction.
Without an inquiry from the buyer, the seller broker marketing an SFR has no duty to comment on the location of the boundaries. Thus, without the inquiry, the seller broker offering an SFR for sale need only disclose observed or known defective conditions affecting the value of the property.
Here, the seller broker needed to:
- identify the source of information when they have not confirmed its accuracy or correctness; or
- condition the response sufficiently to prevent the prospective buyer from relying on their opinion without further investigation.
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Read more about facts and opinions.
Candid response to a buyer’s question
Consider a prospective buyer with no experience in real estate matters. The buyer deals directly with the seller broker of a property which seems suitable to the buyer. The prospective buyer observes a 30-foot easement on the lot in the subdivision map running the entire width of the frontage to the property. The buyer asks the seller broker about the easement, who explains, “It’s for those water lines you find on the curb of the street. It is nothing to worry about.”
The prospective buyer decides to buy the property and build a home on it. In escrow, the preliminary title report (prelim) also reflects the easement. On the buyer’s further inquiry, the seller broker again assures the buyer the easement is on the front side of the lot and is not a problem due to the large setbacks for building improvements.
After close of escrow and commencement of construction of a residence, the local water company digs a deep ditch and installs a major waterline in the easement. With the driveway improvements placed over the easement, the buyer is required to remove it at their own expense when the water company needs to access the easement in the future. The interference causes the buyer to relocate the driveway to the side street entrance.
The buyer makes a demand on the seller broker for lost value paid for the property. The buyer had relied on the seller broker’s representation that the easement presented no problem to the use of the property, when, in fact, it did.
Here, the seller broker, having responded to an inquiry from the prospective buyer on the nature of the easement, must candidly explain the significance of the buyer’s limited use imposed by the easement. Instead, the seller broker gave evasive answers calculated to stifle the buyer’s further investigation.
The buyer’s inquiry is entitled to a response based on the seller broker’s working knowledge of the underlying facts or identification of the source of the information. When the seller broker lacks sufficient knowledge to comment, they are duty-bound to say so.
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Read more about the prelim.
Ads based on seller information
A seller broker may use property information obtained from a seller concerning its size in marketing advertisements. For example, advertising stating a parcel contains more than one acre or a home contains 5,000 square feet is fine promotion.
As long as the information is not known to the seller broker as false, they need not investigate whether it is accurate. In an advertisement, the broker need not identify the seller as the source of the data.
Any promotional material used to locate buyers containing comments consistent with the seller broker’s observations made in a visual inspection are sufficient. For data in advertisements, the seller broker need not measure the property or check the public records to confirm information.
Conversely, in response to an inquiry from a prospective buyer expressing an interest or concern about the size of a parcel or improvement, the seller broker either confirms the data as accurate or attributes their information to a source.
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Source disclosed for income property operating data
For income-producing property, the seller is the primary if not the sole source of information on the property’s income and expenses the seller broker passes on to the buyer or the buyer broker. However, to avoid personal liability for inaccurate data, the seller broker must identify the source as:
- received from the seller as trailing annual property operating data (APOD), presenting the recent past 12 months of operating figures; or
- the opinion of the seller broker as a forward APOD forecasting future operations as anticipated by the seller broker.
While the seller broker reviews data from the seller, they need not confirm its accuracy. To avoid innuendos of misrepresentation, the seller broker never disclaims responsibility for correctness as they attribute the source of the data as the seller.
Critically, the seller broker is ultimately the conduit for information and data they source as received from the seller or others when presented to the prospective buyer. Thus, the seller broker on receipt of property information first reviews — filters — it for any inaccuracies or misrepresentations suspected or known to the seller broker.
When the seller broker’s review of the information does not indicate it is misleading, the seller broker hands it to the prospective buyer or the buyer agent. Again, the caveat given is the seller or other individual is the source of the data.
By identifying the source of the information, preferably on the face of the APOD form used for delivery, the seller broker discloses it’s not the opinion of the seller broker.
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Sufficient notice to alert the buyer of material facts
Consider a seller broker of a condominium unit who is aware units in the project have suffered water intrusion damage. Also, they are aware the homeowners’ association (HOA) filed a lawsuit against the developer to recover the cost of repair for the water intrusion damage in the affected units.
The broker conducts a statutorily mandated visual inspection of the unit, but finds no visible signs of water damage in the unit. The seller claims none exist.
The seller broker locates a prospective buyer represented by a buyer broker. The seller’s Condition of Property Disclosure (TDS), which always includes the seller broker’s observations, is handed to the buyer broker on their request for property information.
The TDS discloses the seller and the seller broker know of no water intrusion damage in the seller’s unit. Further, the seller broker notes in the TDS the existence of HOA litigation over water intrusion damage in other units within the project. The buyer does not inquire or comment on the HOA litigation or water damages to the project.
The buyer submits an offer to purchase the property prepared by the buyer broker. The offer contains wording acknowledging the buyer’s receipt of the TDS, and when it does not, wording is included in the seller’s counteroffer. The buyer and seller enter into a purchase agreement.
Later, the seller broker receives newsletters and minutes from the HOA meetings which further discuss the previously disclosed water intrusion problems. The seller broker also reads the HOA’s complaint against the developer, which are public records. The broker does not bring the documents — which contain no new information — to the attention of the buyer broker.
Escrow closes and the buyer takes possession of the unit. Later, the buyer discovers pre-existing water intrusion damage to the unit.
Facts disclosed put the buyer on notice
Continuing the previous example, the buyer claims the seller broker owed them a general duty to pass on all documents known to exist concerning the extent of the water intrusion damage in the development, such as the newsletters, minutes from the HOA meetings and a copy of the lawsuit the HOA filed.
Did the seller broker sufficiently inform the buyer about the water intrusion problem to place the buyer on notice a water intrusion problem existed in the project?
Yes! The seller broker disclosed facts sufficient to notify the buyer about the water intrusion damage. Once informed of the potential problem within the project, it was the buyer’s (or the buyer broker’s) duty to exercise reasonable care to protect the buyer.
The seller broker has no duty to voluntarily advise the prospective buyer to investigate what consequences might flow from the facts disclosed. [Pagano v. Krohn (1997) 60 CA4th 1]
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Solar shade notice puts the buyer on notice
Also consider a seller who previously received a Solar Shade Control Notice from a neighbor. The neighbor’s solar energy collector is located solely on the neighbor’s property.
While the seller is not mandated by code to voluntarily give a copy of the notice to any prospective buyer, the seller broker advises their seller-client of the need for notice of the solar situation in the TDS given to prospective buyers and buyer brokers. The Solar Shade Control Notice establishes a sort of appurtenant right in the seller’s property held by the ownership of the neighboring property.
Trees or shrubs which shade more than 10% of a neighbor’s solar energy collector are considered a nuisance to the neighbor. Voluntarily providing the buyer with a copy of the neighbor’s notice protects the seller and the seller broker from claims of misrepresentation by failure to disclose — an omission. The solar shade alone gives the buyer sufficient notice to alert them to conditions which may affect the buyer’s future use of the property due to required tree maintenance. [Calif. Public Resources Code §25982.1]
Editor’s note — When a seller has sent solar energy collector notices to neighbors prior to installing solar equipment, they need to voluntarily provide prospective buyers of their property with a list of neighbors they sent the notice to.
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Disclosures are always made prior to acceptance
Consider a buyer broker who represents a prospective buyer for a one-to-four unit SFR. The buyer broker asks the seller broker about the availability of a home they market for sale on a multiple listing service (MLS). The seller broker advises the buyer broker the property is still for sale.
The buyer broker and the prospective buyer inspect the property and determine it meets all the buyer’s needs. The buyer broker requests a property marketing package from the seller broker. The purpose is to inform the buyer whether to buy the property and, if so, to establish a price and write up an offer.
The seller broker refuses to provide the buyer broker with a marketing package for the property. The seller broker tells the buyer broker any disclosures are made according to standard operating procedure, as provided in the trade union purchase agreement, after the participants accept an offer and open escrow.
Undeterred by the seller broker’s failure to timely hand over mandated disclosures — as soon as possible (ASAP) on inquiry into the property — the buyer broker prepares and submits an offer on behalf of the prospective buyer. The seller rejects the offer as unacceptable. The seller broker prepares a counteroffer on behalf of the seller, bargaining for better terms.
Again, neither the seller nor the seller broker presents disclosures about facts which may adversely affect the buyer’s decisions to buy the property. Further, the seller broker does not disclose their knowledge of monetary liens encumbering title with principal debt exceeding the counteroffer price.
Likewise, the seller broker fails to protect the seller — and themselves — from liability resulting from the undisclosed liens on the property. The mandated short sale contingency addendum was not made part of the counteroffer, a situation known only to the seller broker.
The buyer accepts the counteroffer — structured as a cash-to-new-mortgage sales transaction — and escrow opens. The buyer owns their current residence, which is in escrow, sold to a buyer ready to close when the purchase of other property contingency is waived.
The buyer, unaware of recorded title conditions which may interfere with acquiring their new home, closes escrow for the sale of their primary residence. The buyer now incurs expenses related to their preparation for taking ownership and possession of the seller’s home.
On the buyer’s review of the prelim obtained by escrow, they discover information about the encumbrance on title condition. Critically, the seller broker knew the title conditions existed prior to the seller and buyer entering into a purchase agreement.
Due to the lien amounts exceeding the purchase price, the seller is unable to deliver title and close escrow as agreed. The lienholders are unwilling to accept the net sales proceeds for reconveyance of the trust deeds, the short sale aspect the seller broker did not disclose.
The buyer cancels escrow since the seller cannot perform on the terms of the purchase agreement. As a result, the buyer has incurred money losses solely due to the seller’s inability to convey title as agreed.
A broker’s failure to make property disclosures before an acceptance
Continuing with this example, the buyer makes a demand on the seller broker for their money losses incurred after selling their home.
The buyer claims the seller broker is liable for the losses since the broker had a duty to timely disclose all property conditions which may have an adverse effect on the buyer — prior to entering into a binding purchase agreement.
The seller broker claims they are not required to disclose the seller’s clouded title condition prior to the acceptance of an offer since it is confidential financial information, and disclosure is a breach of the fiduciary duty owed exclusively to the seller.
Is the seller broker liable for the buyer’s losses?
Yes! The seller broker has a general duty owed to prospective buyers to disclose information before an acceptance occurs regarding known risks which affect the seller’s ability to perform as bargained. Without the seller broker’s disclosure of public information available to the seller broker concerning title conditions, the buyer is unable to make an informed decision about whether to enter into a purchase agreement. [Holmes v. Summer (2010) 188 CA4th 1510]
The seller broker failed to perform their general duty owed to the buyer to diligently locate and timely disclose knowledge of material facts affecting the buyer’s decision to buy the property.
Again, the seller broker puts the buyer on notice of adverse property conditions ASAP on the buyer’s initial inquiry into the property and always prior to acceptance of an offer.
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Minimum level of disclosure
The broker’s inspection takes place before marketing the property for sale as the broker needs to make property disclosures on the seller’s TDS for delivery to a buyer. Thus, the buyer has all information needed to analyze the property for acquisition and determine its value suitable to the buyer for pricing.
In addition to the visual inspection, the seller broker, not the buyer agent, is charged with disclosing other readily available public and transaction provider information related to the use of the property, as obtained by:
- a home inspection report received by the seller for areas normally inaccessible to the seller broker on a competent visual inspection;
- observations of off-site areas surrounding the property; and
- a review of public records concerning title and permitted use of the property. [CC §2079.3]
Again, seller broker disclosures owed the buyer are a general agency duty. The buyer broker owes the buyer a different specific advisory duty to fully inform the buyer about further investigations the buyer ought to consider based on:
- the seller broker’s property disclosures; and
- information known to the buyer broker.
While the seller TDS disclosures mandated for one-to-four unit inspection and reporting requirements are imposed on seller brokers, brokers marketing any type of property must further investigate and disclose to buyers or sellers material facts known or readily available to the seller broker regarding:
- title conditions;
- the financial conditions of the property’s operating costs and any income; or
- tax aspects of the transaction.
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