When In Doubt, Disclose
Laying Down the Law
March 28, 2016
Christopher J. Charles, Esq.
It has been famously said that “with great power comes great responsibility.”1 This is especially true for REALTORS® who, under Article 26 of the Arizona Constitution, may “draft any and all instruments, including contracts, incident to the sale, exchange, trade, or leasing of property.”2 Because of this authority, REALTORS® bear the responsibility of explaining what all those closing documents mean.3 Put another way, REALTORS® must have the real estate drafting skills and real estate knowledge of an attorney or else face the possibility of committing real estate malpractice. Id. Further, when a licensee commits real estate malpractice, the licensee is subject to not only a “commissionectomy,”4 but may be liable for punitive damages as well.5
REALTORS® owe a fiduciary duty to their clients.6 Among the duties owed is the “duty of disclosure.” Unfortunately for REALTORS®, the disclosure standards often differ depending on the circumstance. As a result, a REALTOR’S® failure to properly apply the correct standard can result in personal liability. While many disclosure requirements are set by statute (e.g., Notice of Soil Remediation, A.R.S. §§ 33-424.01 and 49-701.02), the more difficult disclosure compliance issues arise from the commonly used but often misunderstood “Materiality Standard.” Specifically, in Amerco v. Shoen, the Court reasoned that a fact is material if it is one to which a reasonable person would attach importance in determining the person’s choice of action in a transaction.7 Simple right?
As any experienced REALTOR® will tell you, the importance a buyer or seller places on a property’s characteristics vary. Even more troublesome, an agent’s duty to disclose exists even when the fact is not determined to be material when the buyer makes an inquiry of the seller.8 As a real estate agent, can you always tell the difference between a comment and an inquiry between a buyer and seller?
Further compounding this issue is that the seller’s duty to disclose is different than the buyer’s duty. Worse yet, buyers’ and sellers’ duties differ from their REALTORS’® duties. For example, a seller has a duty to disclose material facts to the buyer, which are not known by the buyer, if the material fact would affect the value of the property. Conversely, a buyer has a duty to disclose facts critical to their ability to perform (i.e., timely close the transaction). How many sellers or sellers’ agents out there have had a deal fall through because the buyer couldn’t obtain financing? When this happened, did the buyer disclose their potential inability to perform beforehand? Did the buyer or REALTOR® breach their disclosure duty?
Like buyers and sellers, REALTORS® must also comply with disclosure requirements. Specifically, A.A.C. R4-28-1101(B) sets forth the following professional conduct requirements for REALTORS®:
“A licensee participating in a real estate transaction shall disclose in writing to all other parties any information the licensee possesses that materially or adversely affects the consideration to be paid by any party to the transaction, including:
- Any information that the seller or lessor is or may be unable to perform;
- Any information that the buyer or lessee is, or may be, unable to perform;
- Any material defect existing in the property being transferred; and
- The existence of a lien or encumbrance on the property being transferred.”
Put another way, REALTORS® must disclose defects in the property, even if the defect is one that is not readily observable (a latent defect). The failure to properly disclose a latent condition on the property (e.g. mold, asbestos, termite infestation, water well, prior litigation, easement, and so on) may subject the REALTOR® to civil (and administrative) liability.
It is safe to say that Arizona laws hold buyers, sellers, and their REALTORS® to strict standards. It is also safe to say that an Arizona licensee will be held to the same standard as an attorney, who has attended 3 years of law school. As a result, every REALTOR® should establish and maintain a personal relationship with a real estate attorney to discuss these types of issues. Not all attorneys are deal killers; when consulted with early, attorneys can help minimize liability and help facilitate a smooth transaction.
If you or someone you know has questions regarding disclosure issues or any other real estate matter, please call or email today.