May 7

Can A Real Estate Agent Really Be Required To Disclose More Than What He or She Knows?

At some point in time, most of us have purchased a residence or some other piece of real estate and have used the services of a real estate agent or broker in the transaction. (For the sake of convenience, I will collectively refer to agents and brokers as “agents”.)

Real estate agents play a vital role in the real estate industry as they interface between sellers and buyers. Among other things, they assist sellers in making a home attractive for potential buyers and they offer their expertise in helping a seller determine an appropriate listing price. They also assist buyers in determining what the buyer really needs in a residence and what the buyer can realistically afford.

The Agent’s Duty To Disclose

One of the most important services that an agent can provide to a buyer, and particularly an inexperienced one, is to assist the buyer in evaluating a property’s condition so that the buyer does not buy a house which has numerous mechanical or structural surprises that will cost the buyer more than was expected to make the house livable.

In adopting Civil Code Section 2079, the California legislature recognized the importance of the agent’s experience and knowledge by requiring the agent to conduct a reasonably competent and diligent visual inspection of a property offered for sale and to disclose to the prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal. The real estate agent satisfies much of that duty through the use of the Transfer Disclosure Statement (TDS), a form which the seller and both the seller’s and buyer’s agents complete and provide to a buyer during the escrow.

But, the agent’s duty doesn’t end with his or her signature on the TDS. The law imposes a more far-reaching duty of disclosure on an agent than merely completing the TDS form, which only requires that they disclose facts and conditions which would be revealed by a reasonably competent and diligent visual inspection. California law requires an agent to actively try to learn material facts that the agent does not know that might affect their client in making a decision to buy a property.

The Agent Has To Dig To Learn Information

In Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, the Court of Appeals (Fourth District) said that an agent must place herself in the buyer’s position and to ask herself what type of information the buyer would need to know in order to make a well-informed buying decision. Then, the agent must investigate facts which are not known to the agent and disclose to the buyer all material facts that might reasonably be discovered.

I tried a case some years ago in which an agent sold a property to buyers which appeared to them (and any reasonable person) to be a duplex. Each of the units had separate kitchen facilities and each was accessed through a separate entrance. The buyers had informed the agent that they intended to use the property as a duplex for their respective families. The agent knew that there were many illegally-created duplexes in the area where this property was located, but he never took it upon himself to investigate with the local planning and building officials whether or not this particular duplex had been legally created.

At trial, the agent testified that he had no actual knowledge that the duplex had not been legally created and sought to defend himself on the basis that he only needed to disclose the information that he actually knew.

The jury was given a contrary instruction, however, based upon the Field v. Century 21 Klowden-Forness Realty case, because the agent should have considered that, even though the agent didn’t have information that the duplex was illegally created, the legal status of the duplex was an important fact which the buyers needed to know to make an informed decision about buying that property. In returning a verdict against the agent, the jury found that he should have actively researched that information with local officials in order to properly inform his buyers.

A Buyer’s Failure To Investigate Does Not Absolve The Agent

The agent in my case also argued at trial that the buyers should have called the local building officials themselves to determine the legal status of the duplex property. However, a real estate agent, who owes a fiduciary duty to his or her client, and who usually has a superior knowledge about purchasing real estate over that of his client, cannot legally shift responsibility to the client to undertake that investigation. California law provides that the client has a right to rely upon the agent and that it is no defense that the buyer failed to exercise reasonable care to protect his or her own interests, or that the client might have learned the true facts by independently investigating the circumstances of the representations himself. Schoenberg v. Romike Properties (1967) 251 Cal.App.2d 154, 162; Sime v. Malouf (1949) 95 Cal.App.2d 82.

Agents Beware!

Most real estate agents are surprised to learn that they have an obligation to disclose to their client more information than they actually know and that they have to undertake an affirmative investigation of those facts which might be important for a buyer to know in deciding whether or not to purchase property. But, that is California law.

The extent of the agent’s affirmative duty to investigate and disclose facts to their client is not limitless. It depends upon the facts of the transaction and the buyer’s knowledge and experience, the questions asked by the buyer, and the nature of the property and terms of the sale.

What Are The Agent And Buyer To Do?

Diligent real estate agents should conduct an extensive discussion with their buyer to learn exactly how the buyer intends to use the property so that the agent will be better able to anticipate the information which would be important for the client to know to make the purchase decision. And, then, the agent should actually spend some time trying to think through the various issues which the specific property might possibly raise for the buyer’s anticipated use.

Similarly, an astute buyer should make certain that he or she has fully discussed with the agent how the property will be used, or what the buyer’s expectations are for the property. If the buyer has any unusual needs for the property, or if there is any expectation which is not customary in a garden variety residential purchase, the buyer should be certain to ask the agent about those issues so as to place the agent on notice that the information is important in the buyer’s purchase decision.

There is nothing worse than a real estate transaction that has gone bad. The buyer is unhappy because their dream home has become a nightmare. The seller is usually accused of having concealed information from the buyer, and the agents, who are the fiduciaries of their clients, are almost invariably made to refund some or all of their commissions to the clients. Worse yet, the seller and agents could get sued. The professional agent can avoid that, both for the agent’s sake and that of his buyer-client, by taking some time during the transaction to thoroughly investigate all of the facts about the property.

  1. Bob 13 May 2013 | reply

    Excellent article Robert

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