Q: The Seller had listed his Property with another Broker last year; an escrow was opened but did not close because that first Buyer could not get their desired financing. The first Buyer’s Agent provided the Seller and the Seller’s first Agent with a copy of the Inspection Report (which found several negative factors about the Property) and the Appraisal Report which indicated that the Property was worth 10% less than what that first Buyer had been willing to pay.
The Seller now wants to list with us and he has given us the documents he received from that first Buyer “for information purposes only.” The Seller has told us that he will not give us the Listing unless we agree, in writing, that we will not provide the prior Inspection Report and the prior Appraisal to any new Buyer. I am concerned about taking the listing under these constraints. Must I obey the Seller? Do I face any liability for following the Seller’s instructions? Does the Seller have any liability for not providing these documents to a new Buyer? What should I do?
A: Real estate licensees must disclose to the Buyer all material facts that are known to the licensee affecting the value or desirability of the Property including the existence of, and the information contained in, prior reports. This is true whether that licensee is the current Seller’s Broker, the Buyer’s Broker, or was a Seller’s or Buyer’s Broker on a prior transaction and is now handling another transaction involving the same Property.
INSPECTION REPORTS
The California Appellate Courts have long concluded that if a Broker has possession of a report and does not provide that report to a Buyer, then the Broker has committed fraud, a civil tort that can result in the Broker paying the Buyer’s actual damages and punitive damages, as well. (See Godfrey v. Steinpress (1982) 128 Cal.App.3d 154.)
Brokers and Agents who are found liable for fraud can also face license sanction and even revocation and will probably not have insurance coverage for the claim because E&O policies specifically exclude from coverage any type of fraud. Thus, concealing the reports that are in the Broker’s possession is a very serious liability issue. Because there is significant liability exposure for Agents and Brokers who commit fraud, we have created an easy to remember six-word rule:
“YOU GOT IT; YOU GIVE IT.”
The fact that the Seller does not want you to give that documentation to the new Buyer does not change that rule. The fact that the Seller’s Broker is the Seller’s fiduciary does not change that rule. As the Seller’s Agent, you have an obligation to protect all of the Seller’s interests and, if you agree to conceal documents as demanded by the Seller, you are actually creating liability for yourself and would not be acting as a proper fiduciary. If you do conceal those documents from the new Buyer, you and the Seller would be committing fraud; the California Appellate Courts have long held that failure of the Seller to fulfill the Seller’s duty of disclosure to the Buyer constitutes fraud. (See Lingsch v. Savage (1963) 243 Cal. App.2d 729)
If a Seller instructs you not to disclose any information or documents that are in your possession, you must advise the Seller that you cannot follow those instructions because you will not be a party to a fraud. Under long-standing common law principles, a Seller cannot legally instruct an Agent to commit fraud for any reason; both the Seller and the Agent will be liable for the fraud committed by the Agent.
If the Seller demands that you conceal information or documents, then you will have no choice but to refuse to take the Listing or to withdraw from the existing Listing. If the Property is already under contract when the Seller instructs you to withhold information or documents that are in your possession, then you must first disclose that information to the Buyer under the general duty owed to all parties to act in good faith and honesty (as specified in the statutory Agency Disclosure form) and then, if the Seller accuses you of violating the Seller’s instructions and/or threatens to take any action against you, immediately confer with your legal counsel regarding terminating the agency relationship.
Some inspectors have attempted to improperly limit their liability exposure by specifying in their reports that the document is intended to and can “only by used by the buyer who ordered it.” That language is not legally enforceable and in no way changes the 6-word rule above. The California Appellate Courts have recognized that the Inspector’s reports can and will be used in subsequent transactions by real estate licensees and other Buyers. (See, for example, Blago Leko v. Cornerstone Home Inspection, et al. (2001) 86 Cal.App.4th 1109)
APPRAISAL REPORTS
An Appraisal Report is not an “inspection report” as defined in Paragraph 12 B of the CAR RPA and thus the Buyer may not be obligated to provide that document to the Seller. However, Appraisal Reports are often provided to Sellers and Seller’s Agents to establish that the Buyer is acting in good faith when exercising their Appraisal Contingency. Thus, it is not uncommon for Brokers to have a copy of one or more Appraisal Reports in their file.
Even though an Appraisal Report is not included within the definition of an “inspection report,” it should not be dismissed as being simply “an opinion of value.” The valuation assessment made by an Appraiser is based upon several factors which may well affect the value or desirability of the Property and that information is thus deemed by the Courts to constitute “material facts” that must be disclosed to Buyers. The most obvious “material facts” that are always contained in Appraisal Reports are the size of any structures, lot size, number of rooms, permitted construction and permitted uses – the very topics that lead to numerous claims and lawsuits every year. All of that information must be disclosed to a Buyer; the Seller cannot instruct the Agent to conceal those material facts.
PRACTICE TIPS
- Do not work with Sellers who do not intend to provide all material facts to the Buyer and/or who attempt to forbid you from making full and complete disclosure of all known material facts. The commission earnings will not pay for your losses in a subsequent fraud claim.
- If a Seller demands that you prove that they have a legal obligation to disclose known material facts and/or documents, do not give this Tip to the Seller or otherwise attempt to provide legal advice to the Seller; instead, encourage the Seller to discuss the issue with the Seller’s own qualified California real estate attorney.
- If you are in possession of any documents relating to the Property that you are listing or selling, follow the 6-word rule: YOU GOT IT, YOU GIVE IT. There are no exceptions to this rule.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2019 08/23/19