BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Listing Brokers Must Disclose a Short Sale to Buyer
or
Conflict Between Duty of Confidentiality and Duty to Disclose
In the recent case of Holmes v. Summer the court held that a listing agent must disclose to a buyer that a sale is a short sale.
In that case, the buyer had not been advised that the seller had to receive a short payoff from the existing lenders in order to close — in other words, this was a short sale. The seller had three loans on the property totaling almost $400,000 more than the $749,000 sales price.
The court concluded that where there is a substantial over-encumbrance of the property “there is a duty for the agent or broker to disclose the state of affairs to the buyer, so the buyer can make an informed choice whether or not to enter into the transaction that has a considerable risk of failure.”
While this result may seem obvious, this case does raise some interesting, and perhaps unanticipated, questions regarding the interplay of a duty to disclose and the duty of confidentiality that comes with fiduciary duty.
The court recognized this when it stated that the issue of “the duty to disclose and the duty to maintain client confidentiality is clearly involved” in this case. But the court reasoned that the deeds of trust, being a matter of public record are not confidential information, and thus the agent’s duty of honesty and fair dealing, which is owed to all parties in the transaction, overrides the agent’s duty of confidentiality owed to the seller. But, the court further suggested that the listing agent should get the seller’s permission to disclose this information.
But, what if the seller refuses to give that permission?
This case highlights the sometimes inherent conflict between the duty of confidentiality owed to the client, and the duty of honesty and fair dealing which would require the disclosure of some fact or condition.
In another case, a court held that a commercial tenant’s broker had no duty to disclose to a landlord that he knew that the tenant-corporation was in severe financial trouble at the time the tenant signed the lease. The tenant promptly defaulted on the lease and landlord sued tenant’s broker for failure to disclose the knowledge of tenant’s poor financial position. Here, the court ruled that confidentiality prevails and tenant’s broker did not have to disclose that information.
These types of issues of conflicting duties come up regularly in real estate transactions.
PRACTICE TIPS:
1. Listing agents should always question their sellers closely regarding the indebtedness against the property.
2. In addition to the numbers of loans against the property and the face amount remaining on those notes, such things as pre-payment penalties, arrearages and penalties because of non-payment, tax liens, judgment liens, mechanics, liens, and other matters of record requiring payment at close of escrow will determine whether the sale is a short sale or not.
3. Prepare a detailed “net sheet” for seller to review which will be sent to seller’s lenders if it is to be a short sale.
4. In addition to using a Short Sale Addendum as a part of the purchase agreement, it is always wise to advise a buyer’s agent that this will be a short sale prior to the writing of an offer, if you know an offer is coming in, so that a buyer who does not want to participate in a short sale doesn’t waste time attempting to negotiate a sale.
5. In all situations, if you as an agent for either a seller or a buyer feel a conflict between your duty of confidentiality to your client and your feeling that the duty of honesty and fair dealing would require the disclosure of a fact or property condition, discuss the matter with your manager or broker prior to proceeding.
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 2010 12/03/10