Jim Porter: Real estate agents’ disclosures expanded
October 14, 2010
TRUCKEE/TAHOE, Calif. and#8212; Real estate agents be advised of a new case and#8212; Holmes v. Summer. You have yet another disclosure obligation.
Phil and Jenille Holmes made an offer to buy a home in Huntington Beach through the sellerand#8217;s listing agent Sieglinde Summer, a RE/MAX office. The Holmeses did not have an agent.
An offer was submitted, a counter made and escrow opened with a sales price of $749,000 with a 30-day escrow.
The Holmes immediately sold their existing home to complete the purchase of the Huntington Beach property. That was a huge mistake, as anyone could have told them. Before close of escrow but after the Holmes sold their other home, they learned the seller had three deeds of trust and owed $1.1 million, which agent Summer knew all along but failed to disclose to the Holmes.
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The sale did not go down; what did go down is a lawsuit the Holmeses filed against agent Summer and RE/MAX, claiming she had a duty to disclose the excess debt because it indicated a substantial risk, over and above the risk inherent in routine residential sales transactions, that the escrow would not close. Who should win?
A seller must disclose material facts affecting the value or desirability of property which are known to him or her or should be known and are not known or within the observation of the buyer. The sellerand#8217;s agent has the same duty of disclosure.
Most of the time legal disputes over failures to disclose involve physical property defects like a leaky roof or land subsidence. But not always. There can be a duty to disclose a neighborhood nuisance, or a murder on the property, or violations of building codes.
Selling agent Summer told the court the loans were a matter of record and could be seen on the preliminary title report; however, by the time the Holmeses received the title report, they had already sold their home. I assume and#8220;soldand#8221; means they went into escrow, unless it was the fastest sale in history.
The listing agent owes the seller a fiduciary duty of utmost care, integrity, honesty, and loyalty under the Civil Code, while the listing agent owes the buyer non-fiduciary duties of care, honesty, good faith, fair dealing and disclosure. (In case you forgot.)
The court of appeal ultimately ruled that when a sellerand#8217;s real estate agent is aware the existing debt on a residence far exceeds the sales price, there is a duty to disclose that to the buyer so the buyer can make a decision whether to make an offer that has a considerable risk of failure.
In practice that would be difficult to do as often sellerand#8217;s agents do not even know when an offer is coming in.
My two cents
Iand#8217;m not sure about this case. I suppose on the facts of the case the courtand#8217;s conclusion is correct that the sellerand#8217;s agent should have told the buyer early on about the overly-burdened property being sold.
But I am concerned this new duty to disclose high risk possibilities that a sale will not close could be expanded to dozens of situations, especially given this quote from the case, and#8220;At a minimum, the brokers did not act fairly towards these residential buyers when signing them up for a real estate purchase the brokers had reason to know was a highly risky proposition.and#8221;
It seems to me, a buyer of a failed escrow can now argue the seller and sellerand#8217;s agent should have disclosed something they were aware of that would have suggested the sale closing would be and#8220;a highly risky proposition.and#8221; This case may be appealed to the California Supreme Court.
Jim Porter is an attorney with Porter Simon, with offices in Truckee, South Lake Tahoe, Incline Village and Reno. He is a mediator and was the Governor’s appointee to the Fair Political Practices Commission and McPherson Commission, both involving election law and the Political Reform Act. He may be reached at email@example.com or at the firmand#8217;s website http://www.portersimon.com.