Disclosure Obligation Backfires for Real Estate Agent
The real estate agent is charged with additional disclosure obligations over that of the seller. In this case, the agent approached the owner of a property inquiring whether he wished to sell. The owner was reluctant.
The agent asked whether he could obtain a 24 hour listing if he had an interested buyer. The owner agreed, signed the listing and the buyer submitted an Offer.
This property was a residential property just to the north of a small plaza. The Offer contained a condition permitting the buyer to undertake environmental investigations and conduct soil tests. The buyer proceed with both. As it turned out, the property contained soil which had become contaminated due to the previous presence of a cleaning establishment in the nearby plaza over 40 years ago. Over the years they dumped cleaning solvents out behind the rear of their store. The owner was unaware of the cleaners as he had only owned the property for the last 15 years.
They deal fell through. That seems reasonable. But, here’s the difficult part.
The owner now has 2 years to sue the former cleaning establishment. That will be a challenge. They probably had insurance, but they left years ago. Without this “knowledge”, the owner had a valuable piece of property suitable for residential use. The proposed purchaser wanted to convert it to office use. This might have been possible since it was the next property to the commercially zoned plaza.
It is noteworthy that any commercial mortgage financing would have required the environmental assessment and subsequent soil tests.
This new problem constitutes a latent defect in the property which now must be disclosed to a buyer. Previously, no disclosure was required, since he was unaware of the problem. Now, he knows, and he has to tell. Clearly, this will reduce the price.
Additionally, he will now have to hire lawyers, and investigators as when as expert witnesses to pursue a lawsuit for the contamination. When he didn’t know, the clock was not ticking. Now that he knows, he has 2 years.
The owner says he was duped by the agent. He didn’t want to sell. He had no idea about the agent’s duty to disclose material facts. That lifted the standard in the first place. No explanation was offered. In addition, he accepted an Offer with two conditions that are commonly found in commercial contracts, but not residential contracts. The owner never appreciated that the buyer had any use in mind other than the residential use.
So, the buyer walks away, the agent walks away and the owner is left with a mess.
What steps could the agent have taken to protect himself from a lawsuit initiated by the seller?
The owner’s statement of claim will identify several issues as falling short of the professional responsibilities of the agent:
- Failure to explain agency
- Failure to adequately explain multiple representation (acting for buyer and seller in the same deal)
- Failure to explain seller’s disclosure and latent defects
- Failure to identify risks associated with discovery
- Failure to explain the agent’s duties concerning material facts
- Failure to explain 2 conditions
- Failure to disclose buyer’s intended use
- Failure to seek seller’s informed consent
The owner certainly has a measurable financial loss and some remedies here. In part, they arise out of an agent’s duty to comply with the Code, yet we have a failure in terms of “informed consent”. The agent missed the potential “conflict” between his disclosure obligations and those of the seller. And, that leads to liability!
Brian Madigan LL.B., Broker