Hello everybody. First a bit of trivia: The California Department of Real Estate no longer exists. The DRE has been taken over by the California Department of Consumer Affairs and Consumer Affairs then changed the DRE’s name to the Bureau of Real Estate. Cost savings is the reason it gives for the change. The agency is now known as the BRE, no longer the DRE.
Now let’s move on to a more important topic, namely, the obligations of real estate licensees to disclose to a buyer material facts about real property listed on the MLS for sale.
It is a particularly appropriate time to review the applicable laws as just recently, March 7, 2014 to be exact, the California Court of Appeal rendered a decision which governs all real estate licensees in the state, and compares the differing obligations of the listing agent and the selling agent, especially with regard to Multiple Listing Service postings.
The General Rules
Before discussing the specifics of that newest case (Saffie v. Schmeling), let me review with AOA members certain general rules applicable to real estate licensees.
Perhaps the most important of these is that brokers and salespersons have the obligation of honesty and fairness toward all parties, even if they only represent the buyer or the seller.
Stated conversely, the law prohibits a licensee from knowingly misrepresenting a material fact (i.e., lying) to either party.
Further, a real estate agent who speaks on a subject has the duty not only to tell the truth, but not to intentionally omit important information which would otherwise render the true statement false or inaccurate.
Disclosures to a Buyer
The recent Saffie case points out just how important it is to make honest and accurate disclosures, even though I find surprising one significant aspect of the court’s ruling.
In that case, the seller’s listing real estate broker posted information on the Multiple Listing Service (MLS) in 2006 stating that although the property was in an earthquake study zone, a “Fault Hazard Investigation Report concluded that there was no evidence of an active fault on the property.” However, the report was generated in 1982, though that fact was not revealed in the MLS listing.
There is a law in the California Civil Code which regulates the information a broker publishes in the MLS. It says that the listing agent is responsible for the truth of all information he places in the posting.
The buyer, who was introduced to the property through his own broker after having seen the MLS listing, decided to purchase the land for development.
During escrow, the seller’s broker gave the buyer’s broker a copy of the 1982 report, together with a letter from the County Planning Department approving it.
The buyer’s broker provided those documents to the buyer, but the buyer’s broker did so without reading the report or even understanding what a Fault Hazard Investigation Report is. Nevertheless, the buyer’s broker led the buyer to believe that the report was current and could be relied on as an indication that the property was ready to build upon.
Based on that, the buyer completed the purchase of the property without performing any further investigation relative to the geologic issue of the land in general, or with respect to the investigation report in particular.
As AOA readers may have surmised, the findings in the 1982 report did not meet the County’s earthquake standards in effect when the escrow closed 14 years later. Significantly, the standards upon which the 1982 determinations were based changed dramatically in the ensuing decade, particularly after the 1994 Northridge earthquake.
When the buyer ultimately discovered he could not build on the property, he sued his own broker as well as the seller’s broker. Damages were awarded in favor of the buyer for roughly $232,000, but against whom?
Before continuing with this discussion, I urge readers to pause for a moment to consider this question: Which of the two brokers, if not both of them, had that $232,000 liability toward the buyer?
The Ruling of the Court
On first impression, one might expect that both agents were liable ─ the theory being that the buyer’s broker, who was the buyer’s fiduciary, was responsible because he led the seller to believe that the property was buildable, and the seller’s broker should be liable because he referenced an outdated report in the MLS, without clarifying it.
In fact, the appellate court concluded that only the buyer’s broker was liable (on the grounds that the buyer’s broker directly induced the buyer to believe the property was buildable.) It then affirmed an award against the buyer’s broker for about $232,000.
The tougher issue was whether the seller’s broker should be jointly or individually liable on the theory that his posting on the MLS referred to an outdated report, and did not disclose that it was outdated.
Surprisingly, the Court of Appeal held that the selling broker was not liable because (1) the seller’s broker was not a fiduciary of the buyer, and (2) as such, his obligation to the buyer was merely to comply with the Civil Code (i.e., Section 1088) which regulates the content of MLS postings.
That section mandates that the listing broker “shall be responsible for the truth of all representations and statements made by the agent [in the MLS] of which that agent … had knowledge or reasonably should have had knowledge to anyone injured by their falseness or inaccuracy.”
In what appears to me to be “splitting hairs,” the appellate court justified its decision by explaining that the listing broker’s MLS posting was truthful as there was in fact a Fault Hazard Investigation Report which concluded that there was no evidence of an active fault on the property. Thus, strictly construing Civil Code Section 1088, the Court of Appeal held that the seller’s broker was not liable because the MLS listing was truthful to the extent that it covered the topic.
The court then went on observe that there is nothing in Section 1088 or any other source of law imposing the responsibility on a seller’s broker to ensure that true statements in an MLS are not misconstrued by a buyer, or to ensure that the buyer performs the appropriate due diligence to evaluate the significance of such true statements for the buyer’s particular purposes.
My Personal Opinion
I think the Court of Appeal was mistaken in its decision not to find liability of the seller’s broker.
There is another doctrine in law that the omission of information which would otherwise render a true statement false or inaccurate, must be disclosed. While it is correct that the seller’s broker did not know that the 1982 report he cited was outdated, it seems that the very reason he referenced that report declaring that the property was buildable, was to lead the buyer to believe that the property was, in fact, buildable.
In other words, the listing broker purported to hold himself out as having specialized knowledge about the property, including the fact that the report was relevant and applicable as of the time of the listing.
In my opinion, the appellate court should have held that broker at least had the obligation to disclose that he had not independently verified whether the report was still valid.
There are many Courts of Appeal throughout California (although there is only one California Supreme Court). I would not be surprised if some other Court of Appeal would have reached the opposite conclusion and imposed liability on the seller’s broker under the doctrine that one who speaks has a duty to make a full disclosure.
In any event, based on Saffie, the law now effective in California is that a broker is not liable for information he posts in MLS if the material is truthful. Conversely, he will only be liable for false statements if the licensee knew or reasonably should have known that they were not true.
Concluding Remarks
A word to the wise: Whether one is a seller, the broker of a seller, or the buyer’s broker, all communications to the buyer should be truthful with full disclosure. Obviously, knowingly false statements will expose the seller or his broker to liability to the buyer.
Additionally, I recommend that important disclosures be made in writing rather than verbally so that there will be no misunderstanding at a later time of exactly what was said, or not said.
Finally, when any licensee or seller communicates information to a buyer which they have not independently verified, they should disclose to the buyer that they are only passing along information, but that they have not confirmed its accuracy.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 37 years. He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association. He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.
Mr. Alberstone has been awarded an AV rating from Mardindale-Hubbell. An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity. You may Google “Dale S. Alberstone” for further background.
The foregoing article was authored on April 1, 2014. It is intended as a general overview of the law and may not apply to the reader’s particular case. Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.
Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1900 Avenue of the Stars, Suite 650, Los Angeles, California 90067. Phone: (310) 277-7300.