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Withholding material facts in real estate deals

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Real estate agents are required to disclose all material facts — those that may affect the decision-making process — prior to the completion of a transaction. (Courtesy photo)

This week’s question comes John K. in South City, who asks:

Q: “I recently bought my first home with my wife. We saw the ad for the house online and went to an open house. We liked the house and asked the broker about the neighborhood because we wanted a safe, quiet place to raise a family. The broker said it was a quiet neighborhood with older, retired neighbors. The agent acted as a “dual agent,” which, he said, meant he could represent us both. We went through a lot of paperwork, got the loan and then closed on the house. After we moved in, we started seeing a lot of traffic coming and going from next door. It turns out they are selling drugs and may be running a meth lab. I spoke to the other neighbor next door, and he said this had been going on a long time and he had spoken with the broker about it. I feel ripped off, what can I do?”

A: John, this is a tragedy. You work your whole life, save your money and try to make a home for your family and get lied to. You probably won’t be surprised to learn this isn’t the first time this has happened, and the law in the area of disclosures is fairly well-developed.

The relationship between a real estate agent and his or her client is one that involves great trust: Indeed, a home purchase is the largest financial transaction in most people’s lives. It is referred to as a fiduciary relationship, one in which special duties are created. The Realtor is referred to as the fiduciary, and you are his or her principal. Given the fact that the broker represented both of you in the transaction — buyer and seller — he owed each of you a fiduciary duty to disclose to you, his principals, all material facts. That is, all facts that might affect the principals’ willingness to enter into or complete a transaction.

Material facts are those that a fiduciary knows are important to the principal and which might affect their decision making process.

In your case, you made it clear you wanted a safe and quiet place to live. These were facts of material importance to you in making your decision. Your agent owed you a duty not only to disclose material facts that were known to him, but his duty also extended to disclose reasonably obtainable material information, which would require the agent to investigate facts not known to the agent. In this case, it appears the agent didn’t need to investigate anything: He knew the facts.

He had an obligation to disclose them to you. His failure to disclose material facts, which he knew or should have known would affect your decision making, is often referred to as constructive fraud. If you can prove he knew this and withheld it from you, you may be able to sue him for fraud and concealment and seek to recover damages for the harms you have suffered as set forth below.

In addition to the broker owing you an obligation to disclose material information, the seller had a statutory obligation to truthfully complete a transfer disclosure statement. California Civil Code Section 1102.6 sets forth the statutory disclosures you were entitled to receive from the seller. Look at Section II (C)(11): It requires the seller to answer the following yes-or-no question: Are you aware of “neighborhood noise or nuisance problems?”

The owner can’t get out of the responsibility to disclose based on the fact that the question didn’t specifically ask about drugs. Section 1102.8 states that “the specification of items for disclosure in this article does not limit or abridge any obligation for disclosure created by any other provision of law or which may exist in order to avoid fraud, misrepresentation, or deceit in the transfer transaction.”

If the seller knew, the seller had to disclose this information to you. Civil Code Section 1102.13 sets forth the damages you may be allowed to recover. It says: “No transfer subject to this article shall be invalidated solely because of the failure of any person to comply with any provision of this article. However, any person who willfully or negligently violates or fails to perform any duty prescribed by any provision of this article shall be liable in the amount of actual damages suffered by a transferee.”

Civil Code Section 3343 sets forth the kinds of damages you may be entitled to: the difference between the actual value you paid and the actual value received together, with any additional damage arising from the particular transaction. This includes your loss of use and enjoyment of the property to the extent that it was caused by the fraud.

Christopher B. Dolan is owner of the Dolan Law Firm. Email questions to help@dolanlawfirm.com.

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  • Kary

    Two points. First, this story shows the dangers of using a listing broker to write up a buyer’s offer. Washington law is slightly different (assuming this article is accurate) in that the agent would remain just the seller’s agent in most situations. But either way, a buyer should get their own agent. When I’m acting as a listing agent I strongly discourage a buyer who thinks it best I write up their offer.

    Second, if this listing agent is a Realtor they could possibly be investigated and fined by the local Realtor organization. There may be short time limits to file such a complaint, and I doubt the fine money would go to the buyer, but that would be another course of action to look into.