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Questionable practice designed to avoid disclosing defects

 

By Peg Ritenour, OAR Vice President of Legal Services/Administration

Last week I wrote a Buzz post about the duty to disclose a negative inspection report to subsequent buyers after the first contract is terminated. In response, a question was posted by a REALTOR about whether a listing agent is required to give the seller a request to remedy and inspection report to the seller that is received from a buyer’s agent? She also asked about what to do if the seller instructs her not to give him the report?”

First, a listing agent has an obligation to provide a copy of the request to remedy and the attached inspection report to the seller. If the seller instructs the agent otherwise, the agent should ask the seller why he doesn’t want to see these documents. If the explanation is that the seller doesn’t want to disclose any defects found by the inspector to any subsequent buyer, that’s a problem for the listing agent. Why? Because the listing agent will be considered to have knowledge of the information contained in the inspection report that the agent received from the first buyer’s REALTOR. And if that report disclosed any defects in the property, the agent will have a duty to disclose those defects to a subsequent buyer. If the seller instructs the listing agent not to make such a disclosure, the seller should be referred to an attorney for advice on the duty to disclose such information. The agent should also immediately bring this situation to the attention of her broker or manager. If the seller persists in instructing the agent not to disclose any defects discovered  by that inspection, the listing broker should consider terminating the listing because following the seller’s instructions could put the listing agent and broker at risk of a license law violation, as well as potential civil liability.

I have also had listing agents tell me that they actually recommend to the seller that buyers be informed that if they aren’t satisfied with the inspection report that the seller will release the buyers from a purchase contract with “no questions asked.” The rationale for this approach is that if the buyer doesn’t tell them what the inspector found, both the seller and listing agent can plead ignorance to any knowledge about possible defects contained in the report.

This is a bad idea for a few reasons. First, by following this advice the seller may be terminating a contract when the buyer may have no basis for not performing. For example, the items that the inspector found may not be defects at all, but merely routine maintenance items. Or, the buyer may merely claim they were dissatisfied with the inspection when they really just wanted out of the contract because they have a case of “buyer’s remorse.”

But more concerning will be the situation where a defect found in that original report is later discovered by a subsequent buyer of the property after closing and becomes the subject of litigation against the seller, the listing brokerage and listing agent. Discovery conducted in conjunction with such litigation will likely result in the plaintiff/buyer learning that there was a previous contract on the property. Both the seller and listing agent will face questioning by the buyer’s attorney about the reason the contract was released and the results of any inspection. And when it comes out that the first buyer or their agent was instructed by the listing agent not to provide a copy of their inspection report to the seller or to identify the unsatisfactory conditions found by the inspector, the plaintiff’s attorney will have a field day with that listing agent and seller. It probably won’t take much for that attorney to leave the impression in the minds of a jury that the seller, at the suggestion of the listing agent , was trying to avoid disclosure of any problems to any subsequent purchaser. And that may not bode well for either the seller or their agent.

Tags: legal, Legally Speaking