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Ohio Broker found liable for failing to disclose a negative inspection (Part I)

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

A few months ago I blogged about the importance of disclosing a negative inspection report to subsequent buyers. Several REALTORS took issue with doing this because of concerns that the inspector was wrong or unqualified. Well, a broker who had the similar doubts about an inspection and failed to disclose the inspection to a subsequent purchaser just found herself on the wrong side of a lawsuit.

The case involved the sale of property located on a lake in southern Ohio that was listed by the broker. This property was originally owned by a married couple, who later transferred the property to an LLC. Following a divorce, the wife (the “seller”) retained the property.

A purchase contract was subsequently entered into between the seller and a buyer. The buyer was also represented by the listing broker, who acted as a dual agent. After an inspection, the listing broker prepared an addendum on behalf of the buyer, citing the defects found by the inspector and asking the seller to reduce the purchase price. The issues raised by the buyer in the addendum included settling issues in several areas including doors, the garage, the master bedroom and a spiral staircase pad, as well as condensation on the windows in a turret and a lack of a footer on the turret. The seller rejected the addendum and the contract was terminated.

The seller then began repair work on the home that included installing new windows in the turret, replacing a pad behind the turret room, installing a retaining wall on the rear slope of the property, and putting new concrete on the garage floor. This work was still in progress when the listing broker showed the property to a second buyer, an 86-year-old man from California who had grown up in the area. A purchase contract containing an inspection contingency and an “as is” clause was subsequently negotiated by the broker, who again acted as a dual agent. However, the buyer never obtained an inspection.

Less than a year after closing, several issues on the property began to surface. These included a large crack in the yard and sidewalk and shifting of the deck. An engineer and contractor hired by the buyer determined that the land was settling and that the soil was shifting down the slope toward the lake. The buyer filed a lawsuit against the LLC, the seller the broker and the broker’s company. Following a trial, the jury found that the seller — who happened to be a judge — had engaged in fraudulent misrepresentation, fraudulent concealment, breach of contract, and found the seller personally liable to the buyer for approximately $216,000 in compensatory damages, $68,000 in punitive damages, and $68,000 in attorney’s fees, even though the property was held by the LLC.  The jury also found against the broker and her company for breach of fiduciary duties and negligence, but did not award any damages to the buyer on those claims. Both the seller and broker appealed. The buyer also appealed challenging the jury’s award of $0 in damages against the broker.

First, let’s look at the issues raised by the broker on appeal. The broker argued that the claims against her should have been dismissed and that the jury’s finding that she violated her fiduciary duty to the buyer was not supported by the evidence. The Fourth District Court of Appeals disagreed. In upholding the jury’s decision, the court found that as a dual agent the broker owed a fiduciary duty to both the seller and buyer to disclose any material facts of which she was aware. In this case, it was indisputable that the listing agent was aware that settling issues had been alleged by the previous buyer, as she had written the post inspection addendum for that buyer. That addendum outlined structural and foundation issues and estimated that the repairs could exceed $30,000. The broker’s defense was that she questioned whether the inspection findings were truly “facts.” The broker testified that she did not know the name of the inspector and had not received the typical inspection report. Instead she merely had been given a handwritten note that listed the issues with the property. She also speculated that the first buyer may have been using the inspection provision as a negotiating tool.

The appellate court soundly rejected the broker’s arguments. In doing so the court held that even if she had no additional support for the issues outlined in the inspection addendum and wasn’t sure the first buyer had used a qualified inspector, the fact that the first buyer had raised such concerns was a material fact that the broker had a duty to disclose to future buyers. Further, the court held this duty to disclose existed regardless of whether the findings stemmed from a qualified inspector or someone else. The court also found that the  broker’s general statement to the subsequent buyer that the house needed repairs and that he should have it inspected were not sufficient to satisfy her fiduciary duty to the buyer.

As to the issue of the $0 damages awarded to the buyer as a result of the broker’s breach of fiduciary duties, the court found this to be inconsistent with the jury’s findings, given the uncontested evidence that the buyer incurred damages as a result of the broker’s negligence and failure to disclose. Thus the court remanded the case for a new trial of the issue of damages.

To be continued… Next week we’ll explore how the seller fared on appeal.

 

{EDIT:  You can read Part II by clicking here!}

Tags: legal