2013 Residential Property Disclosure form
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FAQs: DISCLOSURE ISSUES
DISCLOSURE WHITE PAPER
Revised: September 2003
Published by OAR’s Legal Services Group, September, 2003
THE REAL ESTATE BROKER’S DUTY OF DISCLOSURE AND THE CONCOMITANT LIABILITY FOR NON-DISCLOSURE
Two words aptly describe modern American society: consumer-oriented and litigious. Neither has a pleasant ring to the ears of real estate brokers; seventy-six percent of all cases against brokers are brought by disgruntled purchasers. In this era of consumer protectionism, brokers must be especially mindful of the duties owed not only to their clients, but also to the purchasing public. The purpose of this article is to survey the case law on the broker’s duty of disclosure, briefly discussing the broker’s duties to his or her principal, examining the doctrine of caveat emptor, the course of the broker’s duty to disclose, the broker’s duty to conduct a reasonable inspection, the purchaser’s duty to inspect, conditions the courts have held to be subject to disclosure, and causes of action frequently asserted against brokers.
I. The Broker’s Duties to His or Her Principal: the Listing Broker and the Seller & the Buyer and the Buyer’s Agent
The relationship between a broker and his or her principal is a fiduciary relationship, one of trust and loyalty. All of the broker’s loyalties run to his or her principal; the broker must always work to the best interests of the principal even if the broker’s own interests are sacrificed in the process. The broker must make full disclosures to the principal on every matter in the transaction. This is true whether the broker is the seller’s agent or the buyer’s agent.
Ohio holds an individual with a real estate license to a higher standard of competency and fairness than a lay member of the public. Richard T. Kiko Agency, Inc. v. Ohio Dept. of Commerce, Div. of Real Estate, 48 Ohio St. 3d 74, 76 (1990). The Ohio legislature has specifically stated that a real estate agent acts as a fiduciary to his or her client (principal) in an agency or subagency relationship. A fiduciary relationship is based on trust and loyalty. This relationship requires the broker to “exercise fidelity and good faith toward his principal in all matters that fall within the sphere of his employment;” to “execute his commission with skill, care and diligence;” and to use his best efforts to promote the principal’s best interests. Salem v. DeWitt-Jenkins Realty Co., 1952 Ohio App. LEXIS 876 (Summit Cty. May 21, 1952); OHIO REV. CODE ANN. § 4735.62 (2002). This is true even when promoting the principal’s interests does not necessarily promote the broker’s interests.
This duty necessarily requires the broker to make full disclosure to the principal of all facts within his or her knowledge that are or may be material to all matters in connection with the transaction. Myer v. Preferred Credit, Inc., 2001 Ohio 4190, at 22-23 (Ohio, Harrison Cty. C.P. 2001). For example, if the listing broker discovers that a prospective buyer plans to use the land to build a carry out or drive-thru, the broker needs to convey this information to the seller, his or her principal. Or, if the listing broker acquires knowledge regarding the prospective buyer’s credit history, this, too, must be disclosed to the seller.
The same standard is applied to buyers and the growing number of buyers’ brokers. Buyers’ brokers are fiduciaries of the buyer. All their loyalties run to the buyer. If, for example, the buyer’s agent learns that the seller will sell for $80,000 as opposed to $100,000, he or she must communicate this to the buyer, even if the lower priced sale would result in a lower commission for the buyer’s broker. The broker must make full disclosure to his or her principal, whether buyer or seller, regarding any matter relating to the transaction.
For a broker to satisfy his or her fiduciary duties of loyalty, good faith, and full disclosure, the broker cannot act for persons who have interests adverse to those of his or her principal. Id. at 28. This includes the broker’s self-interest. Thus, it has been held that a broker is prohibited from either (a) representing both parties (“dual representation”) or (b) splitting fees/commissions with the adverse party’s broker (“self-dealing”), unless these facts are fully disclosed to the principal and the principal consents prior to the transaction. Id. at 28, 34. Failure by the broker to obtain the principal’s fully-informed consent can open up the broker to liability for breach of fiduciary duty. In these suits, brokers can be liable for damages irrespective of actual damage to the principal. Id. at 38.
Mr. Green lives in Ohio and has listed his home for sale with Mr. Day’s real estate agency. Mr. Black is a prospective buyer. He has contracted with Mr. Johnson, who is exclusively a buyer’s broker. Mr. Day learns Mr. Black is a developer who has already acquired all of the other homes on the block and has plans to turn the area into a condominium community. Mr. Day must convey this information to Mr. Green, his principal, because it is relevant to the transaction. It could cause Mr. Green to raise his price substantially or even choose not to sell. Similarly, Mr. Johnson learns Mr. Green is currently experiencing financial problems. Mr. Johnson must communicate this information to Mr. Black because it is relevant to the transaction. It could affect the amount Mr. Black will offer for Mr. Green’s property.