VI. Most Claims Against Real Estate Brokers Include Claims of Fraud for Failure to Disclose Defects in Property.
A real estate broker can be sued for breach of contract and breach of fiduciary duties when the broker fails to satisfy his or her high duties of absolute loyalty and full disclosure to his or her client. Moreover, the broker can also be sued by the party to the transaction that the broker does not represent. These causes of action always include claims of fraud. A fraud claim does not require a contractual relationship or a fiduciary relationship. Indeed, most claims against real estate brokers for the failure to disclose material defects in property are brought by buyers against agents for sellers.
Because a broker’s duty is less than specific as to what must be disclosed, it is not surprising that brokers are most frequently sued on grounds of fraud, such as fraudulent concealment, non-disclosure, misrepresentation, and also for negligent misrepresentation. In order for a cause of action based on fraud to proceed, the following elements must be present: (1) “actual or implied representations or concealment of a matter of fact which relates to the present or past, and which is material to the transaction;” (2) which are “made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred;” (3) “with the intent of misleading another into relying upon it,” (4) “and reliance upon it by the other person with a right to so rely;” (5) and the other person suffers injury by such reliance. Klott, 322 N.E. 2d 690, 692 (Ohio Ct. App. 1974). Thus, fraud claims can be brought by either party to the transaction because there is no requirement of a contractual or fiduciary relationship.
Fraud claims can be either “active” or “passive,” sometimes also referred to as “affirmative” or “constructive.” Active or affirmative fraud includes claims of fraudulent misrepresentation and fraudulent concealment, both of which are based on some affirmative act or statement on the part of the broker. Passive or constructive fraud claims consist of fraudulent non-disclosure–that is, the failure to say something or do something when the court implies a duty to speak or act. The remedies for both kinds of fraud are the same, but as described below, the ability to disclaim liability may turn on this distinction.
It is worth noting that fraud of a broker’s agent can be imputed to the broker as long as it was committed within the scope of the agent’s employment. In determining liability, the proper question to ask is whether the agent was acting within the scope of his or her authority (i.e. conducting ordinary real estate duties) when the agent committed the fraud, not whether the broker had authorized the fraud. In fact, if the agent was acting within the scope of authority, the broker can be liable even when wholly ignorant of the fraud. See Myer v. Preferred Credit, Inc., 2001 Ohio 4190, at 13 (Ohio, Harrison Cty. C.P. 2001); Wardley Better Homes & Gardens v. Cannon, 61 P.3d 1009 (Utah 2002).
A. Fraudulent Misrepresentation
A broker will be liable for fraudulent misrepresentation if the broker makes a knowingly false statement regarding a material fact to the buyer, or if when the broker makes the statement not knowing whether it is true or false, he or she makes it under circumstances implying knowledge on his or her part. This is also true for an incorrect opinion given under circumstances implying knowledge because of the higher standard to which the broker is held. Fraudulent misrepresentation is a form of “active fraud.”
A broker will be liable for fraudulent misrepresentation where: (1) the broker makes a knowingly false representation regarding a material fact, or makes the statement with utter disregard for whether it is true or false; (2) the broker intends for the buyer to rely on the statement; (3) the buyer has a right to rely on the statement and does rely on it; and (4) the buyer suffers harm because he or she relied on the statement. Often a buyer claims that he or she was fraudulently induced to purchase property because of a false statement on the part of the broker upon which the buyer relied. If the false statement had not been made, the buyer claims he or she would not have purchased property. The buyer, therefore, asks the court to set aside the sale or, in the alternative, to award damages, such as the cost of remedying the falsehood, e.g. the cost of fixing the leaky roof or waterproofing the basement. Courts sometimes refer to these claims as claims of fraudulent inducement. The key to fraudulent inducement is a justified reliance on the part of the buyer. If the buyer was justified in relying on the broker’s false statement and was induced to purchase the property, suffering some harm as a result, the buyer will have a valid cause of action against the broker.
In Sanfillipo v. Rarden, 493 N.E. 2d 991 (Ohio Ct. App. 1985), an Ohio court of appeals applied elements of fraud to the following fact pattern. The plaintiff-purchaser, Mr. Sanfillipo, wanted to purchase some property on which to construct a building. He inquired of broker June Frame, sales agent for the company with which the property was listed, whether there was access to gas and water utility services on the undeveloped property. Evidence in the record indicated Frame had orally advised Sanfillipo this was available. Evidence also indicated that Frame had not independently verified the truth of her representation regarding the matter and that she became specifically aware of the lack of utility availability after she made her original representation to Sanfillipo. Frame never corrected the statement she had made earlier. Sanfillipo, 493 N.E. 2d at 993-94.
Sanfillipo did visually inspect the premises, but did not specifically look for signs of utility availability because Frame had already told him it was available. Id. After he bought the property he learned that no utility service was available.
Sanfillipo filed suit for damages, and the court considered whether the doctrine of caveat emptor would bar recovery. While recognizing the duty of the purchaser to inspect the premises, the court also noted it had previously held that a purchaser would not be automatically denied relief for failing to examine public records in advance of his acquisition of property. Niehaus v. Haven Park West Inc., 440 N.E. 2d 584 (Ohio Ct. App. 1981). It then noted the Sixth Appellate District’s holding in Foust “that any duty of inspection may be held to terminate at the point when representations have been made with respect to a material fact in direct response to a purchaser’s inquiry.” Sanfillipo, 493 N.E. 2d at 995. The court found summary judgment against the plaintiffs to be inappropriate here where there was conflicting evidence as to whether Sanfillipo asked about utilities and was answered by Frame, and whether the absence of utility service was apparent to the ordinarily prudent individual conducting a reasonable investigation.
In Noth v. Wynn, 571 N.E. 2d 446 (Ohio Ct. App. 1988), the court of appeals affirmed the lower court’s granting of summary judgment against the purchasers, the Noths, on their claim of fraudulent inducement against the seller and broker. The Noths claimed that the sellers, the Wynns, had not given them accurate information about how much of the lake the Noths bought when they purchased the Wynns’ home. They also claimed the Wynns concealed the property ownership rights in the lake by not telling the Noths that a third party had the power, at its option, to drain the lake.
The court held that the Noths’ actions for fraudulent inducement could not proceed because they had no right to rely on the oral representation of the Wynns or their agent regarding the property where the true facts were equally available to both parties. Noth, 571 N.E. 2d at 449. In this case, the restriction on ownership and true boundaries would have been discovered if the Noths had simply looked at the public records. The Noths did not even have a title search performed. The court concluded that “[w]here any adversities regarding title to property are of public record and therefore easily discoverable, the purchaser of the property is not entitled to rely upon the alleged misrepresentations of the seller or the seller’s agent.” Id.
The Noth and Sanfillipo cases may, at first glance, seem to conflict. However, it was not clear in Sanfillipo that an ordinary check of public records would have revealed the availability of utilities. If checking the public records would not yield the desired information, this would justify Mr. Sanfillipo’s reliance on Ms. Frame’s statement. Also, in Sanfillipo the broker was aware Mr. Sanfillipo would need utility access in order to exercise his intended use, and evidence suggested she allowed her original affirmative statement to remain uncorrected even after she knew it was no longer true. On the other hand, the Noths simply did not conduct a diligent inspection of the property. Since the restrictions on ownership and boundaries were easily discoverable, their reliance on statements by the Wynns or their agent was not justified. None of the considerations in Sanfillipo were applicable to Noth, and the court’s opinion was a reflection of that fact.
Many other Ohio courts, when deciding claims of fraudulent misrepresentation, have focused on the issue of whether a buyer’s reliance was justifiable under the circumstances. In Parahoo v. Mancini, for example, buyers who failed to investigate could not complain of fraud with respect to the size of their land when an accurate description of the property they purchased was brought to their attention during the transaction and could have been determined from the public records. 1998 Ohio App. LEXIS 1630, **23-24 (Franklin Cty. Apr. 14, 1998). The buyers claimed that their broker and the sellers made false representations by failing to disclose that they had sold most of the backyard to the state. Id. at *18. However, the conveyance was actually disclosed to the buyers during closing through the deed, title policy, and mortgage documents. Id. at *24. The documents excluded the state purchase from the conveyance and specifically described the excluded amount. Id.
In addition, the fraud claim could not succeed because the defect was readily discoverable by the buyers. Id. The deed conveying the backyard to the state was recorded three weeks before the closing and specifically described the land. The buyers could have reviewed the public records to see that the sellers had conveyed the backyard to the state of Ohio and the amount of the conveyance. Id.
In Barna v. Paris, buyer alleged misrepresentations by the seller and agent regarding the septic tank and zoning classification. The sellers and their agent were relieved of liability for fraud under the doctrine of caveat emptor because they did not make any representations as to the septic tank system, and the accurate zoning information was available through public records. 2000 Ohio App. LEXIS 4555, at *17 (Lake Cty. Sept. 29, 2000). While the agent did incorrectly identify the zoning, she did not do so with either the intent to defraud or with wanton or reckless disregard of the truth. Id. at **16-17.
In addition, the buyer could not justifiably rely on the agent’s representation because the zoning records were equally available to all of the parties for review. Id. at *17. The buyers were put on notice of a potential defect with the septic system through the property disclosure form and because they hired their own professionals to inspect the system. Id. at *11. Additionally, no evidence was presented that the seller or agent made affirmative representations that contradicted the property disclosure form. Id. at *12.
In Buchanan v. Geneva Chervenic Realty, buyer sued the seller and the seller’s agent for fraudulent misrepresentation of several physical conditions, including damage from pets. 115 Ohio App. 3d 250, 257-58 (Summit Cty. 1996). The court found that the agent did make several inaccurate and misleading statements with regard to the home being pet-free. The court acknowledged that an agent has a duty not to assert as fact matters to which they have no knowledge. The court determined that this agent’s deceptive statements constituted one element of fraudulent misrepresentation.
The court found, however, that the buyer could not prove that her reliance on the agent’s erroneous statements was justified. The buyer became aware during the inspection that animals had formerly lived on the premises. Id. at 258. She requested the correction of other problems before finalizing the agreement, but she did not further inquire about the animals or request accommodations with regard to the former presence of pets. Id. Despite the agent’s misrepresentations, the buyer had enough information to be on sufficient notice of possible problems resulting from pets in the home. Id. at 259.
In another Ohio case, a broker was held liable for fraudulent misrepresentation for his failure to disclose the existence of an easement over the property which had taken effect before the transaction but not recorded until afterward. In Gilbey v. Cooper, 310 N.E. 2d 268 (Ohio, Columbiana Cty. C.P. 1973), the Gilbeys asked the Coopers and their agent Caple about the location of the property lines. Both the Coopers and Caple had knowledge that the state had taken a temporary and permanent easement across the property, but Caple represented to the Gilbeys, in the Coopers’ presence, that the new bypass would not touch their land, making no reference to the easement. Since the easement had not been recorded as of the date of the purchase agreement, and no evidence of the easement was visible to the purchaser conducting a diligent inspection, the court found both the sellers and their broker violated their absolute duty to disclose the defect and were liable to the Gilbeys for fraudulent misrepresentation for their nondisclosure of a latent material fact. This case vividly illustrates a situation where the buyer was absolutely justified in relying on the broker’s statement. Generally, easements are a matter of public record, but this one had not yet been recorded. Thus, even the buyer’s diligent investigation would not have uncovered the defect.
When a seller or broker has engaged in fraudulent misrepresentation, liability cannot be avoided simply by including a disclaimer in the contract. For example, in Schlecht v. Helton, the court found that the seller could not escape liability for water problems in the basement because he had fraudulently misrepresented the basement’s condition. 1997 Ohio App. LEXIS 114, *8 (Cuyahoga Cty. Jan. 16, 1997). The seller failed to acknowledge water problems on the property disclosure form and falsely answered direct questions about the basement condition. Id. at *9. The court found that the “as is” clause in the purchase agreement could not bar liability on a fraudulent misrepresentation claim because the evidence showed that the statements were made fraudulently. Id.
Mr. Smith lives in Ohio and has listed his property for sale with Mr. Brown’s real estate agency. Mr. Jones is a prospective buyer. During an inspection of the property, Mr. Jones asks Mr. Brown if the property would have access to water, electricity, and cable TV, all of which he would need in his business. Mr. Brown says these services are available; however, he is really uncertain whether these services are actually available. Mr. Jones buys the property and discovers the services are unavailable. He sues Mr. Brown and Mr. Smith on the grounds of fraudulent inducement and wins because Mr. Brown made a representation without regard to its truth on which Mr. Jones relied and had a right to rely, and suffered harm thereby. Mr. Brown should NOT have provided information unless he knew it was TRUE.
Brokers are also frequently accused of fraudulent misrepresentation even though they have the best of intentions and have no actual knowledge that they are misleading the buyer. In Pumphrey v. Quillen, 135 N.E. 2d 328 (Ohio 1956), the Supreme Court of Ohio held that in an action for fraudulent misrepresentation, the plaintiff need not prove the defendant made a statement knowing it was false if he can show the defendant made it without knowing whether it was true or false under circumstances implying knowledge on the defendant’s part. Id. at syllabus paragraphs 1 and 2. Again, there must be some evidence the buyer relied on the misrepresentation. Here, the purchasers brought a suit for fraudulent misrepresentation against the seller and broker. Apparently the broker represented that the walls of the home in question were of tile construction when they were actually made of a different material and simply coated with a substance called Perma-Stone. Though the evidence suggested even experts were not aware the walls were not tile, see Pumphrey, 135 N.E. 2d at 332 (Taft, J. dissenting), the court held that since the broker made the statement without knowing it to be true, having no sufficient basis of information to justify his representation, he was “as culpable as if false . . . ” and liable for fraudulent misrepresentation. Id. at 331. His statement was made not as an opinion, but as a statement of fact, without a sufficient factual basis to support it, therefore he was liable.
Mr. Smith lives in Ohio and has listed his house for sale with Mr. Brown’s real estate agency. Mr. Jones is a prospective buyer. During an inspection of the house, he asks if the hardwood floors are oak. Although he is not positive, but thinks they look like oak, Mr. Brown says yes. Mr. Jones buys the house and subsequently learns the floors are not oak. He sues Mr. Brown and Mr. Smith on the ground of fraudulent misrepresentation and wins because Mr. Brown made an affirmative statement regarding a material fact, uncertain whether it was true of false, and without sufficient facts to support his statement. He should not have given an answer if he was uncertain.
B. Fraudulent Concealment – Hiding the True Condition of the Property
A broker will be guilty of fraudulent concealment when the broker takes affirmative steps to prevent the buyer from uncovering material defects in the property. Fraudulent concealment is considered “active fraud.”
Because fraudulent concealment is similar to fraudulent misrepresentation, the legal principles are the same. The difference is that fraudulent concealment usually includes a claim that the real estate broker conspired with the seller to hide a defect in property. In this situation, the broker would not only represent that the basement is dry, but the broker would instruct the seller to paint over water marks or patch cracks in the basement wall so that the buyer will not discover the true condition of the property. Even if no misstatement is made concerning the dryness of the basement, the broker will be liable for fraud.
For example, in Shear v. Fleck, the seller was found to have actively concealed latent problems with water in the basement, so the buyer was entitled to recover for damages despite the “as is” clause in the purchase agreement. Shear v. Fleck, 2001 Ohio App. LEXIS 4063, at **18-19. The sellers deliberately masked the physical flaws caused by the water; contracted for minimal repairs in order to secure a “lifetime warranty;” characterized the problem as a “one-time nature;” and misrepresented the duration of the problem on the disclosure form. Id. at **16-17.
Likewise, in Jacobs v. Recevskis, the seller allegedly fraudulently concealed water and sewage leaks. The evidence revealed that, while they lived in the home, the sellers had experienced leaks in the roof, problems with the well, and problems with the septic system. Jacobs v. Recevskis, 105 Ohio App. 3d 1, at *6 (Clark Cty. June 14, 1995). But the seller told neither the buyer nor the agents about the problems because he felt that he had corrected the problems. Id. The court determined that the corrective steps taken by seller only concealed and disguised the problems and prevented the buyer’s inspection from discovering the leaks. Id. at *7. The case was set for trial to resolve whether buyer’s actions were taken with the requisite intent to mislead and deceive the buyers or for the purpose of repairing and remedying the existing problems. Id.
In cases of fraudulent concealment, the buyer is often awarded punitive damages, in addition to the costs of repairs, because the court determines that the real estate broker’s conduct is so unjustified as to constitute willful and malicious misconduct.
Mr. Smith lives in Ohio and has listed his home for sale with Mr. Brown’s real estate agency. In the process, Mr. Smith pointed out some cracks in the basement walls to Mr. Brown and asked him how they could fix them and thereby make the home more attractive to buyers. Mr. Brown suggested some cosmetic mudding and a fresh coat of paint. Mr. Jones is a prospective buyer who attends Mr. Smith’s open house. Mr. Jones buys the house. Two years later, he realizes there is a distinct bow in his basement wall. He hires a professional contractor and is told the wall has had cosmetic repairs, but will need major structural work. Mr. Jones sues Mr. Brown and Mr. Smith and wins because they actively prevented him from discovering a material defect in the property.
C. Fraudulent Nondisclosure – Silence When There is a Duty to Speak
Fraudulent nondisclosure is “passive fraud” whereby the broker and/or seller commits fraud upon the purchaser by a failure to make a disclosure when under a duty to disclose. It is fraud by omission rather than committing an affirmative act. The facts and circumstances of each case will determine whether nondisclosure of a fact rises to the level of fraudulent nondisclosure.
Fraudulent nondisclosure is a cause of action sometimes asserted against brokers and sellers for the failure to disclose when under a duty to do so. They simply do not say anything when they are supposed to speak. For this reason, fraudulent nondisclosure is different from the causes of action already described, which require some commission of an act in order for the broker to be liable. Fraudulent nondisclosure arises when an omission occurs. The elements necessary to successfully maintain an action for fraudulent nondisclsoure are: (1) an actual concealment (2) of a material fact (3) with knowledge of the fact concealed (4) with intent to mislead another into relying upon such conduct (5) followed by actual reliance thereon by such other person having the right to so rely (6) with injury resulting to such person because of such reliance. Id. at 510. Implicit in these elements is the requirement that the non-disclosing person have a duty to disclose. Thus, a fraudulent nondisclosure claim against the sellers was dismissed in Arbor Village Condo. Ass’n v. Arbor Village, Ltd. because the seller did not have a duty to disclose past repairs to the faulty hot water system where the buyers bought the condominiums “as is” and did not hire inspectors or appraisers. 95 Ohio App. 3d 499, 511 (Franklin Cty. June 9, 1994).
Crum v. McCoy, 322 N.E. 2d 161 (Ohio, Franklin Cty. Muni. Ct. 1974), is an example of a successful claim of passive or constructive fraud. In Crum the McCoys listed their home for sale with Mr. Goodman of Westerville Realty and informed him at that time of a problem with the home’s water system. Mr. McCoy told Mr. Goodman that he wanted prospective buyers to be told up front about the water problem. Goodman listed the problem on his house listing form and his broker’s information card. When he prepared a listing for the Multiple Listing Service, however, he did not note the water problem because as he testified, there was not enough room on the form. Id. Mr. Crum called Goodman to arrange a showing, but neither Goodman nor his agents revealed the inadequacy of the water supply system to Crum at any time. The Crums thereafter bought the house, discovered the problem, and subsequently brought suit against the McCoys and the broker.
The court found that Mr. Crum had conducted a prudent, diligent investigation. Nothing in his inspection caused him to have any doubts about the condition of the water system. Although he did not notice that the washing machine was not hooked up, he did see clothes piled up and around it, which would indicate to the ordinary man that the appliance was being used. Crum, 322 N.E. 2d at 164-65. Instead, the court found both the broker and the seller had failed to disclose the defect. “A real estate broker with knowledge of a serious latent defect in property which has been listed with him has an obligation to use diligence to see that a buyer is informed of the defect, even though the buyer is the customer of a cooperating broker who gets his information concerning the property from a multiple listing service.” Id. at 165. Goodman was under a duty to make sure prospective buyers were made aware of the water supply problem. As a principal, the McCoys were liable for the acts of their agent broker since he had implied authority to act in the manner in which he did. The broker was liable to the sellers for the damages caused by his nondisclosure, however, because it constituted a breach of his fiduciary duty to his principal. Crum 322 N.E. 2d at 165.
Similarly, in Even v. Krawitz, the seller was found liable for fraudulent nondisclosure when the buyers, who relied on the property disclosure form, discovered substantial water leakage soon after they moved in. 1997 Ohio App. LEXIS 1754, at *9 (Cuyahoga Cty. May 1, 1997). The buyer proved fraudulent nondisclosure by showing that the condition that caused the damage existed while sellers owned the home; the water seepage was discovered soon after buyer’s moved in; sealing had been put in place by the sellers to conceal the cause of the damage during inspection; and the property disclosure form contained no information about the water leak and damage. Id. at **10-11.
Fraudulent nondisclosure can also create liability when a seller does not reveal to a buyer sources of peril of which the buyer knows and which are not discoverable by the buyer. Klott v. Associates Real Estate, 41 Ohio App. 2d 118, 121 (Franklin Cty. 1974). In Klott, however, the buyers could not succeed on such a claim because the fact that the water supply on the property was provided by a well instead of a community system was neither purposefully hidden from the buyer nor incapable of being observed. Therefore, the seller did not have a duty to bring this to the buyer’s attention. The buyers claimed that they would not have purchased the property if they knew about the malfunctioning water well. Id. at 119-120. The court determined that while concealment of a dangerous and serious condition of the property, such as a contaminated well, might be actionable, in this case no misrepresentations were made and the defective operation of the well did not put the buyer in peril. Id. at 123. Additionally, there was no reason why the buyer could not have sought out information from the vendor concerning the source of the water and the condition of the equipment. Id.
Nondisclosure is the equivalent of fraudulent concealment when the duty to speak arises in order to place the other party on equal footing. Mancini v. Gorick, 41 Ohio App. 3d 373, 374 (Summit Cty. 1987). In Mancini, the buyer sued the seller, who was the original architect and general contractor for the house, for failure to disclose structural defects in the roof. Although the buyers never took advantage of the inspection provision in the purchase agreement, the court determined that the seller engaged in fraudulent concealment sufficient to overcome the “as is” clause in the agreement. Id. at 374. The nondisclosure by the sellers was the equivalent of fraudulent concealment because the buyer had placed confidence in the seller as he had personally designed and built the house. Id. at 375. The seller was aware that buyer relied on his professional expertise in deciding not to have the house inspected. Id. at 374-75.
Mr. Smith lives in Ohio and has listed his house for sale with Mr. Brown’s real estate agency. Mr. Smith has a serious termite problem and tells this to Mr. Brown. Mr. Jones is a prospective buyer who attends Mr. Smith’s open house. While they converse about the house, no question is asked and no information is given regarding termites. Mr. Jones buys the house. A year later he discovers the termite problem. He sues Mr. Brown and Mr. Smith on a theory of fraudulent nondisclosure and wins. Termites are a latent material defect, and as such, should have been disclosed. Mr. Brown and Mr. Smith were under a duty to disclose and failed to do so. They were therefore liable for fraudulent nondisclosure.
D. Negligent Misrepresentation
Negligent misrepresentation occurs where a broker fails to exercise reasonable care to discover defects the broker should be able to find, and then makes representations regarding the conditions for which the broker did not use reasonable care to investigate. A broker will be liable under a theory of negligent misrepresentation without a showing that the broker knew the statement was false or had utter disregard for whether it was true or false. Rather, the focus is on whether the broker exercised the care and diligence of the ordinary broker to discover defects in the property. The broker will generally not be held liable under negligent misrepresentation, however, for statements regarding matters of public record.
A final theory of brokers’ liability to buyers is that of negligent misrepresentation. It is different from fraud in that it does not require proof of a knowing misrepresentation. It can be the product of an honest mistake. There is some suggestion in Ohio case law that juries will apply this theory when they are reluctant to find that the broker acted with utter disregard of the rights of the buyer, but nevertheless they feel that the buyer has been wronged.
Under the Illinois interpretation of this theory, a cause of action will only lie where a person seeks information from another who is possessed of special skills, the individual trusts the other to exercise due care, and the other party knew or ought to have known that reliance was being placed on his skill and judgement. O’Brien v. Noble, 435 N.E. 2d 554, 556 (Ill. App. Ct. 1982). In O’Brien, the plaintiffs sued the broker under negligent misrepresentation for failing to advise them of a developmental restriction in the zoning ordinance. The appellate court held that no liability existed because no representation was made regarding zoning, and furthermore, zoning matters are of public record and equally accessible by all. The court concluded that “liability will be found when the defendant misrepresents facts of which he possesses almost exclusive knowledge and the truth or falsity of which are not readily ascertainable by the plaintiff.” O’Brien, 435 N.E. 2d at 557. Since zoning ordinances were a matter of law, and “all men are presumed to know the law,” the plaintiffs reliance upon the broker was not justified and the cause of action failed.
Illinois permits a common law claim for negligent misrepresentation against an agent as long as the misrepresentation is a false statement of material fact. Randels v. Best Real Estate, Inc., 243 Ill. App. 3d 801, 808 (Ill. App. Ct. 1993). In Randels, the buyers did not know about a village ordinance that required the hookup of the municipal sewer system at their expense. Denying the negligent misrepresentation claim against the agent, the court found that the agent’s omission about the ordinance, which was a matter of public knowledge equally available to buyers, was not one of material fact because the buyer could have discovered the omission through ordinary prudence. Id. This was particularly true given that the buyer was a licensed real estate agent who received a commission for the sale of the property and had received information from the city about a sewer assessment.
In Kansas, a claim of negligent misrepresentation was initially allowed by statute. In Johnson v. Geer Real Estate Co., 720 P.2d 660 (Kan. Ct. App. 1986), the broker was unaware of the fact that the home was served by a septic system as opposed to the public sewer system. Neither was the seller aware of this fact. The court held the broker and real estate company liable to the purchaser for negligent misrepresentation for their failure to discover and tell the purchaser that the house was served by a septic system. The seller was not found liable. The court found a difference in the standards of knowledge to which the seller and broker would be held. The standard for the seller was lower; no evidence was found to indicate the seller was aware or should have been aware of the existence of the septic system.
On the other hand, the court noted the existence of several factors which “to the eye of an experienced realtor, would indicate that the property was not served by the public sewer system.” Johnson, 720 P.2d 660, 664-65 (Kan. Ct. App. 1986). The court found the broker’s failure to discover the factors and investigate further were sufficient grounds for establishing the broker’s negligence. Under Kansas law, K.S. A. 58 – 3602(a)(3 1), a real estate licensee had a duty to disclose that which he knew or should have known. Id. at 665. The court concluded the language of the statute clearly permitted imposition of liability for ordinary negligence. This was true, despite the sellers being found not liable, due to the real estate broker’s expertise in these sorts of matters. Johnson, 720 P.2d at 666.
After Johnson, however, the Kansas legislature amended the statute to limit recovery to when the broker engages in fraud or makes any substantial misrepresentation. Brunett v. Albrecht, 248 Kan. 634, 641-42 (Kan. 1991). Thus, the Act may no longer be the basis for a private cause of action for negligent or fraudulent misrepresentation, although the court did note that those actions could be brought pursuant to other statues or at common law. Id. at 642-43.
In fact, the Kansas Supreme Court recently recognized a common law cause of action for negligent misrepresentation against real estate agents for statements inducing a buyer to purchase property. Mahler v. Keenan Real Estate, 255 Kan. 593, 606 (Kan. 1994). In Mahler, the buyers relied on the seller’s agent’s statement that the water being discharged from the pipe was from the shower, sink and dishwasher, and that the home had no water problems of which he was aware. Id. at 606. In imposing liability, the court focused on whether the agent failed to exercise reasonable care or competence in obtaining or communicating the information to the buyers. Id. The court found that the agent had no source for his statement other than his own assumption about the sources of the water from the pipe. Id. It was most problematic that the agent transformed his general opinion into specific information and presented it to the buyers as fact. Id.
In contrast, an Ohio court has found that buyers could not succeed on a negligent misrepresentation cause of action against the sellers’ agent. Parahoo v. Mancini, 1998 Ohio App. LEXIS 1630 (Franklin Cty. Apr. 14, 1998). In Parahoo, the buyers failed to find out that the sellers had conveyed part of the land to the state. Id. at *5. The court found that under the doctrine of caveat emptor, reliance on intentional or negligent misrepresentations as to property size was unreasonable as matter of law when accurate descriptions were readily available. Id. at *27. This included misrepresentations made by sellers’ agents. The buyers did not present evidence of affirmative misrepresentations by the agents. Id. In addition, the correct description of the property was available in public records and was specifically provided to buyers at the closing. Id.
Mr. Smith has listed a parcel of property, located in Ohio, for sale with Mr. Brown’s real estate agency. The property is zoned residential. Mr. Jones is a prospective purchaser. He views the property with Mr. Brown and asks whether the land may be put to commercial use. Mr. Brown says “Yes.” Mr. Jones buys the land but cannot get a permit to build a commercial building on his property. He sues Mr. Brown and Mr. Smith on the grounds of negligent misrepresentation. Mr. Jones loses because zoning is a matter of public record easily accessible to all. Thus, while Mr. Brown may not have used reasonable care in discovering the property’s zoning, Mr. Jones cannot rely on statements regarding matters of public record.