WP: Disclosure: The Broker’s Duty to Inspect

V. The Broker’s Duty to Inspect

The listing broker has an affirmative duty to conduct a reasonably diligent inspection of the seller’s property to uncover defects and make those defects known to the buyer. The listing broker may not rely on representations of the seller where he or she has reason to believe the representation is incorrect. The real estate agent is held to a higher standard than the non-licensee.

The buyer is not the only party to a real estate transaction with a duty to investigate and inspect the premises. According to the Code of Ethics of the National Association of REALTORS, the broker is obligated to discover adverse factors reasonably apparent to someone with expertise in the real estate licensing authority. Code of Ethics, Article 2. Like the buyer, the broker is only held to the standard of knowledge of others so situated, i.e., other brokers. The broker is not held to the standard of a contractor or electrician, or other professional, but rather to find conditions which other prudent, diligent brokers would find during an inspection. The broker can best fulfill this obligation by knowing all that he or she can, positive and negative, about the property.

A relatively new statute in Ohio specifically provides that a real estate licensee is not required to discover latent defects in property, or to advise on matters outside the scope of knowledge required for real estate licensees, or to verify the accuracy or completeness of statements made by the seller, unless the licensee has reason to believe that the statements may be inaccurate or incomplete. This statute has not yet been tested in court but it does seem to give licensees protection when a defect, determined to be latent, is not discovered and disclosed.

Once the broker discovers or should have discovered adverse conditions, either through personal inspection or in reliance upon the seller’s representations, the broker’s duty to disclose to the buyer commences. A broker must disclose all material facts about the physical condition of the property of which the broker has actual knowledge and which the buyer would not discover by a reasonably diligent inspection. OHIO REV. CODE ANN. § 4735.67(A) (2002). The buyer’s agent is obligated to disclose to the buyer facts known which affect the value of the property. Kossutich v. Krann, 1990 Ohio App. LEXIS 3449 (Cuyahoga Cty. Aug. 16, 1990). This duty includes disclosure of any material defects in the property, environmental contamination, and information that any other law requires to be disclosed. A broker is assumed to be acting with “actual knowledge” if he or she acts with reckless disregard for the truth.

Additionally, a broker has a duty to advise a buyer if the broker is aware that the seller’s representations are inaccurate. OHIO REV. CODE ANN. § 4735.67(B) and (E) (2002). However, a broker is not liable to the buyer for false information that the seller provided to the broker and which the broker then provided to the buyer in the real estate transaction, unless the broker had actual knowledge that the information was false, or acted with reckless disregard for the truth. OHIO REV. CODE ANN. § 4735.68(A) (2002). In those cases which the broker has some reason to doubt the seller, the broker must further investigate.

In Duman v. Campbell, the buyers sued the sellers and the agent for fraudulent misrepresentation. 2002 Ohio 2253, 3 (Cuyahoga Cty. May 9, 2002). The agent informed the buyers that the sellers had never experienced any water problems in the basement. This representation was consistent with the statements made by the sellers on the property disclosure form. The buyers presented evidence that, before they viewed the home, the agent told another prospective buyer who inquired about the dampness under the basement carpet and presence of mildew that the basement had water problems. Id. at 35.

The court determined that the agent would be liable if she had knowledge of the potential falsity of sellers’ disclosure; the knowledge reasonably should have given her cause to question it; and she intentionally or with reckless disregard for the truth communicated to the buyers the sellers’ disclosure of a dry basement to buyers. Id. See also Allison v. Cook, 139 Ohio App. 3d 473, 485 (Warren Cty. 2000) (agent is liable if the agent gave false information to the buyer either knowingly or in reckless disregard of the truth, or if the agent conveyed false information on her own initiative).

It is important to note that the caveat emptor defense will never protect from liability a real estate agent who fails to disclose to his or her clients facts known by the agent that are material to the transaction. Parahoo v. Mancini, 1998 Ohio App. LEXIS 1630, *34 (Franklin Cty. Apr. 14, 1998) (refusing to relieve real estate agents from liability based on a caveat emptor defense). Caveat emptor protects certain parties (sellers and sellers’ agents) from claims based upon nondisclosure of readily discernable defects when there is no special relationship giving rise to a duty to disclose. Id. at *32. However, a fiduciary relationship exists between a real estate agent and his or her client that gives rise to the duty to disclose, and therefore caveat emptor will not allow an agent to escape his or her disclosure duty. Id. at *34.

One way real estate agents sometimes learn of a defect in property is from a property inspection report provided in connection with a real estate transaction that does not close. For example, a buyer may enter a contract to purchase property which is conditioned upon a property inspection. The property inspection discloses problems with the property that allows the buyer to back out of the purchase pursuant to the terms of the contract. The real estate agent sees the property inspection report which discloses the problems with the property. The real estate agent then continues to market the property to other potential purchasers. In this scenario, the Ohio real estate licensing authority has held that the real estate agent must disclose to potential purchasers the information in the property inspection report even if the real estate agent does not believe that the information is true and accurate and even if a subsequent inspection report has been obtained which disputes the validity and accuracy of the first report. The licensing authority has held that, in this case the results of both reports must be presented to the potential purchaser so that the purchaser can then evaluate the accuracy of the information.

ILLUSTRATION:

Mr. Smith lives in Ohio and has listed his home for sale with Mr. Brown’s real estate agency. Mr. Brown noticed, when he inspected Mr. Smith’s house, that when he turns on light switches, he can sometimes see sparks. He asks Mr. Smith if there is anything wrong with the electrical wiring in the house. Mr. Smith says, “No.” Mr. Brown investigates the wiring no further. Mr. Jones is a prospective buyer. When Mr. Jones arrives at Mr. Smith’s open house at 6:00 p.m., all of the lights are already on in the home. Mr. Jones decides to buy the house. A few weeks after he moves in, Mr. Jones calls Mr. Brown and asks if there is anything wrong with the electrical system in his new house. Mr. Brown says “No.” Three days later Mr. Jones suffers a serious physical injury due to electric shock, subsequently learning the house is improperly wired. He sues Mr. Brown and Mr. Smith for failure to disclose the faulty wiring. Mr. Jones wins because (a) Mr. Brown was not justified in relying on Mr. Smith’s representation that there was nothing wrong with the wiring when he had reason to doubt Mr. Smith, and (b) a reasonably diligent inspection by Mr. Brown would have uncovered the defect.