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When a Seller’s Disclosure Statement Is Not Truthful

(a) An unfortunate but all-too-familiar scenario

You represent a Seller who completed a disclosure statement about the condition of the property. In it the Seller states, for example, that the sump pump in the basement is “new”. You ask for no documentation, as you have no reason to believe he or she is being dishonest about the disclosure. The Seller’s representation is transferred into the MLS listing which repeats that the pump is “new”. Soon after the transaction is complete, and everyone is seemingly happy, there is a period of heavy rain. The basement in the home which you just sold gets flooded, causing expensive property damage for the new owner. After a waterproofing contractor is called and performs an inspection of the sump pump, it is discovered that the sump is not “new”. It had been repaired, not replaced, and, although not “new”, was “in good operating condition” at the time of the home inspection.

The new owner’s attorney writes to you, highlighting the “material misrepresentation” you made about the sump pump, and how her client’s reliance on your misrepresentation caused damage to her client’s property. The letter further demands payment for the itemized damaged property, and that you and/or your client be responsible for the installation waterproofing system. Payment is demanded within a week in order to avoid the court’s involvement. What do you do now?

(b) What happened to “Buyer Beware”?

You have most likely heard the legal term “caveat emptor,” which is a Latin phrase meaning “Let the buyer beware.” This well used term is still applicable, albeit less frequently, to real estate transactions. It essentially means that if the buyer isn’t proactive enough to figure out what’s wrong with the property, the seller won’t be held responsible. Although written disclosures are not required in this State, New Jersey courts protect buyers against sellers who fail to disclose material facts which are not readily observable. In addition, a seller who misrepresents the condition of its property in a written disclosure statement is subject to consequences. But what about you, the seller’s agent? What obligations and liabilities do seller’s agents have with regard to disclosures about property?

(c) The applicable law, generally speaking

Real estate brokers and agents are not only subject to general common law claims such as negligence and fraud but also are subject to liability under the New Jersey Consumer Fraud Act. N.J.S.C.A., 56:8-2, et seq. (the “CFA”) and by extension all applicable administrative codes and regulations. The CFA protects buyers and sellers against affirmative acts involving deception, fraud or misrepresentation, as well as acts of omission where material facts are concealed or omitted. Any misrepresentation, whether by commission or omission, that is “material to the transaction” may be actionable under the CFA.

(d) Two examples

As we advised almost 8 years ago, New Jersey Courts have found that seller’s agent is liable under the Consumer Fraud Act when the misrepresentation, whether by commission or omission, that is “material to the transaction”. See our April 2006 Newsletter about Vagias v. Woodmont Properties, L.L.C., 284 NJ. Super. 129, 134-135 (App. Div. 2006). The Vagias case illustrates the importance of real estate agents verifying critical information. There, the real estate agent sold a property to the buyers knowing they wanted to purchase a property located in a particular section of town because the schools were better and the area was more prestigious. The agent mistakenly, but unintentionally, represented that the property was located in that section without verifying that fact. Because the buyers’ decision to purchase was based primarily on this misrepresentation, the agent was held liable under the CFA.

A case decided last month involved alleged misrepresentations made in the Seller’s Disclosure Statement (“SDS”). In Holt v. Laube, the buyers sued the sellers, seller’s agent and various others allegedly-involved with defectively constructed retaining walls on the property which began to collapse after the purchase. Following an inspection by a licensed engineer, the new home owners were advised that the retaining walls were constructed defectively and needed to be completely replaced. The buyers claimed that sellers made material misrepresentations on the SDS regarding the original construction of the retaining walls, that the sellers constructed the retaining walls without any permits or approval, and that the construction was noncompliant with applicable building codes. The buyers also argued that the SDS contained inconsistent statements, that seller’s agent had a duty to investigate those inconsistencies, and that the inconsistencies constituted affirmative material misrepresentations by seller’s agent when it exchanged the SDS with the buyers.

The trial court dismissed Plaintiffs’ CFA claims against the realtor. An Appellate Court upheld the dismissal focusing on an important distinction between the “omission” and “affirmative act”. The Court wrote where a “… CFA claim is based on an affirmative misrepresentation, plaintiffs must show that the statement was material to the transaction and was made to induce the purchase. [However, where a CFA claim]… is based on an omission, the plaintiffs must show that the defendant had actual knowledge of the material fact and acted knowingly with an intent to deceive.” Since there was no evidence that the seller’s agent had “actual notice” of any problem with the retaining wall and/or acted to conceal it, the Court found that dismissal was warranted and upheld the trial court’s decision.

(e) “Takeaways”

An important “takeaway” from the Vagias case is that when you, the real estate agent, make a representation which is critical to a transaction, you must verify that “information or, if not verifiable, make it clear that the information potentially unreliable and should be dependently investigated. The important “takeaway” from the Holt case is in New Jersey you are not required as agents, to investigate inconsistent disclosure statements absent extenuating circumstances.

Applying these lessons to the scenario at the outset of this article suggests that the buyer will not likely be successful in an action against the seller unless it can be shown that the realtor knew the true condition of the sump pump and intentionally deceived the buyer. However, it may be argued that the mistaken, albeit unintentional, representation in the MLS that the sump pump was “new” was material to the buyer, and, thus, the realtor is responsible, notwithstanding her lack of knowledge about the true condition of the property.

Perhaps the most important “takeaway” of all is that “Buyer Beware” has been replaced, with “Realtor be Scared”. You must be mindful of these cautionary tales. You must proactively prevent later misunderstandings by documenting your files. Doing so could be the only barrier to the loss of your financial well-being.

Posternock Apell, PC counsels realtors, brokers and others involved in the industry with respect to all-matters-real-estate. If you have any questions or concerns please don’t hesitate to call us at (856) 242-8151. Read our Follow Up Article by clicking here.

Dan Posternock and Lakshmi Roberta Roy