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California Court Puts Burden On Buyer's Broker To Investigate Implications of Report

Written by on Monday, 17 March 2014 12:48 pm
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Today we review a recent California Appellate Court Decision (Saffie v. Schmeling, Fourth Appellate District, March 7, 2014) that contains language indicating that a buyer's broker may have more responsibility for "fact checking" than is often believed.

But, before we get into the meat of the case, let me address a few words to a common misperception. There appears to be a wide-spread belief that court decisions are written in such an arcane, jargon-filled manner that they are virtually inaccessible to an ordinary reader. Not so. Oh, sure, there's the occasional Latin phrase and an obscure reference to another decision, but, by and large, they are written in clear, plain English and are easily understood even if the reader is not a law school graduate. Consider the opening line from the case at hand: "This case arises from a real estate transaction that did not turn out as well for the buyer, plaintiff George Saffie, Jr. (buyer) as he had hoped." Pretty clear, isn't it?

Here is what happened.

In June of 2006, the seller's broker entered a commercial parcel listing onto the MLS. The listing included this language: "This parcel is in an earthquake study zone but has had a Fault Hazard Investigation completed and has been declared buildable by the investigating licensed geologist. Report available for serious buyers." The report was done in 1982. The date, May 20, 1982, appeared prominently on the cover of the report. In July of 1982, the Riverside County Planning Department issued a letter granting "final approval of the report."

In June of 2006, the buyer made an offer, through a different broker, that was accepted. During escrow the seller's agent gave the buyer's broker a copy of the report and of the letter. Later, the buyer's broker testified that he did not read the report nor did he even understand what a fault hazard investigation was. The trial court found that the buyer's broker had led the buyer to believe that the report was current and that the property was "ready to build."

After the transaction closed the buyer found that the County of Riverside did not agree that the property was ready to build. Standards had changed since the 1994 Northridge earthquake, and the 1982 report was not up to those standards. A subsequent investigation, performed to current standards, showed that the property required so much excavation and such setbacks that it was no longer feasible for development. Naturally, the buyer sued everyone.

The trial court determined no award was owed from the seller or the seller's broker, but that the buyer's broker and his firm were liable in the amount of approximately $232,000 for breach of fiduciary duty and negligence. The buyer appealed only with respect to the finding of no liability on behalf of the seller's broker.

The buyer contended that the seller's broker's statement in the MLS was false or inaccurate because it failed to specify that the report was done in 1982, thereby giving "a false impression that the report was current as of the date of the MLS listing and remained ‘valid' as a basis for commercially developing the property…" Thus, the buyer argued, the trial court should have applied Civil Code section 1088. Civil Code # 1088 says that an agent "shall be responsible for the truth of all representations and statements" of which the agent had knowledge or should have had knowledge.

But the Appellate court disagreed with the allegation that the MLS statement was false or inaccurate. The buyer and his broker believed that the property was fully cleared for building. But, the court noted, "seller's broker never said that it was." It went on to say, "...the seller's broker did not affirm that the geologist performed his investigation in accord with current County of Riverside requirements, nor did he state that all necessary approvals for building had been obtained." "There is nothing in section 1088... imposing responsibility on a seller's broker to ensure that true statements in the MLS are not misconstrued or to make certain that the buyer and the buyer's broker perform the appropriate due diligence... "

Not only did the Appellate Court say that the seller's broker did nothing wrong, but also it went on to say, "It was incumbent on buyer – and on buyer's broker, in his role as a fiduciary for buyer -- to determine whether the Fault Hazard Investigation report was something buyer should rely on for his particular purposes." [my emphasis] The court then cited an earlier case (Field v. Century 21 Klowden-Forness Realty, 1998) stating that "a selling broker has no obligation to purchasers to investigate public records or permits pertaining to title or use of the property," but the buyer's broker [my emphasis] "is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal's decision."

This is serious stuff. Those who would be a buyer's broker should take heed.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.

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2 comments

  • Comment Link Andrew Show Tuesday, 18 March 2014 10:11 am posted by Andrew Show

    Clearly the court "got it right" as far as the expectation that a "buyer's agent" and their full fiduciary duties (including "reasonable skill and care" and "competency") should be in full force and effect.

    The revelation at trial that the "buyer's broker testified that he did not read the report nor did he even understand what a fault hazard investigation was." is the nail in their wallet's coffin!

    Bravo!

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  • Comment Link bill monroe Tuesday, 18 March 2014 9:19 am posted by bill monroe

    Wow this is a real eye opener. Not only does the buyer have to beware but also the sellers agent.

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