A recent memorandum from the legal department of the National Association of Realtors® (NAR) reminds us that courts are unlikely to be swayed by creative arguments designed to relieve a broker of the duty to disclose material facts. The NAR discussion concerns a case (Sutton v. Driver) that was heard by a North Carolina Court of Appeals.
In the spring of 2005, the Suttons began to look for a beach house investment property on Emerald Isle. On May 25 they entered into a Buyer's Agency Contract with Coastland Realty (C-21 Coastland Realty, Inc.). Their agent at Coastland was Wayne Driver. Coastland was owned by brothers Roy and Vann Parker. Roy Parker was Mr. Driver's immediate supervisor. Vann Parker was Coastland's broker-in-charge and also Mr. Driver's father-in-law.
According to the Court record, Roy Parker suggested to Driver "that his neighbors, the Reaveses, might be willing to sell their beach house at 105 Wiley Court ('Wiley Court property')." The record continues: "Mr. Driver first showed the house to Mrs. Sutton who was immediately interested in it because of its unobstructed view from the top deck of the ocean over the adjacent undeveloped tract of land. That piece of undeveloped land was Block 39. Subsequently, Mr. Driver showed the house to Mr. Sutton and, as they were on the deck looking at the view, Mr. Sutton asked Mr. Driver who owned the undeveloped tract. Mr. Sutton testified in his deposition that Mr. Driver told him that Block 39 was owned by a trust and 'would probably never be sold' and that if it 'were ever sold it would probably be years down the road.' [There was no evidence that Mr. Driver believed this to be false.] Mr. Driver also told Mr. Sutton that the trust had been offered $14 million for 17 or 18 acres and had turned down the offer."
Roy Parker listed the Wiley Court property for $775,000. Both the Suttons and the owners of the property signed a Dual Agency Agreement allowing Coastland to serve as agent for both parties. The next day (June 6) the Suttons submitted an offer to purchase for $735,000. The offer was accepted and the transaction closed in early August.
During roughly the same time frame as the Suttons were attempting to acquire a beach house on Emerald Isle, the Parker brothers were involved in an investment group, BP2, with the intent of purchasing and developing Block 39, the land adjacent to the Wiley Court property. On June 30, approximately 2 weeks after the Suttons had entered into contract, BP2 made a $21 million offer for Block 39. The bid was accepted on July 5. Shortly thereafter BB2 formed another company, Block 39, LLC. That company filed a rezoning application on July 11. The LLC then closed on the property in October. It was subdivided into 46 lots and became a residential subdivision named "Sea Oats." Coastland Realty handled the marketing.
Not surprisingly, within a couple of years (June, 2008) the Suttons filed suit alleging, among other things, that the defendants "failed to disclose key information that was either known, or should have been known" to them at the time of the sale. A certified appraiser's affidavit said that, at the time of the suit (when two houses had been built, partially obstructing the view), the Wiley Court property had decreased in value by $40,000. He stated that, when fully developed, the view would be completely obstructed and the property's value would have decreased to $570,000 - a $165,000 loss.
Actually, the trial court granted summary judgment in favor of the defendants. However, the Court of Appeals disagreed on most counts.
The appellate court rejected the "blame-the-buyer" type of argument raised by the broker defendants. They had asserted that the Suttons were "aware that Block 39 was for sale and could be purchased and developed at any time." There was, after all, a 'For Sale' sign on the property. (It had been there for ten years.) In the court's view, this was outweighed by the statements of Mr. Driver (see above) and also an earlier North Carolina opinion which held that a client "may rely upon the broker to comply with this duty [to disclose material facts] and forego his or her own investigation."
Additionally, the appellate court found it irrelevant that "the information arose out of the Parkers' business dealings separate from their real estate agency." Nor did the court accept the view that the Dual Agency Agreement "negated their fiduciary duty and duty of disclosure to the Suttons."
In short, the court found that the information was a material fact and that the broker had a duty to disclose it in a timely manner. We are reminded of the general principle: If you don't want to disclose something, you probably should.