Last October, the California Court of Appeal for the 4^th Appellate District handed down a major ruling about the time-frame for the listing agent to deliver material disclosures to the selling agent and buyer. Where it has long been customary (and somewhat prudent) to refrain from making certain disclosures until after contract, the court in Holmes v. Summer ruled that some facts are too important to permit the seller to conceal until after the seller accepts the offer.

The Case

Seller had listed his property at a price below the total value of all the debts presently secured against it (a short sale situation.) Neither the seller nor the listing agent advertised the home as a short sale. The buyer submitted a cash-to-loan offer which the seller rejected without disclosing the insolvency. The seller then countered without including a standard short sale contingency.  Buyer accepted the counteroffer and the parties entered contract.

Relying on the contract, the buyer listed his home for sale and incurred other damages. The buyer was then made aware of the situation when the listing agent presented the preliminary title report. The buyer realized that clean title would not pass at the price negotiated by the parties. The buyer pulled out and made a demand on the listing agent for damages.

Argument and Holding

The listing agent argued that he held a fiduciary duty to his client – the seller. And so, the listing agent reasoned that he was not at liberty to disclose sensitive information about his fiduciary’s finances without obtaining prior consent. Indeed, listing agents can be liable to their clients if they reveal sensitive information that puts the client at a negotiating disadvantage. Therefore, the listing agent did not disclose the fact that the property was in debt for more than the purchase price until he was given a green light by his client. The listing agent also pleaded that common industry practice is to have most disclosures made during the escrow period.

The buyer countered that, by intentionally hiding this material fact about the condition of title until after the parties had negotiated a contract, the seller had breached a duty of fair dealing and professional responsibility that is generally owed to the buyer and the community at large. The buyer further argued that the listing agent had failed to meet DRE regulations by failing to act in a manner that would facilitate the buyer making a fully informed decision.

The court sided with the buyer. The court reasoned that the actions of the listing agent put the buyer in a position where he would certainly incur damages. Had the listing agent merely given some notice that this was a short sale situation prior to contract; the buyer’s expectations would have been moderated. However, by contracting to sell clean title for the negotiated purchase price while knowing that the seller might not be able to deliver clean title at the negotiated price, the seller and listing agent put the buyer in a position where the buyer would reasonably and justifiably rely on an unreliable deal.

As for the argument about confidentiality, the court concluded that the listing agent’s duty to maintain sensitive information did not overtake the listing agent’s duty to reveal material facts about the property to the buyer. Therefore, by placing the property on the market and attempting to sell, the seller had consented to revealing all material facts about the property. The issue of when those facts are presented is more of a professional determination that a DRE licensee must make to ensure that he and his client are complying with law.

The Effect

The effect of this decision is that listing agents now have a more pronounced duty to make timely disclosures of the most material facts before the parties enter into contract. Whether a fact is so important that it must be disclosed ahead of contract is a determination that an agent is expected to make based on his or her professional expertise as a DRE licensee.

Without limiting these facts, it is clear that any factor which needs to be revealed in order to give the other side a fair chance to make an informed decision probably needs to be disclosed prior to entering into contract. Among these are facts about the condition of title, facts about the operating costs of the property, facts about the safety of the location (natural hazards and security), facts about manmade hazards and nuisances, and facts about the home’s general condition (TDS information and things revealed in a home inspection that could greatly affect price). These are examples of material facts and, in fairness to the buyer, they should be revealed before entering into contract.