Real Estate Tales from the Courtroom: The Sex Offender Next Door

 

In this case, the buyers filed a lawsuit against the sellers and the real estate broker, alleging fraud, negligent misrepresentation, breach of the duty of good faith and fair dealing, and breach of fiduciary duty after finding out their neighbor was a registered sex offender.  The buyers did not ask to rescind the purchase contract but demanded compensatory and punitive damages.

The Facts Alleged in the Case

The sellers purportedly decided to sell their Scottsdale home because a convicted sex offender lived next door. The broker acted as a disclosed dual agent in the transaction.  During negotiations, when the buyers asked the sellers why they were selling, the sellers said they wanted to move to be closer to friends.  Neither the sellers nor the broker disclosed to the buyer that the next-door neighbor was a sex offender. 

 Six months later, after having moved into the home, the buyers discovered that their neighbor was a “level-one” sex offender that was not listed on the Sex Offender Registry.  The buyers filed the lawsuit alleging that if they had known of the sex offender, they would not have purchased the house. 

The buyer argued that the sellers fraudulently misrepresented their true reason for wanting to move by telling the buyers they wanted to live closer to friends, when they actually wanted to move away from the sex offender next door.  The sellers argued that their alleged statement that they were moving to be near friends was (i) not a representation that there were no sex offenders living near the home; (ii) no prospective buyer would reasonably rely on a seller's representation about his or her reason for moving; (iii) the possible presence of a sex offender could not have been too important to the buyers because they never asked the sellers about the issue, and (iv) pursuant to A.R.S. § 32–2156 there is no liability for failing to disclose any fact or suspicion that there was a sex offender located in the vicinity of the home. 

 The Court Reviews the Arizona REALTORS® Forms

In deciding the case, the Court mentioned all the notices about sex offenders in the Arizona REALTORS® forms used in the transaction. 

The sellers provided the buyers with an Arizona REALTORS® Residential Seller's Property Disclosure Statement (SPDS).   Just above the buyers’ signature on the SPDS there is a notice: 

·         “Notice: Buyer acknowledges that by law, Sellers, Lessors and Brokers are not obligated to disclose that the Property is or has been ... located in the vicinity of a sex offender.”

The statement on the front of the SPDS titled “Residential Seller Advisory” states: 

·         Please note: By law, sellers are not obligated to disclose that the property is or has been (1) the site of a natural death, suicide, homicide ...... or (3) located in the vicinity of a sex offender. However, the law does not protect a seller who makes an intentional misrepresentation. For example, if you are asked whether there has been a death on the property and you know that there was such a death, you should not answer “no” or “I don't know”; instead you should either answer truthfully or respond that you are not legally required to answer the question.

The court also referenced the “Inspection Period” section of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract that stated:   

·         “If the presence of sex offenders in the vicinity ... is a material matter to the Buyer, it must be investigated by the Buyer during the Inspection Period.” The contract allowed a 14–day inspection period and further provided that the buyers had “conducted all desired independent inspections and investigations and accept[ ] the Premises.”

And, another section of the contract that stated:

·         “Buyer warrants that Buyer is not relying on any verbal representations concerning the Premises except disclosed as follows: ____.”

The buyers initialed the word “None” handwritten in the space that followed.

The Court Addressed the Broker’s Dual Agency and Duty to Disclose

In addressing the claims against the broker, the court stated that the broker's fiduciary duty to disclose material information is not necessarily diminished in a dual-agency situation.  “When obtaining clients' consent to represent both parties in a transaction, a broker must deal fairly and in good faith with each of them”, and “disclose all material facts that the [broker] knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them.”

 The court stated that with the clients' informed consent and in the absence of fraud, the duties a broker owes their clients may be limited by agreement. The court noted that both buyers and sellers agreed to the Arizona REALTORS® Consent to Limited Representation (“Consent”).  The court quoted portions of the Consent as follows:

 [Broker] represents both the Buyer and the Seller with limitations of the duties owed to the Buyer and the Seller, such as:

* * *

·         (2) There will be conflicts in the duties of loyalty, obedience, disclosure and confidentiality. Disclosure of confidential information may be made only with written authorization. This does not relieve [Broker] of any legal obligation to disclose all known facts which materially and adversely affect the consideration to be paid by any party to the transaction.

 3) Pursuant to A.R.S. § 32–2156, Sellers, Lessors and Broker/Licensee(s) are not obligated to disclose that the Subject Property is or has been ... located in the vicinity of a sex offender.

The Court’s Decision

·         Buyer v. Seller:  The court acknowledged that the seller made fair points regarding their statements about why they were moving, and the court did not say that as a matter of law, the alleged misrepresentation was material to the transaction or that the buyers reasonably relied on it.  “However, when one is asked a question that fairly calls for disclosure of a material fact, he or she commits fraud by concealing the truth or otherwise answering in a manner deliberately calculated to mislead.” Therefore, the court found that a jury must decide whether the sellers were liable to the buyers for common-law fraud.  The ultimate outcome of the buyers’ case against the seller on the common law fraud claim is unknown to this author.

 Buyer v. Broker:  The court stated that even assuming that A.R.S. § 32–2156 did not apply and the broker otherwise would have had a duty to the buyers to disclose the sex offender, the buyers expressly agreed that broker had no obligation to make that disclosure in the Arizona REALTORS® Consent to Limited Representation form. Therefore, the buyers’ claim against the broker was dismissed.

 Case Lessons:

·         If asked about suicides, murders, other felonies, or registered sex offenders in the vicinity of the home – you can decline to answer pursuant to A.R.S. § 32–2156, but you should not answer in a way that would be a lie or misleading.

 When acting as a dual agent, always use the Arizona REALTORS® Consent to Limited Representation form. 

                          Lerner V. DMB Realty, LLC., 234 Ariz. 397, 322 P.3d 909 (2014)

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/23/22

 

What the Heck is the “Standard of Care”?

 

You have likely heard the phrase “standard of care,” but what the heck is it?  Well, the term "standard of care" is a legal concept that is generally applied to the conduct of any professional, such as a doctor, a lawyer, or an engineer, and the legal concept of “standard of care” applies to real estate professionals as well. 

The Standard of Care Requires Reasonable Care

The standard of care requires that a real estate agent exercise the degree of care that a reasonable agent would exercise in the same or similar circumstances. Figuring out what is “reasonable” under the circumstances is generally the hard part. 

What constitutes reasonable care in a transaction varies depending on the situation. The specific conduct, disclosures, advice, and counsel required of an agent depend on the facts of each transaction, the knowledge and the experience of the client, the questions asked by the client, the nature of the property and the terms of sale. You are not required to be perfect, but you are required to act with reasonable care.

 Reasonable care may include:

·         Resisting any temptation to provide advice that is outside the area of expertise for a real estate licensee.

·         Recommending other professionals when necessary to perform inspections and investigations or to provide legal and tax advice.

·         Assisting your client in verifying information when you have reason to question the accuracy of the information being provided or when your client has questioned the information.

·         Disclosing all known material defects existing in the property. If you have to ask whether a fact must be disclosed, the answer is probably “yes.” 

·         Practicing within your area of expertise.

·         Understanding the purchase contract and related documents.

·         Complying with the ADRE Statutes and Commissioner’s Rules.  https://azre.gov/laws-rules-policy-statements-and-advisories

                                            

If you are unsure what is reasonable under the circumstances or how to handle a situation, always consult with your designated broker or manager for guidance. 

The Battle of the Experts in Determining the Standard of Care

How does the judge, jury or arbitrator in a lawsuit determine what a "reasonable” real estate professional would do in the same or similar circumstances? That is where the experts come in.

The standard of care is generally established by expert testimony, unless the conduct required by the situation is within the common knowledge of a layperson. Therefore, a plaintiff buyer or seller that alleges that a defendant agent acted negligently usually must present the testimony of a qualified expert, in other words, another agent, that the defendant agent acted unreasonably and fell below the standard of care.

The defendant agent will generally do the same – present the testimony of another agent as an expert witness that will testify that the agent’s actions were reasonable under the circumstances and within the standard of care. 

The judge, jury or arbitrator will consider the testimony of each expert along with the rest of the evidence presented and make the determination of whether the agent complied with the standard of care.  If not, there are consequences. 

Consequences of Falling Below the Standard of Care

If an agent’s conduct falls below the standard of care, the agent is negligent. Once an agent’s negligence is established in a lawsuit, the agent will be held liable to the plaintiff buyer or seller for all damages (money) caused by the negligent conduct. Additionally, any judgment arising from such a case must be reported to the ADRE within ten days and the ADRE may impose regulatory sanctions as well.

Tips to Help You Practice Within the Standard of Care

The following is a list of tips to help you exercise reasonable care and practice within the standard of care.  

• Get to know your client and their concerns.                                                  

• Read and understand the purchase contract & related forms. 

• Educate your client on the process and documents.

• Avoid shortcuts, such as incorporating other documents into the contract or failing to write contingencies out completely.

• Handle all offers properly and promptly. 

• Practice only within your area of expertise, both in practice area and geographically.

• When in doubt, disclose – and do it in writing.                                             

• Assist your client with disclosures & due diligence. 

• Think before you speak - don’t speculate or guess. Identify the source of any information provided and direct your client to the source if possible.

• Verify information if you have reason to question the accuracy of information being provided in a transaction or if your client has questioned the accuracy of the information.

• Document the transaction - take contemporaneous notes and confirm important issues in writing.

• Communicate, communicate, communicate – answer your phone and promptly return calls to clients and the other agent.  Talking is almost always better than texting. 

 Don’t forget – you are a professional.  By complying with the standard of care, you not only reduce the potential of costly and time-consuming lawsuits, but also reduce the risk that your clients will encounter problems during or after the transaction.

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/7/22