“Whiskey is for Drinking; Water is for Fighting Over” . . . What Buyers Need to Know

 

The quote “whiskey is for drinking; water is for fighting over” has often been attributed (possibly incorrectly) to Mark Twain.  However, regardless of where the quote originated, it reflects the fact that “fighting” over water in the West has had a very long and storied history.  For a little background, see the US Department of the Interior Bureau of Reclamation summary of Arizona’s “fights” for an assured water supply over the last century. 

Arizona’s water supply, and the water supply in the entire western United States, continues to be a focus in the media and with the state’s elected officials.  And, water supply is an extremely complex issue, just take a look at the Arizona Department of Water Resources (ADWR) News Blog. 

A real estate licensee is not required to be a water expert.  However, buyers need to know the source of a property’s water supply and if there are any water issues before purchasing that property. A real estate licensee should be knowledgeable as to where to direct a buyer to obtain this information.   

New Home Subdivision Public Report:  A subdivider (anyone who offers six or more lots for sale in a subdivision) must give a prospective new home buyer a copy of an Arizona Department of Real Estate (ADRE) issued Public Report and an opportunity to read and review it before the prospective buyer signs a contract to purchase a home in the subdivision. A.R.S. §32-2183(A). The Public Report is required to include a great deal of information on water supply to the development.  A.A.C. R4-28-A1205.  A resale buyer can obtain a copy of a home’s Public Report from the ADRE  Public Report Database.

Buyer Advisory:  The Arizona REALTORS® Buyer Advisory advises the buyer to investigate the availability and quality of the water to the property and provides several resources.

Water/Well Issues The property may receive water from a municipal system, a private water company, or a well. You should investigate the availability and quality of the water to the property, as well as the water provider.

A list of Arizona’s water companies is available at the Arizona Corporation Commission. https://www.azcc.gov/utilities/water  (Arizona Corporation Commission - Utilities-Water) https://new.azwater.gov/aaws/statutes-rules  (Assured and Adequate Water Supply),

Adjudications: Arizona is undertaking several Stream Adjudications, which are court proceedings to determine the extent and priority of water rights in an entire river system. For information regarding water uses and watersheds affected by these adjudications, and the forms upon sale of the property, visit the Department of Water Resources online. https://new.azwater.gov/adjudications (Department of Water Resources – Adjudications). 

CAGRDs: The Central Arizona Groundwater Replenishment District (CAGRD) functions to replenish groundwater used by its members, individual subdivisions and service areas of member water providers. Homeowners in a CAGRD pay an annual assessment fee which is collected through the county property tax process based on the amount of ground water served to member homes. www.cagrd.com (Central Arizona Ground Water Replenishment District)

Disclosures

Property owners obtain their water from a variety of sources depending upon their location:  public municipalities, private water companies, private wells, shared wells, and hauled water.  According to the Arizona Corporation Commission (ACC), there are more than 400 individual water systems operated by almost 350 companies under their jurisdiction.  The ACC can assist in obtaining information about the water company servicing a particular area. 

SPDS:  Sellers should disclose their property’s water source to the buyers on the Arizona REALTORS® Seller’s Property Disclosure Statement (SPDS).  And, if the seller is aware of any past or present drinking water problems, those should be disclosed on the SPDS as well. 

The SPDS specifically advises the buyer that if the property is served by a well, private water company or municipal water provider that the ADWR may not have made a water supply determination and the buyer should contact the water provider during their Inspection/Due Diligence Period. 

Water Well Disclosures:  If the property is served by a well, the Arizona REALTORS® Domestic Water Well Addendum to the purchase contract and the Domestic Water Well/Water Use Addendum to the Seller’s Property Disclosure Statement should be completed and provided to the buyers to assist them in their inspection and provide additional disclosures. 

Disclosures of Other Known Water Issues:  Sellers and real estate licensees who are aware of other adverse water issues are obligated to disclose those facts to a buyer.  These water issues may occur in “wildcat subdivisions” (in which land is split into five or fewer parcels and are not required to obtain an ADRE Public Report) or in other areas in the state.  Water issues that may need to be disclosed include curtailments, moratoriums, impending water cutoffs, water quality issues, and operational problems with a private utility.

The lack of an adequate and safe water supply to a property is undoubtably a material fact.  Where a seller of real property knows of facts materially affecting the value of the property that are not readily observable and are not known to the buyer, the seller is under a duty to disclose those facts to the buyer. Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (App. 1986).

Additionally, pursuant to the Arizona REALTORS® Residential Resale Purchase Contract the seller warrants that the seller has disclosed to the buyer and real estate agent all material latent defects and any information concerning the home known to seller, excluding opinions of value, which materially and adversely affect the purchase price to be paid by the buyer. 

Additionally, the Arizona Department of Real Estate Commissioner’s Rules R4-28-1101 requires a real estate licensee participating in a real estate transaction to disclose to all other parties any information which the licensee possesses that materially and adversely affects the consideration to be paid by any party to the transaction, including any material defect existing in the property being transferred.

Don’t become a Party to a Water “Fight”

With the appropriate disclosures and the buyer’s due diligence, a real estate licensee, seller, and buyer can avoid becoming involved in a water “fight” after close of escrow.   If there is any question about the source, availability, quality of the water to the property, water rights, or water costs, assist the buyer in investigating the issue during the Inspection/Due Diligence Period by directing them to the appropriate sources of information.  

 

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.  10/25/2022

The Buyers’ Questions – Real Estate Tales From the Courtroom

 

In this real estate malpractice lawsuit, the court discusses a real estate agent’s 

duty to the client versus a real estate agent’s duty to a non-client. 

The Alleged Facts

The real estate agent represented the seller in selling vacant hillside land in Surprise, Arizona, in which the agent had been involved in the successful efforts to subdivide into lots. During that work, the real estate agent had contact with a civil engineer about road access to the lots. The civil engineer testified that he told the real estate agent that it would take at least one year to do the road work required (including permitting) before any construction on an access road could begin. However, the real estate agent testified to seeing the access road being built five to six months after that meeting with the civil engineer. 

 A few years later, the buyers contacted this real estate agent to view the lots as a possible homesite. During a site visit, in responding to the buyers’ questions about the access road, the real estate agent said it was a good road built at a substantial cost, although it was not yet complete. One of the buyers testified that the real estate agent said, “the county wouldn't let us sell these lots up there if this road weren't [sic] built right.” When the buyers asked the real estate agent whether they should have their own real estate agent, the real estate agent said that was not necessary. The buyers then signed an agreement whereby the real estate agent acted as a dual agent.  (The reported case does not specify whether this agreement was the AAR Consent to Limited Representation Agreement.)

At a later meeting, the real estate agent provided the buyers with written easements in case they had “any lingering doubts about the road.” The real estate agent assured them “that everything was good about the road” and that the buyers “knew everything there was to know about” the road.

The real estate agent provided the buyers a disclosure affidavit that stated “[t]here is ... legal access” and “physical access to the Property.” After reviewing the affidavit, the buyers again expressed concern about access, including whether a two-wheel drive vehicle could operate on the road. The real estate agent then added a handwritten note on the affidavit stating the road was “[c]urrently not traversable by two wheel drive passenger motor vehicle.” 

The buyers signed a contract to purchase a lot, which was amended several times, including amendments to address the access road. One buyer testified that, before closing, she again asked the real estate agent about the road and the real estate agent again said that the buyers knew “everything there is to know about this road.” The transaction closed.

When the buyers applied for a permit to build a home on the lot, Maricopa County denied the application because the road was built without a permit.

The Lawsuit

When the buyers were unable to obtain a permit to build a home on the lot, they filed this lawsuit against the real estate agent and the seller asserting fiduciary duty and negligence-based claims, misrepresentation of the status of the road, and failure to disclose material information about the status of the road, resulting in a seven-day jury trial.  “The jury heard expert testimony about a real estate agent's obligation to give “full, complete, accurate disclosure of important information” in the agent's possession, and that this standard could be breached if an agent affirmatively gave information without knowledge of its truth or that the agent knew was incorrect.”

After deliberation, the jury returned a verdict in favor of the buyers for $318,200.47, allocating no fault to the buyers, 30 percent fault to the seller and 70 percent fault to the real estate agent.   The real estate agent appealed. 

The Appeal - What Law Applies

On appeal the real estate agent argued that the superior court should “have offered a specific legal instruction ... as set forth in Aranki v. RKP Investments, 194 Ariz. 206, 979 P.2d 534 (App.1999)” which states:

The real estate agent is not liable to the buyers for passing on information without proof that they did so under circumstances suggesting they knew or should have known that any information provided by the sellers might be false.

However, the Court of Appeals noted that this language in the Aranki case addressed a negligent misrepresentation claim by a buyer against a seller's agent, not a client's fiduciary duty claims against the client's agent. 

The Court went on to discuss an agent's fiduciary duty to a client, noting cases that state: “A real estate agent owes the duty of utmost good faith and loyalty to his [or her] principal” and real estate agents owe “duty of good faith and loyalty to their principal” and “must exercise reasonable due care and diligence to effect a” transaction to the client's “best advantage”, along with the Commissioner’s Rule A.A.C. R4–28–1101(A)  that a real estate agent “owes a fiduciary duty to the client and shall protect and promote the client's interests.”

The Court explained that the Aranki case recognized the “important distinctions between the claims” by a buyer against a seller's agent (where no fiduciary duty is owed) and by a buyer against the buyer's agent (where a fiduciary duty is owed). “Aranki simply acknowledged the compatibility of the fiduciary duty an agent owes to his client with the duty to deal fairly with all other parties to the transaction.”

The decision in the Aranki case stated:

The duty of fair dealing does not include investigations to discover defects in the sellers' property ... Thus, the misrepresentation claim would be proved here only if plaintiffs [the purchasers] could establish that the [seller's brokers and agents] ... knew or should have known of the defects [in the land] giving rise to this litigation and failed to disclose such information. The sellers' real estate brokers and agents are not liable to the [non-client] buyers for passing along such information without proof that they did so under circumstances suggesting that they knew or should have known that the information provided by the sellers might be false. 

There was virtually no discussion by the Court of Appeals addressing the fact that the real estate agent was acting as a dual agent in the transaction at issue. 

The Court of Appeals Decision

The Court of Appeals in this case ultimately determined that the superior court did not err and the judgment against the real estate agent and in favor of the buyers was affirmed.

 Case Lessons: 

• If the buyer questions the accuracy of the seller’s representations or any information, advise the buyer in writing to obtain independent verification.
• Do not be the source of information – be the source of the source. 

 Helmke v. Service First Realty, LLC, Court of Appeals of Arizona, No. 1 CA–CV 14–0078 (2015)

NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

 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.  10/17/2022