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Agents Beware!

Posted on Tuesday, September 12, 2017 at 12:52 PM by Nicholas Norton

As every realtor knows, the Seller Property Condition Disclosure Statement is an integral piece of every residential real estate transaction and is required to be completed by the seller pursuant to Neb. Rev. Stat. § 76-2,120 before a purchase agreement is entered into. If a seller violates its duties under section 76-2,120, the purchaser has a separate cause of action against the seller, which allows the purchaser to not only recover actual damages, but also attorney fees. An action filed under this statute is required to be commenced by the purchaser within one year of the earlier of the conveyance or of the buyer taking possession of the property. Additionally, an action for violation of the disclosure statute is in addition to, and not in place of, other more traditional remedies related to fraud and misrepresentation.

However, what duties does a real estate agent (for either the buyer or seller) have to disclose known defects? In Neb. Rev. Stat. § 76-2,120(9), the Legislature provides that “[a] person representing a principal in the transaction shall not be liable under this section for any error, inaccuracy, or omission of any information in a disclosure statement unless that person has knowledge of the error, inaccuracy, or omission on the part of the seller.” The natural inference from this language is that an agent shall be liable for errors, inaccuracies, or omissions on the part of the seller of which the agent has knowledge. The Nebraska Court of Appeals addressed the issue in Bohm v. DMA Partnership, 8 Neb. App. 1069, 607 N.W.2d 212 (Neb. App. 2000), which appears to be the only occasion that an appellate court in Nebraska has considered an agent’s liability under the disclosure statute.

In Bohm, the Court of Appeals held that an agent can only be liable under § 76-2,120(9) when “(1) a disclosure statement is actually provided by the seller; (2) the seller knowingly provided a statement containing errors, inaccuracies, or omissions; and (3) the agent knew that the seller had actual knowledge of the error, inaccuracy, or omission at the time the seller provided the statement.” Bohm, 8 Neb. App. at 1080, 607 N.W.2d at 220. Stated another way, the Bohm decision stands for the proposition that, in order for liability to attach to an agent, it must be proven that the agent “had knowledge, not of the defect, but of [seller’s] knowledge of the defect at the time [seller] made the disclosure.” Id. at 1081, 607 N.W.2d at 220. While this reading of the disclosure statute provides some level of comfort to real estate agents, this author believes that the Supreme Court of Nebraska would likely rule differently if faced with this issue again for a couple of reasons.

First, the applicability of the decision of the Bohm court to a case in which a seller completes a disclosure statement and the agent knows of undisclosed defects (but doesn’t disclose them) is questionable. In that case, the outcome was easy, as the seller had failed to provide a written disclosure statement altogether. Naturally, an agent could not be held responsible for errors, inaccuracies, or omissions that did not exist due to the lack of a disclosure statement. The question of what kind of knowledge an agent must have was not squarely before the court and, for that reason, the Bohm decision loses some of its precedential value.

Second, the outcome under the Bohm test is illogical and does not comport with other well-established Nebraska law. As in any agency relationship, a realtor owes certain duties to the buyer or seller being represented. These duties are set forth in Neb. Rev. Stat. §§ 76-2417 through 76-2419, and include such mainstays as the duties of care, loyalty, and confidentiality. However, in contrast to the duties normally owed to the principal, the realtor also has a statutory duty of disclosure to the other party in the transaction. Specifically with regard to a seller’s agent:

[A] licensee shall disclose in writing to the buyer, tenant, or prospective buyer or tenant all adverse material facts actually known by the licensee. The adverse material facts may include, but are not limited to, adverse material facts pertaining to: (i) Any environmental hazards affecting the property which are required by law to be disclosed; (ii) the physical condition of the property; (iii) any material defects in the property; (iv) any material defects in the title to the property; or (v) any material limitation on the client’s ability to perform under the terms of the contract.

Neb. Rev. Stat. § 76-2417(3)(a). A buyer’s agent must also disclose adverse material facts to a seller, but these types of disclosures are typically focused on buyer’s financial ability to perform the contract. See id. at § 76-2418(3)(a). Dual agents must disclose all adverse material facts that a buyer’s or seller’s agent would have to disclose. See id. at § 76-2419(3).

Notwithstanding the court’s holding in Bohm, it is wise to carefully consider your options as an agent when you discover defects with a property that are not disclosed in the seller’s disclosure statement. If the Bohm decision is overturned, there is significant risk to the realtor in failing to disclose known defects or to correct (by addendum) the seller’s disclosure with regard to the same. On the other hand, while making disclosures that your client may not like could be harmful to the relationship in a particular transaction, the same statutes requiring disclosures of adverse material conditions also provide immunity from a lawsuit for making any required or permitted disclosure. The best practice is to make whatever disclosures of property defects that are required pursuant to §§ 76-2417 through 76-2419, in writing, and attach the same to the seller’s disclosure that is provided to a potential buyer.

The attorneys at Jacobsen Orr have experience in handling a wide array of real estate related issues. If you face this situation and need advice on the best way to handle it, please contact us and set up an appointment today.

Posted in: Business, Real Estate
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