Ruling Puts Onus on Sales Agents

It’s getting rough out there for that much-maligned real estate salesperson.

Some may say, that’s tough, it’s about time.

In a landmark case, the courts have ruled that brokers are responsible not only for what they know but for what they would have known had they made a reasonable effort to find out.

That decision concerned the sale of a house and did not address any non-residential application.

The shoring up of responsibility came in the wake of the landmark California case, Easton vs. Strassburger, involving a broker who sold a home in tiny Diablo, in Contra Costa County, for $170,000 in 1976.

(According to court records, the house was built on improperly impacted soil. It slid, causing a crack in the dwelling, dropping the home’s value to $20,000, with repair estimates exceeding $200,000.)

Art Mazirow, an attorney who has long specialized in realty law, citing the ruling in a telephone interview, drew no distinction between a broker selling a home or one making a deal involving a shopping center.

To date, there has been no definitive court ruling on the same ethics applying to commercial or industrial land or property. But it’s bound to come.

“The logic, the theory and the duty” involved are the same, Mazirow believes. There is really no distinction, he added, if, for example, in a potential, non-residential transaction, land is contaminated by toxic material. The potential buyer should be given that information.

If that fact is not revealed, the commercial broker would be just as liable as a residential broker who didn’t know or learn, for instance, that a home contained some dire fault.

Mazirow, a partner in the Los Angeles law firm of Buchalter, Newer, Fields, Chrystie & Younger, appeared recently before a very attentive audience--members of the Society of Industrial Realtors, Southern California chapter.

He noted that the court applied Article 9 of the National Assn. of Realtors’ own code of ethics to establish the affirmative obligation on the part of brokers to discover adverse factors about a transaction.

“The real estate industry itself created the duty,” he added.

“A real estate license is the bare minimum for real estate salespersons today because the legal obligations that they now have are so substantial. Salespeople must be controlled and managed today as never before in order to prevent lawsuits from being filed.”

Typically, Mazirow said, litigation involves young and “first-deal” brokers.

“I believe that the problem arises because of the interplay of several factors; the amount of knowledge and information that the law requires a licensed real estate person to have, has been increased dramatically in recent years; the increased amount of disclosures that must be given and--perhaps most important--the contingency fee the broker is only paid if the transaction closes,” he said.

“Sometimes, the urgency to obtain the commission is so great that the legal obligations take a back seat.”

If a client alleges that the broker breached the fiduciary obligation to the client by not fully disclosing all material facts, the burden of proof is shifted to the broker to prove that there was full disclosure, the attorney said.

As a result of the Easton vs. Strassburger ruling, brokers are responsible not only for what they know but for what they might have learned by reasonable investigation, he emphasized.

When representing investment buyers, he said, brokers also have the duty to reveal future broker relationships, particularly if they know that a buyer plans to immediately re-sell the property in question. The broker has a fiduciary responsibility to every party to a transaction, he stressed.

“If the listing broker offers a property at less than the listing price and has not advised the client of this, it may be grounds for disciplinary action. The key, therefore, to a fiduciary relationship for a broker is disclosure.”

Again, acknowledging that the Easton vs. Strassburger case focused on a residential transaction, Mazirow told the industrial brokers attending the Jonathan Club function:

“I can think of no theoretical reason why commercial and industrial brokers are not affected by the case.”

A fair and friend-of-the court warning?