Disclosing Information Upfront Can Mitigate Consequences in the End
Secrets come in all shapes and sizes from little white lies to massive cover ups. Keeping secrets in a real estate transaction can lay the groundwork for dissatisfied clients, damaged reputations, and ultimately expensive claims against you and your business. Most states have disclosure laws that apply to real estate transactions, but in the end, it’s just good business practice. In this real-world example, all parties in the sale were aware of issues with the property and openly shared the details prior to the sale. A claim was still filed, however. Read on and see what happened in the end.
A buyer contracted to purchase a condominium from a seller who indicated they were unaware of any moisture problems within the unit. However, the seller’s broker disclosed some units within the complex were the subject of litigation between the condominium association and the developer due to damages caused by water intrusion. To verify the contracted unit did not have moisture problems, the buyer had a relative perform a home inspection. No evidence of water intrusion was found.
A few months after purchasing the condominium, the buyer uncovered evidence of dry rot and water damage while renovating the unit. From the extent of damage found, it appeared the affected areas had been exposed to moisture for a prolonged period of time.
The buyer sued their broker, the seller, and the seller’s broker alleging material misrepresentation and fraud for failing to disclose the existence of water damage in the unit. In addition, the buyer claimed the seller’s broker had a duty to further investigate the disclosed litigation and provide further details of water intrusion. The buyer further argued had they known the full details of litigation, they would have conducted a much more thorough inspection of the unit prior to purchase.
Ultimately, the court found the seller’s broker had no duty to disclose the details of water intrusion in other units nor did they have a duty to investigate and provide information regarding the lawsuit to the buyer. Moreover, the buyer’s broker also had no duty to verify the details as they were only relaying the information conveyed to them. The court concluded the buyer was aware the condominium complex had water intrusion issues and obtaining additional details was their own responsibility—not the brokers. The claim against the seller was dismissed as well.
There was little either broker could have done differently to prevent the claim. However, their diligent handling of the transaction was instrumental in mitigating the loss and achieving a favorable outcome. Both brokers maintained excellent records and confirmed in writing all representations that were made to the seller. Additionally, all information was readily provided.
Although there is no way to guarantee the complete avoidance of claims, sound business practices go a long way toward mitigating losses when and if they are made.
Preventing a claim in the first place is part of a comprehensive risk management strategy. For more information about E&O coverage and other risk management topics, visit pearlinsurance.com
This article was produced in conjunction with AXA XL and is not to be taken as legal advice.