Articles

Real Estate Brokers' Liability for Fraud and Misrepresentation

By: Thomas G. Sherwood

(Mr. Sherwood is counsel to the firm of Ackerman, Levine, Cullen and Brickman in Great Neck, with a practice concentrated in litigation and real estate)

Following closing of title, purchasers of real property often discover, to their dismay, facts that adversely impact upon the value of their new property. One potential target of the disappointed purchaser's ire is the real estate broker who introduced the purchaser to the property. Sellers also can become aggrieved by their brokers, generally due to the failure to disclose material information about the purchaser.

The broker is not shielded by the principle that the seller's obligations under the contract become merged into the deed, or by the rule of caveat emptor, which imposes no duty upon the seller to disclose any information about the premises. Further, the broker may not be protected by the customary language contained in contracts of sale, providing that the purchaser has performed its own investigation, and is not relying upon any oral representations by the seller.

Purchasers who believe that a broker failed to advise them of material information, or made false representations to them, generally seek relief on theories of either negligent representation or common law fraud. Sellers, in addition to these theories, also have alleged causes of action for breach of fiduciary duty, often as counterclaims in actions to collect brokerage commissions. As a fiduciary, a licensed real estate broker must exercise the utmost good faith and loyalty in his duties for his client.

In order to sue a broker on a "negligent misrepresentation" theory, a party must demonstrate that a statement was made, that the defendant knew that the statement was to be relied upon for a particular purpose, that the statement was false, that its falsity resulted from a lack of due care on the part of the defendant, and that the plaintiff was damaged as a result.

In Grammar v. Turits, the New York Appellate Division recently affirmed the denial of a broker's motion dismiss a negligent misrepresentation claim brought by the actor Kelsey Grammar. Mr. Grammar alleged that he hired the broker to locate a Hamptons oceanfront summer rental, stressing his need for peace and quiet. When Mr. Grammar arrived from California to take occupancy, he discovered ongoing construction next door, vacated the rental, and sued his broker.

While there are many New York cases refusing to permit purchasers to recover for negligent misrepresentation from brokers who represent the seller, one recent decision of the New York Appellate Division held that a purchaser fell within the class of persons who could sue the seller's broker for misrepresentation, in that case a claim that the house on a Westchester estate had been designed by famed architect Stanford White. Another recent decision permitted the purchaser at an auction sale to sue the broker who conducted the sale for alleged negligent misrepresentations.

In order to prove negligent misrepresentation or fraud, there must be proof of concealment or a false statement. A realtor has a duty not to conceal or misrepresent known facts, but has no duty to investigate unknown facts and report them to the purchasers. For example, a seller's broker was not held liable to the purchaser for being silent when the seller falsely represented that a house was a legal three family house, in the absence of proof of the broker's active concealment, or a fiduciary or confidential relationship between the broker and the purchaser.

Even where the broker has actual knowledge of the problem, silence may not be sufficient to impose liability, especially where the purchaser had the means to discover the truth himself. In Bando v. Achenbaum, the purchasers discovered after closing that termite damage to their new home was far more extensive than they had believed at the time of closing. An action was commenced against the seller, realtor, termite inspector and home inspector, alleging that they had misrepresented the extent of the termite damage. The Appellate Division granted summary judgment dismissing the claims against the seller and realtor, holding that silence is insufficient to support an action for fraudulent misrepresentation, "particularly where the plaintiffs were on notice of a condition prior to closing and failed to discover the severity of the problem".

When the purchasers claim that the broker's fraudulent misrepresentations induced the purchaser to enter into the contract, the plaintiff must show not only that the broker made a misrepresentation, but also that the misrepresentation was intentional, was relied upon by the purchaser, and damaged the purchaser.

These elements can be difficult to prove against a broker. As discussed above, silence is not generally a misrepresentation. Proving reliance by the purchaser may also create a serious obstacle. In one case, for example, claims that a broker fraudulently induced the purchaser to buy based upon misrepresentations as to the projected real estate taxes on a house under construction were dismissed, with the court holding that "we need only note that plaintiffs cannot justifiably rely upon representations made with respect to these or any other matters that, through the exercise of ordinary intelligence, they could have ascertained the veracity of on their own."

In another case, the court dismissed a claim by a purchaser against a listing broker, where the purchaser alleged that the broker had failed to disclose prior fire damage, which was hidden after the broker had inspected the house but before the purchaser did so. In that case the court found no proof of intent by the broker, in that the broker was not proven to have known of the seller's later concealment of the fire damage, as well as no proof that the purchaser had a right to rely upon disclosure by a broker acting on behalf of the seller.

Despite the difficulties outlined above, it is possible to sue real estate brokers who have made material misrepresentations of fact, or who have concealed information that the purchasers could not discover on their own. One area where fraud actions have succeeded is where the broker is alleged to have a conflict of interest. In TPL Associates v. Helmsley Spear, the Appellate Division the seller's complaint against the broker, where it was alleged that the broker had assured the seller that the broker's members would only own less than ten percent of the purchaser. The court held that failure to disclose that the broker in fact owned a larger percentage of the purchaser was a breach of the broker's duty of loyalty to the seller, that constituted fraud.

In another case, the court refused to dismiss the purchaser's fraud complaint, where the broker had agreed to obtain a pest inspection, and advised the purchaser that the house had "passed" the inspection, without disclosing the inspector's written observation that the conditions were "conducive to carpenter ants". The Court found that in arranging the inspection and representing that the house had passed, the broker assumed the duty to disclose any facts that might affect the purchaser's conduct in the transaction. The court also found adequate proof of intent, finding that under the circumstances, it could infer an intent to deceive from the facts surrounding the transaction, including that the broker stood to gain a commission upon the closing.

The cases discussed above illustrate that the potential liability of real estate brokers depends to a large extent upon the relationship between the parties and the nature of the facts allegedly concealed or misrepresented. Where the purchaser with diligence could have discovered the truth, courts have refused to impose the obligation on the broker to make accurate disclosure. Where the broker has assumed a duty to the plaintiff, either by acting as broker on that party's behalf, or by taking some action on behalf of the party it does not represent, the court will be more likely to find the broker liable for fraud and negligent misrepresentation.

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