BEST OF THE HOTLINE:  Truth be Told

By James L. Goldsmith, Esq.

FACTS: The property listed for sale is a unit in a condominium with mixed commercial and residential use. Previously, an accepted offer failed to close because it was contingent on FHA financing that was not granted. Apparently, the condo's mixed use was the problem.

The property went active and another offer was received. The buyer was advised that the condo's mixed use might make financing difficult but the buyer's agent felt confident that conventional financing was achievable. The listing agent was less certain but, given the slow market, the seller accepted the offer with a conventional financing contingency.

When the listing agent was informed that the buyer's lender refused to commit, she was not surprised. What did surprise the listing agent, however, was that the rejection came from a lender other than that named in the agreement of sale. The listing agent notified her seller of the rejection and of the buyer's failure to apply to the named lender.

The listing agent's broker was livid when he found out that the agent told her seller of the buyer's breach of the mortgage contingency clause. He wanted to know why his agent had "opened a can of worms" when all she had to do was tell the seller that the buyer was unable to get a commitment. After all, the broker claimed, even if the buyer had applied to the named lender, he never would have received the commitment.

Q: Did the listing agent do the right thing by telling the seller that the buyer had not applied to the named lender?

A: Yes. When is telling the truth ever wrong? The broker obviously was concerned that the seller would refuse to return the deposit to the buyer and, perhaps, bring on litigation that could frustrate an eventual sale of the property. The broker may have been correct that the buyer's breach was not material because any lender, even that named, would have rejected this mortgage application, but this did not entitle the agent to withhold information.

This Hotline call really had to do with issues of honesty and ethics, and little else. When discussing issues with our clients, it is very easy to gloss over details. How we report the facts may guide our clients in the direction we want them to go. And it is easy to rationalize this approach because, after all, we know where they should go! In our example, would the seller really understand that it did not matter whether the buyer made the application to the named mortgage lender? The outcome would have been the same and it is better for us to get the property back on the market.

Generally I do not give in to "slippery slope" arguments. But when it comes to cutting corners and obfuscating the truth, I have little tolerance. I understand that our clients do not always make the best decisions and that they benefit by heeding our advice. That does not, however, give us the right to spin facts in a way that will steer them onto a course of deceit, even one that may be in their best interest. The transactions that we facilitate are, after all, not ours but our clients. Our clients are entitled to the truth, all of it.

Mr. Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. He may be reached at realcompliance.com.