MLS descriptions abound with representations to the effect that the property "has income-producing potential", "in-law quarters", is "perfect for small horse farm", and so on. Can the buyer rely on these representations without verifying the zoning status with the municipality? Is the seller or listing agent responsible when, after settlement, the new owner receives a "Cease and Desist" order demanding that the rental or other activity end?
All too often a buyer learns of use restrictions or the true zoning classification of a property following settlement, and not before. Does the buyer have recourse, and if so, against whom? The buyer likely believes that the seller and/or listing agent is responsible for making a substantial misrepresentation upon which the buyer relied. The buyer is probably right: the seller misrepresented a material fact and that misrepresentation may have been repeated by the listing agent. Recovery via a lawsuit, however, is unlikely.
The first problem with holding the seller responsible is that the MLS description and the erroneous statement are not guarantees, warranties, or even representations upon which the buyer is permitted to rely. At the bottom of each MLS page is the somewhat contradictory language we all know that says the information is deemed reliable, but is not guaranteed. More importantly, the Agreement of Sale excludes representations, such as the MLS description, marketing brochures or other statements and claims made by the seller and listing broker, unless those representations are repeated in the Agreement of Sale. The integration clause of our Standard Agreement (paragraph 28, entitled "REPRESENTATIONS") clearly states:
(A) All representations, claims, advertising, promotional activities, brochures or plans of any kind made by Seller, Brokers, their licensees, employees, officers or partners are not a part of this Agreement unless expressly incorporated or stated in this Agreement. This Agreement contains the whole agreement . . .
This provision makes out-of-contract representations unenforceable (at least those representations that can be verified by going to the municipality, checking public records, recorded restrictions, etc.). It's as though the false statement was never made or the advertisement never existed; therefore it cannot be the basis of a lawsuit.
You may expect that the buyer will next turn his attention to his buyer agent. Did the agent tell her buyer that they could not rely on those statements unless they verify the truth of the representation by contacting the municipality, engaging counsel, or by some other reasonable means? While a buyer agent may not be responsible for verifying promised uses, a buyer agent is response for advising their client of those representations for which the seller remains liable and those that are not a part of the Agreement of Sale. Further, the buyer agent must underscore for the buyer that seller's misrepresentations, if any, may not be redressable by a court if they are not included in the agreement. While it may seem unfair to relieve a misrepresenting seller from liability, our courts have been fairly consistent in upholding the meaning of this clause of our Standard Agreement.
Whether you verify the accuracy of seller's representations or merely advise your client that he/she cannot assume that these statements are accurate, is up to you. As long as your client understands that publicly available information must be verified, you have taken a great step in limiting your own liability. Advising your client that they need to verify such representations should be made in writing. An alternative rarely employed by real estate licensees is to incorporate all seller representations into the Agreement of Sale. An addendum stating that "seller represents and warrants that the property may lawfully be used as a horse farm with up to five horses (this representation to survive settlement)" transfers the risk that the property is not so zoned from the buyer to the seller. Should a difficulty arise after settlement, the buyer has every right to look to the seller, and not to you, his buyer agent.
Get those seller representations in writing!
Copyright © Brett M. Woodburn, Esquire, CALDWELL & KEARNS, P.C., 2008
All Rights Reserved
Jim 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. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com.