Disclosure Lawsuits: Agent and Broker Liability

In other articles, I have discussed the issue of seller non-disclosure. Yet, sellers are not the only parties to litigation arising out of non-disclosure disputes. Sellers’ and buyers’ agents and brokers are often named as parties in non-disclosure litigation. Although many disclosure disputes are merited, other times a broker may be unfairly caught up in a disclosure dispute. This article will focus on the general disclosure duties that agents and brokers owe to other parties in a transaction.

A real estate agent owes a fiduciary duty to his or her client and must protect that client’s interests in the transaction. See e.g., A.A.C. R4-28-1101(A). But, a real estate agent must also deal fairly with all other parties to a transaction and must disclose any information that the real estate agent has that may materially or adversely affect the consideration paid by either party. See A.A.C. R4-28-1101(A), (B). This duty requires a real estate agent to disclose whether his or her client is unable or unwilling to perform, any material latent defects with the property known to the agent, and whether there is any lien or encumbrance on the property. Real estate agents will also likely be bound by any applicable codes of ethics.

Real estate brokers have a general duty to supervise their agents (see A.A.C. R4-28-1103) and may be liable for the actions of their agents through the doctrine of respondeat superior.

In disclosure disputes involving an agent, a party to a real estate transaction generally contends that the agent failed to disclose material information in connection with a transaction. This is commonly seen with non-disclosure of latent (hidden) defects with respect to the seller’s agent and with a buyer’s financial issues with respect to the buyer’s agent, among others. The crux of any litigation involving this type of dispute is proving actual knowledge. An agent is generally under no duty to investigate issues on behalf of another party (non-client) and must only disclose what he or she knows.

A prime example of when an agent has a disclosure duty is when an inspection discloses some defect in the property and, for whatever reason, the property does not close escrow. In this case, the agent has a duty to disclose this defect to a future purchaser in a different transaction because the agent now knows of the defect by virtue of the inspection.

Arizona law is clear that when a licensed real estate professional has knowledge of material information, that information must be disclosed to all parties to a transaction in writing. Simply telling a party about a defect is not sufficient. In our difficult real estate market, it is especially important to ensure that you, as an agent, disclose all material information that you know in order to avoid personal liability and liability for your brokerage. This articles is not legal advice. It provides general legal information.