When you decide to sell your New York home, you might try to sell it yourself, or you might hire a real estate broker to help you. If you hire a broker, you will have a close working relationship with that person, and he or she will learn a lot about the property – thus raising the question, how much information can and should your broker share with prospective buyers? This article will explore that question.
First, a little background. Upon hiring the broker, he or she will ask you to sign a contract authorizing the broker, and one or more sales agents working for the broker, to offer the property for sale at a certain price – the “asking price” – and will describe the commission arrangement. The broker and sales agent are also authorized, in the contract, to enter the property into a multiple listing service (an electronic database of information about properties offered for sale, often called the MLS). Consequently, the contract is called the “listing agreement,” and the broker and sales agents are referred to as the “listing broker.”
The listing broker will help you set the asking price, communicate with prospective buyers and their brokers — called buyers' brokers – and generally help you through the contracting, inspection, and closing process. To perform these functions, the listing broker often receives detailed information about the property contained in appraisals, inspection reports, and surveys, and becomes familiar with the condition of the property.
A prospective buyer may also hire a broker to help find properties and act as a guide through the purchasing process. During the property search, inspection, and contract negotiation, the buyer will often ask both brokers questions about the condition of the property — that is, whether it has any known defects.
Do one or both of the brokers have to tell the buyer about known defects, or take action to discover defects and report them? Let’s take a detailed look at what the listing broker and the buyer’s broker must discover and disclose to the buyer about the property.
The Listing Broker’s Duty to Disclose Is Limited
The New York courts' long tradition of applying the rule of “caveat emptor” or “let the buyer beware” to real estate transactions is changing. Under “caveat emptor,” the buyer was responsible for inspecting and finding defects in the property before the purchase, and the listing brokers generally had no duty to disclose information about property defects.
However, exceptions have long been a part of New York’s legal approach. If the listing broker passed information about the property from the seller to the buyer that the broker actually knew was false, or if the listing broker omitted material facts about known defects, the listing broker may be liable to the buyer for damages; but only if the misinformation, or omitted information, was material to the buyer’s decision to purchase the property and the buyer relied upon the listing broker’s statements in making the final purchase decision. If the buyer’s inspection revealed any information that could lead to knowledge of property defects, the buyer cannot claim reliance on the broker’s statements.
Recent court rulings have softened the application of “caveat emptor” as applied to brokers. Also, the New York legislature amended the law governing real estate broker licensing to add some disclosure requirements (in 2002), and added more disclosure requirements with the passage of the Property Condition Disclosure Act (the PCDA). (N.Y. Real Prop. Law §§ 460-467.)
The Listing Broker’s Disclosure Requirements Under the PCDA
The listing broker is required to advise the seller about the disclosure requirements contained in the PCDA prior to the time the buyer signs the real estate purchase contract. The listing broker will usually provide a blank disclosure statement form for the seller to complete, but is not legally required to do so.
The listing broker is also supposed to notify the buyer about the PCDA if the buyer is not represented by a broker. A listing broker who performs these actions in a timely manner will not be liable for any violation of the PCDA.
For more information on the PCDA, see Nolo’s Article: "New York State Home Sellers: Disclosures Required Under State Law"
What the Listing Broker Must, and May Not, Disclose Under the Real Estate Licensing Law
New York real estate brokers and agents who engage in fraud or fraudulent practices or dishonest or misleading advertising face fines or revocation or suspension of their license. This comes from Article 12-A of the Real Property Law. (N.Y. Real Prop. Law §§440-443-a) as administered through the Department of State Division of Licensing. (N.Y. Real Prop. Law §441-c(1)(a)).
The law says that a broker is not generally required to inspect the property to discover defects or to verify the seller’s claims about the property prior to telling the buyer what the seller has said about it. However, if the broker knows of a defect, or knows that the seller has misrepresented the condition of the property, the broker must fully disclose the relevant information to the buyer or buyer’s broker. Also, if the broker uses any of the seller’s statements in marketing or advertising materials for the property, the broker is required to verify them.
In 1995, to settle a growing controversy over what were called “stigmatized properties,” the New York legislature amended the broker licensing laws to relieve brokers from any duty to disclose:
- that a previous owner or occupant of the property had, or was suspected of having, HIV, AIDS, or other unspecified diseases unlikely to be easily transmittable through occupancy of a dwelling place, and
- that the property was the site of a felony such as a homicide, a suicide, or another death. (N.Y. Real Prop. Law §443a-1.)
This means that buyers can’t sue brokers who fail to disclose the excluded matters; nor can the brokers face discipline over such acts. (N.Y. Real Prop. Law §443a-2 (b)). However, the buyer may make a written inquiry to the seller’s agent, or directly to the seller, for this information. The seller can choose not to respond to the inquiry. If the seller chooses not to respond, the listing broker shall not respond. (N.Y. Real Prop. Law §443a-3.)
Disclosure Obligations in a Dual Agency Arrangement
It is not unusual for a brokerage firm to represent both sellers and buyers. If the buyer wishes to see a property the broker has listed for a seller, the broker may become the agent of both seller and buyer — called a dual agent. Representing the seller and the buyer, a dual agent cannot maintain the same level of loyalty and confidentiality to either. The rule of “caveat emptor” will not apply, and the listing broker will make disclosures of known facts about the property to the buyer.
To ensure that the special relationship of the dual agency is explained to both parties, the New York legislature passed a strict broker-relationship disclosure law. The dual agent is legally required to give a disclosure form to both parties and to obtain their consent to the relationship. The language of the disclosure form, called the Disclosure Regarding Real Estate Agency Relationships, is set by the law, and describes the duties and loyalties owed by the dual agent to each party and the potentially competing interests. (N.Y. Real Prop. Law §443.)
The Buyer’s Broker Disclosure Requirements
Unlike the listing broker, or the dual agent, the buyer’s broker is exclusively the agent of the buyer, representing the interests of the buyer only. The buyer’s broker owes the buyer undivided loyalty, and must make a complete disclosure of everything known about the property to the buyer.
However, the buyer’s broker is not required to make any independent inspection of the property to learn about property defects. It is still up to the buyer to hire inspectors and make appropriate inquiries about the property.
Disclosure Rules When the Broker Becomes the Buyer or the Seller
New York courts have made some rulings about the broker’s disclosure requirements in the unusual situations where the broker becomes a party to the transaction. In one case, the court ruled that a buyer’s broker was required to disclose an adverse property condition to the buyer even though the buyer had contracted to purchase the broker’s home and the broker had become the seller.
The court ruled that the broker’s duties continued until the buyer signed the disclosure regarding the agency relationship. (See Dube-Forman v. D'Agostino, 877 N.Y.S.2d 740 (N.Y. App. Div., 2009).) In an earlier case, however, a different division of the New York appellate court ruled that the listing broker’s disclosure duties to the seller ended upon signing of the purchase agreement, and thereafter, the listing broker was not required to disclose a material change in the transaction to the seller. (See Dubbs v. Stribling & Assocs., 712 N.Y.S.2d 19 (N.Y. App. Div., 2000).)
For further information on New York real property broker disclosure requirements, consult an experienced real estate attorney.