Broker Liability for Misrepresentations

Cases and lessons from the Wisconsin courts


 Debbi Conrad  |    October 06, 2016
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Broker liability may arise as a result of misrepresentation, including concealment and the failure to disclose where this is required. Misrepresentation may be found if a licensee incorrectly states that a particular aspect of a property is in good condition when it is not. Liability for misrepresentation can be founded on intentional fraud, negligence or strict responsibility.

When it comes to the subject of broker liability for misrepresentations, the cases that have been decided by the Wisconsin appellate courts teach some very pertinent lessons.

Case Study #1:¬†Failure to disclose ‚ÄĒ and telling the seller not to disclose either!

In Shister v. Patel, the buyers received the sellers’ Real Estate Condition Report (RECR) before making their offer to purchase. The RECR indicated the sellers had no knowledge of any remodeling done without required permits and were not aware of any pending property tax reassessment. However, the sellers had remodeled their basement without the necessary permits. The sellers’ listing broker advised them to not disclose this information on the RECR and to not worry because she would take care of it.

The listing broker‚Äôs property flier advertising a finished basement alerted the city assessor that the sellers had remodeled and finished their basement ‚ÄĒ a fact not reflected in the assessment records or in the assessed value. The assessor contacted the sellers to arrange for a reassessment, and the broker met with the assessor in place of the sellers. The property was reassessed between the date of the buyer‚Äôs offer and closing.

After closing, the buyers first learned that the sellers had remodeled the basement without the required city permits and that the home had just been reassessed due to the city’s discovery that the basement had been remodeled. The assessed value increased by nearly $60,000, which resulted in a total of $4,408.34 in increased property taxes over a period of three years, and the buyers also had to pay $2,143.20 for retroactive remodeling permits. The buyers sued the sellers and the listing broker.

The circuit court dismissed all claims except the false advertising claim against the sellers based on the Economic Loss Doctrine (ELD). The ELD, in general terms, bars a buyer’s misrepresentation claims against the seller in residential transactions. The buyers appealed, and the Wisconsin Court of Appeals held that the ELD does not apply to claims arising from the provision of services or professional malpractice. The doctrine does not protect an agent making untrue factual statements about the condition of a property or not honoring the duties under Wis. Stat. § 452.133(1) to provide brokerage services honestly and fairly and with reasonable skill and care, and to disclose material adverse facts to all parties. 

REALTOR¬ģ Practice Tip

As always, real estate brokers must fulfill their legal duties to disclose material adverse facts and information suggesting the possibility of material adverse facts, promptly and in writing, to all parties.

Resources
  • Shister v. Patel, 2009 WI App 163, 322 Wis. 2d 222, 776 N.W.2d 632.¬†
  • ‚ÄúThe Seller's Dirty Little Secret,‚ÄĚ in the February 2015 Wisconsin Real Estate Magazine at www.wra.org/WREM/Feb15/Secret.¬†
  • ‚ÄúEconomic Loss Doctrine Does Not Bar Misrepresentation Claims against Real Estate Agents,‚ÄĚ in the February 2010 Wisconsin Real Estate Magazine at www.wra.org/WREM/Feb10/MisrepresentationClaims.¬†

Case Study #2:¬†‚ÄúAs-is‚ÄĚ won‚Äôt protect you from an inaccurate affirmative representation!

The story in Grube v. Daun starts in 1974 when Louis Achter bought a farm from his father. While either Louis or his father owned the farm, an underground gasoline tank (UST) was installed. In 1978, Achter noticed a leak in the UST, so he pumped out the gasoline and stopped using the UST. Achter never told anyone about the gas leak. In 1985, he sold the property to John Daun, who, in turn, sold a portion of the property to Gordon and Julie Grube on an ‚Äúas-is‚ÄĚ basis. Daun‚Äôs broker showed the farm to the Grubes and told them that the land was ‚Äúsuitable for business, residential, recreation and family purposes.‚ÄĚ The Grubes later discovered that their wells had been contaminated by the gas leaking from the UST. The Wisconsin Department of Natural Resources confirmed the existence of pollutants and assessed the cost of decontamination at over $90,000.

In 1989, the Grubes sued Daun‚Äôs real estate broker for negligence, intentional misrepresentation, strict responsibility for misrepresentation, negligent misrepresentation and violation of the Wis. Stat. ¬ß 100.18 deceptive advertising practices statute. The trial court dismissed all claims because the court held the negligence and misrepresentation allegations were barred by the ‚Äúas-is‚ÄĚ clause and there was no evidence of a ‚Äúdeceptive practice‚ÄĚ within the meaning of ¬ß 100.18. The Grubes appealed.

The court of appeals reviewed the basic elements of the misrepresentation claims alleged against the broker: (1) the defendant/broker making a factual representation, (2) which was untrue, and (3) which the plaintiff/buyer believed to be true and relied on to his or her detriment. The Grubes allege the broker made a misrepresentation of fact by stating the property would be suitable for business, residential, recreation and family purposes, and they relied on that representation in their purchase.

The court examined whether an ‚Äúas-is‚ÄĚ clause protects a broker from liability for misrepresentation when neither the broker nor the seller knew the land was contaminated. The court concluded a broker may be liable for misrepresentation when he or she makes a positive representation about an aspect of the property even if the property is sold ‚Äúas-is.‚ÄĚ The buyer is entitled to rely upon such an affirmative representation and expect full and fair disclosure of all material facts relating to that aspect of the property.

REALTOR¬ģ Practice Tip

A licensee may be liable if he or she makes false affirmative statements about the property, even when the offer includes an ‚Äúas-is‚ÄĚ clause. The licensee undertakes full responsibility for accuracy when making statements in a transaction where silence would suffice.

Resources
  • Grube v. Daun, 173 Wis. 2d 30, 496 N.W.2d 106 (Ct. App. 1992).¬†

Case Study #3: You don’t have to disclose if the inspector beats you to it!

The Conells personally inspected the home they intended to purchase, including the basement. The listing broker drafted an offer stating there were no exceptions to the standard warranties and representations except as stated on the seller‚Äôs property condition report and that the buyers acknowledged receipt of a copy of that report. The Conells, however, did not receive a copy of the condition report until closing. That report indicated the basement had ‚Äúdampness‚ÄĚ and ‚Äúleaks/seepage.‚ÄĚ

The offer also included an inspection contingency. The inspection report described two cracks in the basement walls and indicated that one wall bowed, which would require shimming the joists and ‚Äúpossible eventual repairs.‚ÄĚ Hairline ‚Äúsettlement‚ÄĚ cracks were also noted in the floor, but these were ‚Äúnot uncommon‚ÄĚ and ‚Äúacceptable‚ÄĚ to the inspector. Both ‚Äúyes‚ÄĚ and ‚Äúno‚ÄĚ regarding ‚Äúwet basement condition‚ÄĚ were checked on the report. The report further explained that there was ‚Äú[p]ast and present dampness‚ÄĚ in the northwest corner of the basement, but concluded that ‚Äú[n]o apparent evidence of serious moisture problems‚ÄĚ was present.

The Conells did not object to the inspection results, received the seller’s condition report and closed. Later they discovered the basement had chronic water problems, and they sued the listing broker and agent for negligence, strict responsibility misrepresentation and negligent misrepresentation. The Conells alleged that the water leaks were made known to the broker through the condition report and that he should have disclosed the leaks in the basement prior to closing.

The court, however, found that the Wis. Stat. § 452.23(2)(b) and Wis. Admin. Code § REEB 24.07(5) provisions for a licensee’s reliance upon a written report from a third-party expert protect licensees from liability. Information consistent with the expert’s report need not be disclosed. A licensee is not required to duplicate information coming to the buyer via another professional’s report. The broker escaped the lawsuit alleging negligence and misrepresentation based on the failure to disclose leaks in the basement, despite the fact that the condition report for unknown reasons was never delivered to the buyer until closing.

REALTOR¬ģ Practice Tip

The court indicated that Wis. Stat. § 452.23(2)(b) is straightforward in relieving the broker from the duty to disclose information related to the condition of the property when an inspection is conducted by a qualified third party who renders a written report disclosing that information to the parties.

Resources
  • Conell v. Coldwell Banker Premier Real Estate, Inc., 181 Wis. 2d 894, 512 N.W.2d 239 (Ct. App. 1994).

Case Study #4: Attribute the source!

Consumers tend to rely on stated data as the absolute truth unless the statement is specifically qualified, as did the buyers in Gauerke v. Rozga. In 1976, Robert and Ann Rozga listed their resort hotel, telling the broker they had five and one-half acres of land with approximately 600 feet of frontage on the Eagle River and about the same amount of frontage on Highway 70, all based on what the former owners told them. This information was also given to the cooperating agent. The listing agent prepared a spec sheet and asked the sellers to check the accuracy, but they did not modify the frontage and acreage information.

The Gauerkes were given a copy of the spec sheet after the cooperating agent removed the listing office’s contact information and substituted his information. The buyers went to see the property without any agents present, and the sellers repeated the frontage and acreage information.

The buyers made an offer for $125,000. The cooperating agent asked the sellers to sign a warranty stating ‚Äúsellers warrant above figures to be true and accurate.‚ÄĚ The parties closed on December 27, 1976.

Two years later, when they were selling the property, the Gauerkes discovered that the property actually contained only two and seven-tenths acres and had only 415 feet of river frontage and 278 feet of highway frontage. On June 22, 1979, the Gauerkes sued the brokers.

The jury found the brokers were liable based on strict responsibility and apportioned responsibility 40 percent to the cooperating broker, 60 percent to the listing broker, and 0 percent to the sellers. The damages were found to be $10,000. The court of appeals and the Wisconsin Supreme Court agreed that the brokers were liable for strict responsibility misrepresentation, which applies where a party implies that he has complete knowledge of the fact represented when he is in a position to know. Liability is found when there is: (1) a representation made as of the defendant’s own knowledge, concerning a matter about which he purports to have knowledge, and (2) a defendant with an economic interest in the transaction from which that defendant expects to gain some economic benefit. The applicability of the doctrine of strict responsibility does not depend on the actual source of the speaker's knowledge, but rather that the speaker professes or implies personal knowledge. The other key element is the buyer's justifiable reliance on the statement. 

REALTOR¬ģ Practice Tip

A Wisconsin licensee can be liable for inaccurate statements that appear to the buyer to have been made from the broker's own personal knowledge. In Wisconsin, an inexperienced buyer is entitled to rely on the factual statements made by a professional. Thus when a broker receives data from the seller, the city treasurer's office or another third party, and then restates the information in a data sheet or other advertising as if it were fact, the broker may be held responsible for the accuracy of the information. Accordingly, REALTORS¬ģ are advised to specifically attribute data used in advertisements, such as acreage, square footage and assessed values, to its source.

Resources
  • Gauerke v. Rozga, 112 Wis.2d 271, 332 N.W.2d 804 (1983).
  • See page 2 of the August 2015 Legal Update, ‚ÄúReal Estate Advertising Content,‚ÄĚ at www.wra.org/LU1508 regarding attributing the source of information used in advertising.
  • ‚ÄúY'all Can't Walk No Line: A reminder about refraining from explaining the boundary line location,‚ÄĚ in the January 2016 Wisconsin Real Estate Magazine at www.wra.org/WREM/Jan16/Line.¬†
Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.
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