In keeping with the transaction theme this month, a little self-testing might be in order. The following scenarios are taken from real-life scenarios from other states. Sometimes the brokers made good decisions, and in other cases, they did not. Read along and see how you would fare if you were presented with these fact patterns in Wisconsin!

The homeowners association and the gas leak

A married couple entered into a buyer agency agreement to find a home. They told the buyer’s agent they did not want to live in a homeowners association (HOA) because they wanted to build a fence on the property for their dogs. They found a home that was served by a well located about a mile away from where the buyer’s agent lived. It was common knowledge in the area there had been a gas station leak of such magnitude that it might contaminate groundwater. The buyer’s agent also was aware the property had been subject to a homeowners association, but the covenants on the property had expired in 2005; there was a surviving community association that was voluntary and non-binding and did not constitute an actual HOA. Neither issue was referenced in any disclosures from the seller or listing broker.

Should the buyer’s agent disclose anything to her clients? Is either issue a material adverse fact, information suggesting the possibility of a material adverse fact, or material information not known by the client or discoverable by the client through reasonably vigilant observation under the Wis. Stat. § 452.133 duties owed to clients? 

With regard to the prior HOA that has become a voluntary association, what would you do? 

The agent in the actual case did not disclose anything, although it may have been wise to have at least told the buyers about this so they would not have become alarmed when they received a notice from the local group stating they were now part of a neighborhood property association and their property was subject to certain covenants. It would have been good client service to alert them and explain the circumstances, but this did not appear to rise to a level requiring written disclosure.

With regard to the gas leak, what would you do? 

The agent in the actual case did not disclose anything about the gas leak. That was unfortunate when a few months after the buyers closed, a representative from ExxonMobil came to the property to test the well water for possible contamination arising from the leak. It was at that point the buyers sued the buyer’s agent for failure to disclose the HOA and the gas leak.

No liability was found with regard to the HOA that had turned into a voluntary association. However, with regard to the leak, the court found that although the buyer’s agent did not have actual knowledge of contamination, she was aware of the possibility of contamination as she lived in the area and the leak was common knowledge to area residents. The information should have been disclosed as information suggesting the possibility of a material adverse fact and/or as material information pertaining to the transaction. Two years after the buyers closed, the buyer’s agent joined a class action lawsuit against ExxonMobil for the leak, so this was more than a fuzzy rumor.

Based on Maryland Real Estate Comm'n v. Garceau, 172 A.3d 496 (Md. Ct. Spec. App. 2017).

Sewer access for lot

The buyers were looking for an investment property to purchase and then sell. They learned about a subdivision lot available from the exclusive listing firm (Blue Ridge) representing the developer (Eagle Rock). Mr. Joseph, one of the Blue Ridge brokers, was also an owner in Eagle Rock. When the buyers visited the subdivision, a Blue Ridge listing agent spent hours at the development with them. She stated public sewage disposal was available to lot 25.

Eagle Rock published publicly available guidelines on its website that clearly speak to the existence of public sewer at each homesite in the subdivision. The MLS listing for lot 25 clearly indicated the sewer service was available to the lot. In addition, there were several sewer manholes and sewer grates at the development when the buyers visited the property. Under applicable code, if there was no public sewer, the lot would be restricted to a two-bedroom septic tank system.

However, there was a seller disclosure statement stating the lot would not have public sewer. It was signed by Mr. Joseph some three months before the buyers first saw it at closing. The buyers purchased lot 25.

With regard to the sewer access, what would you, as a licensee with a Wisconsin listing firm, have done? 

Despite numerous representations to the contrary, public sewage disposal was not available. Every Wisconsin licensee worth his or her salt would disclose the information Mr. Joseph, an Eagle Rock owner and a Blue Ridge broker, clearly was aware of three months before closing: lot 25 is not and will not be served by public sewer. There seems to be no question this is a material adverse fact. Without public sewage disposal, lot 25 was restricted to a two-bedroom septic tank system and thus a two-bedroom house; this information is especially important since the buyers were intending to resell the property.

The buyers’ attempt to resell the lot fell apart because of the septic issue. The buyers sued the Eagle Rock developer and the Blue Ridge listing firm. Their purchase of lot 25 was rescinded based upon theories of material misrepresentation and deceptive trade practices, and the listing broker was ordered to pay their attorney’s fees.

Based on Hall v. Eagle Rock Dev., LLC, No. E201501487COAR3CV, 2017 WL 3233496 (Tenn. Ct. App. July 31, 2017).

Improperly prepared contingency clause 

The owners of a dog daycare business decided to offer overnight kennel services and began searching for a property to accommodate the kennels. They entered into a buyer agency agreement, and the buyer’s agent located a property with a barn on it. The buyers found the barn would accommodate their kennels, so they negotiated purchase price with the sellers and measured the property to ascertain whether the proposed kennels would meet the town zoning ordinances. After discovering the barn did not meet the 200-foot setback requirement for kennels, the buyers expressed concern. One of the sellers was a township supervisor, and he told the buyers he would help them obtain a zoning variance. He also told them the barn did meet the zoning requirements because the steps that extended into the barn brought the barn within the setback requirement.

The buyers asked the buyer’s agent to draft a contingency allowing them to void the offer if the barn could not be used as a kennel. The buyer’s agent drafted a contingency allowing the buyers to cancel the offer if the property could not be used for kennels without specifying the barn; the language was approved by the firm’s managing broker. The buyers expressed concern that the contingency was not specific enough, but the buyer’s agent assured them the language was sufficient. The buyers received a zoning variance and completed their purchase of the property.

Following their purchase, the town informed the buyers the town would not issue the permit allowing the buyers to use the barn as a kennel. 

What would a Wisconsin licensee have done differently regarding the kennel contingency?

Wis. Stat. § 452.40(1)(a) indicates Wisconsin licensees “use a form” by filling in blanks or modifying printed provisions at the instruction of the parties with whom they are working or representing. A good Wisconsin licensee, accordingly, would listen to the client’s concern that the contingency did not mention the use of the barn for the kennels and make that modification. Because a Wisconsin licensee may not provide advice or opinions concerning the legal rights or obligations of parties to a transaction or the legal effect of a specific contract or provision, perhaps a Wisconsin licensee would have an attorney review or draft the contingency to ensure it accomplished what the clients had asked for. Reviews conducted by a supervising broker are not legal advice or a legal opinion.

The buyers sued the buyer’s agent for negligence in drafting the contingency because it did not allow them to cancel the offer when they couldn’t use the barn as a kennel. A jury found for the buyers and awarded them damages of approximately $200,000. 

Based on Hensley v. Duvall, No. 2911 EDA 2015, 2017 WL 1372759 (Pa. Super. Ct. Apr. 13, 2017). 

Lakeshore access dimension

Wells Fargo foreclosed on a property in 2010. The bank’s appraiser estimated the property needed approximately $22,000 in repairs, and the listing broker said the property had potential but was a mess. The bank spent $75,000 on repairs. The broker listed the property for sale in the MLS “as-is” with a lake view. The broker later reduced the price and added 1,500 feet of lakeshore located across the road to the property description.

An Ohio couple retained a buyer’s agent and visited the property twice. The buyers questioned the buyer’s agent about the 1,500 feet of lakeshore property. The buyer’s agent contacted the listing broker who forwarded a link to the county website, which showed the property as having 900 feet of lakeshore access and 600 feet on a flowage.

What would you, as a Wisconsin licensee, have done if you had this listing? 

It would have been prudent to clarify the representation concerning feet of frontage on the MLS and anywhere else the frontage information was stated. More importantly, a knowledgeable Wisconsin licensee knows there can be liability for inaccurate statements that appear to have been made from the broker’s personal knowledge. When a broker receives data from the seller, the city treasurer’s office or another third party, and restates the information in a data sheet or other marketing as if it were fact, the broker may be held responsible for the accuracy of the information. Accordingly, the intelligent Wisconsin agent would specifically attribute the data to its source, here first to the seller and then to the county website. 

The buyers made an “as-is” offer for the property. They did not have the property surveyed or inspected. After closing, the buyers discovered a number of issues including mold, urine-stained walls and dead animals in the walls when they pulled up the carpeting and moved appliances. A neighbor also told them they only owned half of the 900 feet of lakeshore.

What might a Wisconsin licensee have done differently for this buyer? 

Wis. Admin. Code § REEB 24.07 requires licensees to perform reasonably competent and diligent property inspections and disclose material facts and potential adverse facts to the parties in writing. This is not excused or waived in “as-is” sales. In addition, the buyers should have been urged to have inspections and testing done. 

The buyers sued the bank and the listing broker alleging fraudulent misrepresentation for failure to accurately disclose the condition of the property and the size of the property’s waterfront access. The court found in favor of the broker and the bank, and the buyers appealed.

The Minnesota appellate court ruled the broker did not make a misrepresentation when he based his statements on information from the county website. The property taxes for the property were based on 900 feet of lakeshore access, and the appraisal also stated there was 900 feet of lakeshore access. Concerning the condition of the property, the buyers did not present any evidence the broker knew of defects or made any representations about the property’s condition in the “as-is” transaction. 

Based on Beckman v. Wells Fargo Bank, N.A., No. A15-1819, 2016 WL 5640664 (Minn. Ct. App. Oct. 3, 2016). 

Foul odor not “sea air”

The buyers purchased a seaside home. When they visited the home prior to purchasing, they noticed a strange, moldy aroma in one of the rooms. The real estate professional, who was serving as a dual agent, told the buyers the smell was from “sea air” and could be fixed by “changing things like sheetrock.”

What might a Wisconsin licensee have done differently? 

It is never smart to speculate or make statements not based in fact. The agent could have recommended the seller investigate the odor when the property was listed. 

Once the buyers arrived on the scene and the relationship became multiple representation without designated agency, or “dual agency,” the agent could provide brokerage services to each client and prepare the offer as the buyers directed. However, once it became time to negotiate, the agent was required to remain neutral and not provide any advice or opinions that placed the interests of one client ahead of the other.

However, the agent should have inspected the property and disclosed material adverse facts and information suggesting the possibility of material adverse facts. One would think the agent surely noticed the smell and would have disclosed it as information suggesting the possibility of material adverse facts.

When the buyers moved into the property, they noticed an “oil-like” odor on the first floor. They eventually hired a contractor who found a buried septic tank and a buried oil tank. During the removal of the oil tank, there was an inadvertent spill causing additional remediation. Eventually, the buyers moved away, and the entire house was removed from the property.

The buyers sued the seller, the dual agent and the agent’s broker. The buyers settled with the agent and broker for $275,000. The court ruled the evidence supported the negligent misrepresentation allegations, holding the seller vicariously liable for the agent’s statements that the strange smells were “sea air.” The court found $91,635 in damages for the discovery of the tanks and remediation of the property but awarded nothing because the settlement exceeded that amount. The case was sent back to trial court.

Based on Fong v. Sheridan, No. A144286, 2016 WL 1626221 (Cal. Ct. App. Apr. 21, 2016).

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.