Because agents and brokers are not parties to the offer to purchase or other contracts between the parties, it would appear that the Economic Loss Doctrine (ELD) would not block misrepresentation lawsuits against licensees. The Wisconsin Court of Appeals has now confirmed, in Shister v. Bipin, 2009 WI App 163, that the ELD does not bar home purchasers from suing the seller’s real estate broker for misrepresentations committed in a residential real estate transaction.

In Below v. Norton, (2008 WI 77) (www.wisbar.org/res/sup/2008/2005ap002855.htm), the Wisconsin Supreme Court held that the ELD applies to residential real estate transactions, thereby barring a buyer’s common law misrepresentation claims against the seller. (See Pages 1-6 of the August 2008 Legal Update, “2008 Supreme Court Decisions Affecting Real Estate,” at www.wra.org/LU0808 for further discussion of the case and its impact.) The ELD is a judicially created doctrine that encourages the parties to a contract to anticipate all of their potential legal claims relating to the contract and address them in the contract. According to the ELD, there should not be any lawsuits based on misrepresentation, fraud or negligence (referred to as tort claims) with regard to the subject of a contract because the parties should have provided the remedies they need in their contracts. This has been changed, at least for one- to four-family residential real estate transactions, by the recently enacted Wis. Stat. § 985.10. This statute allows homebuyers who are harmed by a seller’s intentional misrepresentation or fraud to once again sue the seller for both compensatory and punitive damages.

In Shister, the buyers received the sellers’ Real Estate Condition Report (RECR) before making their offer to purchase. The sellers’ RECR stated the sellers had no knowledge of any remodeling done without the required permits and were not aware of any pending property tax reassessment. The sellers knew they should have had a building permit and told the listing broker that they had remodeled their basement without the necessary permits. She had advised them to not disclose this information on the RECR. She told them not to worry because she would take care of it.

The listing broker’s property flier advertising a finished basement alerted the city assessor that the sellers had remodeled and finished their basement, 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 real estate broker met with the assessor in place of the sellers. The property was reassessed between the date of the buyer’s offer and closing.

After closing the buyers 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 previously unfinished basement was remodeled and finished. 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 buyer also had to pay $2,143.20 for retroactive remodeling permits.

The buyer sued the sellers for fraudulent misrepresentation under Wis. Stat. § 100.18, the false advertising statute, and for common law intentional and strict liability misrepresentation. The buyer sued the listing broker for breach of professional duties and intentional and strict liability misrepresentation. The circuit court dismissed all claims except the false advertising claim against the sellers based on the ELD and allowed only the cost for the retroactive permits.

The buyers appealed and the Wisconsin Court of Appeals held that the Below v. Norton case did not apply to brokers. The ELD “does not address or limit the liability of third party professionals who are involved in the real estate transaction, and whose duties and responsibilities to the plaintiff do not arise out of contract.” The ELD does not apply to claims arising from the provision of services or for professional malpractice. Additionally, there was no contractual relationship between the buyers and the listing broker. The broker’s duties arise from license law, and, the Court observed, “[T]here is no insulation from liability [for an agent] under the law for making untrue factual statements about the condition of a property during the course of a sale.” The broker has an independent duty under Wis. Stat. § 452.133(1), not arising from contract, to provide brokerage services honestly and fairly and with reasonable skill and care, and to disclose material adverse facts to all parties.

• REALTOR^® 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. The ELD provides no excuse for licensees failing to disclose, disclose, disclose! Review the October 2009 Legal Update, “Diligent Disclosure,” at www.wra.org/LU0910 for disclosure duty details.

Debbi Conrad is Director of Legal Affairs for the WRA.