The legal battleground – disclosure obligations

 

Following on from our last newsletter where we discussed the definition of “Real Estate Agency Work” as part of our legal battlegrounds series, this month we look at disclosure obligations of licensees.   

Disclosure obligations of a licensee under the Act and Code of Conduct

The extent of the disclosure required by a licensee under the Real Estate Agents Act 2008 and Code of Conduct is often a key feature of complaints and enquiries we receive. 
 
There are two key rules in the Code that set out the disclosure obligations of licensees: rules 6.4 and 10.7. 
  • Rule 6.4 provides:
    A licensee must not mislead a customer or client, nor provide false information, nor withhold information that should by law or in fairness be provided to a customer or client.
  • Rule 10.7 provides:
    A licensee is not required to discover hidden or underlying defects in land but must disclose known defects to a customer. Where it would appear likely to a reasonably competent licensee that land may be subject to hidden or underlying defects, a licensee must either—
    (a) obtain confirmation from the client, supported by evidence or expert advice, that the land in question is not subject to defect; or
    (b) ensure that a customer is informed of any significant potential risk so that the customer can seek expert advice if the customer so chooses. 

Erosion of caveat emptor

The traditional position in relation to the transacting of real estate has been “caveat emptor “or “buyer beware”.  
 
In reality, this concept has been significantly eroded throughout the world with the development of modern consumer law.  For instance, in New Zealand, the enactment of the Fair Trading Act 1986 meant that it was no longer acceptable for agents to mislead customers in relation to real estate transactions, even inadvertently and in good faith. Our Code of Conduct is a further erosion of this concept. 
 
In addition, the Real Estate Agents Act 2008 means that there is now far easier, and cheaper, access to remedies via our complaints and disciplinary process. 
 

Tribunal decisions

Against this background, a number of cases before the Tribunal have dealt with the extent of a licensee’s disclosure obligations. The Tribunal has taken the stance that obligations to disclose are a fundamental duty and licensees can no longer simply turn a blind eye to actual or even possible, defects with a property.  
 
In B v CAC & M,[2011] NZREADT 19 the Tribunal considered an appeal where the purchaser, an immigrant from England, viewed a property and got a building report. This report showed that the property was generally in a good condition. A subsequent building report obtained by the purchaser indicated that there was leaky house syndrome in evidence and that there were a large number of deficiencies in the stucco cladding of the house and cracks which draw in water by capillary action. Essentially, the contention of the purchaser was that they had been the unwitting purchasers of a property that suffered from the leaky house syndrome due to the failure of the agency to discharge its obligations under rules 6.4 and (then 6.5) 10.7. 
 
The Tribunal commented: 
[33]…..What causes the Tribunal considerable concern is the apparent belief held [by the agents] that so long as they suggest to a purchaser that a building inspectors report be obtained that is the limit of their obligation. While that one size fits all approach may have sufficed prior to 17 November 2009 when the Real Estate Agents Act 2008 came into force it no longer does. All three of the ….agents have said they were well aware of the leaky homes syndrome in New Zealand and it would have been pointless for them to deny. In the past decade at least… it has been a long standing problem in New Zealand. In this case [the agent] was dealing with purchasers who would have no knowledge of this and were thus in no position to evaluate what were fairly obvious signs of the present and potential problems this property presented.” And
 
[34]…..We note the commentary in (2010) 14 BCB 1 where the changes in the law introduced by the rules are discussed and where the following comment appears:-
“Rules 6.4 and 6.5 impose a clear duty on agents towards purchasers in respect of leaky homes if the agent:
• Knows the property has been the subject of prior sales which have fallen through following building reports; or
• Knows the property is of materials and design which render it likely to be leaky; or
• Knows of other units in a complex which are leaky; or
• Suspects from his or her experience that the premises may be a leaky home. 
The agent breaches the Code of Conduct unless they either raise the leak issue with the vendor (and get something approaching a vendor warranty that the property is not leaky); or raise the leak issue with the purchaser.  
 
Reliance on statements or the lack of statements by the agent is not a necessary aspect of any complaint involving rules 6.4 and 10.7. In Wright v CAC & Woods [2011] NZREADT 21, the Tribunal noted:  
[41] The emphasis in Rule 6.4 and 6.5 [now 10.7] is on the conduct of [the] licensee. The Rules provide that a licensee must ensure that they are open and honest with a purchaser so that they are not misled in their decision to make an offer to purchase a property. There does not need to be any reliance by the purchaser on the statements (or lack of statements) by the agent and it is clear that a duty of utmost good faith is required from the agent. We also agree with submissions made by Counsel that, for example suggesting a building report should be obtained cannot avoid liability under Clause 6.4 or [10.7]. However each case depends on its factual circumstances and the relationship between agent and purchaser.
 
[43] A licensee must comply with R 6.4 and [10.7] and cannot turn a blind eye to problems with the property.  

Client instructions not to disclose

The issue of what an agent should do when a client does not want a defect disclosed to a purchaser was addressed in the case of Fagan v REAA & Sinclair [2013] NZREADT 64.  In that case the Tribunal considered that the licensee should discuss the issue with their client first, and if the client remained of the view that the defect (or potential defect) should not be disclosed to the purchaser, the licensee must then cease acting for the client in line with rule 10.8:  

[26] Where a client instructs that information be withheld from a purchaser, and a licensee considers that the information should be disclosed under the Rules, a licensee should raise and discuss the issue in detail with his vendor client. If the client maintains that information must be withheld and the licensee remains of the view that it should be disclosed, the licensee must then decline to act further on that transaction.  
 
[28] A licensee must be very clear with a client when a conflict over disclosure arises. If the client maintains that information be withheld that the licensee considers should be disclosed, the licensee’s duty is to cease to act; not to disclose the information contrary to the client’s instructions. 
In the next newsletter we will look at the skills an agent is expected to display pursuant to the Code of Conduct.