Monday, April 20, 2009

What Information is a Purchaser's Agent Required to Disclose to the Purchaser?

A recent letter opinion in McGlen v. Barrett, a case in Fairfax County Circuit Court, explores a question that arises time and time again in legal disputes: whether one person is legally (as opposed to morally or ethically) required to disclose certain information to another person in connection with their dealings with each other.

A "disclosure" hypothetical: Suppose, for instance, that Jane is selling her used 1994 Accord to Betty, and Jane knows with certainty that the Accord's clutch is on its last legs (it won't last longer than another few weeks!).

In this scenario, does Jane have any legal obligation to disclose the information about the clutch to Betty, or is Betty responsible for doing her own "due diligence" prior to purchasing the Accord?

If Jane withholds the information about the clutch and the car breaks down two weeks later, is Jane liable for the cost of the repairs that Betty now needs in order to make the clunker road-worthy again? Or is Betty up a proverbial creek?

The answer will probably depend on a combination of (1) whether Jane actively defrauded Betty and/or (2) the language in Jane and Betty's sale contract (regardless of the legalities, Betty would have been wise to obtain an inspection of the Accord prior to purchasing it).

In Virginia, a combination of statutes and common law precedents dictate the disclosures that are required (or not) to be made by individuals selling real estate --- and also by the agents who are involved in real estate transactions on behalf of the seller and the buyer. The letter opinion by Judge Jonathan Thacher in McGlen v. Barrett (Fairfax County Circuit Court, CL 2007-12720), highlights a distinction between the disclosure duties of a seller's agent and those of the purchaser's agent.

In McGlen, the purchaser of a parcel of real estate learned -- after closing -- that the parcel was subject to certain building restrictions, under the Chesapeake Bay Preservation Act, which prevented her from building on the property in the manner that she had intended.

The purchaser brought a lawsuit against the seller, the seller's real estate agent, and her own real estate agent. She alleged that the seller and both real estate agents had failed to disclose the building restrictions to her -- and that, therefore, they were liable to her for the damages she suffered as a result of her inability to build on the property in the way she had intended.

With respect to McGlen's claim of fraud against the seller and the seller's real estate agent, the Fairfax Circuit Court held that she had "constructive notice" of the restrictions on the use of the property, since those restrictions had been published and made available to the public. The Court said that the seller and his agent could not -- as a matter of law -- be found guilty of fraudulently concealing this information from the purchaser, since she could have learned about the restrictions by reviewing publicly-available information about the property.

The Court analyzed the obligations of the purchaser's own real estate agent quite differently - using the colorful metaphor of "apples and oranges" to differentiate the disclosure obligations of the seller (and his agent) versus those of the purchaser's agent. The Court wrote that "The obligation of a seller in an arms length transaction to disclose the existence of a public ordinance is a world apart from the contractual or professional obligation of a professional who has been hired by a buyer to advise and assist them in a transaction." Although a trial court evaluating all of the evidence might or might not find in favor of the purchaser, the claim against that the purchaser's agent could not be dismissed as a matter of law.

As McGlen demonstrates, an analysis of when an individual is legally obligated to disclose certain information depends on a variety of circumstances, not least the contractual relationship between the affected parties.