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A new California appellate case expands liability for brokers

Holmes vs. Summer-October 2010

Court Expands Liability for Brokers

A new California appellate case expands liability for brokers.

Prior to our current foreclosure debacle, this case may have come out differently. However, in this era of rampant foreclosures and upside-down properties, this ruling makes sense. The appellate court admits that its holding is based in part upon the current economic climate. It stated that transactions like this one are “doomed to fail” in a “downtrodden economy” when the public needs to have confidence in real estate agents and brokers.

Holmes v. Summer holds that if a real estate broker knows that a listed property is substantially upside-down and cannot be sold without a "short sale", that broker has a duty to disclose to this material fact to a potential buyer. In this case, the buyer entered into a contract with a seller to purchase a house for $749,000. Then, the buyer (in reliance upon the sale) sells his own home to get the money to buy the new one, only to discover to his horror that the loans on the house total over $1.14 million, so the agreed upon purchase price won’t cut it. Holmes v. Summer, G041906 (Cal. App. 4th, filed Oct. 6, 2010).
For the sale to have gone through, either the seller would have had to come up with the extra $392,000 or the various lenders would have agreed to write it off. Justice Moore writes "$392,000 is not exactly 'chump change.”

Here, homebuyers sued the seller's broker, claiming that the broker was under an obligation to disclose to the buyers that the property was over-encumbered and could not be sold at the agreed upon purchase price. The Court of appeal reversed the trial court's judgment sustaining the brokers' demurrer to the complaint. The Court found that under the facts of this particular case, the brokers were obligated to disclose to the buyers that there was a substantial risk that the seller could not transfer title free and clear of monetary liens
and encumbrances.

The seller’s broker argued that she had a duty not to disclose the seller's confidential financial information. However, the court ruled that the existence of the three deeds of trust was public record and could be disclosed.

I believe that even though most sophisticated brokers do disclose the existence of a short sale on the MLS and do use the C.A.R.’s “short-sale addendum", the risks and the details of the “short fall” in terms of dollars are often not clearly communicated to buyers.

Thus, this decision expands broker liability. The court now tells brokers they are "obligated to disclose to the buyers" when there is "a substantial risk that the seller [can] not transfer title free and clear of monetary liens and encumbrances."

This ruling raises troubling issues for brokers and it will be interesting to see if the California Association of Realtors becomes involved in the case if it is appealed further.

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