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Three cautionary tales of real estate agents successfully sued

By Tim O'Dwyer - posted Tuesday, 17 January 2012


Firstly commission will be forfeited, as it was here, if not earned "by good faith performance". When agents betray the trust reposed in them, the court explained, notions of "equity and conscience" apply. Hence forfeiture of commission is "a real deterrent to betrayal".

Secondly disloyal agents face being liable for "equitable" damages, and will be allowed "a narrow escape route for liability" only if clients' losses had occurred in any event without any breach of duty. Once a client suffers loss as a result of a fiduciary breach affecting the sale price, the measure of damages is the difference between that price and market value – as it was here.

Clients are entitled, the judgement continued, to the "single-minded loyalty' of their agents who must act in good faith; must not profit out of their trust; must not place themselves where their duties and own interests may conflict; and must not act for their own or a third person's benefit without clients' "informed consent". Failure to disclose material facts, objectively likely to impact on sellers' judgements, is a breach of agents' "duty of loyalty".

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While Wests knowingly under-sold, KiwiRealty's culpable disloyalty concerned significant information about their prospective buyer. This undisclosed information would have been material to Wests' attitude to Dagg's offer and the possibility of attracting better offers from non-dealers genuinely wanting their house as a family home.

Tale two (from the United States)

"When agents negotiating a residential sale do not disclose that a property is so greatly over-unencumbered clear title almost certainly cannot be conveyed for the agreed price, the transaction is doomed to fail. The buyer is stung, and the market is disrupted. When properties made unsellable by their debt load are listed for sale without appropriate disclosures, and sales fall through, buyers become leery of the market while lenders extending those buyers credit waste valuable time processing useless loans."

These opening remarks by a Californian Appeal Court summed up the wider ramifications of the case before it where "stung" buyers, Josh & Kate Potter, were suing agent, Sally Fox.

Russ Mantan listed his home with Fox who then multi-listed it for sale at $799,000. After Potters saw the home on the internet they arranged an inspection with Fox. Potters liked the property, offered $700,000, Mantan counter-offered $749,000, Potters accepted and a contract was signed.

Unbeknownst to Potters, the property was encumbered by three mortgages: $695,000 was owing on the first, $196,000 on the second and $250,000 on the third – making a total debt of $1,141,000. The counter-offer did not mention these mortgages or that this was $392,000 less than the mortgage debt. Because Fox was aware the property was "over-encumbered" she later attempted to arrange a "short sale" whereby Mantan's lenders might accept lesser payments at settlement. However none of the mortgagees would agree to this. Meanwhile Potters sold their existing home so they could complete this purchase.

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Since Manton could not settle without full mortgage releases, the contract fell over. Potters were considerably out of pocket, and sued Fox for damages alleging negligent misrepresentation and failure to disclose.

When the matter came to court, the Judge told Potters: "You've got a great lawsuit against your seller".

No matter that debt-ridden Mantan was, in the Judge's words, "basically judgment-proof".

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(Each of these true stories – but with fictitious names used – first appeared in Tim O’Dwyer’s Real Estate Escapes column in Australian Property Invester Magazine.)



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About the Author

Tim O’Dwyer is a Queensland Solicitor. See Tim’s real estate writings at: www.australianrealestateblog.com.au.

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