Three cautionary tales of real estate agents successfully sued

Fox was not liable, as she had not breached any duty to disclose. Potters appealed.

The Appeal Court noted how Fox knew that any sale at $749,000 was doomed unless the lenders discounted their debts by $392,000, or Mantan found the cash. This was not "chump change," remarked the Court, for any lenders to forego or for any seller to "cough up."

Potters' case was that the magnitude of the mortgage debt affected both the property's value and desirability. Because Fox knew how much was owing (which they could not find out), she not only owed them a duty of disclosure but also, by her silence, effectively misrepresented the non-existence of impediments to the transfer of clear title.

Fox's lawyers argued that making this disclosure meant revealing confidential information. Moreover, the agent's duty to disclose material facts did not extend to financial information when the seller had agreed to sell free of monetary liens and encumbrances.

"The latter viewpoint misses the big picture," stated the Court judgement. Although a buyer may be harmed acquiring a property with undisclosed physical defects, a buyer may also be harmed by contracting when settlement is highly unlikely.

The main purpose of pre-contract disclosure, the judgement continued, is to protect buyers from "unethical" agents and sellers while ensuring sufficient accurate information is provided to make an informed decision to purchase: "An agent must exercise reasonable care to protect persons the agent is attempting to induce into entering a transaction for the purpose of earning a commission."

When an agent knows that mortgage debts exceed the sale price (requiring mortgagees' "shortsale" cooperation or the seller's making up the difference), the agent is obliged to disclose these circumstances so the buyer can inquire further before entering into a highly risky transaction.

Although the confidentiality duty to the seller must take into account the disclosure duty to the buyer, the Court saw a clear solution to any conflict between these duties: "Obtain the seller's permission to disclose relevant confidential information before the buyer enters into a contract." Any agent who proceeds without that consent does so "at the peril of liability should the transaction go awry due to the undisclosed risks involved."

The Court ruled for Potters, and found Fox breached her obligation "to disclose there was a substantial risk the seller could not transfer free and clear title."

Aussie agents beware, because the same legal principles apply here. In recent years more than a few buyers across Australia have similarly had purchases come unstuck because their sellers sold for less than what they owed. No local agents have been successfully sued yet but the time will come – especially if buyers are significantly disadvantaged and the agents knew about the extent of their seller clients' indebtedness.

And the final tale (from West Australia)

After architect Henry Thomas established his property development consulting business he heard of favourable development prospects in a distant coastal town. He soon visited there and met estate agent Ken Miller (whom he would later successfully sue for big bucks). Henry told Miller he was looking for a property suitable for unit development, and became interested in one which Miller showed him.