Just what is a real estate broker doing in bringing together a seller and a buyer?
Until recently, that was a fairly simple question, at least from a legal point of view. Brokers were the agents of the sellers who paid them. They had no duty to the buyers -- other than an obligation not to say or do anything fraudulent -- and that meant they could pass on, without any independent checking, any of the details about the property that the seller told them.
All that is changing now.
"Recent trends indicate that the integrity of the broker has become more closely scrutinized," notes Peter J. Birnbaum, a staff attorney with the Attorneys' Title Guaranty Fund. But it is not yet clear just how far the new trend is going.
Birnbaum cites a Federal Trade Commission study that shows most home buyers think that the real estate agent with whom they are working is looking out for their interests. And, he suggests, there may be convincing evidence that they are right. Traditionally, because the buyer does not pay the agent, the agent has no obligation to the buyer. But Birnbaum points out that houses sold by the owner tend to go for less, so the premium that a buyer pays for a property listed by a broker may, in fact, buy some fiduciary responsibility.
Courts are receptive to that sort of argument. Three years ago, for instance, the Illinois Supreme Court threw out a precedent that had been in force for more than half a century; no longer may a broker assume that, because he (or she) is working for the seller, he can ignore the needs of the buyer, the state justices decreed. That may mean, for instance, that the broker must tell the buyer the estimated true value of a piece of property, warning when a price seems higher than the market would warrant.
The new obligation comes up most frequently when the new property owner discovers some major hidden problem well after the sale. The old rule was that unless the broker knew about the hazard and deliberately concealed the facts, there would be no liability. Increasingly, however, courts are telling brokers that are obliged to find out more about the condition of the property.
Last year, the California Court of Appeals upheld a jury verdict holding a broker liable for not ordering soil tests on a property up for sale. The house, complete with swimming pool and guest house, sold for $170,000, but later suffered major damage from massive earth movement. Contractors estimated that it might cost as much as $213,000 to repair the damage and ensure that such an accident would not happen again. The appellate judges decided that it is reasonable to expect the broker to take steps to find out about the problem; not doing so, they said, is the same thing as knowing of the hazard and concealing the facts.
Not only are courts deciding that brokers have a duty in such cases, but they are backing up that duty by ordering the brokers to pay the unhappy buyers significant amounts of money. "There's a tendency, I think, for courts to award greater and greater damages," says real estate lawyer Michael Rooney. Last year, for instance, an Illinois appeals court upheld a $50,000 punitive damage award against a broker -- a payment over and above what the jury thought was the customer's actual loss. Rooney sees a significant trend towards punishing brokers who fail to live up to the expertise in real estate matters that society expects them to have.
A Washington state court ruled that brokers must check out every detail about a piece of property before repeating the seller's claims to a buyer. And in some jurisdictions, even that may not be enough. The Alaska Supreme Court says that a broker can be held liable for passing on incorrect information even if he or she checked it out with care, but still made an innocent mistake. That's an obligation very much like the strict liability -- responsibility for injuries even when no one was at fault -- that is imposed on the manufacturer of drugs and similar highly dangerous products.
The new curbs on the freedom of real estate brokers to wheel and deal have been pioneered by the courts. But there are indications that state legislators approve and want to get into the act, too.
Most jurisdictions have passed statutes setting up funds from which both buyers and sellers who feel they have not gotten a fair shake in a real estate deal can collect damages without having to go through lengthy litigation. Pennsylvania put into effect earlier this year a new licensing act that requires, among other things, that brokers tell potential customers that all fees are negotiable.
Because regulation of real estate brokers is a state matter and because state law controls who can bring damage suits and how easily they can win them, the exact responsibilities of brokers vary from place to place. But unequivocal precepts of the past are no longer in force, and, as in so many other areas of commerce, it now is far easier for disgruntled customers to look to the courts for recompense.
In other recent cases, courts ruled that:
* Rank-and-file workers are not the only ones who have to be protected from racial slurs. The U.S. Court of Appeals in Cincinnati upheld an award of $30,000 in punitive damages won by a Hispanic supervisor who had to put up with ethnic taunts from two of the workers under him. When the supervisor complained about the situation to his bosses, they told him to "pay no attention" to the insults. That is enough evidence of bias to make a case under the 1964 Civil Rights Act, the appellate judges decided, because the managers contributed to the "hostile working environment" by not doing anything concrete about the complaints. (EREBIA v. Chrysler Plastics, June 7)
* Accountants have a responsibility only to their clients, not to others who rely on audited financial statements. The New York Court of Appeals, the state's highest court, laid down that rule more than 50 years ago, but in recent years so many of the old curbs on damage suits have fallen that a mid-level appellate court thought it was time to allow suits by lenders who had relied on accountant's findings. But the top court reversed that ruling, sticking with the old principle that protects accountants from such litigation. Unless there is a direct link between the accountants and the company that is basing decisions on their work products, the accountants have no liability for losses resulting from their mistakes, the decision says. The mere fact that an accountant might expect clients to take financial statements to would-be lenders is not at all a direct enough connection. (Credit Alliance v. Arthur Andersen, July 2)
* Corporations must be represented in court by a lawyer. Individuals have the right to plead their own cases, although judges will urge that those without legal training get some professional help. But the U.S. Court of Appeals in Atlanta last month reaffirmed that companies must hire attorneys. Earlier rulings from other courts already have established that precedent, but the plaintiff in the most recent case -- the president and majority owner of a service station disputing the price it was charged by its gasoline supplier -- claimed that he could act as an individual because the corporation had assigned its claim to him personally. But the appellate judges called that assignment just a way to get around the rule that a corporation has to have a lawyer, and refused to recognize the loophole. (Palazzo v. Gulf Oil, July 5)