Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, October 1, 1995 TAG: 9509290022
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
The Smiths owned a house for a relatively brief time and, when they had to sell, they told the buyers that the basement had never leaked.
Then heavy rains came after the sale, drenching the area and flooding the basement. Oh yes, the neighbors told the buyers, that happened all the time when the Joneses had owned the house - before the Smiths moved in.
The buyers sued the Smiths for fraud - and won. The courts said the Smiths should have known about the basement's problems even though it had never sprung a leak during their occupancy.
Gearhart, a principal with the Roanoke firm of Gearhart-Stevens Inc. Realtors, said that wouldn't happen under a new real estate law that goes into effect in Virginia today.
The seller used to be on the hook in any real estate transaction, said Gearhart, who is a member of the Virginia Real Estate Board, the state agency that governs the industry and, therefore, will enforce the new law.
Before today, the seller was responsible for any representation made not only by his own real estate agent, but also by agents representing any potential buyer for the house even though he probably didn't even know them.
The seller could have, of course, counter-sued the agent who made a false representation about, say, the age of the roof. But that meant extended and complicated litigation.
What has changed, starting today, is that the law favors the seller more than it does the buyer. Buyers, in fact, should now remember that old caveat: Buyer beware.
The new law states specifically that the seller is responsible only for what he actually knows. It still is fraud, as it has always been, to conceal a known physical defect, such as covering signs of a leaky basement with new drywall and then failing to tell potential buyers about the true condition that they cannot see.
Don Constable, president of the Roanoke Valley Association of Realtors, said the organization's staff is hustling to prepare new forms for contracts, listing agreements and all other paperwork involved in the sale of a home.
The association plans to run seminars for local real estate agents through this month.
Constable said the new law is helpful for the public as well as for agents representing buyers, sellers, landlords and tenants.
Jean Ann Fox, spokeswoman for the Virginia Citizens Consumer Council in Richmond, said her organization lacks the resources to follow real-estate laws.
But she noted that the realty industry lobbied successfully at the legislature's last session for removal of real estate agents from the Virginia Consumer Protection Law. That means, she said, that a person with complaints against an agent cannot sue under that law but must take the case to the Virginia Real Estate Board, which is controlled by real estate agents and brokers.
David Rubenstein, executive director of the Virginia Poverty Law Center, another group concerned with consumer issues, said it took no position on the new law.
The best protection for consumers, Constable said, is for buyers to hire home inspectors to examine houses before making final offers. The real-estate industry recommends hiring home inspectors who can determine a house's true condition and provide presumably unbiased views about what repairs a house may need. Such inspections can turn up problems that even a seller does not know about.
But what about considerations that are not part of a property's physical condition? Suppose, for instance, there are future plans for a highway to be built nearby that could affect property values, noise or accessibility for an entire neighborhood or subdivision.
The new law doesn't cover such matters directly, but seems to suggest that the seller is obligated to reveal only matters related to the physical condition of the house. The real estate agent listing the property, however, is required to acknowledge every situation he or she knows about, including rezonings and proposed highways.
Actually the seller has two options when it comes to disclosure, Constable said.
One is a form of disclosure in which the seller attempts to list every problem or defect and the steps taken to correct them. Constable said this form is suitable for a relatively new house where the owner has resided long enough to know its condition.
The other choice is a form of disclaimer. Constable is, in fact, using this form in the sale of his own house because it is 23 years old. He said he frankly doesn't know whether the structure, because of its age, complies with current building code.
The extreme example of the likely use of a disclaimer form, he said, would be for the seller of a house he inherited but never occupied.
But even with a disclaimer form, Constable said, it is still fraud to conceal a problem such as a leaky basement if the seller knows about it.
Real estate agents like to see a disclosure form because of its certainties, Constable said, but lawyers probably would advise their clients to follow the sellers' safer course of a disclaimer.
Laura Benjamin, executive vice president of the Roanoke Realtors association, listed six changes in the law that impact the public.
The new law clearly states the duties real estate agents owe to their clients and other customers. (Under Virginia law, a client is someone with whom a realty broker has a written agreement to provide specific service; a customer does not have such an agreement.)
Until now, those duties were scattered throughout case law, state law and regulations of the Virginia Real Estate Board. Sometimes these sources were in conflict.
Edwin C. Hall of Hall Associates Inc. of Roanoke said the rules are clearer for everyone than they have been in the past. If a client reads this single new law (Chapter 21 of Title 54.1, Sections 2130 through 2144, of the Virginia Code available in most libraries), they will know the full duties of a real estate agent.
Hall, who was president of the Virginia Association of Realtors when those sections were drafted last year, said new paperwork also will help buyers and sellers understand their responsibilities.
Tim Garrison of Boone & Co. said that the lawmakers "cleaned up a lot of things and put it in black and white."
The new law eliminates "vicarious liability." As Gearhart pointed out, the seller no longer will be responsible - and liable - for the actions of his agent and other agents. The seller will be responsible only for his own actions unless he has knowledge of improper action by his agent and fails to correct it.
This means, Gearhart said, that the seller is no longer responsible for statements made by the various agents that show the property to potential buyers. Because of multiple listing services, houses frequently are shown by agents who work with brokers other than the one listing the property. And under the old law, the seller had been responsible for statements about his property by agents he had never met.
Tim Garrison, who was president of the Roanoke association when the law was written last year, said the seller could in the past be sued if an agent working with a buyer said, for example, that the roof was two years old when, in fact, it was older. The seller then had to turn around and sue the agent.
The new law holds the seller and buyer responsible only for information they actually know, meaning those parties no longer will be liable for knowledge possessed by their agent which is not actually known by the seller and buyer.
The seller, for instance, might not know about a government plan for a future highway crossing near the property or for a pending rezoning that might reduce residential property values.
Before today, Hall said, a seller was liable for information that a court might rule he should have known.
Anyone living in the house should know about a leaky basement and cannot cover it over with drywall. On the other hand, Garrison said, most homeowners are not aware of various proposals pending for the neighborhood or whether a nearby landfill is leaching contaminates.
One thing the buyer must disclose, Garrison said, is his intent about living in the house. The buyer must say whether he intends to occupy the house or whether he intends to make it a second home or an investment property.
The reason, he said, is it is much easier to obtain a mortgage for a primary residence than it is for a second home or investment property. The seller should be able to weigh two offers with the knowledge that one of the potential buyers might have trouble getting a loan.
Disclosure, Garrison said, "is a powerful word." The law, he said, requires the seller and his agent to disclose every physical problem with the house even if the buyer overlooks asking about that particular situation. But only if they know about it.
The new law protects the seller and buyer by requiring that all confidential information provided to their agents must remain confidential forever.
Confidential information is defined as all personal and financial information provided in confidence, plus any other information which the client requests to be kept confidential.
Hall said the old law was "vague" on the subject of confidentiality and silent on the question of the length of time it was binding.
A seller, for instance, might tell his agent that he must sell because he is threatened by bankruptcy. Hall said the agent can never discuss this fact regardless of whether the seller actually goes bankrupt.
Garrison said the old law could have been construed to read that the agent was silenced only during the house-selling relationship. Now, even around his own real estate firm, Garrison said, an agent "must keep his mouth shut."
The law defines as confidential all personal and financial information, plus any other matter for which the client requests confidentiality.
Constable cited the possible case of an agent who represents a seller, but is later replaced when there's no sale. If that agent subsequently brings a potential buyer to the house, Constable said, he cannot tell the buyer about the financial information he had received from the seller.
The new law clarifies the requirements to disclose material facts, Benjamin said. Such items are related to the vicarious liability issue. She said there had been an area of confusion because regulations of the Virginia Real Estate Board conflicted with a recent decision of the Virginia Supreme Court.
Gearhart said the board's regulation makes it the duty of the seller's agent to disclose all material facts about the house. The court ruling in a Roanoke case, however, said that the seller's agent did not have to disclose all adverse facts to the buyer.
Intensifying the agent's quandary, the board ruling was even enshrined in the Virginia industry's code of ethics, Gearhart said.
Donald L. Wetherington, a lawyer who represents the Roanoke association, said the case decided in February 1994 suggested that a listing agent has a fiduciary duty to the seller that would obligate him not to disclose all information to the buyer.
This court opinion created a dilemma for the listing agent until it was superceded today by the new law, Wetherington said.
Until the law was clarified today, Garrison said, an agent could have been sued under the court ruling by the seller if he revealed a problem with the house - and fined by the board if he failed to disclose it.
The new law replaces both the board regulation and the court decision. It comes down squarely on the side of the board, but this time it does so with the force of law.
Now the law states clearly that an agent must disclose all material information about the house, Gearhart said. The seller himself must either disclose or disclaim.
Firms that offer to represent both sellers and buyers will be able to represent both parties fully through a new option of "designated representation," Benjamin said.
This situation has always arisen when the agent of a potential buyer works for the same firm as the agent of the seller.
Hall said consumer groups have "blown out of proportion" the potential for a conflict of interest in such circumstances. So called dual representation has always been disclosed to the clients, he said, and the clients involved have enough sophistication to understand the situation.
The new statute is a good law, Hall said, but it represents "overkill."
Under the new law, Garrison said, the broker who heads the agency will appoint, or designate, agents to represent each side. Full disclosure is required, and the designated agents must deal at arm's length with each other. They cannot discuss between them any confidential information. Garrison said it would be best if they did not discuss the situation in the office.
Gearhart pointed out that the new law remains to be tested in the courts. He said buyers and sellers - and their agents - must cope with the rulings that will result when unforeseen situations result in litigation.
"We're all adjusting to change," Gearhart said of the impact of the new law on the real estate industry. "It's new ground for all of us."
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