Short Sale Disclosure

The duty of a listing broker and agent to a buyer has changed in light of the onslaught of short sales. On October 6, 2010, the California Appellate Court in the case of Holmes v. Summer, 4th Appellate Dist., 3rd Div. 2010, extended the listing agents' duty to a buyer, requiring disclosure of financial obstacles affecting title. Specifically, if the listing agent or broker is aware that monetary liens and encumbrances exceed the sale price of a residential property, requiring the seller to either undergo a short sale or deposit a substantial amount of cash into the escrow to obtain a release from the lender, there is a duty to disclose this state of affairs to the buyer.

In the case of Holmes, a buyer of a residential property sued the sellers' broker, asserting misrepresentation, failure to disclose, and negligence. Escrow was cancelled as result of the seller being unable to effectuate a short sale or come up with sufficient cash to obtain the release of a monetary lien. The Court applied a strict standard of care to the sellers' agent, scrutinizing everything she did. For example, the Court found fault with the fact that the Multiple Listing Service ("MLS") advertised the sale of property for approximately $750,000, stating only that the "seller was motivated and that the [listing agent] would get a 3 percent commission." The buyers were never advised that the property was subject to three deeds of trust, with a total debt of $1,141,000, or that the seller's lenders would need to either approve a short sale or the seller would have to deposit $392,000 in cash to escrow to cover the shortfall. The buyers never did a title search, and in reliance on the purchase agreement, sold their home to fund the purchase of what they thought would be their new residence. When the deal fell through, the buyers sued the listing agent and broker, not the sellers.

The buyers did not sue the sellers because they were said to be "judgment proof." Because the sellers could not afford to keep their home, they could not, in all likelihood, afford to compensate the buyer for his damages. Under different circumstances, even if a buyer sues the broker, agent and the seller, and they are all found at fault, the legal theory of joint and several liability would apply. This means that if two or more defendants are found responsible for an indivisible injury, each defendant is liable for the entire award regardless of the individual's degree of fault. A so-called "deep pocket" defendant may be held liable for an entire damage award even if such a defendant is only fractionally liable. The broker could end up responsible for all of the buyer's damages, if in fact the seller is "judgment proof."

Licensed real estate brokers and salespersons should consider the following to limit their liability exposure. First, the agent should have an understanding of the client's financial obstacles and advise the client from the start that they may be required to disclose such information to the buyers. This type of communication should be solidified with a signed written consent to use confidential information. Second, if applicable, the MLS should include notice of a potential need for Short Sale. Pursuant to Civil Code § 1088, an agent is responsible for the truth of all representations and information listed in the MLS. Constructive notice is not a viable defense. Even assuming a title search would reveal the existence of deeds of trusts on the property, the agent cannot rely on a buyer doing such a search.

Balancing factors used by the Court to determine liability on the part of a broker and agent include: 1) the extent to which the transaction was intended to affect the plaintiff; 2) the foreseeability of harm; 3) the degree of certainty of injury; 4) the closeness of the connection between the defendant's conduct and the injury suffered; 5) the moral blame attached to the defendant's conduct; and 6) the policy of preventing future harm. By searching online the case of Holmes v. Summer, anyone can read Justice Moore's analysis of these five factors. The factors arise out of equitable principals, requiring the broker and agent to apply a higher degree of care and consciousness to the Short Sale transaction. The real estate attorneys at Kring & Chung, LLP, some of whom also maintain a real estate broker's license, are knowledgeable and ready to assist both the Seller and the Agent through the Short Sale transaction, and any other real estate matters.

Anna Greenstin is an Associate at Kring & Chung, LLP's Irvine, CA office. She can be contacted at (949) 261-7700 or agreenstin@kringandchung.com.