The Neighbor Said …

You are the sellers' agent and are holding an open house. The next-door neighbor drops by and tells you that they are planning a remodel of their home that will result in the footprint of that home being moved to within five feet of the common boundary between the two properties, a new two-story wing with large windows overlooking the pool area of your sellers' property will be added, the remodel will take up to two years and will require extensive excavation and the removal of several hundred yards of dirt.

The sellers were previously provided with the PRDS Seller Advisory regarding completing the real estate Transfer Disclosure Statement and other seller disclosure forms, but their TDS and SSC do not disclose any information that the neighbor provided to you. Your AVID has been completed and also does not contain any such information.

What should you do in light of the information given you by the neighbor?

1. Should you ask the sellers if they know about the neighbor's planned remodel?

2. If they did have this knowledge, should you have them amend their disclosure documents?

3. Irrespective of whether the sellers had such knowledge, should you amend your AVID and disclose the information the neighbor has provided you? If you do, should you identify the neighbor as the source of this knowledge, state whether you have or have not verified any of this information, state that you will not be investigating the specifics of the neighbor's plans or the impact the remodel may have on the sellers' property, and advise prospective buyers to investigate all of these issues?

4. Should you ignore the information and neither disclose nor discuss it with the sellers and not disclose it to potential buyers?

If you believe that #4 is the correct answer to this question, I suggest that you reconsider your position in view of the recent Court of Appeal decision Ryan v. Real Estate of the Pacific, Sotheby's International. The basic facts of that case were similar to those recited above. One day after close of escrow, the buyers learned about the planned remodel from their new neighbor, and they immediately demanded that the transaction be rescinded. The sellers asked their agent for input on that rescission demand, and, remarkably, the agent recommended that the sellers not accept the rescission. The Court of Appeal decision does not indicate whether the sellers consulted with a lawyer before rejecting the demand for rescission.

The buyer and seller participated in a mediation, which was unsuccessful. Once again, the Court of Appeal decision does not provide any details as to what positions were taken by any of the parties or what settlement discussions took place. The buyer and seller had initialed the arbitration clause, and the case proceeded to binding arbitration. The brokers and agents did not participate in the arbitration.

The arbitrator's award rescinded the contract. The purchase price of $3.86 million was refunded by the seller to the buyer, and the seller took back the property. In addition, the arbitrator also awarded the buyer damages, pre-judgment interest, costs, and attorneys' fees in excess of $1 million.

The seller then filed an action in Superior Court against their broker and agent seeking recovery of the money they had to pay the buyer, including the attorneys' fees and costs, based on the arbitrator's award. The basis of the seller's claim against the broker and agent was that the agent knew about the neighbor's plans and did not advise either the seller or the buyer of those plans.

The arbitrator's award included findings that the seller's agent and broker were liable to both the seller and buyer for failing to disclose the information about the neighbor's remodeling plans. This finding was not, however, binding in the Superior Court action because the broker and agent had not been parties to the arbitration.

The seller's broker and agent made a motion for summary judgment in the Superior Court action, arguing that they did not have any duty to disclose the information they received from the neighbor regarding the neighbor's remodeling plans. The seller's attorney did not retain an expert witness to provide an opinion that such a duty existed on the part of the agent and broker. It is unclear precisely why the seller's attorney made that choice (e.g., they thought they could rely on the arbitrator's decision and/or they did not believe an expert opinion was needed).

The trial court granted the broker and agent's motion for summary judgment on the basis that the seller needed an expert to establish that the broker and agent had an obligation to disclose the neighbor's information and violated the standard of care.

The seller appealed, and the Court of Appeal reversed the granting of the summary judgment in favor of the broker and agent.

In reaching its decision, the Court of Appeal stated, "If [the broker and/or agent] had some knowledge that could impact the sales price (especially if that information would adversely affect the price), it logically follows that they, in providing a service to their clients, would have a fiduciary duty to share such information ... the lack of an expert witness would not be an impediment in proving such a cause of action ... they did not need to engage in any investigation to discover this information. They simply chose to remain silent, collect their commission, and left the [seller] to deal with the consequences. In short, the conduct required by the circumstances here is within the common knowledge of a layman."

While the outcome of this case demonstrated that expert testimony is not always needed to establish that a broker and agent have liability, there is a much more salient concern for real estate professionals: where facts are known, regardless of the source, the broker and agent need to disclose that information.

The other issue that frequently arises in these scenarios is that the seller or agent discount the value of the neighbor's information because the source is allegedly "unreliable" or the information is dismissed as being rumor or "hearsay." The distinction between fact and fiction and/or reliable or unreliable sources is difficult to define, even for experienced litigators. Therefore, regardless of the source, regardless of any doubts, the best practice is if you know something, disclose it.