4 Ways Illinois Realtors Can Protect Themselves from Liability for Undisclosed Property Conditions

By Christopher R Dunsing on June 12, 2014 | Posted in Blog

Illinois real estate agents and brokers perform extensive due diligence in completing a transaction, from a simple home inspection on a residential sale to environmental site assessments in commercial transactions.  Nonetheless, there are many things that an agent or broker simply cannot know about a property.  Recently, several cases have again addressed the extent of a real estate salesperson or broker’s liability for undisclosed, hidden or latent conditions in a property, including those conditions known only by the seller of the property.  While there are a number of different statutory and common law causes of action, each with their own unique requirements to prevail on a claim, the same fundamental questions permeate all of them:

Was there a false statement or omission of information by a salesperson or broker to a buyer or their representative regarding a condition of the property?

Did the salesperson or broker know that the statement was false when it was made or withhold some relevant information about the condition?

Even if the salesperson or broker did not know a statement was false or that omitted information was relevant, should they have? In other words, did the agent or broker negligently make the statement or withhold information?

Did the buyer suffer any damages as a direct result of the false statement or omission?

The field of potential undisclosed, latent or hidden conditions is wide, and Illinois courts have addressed claims against real estate professionals based on such varied issues as title defects, architectural or design flaws, termite damage, flooding history, commercial revenue statements, local ordinances and school district lines.  Just as the conditions vary, so do the defenses, but here are a few points to keep in mind for your business:

When in doubt, disclose any condition of the property to the buyer prior to any transaction.

No single transaction is worth the possible personal liability or licensure repercussions of withholding relevant property conditions.

The Illinois Consumer Fraud and Deceptive Business Practices Act (the “Consumer Fraud Act”) allows for statutory fraud actions against both a buyer’s or seller’s real estate salesperson or broker if “the salesman or broker knows of the false, misleading or deceptive character of such information.” The Consumer Fraud Act is a popular mechanism for plaintiffs’ attorneys because if a violation is proven, it allows for statutory recovery of the attorney’s fees.

The Illinois Real Estate License Act of 2000 also allows a private right of action for purchasers of property against their own real estate broker and the seller’s broker.  The Real Estate License Act provides:

“Licensees shall treat all customers honestly and shall not negligently or knowingly give    them false information. A licensee engaged by a seller client shall timely disclose to    customers who are prospective buyers all latent material adverse facts pertaining to the physical condition of the property that are actually known by the licensee and that could     not be discovered by a reasonably diligent inspection of the property by the customer. A licensee shall not be liable to a customer for providing false information to the customer if the false information was provided to the licensee by the licensee’s client and the licensee did not have actual knowledge that the information was false.”

Illinois also recognizes claims for fraudulent and negligent misrepresentation, some contractual and quasi-contractual claims and, potentially, breach of fiduciary duty claims against real estate professionals.  Contract claims are fairly specific and based on the agreement(s) entered into between the parties, particularly if the claim is brought by the buyer against his or her own broker or agent.  Breach of fiduciary duty, however, can be more nebulous and is often premised on a “special relationship” between the broker and the buyer.

While researching every aspect of a property is both impractical and impossible for a real estate professional, you might consider more “in-depth” research into a property beyond the residential or commercial listing information.

The Residential Real Property Disclosure Act already requires a wide range of conditions be disclosed by a seller to a home buyer prior to purchase, however, this does not always protect a realtor if the seller fails to disclose known conditions.

But note, the Consumer Fraud Act does not allow for recovery based on innocent misrepresentations by a real-estate professional to a prospective buyer, when the only person who knows of the falsity is the seller who gave the information to the real-estate professional.  Generally, a broker has no duty to prospective buyers of real estate to independently substantiate the representations of a seller unless the broker is aware that such a representation is false.  Mere expressions of opinion on future or contingent events, expectations, or probabilities will generally not support an action under the Consumer Fraud Act.

Make sure that your listing agreements and representation agreements acknowledge the limitations of your liability for unknown conditions in a property.

Many pre-printed listing agreements between a seller and a seller’s agent already contain language that (a) any information regarding a property provided by a seller must be accurate, (b) a seller may be held responsible to a buyer for latent or hidden, undisclosed defects in the property and (c) the seller agrees to indemnify the seller’s agent from any claims resulting from latent or hidden defects in the property that are known by the seller.  Similarly, many buyer’s representation agreements provide that a buyer’s agent is not an expert in the legal, environmental and/or engineering fields, and limit the buyer’s agent’s duties to disclosing only those conditions known to him or her through inspection or otherwise.

Finally, protection against these claims begins and ends with your errors and omissions policy.  Contact your insurance carrier for guidance on the extent of your coverage.

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