February 2022 | Buyer’s Broker Owes No Duty to Disclose to the Seller that an Offer is Not “Fair Market Value”
A recent decision from the California’s Fourth District Court of Appeal analyzes whether a buyer’s broker has a duty to disclose to a seller that the proposed price to buy vacant land is significantly lower than the fair market value of the land. The Court concluded that the broker does not have a duty to disclose that information. Greif v. Sanin, et al., No. E070283 (Ct. App. Jan. 26, 2022).
Facts of the Case
As the Court of Appeal decision observed in its opening sentence: “This is a case of seller’s remorse.” Earl Greif sold 10 acres of vacant land to Yardley Protective Limited Partnership, a family real estate investment venture. He later attempted to back out of the sale. The buyers sued Greif to enforce the agreement.
Earl was born in 1925 and suffered from a variety of illnesses, including a heart attack in 2004 and strokes. Earl’s illnesses impacted his cognitive abilities and his ability to walk, see, hear, and speak.
Earl had purchased 5.04 acres of raw vacant land in 2006 for $1.85 million and the adjacent parcel consisting of another 5.04 acres of raw vacant land in 2011 for $480,000. At the time of the sale to Yardley the Property had a Fair Market Value in excess of $4 million.
In 2012, Yardley’s broker informed Earl that Yardley wanted to purchase the Property. When Earl met with the Yardley representatives, he informed them of his physical limitations. Earl’s driver informed the Yardley representatives that they would need to be directly in front of and close to Earl so he could communicate with them. Earl and the representatives negotiated for the purchase price of the Property, ultimately agreeing to a purchase price of $3.330 million. The written purchase agreement recited a purchase price of $330,000. Earl signed the purchase agreement as is. Soon after Earl signed the purchase agreement, he realized that he had sold the property for less than fair market value (FMV), so he tried to back out of the sale. But Yardley opened escrow on the Purchase Agreement and deposited its Earnest Money Deposit into escrow as required by the contract. Earl then rescinded the Purchase Agreement by executing escrow cancellation instructions.
The Yardley partnership sued him and others to enforce the purchase agreement. Earl filed several cross-complaints, including one alleging that the Yardley partnership representatives’ broker (Sanin) should have notified him that the stated sale price in the purchase agreement was significantly lower than the FMV. The case went to trial, and the judge decided in favor of the Yardley partnership. The trial judge granted the broker’s motion for judgment on the pleadings shortly before trial Earl unfortunately passed away while the lawsuit was pending, so his son Mark Greif appealed the decision on his behalf.
Did the Buyer’s Broker Owe a Duty to Disclose the stated Purchase Price was significantly lower than Fair Market Value to Greif?
Greif appealed the various court decisions, including the court’s granting of the motion for judgment on the pleadings in favor of the broker. On appeal, Greif argued that the Yardley partnership’s broker owed Earl a duty of fairness and good faith that he had breached. The trial court concluded that the broker did not owe any duty alleged in the negligence cross-complaint to Earl. In its opinion, the Court of Appeal analyzed whether the broker had a statutory or common law duty to the seller. First, the court noted that the broker worked for the buyer, not for the seller. At the time Earl signed the purchase agreement, there was no statute or law requiring disclosures by a buyer’s broker to a seller of vacant land (the statute was later amended to change this). This fact is distinguishable from the statutory duties owed by real estate brokers in the sale of residential properties to the parties.
Second, the Court examined duties based upon common law. The Greif court observed that “[u]nder common law, generally any person who performs professional services owes a duty of care to all persons within the area of foreseeable risk.” This means that brokers do owe a higher duty than laypeople to the public. The standard of care of a real estate broker can be measured by the Code of Ethics of the National Association of Realtors. While a broker has a duty of absolutely fidelity to the client’s interest, a broker should treat all parties to a transaction fairly. To determine whether a broker has a duty to a third party is a question of law that is determined by considering several factors: the extent that the transaction was intended to affect the third party;
- the foreseeability of harm;
- the degree of certainty that the third party suffered injury;
- the closeness of the connection between the broker’s conduct and the injury suffered;
- the moral blame attached to the broker’s conduct; and
- the policy of preventing future harm.
(Biakanja v. Irving (1958) 49 Cal. 2d 647, 650).
The Court of Appeal found that a broker does owe a duty of care to the seller. The question is the scope of that duty. The Greif court focused on the question of whether buyer’s broker owed Earl a duty to tell him that the purchase price was less than FMV. The court concluded that the buyer’s broker did not have that duty. Various decisions cited by Greif in the appeal do not apply to this issue because (1) the price negotiations were at arm’s length, with the purchase price conspicuously stated on the purchase agreement and (2) Earl knew or should have known of the FMV, such as by independently investigating it before agreeing on a price. The broker did not lie to Earl or fail to disclose facts that only the broker knew and Earl could not find out on his own.
Reviewing the factors from Biakanja, the Greif Court held that the buyer’s broker did not owe a duty to Earl to disclose discrepancy between the stated purchased price and the FMV. In particular, the Greif Court points to the lack of foreseeability of harm, given that the purchase price was on the first page of the purchase agreement, which the Yardley broker showed Earl. In addition, the Court cited the policy concerns behind holding a buyer’s broker liable for not disclosing information that a seller – even if disabled as Earl was – should have discovered on his own. Earl knew or should have known the FMV of the Property before selling it. Earl could have hired his own broker to represent him in the transaction, rather than seeking to placing the burden of disclosure on the buyer’s broker.
The Greif opinion illustrates the importance of each side in a real estate transaction having their own brokers. Moreover, outside of statutory duties, a buyer’s broker does not have a common law duty to disclose information (such as the FMV of land) that a seller knew or should have known going into a transaction. This decision emphasizes the limited scope of a broker’s common law duty of care to the non-clients and the importance of due diligence by the principals in real estate transactions.