All brokers have a duty to make accurate statements when advertising property for sale. But how far does a broker have to go to investigate the facts about the property before including the information in marketing materials? Can the broker rely on information provided by the seller?
In the case of Gilbert Barfield v. Hall Realty, Inc., 2010 WL 1238866 (Colo. App.) issued on April 1, 2010, the Colorado Court of Appeals in an opinion written by J. Dennis Graham reaffirmed the limited duties of a transaction-broker in this situation. The case involved representations made by a transaction-broker in advertising brochures for the sale of resort property. The property, located in Gunnison County and known as the Lake Fork Resort, was operated by the seller as an RV park with six cabins, a home, office space, and a grocery store.
In its advertising brochure and in the MLS, Hall Realty represented that the property was a "turn-key business opportunity" for the operation of a 12-site RV park. What the broker did not know at the time was that the seller had not obtained the required permits for the property itself, the sewage disposal system, and the water supply system to allow the operation of a 12-site RV park. After the sale, the County issued a cease and desist order, and the buyer brought suit against Hall Realty based on false advertising.
The buyer's claims against Hall Realty included: (1) negligent misrepresentation, alleging that the broker had "failed to act reasonably in ascertaining the accuracy" of its representation that the resort was a "turn-key business opportunity" for the operation of a 12-site RV park; (2) fraudulent representation, alleging that the broker's representation was made with knowledge on the part of the broker that it was false or with utter indifference to its truth or falsity; and (3) fraudulent concealment, alleging that the broker failed to disclose that the seller had not obtained proper permits.
In the case, it was undisputed that Hall Realty did not have actual knowledge that the resort was not properly permitted to operate as a 12-site RV park. At the time of the sale, Hall Realty believed that it was an on-going, fully operational business. The broker had no reason to suspect that the owner did not have the proper permits, nor did the broker investigate the status of the business's permits. The buyer argued that Hall Realty should have investigated and discovered the permitting problems prior to representing that the property was a "turn-key business opportunity" in its marketing materials.
In finding that the broker had no duty to investigate the permitting issues, the District Court Judge relied on a Colorado statute that provides that a transaction-broker is under no duty to conduct an independent inspection of property and has no duty to independently verify the accuracy or completeness of statements made by the seller or independent inspectors. See C.R.S. § 2-61-807(4). The Court held that, even if a seller knows of a material defect in the property, that knowledge is not imputed to the broker. Thus, even if the seller of the RV park knew that he had not obtained the proper permits and that the advertising was false, the broker cannot be held liable. Absent actual knowledge, the broker has no duty to proactively investigate the status of the property. In this case, Hall Realty had no duty as a matter of law to conduct an investigation of the resort to verify that it could in fact operate as a 12-site RV park under state and county regulations. The appellate court agreed with Judge Graham and found that such a requirement would conflict with the plain terms of the transaction-brokerage statute.
The Court explained that requiring a broker to investigate the property for the benefit of the buyer would advantage the buyer over the seller and violate the broker's duty to act as a neutral facilitator, rather than an advocate for one side of the transaction. The Court found the broker had no duty to investigate despite the fact that brokers also have a duty to ensure the accuracy of statements they make in advertising properties for sale. The Court found that brokers cannot insulate themselves from liability for making statements they actually know are false or are not supported by the facts. Here, the Court found no such evidence of actual knowledge on the part of the brokers. The Court ultimately held that acting with indifference to the true facts is not sufficient to make a claim against the broker. Rather, a buyer must allege and prove that the broker had a duty to disclose and actually knew that the material facts were not disclosed. The buyer did not seek an appeal of the case to the Colorado Supreme Court and the time period for doing so has now expired.
Despite the new appellate court ruling, Colorado brokers must still comply with Commission Rule G-7. (Brokers engaged in locating rental properties for an advance fee must also consult Rule G-6.) With respect to media advertising, Rule G-7 provides that a licensee shall be considered unworthy or incompetent in their business where:
- The property is not actually located in the area represented.
- The rental price shown is less than that asked by the owner of the available property.
- The property is non-existent or cannot be verified as currently for rent by the licensee.
- The specifics of the property advertised differ materially from the property as it exists.
- A property is advertised in such a way or under such a heading as to indicate the property is of a different type than it actually is. The word "type" refers to such designations as: single family detached residence, duplex, apartment, condominium, townhouse, or mobile home.
The practice pointer that emerges here is that, while a transaction-broker need not conduct their own due diligence for the benefit of the buyer, the best rule of thumb is to always check the facts of which you have knowledge before marketing property to the public.