There are two separate and distinct laws that apply to disclosure when it comes to real estate transactions. There is one law for sellers and another for their “agents”.
Seller’s Obligations
Sellers are bound by the common law. They must disclose certain defects in a property by law. This duty is limited since caveat emptor is still the law.
Disclosure is limited to latent defects which:
- Are material, that is significant or important enough,
- Render the premises: a) unfit for human habitation, or b) structurally unsound.
Latent defects are the ones which are not commonly visible and present for all to see. They cannot be detected easily by the senses. They need to be pointed out.
Patent defects, on the other hand, are clear and obvious. No need to point them out since they are indeed “clear and obvious”. However, there is one small exception here, and that applies to hidden or concealed patent defects. If there is a clear and obvious defect, but the seller covers it up and hides it from view, this concealment can constitute fraud and such a patent defect would have to be disclosed. In some cases, Courts have described such defects as “latent” rather than “concealed patent defects”. The result, nevertheless, is the same, they must be disclosed.
Listing Agent’s Obligations
The listing agent is registered under the Real Estate and Business Brokers Act, 2002 and is bound by certain statutory responsibilities. This includes the obligation to disclose material facts. These are facts which would affect a reasonable person’s decision to buy or sell property. That obligation is set out in the Code of Ethics under the Act. This obligation is restricted to those parties for whom the Agent is acting, in whatever capacity, that is, client or customer. It does not extend to third parties.
Disclosure Dilemma
Assume that there is a fact, which doesn’t meet the latent defect test, yet amounts to a material fact. This could be anything!
The seller does not want to disclose this fact, and the listing agent wants to advertise it, so as to ensure that a higher ethical disclosure test has been met..
Agent’s Fiduciary Obligations to the Seller
First things, first!
The real estate agent is an “agent” and owes certain fiduciary obligations to the seller:
- Disclosure,
- Obedience,
- Confidentiality,
- Competence,
- Accounting,
- Loyalty.
Here, obedience, confidentiality and loyalty will apply. Simply put, the agent is to follow the principal’s orders. These duties “trump” the ethical disclosure obligations. Those laws just apply to real estate agents.
When it comes to secrets, wouldn’t you really expect your lawyer, accountant, tax advisor, stockbroker, and doctor to keep your secrets safe? Of course you would! They all owe a duty to you that obligates them to secrecy.
No one expects the criminal trial lawyer to “rat out” his client, the journalist to reveal his source or a priest to be telling everyone in the community a parishioner’s sins from the confessional.
So, no one is reasonably expecting a real estate agent to disclose secrets.
Resolution to the Dilemma
The listing agent is faced with two ethical choices:
- Disclose, and thereby breach the fiduciary obligations owed to the client, or
- Not disclose and breach some ethical disclosure best practices.
So, the resolution is rather straightforward. There is a two step process:
- Seek the consent of the seller to authorize and permit the disclosure,
- Failing which, refuse to continue with the representation.
I do appreciate that there is a problem just walking away, particularly after a great deal of time and money has been invested in the listing.
The new decision of the Supreme Court of Canada in Bhasin v. Hrynew may offer some guidance on this point, and encourage a sound resolution to this dilemma.
Brian Madigan LL.B., Broker