Buyer’s Broker Beware!

Most real estate professionals who handle residential transactions are familiar with the stigmatized property statute, A.R.S. § 32-2156. It provides:

“A. No criminal, civil or administrative action may be brought against a transferor or lessor of real property or a licensee for failing to disclose that the property being transferred or leased is or has been:
1. The site of a natural death, suicide or homicide or any other crime classified as a felony.
2. Owned or occupied by a person exposed to the human immunodeficiency virus or diagnosed as having the acquired immune deficiency syndrome or any other disease that is not known to be transmitted through common occupancy of real estate.
3. Located in the vicinity of a sex offender.
“B. Failing to disclose any fact or suspicion as set forth in subsection A shall not be grounds for termination or rescission of any transaction in which real property has been or will be transferred or leased.” (Emphasis added.)

Part of the legislature’s intent in passing this statute was to immunize transferors, lessors, and real estate licensees from legal repercussions if they fail to disclose certain facts about stigmatized properties. The statute does this by prohibiting any criminal, civil, or administrative action against a transferor, lessor, or licensee for failure to make certain disclosures.

Suppose that a buyer’s broker represents a client in the purchase of a residence. The broker owes the client (1) fiduciary duties that include full disclosure and (2) professional duties of reasonable care in handling the transaction. Under normal circumstances, if the broker breaches the fiduciary duty of full disclosure and fails to handle the transaction with reasonable care, he or she can be sued. More specifically, the client would have potential causes of action for breach of fiduciary duty and negligence.

Now, suppose that the buyer’s broker knows that the house the client is purchasing was the site of a recent homicide. In reliance on the stigmatized property statute, the broker decides not to disclose this information to his or her client, the buyer. A few days after the buyer moves into the house, she finds out about the recent homicide from a neighbor. The buyer never would have bought the house if she had known about the homicide. If the stigmatized property statute did not exist, the buyer would have potential claims against the broker for breach of fiduciary duty and negligence. Given this scenario, does the stigmatized property statute protect the buyer’s broker from civil liability?

The stigmatized property statute says that no civil action may be brought against a licensee for failing to disclose that the property was the site of a homicide. In other words, the plain language of the statute takes away (i.e., abrogates) the right of an injured buyer to sue a buyer’s broker for non-disclosure of this information. Since the statute purports to take away this cause of action, the statute must be examined to determine whether it runs afoul of the anti-abrogation clause contained in the Arizona Constitution.

Many readers will be asking, “What is the anti-abrogation clause?” The anti-abrogation clause is set forth in article 18, section 6 of the Arizona Constitution. It provides:

The right of action to recover damages for injuries shall never be abrogated, and the amount recovered shall not be subject to any statutory limitation.” (Emphasis added.)

This provision precludes the Arizona legislature from enacting any statute that abrogates or takes away the right to recover damages for injuries. It also precludes the legislature from enacting caps on the amount of damages that can be recovered. However, the Arizona Supreme Court has interpreted the anti-abrogation clause to apply only in certain circumstances, i.e., only to certain types of claims.

The Arizona Supreme Court applies a two-part analysis to determine whether a claim is protected by the anti-abrogation clause. Duncan v. Scottsdale Medical Imaging, 205 Ariz. 306, 313, 70 P.3d 435 (2003). First a court must determine whether a claim can trace its antecedents to the common law. Claims for breach of fiduciary duty and negligence both have a lengthy history in the common law, dating back well before the time Arizona became a state. Therefore, both types of claims satisfy this first test.

Second, a court must determine whether the statute at issue regulates an action for damages or completely abrogates it. Regulation is allowed, but abrogation is not. In this case, the stigmatized property statute abrogates the right of an injured buyer to bring a civil action against the buyer’s broker. Therefore, the wording of the stigmatized property statute clearly satisfies this second test. This is not good news for our hypothetical buyer’s broker.

What this suggests is that under the above scenario (i.e., failure of a buyer’s broker to disclose to a client information set forth in the statute), the stigmatized property statute violates the anti-abrogation clause contained in article 18, section 6 of the Arizona Constitution. In other words, the stigmatized property statute is probably unconstitutional as applied to a buyer’s broker. Therefore, a buyer’s broker should not rely on the stigmatized property statute for protection.

Let’s summarize. A buyer’s broker owes his or her client (1) fiduciary duties that include full disclosure and (2) professional duties of reasonable care in handling a transaction. In order to comply with his or her fiduciary duties, a buyer’s broker should disclose to his or her client all material information about a property, including the information referred to in the stigmatized property statute. For example, if the property was the site of a homicide, tell your client. If the property is located near a sex offender, tell your client. The same rule applies to other information referred to in the statute. Written disclosure is always the best, because it allows the broker to later document information that was transmitted to the client.

Next, in order to comply with his or her professional duties, a buyer’s broker must exercise reasonable due care and diligence to consummate a transaction to the client’s best advantage. This requires the buyer’s broker to use due diligence in obtaining material information about a property, so that (1) the broker can accurately advise the client about the transaction and (2) the client can make an informed decision regarding the purchase. Material information learned by the buyer’s broker as a result of his or her due diligence must be disclosed to the buyer, including the information referred to in the stigmatized property statute.

Finally, a buyer’s broker should not rely on the stigmatized property statute for protection. If a buyer’s broker relies on the statute for protection and the statute is found unconstitutional, the broker will be left virtually defenseless. The broker’s failure to disclose to the client would constitute a clear breach of fiduciary duty, and would probably amount to professional’s malpractice. In addition, since the broker’s wrongful conduct would be committed willfully, knowingly, and without regard for the client’s interests, the broker would be skating uncomfortably close to exposure for punitive damages. A buyer’s broker can avoid these potential problems by fully disclosing information about a stigmatized property to his or her client.

Hopefully, this article will help buyers’ brokers avoid a potential trap lurking in the stigmatized property statute.

Craig Stephan
Attorney at Law
480-621-8281
website: www.craigstephanlaw.com
email: info@craigstephanlaw.com

Buyer’s Broker Beware!
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