Disclosure Obligation of Agent Not Involved in Transaction

QUESTION: My buyer client recently terminated a contract when a survey performed during the due diligence period revealed the presence of an encroachment. The sellers withdrew the listing and are apparently trying to figure out what to do about the encroachment. If the property comes back on the market with a new listing agent before the encroachment is remedied, and the new agent does not note the encroachment in the listing, do I have a duty, either legally or ethically, to notify the new listing agent of the encroachment?

ANSWER: As a general rule, not unless you become involved as a broker in a potential transaction involving the property.

According to the Real Estate Commission’s License Law and Rule Comments, a licensed real estate agent has a duty to disclose material facts to both the agent’s principal and to third parties the agent deals with on the principal’s behalf. In addition, an agent has a duty to disclose to his or her principal any information that may affect the principal’s rights and interests or influence the principal’s decision in the transaction. Note that an agent’s obligation to disclose material facts is triggered by the existence of an agency relationship with someone who is involved in a potential real estate transaction. If an agent has information about a property, but is not involved on behalf of a client in an actual or potential transaction concerning that property, there is no agency relationship, and therefore no duty to disclose.

In this case, unless you have a buyer client interested in the subject property, you would not have a duty to disclose your knowledge of the encroachment to the new listing agent. Your failure to disclose the encroachment would not be considered concealment, and would not subject you to discipline by the Real Estate Commission.

Article 2 of the REALTOR® Code of Ethics obligates REALTORS® to disclose “pertinent facts” relating to the property or the transaction. Standard of Practice 2-5 makes it clear that facts considered non-material bylaw are considered not “pertinent” for purposes of Article 2. Since, under the circumstances described in your question, the existence of the encroachment is not a material fact under law, it is also not a “pertinent fact” under the Code of Ethics that you would be ethically obligated to disclose.

NOTE: Both the license law and the Code of Ethics generally apply to brokers/REALTORS® when they themselves are acting as principals in a transaction. Thus, the obligation to disclose “material” or “pertinent” facts would apply under such circumstances even though the agent was not representing anybody else involved in the transaction.