What are an agent’s duties regarding disclosure of an off-site condition?

QUESTION: A broker in our office who represents a buyer recently put a home under contract. During the home inspection this week, the buyer was standing outside the house and heard a train go by. It was not visible but the buyer was upset that the existence of a railroad track in close proximity to the back side of the property was not disclosed on the Residential Property and Owners’ Association Disclosure Statement. The seller checked the “No Representation” box on all the questions on the Disclosure Statement.

The buyer intends to terminate the contract. It is within the Due Diligence period, so the buyer has the right to do so and receive a refund of his Earnest Money Deposit. However, the buyer also wants to recover his Due Diligence Fee and the home inspector’s fee because he feels that the presence of the railroad track should have been disclosed and that the sellers have somehow breached the contract. Does the existence of an active train track (that is not visible from the house) have to be disclosed by the seller? Did the seller breach the contract? If not, does the buyer have a claim for damages against the listing agent?

ANSWER: Under North Carolina law, sellers have very limited disclosure obligations to buyers. While sellers may not misrepresent facts, or fraudulently conceal a defect in their property, the general rule is caveat emptor, let the buyer beware. Here, there is no evidence that the seller has misrepresented anything nor actively concealed the existence of the track. As a result, we do not believe that the seller has breached the contract.

Unlike sellers, REALTORS® are required both by statute and by the REALTOR® Code of Ethics to disclose all material facts to their own clients and to the other parties involved in a real estate transaction. Licensees are subject to disciplinary action and potential civil liability for failing to disclose a material fact.

In some cases, it is not easy to determine whether a fact is sufficiently “material” to require disclosure. The North Carolina Real Estate Commission has identified three categories of facts that must be disclosed if the agent has knowledge of those facts OR if the agent should reasonably be aware of those facts: (1) facts about the property itself, (2) facts that relate directly to the property, and (3) facts that relate directly to the ability of a principal to complete the transaction.

The second category, facts that relate directly to the property, are typically external factors that affect the use, desirability or value of a property. Examples given in the Real Estate Commission’s Real Estate Manual are a pending zoning change, the existence of restrictive covenants, plans to widen an adjacent street, and plans to build a shopping center on adjacent property.

In determining whether a particular “external factor” sufficiently affects the use, desirability or value of a property so as to require disclosure, a reasonableness standard should be applied. Ask yourself whether the external factor would affect a reasonable prospective buyer’s decision to buy the property. In the situation you have described, the close proximity of the track to the listed property militates in favor of disclosure because the noise produced by passing trains could certainly be substantial enough to affect the normal use and enjoyment of the property.

Agents on both sides of the transaction have a duty to discover facts which, through reasonable diligence, should be known to them. When those facts are material, they must be disclosed. Here, the existence of an active railroad track adjacent to the subject property likely should have been discovered by both agents and disclosed to the prospective buyer BEFORE the buyer made an offer for the property. Thus, in our view, both agents (and possibly their firms) face potential disciplinary action and/or civil liability for failing to disclose the track to the prospect before the property went under contract.