When does an agent have a duty to discover and disclose a potential defect?

QUESTION: Several months ago, I listed a 1920’s bungalow for sale. It had an unfinished basement with cinder block walls and a concrete floor. The basement contained a furnace and the owners also used the basement for storage of some personal items. The owners completed the new version of the residential property disclosure statement and checked the “No representation” box on the line asking about water seepage, dampness, etc. in the basement. The sellers did not tell me about any seepage problem in the basement, and I did not see any evidence of a water leak when I looked at the house prior to listing the property in the MLS. The house went under contract and the buyer hired a professional home inspector. I never saw the inspector’s report but no repairs were requested by the buyer. Two days after closing, there was a very heavy rain. I received a call from the buyer’s agent the next day. He told me that water had seeped into the basement, and that the walls and the concrete floor were damp. The buyer claims that I failed to disclose that the basement suffered from water seepage, and he is demanding that I pay for repairs. Do I have any responsibility to the buyer?

ANSWER: Based on the circumstances you describe, we do not think so. North Carolina’s license law and the REALTOR® Code of Ethics both obligate REALTORS® to disclose material facts about the property if the agent is aware of such facts, or if the agent should reasonably be aware of such facts. A drainage problem in the basement of a home is certainly the type of defect that, if significant, would be deemed a material fact. Here, however, there is no evidence that you had any knowledge of a defective condition.

The next issue to consider is whether you should have known about an existing or potential water seepage issue. The North Carolina Real Estate Commission takes the position that licensed agents have an affirmative duty to ascertain pertinent facts about the property involved in a transaction. In determining whether a licensed agent has met his or her burden of discovery, the Commission generally looks at several factors. One is the existence of a “red flag”, i.e. a situation that should make a reasonably prudent agent suspect that information provided to him or her is suspect. That element is not present in the facts you have provided. Your inspection of the premises disclosed a basement being actively used with no evidence of past or current water intrusion. The fact that the buyer hired an inspector and then requested no repairs is also helpful: it tends to indicate that your failure to ascertain the potential for water seepage was reasonable under the circumstances.

Another factor the Real Estate Commission considers is whether the agent has included information in his or her advertising. If so, the listing agent will be held to a high standard regarding the accuracy of the information provided. As an example, if you had included a statement in your advertising that the basement was dry, you would be expected to take reasonable steps to verify the accuracy of that statement. Here, there is no indication that you referenced the basement in any of your advertising.