Duty to Disclose Material Facts: Claims Against Real Estate Agents After Cummings v. Carroll
In December of 2021, the North Carolina Supreme Court issued a decision in an area that is the subject of frequent litigation: claims by purchasers of homes against the real estate agents involved in the purchase. The decision by the Court could affect seller’s agents’ duty to disclose to potential homebuyers and buyer’s agents fiduciary duty.
The Court’s opinion addressed the buyers’ claims against each of the defendants; this article will focus on two issues: the negligence and fraud claims against the sellers’ agents, and the breach of fiduciary duty claims against the buyers’ agents.
Background on the Case
The case, Cummings v. Carroll, 379 N.C. 347, 866 S.E.2d 675 (2021), involved the sale of a beach house. The buyers and sellers in the transaction were represented by separate real estate agents. Prior to listing the house for sale, the sellers experienced problems with water intrusion. They hired a handyman who informed them that he hoped that he had successfully addressed the issue. This information was shared with the sellers’ agents. The sellers completed the required property disclosure statement and did not disclose the prior water intrusion. The sellers’ agents, relying on the handyman’s statement, did not make any further disclosure on the subject. Though they knew that the house had previously been used as a rental property, the buyer’s agents did not seek to obtain the rental agency’s records, which would have revealed the existence of prior problems with water intrusion. The buyer’s agents did, however, recommend that the buyers obtain a home inspection. The inspection, which was performed by licensed home inspector and general contractor, did not reveal the water intrusion issues.
After closing, the buyers discovered extensive water intrusion and termite issues, which their contractor believed should have been discoverable before closing, and which compromised the structural integrity of the house. The buyers brought claims against the sellers, the sellers’ agents, and their own agents under a variety of legal theories. The trial court entered summary judgment in favor of all defendants, and the North Carolina Court of Appeals affirmed in part and reversed in part. A dissent from Judge Arrowood resulted in an appeal as a matter of right to the Supreme Court.
Opinion of the Supreme Court
Claim #1: Negligence and Fraud
The Court determined that because there was no agency relationship between the buyers and the sellers’ agents, the sellers’ agents owed the buyers no contractual or fiduciary duties. The Court looked to its prior precedents to hold that an agent representing a seller has an affirmative duty to disclose to the buyer all material facts known to the agent. The Court defined a material fact as a fact the agent “knows or should know would reasonably affect the purchaser’s judgment,” which is consistent with the Real Estate Commission’s definition of the term. Though the opinion does not explicitly say so, the majority apparently accepted the Real Estate Commission’s view that issues that have been repaired are not material facts.
The question, then, was whether the sellers’ agents’ reliance on the handyman’s statement was reasonable. If the reliance was unreasonable, the duty to convey material facts would have required the seller’s agent to disclose the information. The Court found an issue of fact as to whether the reliance was reasonable, focusing on the handyman’s qualification as a painter (versus as a home inspector or general contractor), and the ambiguousness of his statement that he believed that he had found and repaired the leak. The result of the Court’s holding is that the Cummings buyers will be permitted to proceed to a jury trial on the negligence and fraud claims and, specifically, on whether the seller’s agents’ reliance was reasonable.
In a dissent joined by Justice Newby, Justice Berger argued that the majority’s decision constitutes an expansion of a seller’s agent’s duties because, in his view, it was reasonable as a matter of law for the sellers’ agents to believe that the leaks had been repaired. Justice Berger argued that the Real Estate Commission does not require disclosure of issues that have been repaired and that the handyman’s qualifications should not have created an issue of fact as to the reasonableness of the agents’ belief, especially in light of the buyers’ inspection. He argued that the majority’s opinion “expands the duty a seller’s agent owes to a purchaser to the functional equivalent of a fiduciary duty” and that it suggests that “a seller’s real estate broker is now a guarantor of the condition of the condition of the subject property.”
Scope of the Decision
The effect of the majority’s decision may be narrower than that. It does not broadly hold that repaired issues are now material facts or that a seller’s agent has a duty to conduct an independent investigation into the condition of the property. It does, however, create some uncertainty in cases where a seller’s agent knows about prior issues and receives assurances of repair. Under the majority’s reasoning, the agent must determine whether the assurance received is clear and from a qualified source. If there is doubt on either front, a seller’s agent could have a duty to disclose at least the prior issue, if not also the attempted repair and the ambiguous assurance.
Claim #2: Breach of Fiduciary Duty
The agency relationship between buyer and agent gives rise to fiduciary duties on the part of the agent, which requires the agent to “make a full and truthful disclosure to the principal of all facts known to him, or discoverable with reasonable diligence and likely to affect the principal.” The key distinction between this duty and the duty owed by the seller’s agent to the buyer is the duty to disclose not only known material facts, but facts that the agent should reasonably have discovered.
Opinion of the Court
Because there was no evidence in the record that the buyers’ agents knew about the water intrusion issues, the Court determined that the relevant inquiry was whether the buyers’ agents had an independent duty to obtain the rental agent’s maintenance records, which (unbeknownst to them) contained information about the leaks. Because the record contained no evidence that maintenance records are by itself material facts, facts the agent knows or should know would reasonably affect the purchaser’s judgment, the Court unanimously held that the buyer’s agents had no duty to obtain them.
Put differently, the agents would have only breached their duties to the buyers if maintenance records from a rental agent is information that an agent should seek in every transaction involving rental property, and there was no evidence of that in the record. On the other hand, of course, if the agents had reason to believe that the records contained information about water leaks, the agents would have had a duty to disclose that information. However, the record did not contain that evidence, either.
Tips for Real Estate Agents
The primary lesson to take from the Cummings decision is each transaction is different. Within the scope of a seller’s agent, what constitutes a material fact in one case may not in another and agents should consider the totality of the circumstances in evaluating whether a disclosure is required. Within the scope of a buyer’s agent’s fiduciary duty, they must conduct a reasonable investigation into the condition of the property, which differs from transaction to transaction and from buyer to buyer. Agents should consider the totality of the circumstances in evaluating what investigation is required and consider contacting legal counsel in cases of uncertainty.