Chapter: A buyer's agent in Maryland is showing a property with a known latent defect that the seller has not disclosed. What is the agent's duty? (EN)

Chapter: A Buyer’s Agent in Maryland is Showing a Property with a Known Latent Defect That the Seller Has Not Disclosed. What is the Agent’s Duty?

I. Defining Latent Defects and Material Facts

• Latent Defect: A property defect that is not discoverable through a reasonable and diligent inspection. This contrasts with a patent defect, which is readily observable. Latent defects can significantly impact a property’s value, habitability, or safety. Examples include:
  • Hidden structural damage (e.g., foundation cracks concealed by drywall).
  • Previous flooding that resulted in mold growth behind walls.
  • Contaminated soil hidden beneath the surface.
  • Defective plumbing or electrical systems not readily apparent.
• Material Fact: Information that, if known, would likely affect the decision of a reasonable person in deciding whether to purchase or not purchase the property. A latent defect invariably constitutes a material fact. The “reasonable person” standard is a legal concept reflecting the average level of care, skill, and judgment that a person would exercise under similar circumstances.
  • Mathematically, the impact of a material fact on buyer decision-making can be represented as a probability function, P(Buy | Fact), where P(Buy | Fact) is the probability of buying the property given knowledge of the material fact. A material fact significantly alters this probability compared to P(Buy | No Fact).

II. Maryland Real Estate Law and Regulations

• Maryland Real Estate Brokers Act (Business Occupations and Professions Article §17-101 et seq.): This Act outlines the duties and responsibilities of real estate licensees in Maryland.
  • Key provisions relevant to latent defects include the licensee’s duty to deal honestly and fairly, and to disclose all material facts.
• Code of Ethics (National Association of REALTORS®): While not law, adherence to the NAR Code of Ethics is often considered a standard of practice. Article 2 states that REALTORS® shall avoid misrepresentation of pertinent facts relating to the property or the transaction. Article 1 further emphasizes the duty to protect and promote the interests of the client.
• Seller’s Disclosure Requirements: Maryland law requires sellers to provide a written disclosure or disclaimer regarding the condition of the property (Maryland Real Property Code §10-702). However, a seller can choose to provide a disclaimer statement, stating they are selling the property “as is” and making no representations about its condition. Crucially, even with a disclaimer, a seller cannot knowingly conceal latent defects.
• Agent’s Independent Duty of Disclosure: A buyer’s agent has an independent duty to disclose known material facts to their client, regardless of whether the seller provides a disclosure statement or a disclaimer.

III. The Buyer’s Agent’s Duty: A Multifaceted Approach

• A. Investigation and Due Diligence:
  1. Visual Inspection: A buyer’s agent should conduct a diligent visual inspection of the property. While not expected to be a professional home inspector, the agent should look for obvious signs of potential problems.
  2. Questioning the Seller’s Agent: The buyer’s agent should proactively inquire with the seller’s agent about any known defects, past repairs, or issues with the property.
  3. Review of Public Records: The agent should advise the buyer to review public records, such as permit histories, to uncover any information relevant to the property’s condition.
• B. Disclosure to the Buyer:
  1. Immediate Disclosure: If the buyer’s agent becomes aware of a known latent defect that the seller has not disclosed, the agent must immediately disclose this information to their client (the buyer).
  2. Full and Accurate Information: The disclosure must be complete and accurate, presenting all known details about the defect. Conjecture or speculation should be avoided.
  3. Documentation: The disclosure should be documented in writing, with acknowledgment from the buyer, to protect the agent from potential liability.
• C. Advising the Buyer:
  1. Professional Inspections: The agent should strongly advise the buyer to obtain a professional home inspection by a qualified inspector. This inspection should include specialized inspections if the agent suspects specific issues (e.g., a mold inspection if past water damage is suspected, a structural engineer if foundation issues are suspected).
  2. Legal Counsel: The agent should advise the buyer to seek legal counsel from a real estate attorney to understand their rights and options, especially if the seller is not forthcoming with information.
  3. Renegotiation or Withdrawal: Based on the findings of the inspection and legal advice, the agent should assist the buyer in deciding whether to renegotiate the purchase agreement or withdraw from the transaction.

IV. Potential Liability and Consequences

• Negligence: Failure to disclose a known latent defect can result in a claim of negligence against the buyer’s agent. The elements of negligence are:
  • Duty of Care: The agent has a duty to act reasonably and professionally in representing the buyer’s interests.
  • Breach of Duty: The agent breaches this duty by failing to disclose a known latent defect.
  • Causation: The breach of duty directly causes harm to the buyer.
  • Damages: The buyer suffers actual damages as a result of the undisclosed defect (e.g., repair costs, diminution in property value).
• Misrepresentation: Intentionally concealing or misrepresenting facts about the property can lead to a claim of misrepresentation.
• Disciplinary Action: The Maryland Real Estate Commission can take disciplinary action against a licensee for violations of the Real Estate Brokers Act or the Code of Ethics, including suspension or revocation of their license.
• Civil Lawsuits: Buyers can pursue civil lawsuits against the agent for damages resulting from the undisclosed latent defect.

V. Case Studies and Examples

• Example 1: Foundation Cracks: A buyer’s agent notices hairline cracks in the foundation of a home during a showing. The seller’s agent claims they are superficial. However, the buyer’s agent recalls seeing evidence of water damage in the basement during a previous visit. The agent must disclose their observations and recollection to the buyer and advise them to obtain a structural engineer’s inspection.
• Example 2: Mold Remediation: The buyer’s agent learns from a neighbor that the property had a significant mold problem several years ago that was purportedly remediated. The seller’s disclosure statement makes no mention of mold. The agent must disclose this information to the buyer and advise them to obtain a professional mold inspection, even if the seller denies the problem.
• Example 3: Septic System Failure: The seller’s agent mentions “occasional backups” in the septic system. The buyer’s agent knows that septic system failures are a common and costly problem in the area. The agent must disclose the potential for septic system issues to the buyer and advise them to obtain a septic system inspection. The agent should further advise that the buyer speak to a septic contractor and/or county official to understand the permitting process for the system and any records of maintenance.

VI. Mitigation Strategies for Buyer’s Agents

• Comprehensive Documentation: Maintain meticulous records of all communications, inspections, and disclosures related to the property.
• Continuing Education: Stay up-to-date on Maryland real estate law and regulations, as well as best practices for identifying and disclosing potential property defects.
• Errors and Omissions Insurance: Maintain adequate errors and omissions (E&O) insurance coverage to protect against potential liability claims.
• Consult with Legal Counsel: Seek legal advice when faced with complex or uncertain situations regarding disclosure obligations.
• Promote Thorough Inspections: Emphasize the importance of professional inspections to buyers and encourage them to obtain a comprehensive inspection report.
• Transparency and Honesty: Above all, prioritize honesty and transparency in all dealings with buyers and sellers.

VII. Conclusion

A buyer’s agent in Maryland has a critical duty to protect the interests of their client. This duty includes disclosing all known material facts, including latent defects, regardless of the seller’s disclosure or disclaimer. Failure to fulfill this duty can expose the agent to significant legal and ethical consequences. By understanding the relevant laws, regulations, and ethical principles, and by implementing robust investigation and disclosure practices, buyer’s agents can effectively protect their clients and mitigate their own risk.