Real Estate PL Topic - Puffing, Misrepresentation, and Latent Defect

Puffing, Misrepresentation, and Latent Defect

Even though an agent’s primary responsibility is to the principal, the agent also has duties to third parties. When working with a third party, or customer, a real estate professional is responsible for adhering to state and federal consumer protection laws, as well as the ethical requirements imposed by professional associations and state regulators. In addition, the real estate professional’s duties to the customer typically include

• reasonable care and skill in performance,
• honest and fair dealing, and
• disclosure of all facts that the real estate professional knows or should reasonably be expected to know that materially affect the value or desirability of the property.

Puffing

Real estate brokers and sales associates must always be careful about the statements they make. They must be sure that the consumer understands whether a statement is an opinion or a fact. Statements of opinion are permissible if not made carelessly and there is no intention to deceive.

Statements of fact, however, must be accurate. Exaggeration of a property’s benefits is called puffing. While puffing is legal, real estate professionals must ensure that none of their statements can be interpreted as fraudulent. For REALTORS®, puffing is considered unethical even if it is legal.

Intentional or Negligent Misrepresentation

Intentional Misrepresentation

Fraud is the intentional misrepresentation of a material fact in such a way as to harm or take advantage of another person. That includes not only making false statements about a property but also intentionally concealing or failing to disclose important facts when there is a duty to disclose.

Negligent Misrepresentation

The misrepresentation or omission does not have to be intentional to result in real estate professional liability. A negligent misrepresentation occurs when the real estate professional should have known that a statement about a material fact was false. A real estate professional’s lack of awareness of an issue is no excuse. A misrepresentation due to the professional’s carelessness will make the professional culpable (subject to liability). If the buyer relies on the real estate professional’s statement, the professional will be liable for any damages that result. Similarly, a real estate professional who accidentally fails to perform some act – for instance, forgetting to deliver a counteroffer – may be liable for damages that result from such a negligent omission. Simple negligence can result in an accidental misrepresentation and, while some damages may result, they may be covered by the real estate professional’s errors and omissions insurance.

Latent Defect

In residential transactions involving property of up to four units, the seller typically has a duty to disclose any known defects that threaten structural soundness or personal safety. A latent defect is a hidden structural defect that would not be discovered by ordinary inspection. Buyers may cancel the sales contract or receive damages when a seller fails to reveal known latent defects.

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