Opinion ID: 1226978
Heading Depth: 1
Heading Rank: 1

Heading: Liability of Realty Company

Text: The Teters sought to establish liability against Old Colony on two theories. [1] First, they contended that Old Colony should be liable because it had a duty to make a reasonably diligent inspection of the premises, which would have disclosed the defective condition of the retaining wall. Second, they asserted that because Old Colony contacted Kelley, Gidley to make the engineering inspection of the property, Kelley, Gidley then became Old Colony's agent. Thus, as the principal, Old Colony is liable for Kelley, Gidley's negligent acts in making the inspection and subsequent report to the effect that the retaining wall was in a good condition. For the initial proposition that a real estate broker has a duty to disclose not only those known defects which substantially affect the value of the property, but also those defects that a reasonably diligent inspection would reveal, the Teters cite Bevins v. Ballard, 655 P.2d 757 (Alaska 1982); Easton v. Strassburger, 152 Cal.App.3d 90, 199 Cal. Rptr. 383 (1984); Berryman v. Riegert, 286 Minn. 270, 175 N.W.2d 438 (1970); Gouveia v. Citicorp Person-to-Person Fin. Ctr., Inc., 101 N.M. 572, 686 P.2d 262 (1984); Hughes v. Holt, 140 Vt. 38, 435 A.2d 687 (1981). However, we find that except for Easton, supra, these cases turn on a factual pattern in which the real estate broker made affirmative misrepresentations to the prospective purchaser that were factually untrue. [2] In this case, the real estate broker is not claimed to have made representations that were untrue. Consequently, we find the foregoing cases not particularly helpful in resolving the real estate broker's liability in this case. The Easton case, supra, presents a factual situation rather similar to this case. Shortly after the house was purchased, there was substantial earth movement on the property which caused extensive damage to the house and the driveway. Expert testimony indicated that the earth movement was caused by fill placed on the property which was not properly engineered and compacted. Agents from the real estate broker firm had made several inspections of the property and, according to the court, they were aware of certain `red flags' [3] which should have indicated to them that there were soil problems. 152 Cal.App.3d at 96, 199 Cal.Rptr. at 386. The court in Easton set out the general law that requires a broker to disclose to a buyer material defects known to the broker but unknown to and unobserveable by the buyer. 152 Cal.App.3d at 99, 199 Cal.Rptr. at 387. (Citations omitted). [4] The court recognized that where such nondisclosure of known facts occurs, the broker is guilty of fraudulent concealment. [5] However, the buyer's suit in Easton was grounded on negligence rather than fraud. 152 Cal.App.3d at 99, 199 Cal.Rptr. at 387. This procedural point brought the court to consider whether a broker is negligent if he fails to disclose defects which he should have discovered through reasonable diligence. 152 Cal. App.3d at 99, 199 Cal.Rptr. at 387. The court concluded that such a duty was owed, but made this qualification: The duty of the seller's broker to diligently investigate and disclose reasonably discoverable defects to the buyer does not relieve the latter of the duty to exercise reasonable care to protect himself. Cases will undoubtedly arise in which the defect in the property is so clearly apparent that as a matter of law a broker would not be negligent for failure to expressly disclose it, as he could reasonably expect that the buyer's own inspection of the premises would reveal the flaw. In such a case the buyer's negligence alone would be the proximate cause of any injury he suffered. 152 Cal.App.3d at 103, 199 Cal.Rptr. at 391. (Emphasis in original). We have not had occasion to formally determine the nature of the obligation of the vendor's real estate broker to the purchaser of the property. We touched on this issue in Lengyel v. Lint, 167 W.Va. 272, 280 S.E.2d 66 (1981), where both the vendor and the vendor's real estate broker were sued by the purchaser on the basis that the broker's advertisement was a substantial misrepresentation of the property. [6] We recognized in Lengyel that [i]t has long been the law in West Virginia that a vendor of real property may be liable to the vendee in an action for fraud. 167 W.Va. at 277, 280 S.E.2d at 69. (Citations omitted). Although we did not establish a particular syllabus point in Lengyel setting out a real estate broker's liability to a purchaser, we did recognize that there are situations in which a real estate agent may be liable to a purchaser in an action for fraud. 167 W.Va. at 278-79, 280 S.E.2d at 70. In Lengyel, we reversed a summary judgment that had been granted in favor of the real estate broker. Following Lengyel, we decided Thacker v. Tyree, 171 W.Va. 110, 297 S.E.2d 885 (1982), where we discussed in some detail the obligation of a vendor to make a disclosure to a purchaser with regard to defects that would materially affect the property. We adopted this rule in its Syllabus: Where a vendor is aware of defects or conditions which substantially affect the value or habitability of the property and the existence of which are unknown to the purchaser and would not be disclosed by a reasonably diligent inspection, then the vendor has a duty to disclose the same to the purchaser. His failure to disclose will give rise to a cause of action in favor of the purchaser. [7] There is a difference between Lengyel and Thacker. The former deals with misrepresentations regarding the fitness or quality of the property which induced the purchaser to buy it. Thacker, on the other hand, places an affirmative duty on the vendor to disclose defects which are known to him, but unknown to the purchaser even with a reasonably diligent inspection. [8] Both theories are based on fraud, as in the case of Lengyel where the purchaser was given false information concerning the quality of the house and the size of the lot, and these misrepresentations came within its Syllabus Point 1: The essential elements in an action for fraud are: `(1) that the act claimed to be fraudulent was the act of the defendant or induced by him; (2) that it was material and false; that plaintiff relied upon it and was justified under the circumstances in relying upon it; and (3) that he was damaged because he relied upon it.' Horton v. Tyree, 104 W.Va. 238, 242, 139 S.E. 737 [738] (1927). In Thacker, the vendor had a duty to disclose known latent defects that materially affected the value of the house, and we said that in several earlier cases, [we have] recognized the general principle that an action for fraud can arise by the concealment of truth. 171 W.Va. at 113, 297 S.E.2d at 888. (Citations omitted). The foregoing rules with regard to a vendor's liability to a purchaser have been adopted in other jurisdictions as applying to the vendor's real estate broker. Thus, it is generally held that a vendor's real estate broker may be liable to a purchaser if the broker makes material misrepresentations with regard to the fitness or habitability of residential property or fails to disclose defects or conditions in the property that substantially affect its value or habitability, of which the broker is aware or reasonably should be aware, but the purchaser is unaware and would not discover by a reasonably diligent inspection. See, e.g., Bevins v. Ballard, supra ; Easton v. Strassburger, supra ; Dyer v. Johnson, 757 P.2d 178 (Colo. App.1988); Revitz v. Terrell, 572 So.2d 996 (Fla.App.1990); Shaffer v. Earl Thacker Co., Ltd., 6 Haw.App. 188, 716 P.2d 163 (1986); Harkala v. Wildwood Realty, Inc., 200 Ill. App.3d 447, 146 Ill.Dec. 232, 558 N.E.2d 195 (1990); Ditcharo v. Stepanek, 538 So.2d 309 (La.App.), writ denied, 541 So.2d 858 (1989); Berryman v. Riegert, supra ; Gouveia v. Citicorp Person-to-Person Fin. Ctr., Inc., supra ; Johnson v. Beverly-Hanks & Assoc., Inc., 328 N.C. 202, 400 S.E.2d 38 (1991); Sanfillipo v. Rarden, 24 Ohio App.3d 164, 493 N.E.2d 991 (1985); Smith v. Renaut, 387 Pa.Super. 299, 564 A.2d 188 (1989); Henry S. Miller Co. v. Bynum, 797 S.W.2d 51 (Tex. App.1990); Hoffman v. Connall, 108 Wash.2d 69, 736 P.2d 242 (1987). See generally 37 Am.Jur.2d Fraud & Deceit § 158 (1968); Annot., 46 A.L.R.4th 546 (1986). It also must be shown that the misrepresentation or concealment was a substantial factor in inducing the purchaser to buy the property. See Syllabus Point 1, Lengyel v. Lint, supra . The basis for the foregoing rule is a recognition by the courts that even though a broker has a contract with a vendor to sell the real estate, most of the broker's contact is with the purchaser. As a licensed professional, a broker is obligated to deal fairly with the purchaser. The Supreme Court of Washington in Hoffman v. Connall, 108 Wash.2d at 75, 736 P.2d at 245, gave this summary, quoting from its appellate division case of Tennant v. Lawton, 26 Wash.App. 701, 706, 615 P.2d 1305, 1309-10 (1980): `The underlying rationale of [a broker's] duty to a buyer who is not his client is that he is a professional who is in a unique position to verify critical information given him by the seller. His duty is to take reasonable steps to avoid disseminating to the buyer false information. The broker is required to employ a reasonable degree of effort and professional expertise to confirm or refute information from the seller which he knows, or should know, is pivotal to the transaction from the buyer's perspective.' (Citations omitted). The Kansas Supreme Court in Johnson v. Geer Real Estate Co., 239 Kan. 324, 720 P.2d 660 (1986), decided that its real estate brokers' licensing act which contained grounds for revocation of a broker's license sets the standard of care for brokers with regard to purchasers and concluded in its Syllabus Point 5: An action for damages against a Kansas real estate broker may be predicated upon negligent violation of K.S.A. 58-3062, a part of the Kansas Real Estate Brokers' and Salespersons' License Act. Our general rule is consistent with the provisions of W.Va.Code, 47-12-11 (1959), relating to acts that may cause the suspension or revocation of a real estate broker's or salesperson's license. [9]
Having established the general rule in regard to a broker's duty to a purchaser, we find that the plaintiffs do not charge in this case that there was a material misrepresentation made on the part of the broker. Nor do plaintiffs assert that the broker concealed a significant latent defect in the property of which the broker was aware or reasonably should have been aware. Rather plaintiffs claim that because of the broker's superior knowledge, there was a duty to investigate and discover whether the retaining wall was defective. We decline to hold that a broker has an independent duty to inspect and uncover latent defects on residential premises. We agree with this statement from Hoffman, supra, where the court quoted from Provost v. Miller, 144 Vt. 67, 69-70, 473 A.2d 1162, 1164 (1984), that `[r]eal estate brokers and agents are marketing agents, not structural engineers or contractors.' [10] 108 Wash.2d at 74, 736 P.2d at 244-45. See also Lyons v. Christ Episcopal Church, 71 Ill.App.3d 257, 27 Ill.Dec. 559, 389 N.E.2d 623 (1979). We dealt with a situation in Gamble v. Main, 171 W.Va. 469, 300 S.E.2d 110 (1983), where the contractor who built the plaintiffs' house was sued because the septic system was defective. We discussed a number of defective soil condition cases pointing out that the contractor could be held liable if he knew or reasonably should have known of the adverse soil conditions. We found in Gamble that the plaintiffs' adverse verdict should not be set aside and concluded in Syllabus Point 2: The implied warranty of habitability or fitness does not extend to adverse soil conditions which the builder is unaware of or could not have discovered by the exercise of reasonable care. Other jurisdictions have declined to hold a broker to a duty to make an independent inspection to uncover latent defects. See, e.g., Harkala v. Wildwood Realty, Inc., supra ; Emerson v. Ham, 411 A.2d 687 (Me.1980); Brown v. Pritchett, 633 S.W.2d 294 (Mo.App.1982); Provost v. Miller, supra ; Hoffman v. Connall, supra . In this case, there was an independent investigation of the soundness of the retaining wall and the structural soundness of the residential structure by a competent civil engineering firm made at the request of the plaintiffs. This report indicated that the premises were in a sound structural condition. Old Colony was entitled to rely on this report.
We also conclude that Old Colony by hiring Kelley, Gidley, upon the request of the plaintiffs, did not have an agency relationship with Kelley, Gidley in order to become responsible for its negligence. We gave this general definition of an agent in Syllabus Point 3 of State ex rel. Key v. Bond, 94 W.Va. 255, 118 S.E. 276 (1923): An agent in the restricted and proper sense is a representative of his principal in business or contractual relations with third persons; while a servant or employee is one engaged, not in creating contractual obligations, but in rendering service, chiefly with reference to things but sometimes with reference to persons when no contractual obligation is to result. As pointed out in Section 2 of 3 Am. Jur.2d Agency at 510 (1986), one of the essential elements of an agency relationship is the existence of some degree of control by the principal over the conduct and activities of the agent: [O]ne of the prime elements of an agency relationship is the existence of some degree of control by the principal over the conduct and activities of the agent. (Footnote omitted). See also Nichols v. Arthur Murray, Inc., 248 Cal.App.2d 610, 56 Cal.Rptr. 728 (1967); Peairs v. Florida Pub. Co., 132 So.2d 561 (Fla.App.1961); Automobile Finance Co. v. Kesk, Inc., 200 So.2d 136 (La.App.1967); Van Pelt v. Paull, 6 Mich. App. 618, 150 N.W.2d 185 (1967); Agee v. Gant, 412 P.2d 155 (Okla.1966); Fernander v. Thigpen, 278 S.C. 140, 293 S.E.2d 424 (1982); Carr v. Hunt, 651 S.W.2d 875 (Tex. App.1983). Here, there is no evidence demonstrating that the broker retained any control over the manner in which the engineering firm performed its inspection of the premises. Consequently, the trial court should have directed a verdict in favor of Old Colony on the agency question, as well as on the liability issue. For the foregoing reasons, the judgment against Old Colony is reversed, and we apply the rule contained in Syllabus Point 5 of Adkins v. INCO Alloys International, Inc., 187 W.Va. 219, 417 S.E.2d 910 (1992): `When the plaintiff's evidence, considered in the light most favorable to him, fails to establish a prima facie right of recovery, the trial court should direct a verdict in favor of the defendant.' Syllabus Point 3, Roberts v. Gale, 149 W.Va. 166, 139 S.E.2d 272 (1964). See also Syllabus Point 3, Williamson v. Sharvest Management Co., 187 W.Va. 30, 415 S.E.2d 271 (1992).