Caveat Emptor: Disclosing Facts Obtained in Confidence
Buyers’ Real Estate Agents Obliged to Tell Sellers of Foreseeable Risks
On December 13, 2000, the Arizona Supreme Court ruled that a buyer’s real estate agent may be liable for failing to inform the seller that the buyer might be unable to make all the payments because of financial difficulties. [Lombardo v. Albu, 14 P.3d 288 (Ariz. 2000).] Even though the financial information was obtained in confidence, the Court held that the buyer’s agent had a duty to disclose the financial status of its client.
The significant thing about the Lombardo case has to do with disclosing information obtained in confidence. The Supreme Court acknowledged an agent’s duty not to disclose confidential information of its client, but reasoned that financial information of a buyer is not confidential in a real estate transaction, thereby shifting an agent’s duty from one of confidentiality to his or her client, to one of disclosure to a third party.
The Story Behind the Decision
The Lombardos owned a house in Fountain Hills, Arizona, but were behind in their monthly payments so they listed the house for sale. A buyer’s agent presented an offer to purchase the house. After the offer was made, the prospective buyer gave her agent information that she might be unable to fulfill her financial obligations in order to close the sale.
The buyer’s agent obtained this information in confidence and did not inform the Lombardos that the prospective buyer may not be an “able” buyer. The closing date for the sale was extended several times with the seller’s consent, yet the buyer never was able to obtain financing. After several days, the Lombardos ultimately lost their equity in the property at a trustee’s sale.
Both the Superior Court and the Court of Appeals granted summary judgment for the buyer’s agent, holding that no duty was owed to the seller to disclose the financial information obtained in confidence.
But the Supreme Court reversed those decisions, reasoning that, just as a seller must disclose to a buyer any information that could have a negative impact on the value of the property, a duty of disclosure also flows from the buyer to the seller. Lombardo held that “[t]he buyer cannot present himself as ‘ready, willing, and able’ if he knows there is a risk that the deal will never close because of his inability to perform.” The Supreme Court held this duty included not only a duty to refrain from misrepresentation but also an affirmative duty to disclose any indication that the buyer is not ready, willing or able. Therefore, a duty existed for the buyer’s agent to reveal the financial information, even if obtained in confidence.
A Cautionary Conclusion
Beware: Any professional who obtains information in confidence eventually may have a duty to disclose that information to a third party. If a duty arises to a third party or the information is not confidential because of the nature of a transaction, an obligation probably exists to reveal that information.