Your Money and careers writer for the NZ Herald

Property Report: Degrees of disclosure

Once agents know a house is leaky, or has other serious defects, they have a duty to tell all prospective buyers. PHOTO / NZME
Once agents know a house is leaky, or has other serious defects, they have a duty to tell all prospective buyers. PHOTO / NZME

Vendors need to watch what they disclose or it could come back to bite them. So says specialist property lawyer Nick Kearney, of Schnauer and Co.

There's a move in New Zealand for vendors to provide property information packs. But Kearney says they put themselves at risk of being sued.

Kearney contacted the Herald following an article about plans by the Home Owners & Buyers Association of New Zealand (Hobanz) to provide a new model of sellers' information packs. The idea is that the vendor pays for a report by an approved surveyor.

Buyers can then choose to pay approximately $200 to get a copy of that report and some of the vendor's cost is rebated. That's much cheaper than the $1000 or more buyers sometimes pay on property, after property, after property that they fail to win at auction or by other sales methods.

The system could have many advantages. But the legal aspects are problematic, and buyers should be wary, says Kearney.

As the law stands, says Kearney, he would never recommend a client rely on a vendor's report or for his vendors to provide such reports. It puts the vendor in the firing line to be sued. And such reports usually come with exclusions that state only the party who requested the report can rely on it.

Some say it cannot be disseminated to other parties. That means the buyer at auction who feels they have no choice but to accept the vendor's seller pack including a report and LIM may not have a leg to stand on if they prove to be incorrect.

Although most agency contracts require vendors to disclose defects in the property, vendors are not otherwise obliged to disclose information to their agents that they wouldn't want revealed to a potential buyer, says Kearney. Once agents know or suspect that the house is leaky, or has other serious defects, they have a duty to tell all prospective buyers.

In a general sense, house sales in New Zealand are subject to the legal principle of caveat emptor, which means buyer beware. Under caveat emptor the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made.

Kearney argues that buyers need to get their own building reports, LIMs and other legal information. That way if something goes wrong they have redress against the council or surveyor.

If the vendors supply them, says Kearney, buyers can't then sue the surveyor or the council, because they had not entered into a contract directly with those organisations.

Kearney cites the example of a purchaser in Marlborough who was able to sue the council for incorrect information in a LIM report.

Because the buyer obtained it directly from the council, he was able to sue. But that would not have been the case if the buyer had obtained it through the vendor.

Caveat emptor has been eroded to a certain degree by the Fair Trading Act of 1986, says Kevin Lampen-Smith, chief executive of the Real Estate Agents Authority (REAA). Until then it was legal for agents to mislead customers. Now that's no longer legal even if it's inadvertently and/or in good faith. The REAA's code of conduct raises the bar even further for agents.

None-the-less Kearney maintains the situation is now "incredibly murky", because "while the REAA's code of conduct might have changed things from a standards point of view, the legal position regarding caveat emptor has been unchanged for many years."

Historically not all agents have been keen to disclose what they know about properties, in the fear of failing to pass go (sell the property) and collect their commission. Many complaints heard by the REAA in recent years involve non-disclosure.

Often the "non-disclosure" has been a case of misleading by omission.

If, for example, an agent suspects that the house could be leaky, or a former buyer obtained a report suggesting that and cancelled the deal, they must tell prospective buyers. Overseas buyers have been caught out when agents failed to disclose that the property was built in the leaky home era and what that might mean. Fresh meat straight off the plane from the UK, China or elsewhere was one way for vendors to offload leaky homes.

In one case heard by the REAA, an immigrant from England argued that he had been the unwitting purchaser of a property that suffered from the leaky house syndrome due to the failure of the real estate agent to disclose the information.

The tribunal noted that the agent would have known that they had no knowledge of the leaky home syndrome and were in no position to evaluate what were fairly obvious signs of the present and potential problems with the property.

But the agent did nothing more than suggest that the buyer get a building report, but didn't explain why.

In their decision tribunal members said they were concerned that there was a belief by the agents "that so long as they suggest to a purchaser that a building inspectors report be obtained that is the limit of their obligation".

Since the Real Estate Agents Act 2008 came into force in 2009, that is no longer sufficient.

"The rules imposed a clear duty on agents," says Lampen-Smith. The agent must disclose to potential buyers if they know that the property has been the subject of prior sales that have fallen through following building reports, knows because of materials and design it might be leaky, knows other units in a complex, that are leaky or suspects from his or her experience that the premises may be a leaky home.

Another issue concerning the REAA where the vendor instructs agents not to disclose information. If this happens, the agents must then stop acting for the client.

"If the client maintains that information be withheld that the licensee considers should be disclosed, the licensee's duty is to cease to act; not to disclose the information contrary to the client's instructions."

Buyers need to be particularly wary about private sales as these can be used by vendors to avoid disclosing facts about defects that an agent would have to. If vendors choose not to disclose something an agent would have known, they can't be sued.

- NZ Herald

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