Upholding the Stigmatized Property Statute

On November  27, 2012, the Arizona Court of Appeals rendered  its groundbreaking opinion in the case Lerner v. DMB Realty, LLC*, which was the first case of its kind to deal with a broker’s duties under Arizona’s stigmatized property statute (A.R.S. §32-2156). Ultimately, the stigmatized property statute was upheld and continues to limit an agent’s duties of disclosure in the case of a stigmatized property.

The origins of this case began in February 2008 when Glen Lerner, a prominent personal injury attorney, and his wife purchased residential real property located in Scottsdale, Ariz. Both the Sellers and the Lerners chose to be represented by the same real estate broker, DMB.  The Lerners entered into numerous agreements governing both their relationship with DMB  and purchase of the property. The agreements documenting the Lerners’ purchase of the property and retention of DMB included: (1) the Consent to Limited Representation; (2) the Real Estate Agency Disclosure and Election; (3) the Residential Resale Real Estate Purchase Agreement; and (4) the Residential Seller’s Property Disclosure Statement.

In the Limited Representation Consent, the Lerners acknowledged that they understood and consented to the limitations to the duties DMB  owed to them, particularly:

(3) Pursuant to A.R.S. §32-2156, Sellers, Lessors and Broker/Licensee(s)  are not obligated to disclose  that the Subject Property is or has been… located in the vicinity of a sex offender.

Additionally, the Real Estate Agency Disclosure and Election executed by the Lerners when they initially met with the DMB agent, contained similar language as the Limited Representation Consent and the quoted A.R.S. §32-2156 disclosure. The Residential Resale Real Estate Purchase Agreement also specifically stated that the Lerners would conduct all types of inspections, investigations and inquiries:

concerning the suitability of the [Property] and the surrounding areas…If the presence of sex offenders in the vicinity…is a material matter to [Lerners], it must be investigated by [Lerners] during the Inspection Period. 

Finally, the Residential Seller’s Property Disclosure Statement also included the Lerners’ acknowledgment that: (i) it is the Lerners’ obligation “to investigate any material (important) facts in regard to the Property”; and (ii) “by law, Sellers, Lessors  and Brokers are not obligated to disclose that the Property is or has been… located in the vicinity of a sex offender.”

The Lerners alleged that they discovered in late August or early September 2008, from an individual installing their electronics, that the Property was located in the vicinity of a Level 1 (lowest risk) sex offender. On August 3, 2010, the Lerners filed their Complaint alleging Breach of Fiduciary Duty and the Implied Covenant of Good  Faith and Fair Dealing against DMB, and Breach of the Implied Covenant of Good  Faith and Fair Dealing, Negligent Misrepresentation and Fraud against the Sellers; all based on DMB’s and the Sellers’ failure to disclose that the Property was located in the vicinity of a sex offender.

At the state Superior Court level, the Lerners argued that A.R.S. §32-2156, the stigmatized property statute, specifically as it related to disclosure of sex offenders in the vicinity of a property, violated the Arizona Constitution because it abrogated their right to sue the Seller and the Broker. The Superior Court agreed with DMB  and the Sellers that the Lerners’ lawsuit should be dismissed because A.R.S. §32-2156, which regulates real estate disclosures and prevents actions against real estate transferors, brokers and agents for not disclosing certain stigmatizing facts about property being transferred, including whether the property is located in the vicinity of a sex offender, does not violate the Arizona Constitution. The Lerners then appealed the dismissal to the Arizona Court of Appeals.

On November  27, 2012, the Arizona Court of Appeals upheld the dismissal and upheld the constitutionality of the stigmatized property statute. The Arizona Court of Appeals specifically held A.R.S. § 32-2156 barred the Lerners’ claims against DMB and the Sellers for failing to disclose the presence of the sex offender and rejected the Lerners’ contention  that the statute unconstitutionally abrogated their right to sue for damages.  The Court also held the representation agreement the Lerners signed barred their claim for Breach of Fiduciary Duty against DMB.   In effect, the Arizona Court of Appeals upheld both a statutory protection for brokers, as well as terms limiting a broker’s duties in a representation agreement.

Arizona REALTOR® Magazine – January 2013

Robert B. Zelms Robert B. Zelms is managing partner of the Scottsdale office of Manning & Kass, Ellrod, Ramirez, Trester, LLP. Mr. Zelms received his Bachelor of Arts from the University of Arizona in 1993, and Juris Doctor from Arizona State University College of Law in 1997. Mr. Zelms practices primarily in the area of Professional Liability Defense Litigation, including Real Estate Errors & Omissions and Miscellaneous Professional Liability. He is an author and editor of Manning & Kass’ Arizona Professional Liability and Arizona Real Estate Newsletters. He has completed more than 25 jury trials in the State of Arizona. Mr. Zelms is frequently retained by insurance carriers and brokers to conduct Risk Management Audits and Peer Review Assessments related to E&O insurance renewals. Additionally, Mr. Zelms is an instructor for the Arizona Association of REALTORS® rCRMS Risk Management Certification Program. Mr. Zelms is also a frequent lecturer on risk management/claims issues and has conducted seminars for numerous insurance carriers and companies nationwide.