Written by K. Michelle Lind, Of Counsel

In this case, the buyers filed a lawsuit against the sellers and the real estate broker, alleging fraud, negligent misrepresentation, breach of the duty of good faith and fair dealing, and breach of fiduciary duty after finding out their neighbor was a registered sex offender.  The buyers did not ask to rescind the purchase contract but demanded compensatory and punitive damages.

The Facts Alleged in the Case

The sellers purportedly decided to sell their Scottsdale home because a convicted sex offender lived next door. The broker acted as a disclosed dual agent in the transaction.  During negotiations, when the buyers asked the sellers why they were selling, the sellers said they wanted to move to be closer to friends.  Neither the sellers nor the broker disclosed to the buyer that the next-door neighbor was a sex offender. 

Six months later, after having moved into the home, the buyers discovered that their neighbor was a “level-one” sex offender that was not listed on the Sex Offender Registry.  The buyers filed the lawsuit alleging that if they had known of the sex offender, they would not have purchased the house. 

The buyer argued that the sellers fraudulently misrepresented their true reason for wanting to move by telling the buyers they wanted to live closer to friends, when they actually wanted to move away from the sex offender next door.  The sellers argued that their alleged statement that they were moving to be near friends was (i) not a representation that there were no sex offenders living near the home; (ii) no prospective buyer would reasonably rely on a seller’s representation about his or her reason for moving; (iii) the possible presence of a sex offender could not have been too important to the buyers because they never asked the sellers about the issue, and (iv) pursuant to A.R.S. § 32–2156 there is no liability for failing to disclose any fact or suspicion that there was a sex offender located in the vicinity of the home. 

The Court Reviews the Arizona REALTORS® Forms

In deciding the case, the Court mentioned all the notices about sex offenders in the Arizona REALTORS® forms used in the transaction. 

The sellers provided the buyers with an Arizona REALTORS® Residential Seller’s Property Disclosure Statement (SPDS).   Just above the buyers’ signature on the SPDS there is a notice: 

• “Notice: Buyer acknowledges that 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 statement on the front of the SPDS titled “Residential Seller Advisory” states: 

• Please note: By law, sellers are not obligated to disclose that the property is or has been (1) the site of a natural death, suicide, homicide …… or (3) located in the vicinity of a sex offender. However, the law does not protect a seller who makes an intentional misrepresentation. For example, if you are asked whether there has been a death on the property and you know that there was such a death, you should not answer “no” or “I don’t know”; instead you should either answer truthfully or respond that you are not legally required to answer the question.

The court also referenced the “Inspection Period” section of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract that stated:   

• “If the presence of sex offenders in the vicinity … is a material matter to the Buyer, it must be investigated by the Buyer during the Inspection Period.” The contract allowed a 14–day inspection period and further provided that the buyers had “conducted all desired independent inspections and investigations and accept[ ] the Premises.”

And, another section of the contract that stated:

• “Buyer warrants that Buyer is not relying on any verbal representations concerning the Premises except disclosed as follows: ____.”

The buyers initialed the word “None” handwritten in the space that followed.

The Court Addressed the Broker’s Dual Agency and Duty to Disclose

In addressing the claims against the broker, the court stated that the broker’s fiduciary duty to disclose material information is not necessarily diminished in a dual-agency situation.  “When obtaining clients’ consent to represent both parties in a transaction, a broker must deal fairly and in good faith with each of them”, and “disclose all material facts that the [broker] knows, has reason to know, or should know would reasonably affect the principal’s judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them.”

The court stated that with the clients’ informed consent and in the absence of fraud, the duties a broker owes their clients may be limited by agreement. The court noted that both buyers and sellers agreed to the Arizona REALTORS® Consent to Limited Representation (“Consent”).  The court quoted portions of the Consent as follows:

• [Broker] represents both the Buyer and the Seller with limitations of the duties owed to the Buyer and the Seller, such as:

* * *

• (2) There will be conflicts in the duties of loyalty, obedience, disclosure and confidentiality. Disclosure of confidential information may be made only with written authorization. This does not relieve [Broker] of any legal obligation to disclose all known facts which materially and adversely affect the consideration to be paid by any party to the transaction.

• (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.

The Court’s Decision

• Buyer v. Seller:  The court acknowledged that the seller made fair points regarding their statements about why they were moving, and the court did not say that as a matter of law, the alleged misrepresentation was material to the transaction or that the buyers reasonably relied on it.  “However, when one is asked a question that fairly calls for disclosure of a material fact, he or she commits fraud by concealing the truth or otherwise answering in a manner deliberately calculated to mislead.” Therefore, the court found that a jury must decide whether the sellers were liable to the buyers for common-law fraud.  The ultimate outcome of the buyers’ case against the seller on the common law fraud claim is unknown to this author.

• Buyer v. Broker:  The court stated that even assuming that A.R.S. § 32–2156 did not apply and the broker otherwise would have had a duty to the buyers to disclose the sex offender, the buyers expressly agreed that broker had no obligation to make that disclosure in the Arizona REALTORS® Consent to Limited Representation form. Therefore, the buyers’ claim against the broker was dismissed.

Case Lessons:

• If asked about suicides, murders, other felonies, or registered sex offenders in the vicinity of the home – you can decline to answer pursuant to A.R.S. § 32–2156, but you should not answer in a way that would be a lie or misleading.

• When acting as a dual agent, always use the Arizona REALTORS® Consent to Limited Representation form. 

Lerner V. DMB Realty, LLC., 234 Ariz. 397, 322 P.3d 909 (2014)

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/23/22