It is well known among professional liability attorneys that residential real estate sellers are not the only parties sued for inadequate disclosures. Illinois real estate brokers and their agents are also frequently named as defendants in these lawsuits.
Claims for negligent misrepresentation against real estate professionals are common and often involve claims under the Residential Real Estate Disclosure Act (Disclosure Act) and section 15 of the Real Estate Licencers Act (Licencers Act).
Lawsuits against real estate professionals under these statutes are becoming increasingly common, and there has been significant debate in the Illinois Court of Appeals over the interpretation of issues such as, among other issues, the scope of a real estate agent's duties under these statutes and what evidence or allegations are sufficient for a plaintiff-purchaser to prove the frequently litigated issue of “reasonable reliance.”Two recent appellate court decisions provide some insight.
Hearn's opinion
The Illinois Second District Court of Appeal's decision in Hahn v. McElroy involved a case in which a plaintiff buyer claimed to have discovered mold and water damage shortly after moving into a property. The buyer sued the seller and the seller's agent, and the evidence revealed that the seller had pre-existing water problems that had been resolved in 2015, three years prior to the sale. Of particular note in this matter is that the Second District held that prior problems that the seller reasonably believed had been resolved did not need to be disclosed, and rejected the plaintiff's argument that circumstantial evidence to the contrary was sufficient to deny the defendant's motion for directed judgment after bench trial.
The buyer further argued that because the plaintiff knew about the previous water problems, it should have investigated and verified the accuracy of the disclosure statement that there were no water or mold problems. The Second District Court rejected this argument, finding that Section 35 of the Disclosure Act does not require the seller to investigate and verify the statement, and that the seller's agent had no such duty.
The Hahn decision offers insight into two key points that are often contested in these cases.
• There is no need to disclose past defects that the seller reasonably believes have been repaired.
•The Disclosure Act places no obligation on real estate agents to independently investigate the veracity of their clients’ disclosures.
With respect to the former, Hahn clarifies the scope of disclosure laws such that if a seller reasonably believes that past issues have been resolved, neither the seller nor its agents are required to disclose those past issues and how they were resolved.
Regarding the latter, Hahn draws an important distinction between a Disclosure Act claim against a real estate agent and a negligent misrepresentation claim: Under the Disclosure Act, the agent has no duty to investigate the seller's representations, whereas in a negligent misrepresentation claim, the agent has no duty to independently investigate unless the agent could have discovered that the seller's representations were false through the exercise of ordinary care. See, e.g., Harkala v. Wildwood Realty, Inc., 200 Ill. App. 3d 447, 454 (1st Dist. 1990).
Negligent misrepresentation and disclosure law claims against real estate professionals are often based on the same allegations, so the distinction made in Hahn is an important consideration.
Rebyte's Opinion
In Revite Corp. v. 2424 Chi., Inc., of the Illinois First District Court of Appeals, the court (in an unpublished Rule 23 opinion) affirmed a trial court’s dismissal of various claims against a seller and a real estate agent in connection with the plaintiff’s purchase of two residential units and one commercial unit in an HOA building.
Revite’s opinion provides insight into the scope of duties under real estate agent licensing law and the facts that could defeat plaintiffs’ legitimate reliance claims.
The First District Court dismissed the plaintiff's argument that the plaintiff's agent breached its duty to use reasonable skill and care by failing to advise the plaintiff to bring an inspector to the walk-through on the closing date. The court noted that the agent (acting as a dual agent under section 15-45 of the Licensing Act) had no duty to advise the plaintiff to bring an inspector. The Licensing Act provides that the agent “may assist in arranging the inspection.” Thus, the court found that the plaintiff “had not explained how its advice breached its duty 'to use reasonable skill and care in the performance of brokerage services' under section 15-15(a)(3).”
Although Revite’s opinion is unpublished, there may nevertheless be merit to the argument that the agent breached his duties under the Licensee Act by failing to advise the buyer to bring an inspector with him to the final walk-through.
Additionally, the Revite plaintiffs argued that they properly relied on the real estate agent’s representations that they could install a fence on the property to support their claim for negligent misrepresentation against the real estate agent. However, the court found that the plaintiffs could not prove proper reliance on the real estate agent’s representations because the plaintiffs’ real estate attorneys (at the plaintiffs’ instructions prior to settlement) specifically negotiated for the plaintiffs to become members of the HOA, thereby subjecting the plaintiffs to the HOA’s declarations that explained they could not install a fence without board approval. As such, the court upheld the grant of summary judgment on that claim.
The First District's discussion of reasonable reliance in Revite is noteworthy because whether reliance on a statement is reasonable is usually a question of fact that bars summary judgment. See, e.g., Olson v. Hunter's Point Homes, LLC, 2012 IL App (5th) 100506 (holding that even if the public records revealed the misrepresentations to the plaintiff-purchaser, the complexities of interpreting those public records were sufficient to give rise to a question of fact as to whether reliance was justified). Thus, the Revite opinion discusses the elements of reasonable/justifiable reliance outside the context of the public records and provides guidance on what other information available to the plaintiff-purchaser may preclude the possibility of asserting justifiable reliance and avoiding a question of fact.
Finally, it is worth noting that other appellate courts around the country have recently addressed similar factual circumstances and upheld lower court decisions in favor of the seller’s real estate agent. See, e.g., Douet v. Romero, Tex. 14th App. Dist. (2022) (upholding summary judgment in favor of the seller’s agent because there was no evidence that the agent knew or should have known that the seller’s representations that mold problems did not exist were false) and Atlanta Partners Realty, LLC v. Wohlgemuth, 365 Ga. App. 386, 393-96 (2022) (holding that the plaintiff’s buyer’s negligence claim against the seller’s agent failed because the plaintiff could have discovered the alleged defects through a reasonable inspection and therefore the seller’s agent was not liable).
The clear language of Georgia's statute governing a seller's agent's duties to a buyer is conclusive as to the scope of the agent's duties to the plaintiff, providing that a plaintiff cannot establish the element of legitimate/reasonable reliance if an alleged defect would have been discovered by reasonable inspection. See also Young v. Era Advantage Realty, 2022 MT 130 (Mont. Sup. Ct. 2022) (holding that a plaintiff buyer's negligence and constructive fraud claims against a seller's agent were legally unsuccessful because the plaintiff failed to present evidence that the seller's agent knew or should have known about undisclosed defects). [water intrusion]and the law governing the duties of real estate agents in Montana is [MCA §37-51-313(3)(a)] It regulates the scope of the seller's agent's obligations to the plaintiff buyer.
Conclusion
Increasingly, residential real estate purchasers are using the same facts and allegations in common law negligence and statutory claims against sellers' real estate agents. In Illinois in particular, claims for negligent misrepresentation are often supported by claims under the Illinois Residential Real Estate Disclosure Act and real estate licensing laws.
The sheer volume of these claims has resulted in multiple appellate court reviews of the various issues raised and what a plaintiff buyer must offer as evidence to satisfy the elements of the claim. As mentioned above, it is important for professional liability attorneys to monitor these appellate decisions and understand the nuanced analysis of these claims. Specifically, it is important to know the extent to which the statute governs the scope of a seller's agent's duties to a buyer and what evidence may be dispositive in establishing that a plaintiff buyer legitimately or reasonably relied on the agent's representations.
The law in this area evolves regularly, and conducting discovery with the considerations outlined above in mind can lead to decisive motion wins and save real estate professionals the costs and risks associated with taking these cases all the way to trial.
