Duty to Disclose Off-Site Conditions

Real estate brokers have duty to disclose off-site conditions that are material to the sale of property

A long running debate among lawyers, courts and real estate practitioners is whether a real estate broker or seller is obligated to disclose known conditions present in the neighborhood surrounding a specific property if those conditions could affect the desirability and, therefore, the value of the property. The majority rule is that a broker and seller have a clear duty to disclose material facts of which they are aware about the specific property listed for sale.

Until recently, the traditional rule of caveat emptor ("buyer beware") applied to conditions present on other properties in the surrounding neighborhood or town. It was presumed to be unreasonable to hold sellers and brokers responsible for disclosing factors relating to properties in which they had no ownership interest, or for which no agency relationship existed with the owners. The more recent trend, however, is to impose liability on brokers and sellers for failure to disclose conditions present on so-called "off-site" property when those conditions can reasonably be expected to affect the value of the property listed for sale.

This was the recent holding of the New Jersey Supreme Court in 420 N.J. 1995. In this case, a developer acquired a tract of land and listed the subdivided homesites with a local real estate broker, who, in turn, sold the homesites to buyers who built homes on the sites between 1984 and 1987. The development was located near a site in which hazardous waste had been dumped from 1966 to 1978. In 1980 the federal EPA warned that the development of housing near the dump site could cause "a future Love Canal." A copy of this 1980 EPA report was found in the developer's files. Notwithstanding his apparent knowledge of the nearby dump site and the potential dangers it presented, the developer rejected the real estate broker's suggestions that the existence of the dump site be disclosed.

The homeowners eventually filed a class action lawsuit against the developer and real estate broker alleging common law fraud and a violation of New Jersey's Consumer Fraud Act. The trial court granted the defendants' motion for summary judgment on the ground that a landowner does not owe a purchaser any duty to disclose conditions on the land of another owner. The Appellate Division reversed the trial court and held that such a duty did exist when the off-site conditions

1. are unknown to the buyers;
2. are known or should have been known to the seller or the seller's broker; and
3. based on foreseeability, the off-site conditions might materially affect the desirability of the property that is for sale.

The New Jersey Supreme Court affirmed the Appellate Division. The Supreme Court specifically remarked that:

"Whether a matter not disclosed . . . is of [sufficient] materiality, and unknown and unobservable by the buyer, will depend upon the facts of each case."

The facts of the case no doubt determined the Court's holding. The development at issue was adjacent to a hazardous waste dump site, and was characterized by the federal EPA as a "potential Love Canal." The developer and, apparently, the broker both knew about the presence of the dump site, and seriousness of the risk it imposed, before homesites were sold to the plaintiffs. There was also evidence of odors emanating from the homesites and physical illnesses suffered by the homeowners that were attributable to chemicals leaking from the nearby dump site. On these facts, it was not difficult for a court to conclude that the broker and developer had a duty to disclose the existence of the dump site to potential buyers.

The issue that remains to be resolved is what limits will eventually be placed on this duty to disclose "off-site" material factors. For example, how distant must an "off-site" factor be to the property listed for sale? Next door? Same block? Same street? Same neighborhood?

How much knowledge must a real estate broker have of the "off-site" factor before being deemed to "know" about it? Are newspaper reports enough to put the broker on notice? What about proceedings before state or local government agencies, such as zoning boards, municipal boards of trustees, or state departments of transportation, environmental protection, or energy?

Is any "off-site" factor that can arguably affect the desirability of a property going to be deemed to be "material"? What about a property that is in proximity to a group home for recovering alcoholics, drug abusers, or for persons suffering from AIDS or HIV? What about a Section 8 housing development? Are neighborhood crime rates or local school academic achievement records "material"?

Must the "off-site" factor be actual or merely potential? What about a "proposed" landfill, correctional center, or regional airport? What about a report that a municipality's drinking water "might" contain high levels of lead?

It is likely that the holding in this case will be followed in other states that have not already addressed the issue. Therefore, real estate brokers are well advised to disclose known facts that might affect the desirability of property even if the fact relates to nearby property rather than the actual property for sale. This is especially true when marketing property for a builder or developer who will be deemed to have superior knowledge and insight as compared to an individual home buyer.

"Materiality" will be the rule of thumb on how far the duty to disclose will extend. The best way to gauge whether a fact is "material" is to ask yourself whether it would make a difference to you in deciding whether to buy the property if you knew the fact at issue. If the answer is "yes", a judge or jury may well decide the fact is "material."

Brokers should still be mindful of fair housing laws, however, and avoid disclosure of facts relating to the actual or potential presence of persons of a particular race, religion, national origin, sex, or disability even if these factors may arguably affect the "desirability" of a listed property. Compliance with federal, state or local fair housing laws will almost certainly be a defense to a consumer fraud claim when the "off-site" factor not disclosed relates to criteria forbidden by fair housing laws to be considered in a real estate purchase.

Please note that the comments and opinions contained herein are not to be construed to be legal advice by the author, Victor O. Schinnerer & Company, Inc., or the CNA/Schinnerer errors and omissions insurance program.

This information is made available to you for your risk management program. No action should be based on this information without appropriate advice from legal counsel and a review of currently applicable statutory and case law.

This article from the Risk Management Reporter, November 1997, was written by Robert D. Butters of the law firm of Arnstein & Lehr, which concentrates in the representation and defense of real estate brokers and agents.