Ruling on Transaction Brokerage

 

Buyer and seller are under contract. After the contract is formed and before the contract closes, the market value of the property increases dramatically. Before a due diligence contingency of the deal expires, the buyer seeks an extension of the contingency. Does a transaction-broker have a duty to disclose to the seller that the market value of the property has increased since that might affect the seller’s willingness to grant the extension?

The 2001 federal court decision in the Sussman case answered the above question “no.” This decision is perhaps the first published precedent helping us understand the duties of a transaction-broker

Colorado will usher in the era of designated brokerage on January 1, 2003. Designated brokerage expressly eliminates dual agency. Though transaction-brokerage will be practiced less frequently, it will still be practiced in a variety of situations, including deals in which one licensee assists both a buyer and a seller

In Sussman, the sellers contracted to sell a property for approximately $2.5 million. A portion of the property was water shares. The contract was formed in September of 1999 when the water had an approximate value of $14,000-$17,000 per share. It was scheduled to close five months later in February of 2000. The contract contained a contingency allowing the buyer to back out of the deal by December 3 if the buyer determined the property unsuitable for development. The buyer was a company in which the transaction-broker was a principal

Before the deadline, the buyer asked the seller to extend the contingency by one week and the seller consented. At the time the buyer requested the extension, the value of the water had increased approximately 65% to approximately $28,000 per share. None of the brokers involved in the transaction, including the transaction-broker, disclosed to the seller the increased value of water. The seller did not learn of the water’s appreciation until after granting the extension

After closing and discovering the increase in the value of the water, the seller sued the transaction-broker (among others) alleging that Colorado law required the transaction-broker to disclose the rising value of the water. The seller argued that had the seller known of the rising value, the seller either would have demanded additional consideration for the contract extension, or would have rejected the extension

The court dismissed the claims against the transaction-broker stating that the sellers “argue that [Colorado’s brokerage relationship] statute requires the transaction-broker to advantage sellers over buyers. Such a role would require the broker to track rising property values, inform the sellers of those values, and advocate sellers modify their strategy accordingly.” The court continued: “Such a duty would effectively remove the transaction-broker from his role as intermediary, and put him in the position of advocate for the seller. By statute, such advocacy is reserved for the seller’s agent, . . .

The court quoted, and was therefore aware of, the provisions in the law which require a transaction-broker to disclose to “all prospective buyers . . . any adverse material facts actually known by the broker including but not limited to adverse material facts pertaining to the title, the physical condition of the property, any defects in the property, and any environmental hazards affecting the property required by law to be disclosed.” An implication of Sussman is that the appreciation of the value of the property between the time the contract is formed and the time it closes is not a material fact which needs to be disclosed by a transaction-broker (or a buyer’s agent) to a seller

Critics of transaction-brokerage point to its awkwardness when the transaction-broker has a special relationship with one of the parties (such as when a transaction-broker is helping one of its relatives buy a property.) The Sussman court appeared not to be troubled by the special relationship between the transaction-broker and the buying company

The portions of Colorado’s brokerage law on which the Sussman court relied are not modified by Colorado’s new designated brokerage law. The decision will help to clarify the role of transaction-brokers and confirms the logic that transaction-brokers who facilitate deals for both parties tend to have less risk than agents of unhappy buyers or unhappy sellers

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN