Wynn Williams completes lots of defence work for real estate agents. Sometimes agents engage us directly; sometimes we act under instructions from their professional indemnity insurers. Either way, one recurring theme is claims against agents for passing on incorrect information received from the vendor.
This is understandably surprising to many of our clients. Why should an agent be liable for misrepresentation, if the information they passed on to a purchaser is exactly what they received from the vendor? This is especially the case if the vendor has been 'selective' with the information they have passed on, or even told outright lies about the property.
This article focuses on two topics: agents' liability for passing on a third party's report, and agents' liability for passing on incorrect information told to them by the vendor.
Agents' liability for passing on a third party's information – being a 'mere conduit' of information
The defence of 'mere conduit' is not a new invention. The law has developed a defence for agents (or other professionals), whereby they say they were merely passing information to a buyer, without endorsing the information as true. Typically, this will be building reports, property information from third parties, etc. There are limits on this defence. The Supreme Court has described what must be proved for a mere conduit defence to succeed:
Only the Supreme Court could get away with using the word 'imprimatur' – Latin for 'let it be printed' – meaning a 'seal of approval'. It is particularly difficult for agents to show that they have passed on information from the vendor without giving it their seal of approval. They are, obviously, the vendor's agent, owe a fiduciary duty to the vendor, and are paid by taking commission when the property sells. Experience tells us that this defence is normally only partly successful.
In order to bolster this defence, here are a few practical tips for agents:
- Always make a point of advising, in writing, that buyers carry out their own due diligence. This is so common a piece of advice that sometimes it does not get formalised in writing. Even if it appears in the fine print of marketing material, or in your standard terms and conditions, or you tell it to every buyer over the phone, say it again in an email.
- When passing on vendors' reports, or any other information to buyers, record that this is provided by the vendor and you have no independent knowledge of the contents. Again, record it in writing in the cover email. To really cover yourself and your colleagues, make it a standard paragraph in any email that goes out with vendors' information.
- Do not be tempted to read the pre-purchase report and then adopt its findings in your marketing pitch. For example, avoid saying "there is absolutely no chance the flat butynol roof leaks", instead saying "a building report has been done and the inspectors found no signs of leaking – but if you're worried about the flat butynol roof, you need to get your own report."
Usually, when agents rely on a mere conduit defence, it is because they have been joined to proceedings with several other parties. For example, in scatter-gun leaky home litigation, agents are often joined alongside the vendors, builders, architects, pre-purchase inspectors, local councils etc. As peripheral parties, hoping to shift liability back onto the author of (say) a negligent report, the stronger the mere conduit defence the better. Specific disclaimers in emails are far better than general terms in the fine print of marketing material.
What if the vendor gives agents incorrect information?
The firm recently defended an agent in an READT complaint. The vendor had carried out some building work and a building consent was granted, but with no code compliance certificate issued. Twenty years passed and the vendor told our client that the extension works were carried out pre-1992, under a 'building permit' and 'all the inspections had been done'. Under the old Building Act (applying to work pre-1992), no code compliance certificate was required for building permits, so long as the council signed off the necessary inspections.
The property sold at auction with the sale and purchase agreement including the standard warranties that all building work was fully consented and compliant. An 'as is, where is' clause was originally inserted, but our client told the vendor that this would limit the value of the property to land value. On the basis of the information given by the vendor, our client said there was no need for the 'as is' clause.
If all the vendor's information were true, there would be no problem. Unfortunately for our client, the vendor's information was incorrect, and his building work was not consented appropriately (the code compliance certificate was never issued). Either he intentionally withheld the correct information to try and secure a sale, or he simply forgot key details and did not provide the consent documents for our client to check the dates. In either case, our client did not obtain a LIM and did not request further written records concerning the building work. The vendor had to pay to bring the house up to current code and then filed a complaint about the agent for allowing him to remove the 'as is, where is' clause.
The agent was charged with misconduct and faced a week-long hearing in the Real Estate Agents Disciplinary Tribunal. It took a lot of hard work, and detailed evidence statements, before the Complaints Committee reduced the charge to unsatisfactory conduct. Our client accepted this charge, acknowledging that he should have checked the source documents. It was particularly galling for our client that he was being held responsible for the incorrect information he was given by the complainant.
The Real Estate Agents Disciplinary Tribunal confirmed the unsatisfactory conduct finding. It seems that the Tribunal's starting point is that a vendor is not accountable for the information they give to the agent. Agents are responsible for ensuring any information purchasers receive is accurate. This does not seem fair.
Practically, to try and guard against being responsible for the vendor's inaccuracies, agents could:
- Check all information about consents from the primary source (LIM, Building Consent documents etc.). Even if there's nothing to suggest the vendor's information is wrong, check it anyway.
- If client instructions don't match the primary sources you have, you need to talk to the client. If they insist that a property be marketed with incorrect information, you need to refuse. Talk to your principal agent or head office etc. To knowingly market a property incorrectly is a breach of the conduct and client care rules, regardless of a client's instructions.
- Always advise in writing that the vendor consults a lawyer before amending the sale and purchase agreement.
Hopefully, most agents will never need to consult a lawyer about court proceedings they have been joined to, or about a complaint made against them.
If proceedings or a complaint are received, agents should lodge a notification with their insurer as soon as possible. As a general rule, no one has ever paid more in premiums because they notified their insurer of a potential issue, even if a formal claim or complaint never eventuates.
The worst thing to do with a proceeding or complaint is ignore it.
1 Red Eagle Corp Ltd v Ellis  NZSC 20,  2 NZLR 492 at .
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.