Real Estate Broker Cannot Escape Liability for Negligent Misrepresentation

Published on: April 18, 2013

The Massachusetts Supreme Judicial Court recently concluded that a real estate broker has a duty to exercise reasonable care in making representations, and that certain exculpatory provisions contained within a standard form purchase and sale agreement do not relieve real estate brokers of that duty.

In the case of DeWolfe v. Hingham Centre, LTD, SJC-11168 (April 11, 2013), a real estate broker was hired to sell property in Norwell, Massachusetts. The sellers informed the broker that the property was zoned as “Residential Business B” or that it was zoned “Business B.” There is no zoning district in Norwell known as “Residential Business B.”  The real estate broker, who had listed other properties in Norwell, did not know of any businesses ever being operated out of the property. Further, the property was adjoined on either sides by houses, and not businesses. Despites such facts, the real estate broker listed the property for sale in at least two newspapers as being zoned as “Business B,” without conducting any independent investigation to confirm the same.

The buyer, a hairdresser seeking to open a six station hair salon, met with the real estate broker at the property for a viewing and informed the real estate broker of his intentions for the property. At the viewing, the buyer saw a copy of the listing sheet prepared by the real estate broker, identifying the property as being zoned “Business B.”  Additionally, during the viewing, the real estate broker provided a copy of the relevant section of the Norwell zoning ordinance, which allows hairdresser as a permissible use within the district designated “Business B.”

Thereafter, the buyer and sellers executed a standard form purchase and sale agreement which was provided by the real estate broker. Paragraph 25 of the purchase and sale agreement, captioned “Warranties and Representations” stated that:

“The BUYER acknowledges that the BUYER has not been influenced to enter into this transaction nor has he relied upon any warranties or representations not set forth or incorporated in this agreement or previously made in writing, except for the following additional warranties and representations, if any, made by either the SELLER or the Broker(s): NONE.”

Subsequently, the property was conveyed to the buyer and shortly thereafter, the buyer learned that the property was zoned as “Residential B” rather than “Business B,” and that a six station hair salon was not an allowed use of the property.

The buyer then brought suit against the sellers and real estate broker, among others. The real estate broker argued that she was immune from liability because she did not have any duty to confirm the zoning status of the property, and that even if she did, the warranties and representations clause set forth in the purchase and sale agreement relieved her of any liability.

In rejecting the arguments advanced by the broker, the Massachusetts Supreme Judicial Court held that where it is reasonable under the circumstances “for a broker to rely on information provided by a seller, the broker will not be liable for conveying information to prospective buyers without conducting further investigation.” However, “where it is unreasonable in the circumstances for a broker to rely on information provided by the seller, the broker has a duty to investigate further before conveying such information to prospective buyers.”  To that end, the Supreme Judicial Court found that a trier of fact could have found that the real estate broker failed to exercise reasonable care in making representations given that “Residential Business B” is not a recognized zoning district in Norwell, the fact that no known business use had been made out of the property, and that the property was adjoined on either side by houses and not businesses.

Further, the Supreme Judicial Court concluded that the warranties and representation clause contained within the standard form purchase and sale agreement permitted reliance by the buyer on prior written representations made by the seller or the broker (i.e., the property listing sheet) that were not expressly set forth or incorporated into the purchase and sale agreement.

Accordingly, while the traditional adage of “buyer beware” may still hold true in a variety of circumstances, sellers and their agents may not always avoid liability for negligent misrepresentations upon which the buyer relies.