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Potter v. First Real Estate Co., Inc.: Agency Relationship Creates Disclosure Duty for Salesperson

Alabama's highest court has considered whether a real estate broker serving as disclosed dual agent could be liable to buyers for alleged misstatements made to the buyers about the property's presence in a flood plain even when the buyers were given a survey at closing which showed that the property was in the flood plain.

In 1998, Joseph Potter and his then-fiancé Jamie ("Buyers") called Dawn Borden of First Real Estate Company ("Salesperson") about a "for sale" sign they saw on the property of a home the Salesperson had listed for sale. The Salesperson, the Buyers, and the home owner executed a dual agency agreement, which stated the Salesperson would represent both the Buyers and the owner.

The Salesperson accompanied the Buyers twice to the property. During the first visit, one of the Buyers allegedly asked the Salesperson if the house was located in a flood plain. The Salesperson allegedly stated that she did not know, but that she would check a survey in her office. During the second visit, the Salesperson presented one of the Buyers with a survey which one of the Buyers later testified was almost illegible. As the Buyers were trying to determine what the survey said, the Salesperson allegedly told them that the survey stated that the property was not in the flood plain. The Buyers testified that since the survey was difficult to read, they accepted the Salesperson's statements as true.

The Buyers executed a sales contract for the house in July 1998. Part of the sales contract read as follows: "THE PROPERTY _____IS _____ IS NOT LOCATED IN A FLOOD PLAIN". The blank next to the "IS NOT" line was checked. The Buyers also testified they again asked the Salesperson if the property was located in a flood plain, and she allegedly again told them it was not. The purchase contract also contained a disclaimer stating that the Buyers did not rely upon any statement made by the Salesperson in reaching their decision to purchase the property, and that the Salesperson had made no warranty or representation as to the property's condition. At the closing a few weeks later, the Buyers were given a number of documents. One of the documents was a survey which stated that the property was located in a flood plain. The Buyers signed a certificate acknowledging that they had received a copy of the survey.

In 1999, the Buyers received a letter from their mortgage company telling them that they needed to purchase flood insurance because their property was located in a flood plain. The Buyers claimed that this was the first time they had heard that the property was in a flood plain. The Buyers eventually purchased flood insurance, and then filed a lawsuit in 2001 against the Salesperson alleging fraud. The trial court entered judgment in favor of the Salesperson, and the Buyers appealed.

The Supreme Court of Alabama reversed the trial court's ruling and sent the case back to the trial court for further proceedings. The Buyers claims were subject to a two-year statute of limitations, and so the issue was when did the Buyers have legal notice of the property's location in a flood plain- at closing when they received a copy of the survey (which would mean the statute of limitations barred the claims) or when they received the first letter from the insurance company. Alabama uses a "reasonable-reliance" standard to determine when a party should have discovered the fraud in order to start the statute of limitations time period. The reasonable-reliance standard establishes that the start of the statute of limitations period is usually a question of fact for a jury to resolve but courts can enter judgment against the party alleging fraud when the party received understandable documents but the party claims to have not read these documents. Using this standard, the trial court had dismissed the lawsuit because the Buyers had acknowledged receiving a survey at closing which had clearly indicated that the property was located in a flood plain.

The court found that the reasonable-reliance standard did not bar the Buyers' claims because of the agency relationship which existed between the Salesperson and the Buyers. The agency relationship imposed a heightened disclosure duty upon the Salesperson and so the Buyers could rely upon statements made by the Salesperson. In this case, the Buyers were given inconsistent documents. The sales contract stated that the property was not located in a flood plain, while the survey given to the Buyers at closing indicated that the property was in the flood plain. Further, the Buyers alleged that the Salesperson told them that the "illegible" survey showed the property was not in a flood plain. Based on all of this, the court ruled that a jury could conclude that the Salesperson's statements lured the Buyers into a false sense of security about the property's location. Therefore, the court sent the case back to the trial court for further proceedings.

Three judges dissented from the majority opinion, arguing that it was not reasonable for the Buyers to rely upon statements made by the Salesperson since the Salesperson was serving as a dual agent.

Potter v. First Real Estate Co., Inc., 844 So.2d 540 (Ala. 2002).