Legislature(1993 - 1994)
03/16/1994 01:15 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 517 - REAL PROPERTY TRANSFERS JUDY MATHIS, Legislative Assistant to Representative Ron Larson, Prime Sponsor of HB 517, testified that HB 517 would remove real estate professionals from liability for innocent misrepresentation in real estate property transactions. This bill was introduced as a result of a 1989 Supreme Court decision, in Bivins vs. Ballard, that brokers who make an innocent misrepresentation to a purchaser of real property are liable for the misrepresentation. This ruling puts an unjustified liability on real estate professionals. She further stated that allowing innocent misrepresentation action against a broker in such circumstances is like posing strict liability and there was no reason for making the broker liable for the seller's misrepresentation. She concluded by saving that HB 517 would overturn the Supreme Court's decision by removing real estate brokers' liability for innocent misrepresentations. GORDON SCHADT, Attorney representing the Alaska Association of Realtors, testified that innocent misrepresentation is a situation where an individual does not have a reason to know, or does not know, there is a problem in their house, and they are a conduit. So, if the seller fills out a form which says there are no problems in the basement and you, as a real estate agent, pass that on to the buyer, you have liability even though you had no reason, you were not negligent, you didn't intentionally do anything wrong, by being that conduit. The Bivins case was a narrow decision and the court basically said that they think the broker should have the liability. TAPE 94-43, SIDE B Number 000 MR. SCHADT continued his testimony by further stating that there is a required form that needs to be filled out from the seller to the buyer so that the buyer can then evaluate the situation relating to the property to make an informed decision. The real estate broker, as a conduit, just passes on the information, and as a result, is liable. Mr. Schadt concluded that HB 517 would simply take away the innocent misrepresentation aspect of the real estate transaction. Also, part of the spin-off that he sees as detrimental is that the problem typically is between the seller and the buyer and that is where the problem essentially lies. DAVE FEEKEN testified via teleconference in support of HB 517. He sighted an example of an innocent misrepresentation a buyer, who after closing on a home, sent a letter to him revealing a leak in the shower and that he wanted it repaired. Upon investigation it was discovered that the buyer began a remodeling of the shower and broke a seal, which caused the leak. REP. NORDLUND inquired into how this bill would solve the problem of an unreasonable buyer. MR. FEEKEN responded that if there wasn't a chance of using innocent misrepresentation as a claim, problems of unreasonable buyers wouldn't exist. CRAIG JOHNSON, Member of the Kodiak Board of Realtors, testified via teleconference in support of HB 517 and remarked that there are limited opportunities for obtaining errors and omissions insurance coverage to protect real estate agents against innocent misrepresentations. FRANK MICHEL, past chair of the Alaska Board of Realtors Legislative Committee, testified via teleconference that this legislation was meant to be part of a comprehensive packet which included agency and property disclosure, both of which became law. He further testified on the difficulty of obtaining insurance if you are not part of a national chain. He said AS 34.55.030 contains innocent misrepresentation protection and the passage of HB 517 would extend that testimony to realtors. GREG ERIKINS testified via teleconference in support of HB 517. He felt it was not too much to ask the state of Alaska to protect a licensed real estate practitioner from innocent misrepresentations. GLEN RYERSON, President of Southeast Board of Realtors, testified in support of HB 517. He further testified that he sold a home which, as it turned out, during the transaction the seller disclosed that there were no easements affecting the property and that the septic system was in good working order. The records office substantiated that there were no easements and the septic system was checked out by an engineer and it was passed and received approval by the Department of Environmental Conservation. A year later, the new owner decided to refinance the house and during this process had to have the septic system re-certified. During the inspection, problems were noted and it was revealed that there was no drainage field, as well as other problems. REP. NORDLUND inquired as to what sort of obligations agents have to make sure that the representations they make about a property are correct. MR. SCHADT responded that that fits into the area of negligence and negligence is decided in a standard that has not always been satisfactory and it is what a reasonable agent in this case would have done in that situation. Thus it is not as specific as it should be and that is a problem with that area of the law; i.e., tort liabilities. An example would be if a reasonable agent would have seen something that would put them on notice then they would need to proceed to investigate further. REP. NORDLUND then inquired about a situation in which a seller says the furnace works fine and when winter comes and the buyer turns on the furnace and discovers it is inoperable. He asked, what about a situation like that. MR. SCHADT responded that if there is an inquiry such as a buyer asking "what is the furnace like or does the furnace work?", one of the ways you can have liability is if you are asked a question and you do not undertake initiative to find out the accuracy of your answer. He further remarked that the agent should undertake the responsibility, to avoid negligence, to follow-up on any indication that there might be a problem. CHAIRMAN PORTER inquired if an agent sees that there are water marks on the ceiling and he asked the seller, who responds that yes there was, and I had it fixed, here is a receipt and as far as he was concerned the leak was fixed. Under the current situation, as Chairman Porter understood the law, he asked if that agent was liable. MR. SCHADT responded, yes, that is correct. CHAIRMAN PORTER then asked if HB 517 would rectify that situation. MR. SCHADT responded yes. REP. GREEN inquired how many times, in the number of transactions that are conducted, how many of those would result in a situation where the realtor would be brought in rather than the buyer and seller dealing directly with each other. MR. SCHADT responded that over half innocent misrepresentation litigation involves the realtor. REP. GREEN then restated the question to be of one hundred transactions, how many of those would end up with the seller going after the realtor because of a bad negotiation? MR. SCHADT responded that he didn't know the percentage. He then remarked that this type of litigation is one of the most common forms of real estate litigation that may well account for half or more of the lawsuits that relate to real estate. REP. GREEN then asked for clarification whether he meant seller and broker or buyer and broker because the buyer has been stuck with the property. MR. SCHADT responded that it is typically the buyer coming after the seller and bringing in the agents, often after consulting an attorney. REP. GREEN inquired if the property disclosure statement has less than the number of these things because the seller has to disclose things that might not have otherwise done, because of fraudulent misrepresentation. MR. SCHADT responded that it probably is, but it only officially went into effect last July, so there isn't a great deal of history to go with it. He further remarked that the disclosure statement should reduce the amount of litigation overall. REP. GREEN stated that without HB 517, the real estate sales persons are at more risk than they would be with this bill. He inquired if there are some situations that really do involve negligence or something on the realtor's behalf. Mr. SCHADT responded that there are and if you get into a leaky roof you are looking at ten or twenty thousand dollars. He further responded that there are several other factors which exacerbate the situation and that there are a lot of situations that result in costly litigation. REP. GREEN inquired if there is a perceived conflict because the sales commission comes from the seller to the broker and is there any potential, that by now giving the broker a waiver, what is my recourse, innocent fraud, by going through the broker? MR. SCHADT responded that fraud is one extreme that would be there. Negligence is still there and that's the one that is going to be. There has been for a long time, fraud on the agent's part, in his experience, is fairly well. Negligence does come up in situations, such as, you should have seen those water marks, etc., and that will remain there. He didn't think the passage of the money influences things that much. REP. GREEN stated that perhaps there is an innocent representation because he has less (inaudible) as a broker now than he did yesterday before this thing became law. He has a duty, but there are shades of gray. He asked if this bill would cause the broker to fall into a little darker shade of gray on their duty to look into the water spots, or something maybe a little more subtle than that? MR. SCHADT responded that he didn't think so because we are not doing away with the negligence part of it. REP. GREEN remarked that he was not talking about negligence, he was talking about the innocent part, where he thought was the gray area, and he wanted to know if HB 517 would cause him as a real estate agent to relax my duty. MR. SCHADT responded that the thing that keeps the agents from relaxing their duty is the fact that they have to be diligent in what they do because if they don't they are back into negligence. CHAIRMAN PORTER inquired if he knew of any situation in which the court has caused someone by definition who is innocent to be guilty. MR. SCHADT responded that he was not aware of any. He further added that HB 517 does not change the fact that under state case law a seller is liable for an innocent misrepresentation. TAPE 94-44, SIDE A Number 000 REP. NORDLUND remarked that a buyer could make an innocent misrepresentation, I have had personal experience, and I find it difficult to believe that a real estate agent could not have some knowledge as to the workmanship of a structure. MR. SCHADT commented that as the real estate profession is evolving they are becoming clearer with their buyers as to what their role is. He thought that helps to a certain extent. He agreed that the public comes to a real estate agent with a higher expectation and they should. REP. JAMES commented that she feels that if a person has a problem that somebody is at fault and that is not necessarily true. Even in criminal cases, intent is very important and she agreed that real estate people are expected to know more, but they are not engineers or surveys, they are sales people and they are there to pass on the information from the seller. Therefore, she felt that the law needed to be changed. CHAIRMAN PORTER commented that he was going to support this bill because we have created the requirement to fill out a property disclosure form that is passed on to the buyer. This then increases the vulnerability of the broker because he has to pass the form on. REP. JAMES moved that HB 517 be moved from committee with individual recommendations. REP. NORDLUND objected and stated that he would like to be able to offer a couple of amendments. One along the lines of there should be some protection afforded the potential buyers that real estate agents are not necessarily experts in terms of the structural, mechanical, wood aspects of the house but they are primarily agents for the financial aspects of the transactions. The other amendment would be defining innocent misrepresentation. CHAIRMAN PORTER asked Mr. Schadt whether the court would have difficulty with the term innocent misrepresentation. MR. SCHADT responded no because they specifically adopted that term in the Bivins case and the statute attempts to give some definition where it talks about not having personal knowledge of the error, inaccuracy or omissions. The court would find that their case clearly defined that. REP. GREEN remarked that he was opposed to HB 517, but he would pass it on because he doesn't see any duty in here that says that it's a duty that might be a negligent case. It just says if the agent doesn't know, it's okay. CHAIRMAN PORTER asked the committee for a motion to adopt the CS; and hearing no objection, the CS was adopted. CHAIRMAN PORTER then declared the CS for HB 517 moved from committee with individual recommendations. The House Judiciary Committee was adjourned at 3:07 p.m.