SENATE LABOR AND COMMERCE COMMITTEE January 18, 1994 1:35 p.m. MEMBERS PRESENT Senator Tim Kelly, Chairman Senator Steve Rieger, Vice-Chairman Senator Bert Sharp Senator Georgianna Lincoln Senator Judy Salo NO MEMBERS ABSENT COMMITTEE CALENDAR SENATE BILL NO. 206 "An Act relating to real property transfers." PREVIOUS SENATE COMMITTEE ACTION SB 206 - See Labor & Commerce minutes dated 8/10/93. WITNESS REGISTER David Sommers Alaska Association of Realtors 913 Noble Street Fairbanks, Alaska 99701 POSITION STATEMENT: Supported SB 206. Joe Russo Greater Fairbanks Board of Realtors 913 Noble Street Fairbanks, Alaska 99701 POSITION STATEMENT: Supported SB 206. Bill Allen Greater Fairbanks Board of Realtors P.O. Box 73765 Fairbanks, Alaska 99707 POSITION STATEMENT: Supported SB 206. Karl Schroeder Real Estate Agent 1199 Viewpointe Fairbanks, Alaska 99709 POSITION STATEMENT: Supported SB 206. Greg Erkins Alaska Association of Realtors Greg Erkins Realty 3340 Arctic Blvd Anchorage, Alaska 99503 POSITION STATEMENT: Supported SB 206. Mark Korting RE/MAX PROPERTIES, INC. 2600 Cordova Street Anchorage, Alaska 99503 POSITION STATEMENT: Supported SB 206. Rick Hunter 500 N. Main Street Wasilla, Alaska 99654 POSITION STATEMENT: Supported SB 206. Frank Michel 4901 E. Parks Highway Wasilla, Alaska 99654 POSITION STATEMENT: Supported SB 206. ACTION NARRATIVE TAPE 93-1, SIDE A Number 001 CHAIRMAN TIM KELLY called the Labor and Commerce Committee meeting to order at 1:35 p.m. SENATOR KELLY returned SB 206 (RESIDENTIAL REAL PROPERTY TRANSFERS) to committee and distributed a proposed committee substitute for consideration. SENATOR KELLY directed his aide, JOSH FINK, to give an overview of the committee substitute. MR. FINK explained the Committee Substitute for SB 206 would remove real estate professionals from liability for "innocent misrepresentation" in real property transactions. He quoted the Alaska Supreme Court Ruling in 1982 in Bevins v. Ballard that brokers who make an "innocent misrepresentation" to a purchaser of real property are liable for the misrepresention, but SB 206 proposes this ruling puts an unjustified liability on real estate professionals. MR. FINK said SENATOR KELLY agreed with the dissenting opinion by JUSTICE CONNOR, which reads, "When a realtor acts as a mere conduit for passing on information supplied by the seller, he should be under no duty independently to verify that information unless he has reason to believe the information to be false. ... Allowing an innocent representation action against the broker in such circumstances is quite close to imposing strict liability. There is no reason to make the broker the 'insurer' of the seller's representations." MR. FINK quoted a Supreme Court ruling in 1984 in State of Alaska, Real Estate Commission v. Myrna Johnson and Eva Loken stating the Alaska Surety Fund does not cover innocent misrepresentation claims. This has made errors and omissions insurance for real estate professionals more expensive and difficult to obtain in Alaska. Additionally, he said the passage of HB 298 last year, requiring detailed written disclosures in residential real property transfers as of July 1st, have substantially increased brokers' liability risk. MR. FINK explained written disclosures provided by the seller to the broker, then forwarded by the broker to potential buyers, could place liability on the broker for any misrepresentation the seller makes. MR. FINK concluded the overview by explaining SB 206 would overturn the Court's decision in Bevins v. Ballard, and remove an agent's liability for innocent misrepresentations as it was prior to 1982. MR. FINK noted the change in the committee substitute with the addition of "transferor or" on line 6. Number 051 SENATOR KELLY said the Trial Attorneys had sent a fax opposing SB 206. Next, SENATOR KELLY turned to the teleconference network to invite DAVID SOMMERS in Fairbanks to testify. MR. SOMMERS introduced himself as the president of the Alaska Association of Realtors, went on record for the association as supporting SB 206, explained their position, and suggested a State Insurance Fund to cover problems caused innocently. SENATOR RIEGER, in reference to the cover page from the sponsor statement detailing written disclosures by the seller in a real estate transaction, asked how much of that law would remain in effect with the passage of SB 206. MR. SOMMERS said it would remove the liability for what they do not know. SENATOR RIEGER asked if the seller is required to fill out the disclosure and the broker is entitled to rely on that disclosure unless they have reason to believe something is wrong. MR. SOMMERS said he was correct and explained what would still be expected of a real estate agent in the State of Alaska. Number 093 SENATOR RIEGER expressed curiosity as to the "due diligence" requirement on a broker if SB 206 passes. MR. SOMMERS said it would include anything that could be ascertained by the agent in looking at the building, some mandatory paper work completed by the seller, and any general knowledge of the area. SENATOR RIEGER asked if the "due diligence" was codified any where, or just case law that has evolved over time. MR. SOMMERS believed it was case law, but he didn't have a legal answer. SENATOR SALO asked an additional question of MR. SOMMERS as to whether a "due diligence" included an engineer's report. MR. SOMMERS explained they wouldn't necessarily know if an engineer's report exists, unless it is disclosed; however, he said it was common to recommend such a report in any case. SENATOR KELLY then called on JOE RUSSO in Fairbanks. MR. RUSSO, the vice-president for the Greater Fairbanks Board of Realtors, said the bill was supported by the board. Next, SENATOR KELLY called on BILL ALLEN, also representing the Greater Fairbanks Board of Realtors, who referenced HB 298 from last year to protest the cost and the difficulty in obtaining insurance. He said he didn't think it was fair the State of Alaska requires the real estate community to be liable for the seller's representation, and he claimed his sales commissions did not justify such an exposure to liability. MR. ALLEN expressed frustration that Alaska is one of only three states where real estate professionals are made liable for misrepresentation. Last to speak from Fairbanks was KARL SCHROEDER, representing himself as a real estate licensee, who spoke in support of the legislation. He mentioned in AS 34.07 there was a disclosure statement that also contained a provision which could be waived because of the triple damages. MR. SCHROEDER explained, as a real estate licensee, he felt duty bound to disclose problems and suggest remedies he encountered in his profession. He thought the innocent representation provision increased the cost of doing real estate business. Number 169 Testimony in Fairbanks was concluded, and SENATOR KELLY turned to the Anchorage LIO to call on GREG ERKINS, Chairman of the Legislative Committee for the Alaska Association of Realtors. MR. ERKINS explained he would add to the testimony from the Fairbanks members protesting the members feel they are being held liable for information from experts such as surveyors, inspectors, heating and plumbing employees, appraisers, title companies, and environmental engineers. He said they were asking not to be held liable for information from these persons. Number 223 SENATOR KELLY explained that SENATOR PEARCE sponsored a bill that provided, as a form of protection to the public, a property disclosure form for each time a residential property was transferred or sold in the State of Alaska. As her bill went through the process, the innocent representation language was in the bill. At the request of the realtors, the language was removed from the bill, and SENATOR KELLY said only two other states require liability on behalf of real estate professionals in innocent representation cases. SENATOR KELLY asked for any other testimony from Anchorage, and MARK KORTING asked to speak. MR. KORTING spoke in favor of SB 206, stressing it was a question of fairness. He described the standards under which the realtors operate, and said there should be a test of these standards, but not for the innocent misrepresentation requirement. Number 265 SENATOR KELLY referred to the waiver position in testimony from MR. SCHROEDER and from MR. ALLEN in Fairbanks, saying there was a provision allowing both parties to agree to waive the property disclosure form. SENATOR KELLY was not in complete agreement with the waiver and questioned who would be liable -the seller or the real estate agent? SENATOR LINCOLN quoted a statement from a MR. GREEN, who asked how the public would know which statements from a licensed real estate professional could be relied upon. She wanted to know what questions the public should be asking of the realtor to get all of the information. She thought the waiver was a good idea, because it would force both parties to understand the status of the information, but she was still concerned about the protection of the public. SENATOR KELLY directed MR. FINK to read the fax from the Trial Attorneys, because it dealt with the questions from SENATOR LINCOLN. MR. FINK read the fax from HAROLD GREEN, representing the Trial Lawyers to say, "I am submitting this written testimony on SB 206, which as I understand it, will remove civil liability for innocent misrepresentation by a licensed real estate agent in Alaska, and thereby reverse Bevins v. Ballard, whether or not the process imbued in SB 206 involves real public policy judgement on the part of this Legislature. Let us assume that SB 206 were to become law, how will the public be notified if they can no longer rely on upon certain representations made by a licensed real estate professional? Must each real estate transaction contain conspicuous language such as 'WARNING - YOU SHOULD NOT RELY UPON STATEMENTS MADE BY YOUR LICENSED REAL ESTATE PROFESSIONALS IN ALASKA.' Or should the real estate professional be required to start a conversation with a new perspective client with such a notice? How will the public be notified if they can no longer rely upon statements by a licensed real estate professional? How will the public know which statements from a licensed real estate professional can be relied upon and which statements from a licensed real estate professional cannot be relied upon? Wouldn't it be cruel to pass SB 206 without concurrently passing expressed notice requirements that clearly tell the public they should no longer rely on statements of licensed real estate professionals in Alaska? Perhaps SB 206 will erode public confidence in our licensed real estate professionals. Does SB 206 truly benefit the real estate professional? Does SB 206 benefit the citizens of Alaska? By HAROLD GREEN, ESQ." SENATOR KELLY asked if anyone on the Teleconference Network wanted to answer the argument, and MARK KORTING from Anchorage asked to try. Number 318 MR. KORTING thought the real estate agents were already held to a standard of practice, knowledge, and liability, and the courts, in the past, have determined these standards. He didn't think this would change with the wording of the bill, and he thought the disclosure statement was different from the innocent misrepresentation statement. MR. KORTING referred to testimony from MR. ERKINS to prove his point. SENATOR KELLY wasn't sure he had answered SENATOR LINCOLN question and asked SENATOR RIEGER for his opinion. MR. RIEGER said he understood the bill would make the seller liable under either fraudulence, negligent, or innocent misrepresentation, but the broker would be liable only under fraudulence or negligence. He asked MR. KORTING if his surmise was correct? MR. KORTING was not clear in his understanding, and MR. RIEGER wondered what kind of things might occur where there is a liability on the seller but not on the broker. MR. KORTING did not think the court would hold the same level of responsibility against the seller that they would a real estate agent, since they are expected to know more. He thought what was being asked in the seller's disclosure form would be the "best of their knowledge," but not to the same standard as information from an engineer, attorney, or architect. Number 380 SENATOR LINCOLN asked if there was a seller disclosure form and an agent or broker disclosure form to be signed by the buyer. MR. KORTING thought the only disclosure form was the one filled out by the seller for prospective buyers. SENATOR RIEGER summarized the points in the legislation giving protections for the buyer, beginning with the seller filling out a disclosure form to the best of the seller's knowledge. The broker or agent would have a "due diligence" liability that is defined in case law for their investigations. He concluded by suggesting buyers could hire their own professional for additional information. MR. ERKINS asked SENATOR KELLY if he could answer some of the questions in MR. GREEN'S fax about to whom do we listen when we work with an agent. He referred to the Bevin's Case to "the right and duty of inspection," to explain the agents were not experts in the field, but if the buyer has concerns, then an appropriate expert should be consulted. He discussed the provisions of the waiver, treble damages, and earnest money, and he gave a personal example of problems involving a dead tree in "innocent misrepresentation." Number 445 SENATOR KELLY said a good example was the Bevin's Case with the hassle over the well, and he felt the duty of the real estate agent was to get the buyer and seller together. He turned to the MatSu Valley for anyone who wished to testify. RICK HUNTER, the immediate past president of the Alaska Association of Realtors and the present Legislative Chair, testified the "innocent misrepresentation" legislation was something needed to provide protection for false information from very reliable sources, and he gave an example of "square footage" irregularities of buildings in the valley. MR. HUNTER claimed the agents were merely conduits for information and thought all parties should check out anything that looked irregular. He refuted MR. GREEN'S question of cover-up and explained the agents were going to be as diligent and professional as possible with the public. SENATOR KELLY then called on FRANK MICHEL from the MatSu Valley, who testified as the past chairman of the Legislative Committee for the Alaska Association of Realtors. MR. MICHEL responded to the concerns posed by SENATOR LINCOLN and MR. GREEN, explaining there has to be a certain amount of integrity in the transaction by an agent, and he claimed there was no such thing as a perfect answer to every problem in a real estate transaction. He believed, after research in other states, that the problem was the lack of insurance on the part of some real estate agents and brokers. He said the waiver did not relieve any responsibility, but would increase the responsibility by the agents. MR. MICHEL said agents were not experts, but had the duty to pass on information from the experts to the buyer. SENATOR KELLY checked the teleconference network for anyone else wishing to testify in opposition to SB 206. There being none, he asked for the will of the committee. Number 499 SENATOR RIEGER moved to adopt the new Committee Substitute for SB 206 (RESIDENTIAL REAL PROPERTY TRANSFERS). Without objections, so ordered. SENATOR REIGER then moved to pass the Committee Substitute for SB 206 (RESIDENTIAL REAL PROPERTY TRANSFERS) from committee with individual recommendations. Without objections, so ordered. SENATOR KELLY noted SB 206 would be going to the Judiciary Committee where some of the questions would be examined again. There being no further business to come before the committee, the meeting was adjourned by SENATOR KELLY at 2:15 p.m.