E&O Risk Manager: Buyer Sues Broker and Sellers

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A Real-Life Situation on the Importance of Understanding Megan’s Law in Your State

Situation

A real estate broker entered into a new listing agreement with a seller of residential property. The home was located in a beautiful neighborhood with excellent schools and access to the commuter rail. Although it was well maintained and favorably priced, this property had been on and off the market for several years.

Problem

While discussing the possible reasons why the property has had trouble selling, the seller theorized that it was a result of living next door to a registered sex offender.

Mistake

Real estate brokers and agents in every state are required to disclose known material adverse conditions to potential buyers when selling property. In most states, a material adverse condition can include facts about the surrounding neighborhood. In this particular transaction, the broker believed that disclosure wasn’t required unless a potential buyer made an actual inquiry about the presence of sex offenders.

Result

The home was eventually sold. The buyers, however, did not learn of the neighbor’s status until shortly after the closing, when they received written notice from the police department. This written notice is consistent with the federal “Megan’s Law,” authorizing local law enforcement agencies to release information about convicted sex offenders. (Congress enacted a federal version of New Jersey’s Megan’s Law in 1996 as an additional section of the federal Violent Crime Control and Law Enforcement Act of 1994.)

The buyers sued the seller and real estate broker, alleging failure to disclose and intentional misrepresentation, while claiming diminution of property value. In turn, the seller filed a cross-claim seeking indemnification from the broker, alleging negligent advice in recommending non-disclosure. The lawsuit was settled after the court ruled on a dispositive motion that the presence of a sex offender was a material adverse condition, and that the broker had a responsibility, but failed to obey state disclosure laws.

Prevention

Brokers and agents should be familiar with the Megan’s Law enacted in their state. If a potential buyer asks about the presence of a sex offender in the neighborhood, and the agent is unsure, they should refer the buyer to the local agency that maintains the control registry of offenders. On the other hand, if an agent has actual knowledge that a sex offender is in proximity to the subject property, they should disclose that fact and specifically cite their source of information.

The recommendations in this article may differ from state and local practices. Greenwich Insurance Company and Indian Harbor Insurance Company Coverage is not available in all jurisdictions.

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