Broker Has Duty to Disclose to Buyer that Proceeds of Sale May Not Be Sufficient to Pay Off Encumbrances


On October 6, 2010, the California Court of Appeal for the Fourth Appellate District, reversed the Superior Court of Orange County’s judgment in Holmes v. Summer. In Holmes, the Superior Court granted brokers’ motion to dismiss buyers’ lawsuit on the grounds that the brokers did not owe buyers a duty of disclosure.

In its decision, the Court of Appeal reversed the Superior Court and held that brokers do have a duty to disclose to a buyer that there was a “substantial risk” that the loans on the property could not be paid with the proceeds from the sale of the property, without the lenders agreeing to a lesser payoff or the seller paying off the remaining debt even though the broker does not represent the buyer.

In Holmes, the broker was a licensed real estate broker who represented a seller in the sale of a home in Huntington Beach, California. The buyers were a couple who sold their home to fund the purchase of the home at issue. Buyers were not represented by broker. At the time broker listed the property, the broker was aware that the property was encumbered by three deeds of trust totaling $1,141,000. To purchase the property, seller and buyers executed a standard California Association of Realtors form purchase agreement and counter offer.

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