Guide and Best Practices for an Alleged Misrepresentation or Failure to Disclose by the Seller or Listing Agent

QUESTION: I am the broker-in-charge of my firm. I have a lot of agents under me who ask whether their buyer is entitled to get their money back when they believe the seller or listing agent has made a misrepresentation or failed to disclose a material fact. What should I tell them?

ANSWER: By far, this is the most common question we get on the NC REALTORS® Legal Hotline. Some days, we are asked this exact question 15+ times, all by different agents. It is common to get the call from both sides of the same transaction. We always give the same answer, and to possibly make this a less common Hotline question, the following is a guide of best practices for these sorts of questions.

1.     Stay in your lane as a broker, and do not act as a lawyer.

Pursuing legal remedies and making legal arguments for a buyer based upon an alleged misrepresentation or failure to disclose is not real estate brokerage. As a buyer’s agent, you are entirely within your role as an agent to ask that your client’s money be returned or propose some kind of seller concession in exchange for the buyer’s continuing to closing. However, the seller is always entirely within their rights to decline any such request.

If the buyer and seller can work it out by consent, then there are standard forms to assist, such as Form 390-T (mutual termination with legal release), Form 4-T (contract amendment), and Form 310-T (repair agreement).

If the parties cannot work it out by consent, agents should recommend their clients seek legal counsel. Agents should avoid getting too far into activities like investigating alleged misrepresentations or disclosure failures, making accusations, making assumptions, holding up closings, refusing to send terminations, and sending monetary demands when there is no movement toward an agreement between the buyer and seller. These things are best left to a litigation attorney who has experience in real estate matters.

2.     On the Legal Hotline, we cannot give a definitive answer as to whether the buyer is entitled to a refund.

The buyer and seller both have the right to make whatever arguments they wish when it comes to denials or allegations of a misrepresentation or a failure to disclose. Some arguments are better than others, but we are rarely able to offer an opinion as to who is right.

This is true even for some scenarios where the contract may provide significant clarity. For example, let’s say a seller’s property is out of governmental compliance, the non-compliance was not disclosed prior to the offer, and the seller has declined to fix the issue prior to closing. This would appear to be a pretty clear situation where the buyer could ask that both the Earnest Money Deposit and Due Diligence Fee be returned to them under paragraph 8(h) of Form 2-T (Offer to Purchase and Contract).

However, even in the example above, the seller could decide not to return the money. The seller may or may not have a good reason. The strength of the seller’s reason is not important. The seller is entitled to make their own decision. And again, if the buyer and seller cannot work it out by consent, then legal counsel should be recommended.

3.     The listing agent and the seller have very different disclosure obligations, which substantially affects whether the buyer may be entitled to damages.

A material fact is any fact that could affect a reasonable person’s decision to buy, sell, or lease property. A material fact must be disclosed by a broker to the parties in the transaction and any interested third parties regardless of the broker’s agency role within the transaction. All brokers have a duty to discover and disclose material facts under N.C.G.S. § 93A-6(a)(1) and Rule 58A .0114(c) of the License Law. This is an affirmative duty, meaning a broker cannot simply claim they did not know about a material fact or rely on their client’s claims about the existence or non-existence of a material fact. All brokers, whether for a buyer or seller, must take action to discover and disclose.

A broker always has a duty to disclose material facts, but a seller does not always have that duty.

North Carolina is a buyer beware state, which means that a buyer has the duty to investigate the condition of a property prior to a purchase. However, this rule comes with an important caveat. A seller must disclose material facts when such facts are only known to the seller and not within the diligent attention, observation, and judgment of the buyer. In other words, if there is a material latent defect on the property only known to the seller, and the buyer cannot discover the defect through reasonable diligence, the seller has a mandatory and affirmative duty to disclose.

In most cases, the buyer’s claim to a refund would be best addressed to the seller, because the seller likely has possession of the Due Diligence Fee. However, what if the alleged misrepresentation or failure to disclose came from the listing agent? Does the seller have liability in that case? The answer will vary case-to-case, because it will depend on what the listing agent and the seller discussed. A seller may have several defenses to avoid liability because of what their agent has said on their behalf. What about the listing agent in this scenario? Do they have liability? Again, it depends on many factors, including what the listing agent knew or should have known.

Questions like the above are what court is for, because they must be answered by a judge or jury. They are not questions that can be easily answered by an agent, the parties, or by us here at the Legal Hotline without a full inquiry. Because of these unknowns and differing obligations of disclosure, we cannot give a definitive opinion about whether or who should pay or receive a refund of the money at issue in a transaction.

4.     What about the RPOADS? Does the seller have to disclose material facts in that document?

A seller’s duty to disclose material facts is separate and in addition to their obligation to complete the Residential Property and Owners’ Association Disclosure Statement (RPOADS). This means that the seller can choose to mark “no representation” in the RPOADS, as allowed by statute, but the seller still has a duty to disclose material latent defects not within discovery of the buyer by reasonable diligence as explained above.

If the seller checks “no representation” throughout the RPOADS, then they will need to disclose latent material defects another way. If a listing agent becomes aware of material facts that are not in the RPOADS, then the listing agent has a duty to disclose such facts even if the seller does not disclose them.

5.     Discipline and monetary damages are completely different things.

When the allegation of misrepresentation or a failure to disclose involves the listing agent, there is always the possibility that the listing agent (and listing firm) could be subject to discipline by the Commission or a local board of REALTORS®. However, discipline does not mean that the listing agent is automatically liable for monetary damages.

In order for a misrepresentation or a failure to disclose to be actionable against either a listing agent or a seller, a buyer will likely need to show that their reliance on the misrepresentation or failure to disclose was reasonable. A buyer may additionally need to prove that they were denied access to be able to investigate a property. This can sometimes create a high bar for a buyer to clear depending on the case.

The question of reasonableness is, obviously, one that can only be resolved in court when it comes to monetary damages. Discipline, on the other hand, may be imposed regardless of the reasonableness of the buyer’s reliance. In either event, it is common for buyer’s agents to believe that just because there has been a violation of the License Law or the Code of Ethics that their buyer may be entitled to a refund of monies from the transaction. This is not the case. Both the seller and a listing agent will have many defenses to raise should a monetary claim be made by the buyer.

6.     An alleged misrepresentation or a failure to disclose does not usually result in a breach of contract.

In most cases where there is an alleged misrepresentation or failure to disclose, the buyer claims, often through their agent, that had the buyer known the true condition of the property, then they would not have made the offer in the first place. This is not a breach of contract claim, because it does not point to a particular provision of the contract that the seller has breached or indicate a contractual condition the seller has failed to satisfy. Rather, the claim is one of fraud or negligent misrepresentation, which in the legal world we call “torts.”

Tort is defined as a wrongful act or an infringement of a right – other than under contract – leading to civil legal liability. The definition itself shows that these sorts of claims are not real estate brokerage. They are legal theories outside the realm of contract. To assert them effectively, as shown above, it often requires the assistance of legal counsel.

7.     In cases where there is $10,000 or less at issue, buyers may consider small claims court instead of hiring a lawyer.

Small claims court is designed to be used by laymen. If a buyer does not wish to seek legal counsel, even after being told to do so by their agent, then they may consider small claims court as an alternative. In these cases, agents still should limit their guidance, and only inform the buyer that forms are available at the clerk of court to pursue a small claims action.

In conclusion, finally, at long last, the answer to your question is, quite simply, do not be afraid to recommend that the brokers under you advise their buyers to seek legal counsel. If the buyer believes they are entitled to a refund of their money or other damages, then they may pursue that legal matter as they wish, even if they do not have a strong argument to do so. If the buyer does not wish to seek legal counsel, then that is their choice. It is not a buyer agent’s duty to become the buyer’s advocate just because the buyer does not wish to spend money on an attorney.

Similarly, if a seller wishes to deny a buyer’s claim, even if it is not for a good reason, then they may do so. Listing agents should also not hesitate to recommend that their clients seek legal counsel if a dispute cannot be resolved by consent.

We hope this guide stresses how complex these cases are, and accordingly why it is not a question that can often be answered by brokers or the Legal Hotline. We strongly encourage brokers recommend legal counsel for their clients more often in these situations.

Release Date: 2/13/2025

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