Bazal v. Rhines: Restriction on Number of Dogs Was a Material Fact

A recent decision from the Court of Appeals of Iowa, Bazal v. Rhines, addressed issues of fiduciary duties and the duty of good faith. In this case, the Bazals (the "Sellers") owned a home in the Bowman Woods development in Iowa. In June 1995, they listed it for sale with Dick Brown who was affiliated with the Skogman Realty Company (the "Brokerage"). The Brokerage and affiliated companies had developed Bowman Woods, and it was the exclusive listing broker for all new homes in the development.

Paul and Karen Rhines were looking for a home in Bowman Woods that would meet their needs, which included space for their four dogs. Their buyer representative, Marilyn Palma, also was affiliated with the Brokerage. Palma told the Rhines she thought the Seller's home would meet their needs. The Rhines and the Sellers signed a Consensual Dual Agency Agreement since the Brokerage would be representing both of them in the transaction. In July 1995, the Rhines and the Sellers entered into a contract for the sale of the home, to close on September 30th. The Sellers were not informed of the Rhineses' need for space for their dogs. The Sellers committed to purchase another home.

On September 10th, the Rhineses' attorney prepared a title opinion, which disclosed a restrictive covenant on the property that limited dog ownership to one per dwelling unit (the "Dog Clause"). The attorney wrote to Ms. Palma, noted the Dog Clause and suggested that solutions, such as waivers, be considered to solve the problem. The Brokerage took no action on the dog matter and Palma repeatedly told the Rhines that the Dog Clause was not a problem. When no steps were taken to resolve the Rhineses' concerns about the Dog Clause, the closing did not take place.

The Sellers re-listed their home with the Brokerage. On Dick Brown's advice, and due to financial considerations, since they had purchased another home and now were paying two mortgages, they lowered the asking price. Partly because of the time of the year, the house was difficult to sell. Ultimately it sold in March 1996, for $10,000 less than what the Rhines had agreed to pay. The Sellers sued the Brokerage and Ms. Palma, and the lower court awarded the Sellers $19,933 in damages (resulting from the reduced sale price, additional property taxes and interest). The Brokerage and Palma appealed that decision.

On appeal to the Court of Appeals of Iowa, Ms. Palma claimed that she did not owe fiduciary duties to the Sellers to disclose the Dog Clause. Palma and the Brokerage also argued that they had no fiduciary duty to close the transaction. The court disagreed.

Quoting an earlier Iowa court decision, the Bazal court stated that "[r]eal estate brokers assume a fiduciary relationship with their principals which creates a duty of fidelity and good faith." It further observed that by virtue of various documents the parties had signed, including the Listing Agreement, the Agency Policy and Disclosure Form, and the Consensual Dual Agency Agreement, both the Brokerage and Palma owed the Sellers a duty of good faith and fiduciary duties, including the duty to discover reasonably discoverable material facts. The court also pointed to the National Association of REALTORS® Code of Ethics (to read about other decisions relying upon NAR's Code of Ethics, click here) , stating that it requires its members to disclose material facts to buyers and sellers. Under the facts of this case, the court found that the Rhineses' plan to bring four dogs to the property, and the existence of the Dog Clause, were material facts which, if known, should have been disclosed to all parties.

The court also stated that the Brokerage and Palma had a duty to use their best efforts to resolve any problems and to close the transaction. It found substantial evidence supporting the lower court's determination that they had not used their best efforts.

Palma and the Brokerage argued that even if the failure to disclose the "Dog Clause" was a breach, it was not the proximate cause of the Sellers' damages. However, there was evidence that the Sellers could have sold the house to other interested potential buyers if it had not been off the market for over two months. In addition, the failure to tell the Sellers about the Dog Clause prevented the Sellers from pursuing solutions to the issue themselves. The court upheld the lower court's decision, finding that the breaches of duties owed to the Sellers by the Brokerage and Palma were the proximate cause of the Sellers' damages.

Bazal v. Rhines, 600 N.W.2d 327 (Iowa Ct. App. 1999).

Notes: Article 2 of NAR's Code of Ethics states:

REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction. REALTORS® shall not, however, be obligated to discover latent defects in the property, to advise on matters outside the scope of their real estate license, or to disclose facts which are confidential under the scope of agency or non-agency relationships as defined by state law.

The events of the Bazal case appear to predate Iowa's statute addressing brokerage relationships with consumers ("agency" legislation); at least the court does not make any mention of such legislation.