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A federal court has considered whether the Residential Lead-Based Hazard Act ("Act") requires a buyer's representative to ensure that a seller and its representative have complied with the Act's disclosure requirements.
Tonia Flowers ("Buyer") purchased an apartment building from George and Lenise Johnson ("Sellers"). The Sellers were represented in the transaction by ERA Unique Real Estate ("Broker") and the Buyer was represented by Eaglets Real Estate ("Buyer's Representative"). The Buyer's Representative was compensated by the Broker in connection with the sale of the property for procuring a buyer for the property. After the completion of the transaction, the Buyer discovered the presence of lead-based paint on the premises. The Buyer alleged that the Sellers had knowledge of the lead-based paint but failed to disclose it, and that none of the lead-based paint disclosures required by the Act had been provided to her. The Buyer allegedly spent large sums of money to abate the lead-based paint in the apartments and also claimed to have lost rental income. The Buyer filed a lawsuit against the Sellers, the Broker, and the Buyer's Representative for their failure to disclose the presence of lead-based paint on the property. Count VI of the complaint alleged that the Act required the Buyer's Representative to ensure that the Sellers and the Broker complied with the Act, and the Buyer's Representative failure to ensure such compliance made the Buyer's Representative liable for damages. The Buyer's Representative filed a motion to dismiss the allegations contained in Count VI.
The United States District Court, Northern District of Illinois, ruled in favor of the Buyer's Representative and dismissed the allegations contained in Count VI. The court held that the Act did not require a buyer's broker to make lead-based paint disclosures nor did it require the buyer's broker to assure that the seller comply with the Act's provisions.
The Act requires that sellers or lessors of property built before 1978 disclose all known information about lead-based paint and lead-based paint hazards within their premises. The Act also provides that any person who knowingly violates the Act is liable for triple damages. Congress directed the United States Department of Housing and Urban Development and the United States Environmental Protection Agency to jointly develop regulations ("Regulations") implementing the Act's provisions. In the Regulations, an agent is defined as "any party who enters into a contract with a seller or lessor, including any party who enters into a contract with a representative of the seller or lessor, for the purpose of selling or leasing" a property to which the Regulations apply. A duty to insure the seller or lessor's compliance with these disclosure requirements is also imposed on any representative hired to market the property by the seller or lessor, including both listing agents and selling agents (whether they are buyer's agents, subagents, or, it would appear, "facilitators" or transaction brokers), and excludes only representatives retained and compensated exclusively by the buyer.
Based on the Regulations, the Buyer argued that since the Buyer's Representative was paid a cooperative commission by the Broker, the Buyer's Representative was required to ensure the Sellers' compliance with the Act. The court noted that the language of the Act requires a seller to comply with the Act's provisions and also requires an agent, with whom the seller contracts for the purpose of selling the housing, to "ensure compliance with the requirements" of the Act. The court ruled that since the Act places a duty to ensure compliance on an agent retained by the seller, but not on a buyer's broker, the Buyer's Representative had no duty to ensure the Sellers complied with the Act's provisions. The court acknowledged that the Regulations impose such a duty on buyer's brokers who are compensated by the seller or the seller's agent, but the court stated it must reject "administrative constructions of the statute...that are inconsistent with the statutory mandate." Since the text of the Act imposes compliance assurance duties on seller's agents but not on buyer's representatives, the court rejected the broader duties imposed by the Regulations. Thus, the court dismissed the allegations contained in Count VI of the Buyer's lawsuit against the Buyer's Representative.
Flowers v. ERA Unique Real Estate, Inc., 170 F. Supp. 2d 840 (N.D. Ill. 2001).
Editor's Note: NAR Legal Affairs recommends that buyer's representatives should continue to comply with the Regulations as written until there is more substantial authority agreeing with this court's conclusions because this decision conflicts with the specific language of the Federal lead-based paint disclosure Regulations, which provide that buyer's representatives must comply unless they are compensated exclusively by the buyer. This single lower federal court holding to the contrary has limited precedential value until it is affirmed or appealed, or until other courts consider the issue and reach the same conclusion. Therefore, the Regulations should continue to be followed as written. To learn more about how to comply with the Regulations, click here.