What is a material fact in real estate? Well, it turns out that the answer is complex. In this article, I’ll attempt to provide an answer and provide some guidance as to the best ways to disclose material facts.
A May 2021 State Administrative Tribunal decision has highlighted the importance of real estate agents disclosing material facts prior to the buyer executing a purchase contract. In this case, the purchaser entered into a contract for a block of land in one of Perth’s northern suburbs. Between making the offer and the seller accepting, the buyer was provided with a copy of the title search, a copy of the deposited plan, and a copy of a Landgate notification indicating the property was in a bushfire-prone area.
Prior to settlement, the buyer was contacted by her builder advising her that they had identified two sewer lines running through the property.
Notably, the title search made no mention of any form of encumbrance relating to the existence of a sewer line.
The agent did not provide the purchaser with a sewer plan or a Landgate Property Interest Report.
The Commissioner for Consumer Protection alleged that the agent failed to “verify all facts material to the transaction, namely with regard to the Sewer Line issue…” and, as a result, they “failed to exercise due care, diligence, and skill contrary to Rule 6 of the Code.”
The agent accepted that they “should have conducted more appropriate searches before the sale of the property” but were nonetheless fined a total of $9,000 and ordered to pay $500 in costs.
What must be disclosed in a real estate transaction?
Rule 24 of The Real Estate and Business Agents and Sales Representatives Code of Conduct 2016 (the Code) imposes a positive obligation on Western Australian real estate agents, including sales representatives and property managers, to “…make all reasonable efforts to ascertain or verify all facts material to a transaction.”
It’s worth noting here the term “reasonable efforts”, which means something different for every agent. The question then turns to what the Commissioner considers reasonable, and this is something that becomes clear from the many bulletins published by DMIRS in relation to this subject.
When must disclosure of material facts be made?
The disclosure of material facts must take place prior to the client executing a contract for the sale or lease of land. DMIRS recommends disclosing non-sensitive material facts such as the land area and zoning as part of the agent’s marketing. However, sensitive matters–a death or suicide, for example–would be best disclosed only to buyers or tenants seriously considering entering into a contract.
To whom must disclosure be made?
The Code Rule 24(2) requires the agent to disclose a material fact “to any person who may be affected by the material fact and appears to be unaware of it.” Obviously, the disclosure must be made to intending buyers or tenants but it could conceivably be required to be made to a property owner who was unaware of a material fact.
Why is disclosure required?
The requirement to disclose material facts is designed to support an intending purchaser or tenant to make a fully informed decision in respect of a property transaction.
The ethics of disclosure in the context of real estate transactions were highlighted in the Gonzales case, where the agent failed to disclose a triple homicide in a Sydney property offered for sale. The case led to a review of real estate legislation in NSW.
Disclosing material facts in a frank and transparent manner reduces the risk of damage to an agent’s reputation, increases transactional transparency, and provides buyers with a greater degree of confidence through reduced risk.
What is a material fact in real estate?
The term “material fact” is not defined in the Code. The Consumer Protection Division of the Department of Commerce in WA (now DMIRS) state that a material fact “could include what would be important to a reasonable person in deciding whether or not to proceed with a particular transaction. These are facts that are generally related to issues of market value and a person’s decision on purchasing a property.”
According to the Consumer Affairs Victoria Material Facts Guidelines, material facts fall into two categories:
- Generally: a fact that an average, reasonably informed purchaser with a fair-minded understanding of the property market, including the role of an estate agent, would generally regard as material in their decision to buy land…
- Specifically: if a fact about land is known by the vendor (or the vendor’s agent, including an estate agent) to be important to a specific purchaser, it can be material, even if other agents and consumers would not generally consider that fact to be important or of significance to them. This knowledge could arise if (for example) a particular purchaser:
- asks a specific question about the land of the vendor or the vendor’s agent (including their estate agent), and/or
- where a purchaser informs the vendor/agent of their intended use of the land.
How to disclose a material fact
There are a number of means by which material facts can be disclosed but it is important that the disclosure is made before the execution of the contract by the buyer.
Methods of the disclosure include:
- Physical inspection where the item to be disclosed is clearly visible
- In writing
- As an attachment to the contract
- In a seller’s disclosure statement provided to the buyer
- As part of the auctioneers pre-amble prior to a public auction.
What types of facts are generally considered material?
The following list includes items that are generally considered as material to a real estate transaction. This list is by no means exhaustive and agents should make their own inquiry as to what is the material with respect to individual property transactions.
|
Material Fact |
Method of ascertaining facts, mitigating risk |
|
Sewer line location |
Dial Before You Dig Plan |
|
Possible road widening |
WAPC Clause 42 |
|
Stigmatised property e.g. murder, suicide |
Owner disclosure, local knowledge |
|
Use of premises for manufacture of illicit drugs |
Owner disclosure, drug residue test |
|
Fence or other encroachments |
Owner disclosure, measurement |
|
Restrictions noted on the title |
Title, encumbrance, and notification searches |
|
Unapproved buildings and structures |
Council inquiries, owner disclosure |
|
Proposed developments affecting the amenity of the property |
Council inquiries, owner disclosure, local knowledge |
|
Structural defect, termite infestation |
Owner disclosure, structural/timber pest inspection |
|
Combustible cladding, asbestos, contamination |
Owner disclosure, building inspection |
|
Flood or bushfire prone property |
Landgate PIR, title/notification search |
|
Mosquito infestation |
Landgate PIR |
Conclusion
The case mentioned at the start provides a timely reminder to agents of their obligations to use reasonable efforts to ascertain, verify and disclose material facts with respect to real estate transactions in which they are involved. Doing so makes sound commercial sense as it serves to protect both the buyer and the agent’s reputation.
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