Notorious R.O.B.

Had a most interesting discussion with a REALTOR friend last night over dinner about professional ethics, and came across an interesting question. We didn’t know the answer, so I figured I’d blog about it and ask you all.

The question is whether a REALTOR has a duty to disclose bad acts by a client, or more importantly, by an ex-client, if she knows that what the client is planning on doing is (a) illegal, (b) unethical, and/or (c) fraudulent.

Scenarios

For example, let’s say that a REALTOR takes a listing and starts walking through it with the client. She notices obvious structural problems — say a cracked foundation or something like that. She mentions it to the client, and the client instructs her to say nothing about it, that he plans on covering up the problem, and tells the REALTOR more or less in straightforward terms that he plans on committing fraud.

Our REALTOR immediately tells the client that what he’s planning on doing is illegal, unethical, and advises him not to do so. The client responds by firing the REALTOR: “If you’re not going to help me and work for my interests, then I can’t trust you.”

Does our REALTOR have any responsibility to tell someone that this house has a major structural defect, and that the seller is planning on defrauding the buyer as to the defect?

Keep in mind that she is no longer the REALTOR on the deal. She’s been fired. The client has gone and found another REALTOR who is ostensibly more flexible as it comes to morals and ethics.

My REALTOR friend thought that she had no duty to disclose, because she is no longer party to the contract. Can that be right?

Further Scenarios and Questions

Same situation as above, but our REALTOR heroine believes that the new listing agent who has come in after her does not know about the major defect, because the client has already covered it up. Does she have either a legal obligation or an ethical responsibility under the Code of Ethics to inform the new listing agent?

Suppose that a buyer enters into contract on this house. The buyer is represented by one of the agents in our REALTOR heroine’s brokerage. So legally, the buyer client is represented by the same broker. Does our friend have either (a) the responsibility to tell her broker/the buyer’s agent in her same office, or (b) the right to tell her broker/buyer’s agent? If the buyer is represented by another brokerage, can the REALTOR call the buyer’s agent to inform her of the problem with the property? Is she obligated to do so?

Suppose that the new listing agent is in the same office/brokerage. In conversation with the new listing agent, our heroine learns that he knows about the problem, and is willing to go along with the client’s plan to cover it up and commit fraud. Does our heroine have (a) duty to report the listing agent to the Association or to the State Board; or (b) a duty to report the agent to her broker; or (c) if no obligation to report, does she have the right to report him to either the authorities or to her broker?

What about issues and problems not related to the property at all? For example, in walking through the listing, the REALTOR notices a large stash of drugs, assault weapons, and cash suggesting that the client is a major drug dealer. This has nothing to do with the property, of course, but is clearly an illegal activity. Does she have an obligation to report the client to the authorities?

Matter of Degrees

However you answer the above hypotheticals, any duty or right to divulge client information learned in the course of professional representation will be fraught with judgment calls. A situation where the client is explicitly planning on committing fraud might be an easy call. One can imagine a range of more difficult choices.

Something minor — like say, a window that gets stuck often — is probably not going to warrant any duty to disclose or major ethical issues. But one can easily imagine a host of situations between stuck window and cracked foundation. With so many grey areas, one can imagine a host of ethical dilemmas arising from the client’s understandable desire to maximize the value of his property and the REALTOR’s duty to work for the client’s best interests, counterbalanced by some sort of duty to the public.

Is there any guidance out there, either at the state regulatory level, or at the Association level, as to how REALTORS should conduct themselves in such ethical situations?

I’m asking these hypotheticals because I don’t know the answer. My friend and I spent a pleasant hour or so over wine and Thai food discussing these dilemmas, and didn’t come to many conclusions.

So what do you say? Obligations? Rights to disclose?

-rsh

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