By Jonathan A. Goodman

Buyer and seller are under contract. After the contract is formed and before the contract closes, the market value of the property increases dramatically. Before a due diligence contingency of the deal expires, the buyer seeks an extension of the contingency. Does a transaction-broker have a duty to disclose to the seller that the market value of the property has increased since that might affect the seller's willingness to grant the extension?

The 2001 federal court decision in the Sussman case answered the above question "no." This decision is perhaps the first published precedent helping us understand the duties of a transaction-broker.

Colorado will usher in the era of designated brokerage on January 1, 2003. Designated brokerage expressly eliminates dual agency. Though transaction-brokerage will be practiced less frequently, it will still be practiced in a variety of situations, including deals in which one licensee assists both a buyer and a seller.

In Sussman, the sellers contracted to sell a property for approximately $2.5 million. A portion of the property was water shares. The contract was formed in September of 1999 when the water had an approximate value of $14,000-$17,000 per share. It was scheduled to close five months later in February of 2000. The contract contained a contingency allowing the buyer to back out of the deal by December 3 if the buyer determined the property unsuitable for development. The buyer was a company in which the transaction-broker was a principal.

Before the deadline, the buyer asked the seller to extend the contingency by one week and the seller consented. At the time the buyer requested the extension, the value of the water had increased approximately 65% to approximately $28,000 per share. None of the brokers involved in the transaction, including the transaction-broker, disclosed to the seller the increased value of water. The seller did not learn of the water's appreciation until after granting the extension.

After closing and discovering the increase in the value of the water, the seller sued the transaction-broker (among others) alleging that Colorado law required the transaction-broker to disclose the rising value of the water. The seller argued that had the seller known of the rising value, the seller either would have demanded additional consideration for the contract extension, or would have rejected the extension.

The court dismissed the claims against the transaction-broker stating that the sellers "argue that [Colorado's brokerage relationship] statute requires the transaction-broker to advantage sellers over buyers. Such a role would require the broker to track rising property values, inform the sellers of those values, and advocate sellers modify their strategy accordingly." The court continued: "Such a duty would effectively remove the transaction-broker from his role as intermediary, and put him in the position of advocate for the seller. By statute, such advocacy is reserved for the seller's agent, . . ."

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This publication is intended to provide accurate and authoritative information on the subject matter covered. It is distributed with the understanding that the publisher and distributor are not rendering legal, accounting or other professional service, and assume no liability in connection with its use. Copyright © 2002.

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By Oliver E. Frascona

At her buyer clients' request, Joan went to the inspection. "She was our agent, and we thought she should be there," the buyers would later testify.

Occasionally, just to make sure the inspection was done properly, Joan would point something out that she felt the buyer or inspector had missed. The buyers were grateful.

After the inspection, the buyers, the inspector, and Joan discussed what had been discovered. An amendment to the contract was prepared and executed, setting out what the buyers wanted the seller to accomplish as a condition of the purchase. Joan made sure the amendment didn't say, "buyers request that seller . . ." and instead said, "seller shall, on or before ______, obtain a building permit, use licensed contractors, and make the following repairs up to code." Joan knew to have the inspector do the second inspection, but she went along to make sure it was done properly.

Three weeks after closing, Joan got a call from the buyers. In a heavy storm, water had come in through a gap between the fireplace and the wall and had ruined the carpet and the flooring beneath it.

When the seller and the inspector refused to pay, the buyers asked Joan to cover the cost. Joan explained that she wasn't inspector, and didn't "guarantee" the house.

The lawsuit named three defendants: Joan, her broker, and the inspector. The claim against the inspector was dismissed immediately, as his contract limited his liability to $300 and he gladly paid it.

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Joseph Adams Cope

Mr. Cope received his Juris Doctor from the University of Colorado, in 1976. His practice emphasizes Water Law, Litigation, Aviation, Real Estate, and Equine Law.

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Joyce M. Bergmann

Ms. Bergmann received her Juris Doctor from the University of Denver, in 1987. Her practice emphasizes Real Estate, Civil Litigation, Appeals, and Association Law.

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