Illinois Real Estate Broker Liability: Developments Over the Past Decade
The author reviews caselaw over the past ten years expanding and defining the scope of real estate brokers’ liability to purchasers in Illinois.
By Daniel R. Hofstetter
Up until the mid-1970s, aggrieved real estate purchasers could pursue only the seller, and they could generally sue only for fraud or misrepresentation. When a purchaser sued a broker, the broker was usually the “listing agent” of the seller (i.e., a broker hired by the seller to sell the property). In such cased, the courts usually held that the broker was the seller’s fiduciary and owed no independent duties to the purchaser; any acts of fraud or misrepresentation by the broker were imputed to the seller. Furthermore, purchasers were often denied relief for failing to properly inspect the real estate in question.
Much has changed in the last fifteen years, and particularly during the last decade. The Illinois courts and legislature have expanded liability of the broker to the purchaser by creating causes of action in statutory law under the Illinois Consumer Fraud and Deceptive Business Practices (Act1), tort law (under common law fraud and misrepresentation theories), and agency law. This article will review the growth – and in some cases, the subsequent restriction – of broker liability in the recent past.
II. Statutory Causes of Action
In 1982, Illinois courts accepted two statutory theories of liability of real estate brokers to purchasers based upon two legislative acts, the Illinois Consumer Fraud and Deceptive Business Practice Act (“the Act”) and the Illinois Real Estate Brokers and Salesman License Act.2 Effective January 1, 1986, the Illinois legislature restricted broker liability by eliminating a private cause of action previously established under the Illinois Real Estate Brokers and Salesmen License Act3 by the Illinois Supreme Court in Sawyer Realty Group, Inc. v Jarvis Corporation,4 leaving only one statutory cause of action.
A. The Consumer Fraud Act and the “Knowing Falsity” Requirement
In the 1980 case of Beard v Gress,5 the court found an implied private cause of action in the Consumer Fraud Act for real estate purchasers against brokers. The Act was later amended to expressly provide a private cause of action for damaged real estate purchasers. Section 1(f) of the Act now states as follows:
The terms ‘trade’ and ‘commerce’ mean the advertising, offering for sale, sale, or distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value wherever situated, and shall include any trade or commerce directly or indirectly affecting the people of this state.”6
Section two of the Act defines prohibited methods of competition and deceptive acts or practices:
Unfair methods of competition and unfair or deceptive acts or practices, including but not limited to the use or employment of any deception, fraud, false pretense, false promise, misrepresentation or the concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression or omission of such material fact, or the use or employment of any practice described in Section 2 of the ‘Uniform Deceptive Trade Practices Act’, approved August 5, 1965,7 in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby. In construing this section consideration shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to Section 5(a) of the Federal Trade Commission Act.8
Finally, Section 2 of the Uniform Deceptive Trade Practices Act states as follows:
A person engages in a deceptive trade practice when, in the course of his business, vocation or occupation, he … (12) engages in any other conduct which similarly creates a likelihood of confusion or of misunderstanding.9
Since earlier courts were holding brokers liable for certain practices or acts regardless of their intent or knowledge about the deceptiveness of their representations,10 the false, misleading, or deceptive character of such information before liability can attach:
(4) [nothing in this Act shall apply to] the communication of any false, misleading, or deceptive information provided by the seller of real estate located in Illinois, by a real estate salesman or broker licensed under The Real Estate Brokers License Act, unless the salesman or broker knows of the false, misleading or deceptive character of such information. This provision shall be effective as to any communication, whenever occurring.11
Beard v Gress12 greatly expanded liability of a real estate broker under the Act, since a purchaser’s reliance upon the alleged misrepresentation was not required as in traditional cases of fraud and misrepresentations, (though proving reliance undoubtedly strengthens the plaintiff’s overall position). In addition, attorney’s fees and costs are specifically permitted under the Act.13 Punitive damages have also been awarded to purchasers against brokers under the Act14.
B. “Acts” and “Practices” Leading to Broker Liability to Broker Liability Under the Act
Throughout the 1980s, the majority of Illinois courts have either ruled that brokers are liable to purchasers under the Act or, at the least, that purchasers have stated a cause of action sufficient to justify trial. These cases have attributed broker liability to a variety of broker acts and practices. The following cases discuss these “acts” and “practices” and appear in chronological order, beginning with 1980.
In Beard v. Gress,15 purchasers stated a cause of action against brokers who innocently misrepresented the interest rate of a loan secured by a mortgage encumbering the realty that was assumed by the purchasers. Note that the Act’s subsequent requirement of a broker’s “knowledge” of the falsity of the statements would most likely preclude recovery today.
In the Buzzard v Bolger16 the second district court held that brokers engaged in deceptive practices when they incorrectly informed prospective purchasers that 1) the sellers would be required to repair any substantial material defects because the purchasers were applying for Veteran’s Administration financing 2) the purchasers would not be required to purchase the realty unless the Veteran’s Administration approved an appraisal, and 3) the purchasers would not need an attorney. The court held that these misstatements amounted to conduct that created a likelihood of confusion or of misunderstanding. Once again, however, the facts giving rise to the cause of action occurred before the enactment of the mental state requirement, which might have precluded recovery today.
In Salisbury v Chapman,17 the purchasers brought an action against the partners of a real estate broker who failed to pay off pre-existing mortgages on the purchased property and absconded. Since the purchasers stated a cause of action based on vicarious liability of the partners, and since the absconding partner committed a deceptive act or practice as defined by the Act, the court held that the purchasers sufficiently pleaded a cause of action against the partners. Therefore, it held that liability established under the Act could be imputed to others under a vicarious liability theory.
In Warren v LeMay18 purchasers successfully sued a broker who failed to forward the second page of a termite inspection report to the purchasers’ lender, which would have disclosed extensive termite activity. The court took the totality of the circumstances into consideration in order to find the broker guilty of a deceptive practice; the broker was aware that the purchasers would not be able to obtain their financing in order to purchase the realty if their lender discovered substantial termite infestation, which would negate the broker’s commission. In addition, the damage was so extensive that the purchasers were forced to abandon the premises. The court assessed $25,000 in punitive damages against the broker, along with attorney’s fees of $17,464.50, and costs of $335.42.
In Zimmerman v Northfield Real Estate, Inc.,19 purchasers brought an action against a broker for misrepresenting the lot size of the realty purchased and for numerous structural defects. The court ruled that since the purchasers alleged facts sufficient to state a cause of action for fraud, they also could sustain an action under the Illinois Consumer Fraud and Deceptive Business Practices Act. Because of this decision, a purchaser who can maintain a cause of action against a broker for fraud should also allege a violation under the Consumer Fraud Act and plead additional damage.
In Riley v Fair and Company Realtors,20 purchasers successfully sued a broker under the Act for failing to disclose that the realty was located in a known flood plain. In appeal, the court supported the underlying judgment, but reversed the trial court’s award of punitive damages. The court reasoned that since liability was predicated on the acts of the broker’s sales agent, and that the broker’s liability was purely vicarious, there was insufficient evidence to justify an award of punitive damages directly against the broker without additional aggravating circumstances.
In Stefani v Baird & Warner, Inc.,21 the court held that a cause of action was sufficiently pleaded in the complaint of two purchasers for breach of fiduciary duty. In this case, the broker was specifically retained by the purchasers to find a house for them. The broker found a house and submitted a bid on the purchasers’ behalf without informing them of another interested buyer. The other buyer outbid the plaintiffs, but only after the original listing agreement with another broker lapsed and the broker defendant had obtained the listing, thereby earning twice the commission he would have otherwise.
Stefani is the only appellate case where a cause of action under the Act was maintained without alleging fraud or misrepresentation. Accordingly, breach of a fiduciary duty can constitute a deceptive act or practice for purposes of the Act.
C. Courts Denying Liability Under the Consumer Fraud Act
Three courts since the Beard v Gress case have denied liability of real estate brokers under the Act. The first court, in Munjal v Baird and Warner, Inc.,22 ruled that the purchasers failed to state a cause of action against a broker who represented that water in the basement of the home was caused by a faulty check valve, not flooding. The court noted that the broker apparently believed the home to be free from flood problems at the time of the misrepresentation and that the purchasers observed flooding on the day before closing. During the final inspection, the broker agreed that there were flooding problems and that the purchasers should contact their attorney. These subsequent actions were held to relieve the broker from any liability he might otherwise have had. Therefore, even if a misrepresentation was made before closing, brokers apparently can relieve themselves of liability by fully correcting the earlier misrepresentation before closing.
The second case under the Act holding in favor of the broker defendant is Fisher v G & S Builders23 In this case, the court held that the broker’s incorrect statement that an odor the purchasers smelled probably came from a large pile of laundry (it was actually sewer gas) did not constitute a deceptive act or practice. The court also noted that the broker offered to take the purchasers back to the property as often as they wanted prior to closing, but they refused. In addition, little evidence was offered to link the odor first smelled with the odor in the home after the purchasers moved in.
In another termite damage case, the appellate court in Harkala v Wildwood Realty, Inc.24 recently shortened the line of broker liability by denying recovery to buyers who discovered that their home was termite infested. The court noted that there was no evidence that the broker knew or had reason to know of the termite infestation in light of the seller’s efforts to conceal the problem. The court apparently felt it unfair to require brokers to conduct an independent inspection of each home to discover any latent defects, especially when the sellers had taken great care to conceal the damage by cosmetic construction.
It was also noted that the broker would have had to tear apart walls to assess the level of damage. The court found such an inspection to be beyond the scope of the broker’s duty. However, if evidence were produced to show that the broker knew or should have known of the condition of the property prior to purchase, the broker would have been required to inform prospective purchasers of that condition.
III. Common Law Fraud and Misrepresentation
Over the past decade, Illinois courts have favored the plaintiffs in most reported cases brought by purchasers against brokers based on fraud and misrepresentation. As the following examination of the cases indicates, real estate brokers owe a duty of good faith in their dealings with purchasers.25
Although the Illinois courts are entertaining separate actions by aggrieved real estate purchasers against brokers based on fraud and misrepresentation, many are pleaded in actions based primarily on the Act. But whether a purchaser’s action is based on statute or common law, the courts ask essentially the same questions: Was the statement or omission false or misleading? Did the broker intend the purchaser to rely on the statement or omission? Did the brokers rely on the statement or did the omission materially affect the decision to purchase? Was the purchaser injured by his or her reliance?
A. Courts Finding for Purchasers on Fraud Theory
In Oltmer v Zamora,26 purchasers appealed an adverse ruling in their action against a broker whose agent failed to disclose that the house they bought sloped more than one foot. In reversing the trial court’s decision, the appellate court noted that the agent 1) was aware of the sloping but failed to disclose it to the purchasers, 2) was related to the sellers, 3) discouraged the purchasers from buying other property, and 4) told the purchasers that the seller recently built the house himself and was a “very reputable” builder in the area. In addition, the court found all elements necessary to establish negligent misrepresentation (i.e., the misrepresentations were material, untrue, known by the agent to be untrue, known by the agent to be untrue, relied upon by the purchasers, made for the purpose of inducing reliance, and that reliance caused the purchasers’ injury).
In the later case of Duhl v Nash Realty,27 the appellate court reversed the dismissal of a complaint based on fraud and misrepresentation for failure to state a cause of action. In this case, the purchaser relied upon the statement of a broker and his agent that their present home could be sold quickly for at least $185,000. The plaintiff then listed the home with the broker and purchased another home through the same broker, informing him beforehand that he (the purchaser) would need to sell the home to finance the purchase.
The purchaser was unable to quickly sell the home, and thus had to make mortgage payments on two homes. The court ruled that these circumstances stated a cause of action sufficient to survive a motion to dismiss, and that the underlying facts should be reserved for ruling by the trier of fact.
In Salisbury v Chapman Realty,28 discussed above, the purchasers sued the partners of a real estate broker because the actual broker, who was also the owner, had failed to pay off existing mortgages on the property and absconded with the sale proceeds. The trial court granted the defendant-partners’ motion to dismiss on the question of fraud.
The appellate court reversed, holding that the purchasers’ allegations of nondisclosure of existing mortgages and a false promise to convey good title to the property at a future date satisfied the elements necessary to establish a cause of action for fraud. The appellate court also rejected the defendants’ argument that the indication of the mortgages in the public record constituted notice, relieving the defendants of their obligation to notify the purchasers.
Although the actual broker, not the partners, had committed the fraudulent acts, and the partners ran a brokerage business that generally did not sell its own property, the court held that vicarious liability should attach to the partners under the Illinois Partnership Act, since the purchasers had good reason to believe that their transaction was being conducted through the regular course of the partnership’s business. Therefore, the appellate court expanded liability of a broker to the broker’s partners, even though the underlying transaction was the private sale of that wrongdoer’s own property.
In Chapman v Hosek,29 the Illinois Appellate Court reversed the summary judgment in favor of both listing and selling brokers. The purchasers’ allegation of fraud was based on the broker’s failure to disclose that the property had flooded in the past. The court found that the alleged fraud was material and that the existence of fraud should be decided by the trier of fact. As in Salisbury, the appellate court found that the presence of information on the public records (in the form of commission reports and maps about flooding in the area) was as a matter of law insufficient notice to the purchasers to relieve the brokers of their duty to disclose.
In Swaw v Ortello,30 the appellate court reversed the trial court’s dismissal of the purchasers fraud count against brokers who failed to disclose structural defects in the house that the purchasers ultimately bought. It was apparent that the broker knew of the defects and misrepresented the condition of the property to the purchaser.
In Richmond v Blair31 a purchaser was held to state a cause of action against a broker who claimed that basement water seepage had been corrected. The appellate court reversed the trial courts’ dismissal of purchaser’s third amended complaint, and left the question of liability to the trier of fact.
In Riley v Fair & Company Realtors32 the appellate court affirmed a jury’s an action against brokers who failed to inform the purchasers that the property was susceptible to flooding. After the purchasers were driven three times from their home by flooding, they filed suit for misrepresentation, seeking compensation and punitive damages. Curiously, the appellate court’s award of $25,000 in punitive damages, finding a lack of aggravating circumstances to justify the award.
In the more recent case of Zimmerman v Northfield Real Estate, Inc.,33 the appellate court reversed the trial court’s dismissal of the purchaser’s fraud counts against real estate brokers. The fraud allegations stated that the brokers had intentionally concealed or made false statements about the lot size the realty, and that they knew the bathtubs and plumbing drain tile system did not work properly, the basement leaked, the south and east walls were badly deteriorated by moisture, the living room wall had a large hole in it, and the basement had suffered massive flooding. The court had improperly dismissed these allegations, since they were questions of fact and sufficient to survive a motion to strike or dismiss.
B. Courts finding for Brokers
Only two recent decisions by the Illinois Appellate Court – The Munjal34 and Fischer35 cases discussed above – have found brokers free from liability for fraud in actions brought by purchasers. In Munjal, the court found for the broker on the fraud count for the same reason it found for him under the Consumer Fraud Act: the broker had informed the purchasers of the defect (periodic flooding) prior to closing.
Similarly, the appellate court in Fisher upheld the directed verdict in favor of the broker-defendant for the same reason on both fraud and Consumer Fraud Act counts: there was insufficient evidence that the odor originally identified by the broker as dirty laundry was the same one later attributed to sewer gas.
Agency is the weakest and least used theory of purchasers against real estate brokers. To recover under this theory, the purchaser must establish a written or oral agreement between broker under which the broker specifically agreed to locate a parcel of realty on behalf of the purchaser. This theory is used infrequently since both listing and selling brokers usually work for the seller on commission and rarely look for property under a specific agreement with the purchaser.
Of three recent cases dealing with the agency theory, only two have held that the facts supported a cause of action for breach of a fiduciary duty of the broker to the purchaser. In Stefani v. Baird & Warner Inc.,36 discussed above, the appellate court reversed the trial court’s dismissal of the purchasers’ count for breach of fiduciary duty under a principal-agent relationship.
In Stefani, the purchasers contacted a salesperson of a local real estate brokerage office to assist them in locating a suitable home. A home listed by another was located, and an offer was made through the salesperson to the listing broker. Simultaneously, a competing offer was made through the brokerage office that employed the salesperson assisting the purchasers. The salesperson was aware of this competing offer, but did not inform the purchasers.
When the second offer was accepted by the sellers, the purchasers sued the brokerage office employing the salesperson representing them for breach of fiduciary duty for failing to disclose that a competing offer had been submitted. The brokerage office argued that it was not an agent of the purchasers but was a subagent of the listing brokerage office, since both brokerage offices would earn a commission by the seller in the event of a sale, and therefore it owed a fiduciary duty only to the seller.
The court held that although a real estate broker generally cannot be the agent of both buyer and seller, the law excepts cases where a broker’s dual agency is disclosed to both parties and the broker acts with the consent of each. In addition, the court observed that though a real estate broker is generally viewed as the seller’s agent, Illinois courts have held that if a buyer requests a broker’s assistance in obtaining a particular piece of property, the broker may be considered the buyer’s agent for that transaction, even though the broker is paid nothing by the buyer and will receive a fee from the seller. Therefore, the appellate court ruled that the complaint in the Stefani case pleaded facts sufficient to establish an agency relationship between the purchasers and brokers.
In Conant v Karris,37 a principal agent relationship was also found. In reversing relationship was also found. In reversing the trial court’s dismissal, the appellate court noted that the purchaser conveyed confidential information to the defendant-broker when he submitted his initial offer of $1.5 million. The broker’s communication of that information to his brother , the brother’s offer of $1.6 million, and the seller’s acceptance of that offer were sufficient to state a cause of action. The court found that a principal-agent relationship existed, established pursuant to an oral agreement by the broker to locate a particular piece of property, and that a breach of that relationship occurred when the broker communicated the confidential information to an adverse party who used it to make a competing offer.
There has only been once recent case denying liability based on the breach of a principal – agent relationship. The appellate court in Buzzard v Bolger38 affirmed the dismissal of the purchasers' count relating to the breach of a fiduciary relationship. The court reasoned that since the seller was paying the commission to both brokers in the transaction, and nothing to the purchasers, there clearly was no principal – agent relationship. However, it should be noted that the appellate court made a point of indicating the confused manner in which the purchaser’s complaint was pleaded, calling it a “hodge podge of allegations,” which may explain the court’s hostility to the fiduciary breach allegation.
Although the Illinois legislature has restricted an aggrieved purchaser’s cause of action against a real estate broker under the ConsumerFraud Act by requiring broker “knowledge,” the courts are still eager to frame most alleged misrepresentation as a deceptive “act” or “practice” for purposes of establishing liability. In addition, Illinois courts have honored well-pleaded complaints alleging fraud and misrepresentation in the majority of cases. Illinois courts have also accepted agency theories of liability pursued by purchasers against brokers, even though such brokers were being paid by the seller.
The message from the courts is this: Brokers should investigate claims by sellers about the condition of property and deal candidly with prospective purchasers is they wish to avoid liability.
1. III Rev Stat ch 121 ½ 262 et seq (1989).
2. III Rev Stat ch 111, 5701 et seq (1982).
3. III Rev Stat ch 111, 5832 (1989).
4. 89 III 2d 379, 432 NE2d 849 (1982).
5. 90 III App 3d 622, 413 NE2d 448 (4th D 1980).
6. III Rev Stat ch 121 ½ 261(f) (1989).
7. III Rev Stat ch 121 ½ 312 (1989).
8. 15 USCA 45 (1988).
9. III Rev Stat ch 121 ½ 312 (1989).
10. Beard, 90 III App 3d 622; Duhl v Nash Realty, Inc.,102 III App 3d 483, 429 NE2d 1267 (1st D 1982).
11. III Rev Stat ch 121 ½ 270b(4) (1989).
12. 90 III App 3d 622.
13. III Rev Stat ch 121 ½ 270a(c) (1989).
14. Warren v Lemay, 142 III App 3d 550, 491 NE2d 464 (5th D 1988).
15. 90 III App 3d 622.
16. 117 III App 3d 887, 453 NE2d 1129 (2d D 1983).
17. 124 III App 3d 1057, 465 NE2d 127 (3d D 1984).
18. 142 III App 3d 550, 491 NE2d 464 (5th D 1988).
19. 156 III App 3d 154, 510 NE2d 409 (1st D 1987).
20. 150 III App 3d 597, 502 NE2d 45 (2d D 1986).
21. 157 III App 3d 167, 510 NE2d 65 (1st D 1987).
22. 138 III App 3d 172, 485 NE2d 855 (2d D 1985).
23. 147 III App 3d 168, 497 NE2d 1022 (2d D 1985).
24. 200 III App 3d 447, 558 NE2d 195 (1st D 1990).
25. Sawyer Realty Group, Inc. v Jarvis Corp., 89 III 2d 379, 432 NE2d 849 (1982).
26. 94 III App 3d 651, 418 NE2d 506 (4th D 1981).
27. 102 III App 3d 483, 429 NE2d 1267 (1st D 1982).
28. 124 III App 3d 1057, 465 NE2d 127 (3d D 1984).
29. 131 III App 3d 180, 475 NE2d 593 (1st D 1985).
30. 137 III App 3d 60, 484 NE2d 780 (1st D 1985).
31. 142 III App 3d 251, 488 NE2d 563 (1st D 1985).
32. 150 III App 3d 597, 502 NE2d 45 (1st D 1986).
33. 156 III App 3d 154, 510 NE2d 409 (1st D 1987).
34. 138 III App 3d 172, 485 NE2d 855 (2d D 1985).
35. 147 III App 3d 168, 497 NE2d 1022 (3d D 1986).
36. 157 III App 3d 167, 510 NE2d 65(1st D 1987).
37. 165 III App 3d 783, 520 NE2d 757 (1st D 1987).
38. 117 III App 3d 887, 453 NE2d 1129 (2d D 1983).