Addressing professional disciplinary issues facing a real estate broker, the Court of Special Appeals of Maryland held that Broker was subject to discipline for failing to disclose to a Buyer potential well-water contamination in the neighborhood due to a well-known gas leak, and that the Property was subject to periodic well-testing for possible contamination. The Court also determined that, given the notoriety of the gas leak, Broker violated applicable regulations requiring her to “remain informed of matters affecting real estate in the community, the State, and the nation[.]” Op. at 38 (quoting COMAR 09.11.02.01).
The Court refused to uphold disciplinary charges for failing to disclose a voluntary homeowners association, which purported to extend prior restrictive covenants that had expired, and determined that the Maryland Real Estate Commission (MREC) abused its discretion in refusing to revise its disciplinary sanction after post-hearing evidence established that the voluntary homeowners association was not binding.
A copy of the opinion can be found here.
Background
Broker was the listing broker for the sellers of certain residential real property (“Property”) within the general area where she had brokered other sales, and in which she also resided. Buyers were represented by a Buyer’s Agent.
After closing, the Buyers discovered two issues concerning the Property. First, Buyers learned of the existence of a voluntary homeowners association (“Neighborhood Association”), that purported to have filed a Declaration of Restrictive Covenants affecting several properties, including the subject Property. Second, Purchaser complained that there was well known gas leak in the neighborhood caused by a large Oil Company that potentially contaminated the well-water servicing the subject Property.
Buyers filed a complaint against Broker with the state real estate commission, MREC, alleging that Broker failed to disclose the existence of potential well contamination from the Oil Company’s gas leak, and failed to disclose the existence of an HOA in the listing/contract.
Disciplinary Process
The Court of Special Appeals’ opinion traces the disciplinary process, from an MREC investigation, disciplinary charges and hearing before an administrative law judge, MREC’s issuance of a proposed order, Broker’s exceptions to such proposed order, issuance of a final order, Broker’s petition for judicial review to the circuit court, an intervening remand, and ultimate appeal.
In sum, after an investigation, and hearing before the administrative law judge, Broker sought to introduce new evidence from the Neighborhood Association conceding that its declaration of restrictive covenants was not binding, and that “there are no current valid or enforceable restrictions in effect beyond those that would be imposed by county regulations.” Op. at 13-14. Both the administrative law judge and MREC declined to consider the evidence, and determined that Broker had failed to disclose both the existence of the HOA and the water-well pollution, in violation of Maryland statute and regulations, discussed below. Ultimately, MREC suspended Broker’s license for 14 days and imposed a monetary penalty of $4,000, noting that such penalty was warranted because Broker “failed to provide material information” to the Buyers on two issues: “the existence of an HOA and the ongoing problems with well contamination in the area.” Op. at 18. As an aside, the Circuit Court noted that the effect of the suspension would result in the two-week closure of an office employing over 45 people.
Broker filed exceptions to MREC’s proposed order, including seeking to admit the new evidence from the Neighborhood Association. MREC declined to accept the new evidence, and issued a final order, which Broker appealed to the Circuit Court.
The Circuit Court remanded the case to MREC to consider the new evidence, and following remand, MREC issued a supplemental order stating that it considered the new evidence, but nevertheless imposed the same 14-day suspension and $4,000 fine. Broker again appealed, and while the Circuit Court found that there may have been substantial evidence that Broker violated the Maryland Real Estate Broker’s Act, the imposition of the sanction was arbitrary and capricious. The Court then set aside the sanction, but left intact the $4,000 fine. Both MREC and Broker appealed to the Court of Special Appeals.
Discussion
Addressing the non-disclosure of the voluntary Neighborhood Association, the Court considered whether Broker violated Md. Code, BOP § 17-322(b)(4), (25) and (33), which provide for sanctions against a real estate broker who “(4) intentionally or negligently fails to disclose to any person with whom the applicant or licensee deals a material fact that the licensee knows or should know and that relates to the property with which the licensee or applicant deals; . . . (25) engages in conduct that demonstrates bad faith, incompetency, or untrustworthiness or that constitutes dishonest, fraudulent, or improper dealings; . . . [or] (33) violates any regulation adopted under this title or any provision of the code of ethics . . .”
The Court noted that “[i]t is well-settled in Maryland law that a real estate broker’s liability is founded on the law of agency.” Op. at 31. “[A]lthough a broker has no general duty to investigate whether an HOA exists, that duty may arise if specific questions concerning an HOA are asked of the broker.” Op. at 31. Thus, prior case law had rejected claims where the allegations did not involve “a misrepresentation or omission of fact that [a broker] knew or had a duty to discover under the circumstances.” Op. at 31.
In addition, although § 17-322 does set minimum standards for real estate agents so as to protect the public, the non-disclosed fact must be “material.” Here, in contrast, “the undisputed evidence . . . establishes that the ‘material fact’ (of the HOA) is non-existent. The officers of the putative HOA (the CCECA) admitted in writing that there was no HOA.” Op. at 33. “It is not mind-bending to conclude that a non-existent fact cannot be a ‘material’ fact.” Op. at 34. Consequently, the Court determined, there could be no violation of § 17-322.
As to the non-disclosure of the gas leak, the Court determined that the failure to inform Buyers of the potential well-water contamination was a material omission. “An omission is considered material if a significant number of unsophisticated consumers would attach importance to the information in determining a choice of action.” Further, the Court referred to the definition of “materiality” under Section 538 of the Second Restatement of Torts, which provides in part that a matter is material if a person making a representation “knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his [or her] choice of action, although a reasonable man would not so regard it.” Op. at 37.
Here, the Court noted that one of the Buyers testified that he “would not have purchased the Property had they known about the [Oil Company] gas leak and the potential and well contamination issues. MREC could infer from the testimony and evidence in this case that ‘a significant number of unsophisticated consumers would attach importance to the information’ before purchasing a home . . . The potential existence of well contamination was, therefore, a material fact in this transaction.” Op. at 37.
Consequently, the Court held that “1) [Broker’s] failure to disclose the material fact – ‘that due to actual and potential contamination of wells in the area, including in Cross Country Estates, the Property was subject to periodic well testing for possible contamination’ – constituted a violation of BOP § 17-322(b)(4); and 2) the failure to disclose ‘demonstrate[d] bad faith, incompetency, or untrustworthiness or that constitutes dishonest, fraudulent, or improper dealings[,]’ constituting a violation of BOP § 17-322(b)(25).” Op. at 37-38. Moreover, given the local media attention focused on the gas leak, the Court also determined that the evidence supported the finding that Broker failed to “remain informed of matters affecting real estate in the community, the State, and the nation[,]” which constituted a violation of a state regulation, COMAR 09.11.02.01, and thereby a violation of BOP § 17-322(b)(33). Op. at 38.
The Court, however, agreed that the sanction imposed by MREC was arbitrary and capricious, since it had first imposed the same sanction, for two violations, without thereafter reducing it in light of the potentially exculpatory new evidence it had been ordered to reconsider. “[T]he exculpatory evidence that MREC was directed to consider on remand by the circuit court was not evidence that would warrant a greater sanction, but rather, a downward revision of the sanction MREC originally imposed. MREC cannot sanction Broker for failing to disclose the existence of a non-existent homeowners association, and the overall combined sanction imposed by MREC on Broker should be modified accordingly.” Op. at 48. The Court then remanded the case to modify the sanction.