Know the material facts
If you are selling or buying a property you need to know the material facts. Material facts always come into focus if there is a murder or criminal offense that has occurred in a property.
The Gonzales house in north-western Sydney is the scene of a horrific triple murder in 2001 by the family’s son. Following the exchange of contracts in 2004, the purchasers found out about the murders and demanded a full refund of their deposit.
147 Easey Street Collongwood was another property that required material facts to be disclosed. This property was sold many years after the horrific events and the impact was most felt by the victims’ families.
Remember, the agent is also under obligation to sell the property to a vendor and to maximize the sale price – achieved through marketing. Disclosing material facts can contradict that duty and the agents in turn appear insensitive. The law does however recognise many people are affected – especially family – as well as those with spiritual or religious views and many ethnic backgrounds.
History of the property
Does the fact that a violent death or even a suicide need to be disclosed? What if a rape or a violent assault took place or if an elderly owner passed away peacefully in their bed?
Real estate agents must disclose “material facts” in relation to any property they sell or lease. Failure to disclose “material facts” may constitute misleading and deceptive conduct, enabling a purchaser or tenant to seek appropriate orders from the court to have the contract set aside and an award of damages made in their favour. The agent could also be prosecuted for breaching consumer protection laws.
On 1 March 2020 new disclosure obligations upon vendors and their agents came into effect with changes to the Sale of Land Act 1962 (Vic) (Act).
Vendors and their agents must now disclose “material facts” to interested parties during negotiations for the sale of real estate (Material Facts).
New section 12(d) of the Sale of Land Act states:
Any person who, with the intention of inducing any person to buy any land—
(d) makes or publishes any statement promise or forecast which he knows to be misleading or deceptive or knowingly conceals any material facts or recklessly makes any statement or forecast which is misleading or deceptive
shall be guilty of an offense against this Act…
Knowingly concealing a material fact in breach of section 12(d) of the Act, can result in a penalty of 120 penalty units ($19,826.40) or up to 12 months imprisonment.
What is a material fact?
A material fact is a fact that would be important to a potential purchaser in deciding whether or not to buy real estate. A material fact may influence a purchaser in deciding whether or not to buy real estate and the price they would be prepared to pay.
A fact is definitive not innuendo, gossip, or speculation. However, an opinion may be a material fact if it is proffered by an expert and is extended to the vendor or agent.
Failure to disclose a fact alone is not sufficient to establish an offense under s12(d). The fact must be material. A fact can be ‘material’ in two ways:
- 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.
Further indications which would be relevant to determining whether something is a material fact include:
- whether the fact is only known by the vendor;
- the reaction of other potential purchasers to the fact, including whether knowledge of the fact may impact a potential purchaser’s willingness to buy land, and
- whether the fact results in the property being in a rare or unusual category or position.
PICTURE Did You Know
Examples of material facts
Vendors or agents who have knowledge of material facts cannot rely on purchasers becoming aware of them through making ‘usual inquiries’ or following the Due Diligence Checklist to avoid disclosure.
General examples of material facts about land which are known to the vendor or agent but which may not be obvious to a potential purchaser include (but are not limited to) circumstances where:
- prior tests or investigations have revealed (or the vendor or agent otherwise knows of) a defect in the structure of the building, a termite infestation, combustible cladding, asbestos (including loose-fill asbestos insulation) or contamination through prior uses of the land;
- the underlying cause of an obvious physical defect is not readily apparent upon inspection (for example, whilst a large uncovered crack in a wall would be obvious to a purchaser upon inspection, the underlying reason for the crack, such as defective stumping, may not);
- there has been a significant event at the property, including a flood, or a bushfire;
- there is a history of pesticide use in the event the property had been used for horticulture or other agricultural purposes;
- there are restrictions on vehicular access to a property that are not obvious during a property inspection (such as truck curfews or where access is via an easement that is not apparent on the Certificate of Title or plans);
- facts about the neighbourhood surrounding the property which may not be immediately apparent upon inspection (such as sinkholes, surface subsidence and development proposals) that would likely affect the use and enjoyment of the property to a greater extent than the usual disturbances and inconveniences of occupying the land of the kind and in the local area of the land being sold;
- building work or other work done without a required building permit, planning permit or that is otherwise illegal;
- strata fees that are related to reparation – works such as waterproofing, retaining walls, structural repairs, etc. Many Body Corporates raise a loan on behalf of the strata and that is paid via higher levies – that purchasers often query.
- the property during the current or previous occupation has been the scene of a serious crime or an event that may create long-term potential risks to the health and safety of occupiers of the land, such as:
- extreme violence such as homicide;
- use for the manufacture of substances such as methylamphetamine, or
- a defense or fire brigade training site involving the use of hazardous materials.
There is a community expectation that homicides that have occurred at a property be disclosed to potential purchasers. Other known acts of extreme violence should be disclosed if a potential purchaser makes a specific inquiry. While these circumstances may not be a physical barrier to the use of the property, they may materially affect a purchaser’s decision to buy the land.
Defects and damage arising from prior significant events – as outlined – and contamination from prior uses of the land will not be considered material if they have been fully remediated, and no further repairs or other works (including ongoing work) will need to be carried out in the future. However, if a potential purchaser asks a specific question relating to defects and damage arising from prior significant events, or from contamination arising from prior uses of the land, those questions must still be answered by the vendor fully and frankly and to the best of the vendor’s knowledge.
What should vendors do?
- Vendors need to prepare the property for inspection ensuring that they do not hide defects or any other important features that would otherwise come to the attention of potential purchasers.
- Conduct searches and inquiries for a section 32 statement – this offers the vendor time to complete any rectifications. It is better to know issues prior to a purchaser uncovering problems – as this is often seen as an opportunity to negotiate the property down more heavily.
- Vendors must answer all inquiries about the property as fully and as frankly as possible.
- Chose an agent that has high ethical standards and that will pass on all material facts to potential purchasers.
- If the vendor is selling the property without an estate agent, the vendor would directly outline all material facts to a potential purchaser.
Failure to comply with the vendor disclosure laws enables the purchaser to rescind (that is, pull out of) the contract and obtain a full refund of any deposit paid
Vendors are not required or expected to carry out tests and investigations of their property to list all issues. Apart from the vendor disclosure legislation, the vendor is not otherwise required to disclose ‘unknown’ defects, such as structural defects, irrespective of their impact on the value or use and enjoyment of the property.
The purchaser must complete their own investigations should they believe there is a structural problem. For example, if a house has cracks and the purchaser is concerned the owner does not need to provide a building inspection report. The obligation is on the purchaser. However, agents often advise the vendor to have a building report completed prior to marketing so vendors are prepared for all scenarios.’
Importantly vendors or the vendor’s agent must disclose to the best of their knowledge all problems. If the vendor or a vendor’s agent has no knowledge of the matters raised by the potential purchaser, this is not non-disclosure.
What should estate agents do?
- Estate agents must ask vendors if there are known issues for the property as this may affect marketing.
- Estate agents must inspect the property and gather information from the vendor and their solicitor or conveyancer of potential material facts.
- The estate agent must answer all inquiries by purchasers as fully and frankly as possible.
- The estate agent should provide potential purchasers with a copy of the section 32 statement and contract of sale upon request of interested purchasers.
- Real estate agents must make continuing disclosure if further material facts become known until the property is sold.
Generally, material facts are disclosed in:
- marketing material or information statements;
- section 32 statement or contract of sale;
- physical inspections of the property where they are clearly visible;
- by specific disclosures made to particular purchasers in the course of negotiations or
- before the start of a public auction.
Clearly outlining the material facts is essential but it is also important to remember the seller has a right to sell and the real estate agent is juggling both those legal obligations.