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What are real estate agents’ obligations in relation to hidden/underlying defects with a property?

14 June 2017

In relation to hidden or underlying defects, the obligations of Real Estate licensees are set out in Rule 10.7 of the Real Estate Agents Act (Professional Conduct and Client Care) Rules 2012 (“Rule(s)”).

Rule 10.7 states:

A licensee is not required to discover hidden or underlying defects in land but must disclose known defects to a customer. Where it would appear likely to a reasonably competent licensee that land may be subject to hidden or underlying defects, a licensee must either:

(a) obtain confirmation from the client, supported by evidence or expert advice, that the land in question is not subject to defect; or

(b) ensure that a customer is informed of any significant potential risk so that the customer can seek expert advice if the customer so chooses.

The Rules do not include a definition for “hidden or underlying defect.” A wide range of matters could be be a defect, including moisture ingress or other damage to the property, unpermitted works at the property, and proposed developments that would impact on the property.

The application of Rule 10.7 in relation to “known defects” is clear. But, it is less clear in relation to “hidden or underlying defects”. Although, the recent decision of the Real Estate Agents Disciplinary Tribunal in YongMewburn v REAA [2016] NZREADT 62 has provided some guidance on this point.

The Tribunal stated in Yong-Mewburn that Rule 10.7 is only engaged when the circumstances are such that it should appear likely [emphasis added] that the property may be subject to a “hidden or underlying defects.” The term “likely” requires the licensee to consider whether it is more likely than not that the property may be subject to a “hidden or underlying defect.” (The “more likely than not” being the standard of proof in civil proceedings.) “Likely” does not refer to a mere possibility such as a rumour of drug use at a property as was the case in the Yong-Mewburn decision. “Likely” refers to a significant potential risk. This interpretation was consistent with the requirement in Rule 10.7 (b): the licensee must ensure that the customer is informed of any “significant potential risk”.

Whether there is a likelihood of a hidden or underlying defect with a property will not be determined based on the views of the individual licensee concerned (subjective basis) but rather based on the views of a reasonably competent licensee (objective basis). That means, the requirements of Rule 10.7 must be complied with if a reasonably competent licensee would consider it more likely than not that a property may be subject to hidden or underlying defects. And to satisfy the requirements, the licensee must obtain confirmation that the land is not subject to defect or must ensure that the customer is informed of the potential risk.

Source: InBrief Winter 2017

Author: Caroline Eric

InBrief Winter 2017

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