The question every sales agent asks when told they must disclose all material facts to potential buyers is: so what exactly is a material fact?
It is fair to say that a lot of people would not want to live in a home where something unpleasant has occurred. For example, if there had been a murder or violent crime committed in a house, there are many people who would object to living there. In the same way, ongoing occurrences such as excessively noisy neighbours can also be off-putting to potential buyers.
Perhaps it would make no difference to you, but for countless prospective buyers with cultural, religious or superstitious beliefs, it can. This is what makes the issue of “material fact” so difficult for agents; what is an important consideration for one person may be completely irrelevant to someone else.
In this article, we look at material fact as it applies to sales agents. The issue of material fact is also one that affects residential tenancies, and this will be covered in the May edition of the Journal.
What is a material fact?
Under section 52 of the Property, Stock and Business Agents Act 2002, the obligation to disclose a material fact lies with the agent. However, defining just what constitutes a material fact is not at all straightforward.
The decision in Hinton v Commissioner of Fair Trading [2007] NSWADTAP 17 provides some guidance:
“[An] act may become ‘material’ within the meaning of s.52 in two ways – it can become ‘material’ because in the particular circumstances it is known by the agent to be ‘material’ to the particular consumer, even though the agents and consumers may not typically regard the matter as ‘material’. The other way in which it may become ‘material’ is by the application of an objective standard which has regard to what a reasonably informed consumer with a fair minded understanding of the real estate market, including the role of the real estate agent, would regard as ‘material’.”
The decision in Hinton involved the sale of a property that had been the scene of a triple murder, a fact that the Administrative Decision Tribunal held that the buyer should have been made aware of, but was not.
The decision to some extent clarifies the agent’s obligation to disclose a material fact to potential buyers by effectively removing the subjective element and establishing an objective test. However, the issue of what is and what is not a material fact remains problematic for agents.
Matters to consider
The Hinton case provides some direction to agents to assist in determining whether something is a material fact. Matters to consider include:
- The agent’s treatment of the fact
- Whether the fact is able to be independently ascertained
- Whether the fact is likely to impact on price
- The reaction of other buyers to the fact
- Whether the fact results in the property being in a rare or unusual category or position.
Agents may need to consider these matters when undertaking an inspection and preparing a report prior to listing a property for sale. Agents should ensure the seller understands the restrictions imposed by the legislation in relation to representations about a property for marketing purposes and the need for agent compliance with the legislation. Sellers should also be aware of those matters which the agent may need to disclose if material to a buyer’s decision to buy the property.
NSW Fair Trading guidelines
The Fair Trading guidelines do not provide an exhaustive list or a definition of material facts; however, they do provide some clarity about what issues to consider when trying to decide if something is a material fact or not.
According to the guidelines, “Apart from individual circumstances where an agent understands that a particular issue is ‘material’ to an individual … agents should concern themselves with considering issues which are sensitive for a significant proportion of the population.”
Examples given of what could be a material fact include whether the property has a current DA approval, whether it had water damage in the past, or if it was the scene of a serious crime during the current occupation.
A common question by agents is: “How long does it take before a material fact is no longer material?” While not providing a definitive answer, the guidelines suggest that agents focus on material facts that relate to the period when the vendor was the owner of the property.
Inevitably there will still be grey areas. The answer will probably depend on the circumstances and how recently the issue occurred.
Clarity, consistency and certainty
The law as it stands puts agents in a difficult position: they must act in the best interests of their client, the seller, while at the same time disclose information to prospective buyers that may not be in the best interests of their client. Importantly, the seller does not have to disclose material facts.
REINSW believes the obligation to disclose material facts to buyers should be uniform; that is, it should apply to both the seller and the agent.
REINSW has called upon the NSW Government to provide clarity, consistency and certainty in relation to material fact.
- Clarity. We need a clear definition as to what constitutes a material fact. It is problematic for agents to disclose a material fact without a definition of what it is.
- Consistency. If the desire is to protect consumers, then the requirement to disclose material facts should be uniform; that is, by both the seller and the agent. Why? Because it is the seller who has the best knowledge of material facts. Further, capturing the seller removes the conflict that currently exists when the agent attempts to satisfy their obligations to both the seller and prospective buyers.
- Certainty. At what time should the disclosure of material facts be made? REINSW believes that there is a possible argument that material facts should be disclosed in a prescribed manner, the most obvious being in the standard Contract for Sale (as is the case with a variety of other warnings and disclosures).
The issue of material fact is complex. Unfortunately, the problem has been handed to the real estate profession without sufficient assistance and guidance. This places agents in an untenable position and exposes consumers to risk.
REINSW continues to lobby for reform in this area and we will keep you informed of our progress.
Material fact clause in Agency Agreements
REINSW has, in part, addressed this issue with an additional clause in REINSW Agency Agreements. The clause obligates the seller to disclose material facts and to acknowledge that the agent must disclose any material facts to potential buyers.
To download sample PDFs for Agency Agreements including the material fact clause, go to www.reinsw.com.au/sampleforms.
If you have questions, or would like further information, please contact the Helpline by calling (02) 9264 2342 or emailing [email protected].