28 February 2019

The Opal (land)mine: clarity needed on material fact

If the Opal Tower received this much publicity in its off-the-plan phase, it would be an agent’s dream. However, its current level of notoriety will have the exact opposite effect for owners, investors and agents.

Just like the Gonzales house*, the coverage of the Opal Tower building defect highlights the need for clarity on what constitutes a material fact (stigmatised property) for the purposes of section 52 of the Property, Stock and Business Agents Act 2002 (the Act).

It’s about consumer protection

“Despite the REINSW’s repeated requests for guidance from NSW Fair Trading over the past ten years, we still don’t have a clear understanding of what constitutes material fact,” says REINSW CEO, Tim McKibbin.

“The Opal Tower building defect is a latent defect, meaning it is not easily identifiable through traditional building inspections. However, the property has clearly been stigmatised by the substance of the issues attaching to the property and the media coverage. In accordance with the obligations in the Act, agents must disclose the defect to potential buyers. However, a vendor is not required to make this disclosure.” 

McKibbin says issues arise for buyers when agents notify vendors, they must disclose a material fact and a vendor chooses to sell their property privately.

“Requiring the disclosure of known defects to potential buyers is just good consumer protection. However, given the obligation to disclose material facts only applies to agents, it’s clearly a flaw in the system,” says McKibbin.

“An agent acting in the best interests of their vendor, should assess and advise the vendor what financial harm the disclosure of the material fact will have on the sale price of the property. The vendor then needs to determine if it’s in their best interests to act for themselves in the sale of their property and avoid the disclosure of the material fact. Where is the consumer protection in that?”

What is material fact?

McKibbin says this is a great question.

“Under section 52 of the Act, the obligation to disclose a material fact lies with the agent. However, defining what constitutes a material fact is not at all straight forward,” he says.

NSW Fair Trading’s guidelines do not provide any tangible assistance, including a list or a definition of material facts.

“NSW Fair Trading’s guidelines seem to suggest that agents concern themselves with considering issues which are sensitive for a significant portion of the population,” says McKibbin. “Determining what’s important, and not important is an unenviable task, when penalties attach to guessing wrong.

“For reasons that defeat me, some material facts can be washed away. If, for example, there was a serious crime on the property, in the second sale that fact may not need to be disclosed.”

Clarity, consistency and certainty

“The law, as it stands, puts agents in a difficult position,” says McKibbin. “They must act in the best interests of their client, the vendor, while at the same time disclose information to potential buyers that may jeopardise the sale.”

McKibbin says it is problematic for agents to disclose a material fact without a definition of what it is. 

“We need clarity. It would be nice to know what has to be disclosed, as agents are currently involved in pure guesswork as to what they do and don’t have to provide to buyers,” says McKibbin.

“It is, though, somewhat entertaining (for all the wrong reasons) that the very same governing body that shies away from the question of a definition acquires remarkable clarity in the event of a breach.

McKibbin says the problem of definition has been shifted to the real estate profession without sufficient assistance and guidance, placing agents in an untenable position and exposing consumers to risk. 

“Unfortunately, having someone to blame – and blame quickly – takes precedence over consumer protection,” he says.

“If NSW Fair Trading is genuine about consumer protection, they must provide:

  1. Clarity | Follow the lead of other jurisdictions and provide a list of what must be disclosed
  2. Consistency | If the goal is consumer protection then also obligate the vendor to disclose material facts
  3. Certainty | Currently there is no agreed means to make the disclosure of a material fact. Given all other disclosures are contained with the contract for sale of land, it’s logical that material facts be set out in this document.”

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*In which three people were murdered