In some cultures it’s customary to meet the neighbors before purchasing a home. In the recent case of Lerner v. DMB Realty, LLC, the plaintiffs wish they would have done just that. Unfortunately, they didn’t discover until after they closed on their purchase and moved in that their next-door neighbor is a class 1 sex offender.

As discussed in this column’s November 2013 edition, Avoiding Real Estate Malpractice, Arizona REALTORS’® Duty to Disclose and the November 2012 edition, Caveat Venditor!, the law imposes strict disclosure requirements on property sellers – namely, sellers must disclose any information that materially or adversely affects the value of the property. Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (App. 1986).

Most families, especially families with young children, prefer not to live near criminals and sex offenders. As a result, buyers want to know if a home is situated immediately next door to a sex offender.

Arizona law, however, exempts certain conditions from disclosure. For example, pursuant to A.R.S. § 32‑2156, sellers and their agents are not required to disclose:

> that the property is or has been the site of a natural death, suicide, or homicide;
> that the property has been occupied by someone with HIV or a similar disease; or
> that the property is located in the vicinity of a sex offender.

The Arizona Court of Appeals recently upheld the constitutionality of this statute in Lerner v. DMB Realty, LLC, et al., 231 Ariz. 297, 294 P.3d 135 (2014).

Notwithstanding A.R.S. § 32-2156, the plaintiffs sued the sellers and their REALTORS® after they closed on the purchase of their residence which is located next door to a sex offender.

Six months after closing on the purchase of their home, the plaintiffs discovered that the home is situated next door to a “level-one” sex offender.[1] This was particularly troublesome to the plaintiffs because they have small children. As a result, the plaintiffs sued the sellers and the REALTORS® for damages due to the non‑disclosure. The plaintiffs argued that the sellers and the REALTORS® were liable

for fraud and non‑disclosure. They urged that their claim wasn’t precluded by the statute because the statute is unconstitutional.

The plaintiffs knew that the sellers and their agents weren’t required to disclose whether the property was near a sex offender. Pursuant to the dual agency agreement[2], the plaintiffs signed the Consent to Limited Representation which reminded the plaintiffs that pursuant to A.R.S. § 32-2156, the sellers and the agents are not obligated to disclose that the property is or has been located in the vicinity of a sex offender.

Further, the sellers provided the plaintiffs with the standard Seller’s Property Disclosure Statement which expressly provided that “buyer acknowledges that by law, sellers, lessors and brokers are not obligated to disclose that the property is or has been … located in the vicinity of a sex offender.”

In addition, the sellers and their REALTORS® provided the plaintiffs with the Residential Seller Advisory which further explained that by law the sellers are not obligated to disclose that the property is located in the vicinity of a sex offender.

And finally, the standard AAR Residential Resale Purchase Agreement provided that “if the presence of sex offenders in the vicinity is a material matter to the buyer, it must be investigated by the buyer during the inspection period.”

Notwithstanding the above disclosures, the plaintiffs sued the sellers because they felt deceived. Prior to close of escrow, the plaintiffs asked the sellers why they were selling and the sellers said they were moving to be closer to friends. After discovering that the property was located next to a sex offender, the plaintiffs inferred that the real reason the sellers were moving was because they didn’t want to live next door to a sex offender and that the sellers’ explanation of wanting to be closer to friends was pretext.

After discovering the sex offender status of the neighbor, the plaintiffs sued the REALTORS® and the sellers for non‑disclosure, breach of fiduciary duty, and fraud.

The sellers and the REALTORS® moved to dismiss the Complaint based on A.R.S. § 32-2156. The trial court agreed that the statute precluded the plaintiffs’ claims and dismissed the Complaint. The plaintiffs then promptly appealed the dismissal to the Arizona Court of Appeals.

On Appeal, the plaintiffs argued that the statute was unconstitutional and that the sellers should have told the plaintiffs about the presence of a sex offender in the neighborhood. They further argued that the sellers committed fraud when they told the plaintiffs that the reason they were moving was to be closer to friends when the real reason was that they didn’t want to live next to a sex offender.

The Court of Appeals generally affirmed the trial court’s ruling and upheld the constitutionality of A.R.S. § 32-2156 and affirmed that the sellers and the REALTORS® were not obligated to disclose the sex offender status of the next door neighbor.

The Court of Appeals found, however, that the plaintiffs may have a claim for fraud against the sellers if the sellers did in fact misrepresent the real reason for moving. Thus, the Court of Appeals remanded the case to trial court for a finding of whether the sellers misrepresented the reason for moving and whether the plaintiffs reasonably relied on their statement.

The Court of Appeals also dismissed the plaintiffs’ breach of fiduciary duty claim against the REALTORS® because pursuant to the statute, the REALTORS® were not obligated to disclose the vicinity of the sex offender. And unlike their claims against the sellers, the plaintiffs did not allege that the REALTORS® made any specific misrepresentations.

The two take aways from the case are: (1) A.R.S. § 32-2156 is constitutional; and (2) the statute does not prevent the claim for outright fraud.

When confronted with these difficult disclosure issues, sellers and REALTORS® must always be truthful in their comments to buyers. When asked whether one of the exempted categories above applies, sellers and REALTORS® should simply respond “by law we are not obligated to respond to your question but if that condition is important to you, you should research your question and possibly hire a professional to help you with your research.”

Christopher Charles is a partner with the law firm Davis Miles McGuire Gardner, PLLC, where he serves as the chair of the Real Estate Practice Group. He is an experienced real estate lawyer and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”).