Disclosure obligations for agents: Illegal building works

The obligations of real estate agents to disclose material facts are complex and difficult to navigate. Agents may question how far they must go in respect to disclosure. Illegal or un authorised building works on a property can create significant difficulties for agents when it comes time to sell. Where an agent knows (or ought to reasonably know) that works (such as extensions, granny flats, decks/patios etc.) have been carried out on a property without council and/or Body Corporate approval, failure to make appropriate enquiries and disclose information to prospective buyers can give rise to serious liabilities. The obligations of disclosure also apply to flooding within the last five years, loose fill asbestos, and in a strata complex, fire safety upgrades, combustible cladding or orders in respect to the cladding*.

How should an agent approach the subject with a vendor?

When meeting with a vendor to prepare the property for market, an agent should explain to the vendor that there are certain obligations in relation to the disclosure of material facts. If a vendor informs an agent of unapproved building works, the agent should advise the vendor to ensure their legal representative discloses this in the contract for sale of land. The agent should also be aware of the unapproved works to ensure they are able to answer any prospective buyers honestly.

If the vendor is not forthcoming or it is obvious that there have been renovations (for instance, the addition of a new wall to create another bedroom), the following steps should be taken:

• Ask the vendor if any additions, extensions, wall removals, conversions etc. have been undertaken during their ownership, or if they are aware of any prior to their ownership.
• If there has been, question whether development consent or a complying development certificate has been obtained for the works.
• Document the vendor responses.

If the vendor admits works were done without consent, the agent should advise the vendor of the risks of going to sale without rectifying the issue, such as lower buyer offers and possible negotiation challenges. The agent should also ensure that there is a disclosure in the contract for sale of land in respect to the works, and if not, notify the vendor's legal representative in relation to the works.

However, if the vendor refuses to confirm any unapproved works (have a record of this conversation), despite clear visible evidence of renovation, further inquiries should be made with the vendor's legal representative. To mitigate risk and liability associated with disclosure, the agent should inform the vendor that illegal works must be disclosed before proceeding with the sale.

If the vendor fails to comply with this advice, agents should consider ending their engagement with the client to completely eliminate any liability.

Advertising and disclosure to buyers

When advertising a property, a vendor (or an agent) must disclose all material facts which could reasonably affect the purchasing decision of a buyer and /or impact the market value of a property; this includes any illegal construction which may require upgrading or demolition to become compliant. These facts can be communicated via various mediums, including verbally before public auctions and during inspections of the property by potential buyers, as well as written disclosure in the contract for sale of land.

Timing of disclosure

As a material fact, agents need to disclose information of illegal building works when there is indication that a person is showing serious intent to purchase a property, or on being asked by a potential purchaser. If new material facts about such works come to light afterwards, these must also be disclosed to the purchaser as soon as the agent becomes aware of them. This minimises the chance of a successful claim for a failure to disclose against them.

Consequences of non-disclosure

In accordance with the Property and Stock Agents Act (2002) NSW, an agent must not induce a person to enter into a contract or arrangement by any false, misleading or deceptive statement or by failing to disclose a material fact that the agent knows or ought to reasonably know. An offence under the Act can attract penalties of up to $22,000 as well as significant reputational damage. The Act also allows a buyer to claim damages or other compensation regarding any misrepresentation or concealment in the sale or purchase of property, regardless of whether an agency agreement has been entered into.

Additional penalties and legal action may also apply against real estate agents advertising and selling a property in accordance with Australian Consumer Law.

Mitigating risk through proper disclosure

Ultimately, a clear, well-documented disclosure process on behalf of the real estate agent preserves the integrity of the sales process and safeguards the agent from liability when selling a property containing illegal works.

If you are an agent or vendor with unauthorised (or potentially unapproved) property works and have concerns about your obligations when marketing or selling a property, please contact Coleman Greig's Conveyancing team today.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.