This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
If the agent makes any material misrepresentations, as for instance, the amount of rent, or any other statement which the purchaser relies on and is induced to purchase the property by reason thereof, and such misrepresentations should turn out to be untrue, the purchaser is entitled to relief and if he has entered into a contract may rescind the same, and if the deed has been delivered and the deal consummated, is entitled to have the sale cancelled and be restored to his original position. And this is so whether the representations were wilfully made, or whether innocently made without proper knowledge upon the part of the agent, and it makes no difference that such representations were made without the authority of the principal or even without his knowledge, no matter how innocent the seller may be of any fraud or guilty knowledge. A principal cannot enjoy the fruits of the bargain without adopting all the instrumentalities employed by the agent in bringing it to a consummation. If an agent defrauds the person with whom he is dealing, the principal, not having authorized or participated in the wrong, may no doubt rescind, when he discovers the fraud, on the terms of making complete restitution. But so long as he retains the benefits of the deal he cannot claim immunity on the ground that the fraud was committed by his agent and not by himself - Bennett vs. Judson, 21, N. Y., 238.
The rule is that the receipt and retention by the principal of the fruit and product of the fraud of the agent renders the principal liable, though innocent of participation in the wrong. In a transaction involving the exchange of properties, the owner of one of the parcels was told by the broker that the owner of the other parcel offered in trade had actually paid in cash twelve thousand dollars for it, and to prove it he exhibited to her the deed executed by the executors, in which the consideration was stated at $12,000. She, believing this statement to be true, made the trade, and upon subsequent investigation it was ascertained that this fact was untrue; that the consideration inserted in the deed was fictitious, that the actual price paid for it within a month was $7,000. The court held that this was a misrepresentation of a fact and not merely an opinion as to the value, and one to influence a purchaser, and constituted a sufficient basis to rescind a sale. It must not be understood that a mere statement of the agent or of the owner of the value of the property would constitute a misrepresentation; a false statement as to the value of property made by a vendor for the purpose of obtaining a higher price than he knows the property is worth will not sustain an action for fraud or entitle the purchaser to rescind a contract. The purchaser must rely upon his own judgment as to value, but this statement is to be distinguished from the case where the false statement is of an actual fact as above stated. It is also a well settled rule of law that if the owner is induced to execute a contract of sale by reason of misrepresentations made by his own agent the latter is not entitled to commissions, although the owner carries out the contract.
In reading of the large deals in real estate made at the present day, we are apt to believe that they are unprecedented, and that they are evidence of a progressive age, or undue speculation; so, also the manner in which such lands are purchased, and the want of proper investigation as to the availability of land for particular purposes by intending purchasers. An examination of cases decided in the courts in the early part of the last century convinces one that the same spirit of speculation existed then as now, if not on a larger scale, as is shown by the opinion given in a case decided nearly seventy years ago. A person offered lands for sale by the acre, near the city, and represented that the same was adapted to be laid out into city lots, free from rock, and level and graded, and said that it actually cost $32,000, and induced the purchaser to take a large interest in the property at that price. The purchaser relied upon these statements and never examined the property; the representations turned out to be false, as the property only cost $16,000 and was hilly and not graded and full of rock. In an action brought to rescind the sale on the ground of these misrepresentations, Judge Bronson, one of the ablest judges this State has ever had, states: "It will seem marvelous if not wholly incredible to those who do not live in the years 1835 and 18536 that men should purchase land lying within a few hours' ride of their residence and agree to pay thirty-two thousand dollars for it, without ever having taken the trouble to look at the property either in person or by an agent. But farms lying in the vicinity of cities and villages were then so much in demand for the building of new towns that many persons thought it best not to hazard the loss of a bargain by stopping to look or inquire. They might better lose the little sum of $32,000 than be absent one whole day from Wall Street, and thus miss the possible chance of purchasing the site of some other prospective city of much greater magnitude. Wonderful as it may seem to the next generation, such things did happen." In view of the speculation now going on, were the judge living now, he would only see a repetition of what happened in his own time. In that case the purchaser was relieved of his contract, the Court saying the credulity of the purchaser furnishes but a poor excuse for the falsehood and fraud of the seller; the latter will have no just ground for complaint if he is held responsible for his misconduct.
It is not every false affirmation of the vendor which will give the vendee an action, although he may be deceived by it. It often happens in the making of bargains that many things are said which neither party regards of much consequence; and if the buyer trusts to representations which were not calculated to impress upon a man of ordinary prudence; or if he neglects the means of information easily within his reach, it is better that he should suffer the consequences of his own folly than to give him an action against the seller. It is difficult to lay down a general rule on this subject. It may be stated generally, however, that where it is impracticable for the purchaser to ascertain the truth upon investigation, or where the seller by his acts prevents a proper investigation on the part of the buyer, or the fact is within the personal knowledge of the seller, then the representations are material, and, if false, the purchaser will be relieved. If the broker is employed in an exchange to ascertain the rents of one of the parcels offered in trade, and the broker procures an erroneous statement thereof, though believing it to be true, which the principal relies on, and contracts to exchange the property, but rescinds the contract after learning the facts, the broker is not entitled to commissions. Having employed the broker to ascertain the rents, the principal was under no obligation to make a personal investigation. The information obtained being of no value to the principal, he was misled thereby into executing a contract, which, because the misrepresentations were also chargeable to the owners of the other parcel, was not enforcible against the principal. To allow a broker to recover commissions on these facts would be inequitable and cannot be sustained on any principle of law, and it is immaterial that the error was unintentional and without fraud.