Over 70% of claims asserted against real estate agents arise regarding disputes regarding defects in or physical conditions of the property sold that impact the value, desirability or use of the property. Seller's disclosure statements, if handled correctly (as explained below), are an effective means to reduce and manage the risks associated with misrepresentation and non-disclosure claims.
The reason that seller's disclosure statements are effective is because they require sellers to make affirmative representations regarding the condition of the property and because they put the purchaser on notice of potential defects or physical conditions of the subject property thereby placing the purchaser on notice and requiring the purchaser, after being placed on notice, to independently investigate the conditions of the property prior to the purchase. These two simple facts serve as strong defenses to claims asserted against listing agents predicated on negligence, intentional misrepresentation and fraud.
What Must Be Disclosed to Purchasers - Evolution from Caveat Emptor to Full Disclosure
The general rule in the sale of residential real estate was "caveat emptor" - that is, buyer beware. However, since then, the trend has been to impose on the seller and/or the listing agent the duty to disclose "materially adverse facts" regarding the property to purchasers. Initially, these disclosures were limited to defects in the property or physical conditions of the property and included such items as the condition of such items as:
•· Heating, Cooling and Ventilation
•· Plumbing System, Fixture and Equipment
•· Electrical Systems
•· Roof, Gutters and Downspouts
•· Water and Sewerage
•· Construction Methods
•· Basements and Crawl Spaces
•· Termites/Wood Destroying Insects
•· Soil and Drainage
Subsequently, the scope of the disclosures was expanded to include items relating to hazardous or potentially hazardous substances and other environmental and health concerns existing in or located within the property such as:
•· Lead Paint
•· Asbestos Materials
•· Underground Fuel Tanks
•· Unused Septic or Other Storage Tanks
Again, the scope of disclosures evolved to include items that were not within the four corners but had an impact or potential impact on value, desirability or use of the property, including off-site conditions such as:
•· Electro-magnetic Fields from Overhead Lines
•· Highway Noise
•· Airport Noise
•· Off-Site Groundwater Contamination
•· Natural Disaster Hazards such as Flooding, Hurricane Zones, Mudslides, and Fires
•· Proximity to Off-Site Landfills and Hazardous Waste Sites
In addition, finally, the most recent trend has been to expand the scope of the disclosures to require the disclosure of "status" issues associated with the property or the current and prior occupants of the property and include such items as:
•· Disclosure of Methamphetamine Production on Property or Conviction of Current or Prior Occupant for Drug-Related Offenses
•· Megan's Law Disclosures regarding Proximity to Known Sexual Offenders or Notice of the Availability of Statewide Database.
•· Existence of Insurance Claims or Other Issues relating to the Insurability of the Property
Although some states have comprehensive mandatory disclosure requirements, other states provide little guidance and address the issue of what must be disclosed by the owner and/or listing agent on an ad hoc basis, including periodic statutory enactments and case law involving judicial interpretation of these statutes.
In Missouri, there are few mandatory disclosure requirements - except the federally mandated lead paint disclosures and disclosures regarding methamphetamine production[i] and the location of solid waste and construction landfills.[ii] Occasionally, often in response to judicial decisions, state legislatures may enact legislation that specifically exempts certain items from mandatory disclosure such as psychologically impacted property due to infamous crimes, HIV infection or death.[iii]
Who Must Make the Mandatory Disclosures
The issue of who must make the disclosure depends on the law that imposed the disclosure requirement. Disclosure requirements vary from state to state and even from county to county or city to city within a state. Each real estate professional should carefully review federal and state laws, rules and regulations and county or municipal ordinances, rules and regulations to determine what disclosures are required and who is responsible for making the disclosures.
Notwithstanding the source of the requirement for specific mandatory disclosures, licensing statutes often impose upon the listing agent to disclose "adverse material facts" relating to the property. All too often, this phrase is not defined or, equally as bad, simply refers to items required to be disclosed by law. Because of these general "catch-all" provisions, state and local associations often have drafted and provided to their members standardized disclosure forms. In addition, real estate brokerages often require sellers to provide a seller's disclosure statement - whether the owner has a duty to disclose these items or not - as a condition of taking the listing.
However, some licensing statutes provide a "safe harbor" that clearly provide that the listing agents have no affirmative duty obligation to either conduct an independent investigation relating to the items disclosed by the owner/seller or verify the accuracy or completeness of the information provided or otherwise disclosed by the owner/seller.[iv]
How Listing Agents Can Avoid Potential Liability
Seller's disclosures are an effective tool for limiting liability - when handled properly. Here are some suggested best practices to avoid potential liability for the non-disclosure or misrepresentation of "adverse material facts" relating to a property listed for sale, to wit:
•· Review all applicable federal, state and local laws, rules and regulations to identify what must be disclosed to potential purchasers.
•· Provide specific instructions to the owner/seller to fully and accurately disclose any physical defect or condition, on-site or off-site, which may adversely impact the value, desirability or use of the property or which may pose a health or safety issues to future occupants of the home. Explain to the owner/seller the importance of making full and complete disclosures as well as the potential liability that may arise because of incomplete, inaccurate or misleading statements in the seller's disclosure statement.
•· Provide a cautionary statement to the owner/seller that the standardized disclosure form is intended to assist the owner/seller in meeting their disclosure obligations and that the owner/seller should disclose any other or additional item that they believe may adversely impact the value, desirability or use of the property or which may pose a health or safety issues to future occupants of the home. When in doubt as to whether disclosure is required or not, err on the side of making the disclosure.
•· Do not prepare the seller's disclosure statement. Have your client's hand write the answers or otherwise provide the requested information. Retain a copy of the handwritten form in your files. Revise the seller's disclosure statement to condition or explain the disclosure such as "Owner/Seller has not previously occupied the residence" or "During their occupancy of the residence, Owner/Seller has not observed..." Review the specific language with the owner/seller.
•· When transmitting the disclosure statement for execution, provide a cautionary statement to the owner/seller that the accurate and complete disclosure of physical defects and conditions is important to minimize and defend against possible future claims made or asserted by the purchaser.
•· Before you disseminate the disclosure statement to a prospective purchaser, inspect the property. Look for telltale signs or red flags of prior problems such as water stains, freshly painted areas, obstructed areas, etc. Examples of red flags provided by the National Association of Realtors website include:
1. Roof leak
Water spots or discolorations on ceilings; mold or mildew in closets near roofline
Weakened or grooved wood, especially near ground level
3. Water seepage in the basement
Water marks on the floor, loose or cracked plaster or tile
4. Poor foundations
Large cracks or shifts in the foundation
5. Plumbing problems
Extremely low water pressure; clanking or banging when water is turned
Granulated, cement-like coating on pipes or supports; cotton-candy-like material sprayed on ceilings or walls
7. Underground storage tanks
Vent pipes visible above ground; oil sheens in wet areas
8. Soil instability/mud slides
Gullies in the soil; netting placed to hold soil in place; soil stains higher on exterior walls
•· If you see any telltale signs or red flags indicating prior problems, make specific inquiries to the owner/seller regarding the potential or perceived problem. Document the owner/seller's response by sending a confirming e-mail summarizing the conversation. Retain a copy of the e-mail or other correspondence in your file.
•· If a prior repair is disclosed on seller's disclosure statement, request supporting documentation regarding the repair or any warranty associated with the repair from the owner/seller.
•· Where appropriate, suggest to the owner/seller that they retain a building inspector to conduct a building inspection prior to the listing of the property for sale so that the potential problems can be repaired before the property is listed for sale. Verify that pre-listing repairs are documented and accurately disclosed to the prospective purchaser. The resolution of problems prior to listing can lead to a quicker sale at a higher price.
•· If the property was previously listed for sale (either by the current or former owner), request a copy of the prior seller's disclosure statement from the owner/seller or from the prior listing agent. Often, you can locate a copy of prior seller's disclosure statement by reviewing the prior listing in the local MLS. If an offer was previously accepted and the sale did not close, request a copy of the building inspection report or municipal occupancy inspection report. Compare the prior seller's disclosure statement and/or the prior building inspection to identify inconsistencies.
•· Stay within your area of expertise. Although you are expected to recognize problems or conditions by the exercise of your professional judgment, you are not a home inspector and do not have the expertise to assess the scope of the problem or provide information on suggested repairs or costs.
•· Do not make any statements regarding the condition of the property that prospective purchasers will rely upon in making their decision to purchase. If you do make such a statement, make sure that the statement is factually accurate and complete.
•· If you do not know an answer with certainty, simply state that "you don't know", make the appropriate inquiry to the seller, and transmit the owner/seller's response to the prospective purchaser. Where appropriate, send a confirming e-mail to the prospective purchaser containing limiting or cautionary language such as the "The owner/seller reports that... I am not a building inspector and would strongly suggest that you conduct a building inspection of the property to verify..."
•· Do not offer opinions on soundness of components (e.g. "roof is in great shape), the quality or adequcey of repairs (e.g. "roof was recently repared and there are no problems") or predictions on future events such as "The roof was replaced last fall and should last 20 years."
•· Document your file regarding conversations or discussions with the owner/seller or prospective purchaser regarding the condition of the property. Where appropriate, document your file by sending a confirming e-mail summarizing the conversation or reinforcing cautionary statements made in person. When a dispute arises, you may have a different recollection of the events.
•· If you are a buyer's agent or a dual agent, recommend in writing to the purchaser that they retain and employ a building inspector or other expert to inspect, review and evaluate the condition of the property. If the purchaser declines to make an inspection, send a confirming e-mail explaining that seller's disclosure statement simply reports known conditions reported by the owner/seller and is not a warranty that the condition does not exist or will not occur in the future. Explain the risks associated with purchasing a home without a building inspection. Specifically explain that other inspections are conducted for different purposes and should not be relied upon by the purchaser. For example, the occupancy or municipal inspection or appraisal inspection are performed for different purposes and may not be as rigorous as a building inspection. In addition, the building inspection may not cover specific components like the roof or sewer laterals.
•· Recommend that the owner/seller offer or, in the alternative, that the purchaser purchase a home warranty. If the seller refuses to provide or a purchaser declines to purchase a home warranty, send a confirming e-mail explaining that seller's disclosure statement simply reports known conditions reported by the owner/seller and is not a warranty that the condition does not exist or will not occur in the future. Explain the risks associated with purchasing a home without a home warranty. Also, explain the limitations on what is covered by the warranty.
Seller's disclosure statements provide an important tool for limiting potential liability. However, you can't turn a blind eye and ignore known problems or defects. When in doubt disclose. Stay within your field of expertise. Always document your file. By following these simple rules, you can avoid the costly defense associated with non-disclosure claims.
Note: The opinions and statements contained herein represent my personal opinions and observations. These blog entries are not reviewed, endorsed or approved for publication by Gilded Age Sales, LLC.
Disclaimer: The author is a licensed attorney. However, the opinions and statements contained herein are for informational and discussion purposes only and shall not constitute the provision of legal advice. Nothing contained herein shall establish an attorney-client relationship. Readers are cautioned to seek legal counsel in their state before using or relying upon any of the information contained herein.
[i] Section 442.606 R.S.Mo. (2008) provides, in toto, as follows: "1. In the event that any parcel of real property to be sold, exchanged or transferred is or was used as a site for methamphetamine production, the seller or transferor shall disclose in writing to the buyer or transferee the fact that methamphetamine was produced on the premises, provided that the seller or transferor had knowledge of such prior methamphetamine production. The seller or transferor shall disclose any prior knowledge of methamphetamine production, regardless of whether the persons involved in the production were convicted for such production. 2. A seller or transferor of any parcel of real property shall disclose in writing the fact that any premises to be sold or transferred either was the place of residence of a person convicted of any of the following crimes, or was the storage site or laboratory for any of the substances for which a person was convicted of any of the following crimes, provided that the seller or transferor knew or should have known of such convictions: (1) Creation of a controlled substance in violation of section 195.420, RSMo; (2) Possession of ephedrine with intent to manufacture methamphetamine in violation of section 195.246, RSMo; (3) Unlawful use of drug paraphernalia with the intent to manufacture methamphetamine in violation of subsection 2 of section 195.233, RSMo; (4) Endangering the welfare of a child by any of the means described in subdivision (4) or (5) of subsection 1 of section 568.045, RSMo; or (5) Any other crime related to methamphetamine, its salts, optical isomers and salts of its optical isomers either in chapter 195, RSMo, or in any other provision of law.
[ii]Section 260.213 R.S.Mo. (2008) states, in pertinent part, that "No person may knowingly sell, convey or transfer title to any property that contains a permitted or unpermitted solid waste disposal site or demolition landfill, without disclosing to the buyer early in the negotiation process the existence and location of the site. The seller shall also notify the buyer that he may be assuming liability to the state for any remedial action at the site, except that the sale, conveyance or transfer of property shall not absolve any person responsible for the illegal disposition of solid waste, including the seller, of liability for any remedial action at the site."
[iii] Section 442.600 R.S.Mo. (2008) states, in toto, as follows: 1. The fact that a parcel of real property, or any building or structure thereon, may be a psychologically impacted real property, or may be in close proximity to a psychologically impacted real property shall not be a material or substantial fact that is required to be disclosed in a sale, exchange or other transfer of real estate. 2. "Psychologically impacted real property" is defined to include: (1) Real property in which an occupant is, or was at any time, infected with human immunodeficiency virus or diagnosed with acquired immune deficiency syndrome, or with any other disease which has been determined by medical evidence to be highly unlikely to be transmitted through the occupancy of a dwelling place; or (2) Real property which was the site of a homicide or other felony, or of a suicide. 3. No cause of action shall arise nor may any action be brought against any real estate agent or broker for the failure to disclose to a buyer or other transferee of real estate that the transferred real property was a psychologically impacted real property.
[iv] Section 339.190 R.S.Mo. (2008) states, in toto, as follows: 1. A real estate licensee shall be immune from liability for statements made by engineers, land surveyors, geologists, environmental hazard experts, wood-destroying inspection and control experts, termite inspectors, mortgage brokers, home inspectors, or other home inspection experts unless: (1) The statement was made by a person employed by the licensee or the broker with whom the licensee is associated; (2) The person making the statement was selected by and engaged by the licensee; or (3) The licensee knew prior to closing that the statement was false or the licensee acted in reckless disregard as to whether the statement was true or false. 2. A real estate licensee shall not be the subject of any action and no action shall be instituted against a real estate licensee for any information contained in a seller's disclosure for residential, commercial, industrial, farm, or vacant real estate furnished to a buyer, unless the real estate licensee is a signatory to such or the licensee knew prior to closing that the statement was false or the licensee acted in reckless disregard as to whether the statement was true or false. 3. A real estate licensee acting as a courier of documents referenced in this section shall not be considered to be making the statements contained in such documents.