Seller Disclosures: I Have to Tell Them That About My Property??
Buyers and sellers have competing motivations when it comes to the disclosure of conditions affecting real property. A seller will most likely want to only disclose the minimum necessary — and only those things that are obvious to the untrained professional — caveat emptor.
In contrast, a buyer will want the seller to disclose as much information about the property condition as possible, including all adverse conditions, defects, needed repairs, etc. This makes sense: a buyer needs as much information as possible to determine the purchase price of the property. Even with an inspection, not all conditions will be identified. As such, even armed with a skilled property inspector and engineers, a buyer must rely on the seller’s disclosures about the property’s condition.
(Note that this post will focus primarily on residential properties; we will tackle commercial disclosure in another post.)
Who Has the Duty to Disclose?
Sellers: Section 5.008(a) of the Texas Property Code places a duty on sellers of residential property to make certain disclosures.
Property Code Section 5.008(a): A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed this section which contains, at a minimum, all of the items in the notice prescribed this section.
In response to this statutory provision, the Texas Association of Realtors (“TREC”) has prepared a seller’s disclosure form to ensure compliance with the statute. The Seller’s Disclosure Form focuses on the following:
- Appliances, equipment, and features that exist on the property
- Whether these items are functional
- If the seller knows of any defects or conditions with the main systems of the property
- Knowledge of any conditions on the property (such as termites, wood rot, flooding, improper drainage, aluminum wiring, structural or roof repairs, previous fires, etc.
- Items that need repair
- Repairs/additions/improvements made without permitting
- HOA fees or assessments
- Deed restriction notices
- Lawsuits that directly or indirectly affect the property
- Conditions that materially affect the physical health or safety of an individual
The statute directs that the form be “completed to the best of seller’s belief and knowledge as of the date the notice is completed and signed by the seller.” Sect. 5.008(7)(d). As such, the purpose of the disclosure form is for the seller to disclose material facts that would not be discoverable by the exercise of ordinary care and diligence by the purchaser.
Actual Knowledge Is Key
The seller only has a duty to disclose items of which he has actual knowledge; there is no liability for failing to disclose what a seller should have known but did not know. In short, if a neglectful property owner does not maintain the property and does not have actual knowledge of defects in the material conditions, then the seller may not be held liable for failing to disclose.
For instance, if the homeowner does not know about foundation problems and has ignored small cracks or doors that do not properly close, he would most likely not be held liable for saying, “No — there are no known foundation problems.”
While the TREC form includes numerous property conditions that must be disclosed, failure to respond (i.e., failure to check a box) could be considered an affirmative representation. For instance, if your property flooded, but you don’t check any boxes on the “flooded” form, this would be considered an affirmative representation that you did NOT flood. Silence, therefore, can be equivalent to a false representation when there is a duty to speak and the party deliberately remains silent. (See: Bradford, 48 S.W.3d at 755; SmithKline Beecham Corp. v. Doe, 903 S.W.2d 347, 353 (Tex. 1995); Smith, 585 S.W.2d at 658.)
There is also a continuing duty to disclose and update the disclosure form if conditions change. Even in the absence of a confidential relationship, when one makes a representation, he has a duty to disclose new information when he is aware the new information makes the earlier representation misleading or untrue. Basically, if the home sustains damage after the disclosure form is completed, it would need to be updated.
For instance: if a roof is damaged after a hailstorm and the homeowner does not replace or repair the roof despite receiving a settlement, the homeowner would need to disclose the damage to the roof. (See: Cone v. Fagadau Energy Corp., 68 S.W.3d 147, 168 (Tex. App.—Eastland 2001, pet. denied) (citing Susanoil, Inc. v. Cont’l Oil Co., 519 S.W.2d 230, 236 n.6 (Tex. Civ. App.—San Antonio 1975, writ ref’d n.r.e.)).)
Lastly, partial disclosures can be problematic. If a partial disclosure conveys a false impression, it may be considered a misrepresentation. For instance, it may be considered a partial disclosure giving a false impression if the seller states that the bathroom was remodeled, but the plumbing wasn’t replaced. This is because “remodeled” can give the impression that everything was replaced and new within the bathroom. Also, it would be partial disclosure if asked about insurance on the property and the response was that you had an all-risk policy, but you did not disclose a certain exclusion from coverage.
Exceptions to Completing Disclosures
The Texas Legislature recognized that not every sale of residential real estate should require a disclosure because not every seller can effectively complete the disclosure. As such, section 5.008(e) of the Property Code establishes the following exceptions to the requirement of completing the seller’s disclosure form:
- pursuant to a court order or foreclosure sale;
- by a trustee in bankruptcy;
- to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest (which would include deeds in lieu of foreclosure).
- by a lienholder who has either purchased at a foreclosure sale or a sale pursuant to a court order or accepted a deed in lieu of foreclosure;
- by a fiduciary in the course of an administration of a decedent’s estate, guardianship, conservatorship, or trust;
- from one co-owner to one or more other co-owners;
- made to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors;
- between spouses incident to divorce, legal separation or a property settlement agreement;
- to or from a governmental entity;
- a new residence of not more than one dwelling unit that has not been occupied for residential purposes (this would include newly-built homes);
- of real property where the value of any dwelling does not exceed 5% of the value of the property (pure “tear-downs,” in other words).
In the above instances, the sellers simply do not have the requisite information to complete the form, or the buyer is someone with knowledge of the condition of the property. This is a way of limiting the liability of the seller for any alleged misrepresentation or failure to disclose.
What About the Real Estate Agent or Broker?
Generally speaking, a real estate agent does not become liable for a seller’s failure to disclose or any misrepresentations contained in the disclosure form. However, if the agent does have knowledge of the defect and fails to disclose it, then the agent could become liable.
A broker “would have a duty to come forward only if he had any reason to believe that the seller’s disclosures were false or inaccurate, and the only way he could be held liable for [the seller’s] statement in the notice is if it were shown to be untrue.” (See: Sherman v. Elkowitz, 130 S.W.3d 316, 321 (Tex. App.—Houston [14th Dist.] 2004, no pet.).) In short, a listing real estate agent does not have a legal duty to inspect listed property for defects over and above asking the sellers if such defects exist. (See: Kubinsky v. Van Zandt Realtors, 811 S.W.2d 711, 714 (Tex.App.–Fort Worth 1991, writ denied).)
The Texas Legislature has also limited broker liability by section 1101.805(e) of the Texas Occupations Code, which provides that a broker is not liable for a misrepresentation or concealment of a material fact by a party to a real estate transaction unless the license holder (broker):
- Knew of the falsity of the misrepresentation or concealment; and
- Failed to disclose the license holder’s knowledge of the misrepresentation or concealment.
Through this section, a broker’s liability is limited to his/her own representations and obligations under the contract.
Nevertheless, a broker may be liable for breach of contract if they make a representation regarding the property condition that is later found to be incorrect. For instance, in Coldwell Banker Whiteside Assocs. v. Ryan Equity Partners, Ltd., 181 S.W.3d 879 (Tex.App.–Dallas 2006, no pet.), the agents were held to have breached their contract with the buyers through misrepresenting that the property conformed with the zoning requirements.
Importantly, while the brokerage agreement did not directly require the broker to identify the effects of the zoning status, once the broker undertook to identify the effects, they had an obligation to do so correctly. By offering an interpretation of the zoning ordinances, the broker enlarged their obligations under the Brokerage Agreement.
As noted through the above-referenced cases, a broker’s liability for disclosures is limited to:
- What he or she actually knows and fails to disclose
- The representations that he/she makes
- Obligations under the contract
The general advice to sellers would be to over-disclose to avoid any claim of non-disclosure. In contrast, a broker/agent would be best served by not doing additional investigation into the condition of the property — other than that information provided by the client or seller — and not making any representation that was not made by the seller.