Disclosure Issues – Part 1
Disclosure Issues – Part 1
Once upon a time and throughout the land, the basic rule of buying anything, including real estate, was “Caveat Emptor” – that is, “Buyer Beware.” In more general terms it was consumer beware and applied to a purchaser of any product or service. The seller or landlord had no responsibility to disclose defects in what he was selling or leasing and had no liability for any problems the buyer or tenant had following the transaction.
Things have changed, particularly regarding real estate. Over the past several decades, the legislatures and courts have put more and more burden on sellers and landlords to fully disclose defects in the real property they are selling or leasing.
It is very important that adequate disclosure be made by sellers and landlords to buyers and tenants, respectively, in order to avoid (1) risk of misunderstandings and disputes and/or (2) violation of laws, either of which can be costly. While many disclosure issues are important only in sales transactions, other issues can potentially also be of concern in a leasing transaction. Adequate disclosure is far less time-consuming, costly, and stressful than is litigation.
Discussions in this article are based on general legal principles that apply to many states. However, as with most issues regarding real property transactions, one must know and understand the laws of his state and local governments and/or consult with a competent real estate attorney experienced in the particular area of law at issue.
Although states vary regarding protections provided to buyers and tenants, all states provide significantly more than was the case a few decades ago. Most states require disclosure of known defects and many require disclosure regarding certain specific issues.
Most states no longer allow a seller to escape liability for known defects by selling the property “as is” except for certain transactions such as foreclosures or sales by government agencies (e.g. bankruptcy courts). Most states also provide for tenant protection against “as is” by statute and/or, for residential leasing, through the legal principle of “warranty of habitability.”
Typical disclosure laws require a seller to notify a buyer of certain things regarding the property’s physical condition, material defects, or major repairs that might affect a buyer’s decision to purchase the home. Some states have disclosure laws that require the seller or agent to reveal events such as crimes.
While there are issues specific to only a buyer or to only a tenant, certain issues must be disclosed to both buyers and tenants. The latter includes the lead paint disclosure that is required by federal law for properties built before 1978 and, in some jurisdictions, by more stringent state and/or local laws. Furthermore, some issues are solely or more relevant to residential than to commercial properties.
The temptation to not disclose known material facts should always be resisted by sellers and landlords. Other than the fact that the failure could be considered misrepresentation or fraud, one should expect that the information will eventually be discovered by the buyer or tenant. For serious issues, later discovery sometimes results in litigation.
Discovery by the buyer or his agent before close of a sale escrow may result in cancellation or require renegotiation of the contract. This will result in loss of time and may even be costly, depending on the specific circumstances.
If discovered by the tenant soon after moving in, he may be able to legally break the lease. If a serious material fact that was known, or should have been known by the seller or landlord (or agent thereof) is discovered after it has caused injury or damage, the failure to disclose may result in a lawsuit against the seller or landlord (and probably any agent thereof), usually a costly event no matter what the outcome.
A majority of the states require written disclosure of various issues that might be a material factor in deciding whether to purchase a property and how much to pay for it. In some of those states, the requirement is limited to residential properties of four or fewer units. If the buyer is represented by an agent, such a disclosure will likely be required by the broker even when not required by law.
Many states have also made disclosure of certain non-physical matters an issue, either through legislation or court decisions. For example, a buyer’s agent who has reason to believe that his client cannot perform for some reason could be held liable to the seller if the buyer cannot close escrow because of that issue, as could the buyer himself. Similarly, a listing agent could become liable to the buyer for the inability of the seller to close escrow because of an issue known to the listing agent, as could the seller himself. Examples include (1) the seller is planning to file bankruptcy and (2) a divorce is underway.
Courts have generally extended the idea of fair dealing to apply to buyers and sellers as individuals, whether or not a real estate agent is involved.
As a seller, if you have knowledge of a potentially material fact, disclose it as early as practical in order to minimize possible waste of time and money for all parties.
If you are a buyer, require written disclosure regarding all issues of material concern to you. Written disclosure serves two purposes. First, it points out potential issues before you spend the time and/or money to look for them. Second, it gives you additional legal recourse in the future if full and truthful disclosure is not made.
The disclosure statement should cover such items as known (1) zoning, building code, or permit violations, (2) utility services (including whether or not on city water and sewer), (3) soil stability problems, (4) environmental issues such as mold or asbestos, (5) prior significant damage to the property or any of the structures from fire, earthquake, floods, etc., and (6) any pending or potential legal actions involving the property.
Habitability Standards – As a result of shoddy and improper maintenance by landlords, American courts began to hold that there is an “implied warranty of habitability” in housing that is offered for rent. Many states have codified that concept by statute and landlords can now even be held criminally responsible for neglecting certain maintenance in some states. Both civil and criminal liabilities can be very substantial when related to health or safety issues, even when those issues are not explicitly covered by laws.
Habitability standards apply regardless of how low the rent is and require that rental units meet certain standards for safety, health, and cleanliness. The federal guideline standards are quite low compared to those of many states and local governments. The strictest of the different levels of government for the location of a property will be the safest standard to follow.
The type of disclosures required varies significantly among states. Examples of disclosure items required in some states include (1) the name of the owner and/or any other person authorized to receive legal papers, (2) the bank where the security deposit is kept, (3) any planned condominium conversion, (4) existence of illegal drug waste, (5) the landlord’s tax number if the tenant needs it in order to file for the state’s low-income tax credit, (6) availability of an official registered sex offender database, and (7) existence of “dangerous” mold.
In general, most states require disclosure of issues that could cause injury or substantially interfere with the tenant’s safe enjoyment and use of the property (e.g., asbestos) and under general legal principles, failure to disclose such things would increase risks in litigation related to them even if not an issue covered by statute or ordinance.
Landlords should disclose likely material facts, particularly those disclosures that are required by law, as early as practical in order to minimize possible waste of time and money by sellers and possible buyers or by landlords and possible tenants.
Rent control properties can have additional disclosure requirements. In most controlled jurisdictions, the tenant must be provided the name and address of the government agency or the elected board that administers
the control ordinance.