Disclosure

by Ron Walker   

The idea of disclosure is simple — tell prospective buyers what you know about a property.

In practice, though, things can sometimes get a little more complicated. Read on for insights about the obligations for sellers and brokers, the responsibilities of relocation companies, the role of inspection reports, and whether you have a duty to disclose knowledge of registered sex offenders in the neighborhood.

A seller of real property in Texas and a real estate broker must disclose to a prospective buyer any known material defect in the property. The broker’s duty to disclose known defects is the same without regard to whom the broker represents in a transaction.

Texas Property Code Section 5.008–the seller’s disclosure notice statute–requires a seller to complete a seller’s disclosure notice and deliver it to the buyer on or before the effective date of a contract. If the seller fails to timely deliver the notice, the buyer may terminate the contract for any reason within seven days after the buyer receives the notice. Paragraph 7B of the TREC contract forms reflects the provisions of the statute.

Here are some common questions that arise concerning the seller’s disclosure notice.

Why do multiple variations of the seller’s disclosure notice exist?

The seller’s disclosure notice statute requires the seller to use the form set out in the statute or a form that is substantially similar and, at a minimum, contains all of the items in the statutory form. This allows: a) flexibility of the form; b) additions to the form that might not have been considered by legislators when the statute was passed; and c) changes to the form necessary to clarify questions posed in the form.

The TREC Seller’s Disclosure of Property Condition form is identical to the statutory form. TREC publishes the notice as a convenience for brokers, sellers, and buyers. TREC has not revised the form since the seller’s disclosure notice statute first became law (Jan. 1, 1994).

The TAR Seller’s Disclosure Notice form (TAR No. 1406) complies with the seller’s disclosure notice statute but facilitates additional disclosures common in today’s market. TAR last revised its form on Feb. 22, 2000.

Other seller’s disclosure notice forms are published by local associations of REALTORS^®. The primary concern is that the form contain all of the items in the statutory form and be substantially similar to the statutory form.

What are some of the more significant differences in the TAR form compared to the statutory form?

The organization of the TAR form is easier to follow. For example, many of the listed items are alphabetized and grouped categorically.

The TAR form also clarifies some issues that have arisen with the statutory form. For example, the TAR form allows the seller to specify if previous flooding occurred "onto the property" or "into the improvements." This might be an important distinction, especially for a property located near the coast, a lake, or other waterway that is built to permit flooding onto parts of the property.

The TAR form also accommodates additional, but important, information related to items such as the air conditioning, fireplace, garage door openers, satellite dish, security system, underground sprinkler, on-site sewer systems, and homeowners’ association fees.

Other issues covered by the TAR form include any previous deaths that occurred on the property (other than by natural causes, suicide, or accidents unrelated to the condition of the property), any previous inspection reports the seller received, and information about the DPS Web site that contains the registered sex offender database.

Did the seller’s disclosure notice statute add any additional disclosure obligations on sellers?

Considering that sellers for decades have been obliged to disclose known material defects to prospective buyers, the seller’s disclosure notice statute did not add any additional disclosure requirements. The statute simply specified the mechanism by which sellers must make disclosures required by common law and statutes such as the Deceptive Trade Practices Act and the Fraud in Real Estate Statute.

Must every seller deliver the seller’s disclosure notice to a prospective buyer?

The seller’s disclosure notice statute contains 11 narrow exemptions that most real estate brokers will typically not encounter on a regular basis. The most common exemption is the new home exemption or builder exemption.

The next two most common exemptions are the trustee or executor exemption and the foreclosure exemption. Under these exemptions, a builder of a new home, a trustee or executor of an estate, and the lender after foreclosing on a property are not required to complete the seller’s disclosure notice. Keep in mind, however, that even though these types of sellers are exempt under Section 5.008 of the Texas Property Code, they are still required to disclose any known material defect in the property to a prospective buyer under common law and other statutes.

The mechanism of disclosure, namely the seller’s disclosure notice, is not mandated. Therefore, a lender who knows that the roof leaks in a property that the lender acquired through foreclosure must disclose the defect to any buyer who purchases the property from the lender.

Is a relocation company required to deliver a seller’s disclosure notice?

Relocation companies are not exempt. If the relocation company is the seller, it must deliver the seller’s disclosure notice. The answer depends on who is the seller in the transaction — the original owner or the relocation company.

May a relocation company state on the seller’s disclosure notice that it has never occupied the property and does not know anything about the condition of the property?

The statute provides that if the information is unknown to the seller, the seller must indicate that fact on the notice, and by that act is in compliance. Therefore, the direct answer depends on what the relocation company knows.

A relocation company will often state on the seller’s disclosure notice that the relocation company has not occupied the property and has no knowledge of the condition of the property except for the information that is attached. The attachments might include inspection reports and other information that evidence the relocation company’s knowledge of the property condition.

Must a seller disclose a previous death in a property?

The statute provides that neither a seller nor a broker must disclose deaths that occurred by natural causes, suicide, or accidents unrelated to the condition of the property. This leaves two other types of deaths: 1) deaths caused by an accident related to the condition of the property, and 2) murder.

Deaths caused by an accident related to the condition of the property will most likely need to be disclosed, particularly if the condition has not been remedied. For example, although a swimming pool death may be related to the lack of a proper pool enclosure, such conditions are typically remedied before the property is placed on the market.

With regard to murder, the answer is not as clear. A number of factors may need to be evaluated, such as: a) when the murder occurred; b) how gruesome the murder was; c) if the property has been materially stigmatized by the murder; d) whether the information is material to the purchaser and the purchaser has made known any concerns; e) who committed the murder (occupant, family member, friend, intruder); and f) the number of murders that occurred in the property.

According to DPS, most murders in the home are committed by family members or acquaintances. Although such murders may not be related to the property’s security or the foresee-ability of any future similar occurrence, it is most prudent for a broker to consult with the seller and seller’s attorney and, if doubt remains, disclose.

If a seller receives a copy of an inspection report from a buyer but the contract with that buyer falls through, must the seller or broker provide copies of previous inspection report to the subsequent purchaser?

A broker or seller who receives an inspection report is charged with knowledge of the information in the report. If an inspection report reveals material defects, the seller and broker are obliged to disclose those defects.

Therefore, the question is not whether the seller and broker must disclose the defects, but rather how the seller and broker will disclose the defects. The seller and broker may choose to: 1) disclose the defects orally, but that may be imprudent since no record of the disclosure would exist; 2) summarize the defects in some written communication to the subsequent purchaser, but that may create risk since some important information may be edited out; or 3) provide a copy of the report to the subsequent purchaser along with the seller’s disclosure notice, thereby providing all information the seller and broker have with regard to any known defects.

The TAR seller’s disclosure notice asks the seller to identify and attach copies of previous inspection reports. TAR’s notice cautions the buyer against relying on previous reports as a reflection of the current condition of property and suggests that the buyer employ an inspector of the buyer’s choice.

If a seller and broker believe a previous inspection to be in error (for example, the inspector opined that an item was in need of repair but the seller and broker believe the item is working), must the seller provide a purchaser with a copy of the report?

Typical brokers and sellers do not possess the same level of expertise as an inspector with regard to identifying physical defects in a property. Absent expert evidence, a broker is not qualified to opine that an inspector was in error. The same is true for most sellers.

If a seller believes an inspector is in error, the seller might ask the inspector to reexamine the item or seek a second opinion from another inspector or expert. If the second opinion conflicts with the first opinion, the seller and broker may provide all information to any subsequent purchaser (including the qualifications of both experts) and suggest that the subsequent purchaser employ an inspector that the subsequent purchaser chooses.

If a seller repairs all the items an inspector noted as in need of repair, must the seller provide a purchaser with a copy of that inspector’s report?

A prudent seller and broker would convey all information regarding previous inspections to a purchaser including the previous inspection report and any invoices showing that repairs were made. Once an item is repaired, it is no longer defective, and disclosure of repaired items is not required except as noted in the seller’s disclosure notice (namely, previous fires, previous flooding, previous foundation repairs, previous structural repairs, and previous termite treatment and repairs).

Is a seller prohibited from providing a copy of an inspection report to a purchaser when the purchaser did not pay for the inspection report?

An inspector is obliged to answer only to the inspector’s client and is under no obligation to speak with any other person about the content of the inspector’s report. But the inspector’s opinion as to the condition of the property as of the date specified in a report does not change based on who reads the report.

The inspector’s report should stand on its own. Most inspectors know that a client will use the inspection report to negotiate repairs in a transaction and that the client may need to provide a copy of the report to the other party. This is the nature of the industry that gives rise to the demand for the inspector’s business.

Most inspectors do not require that their clients sign confidentiality agreements prohibiting the client from sharing the report with others. Even if an inspector has a client sign a confidentiality agreement that limits the client’s right to copy and distribute the report, that agreement is binding only upon the client and not any other person who may receive a copy of the report.

Therefore, a seller is only prohibited from sharing a copy of an inspection report with a buyer if the seller is the client of the inspector (i.e., the seller ordered the inspection) and the seller signed an agreement prohibiting the seller from sharing the report.

The standard language in the TREC contract forms does not require the buyer to deliver a copy of inspection reports to the seller. Should a buyer provide, and should a seller accept, copies of inspection reports obtained by the buyer?

It is possible that a buyer may have an inspection completed and then enter into negotiations with the seller to have certain items repaired. In the course of those negotiations, the buyer or buyer’s broker might mention either orally or in writing, that the inspector noted certain items to be in need of repair. Under these facts, the seller or listing broker receives information about known defects as noted in an inspection report. A prudent seller and broker would request a copy of the inspection report so that they may understand the scope of the problem. Having received information about defects noted in the report, either orally or in writing, the seller and listing broker are now under an obligation to disclose this information to any subsequent purchaser. Providing a copy of the report itself to a subsequent purchaser would create the least amount of risk for the seller and listing broker.

In Smith vs. Levine, a prospective buyer obtained a report stating that the foundation was defective. The prospective buyer discussed the report with the sellers and offered to provide the sellers with a copy of the report.

The sellers declined receipt of the report and no deal was consummated with that buyer. When the sellers finally sold the property, they did not inform the ultimate purchaser of the information the sellers had received about the previous inspection report.

When the new owner later contracted to sell the property, his buyer by mere coincidence hired the same inspector that had previously determined the foundation was defective. The second deal fell through and the new owners sued the original owners.

The original owners defended by claiming that they never received a copy of the inspection report and, therefore, had no duty to disclose the oral information they received about the foundation.

The jury and court disagreed. Although the original owners had limited knowledge as to the statements in the report, the original owners were on notice that the inspector found the foundation defective and had a duty to disclose this limited information.

In light of the Smith case, a prudent listing broker would likely request a copy of the inspection report when a buyer’s broker begins discussing the contents of the report. Receiving the report itself would reduce the need for the listing broker to document defects orally conveyed by the buyer’s broker and would minimize miscommunicating to subsequent purchasers regarding the report’s contents.

Must a seller or broker disclose to a prospective buyer the fact that a registered sex offender resides in the neighborhood?

Article 62 of the Texas Code of Criminal Procedure requires the Texas Department of Criminal Justice to notify nearby residents if a category 1 registered offender (highest level of risk) intends to reside in their neighborhood. The department must send written notice to residents located within three blocks of the offender’s residence if the area has been subdivided, and within one mile if the area has not been subdivided.

Article 62 also provides that an owner of a single-family residential property or the owner’s agent has no duty to disclose a nearby registrant to a prospective buyer or tenant. Texas Government Code Section 411.088 requires that the DPS information about sex offender registrants be made available to the public at no cost over the Internet.

As a public service, TAR’s seller’s disclosure notice informs buyers of the DPS sex offender database even though a seller is not required to disclose the presence of a registered sex offender in the neighborhood.

Ron Walker is director of legal affairs for TAR.

Editor’s Note: The questions in this article are some of the most common questions asked by REALTORS^®. To discuss specific issues, designated REALTORS^® can call the TAR Legal Hotline, a free service to members. For more information or to request an application, call 800/873-9155, or fill out an application on the Legal section of the member-only pages of www.tar.org.

All TAR members can also download for free the TAR Seller’s Disclosure Notice, along with all other TAR forms, from the member-only pages of the TAR Web site.