Real Estate Law & Asset Protection for Texas Real Estate Investors (eBook)

Chapter 2

SELLER DISCLOSURE

Competing Interests of Seller and Buyer

As the previous chapter made clear, sellers and buyers have different needs and motivations when it comes to the transfer of real estate. One area that is often an issue is property condition. Sellers typically want to make the transfer “as is” without warranties and with no obligation for repairs. Buyers, on the other hand, have an interest in acquiring property that is in the best condition for the price. They also want full disclosure of adverse conditions, defects, and needed repairs.

Residential Sales

TREC promulgates a Seller’s Disclosure of Property Condition form for use in residential real estate transactions (www.trec.state.tx.us/forms). This form (TREC OP-H) is filled out by the seller and attached to the TREC 1-4 contract. The form tracks section 5.008 of the Property Code which states:

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 the his section which contains, at a minimum, all of the items in the notice prescribed this section.

The purpose of the Seller’s Disclosure is to make it clear what appliances, equipment, and features exist on the property; whether or not these items are working; if the seller knows of any defects or malfunctions in critical systems; if certain red-flag events like termite treatment, previous fires, or flooding have occurred; the need for repairs; and the existence of unpermitted additions, unpaid HOA fees, violations of deed restrictions, lawsuits, or conditions that “materially affect the health or safety of an individual.”

Exceptions

Property Code section 5.008(e) provides that requirement that a Seller’s Disclosure be provided does not apply to a transfer:

1.     pursuant to a court order or foreclosure sale;

2.     by a trustee in bankruptcy;

3.     pursuant to a deed in lieu of foreclosure;

4.     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;

5.     by a fiduciary in the course of an administration of a decedent’s estate, guardianship, conservatorship, or trust;

6.     from one co-owner to one or more other co-owners;

7.     made to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors;

8.     between spouses incident to divorce, legal separation or a property settlement agreement;

9.     to or from a governmental entity;

10.  a new residence of not more than one dwelling unit that has not been occupied for residential purposes;

11.  of real property where the value of any dwelling does not exceed 5% of the value of the property.

Penalty

If the seller does not give the Seller’s Disclosure as required, Property Code section 5.008(f) permits the buyer to “terminate the contract for any reason within seven days after receiving the notice.” However, if the failure to give the notice is coupled with fraud or failure to disclose defects, then other penalties may arise pursuant to the Deceptive Trade Practices Act and/or the Statutory Fraud Act.

Commercial Sales

For commercial transactions, the Texas Association of Realtors has a Commercial Property Condition Statement that is an optional attachment to its standard commercial contracts. Its scope is broader than TREC’s Seller’s Disclosure since it addresses additional issues such as wetlands, underground storage tanks, toxic waste, and the like. Although the form is optional in commercial transactions, a careful buyer should always require that the seller provide it. Note that this and other TAR forms are available only to realtors.

Purpose of Disclosure Forms

The intent and purpose of both the residential and commercial disclosure forms is the same: to induce the seller to disclose material conditions, circumstances, and defects. For some reason, however, the drafters of these forms saw fit to insert a statement at the top to the effect that the contents of the form do not constitute a warranty by the seller. The TREC Seller’s Disclosure states:

THIS NOTICE IS A DISCLOSURE OF SELLER’S KNOWLEDGE OF THE CONDITION OF THE PROPERTY AS OF THE DATE SIGNED BY SELLER AND IS NOT A SUBSTITUTE FOR ANY INSPECTIONS OR WARRANTIES THE PURCHASER MAY WISH TO OBTAIN. IT IS NOT A WARRANTY OF ANY KIND BY SELLER OR SELLER’S AGENTS.

The TAR Commercial Property Condition Statement reads:

THIS IS A DISCLOSURE OF THE SELLER’S KNOWLEDGE OF THE CONDITION OF THE PROPERTY AS OF THE DATE SIGNED. IT IS NOT A SUBSTITUTE FOR ANY INSPECTIONS OR WARRANTIES A BUYER OR TENANT MAY WISH TO OBTAIN. IT IS NOT A WARRANTY OF ANY KIND BY SELLER, SELLER’S AGENTS, OR ANY OTHER AGENT.

Both of these disclaimers confuse the intent and purpose of each disclosure form. Why? Is the seller making disclosures but then warning the buyer not to rely on them? Apparently so. At best, this is ambivalent legal drafting. It should be unsettling if not unsatisfactory from the buyer’s point of view. A careful buyer may consider negotiating inclusion of a clause which makes it clear that the seller is standing behind the truth of the disclosures. Buyers, commercial or residential, should not leave a seller any wiggle-room on the disclosure issue.

Ongoing Duty to Disclose

The Seller’s Disclosure does not in and of itself impose an ongoing duty to disclose matters that may come to the seller’s attention after the form has been signed and delivered to the buyer. Bynum v. Prudential Residential Servs., 129 S.W.3d 781,795 (Tex. App.—Houston [1st Dist.] 2004, pet. denied). Although this may be strictly true as it relates to the form, it would be unwise for a seller to withhold material adverse information that is subsequently discovered. There are too many statutory and common law avenues for an aggrieved buyer to pursue.

Broker Liability

Accurately completing the Seller’s Disclosure is the responsibility of the seller, preferably in the seller’s own handwriting. The seller’s broker does not ordinarily become liable for the seller’s wrongdoing in this regard. 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.” Sherman v. Elkowitz, 130 S.W.3d 316, 321 (Tex. App.—Houston [14th Dist.] 2004, no pet.). Note that Article 1 of the National Association of Realtors Code of Ethics makes it clear that information about defects is not confidential. Disclosure of defects is in fact a duty for all members of the NAR.

The Deceptive Trade Practices-Consumer Protection Act (DTPA)

Failure by a seller to disclose material adverse conditions and defects is a violation of the DTPA. In Business & Commerce Code section 17.46(a), the statute declares:

False, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful and are subject to action by the consumer protection division under sections 17.47, 17.58, 17.60, and 17.61 of this code.

The DTPA also declares the following to be unlawful:

17.46(b)(5): representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities which they do not have. . .

17.46(b)(7): representing that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another.

17.46(b)(10): advertising goods or services with intent not to sell them as advertised.

17.46(b)(24): failing to disclose information...