PROPERTY CONDITION DISCLOSURE FORMS: HOW THE REAL ESTATE INDUSTRY EASED THE TRANSITION FROM CAVEAT EMPTOR TO "SELLER TELL ALL"

Real Property, Probate and Trust Journal, Summer 2004 by Lefcoe, George

Under California's comparative negligence rules, the jury found the sellers sixty-five percent responsible, the builder twenty-five percent responsible, the listing broker five percent responsible, and the cooperating broker (not a party to the litigation) five percent responsible." In comparative negligence situations, joint and several liability applies.100 Because the sellers, the developer, and the builder were judgment-proof, the listing agent had to pay the entire judgment, which the listing agent later split with the selling broker.l0' Clearly, the agent's loss far exceeded the agent's commission.

By March 1985, the California Association of Realtors had published a five point preventive program for real estate licensees to guide them in how to stay clear of Easton-type liability.102 According to the guidelines, real estate licensees should: (1) Ask sellers about property defects; (2) inspect the property; (3) disclose the results in writing to buyers; (4) discuss the inspection report with buyers; and (5) recommend further action based on the disclosure. The pamphlet came with a standard disclosure form. A statute imposing almost the same requirements became effective January l, 1986.103

The justifications for this broker liability standard are varied. First, buyers expect a certain standard of conduct from the listing broker as a licensed, competent professional. As NAR noted over a decade ago, the inspection, which typically takes one to two hours, "[I]s probably quite similar or essentially identical to that which conscientious agents ordinarily make to familiarize themselves with the property and its features."104

A rule protecting a broker who had not bothered to take a close look at the property and requiring only disclosure of known defects, but not defects reasonably discoverable, would wrongly protect a broker from "his ignorance ofthat which he holds himself out to know."105 If brokers do not have a duty to discover defects, brokers may have a perverse incentive to remain ignorant because "inspections might reveal information decreasing the home's value."106 Requiring buyers to prove the broker's actual knowledge when they believe they have been deceived could inadvertently shield negligent brokers from their own incompetence or deceit.

Holding brokers to this higher standard may have the additional advantage of discouraging them from advising sellers to make a house more saleable by painting over or covering up evidence of serious defects without making the requisite disclosures because once brokers learn of defects, even after the removal of visible evidence, they would be required to share their knowledge with prospective buyers.

Mandated broker inspections and disclosures can also provide a discreet way for listing brokers to correct errors in the sellers' disclosure form without putting them in the compromising position of having to offer on their own initiative a correction of their sellers' errors or omissions.

Following Easton, some states imposed an inspection obligation on real estate agents or held them accountable for what they should have known.107 The states that require independent broker inspections for the benefit of buyers include California, Maine,108 New Jersey,109 New Mexico,"0 Wisconsin,1" and, possibly, Utah."2 Seven states have firmly limited broker disclosure obligations to matters demonstrably within the brokers' actual knowledge."3