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

1. Known

Sellers are liable only for failing to disclose material defects actually and demonstrably known to them. With a few exceptions, noted in the last section of this Article, sellers are held accountable only for actual knowledge, not for what they should have known or could have hired an expert to discover.17 They have no duty to investigate matters in order to answer questions raised by buyers or posed in state-mandated questionnaires.18

The seller's denial of knowledge is not conclusive. Even if the seller emphatically denies knowledge, buyers can impute knowledge to the seller through circumstantial evidence,19 though this is often difficult.20

Suppose when signing a purchase and sale agreement, a seller claims the roof is sound and leak-free. The seller sees no reason to disclose past roof leaks that she believes have been repaired21 with the damaged walls and ceilings plastered and painted. Sixty days after the closing, the buyer gets drenched, is furious with the seller, and is certain that the seller intentionally concealed evidence of prior water damage. The buyer's gut feelings will not suffice. The buyer must demonstrate that at the time the seller pronounced the roof to be in good shape, the seller knew that the water intrusion problem had not been solved.22

2. Material

Only material defects count, yet few claims are dismissed for want of materiality, perhaps because most buyers do not sue until faced with substantial losses. Materiality has been measured in various ways: (1) whether the buyer, if fully informed, would have purchased the property;23 (2) whether a reasonable buyer would not have purchased the property; (3) whether the property is less desirable; (4) whether the price would have been substantially lower;24 or (5) whether reasonable persons would attach importance to the omitted fact in determining their course of conduct in the transaction.25

One of the leading cases delinating the outer boundary of "materiality" was widely published: Reed v. King.26 The buyer, an elderly woman, learned after taking title that ten years earlier the home had been the site of a grisly axe murder of a mother and her four children. She sought rescission, a claim the trial court summarily dismissed. On appeal, the buyer won a reversal of the trial court's dismissal and was given the chance to prove on remand that the fact that the house was the scene of a murder depressed the home's market value. Subsequently, many states enacted statutes declaring that psychological impacts are not material facts, hoping to free sellers and brokers of any duty to disclose the untimely deaths or illnesses of previous occupants.27

3. Latent

Expecting a seller to detail every blemish in an older home is unrealistic and wasteful. The common law rule makes sellers responsible for disclosing only latent defects; buyers are presumed to notice patent defects on their own. There is no reason to require the seller to notify the buyer of patent defects that any observant buyer could have noticed.