Duty to Disclose Defects

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 What Full Disclosure Requirements Do Real Estate Professionals Need to Follow?

In real estate transactions, real estate agents and brokers are key parties who help facilitate the sale. Agents and brokers represent buyers and sellers.

They also assist with showing properties and acting as intermediaries between buyers and sellers. Brokers are individuals who have more education and training and perform more technical tasks, such as contract drafting and negotiations.

Brokers are licensed and often oversee agents who work on their behalf. Under both federal and state laws, real estate professionals have duties to disclose to their clients as well as to the other party in the sale.

It is necessary to fully disclose all information that is important to the sale which may affect the buyer’s decision whether or not to purchase. Full disclosure provides the parties to the transaction with all of the details they need to evaluate the property, determine whether to move forward or reject the sale, and to negotiate successfully.

A real estate professional is required to know what information they have to disclose to their clients and the other party. This includes defects, hazards, and other factors.

If an individual is a buyer or a seller and their agent fails to fulfill their duty of full disclosure, the individual may be able to file a lawsuit and recover damages.

How Do Local Laws Differ?

It is important to be aware that local and state laws may differ in their provisions regarding disclosure. A seller should review the local requirements for the location they are selling in.

There are certain local disclosure laws that have loopholes. The local regulations in an individual’s state may be obtained from local and state real estate planning departments.

An individual may also consult a real estate attorney. Knowing what is required to be disclosed can help an individual decide on buying a property and protect a seller from facing a lawsuit.

What Is the Seller’s Duty to Disclose Defects?

In general, a seller is only required to disclose defects which are within their personal knowledge. The seller’s duty to disclose defects is governed by the laws of the state where the property is located, so it is essential to review the real estate and property laws of the state before selling a house.

Sellers are not required to bring general contractors to the home to check for defects. However, they may hire one to advise them of any defects as well as the potential costs for repairs and to assist with preparing any required disclosures.

What Type of Defects Need to Be Disclosed?

A seller is required to disclose defects that they had knowledge of at the time of the purchase, also known as latent defects. Defects that sellers are not aware of but could have discovered after a reasonable search are referred to as patent defects.

Sellers are not required to disclose patent defects unless they actually made a search and were aware of the defect. A seller has to disclose defects that are material.

This means that the defect affects the value or the property or would affect the decision of the buyer. Examples of material disclosures may include, but are not limited to:

  • Roof leaks and other types of leaks that result in the accumulation of water;
  • The tendency of the property to flood;
  • Unpermitted improvements.;
  • Building code violations;
  • Defects regarding the property’s:
    • Walls;
    • Floors;
    • Ceiling;
    • Roof;
    • Windows;
    • Insulation;
    • Foundation;
    • Electrical systems;
    • Plumbing systems;
    • Fences;
    • Sidewalks; and
    • Other structural aspects;
  • Termites;
  • Issues regarding the neighborhood; and
  • Any other factors which may influence the buyer’s decision.

What Is the Duty to Disclose Under California Law?

Because the duty to disclose defects is typically governed by state laws, the disclosure requirements may vary depending on the state an individual resides in. For example, in certain states, a seller is only required to disclose known defects in a property if they are specifically asked about them.

The rules in the State of California, however, are much more stringent. Sellers of real property are required to disclose any known defects that materially affect the value of the property or that affect a potential buyer’s desire to purchase the property.

In California, sellers have an affirmative duty to report any defects and buyers are not required to ask about the conditions of the property in order to learn of the defects. Whether a defect is considered material will depend on the characteristics of the property as well as the statements that were made by the buyer to the seller.

If a buyer would not have purchased a property had they been properly informed of a defect, the defect will be considered material. In addition, the duty to disclose is ongoing in nature.

This means a seller is required to report any issues until escrow closes. A seller must also provide a transfer disclosure statement to a buyer that provides a checklist of some of the more commonly experienced conditions on the property in addition to required disclosures.

What Are the Penalties for the Lack of Adequate Disclosure?

The penalties for the lack of adequate disclosure vary by jurisdiction. Under California laws, for example, there are different remedies that may be available to buyers if sellers did not provide proper disclosure.

If a buyer can show that a seller knew about a defect and failed to disclose it, a buyer may be entitled to damages, including:

  • Compensatory damages: These damages are intended to compensate for the out-of-pocket expenses which the buyer incurred. Courts may award buyers reimbursement for payments that are made to contractors to correct defective conditions;
    • In addition, courts may award the decrease in property value resulting from the defect;
    • In certain situations, a buyer may also be able to recover damages for lost profits;
  • Punitive damages: Buyers may recover punitive damages for cases involving egregious conduct. These damages are awarded in addition to compensatory damages. They are meant to punish the seller for the wrongful conduct and to deter similar conduct in the future; or
  • Equitable relief: This is a type of remedy a court may order the seller to do or not do something instead of providing monetary damages;
    • For example, a buyer may request specific performance from the seller, meaning that the court would order the party that sold the property to correct a condition that was discovered after the sale;
    • Another type of equitable relief is to rescind or cancel the contract completely. This means the buyer would receive their money back but would no longer own the property.

Should I Contact a Lawyer?

If you are considering purchasing or selling a property and you believe the seller may not have fulfilled their duty to disclose, it is important to consult with a property lawyer. Your lawyer can advise you of the real estate laws in your state as well as what remedies may be available to you.

It is also important to be aware that many states require a real estate lawyer to be involved in your property purchase, adding an additional lawyer of protection for the parties involved. If your state does not require this, it is important to consult with a real estate lawyer before completing your sale to ensure that the full disclosure requirements were fulfilled.

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