Know seller’s property disclosure and other disclosure standards
Colorado Real Estate Journal -
Pursuant to rules promulgated by the Colorado Real Estate Commission,- real estate brokers licensed by the state of Colorado are required to use commission-approved forms as appropriate to a transaction or circumstance to which a relevant form is applicable. Both the commercial and residential form Contract to Buy and Sell Real Estate provide that the seller agrees to provide a Seller’s Property Disclosure form completed by the seller “to seller’s actual knowledge, current as of the date of this contract.” The SPD is meant to disclose specific adverse structural, environmental, zoning and other conditions then existing, or known to have existed, on real property. There is a form Residential SPD, and there is a SPD for “All Types of Properties,” which is used in commercial transactions. The SPD may or may not be made part of the Contract to Buy and Sell Real Estate, and that is usually indicated under “Attachments” in Article 30 of the Contract. Even if an SPD is not expressly made part of the Contract to Buy and Sell Real Estate, the contract itself still requires the seller to provide an SPD to the best of the seller’s current actual knowledge. Thus, if the seller fails to provide the SPD, or fails to truthfully disclose a condition existing, or known to have existed, on the property, the seller is open for a breach of contract claim. The seller may also be open to a fraudulent inducement claim, even if the SPD is not made part of the contract. After a buyer takes possession of property, inevitably problems arise with the property’s condition. Sometimes the problem is expensive to resolve or materially impacts the buyer’s use of the property. At that point, the buyer must determine whether the seller knew about the condition and whether the seller properly disclosed it. The first place the buyer should look to is the SPD. Legal claims based on a seller’s failure to properly disclose conditions on the SPD typically center on how much detail, if any, a seller is required to provide in the SPD. The SPD is a “check the box” form that asks the seller to check the box “yes,” “no,” “do not know” or "N/A" for each identified condition. However, there is also a line next to each condition for “Comments.” From a legal perspective, if a seller checks a box “yes” that a certain condition exists, or has existed, on the property, does the seller then need to provide further details known to the seller regarding that condition in the “Comments” section? The answer is unclear. Say, for example, the buyer of a residential property discovers damage to the carpet, matting and floorboards in the home that the buyer attributes to dogs urinating in the home, and the buyer sues the seller for failing to disclose in the SPD that dogs urinated on the carpet. There is no box for dog urine on the SPD. Therefore, if the seller had only checked the box “yes” for “Dogs kept on the Property,” the buyer might argue that the seller had a contractual duty to disclose in the “Comments” section of the SPD everything the seller knew about the dogs and their impact on the property, including if they urinated on the carpet, where they urinated and how many times they urinated. The legal dilemma is whether a seller has to check the boxes based on current actual knowledge, or must the seller disclose the extent or details of what his or her knowledge is, either in the “Comment,” or in an addendum. From the seller’s perspective, however, such a detail-oriented disclosure obligation is not required and could conceivably be endless, whether applied to dogs or any other condition listed on the SPD. The seller might argue that the box disclosing dogs having been kept on the property was checked “yes” and that disclosure was based on the seller’s current actual knowledge. At that point, the buyer was put on notice that dogs were on the property and the buyer had the right and opportunity to conduct an appropriate inspection of the carpet, matting and floorboards. In other words, the SPD is meant purely to put a buyer on notice by checking boxes, with no further detail being required, of a broad category of property conditions so that a buyer can decide whether to investigate any adverse condition further. This interpretation of SPD disclosure requirements is not unreasonable given that the SPD provisions of the Contract to Buy and Sell Real Estate immediately precede the buyer’s inspection rights in the same article. Although the seller in such a case might avoid the breach of contract claim on this basis, the seller is still subject to an independent legal duty in Colorado to disclose known material latent defects on the property. So, in the case at hand, if the buyer could establish that the carpet damage was a defect, that his or her belief that the carpet was not damaged was material in the decision to purchase and that the seller actually knew of the condition, the buyer may still have an actionable fraud claim based on the nondisclosure. Thus, an interpretation of the commission rules and Colorado case law together seem to generally provide that a seller of real estate does not have to provide a SPD. However, a seller must still disclose known material latent defects. If the seller agrees to provide an SPD, it must be completed to the best of the seller's current, actual knowledge. In addition, two other disclosure standards might also apply to the sale of real property. First, a person has a duty to disclose to another with whom he or she deals material facts that in “equity and good conscience” should be disclosed. This standard is predicated upon the legal concept that one party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated facts basic to the transaction, if the person knows the other is about to enter into it under a mistake as to them, and the other, because of the relationship between them, the customs of the trade or other objective circumstance, would reasonably expect a disclosure of those facts. Second, a person must communicate information non-negligently in a transaction where the person gives the information in the course of the person’s business, profession or employment, or when the person has a financial interest in the transaction.