DAVID J. WILLIS ATTORNEY
Copyright © 2013. All rights reserved worldwide.
Seller Disclosure in Texas
by David J. Willis, J.D., LL.M.
Sellers and buyers have different needs and motivations when it comes to the transfer of real property. One area that is often an issue is property condition. Sellers typically want to transfer property "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 defects and needed repairs.
The Texas Real Estate Commission promulgates a Seller's Disclosure of Property Condition form for use in residential real estate transactions (Go to www.trec.state.tx.us/forms). This form (TREC OP-H) is designed to be filled out by the seller and attached to the One to Four Family Residential Contract. It must be given on or before the effective date of the 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 any conditions that "materially affect the health or safety of an individual."
Property Code section 5.008(e) excludes the following from the requirement that a Seller´s Disclosure be provided in residential transactions:
- Pursuant to a court order or foreclosure sale;
- by a trustee in bankruptcy;
- pursuant to a deed in lieu of foreclosure;
- by a lien holder who has either purchased at a foreclosure sale or a sale pursuant to a court order or accepted a deed in lieu of foreclosure;
- by a fiduciary in the course of an administration of a decedent's estate, guardianship, conservatorship, or trust;
- from one co-owner to one or more other co-owners;
- made to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors;
- between spouses incident to divorce, legal separation or a property settlement agreement;
- to or from a governmental entity;
- a new residence of not more than one dwelling unit that has not been occupied for residential purposes;
- of real property where the value of any dwelling does not exceed five percent of the value of the property.
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 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 (see below).
For commercial transactions, the TAR 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. What is intended here? 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 unsatisfactory from the buyer's point of view. Buyers might consider negotiating a clause which strikes this nonwarranty statement and 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 this 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 was subsequently discovered. There are too many statutory and common law avenues for an aggrieved buyer to pursue.
Accurately completing the Seller´s Disclosure is the responsibility of the seller. 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.).
The Deceptive Trade Practices – Consumer Protection Act ("DTPA")
Failure to disclose material adverse conditions and defects is a violation of the DTPA. In 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 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 concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed.
Have no doubt about it: The DTPA applies to real estate transactions. The cases consistently declare that real estate is a "good" within the meaning of the statute. See Chastain v. Koonce, 700 S.W.2d 579, 582 (Tex. 1985).
Additionally, a consumer may file suit if the consumer has relied to that consumer´s detriment upon:
17.50(a)(2) breach of an express or implied warranty;
17.50(a)(3) any unconscionable action or course of action by any person.
Statutory language does not get any broader or more potentially damaging than that. Sellers beware: if you fail to disclose a material item, a jury can find that your action was "unconscionable" (an open-ended term by any definition) and award treble damages, attorney´s fees, and court costs against you.
Texas Business & Commerce Code section 27.01 (the Statutory Fraud Act) is another potential pitfall for sellers who fail to make full disclosure:
(a) Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a
(1) false representation of a past or existing material fact, when the false representation is
(A) made to a person for the purpose of inducing that person to enter into a contract; and
(B) relied on by that person in entering into that contract; or
(2) false promise to do an act, when the false promise is
(b) A person who makes a false representation or false promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for actual damages.
(c) A person who makes a false representation or false promise with actual awareness of the falsity thereof commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.
(d) A person who (1) has actual awareness of the falsity of a representation or promise made by another person and (2) fails to disclose the falsity of the representation or promise to the person defrauded, and (3) benefits from the false representation or promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.
(e) Any person who violates the provisions of this section shall be liable to the person defrauded for reasonable and necessary attorney's fees, expert witness fees, costs for copies of depositions, and costs of court.
(B) made with the intention of not fulfilling it;
(C) made to a person for the purpose of inducing that person to enter into a contract; and
(D) relied on by that person in entering into that contract.
Observe the language contained in Coldwell Banker Whiteside Associates v. Ryan Equity Partners, 181 S.W.3d 879, 888 (Tex. App.–Dallas 2006, no pet.): "A misrepresentation may consist of the concealment or nondisclosure of a material fact when there is a duty to disclose. The duty to disclose arises when one party know that the other party is ignorant of the true facts and does not have an equal opportunity to discover the truth. A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction in question."
Exemplary or punitive damages are available to plaintiffs who prevail. A plaintiff is entitled to recover exemplary damages under statutory fraud if the false representation is made with actual awareness of the falsity of the representation. Hines v. Hash, 843 S.W.2d 464 (Tex.1992).
Common Law Fraud
The Statutory Fraud Act does not preclude a deceived buyer from filing suit on the grounds of common law fraud as well. In other words, the two causes of action can be pursued side-by-side. What is the difference? See Trinity Indus. v. Ashland, Inc., 53 S.W.3d 852, 867 (Tex. App.-Austin 2001, pet. denied) ("The elements of statutory fraud under Section 27.01 . . . are essentially identical to the elements of common law fraud except that Sec. 27.01 does not require proof of knowledge or recklessness as a prerequisite to the recovery of actual damages.")
Any competent plaintiff´s attorney will include as many causes of action as possible in his lawsuit against a nondisclosing seller. This is known as the "shotgun approach" and is designed to insure that, when the dust settles after trial, at least some lines of attack will have found their mark.
Additional Liability for Real Estate Licensees
Agents and brokers who are also sellers need to be especially concerned about failing to make full disclosure. The Real Estate License Act ("RELA"), Occupations Code section 1101.652 allows TREC to revoke or suspend the license of a broker or salesperson if the licensee is convicted of any offense involving fraud or engages in misrepresentation, dishonesty, or untrustworthy behavior. Section 1101.652(b)(3) provides that a licensee may be sanctioned for making "a material misrepresentation to a potential buyer concerning a significant defect, including a latent structural defect." Section 1101.652(b)(4) specifically adds failure to disclose a significant defect to the list.
“As Is” Transactions
It is important to observe that the TREC One to Four Family Residential Contract contains an optional "as is" clause, and the transaction is turned becomes "as is" if the box at paragraph 7D(1) is checked.
Here is the central question: Is it lawful to transfer property without disclosing material defects if the contract states that the transaction is "as is?" In other words, does use of the words "as is" or similar phraseology relieve the seller of the obligation to disclose? The answer, as is true in many areas of the law, is "it depends"–but probably not.
The important case in this area is Prudential Insurance Co. v. Jefferson Associated Ltd., 896 S.W.2d 156 (Tex. 1995), which upheld "as is" clauses in certain narrow circumstances. Two things are critical if such a clause is to be upheld: the specific wording and whether or not the buyer obtained an inspection. Also, in evaluating an "as is" transaction, courts look not just at these two factors but at the totality of the circumstances. Note that if the buyer consults an attorney before agreeing to an as is clause then a court is more likely to find the clause enforceable. Courts dislike situations where the parties are unequally informed of their rights. For this reason, it is more likely that an "as is" provision will be upheld in a commercial rather than a residential transaction since commercial buyers are presumed to be more sophisticated.
In 2007, the Dallas Court of Appeals said the following with regard to "as is" transactions involving residential property: "The nature of the transaction and the totality of the circumstances surrounding the agreement must be considered. Where the ‘as is’ clause is an important part of the basis of the bargain, not an incidental or ‘boilerplate’ provision, and is entered into by parties of relatively equal bargaining position, a buyer´s affirmative agreement that he is not buying on the representations of the seller should be given effect." Kupchynsky v. Nardiello, 230 S.W.3d 685, 690 (Tex. App.–Dallas 2007, pet. denied).
The commercial landlord-tenant case of Italian Cowboy Partners, Ltd. v. Prudential Insurance Co. of America, 341 S.W.3d 323 (Tex. 2011), involved lease of a restaurant with a history of chronic sewage odor. The landlord´s manager, who knew of the problem, fraudulently induced the tenant into a lease by orally declaring that the premises were in "perfect condition." Even though Italian Cowboy is a commercial lease case, it is likely that a similar theory of liability would be applied against a seller of residential property who made similar false statements.
The general take-away from this discussion is that an "as is" clause will not protect a seller in a case of willful concealment, and it will certainly be no protection if the seller engages in fraudulent inducement.
Example? A seller knows that there is foundation settlement because of cracks in the sheetrock and floor tile. So the seller positions a picture over the wall crack and a rug over the cracked tile (willful concealment) and then goes on to tell the prospective buyer that there are no serious defects in the condition of the house (fraudulent inducement)
Determined "As Is" Sellers
What if a real estate investor is determined to sell "as is" and minimize any duty to disclose? In the residential context, of course, this is difficult because the Seller´s Disclosure is a required document. In commercial transactions, however, the situation is more fluid and therefore more risky.
The broker or attorney should advise such a client to (1) have an effective "as is" clause in both the earnest money contract and the warranty deed, and the buyer should sign the warranty deed; (2) the contract language should go further than merely stating that the transaction is "as is"–it should clearly reject any duty of disclosure on the part of the seller; and (3) neither the seller nor his broker should make any assurances or promises (oral or written) relating to property use or condition. A basic seller-oriented "as is" clause would be:
SELLER SELLS AND BUYER UNCONDITIONALLY ACCEPTS THE PROPERTY "AS IS," IN ITS PRESENT CONDITION, WITH ALL DEFECTS, KNOWN OR UNKNOWN, PATENT OR LATENT, AND WITHOUT REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED. SELLER HAS NO OBLIGATION TO DISCLOSE MATERIAL FACTS INCLUDING DEFECTS OR ADVERSE CONDITIONS. BUYER RELIES SOLELY ON BUYER´S INSPECTIONS AND OTHER DUE DILIGENCE IN EVALUATING PROPERTY CONDITION. ANY PRIOR ORAL OR WRITTEN STATEMENTS CONCERNING CONDITION OF THE PROPERTY, WHETHER MADE BY SELLER, SELLER´S AGENTS, OR THIRD PARTIES, ARE EXPRESSLY DISCLAIMED. NO REPAIRS, REMEDIATION, OR TREATMENT WHATSOEVER ARE REQUIRED TO BE PERFORMED BY SELLER. THIS "AS IS" CLAUSE IS A MATERIAL TERM BUT FOR WHICH THE SELLER WOULD NOT HAVE AGREED TO SELL THE PROPERTY TO BUYER. THE CONSIDERATION PAID FOR THE PROPERTY REFLECTS THE "AS IS" NATURE OF THIS CONVEYANCE. PROVISIONS OF THIS "AS IS" CLAUSE SHALL SURVIVE CLOSING AND SHALL NOT MERGE. IF BUYER IS UNCERTAIN ABOUT THE MEANING AND EFFECT OF THIS "AS IS" CLAUSE, THEN BUYER SHOULD CONSULT AN ATTORNEY.
The practical question, of course, is whether or not a buyer will be willing to accept such strict language.
Generally speaking, "as is" transactions as a means of avoiding seller disclosure are problematic at best and should be avoided. No one, especially juries, likes a liar-whether the lie is by commission or omission. The best advice an attorney can give a seller is "disclose, disclose, disclose." If an "as is" clause is going to be included in a contract, the seller should get a real estate attorney to draft it.
Being sued is no picnic. Investor clients often ask, "Can they sue me if . . . ?" For lots of reasons, this is the wrong question, since anyone can sue anyone for anything and incur little or no liability for doing so-at least in the U.S. The better approach is to deter suits in the first place by being open and above-board.
Buyers confronted by a seller who insists on an as is clause while attempting to avoid disclosure should be suspicious. In such a situation, the best course of action for the buyer may be to walk away. Not every deal can or should be made. On the other hand, an "as is" clause combined with full disclosure by the seller may not be a problem so long as the buyer realizes that the he or she should thoroughly inspect the property. Whenever a seller wants to include an "as is" clause in a sales contract, the buyer should respond by including a provision to the effect that such a clause does not relieve the seller of the obligation to disclose material conditions and defects. If the seller balks, then it is probably time for the buyer to walk away.
Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. Reading this article does not make you our client. This firm does not represent you unless and until it is retained and expressly agrees in writing to do so.
Copyright © 2013 by David J. Willis. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, http://www.LoneStarLandLaw.com.