Disclosure Obligations of Residential Sellers in Texas

Topics Covered

Part One: Disclosure Obligations in “As Is” Transactions
Part Two: The Seller’s Disclosure Notice
Part Three: Law Relating to Seller Disclosure

Goals of Sellers

Sellers want a conveyance that excludes responsibility for repairs (a leaky roof), post-closing liability for difficult-to-detect conditions (mold), or external adverse circumstances (future widening of the street by the city). The solution for the seller is to control the drafting of both the sales contract and the warranty deed to ensure that the property is conveyed entirely “as is” in its present condition and without representations or warranties, express or implied, and with all oral statements disclaimed.

The deed delivered at closing will contain both express and implied warranties of title—at least so long as it is a general or special warranty deed—but these are separate and apart from representations or warranties as to property condition. Sellers want nothing to do with the latter.

Goals of Buyers

Buyers want full disclosure from the seller as to all known material facts, conditions, and circumstances including defects and needed repairs regardless of the presence of an “as is” clause in the contract. I may be willing to accept the property “as is,” but you as seller must still tell me what you know about property condition. All of it. No hiding the ball.

The buyer wants to know whatever the seller knows when it comes to material facts—and know it before expiration of the option period. A custom special provision affirming the seller’s duty of full disclosure can be very useful in achieving this.

The buyer should make the seller aware of his legal responsibility to disclose the existence of any known material facts, conditions and circumstances (including defects and needed repairs) that could reasonably affect the buyer’s decision to buy or not buy. Selling a residential property “as is” is not a permissible dodge of this legal (and ethical) responsibility.

Custom Special Provisions

All participants in a residential real estate transaction (parties and agents) should be on the same page when it comes to the requirement of full and ongoing seller disclosure as to known material facts. However, both TREC and Texas Realtors contracts (as well as their respective seller disclosures) are less than satisfactory in explaining just what “as is” means and how it relates to a seller’s continuing obligation to provide full disclosure.

A good solution for buyers is to add a custom lawyer-prepared special provisions addendum that addresses disclosure and “as is” issues and secures the seller’s express agreement to make full disclosure of known material facts, conditions, and circumstances all the way through closing.

PART ONE:
DISCLOSURE OBLIGATIONS IN “AS IS” TRANSACTIONS

The TREC Contract “As Is” Clause

There is a misconception among many sellers (and even among some agents and brokers) that offering a residential property “as is” relieves the seller of any obligation to disclose known issues relating to property condition. This is incorrect. Failure to disclose material facts may occasionally work in commercial transactions, it is contrary to the Deceptive Trade Practices Act when it comes to residential property.

Checking the “as is” box at paragraph 7D(1)of the TREC contract does NOT relieve a residential seller of the legal obligation to disclose known material facts, conditions and circumstances relating to property condition, including defects and needed repairs.

“In the context of a [residential] real estate transaction, a seller is under a duty to disclose [known] material facts that would not be discoverable by the exercise of ordinary care and diligence by the purchaser, or that a reasonable investigation and inquiry would not uncover. But a seller has no duty to disclose facts he does not know. Similarly, a seller is not liable for failing to disclose what he only should have known.” Myre v. Meletio, 307 S.W.3d 839, 843-44 (Tex. App.—Dallas 2010, pet. denied).

Avoiding Lawsuits against the Seller

An “as is” clause, no matter how comprehensive, only protects an honest, disclosing seller. Ritchy v. Pinnell, 357 S.W.3d 410 (Tex.App.—Texarkana 2012, no pet.). Example: a seller knows 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 house (fraudulent inducement).

“A seller cannot have it both ways: he cannot assure the buyer of the condition of a thing to obtain the buyer’s agreement to purchase ‘as is,’ and then disavow the assurance which procured the ‘as is’ agreement.” Prudential Ins. Co. of Am. v. Jefferson Assocs., Ltd., 896 S.W.2d 156, 161 (Tex. 1995).

A skillful lawyer cannot draft his way around the duty of seller disclosure in a residential transaction. “An ‘as is’ clause that is induced by specific misrepresentations about the condition of property will not shield the seller from liability [for fraud].” Williams v. Dardenne, 345 S.W.3d 118 (Tex.App. 2011).

PART TWO:
SELLER’S DISCLOSURE NOTICE

Improved Residential Property

Property Code Section 5.008 requires that a seller of improved residential property provide the prospective buyer with a Seller’s Disclosure Notice. However, Section 5.008(e) provide that a Seller’s Disclosure is not required in the following instances:

(1) pursuant to a court order or foreclosure sale.

(2) by a trustee in bankruptcy.

(3) to a mortgagee by a mortgagor or successor in interest or to beneficiary of a deed of trust by a trustor or successor in interest (which would include deeds in lieu of foreclosure).

(4) by a lienholder who has either purchased at a foreclosure sale or a sale pursuant to a court order or accepted a deed in lieu of foreclosure.

(5) by a fiduciary in the course of an administration of a decedent’s estate, guardianship, conservatorship, or trust.

(6) from one co-owner to one or more other co-owners.

(7) made to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors.

(8) between spouses incident to divorce, legal separation or by a property settlement agreement.

(9) to or from a governmental entity.

(10) a new residence of not more than one dwelling unit that has not been occupied for residential purposes.

(11) of real property where the value of any dwelling does not exceed 5% of the value of the property.

The statutory exceptions do not include “I have never lived on the property,” a common tactic used by unscrupulous flippers in attempting to avoid providing the seller’s disclosure.

Unless expressly exempted by the statute, a Seller’s Disclosure must still be provided by non-occupant investor-sellers.

There is no provision in the statute permitting a buyer to waive the requirement that a Seller Disclosure be provided. Exceptions are specifically listed but “unless the buyer waives this statute” is not among them. The legislature had the opportunity to consider waiver as an exception and intentionally omitted it.

Scope of Seller Disclosure Notice

The Seller’s Disclosure is intended 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 conditions that “materially affect the health or safety of an individual.”

Water penetration from storms, flooding, and burst pipes is a specific concern in south Texas, where many listings state up front that a property has or has not been flooded—without waiting for the question to be asked. In 2019, the TREC sellers disclosure was expanded to include questions about flooding, water penetration, and any previously filed insurance claims relating to water damage. The Texas Realtors disclosure also addresses this subject, just not as extensively.

Neither mold nor previous mold remediation is specifically mentioned in the TREC Seller’s Disclosure form, only any condition that “materially affects the physical health or safety of an individual.”Nor does the form expressly obligate the seller to supplement the Seller’s Disclosure if additional property condition issues arise or are discovered before closing.

Seller’s Belief and Knowledge

The standard for completion of the Seller’s Disclosure is the belief and knowledge of the seller (Prop. Code Sec. 5.008(7)(d). This is a soft standard. It is not nearly as powerful as an actual signed certification by the seller that the disclosure is true, correct, and complete as to all known material facts. A seller could say “I didn’t know there was mold inside those walls! Even when the previous inspector said there was, I didn’t believe him!” Technically, this would be a sufficient defense under the statutory standard of “belief and knowledge”—unless, of course, the seller encounters a skeptical jury that decides he is lying.

What would improve the TREC form? An (1) actual certification by the seller that the Seller’s Disclosure is true, correct, and complete as to known material facts plus (2) an express agreement on the part of the seller to supplement the Seller’s Disclosure all the way through closing.

Ongoing Duty of Seller Disclosure

Problem: neither the Seller’s Disclosure nor the Property Code contain an express duty on the part of the seller to amend or update the Seller’s Disclosure if new material facts about property condition arise or are discovered before closing. Failing to state an ongoing seller disclosure duty is a serious flaw that can be corrected by adding a special provision.

It should be noted that regardless of what the Seller’s Disclosure form says, residential home sales are consumer transactions that fall under the Deceptive Trade Practices Act. A broad reading of the DTPA makes it clear that a residential seller has an ongoing legal duty to disclose known material facts.

Case law affirms this. There is a duty on the part of the seller to update the seller’s disclosure in certain specific circumstances: (1) if a confidential or fiduciary relationship exists; (2) when the seller has already disclosed part of the issue (then the rest of it must be disclosed); (3) when a prior representation by the seller would be untrue or misleading without further explanation; and (4) in the case of partial disclosure when the partial disclosure creates a false impression in the mind of the buyer. Comel v. Birdwell, 2014 WL 4347815 (Tex.App.—Eastland 2014).

It would serve the public interest if TREC forms were amended to make the seller’s disclosure duty (both present and ongoing) crystal clear.

Sellers with Actual Knowledge

Residential sellers with actual knowledge have a duty under the DTPA to disclose any defect that could reasonably be expected to affect the buyer’s decision to buy or not buy. Van Duren v. Chife, 569 S.W.3d 176 (Tex.App.—Houston [1st Dist.] 2018, no pet.).

Van Duren is an interesting case when it comes to interpreting the meaning of the term full disclosure. Even though a condominium seller expressly disclosed water penetration in an “as is” contract, the buyer (a commercial real estate broker with a law degree) still sued, alleging that both the seller and the seller’s realtor failed to fully disclose the extent of the water leak. Birnbaum ultimately lost, but only after putting the seller through expensive litigation up to the court of appeals. Birnbaum, et al vs. Atwell et al, No. 01-14-00556-CV (Tex.App.—Houston [1st Dist.] 2015, no pet.).

Disclosure Notice for Unimproved Residential Property

Property Code Section 5.013 states a separate seller disclosure requirement for unimproved property that is intended to be used for residential purposes. A “seller of unimproved real property to be used for residential purposes shall provide to the purchaser of the property a written notice disclosing the location of a transportation pipeline, including a pipeline for the transportation of natural gas, natural gas liquids, synthetic gas, liquefied petroleum gas, petroleum or a petroleum product, or a hazardous substance.”

However, a “seller is not required to give the notice if: (1) the seller is obligated under an earnest money contract to furnish a title insurance commitment to the buyer prior to closing; and (2) the buyer is entitled to terminate the contract if the buyer’s objections to title as permitted by the contract are not cured by the seller prior to closing.”

Requesting a Seller’s Disclosure Notice

Just because a Seller’s Disclosure is not required in a particular case should not deter a careful buyer from attempting to get one or, alternatively, using a custom special provisions addendum to declare that full and ongoing seller disclosure of known material facts is an essential contract term. The scope and extent of seller disclosure is not just a matter of legality; for a buyer, achieving seller transparency should be considered a vital goal of contract negotiation.

PART THREE:
CAUSES OF ACTION FOR NONDISCLOSURE

Classic Fraud at Common Law

The required elements of common-law fraud are: (1) the defendant made a representation to the plaintiff; (2) the representation was material; (3) the representation was false; (4) when the defendant made the representation the defendant knew it was false or made the representation recklessly and without knowledge of its truth; (5) the defendant made the representation with the intent that the plaintiff act on it; (6) the plaintiff [justifiably] relied on the representation; and (7) the representation caused the plaintiff injury. Shandong Yinguang Chem. Indus. Joint Stock Co., Ltd. v. Potter, 607 F.3d 1029, 1032-33 (5th Cir. 2010).

Fraudulent Misrepresentation

At common law, sellers have a duty to avoid making a material misrepresentation. “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 knows 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 [the decision to buy or not buy].” Coldwell Banker Whiteside Associates v. Ryan Equity Partners, 181 S.W.3d 879, 888 (Tex. App.—Dallas 2006, no pet.).

To make a case of fraudulent misrepresentation, the plaintiff must prove the existence of a material misrepresentation that was false and either known to be false when made, or which was asserted by the defendant without knowledge of its truth, which was intended to be acted upon, which was relied upon, and which caused damage to the plaintiff. Sears, Roebuck & Co. v. Meadows, 877 S.W.2d 281 (Tex. 1994).

Going Down a Well

There is an interesting pro-seller Travis County case where the seller was sued post-closing for not disclosing defects in a well—and after declaring that “everything in this home works the way it should work.” The court of appeals stated that “to the extent that the effect of an ‘as is’ contract may also be nullified through the seller’s use of fraud, we find no evidence of record illustrating that [the seller] knew the actual condition of the [defective] well when he made representations about it being functional or having a certain level or amount of water. Nor does the record contain evidence from which reasonable minds could infer that he garnered such knowledge after making those representations and before the closing date.” Boehl v. Boley, No. 07-09-0269-CV (Tex.App. Jan. 26, 2011).

Thus the court refused to attribute actual knowledge to the seller even though the seller had recently conducted repairs on the well! Summary judgment in favor of the seller was upheld.

Failure to Disclose as Fraudulent Misrepresentation

Is an actively stated misrepresentation or false promise by the seller required in order to prove fraud at common law? What about failure to disclose? The answer depends on whether or not a duty to disclose exists.

“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 knows that the other party is ignorant of the true facts and does not have an equal opportunity to discover the truth [Italics added]. A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction in question.” Coldwell Banker Whiteside Associates v. Ryan Equity Partners, 181 S.W.3d 879, 888 (Tex. App.—Dallas 2006, no pet.).

Given this broad definition of duty, it can be safely assumed that a seller who otherwise satisfies the elements of fraudulent misrepresentation or fraudulent inducement will not escape liability merely because there was no active misrepresentation—at least so long as a duty of disclosure exists, which is most definitely true in sales of Texas residential real estate.

Fraudulent Inducement

Fraudulent inducement is a related cause of action that pertains specifically to a contract between a seller and a buyer. Bohnsack v. Varco, LP, 668 F.3d 262, 277 (5th Cir. 2012). A cause of action for fraudulent inducement requires the existence of an enforceable contract. Zorilla v. Aypco Constr. II, LLC, 58 Tex. Sup. Ct. J. 1140 (Tex. 2015).

The Texas Supreme Court has stated that fraudulent inducement claims are not subject to the usual economic loss rule. Formosa Plastics Corp. United States v. Presidio Eng’rs & Contractors, 960 S.W.2d 41 (Tex. 1998).

DECEPTIVE TRADE PRACTICES

Consumer Protection

The Deceptive Trade Practices—Consumer Protection Act (Bus. & Com. Code Sec. 17.46 et seq.) provides protections for consumers generally, including buyers of residential real estate. Cases applying the DTPA consistently declare that residential real estate is a tangible consumer good and prospective buyers of residential real property are therefore consumers. Accordingly, misrepresentations or failure by a residential seller to disclose known material facts, conditions, and circumstances relating to property condition are violations of the DTPA. Chastain v. Koonce, 700 S.W.2d 579, 582 (Tex. 1985).

The elements of a DTPA claim are: (1) the plaintiff is a consumer who seeks or acquires goods or services by purchase or lease, (2) the defendant engaged in false, misleading, or deceptive acts, and (3) the defendant’s action constituted a producing cause of the consumer’s damages. Bus. & Com. Code Sec. 17.45(4), 17.50(a).

The DTPA states that “false, misleading, or deceptive acts or practices in the conduct of any trade or business are hereby declared unlawful. . . .” Also expressly stated to be unlawful are misrepresenting the characteristics and uses of a particular item; representing that goods or services are of a particular quality and standard when they are not; advertising with intent not to sell as advertised; and failing to disclose information in an attempt to induce the consumer into buying. Additionally, a consumer may seek relief if the consumer relied to the consumer’s detriment upon a seller’s breach of an express or implied warranty (Sec. 17.50(a)(2)) or if the seller is culpable of “any unconscionable action or course of action. . . .” Sec. 17.50(a)(3).

As a catch-all provision, the DTPA provides that a consumer may seek relief if a seller engages in an “unconscionable action or course of action [which] is defined as an act or practice which, to a consumer’s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree.” Martinez v. Martinez, No. 13-19-00518-CV, 2020 WL 5887587 (Tex.App.—Corpus Christi 2020, no pet.). Is this not an exact description of what a non-disclosing seller is doing?

The statute of limitations under the DTPA is “two years after the consumer discovered or in the exercise of reasonable diligence should have discovered the occurrence of the false, misleading, or deceptive act or practice.” Bus. & Com. Code Sec. 17.565.

DTPA Disclosure Requirement

Under the DTPA, a seller is liable to a consumer for non-disclosure if: “(1) the [seller] knew [material] information regarding the goods or services; (2) the information was not disclosed; (3) there was an intent to induce the consumer to enter into the transaction through failure to disclose; and (4) the consumer would not have entered into the transaction on the same terms had the information been disclosed.” Gill v. Boyd Distrib. Ctr., 64 S.W.3d 601 (Tex.App.—Texarkana 2001, pet. denied).

“An act is false, misleading, or deceptive if it has the capacity to deceive an average or ordinary person, even though that person may [be] ignorant, unthinking, or credulous.” Daugherty v. Jacobs, 187 S.W.3d 607 (Tex.App.—Houston [14th Dist.] 2006, no pet.). Note, however, that the DTPA does not apply to mere puffing or opinion. Humble Nat’l Bank v. DCV, Inc., 933 S.W.2d 224, 230 (Tex.App.—Houston [14th Dist.] 1996, writ denied).

A broad reading of the DTPA and its case law suggests that a residential seller’s duty of disclosure in a residential real estate transaction extends to all known material facts, conditions, and circumstances whether directly present on the property or not. A seller’s disclosure duty is both present and ongoing so long as the consumer continues to have the choice to buy or not buy.

Consider the example of a seller who is aware that a cell tower is scheduled to be constructed on an empty lot next door but avoids conveying this important knowledge to a prospective buyer. This would be a DTPA violation.

The Producing Cause Standard

A consumer who claims to have suffered economic damages or damages for mental anguish may seek relief if the other party’s action was merely a producing cause of damages. That is a liberal standard, especially considering that most events in life and business have multiple causes—and the defendant’s alleged action is required to be only one of those causes. Any offense enumerated in the laundry list of Section 17.46 is a basis for a consumer claim so long as the defendant’s actions were “relied on by a consumer to the consumer’s detriment. Bus. & Com. Code Sec.17.50(B).

It is not even required that harm to a potential buyer be foreseeable by a non-disclosing seller. Helena Chem. Co. v. Wilkins, 47 S.W.3d 486 (Tex. 2001). All that is required is that a seller’s dishonesty be a producing cause of harm, perhaps one of several such causes. Foreseeability of harm is not required. Intent to harm is not required. A reasonable prospect that harm might occur is not required.

Sale or Contract Not Required

The DTPA does not require a signed contract (contractual privity) with a non-disclosing seller. Seller liability for misrepresentation or non-disclosure in a residential real estate transaction can arise even prior to execution of an earnest money contract. “To be actionable under the DTPA, the defendant’s deceptive conduct must occur [only] in connection with [italics added] a consumer transaction.” In other words, it is entirely possible that a non-disclosing seller can get himself in trouble by engaging in deception while showing the property. A signed contract is not required. Todd v. Perry Homes, 156 S.W.3d 919 (Tex.App.—Dallas 2005, no pet.). This differs from the Statutory Fraud Act, discussed below.

Exemption for Attorneys and Brokers

As long as they are acting honestly in their professional capacities, attorneys and real estate brokers fall within the professional services exemption of DTPA Section 17.49(c)—an exemption that is lost in cases of fraud or misrepresentation. This is a consistent theme in Texas business and property law: edgy practices may be permissible some of the time but if actual fraud is involved then protections for the offender evaporate.

STATUTORY FRAUD

The Statutory Fraud Act

The Statutory Fraud Act (Bus. & Com. Code Sec. 27.01 et seq.) stands separate and apart from the DTPA as a potential avenue of recourse for deceived buyers of residential real estate.

Bus. & Com. Code Sec. 27.01(a). Fraud in Real Estate and Stock Transactions. 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 a

(2) false promise to do an act, when the false promise is (A) material; (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.

Suits Based on Statutory Fraud

Under Section 27.01(a), the elements of statutory fraud are the same as the elements of common law fraud except that Section 27.01(a) does not require proof of knowledge or recklessness as a prerequisite to the recovery of actual damages. Miller v. Argumaniz, 479 S.W.3d 306 (Tex.App.—El Paso 2015, pet. denied). This eases a plaintiff’s burden of proof under the Statutory Fraud Act which in turn increases the risk of a judgment against a non-disclosing seller.

“To establish statutory fraud, the plaintiff must show the following: (1) the transaction involves real estate or stock; (2) the defendant made a false representation of a past or existing material fact or made a promise to do an act with the intention of not fulfilling it; (3) the defendant made the false representation or promise for the purpose of inducing the claimant to enter into a contract; and (4) the plaintiff relied on the false representation or promise in entering into the contract.” Nelson v. McCall Motors, Inc., 630 S.W.3d 141 (Tex.App.—Eastland 2020, no pet.).

Unlike the DTPA, the Statutory Fraud Act “is applicable only when a conveyance of the property has been made or, in the very least, when there is a valid real estate contract. . . .” BLM of Brownwood, Inc. v. Mid-Tex Cellular, Ltd., No. 11-11-00311-CV, 2014 WL 1285765 (Tex.App—Eastland 2014, no pet.).

Penalties for Statutory Fraud

Violations of the Statutory Fraud Act can result in actual as well as exemplary damages plus reasonable and necessary attorney’s fees, expert witness fees, deposition costs, and costs of court. Actual awareness of the falsity of the representation or promise is required for the award of exemplary damages but may be inferred by surrounding circumstances. Hines v. Hash, 843 S.W.2d 464 (Tex. 1992). Actions under the Statutory Fraud Act must be brought within four years of the time when the claimant knew or should have known of the harm.

Note that there is a tie-in provision connecting the Statutory Fraud Act to the DTPA. Section 27.0015(b) states that “a violation of Section 27.01 [of the Statutory Fraud Act] that relates to the transfer of title to real estate is a false, misleading, or deceptive act or practice” as defined by the DTPA. Accordingly, DTPA remedies are available as well.

Plaintiffs Have Multiple Causes of Action

Multiple causes of action can be pursued simultaneously—and frequently are—by plaintiffs’ attorneys. This shotgun approach is designed to insure that at least one or more of the causes of action presented will be successful at trial. DTPA and statutory lawsuits are popular because attorney’s fees can easily be recovered as part of the judgment. It is reckless to assume that a seller will be sued only under Property Code Section 5.008 (the requirement of a seller disclosure notice) and not, at the very least, for an unconscionable act or practice under the DTPA.