Disclosure Obligations of Sellers and their Brokers

Topics Covered

Part One: Disclosure Obligations of Sellers
Part Two: The Seller’s Disclosure Notice
Part Three: Law Relating to Seller Disclosure
Part Four: Disclosure Obligations of Brokers and Agents

What do sellers want?

Ideally, 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 insure 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.

What do buyers want?

The buyer should demand full disclosure from the seller as to all known material facts, defects, and adverse conditions and circumstances affecting the property, 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. It need not impose additional duties or responsibilities upon the seller (a duty to investigate, for instance). That is not the point. The point is to make the seller aware of his legal responsibility to disclose the existence of any known material facts, needed repairs, and adverse conditions and circumstances 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 responsibility.

Special Provisions Addendum

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 of property condition. A good solution (for either buyer or seller) is to add a custom lawyer-prepared special provisions addendum that addresses disclosure and “as is” issues so that no one is in doubt as to the level of disclosure that is expected and required.

PART ONE:
DISCLOSURE OBLIGATIONS OF SELLERS

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. In effect, the seller is saying to the buyer: This is my idea of what “as is” means: I’m not telling you anything about the condition of the property beyond the Seller’s Disclosure. It’s up to you to investigate and discover what you can.

While this strategy occasionally works in commercial transactions, it is contrary to Texas law when it comes to residential property. Checking the “as is” box at paragraph 7.D.(1) of the TREC Contract does not relieve a residential seller of the obligation to disclose material facts, defects, needed repairs, and adverse conditions and circumstances.

“In the context of a [residential] real estate transaction, a seller is under a duty to disclose 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. It will not protect a seller in a case of willful concealment or if the seller engages knowingly in fraudulent inducement. 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.” Williams v. Dardenne, 345 S.W.3d 118 (Tex.App. 2011). As a result of both common law and statute this duty simply will not go away.

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:

Prop. Code Sec. 5.008. Seller’s Disclosure of Property Condition

(a) A seller of [improved] 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 by this section which contains, at a minimum, all of the items in the notice prescribed by this section.

A seller’s disclosure notice is not required in the following instances (Section 5.008(e)):

(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 a 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 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-resident investor-sellers.

There is no provision in the statute permitting a buyer to waive this requirement. Exceptions are specifically listed but “unless the buyer waives this statute” is not among them. Established principles of statutory construction suggest that 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.

Note that neither mold nor previous mold remediation is specifically mentioned in the TREC Seller’s Disclosure form. Nor does the form oblige the seller to supplement the disclosure if additional property condition issues are discovered before closing.

How does the buyer know if a Seller’s Disclosure is true?

The standard for completion of the Seller’s Disclosure is the belief and knowledge of the seller, specifically referring to property items listed in the disclosure itself.

Property Code Section 5.008(7)(d) states that the disclosure notice “shall be completed to the best of seller’s belief and knowledge as of the date the notice is completed and signed by the seller. If the information required by the notice is unknown to the seller, the seller shall indicate that fact on the notice, and by that act is in compliance with this section.”

The result? A neglectful seller who has not thoroughly acquainted himself with the property may be off the hook: “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 defense under the statutory standard of “belief and knowledge”—unless, of course, the seller encounters a skeptical jury that decides he is lying.

The burden of proving that lie rests on the home buyer who may now find himself a plaintiff in an expensive lawsuit. Such a buyer may justifiably feel let down by Texas disclosure law, wondering why it was necessary to file a lawsuit in order to demonstrate the illegality of withholding known material facts about property condition.

Personal belief has become such a fluid cultural concept that one can find people who believe most anything, including that the world is flat—so anchoring the veracity of the Seller’s Disclosure Notice to subjective belief may not be the most solid of foundations. An (1) actual certification by the seller that the Notice is true and correct plus (2) an express obligation on the part of the seller to supplement the disclosure as warranted would be improvements to the TREC form. These would also provide a stronger basis for legal relief for buyers who are damaged by non-disclosing sellers. This happens all the time and spawns a significant number of lawsuits.

Ongoing Duty of Seller Disclosure

Although the Property Code contains no express duty of disclosure beyond the Seller’s Disclosure Notice, and the TREC form does not mention an ongoing duty, it is clear that a residential seller’s disclosure obligations do not stop with the Property Code. Sales to residential buyers are also regulated by the Deceptive Trade Practices Act—and the seller disclosure requirement of the DTPA is full and ongoing (all the way through closing) as to any matter that could reasonably influence a consumer to buy or not buy.

Case law also affirms 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).

The full disclosure rule is especially clear when the seller has actual knowledge of a defect. 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.”

Shortcomings of TREC and TXR Disclosure Forms

A serious problem is that neither TREC nor TXR contracts and disclosure forms adequately state the seller’s existing and ongoing duty to disclose known material facts, defects, needed repairs, and adverse conditions and circumstances affecting the property. It would serve the public interest if these promulgated forms made the seller’s disclosure duty (both present and ongoing) crystal clear.

It is not enough to counter this point by saying that a seller’s disclosure obligations are separately stated in the DTPA and case law. Buyers and sellers are unlikely to research or read either one. In the real world, real estate practitioners are lucky if they can get the parties to read the contracts in front of them.

A seller’s unambiguous and continuing duty to make full and ongoing disclosure as to property condition should (for the benefit of everyone) be plainly stated in TREC and TXR forms. At present this is not the case. Combine this with the absence of an express Property Code statement on a residential seller’s disclosure duty and it is no wonder that Texas is prone to litigation in this area.

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: LAWSUITS RELATING
TO SELLER NONDISCLOSURE

Suits Based on Common Law Fraud

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) (citing Ernst & Young, L.L.P. v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001)).

Suits Based on Fraudulent Misrepresentation

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 [e.g., 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 that the defendant made a material misrepresentation that was false, and which was 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).

To establish liability, a plaintiff must show that a fraudulent misrepresentation was knowingly made. 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.” 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. Boehl v. Boley, No. 07-09-0269-CV (Tex.App. Jan. 26, 2011).

Can failure to disclose be a 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 of disclosure 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.

Suits Based on 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).

The Deceptive Trade Practices Act

The Deceptive Trade Practices—Consumer Protection Act (Bus. & Com. Code Sec. 17.46 et seq.) is exactly what it says it is: legal protection for consumers from those who would deceive them. Cases applying the DTPA consistently declare that residential real estate is a tangible consumer good as that term is defined in the statute, and prospective buyers of residential real property are consumers. Accordingly, misrepresentations or failure by a seller of residential real property to disclose known material defects and adverse conditions 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, a person who seeks or acquires goods or services by purchase or lease, (2) the defendant engaged in false, misleading, or deceptive acts, and (3) the act 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)).

An “unconscionable action or course of action 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?

DTPA Disclosure Requirement

If one broadly interprets the DTPA in favor of consumers (and the statute expressly states that this is the intent) then a seller’s duty of disclosure in a residential real estate transaction extends to all material facts, defects, needed repairs, and adverse conditions and circumstances whether directly present on the property or not. (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.) 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.

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).

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 Threshold for Seller Liability

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” (Sec.17.50(B)).

According to the Texas Supreme Court, it is not even a requirement 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.

The DTPA protects even the ignorant from the consequences of their ignorance: “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).

DTPA Does Not Require a Contract

The DTPA does not require a signed a 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.

DTPA Ongoing Duty of Disclosure

The DTPA does not say that its provisions apply solely in the beginning of a real estate transaction (when the Seller Disclosure Notice is first given) and not after. No such time boundaries are stated. Accordingly, the only safe way to construe the DTPA is to conclude that its provisions apply during the entire residential real estate contract-to-closing process. If a defect is discovered by the seller or occurs after the Seller’s Disclosure is given then the seller has a legal duty to inform the buyer of those circumstances, right up to the moment the buyer tenders the sales price.

DTPA 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.

The Statutory Fraud Act

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

(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 a (1) 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.

PART FOUR: DISCLOSURE OBLIGATIONS
OF BROKERS AND AGENTS

Summary

Real estate license holders are obligated to make full disclosure as to a range of matters:

(1) any known fact that should be disclosed pursuant to the ethical requirements of fidelity, integrity, and competence as stated in TREC Rules 531.2-4 (Chapter 531, Texas Administrative Code);

(2) when dealing with a client, any known fact that should logically be disclosed as a consequence of being a fiduciary (the OLDCAR duties—obedience, loyalty, disclosure, confidentiality, accountability, and reasonable care and diligence).

(3) when dealing with a customer or member of the public, any known fact that should be disclosed as a matter of honesty and fair dealing;

(4) on whose behalf the license holder is acting as agent;

(5) relevant conflicts of interest;

(6) when representing a seller, disclosure to the buyer of all known material facts relating to property condition (including defects, needed repairs, and any adverse conditions and circumstances) that could reasonably affect the decision of a buyer to buy or not buy; and

(7) as is true for everyone, disclosure of any other matters as may be necessary in order to avoid culpability under the DTPA, the Statutory Fraud Act, and common law rules relating to fraud and negligence.

Real Estate License Act

The law applicable to license holder disclosure is contained primarily in the Texas Real Estate License Act (RELA, found in Chapter 1101 of the Occupations Code):

OCC Sec. 1101.652(b)(1-6). The [Texas Real Estate Commission] may suspend or revoke a license issued under this chapter or take other disciplinary action authorized by this chapter if the license holder, while engaged in real estate brokerage:

(1) acts negligently or incompetently.

(2) engages in conduct that is dishonest or in bad faith or that demonstrates untrustworthiness.

(3) makes a material misrepresentation to a potential buyer concerning a significant defect, including a latent structural defect, known to the license holder that would be a significant factor to a reasonable and prudent buyer in making a decision to purchase real property.

(4) fails to disclose to a potential buyer a defect described by Subdivision (3) that is known to the license holder.

(5) makes a false promise that is likely to influence a person to enter into an agreement when the license holder is unable or does not intend to keep the promise.

(6) pursues a continued and flagrant course of misrepresentation or makes false promises through an agent or sales agent, through advertising, or otherwise. . . .

Fiduciary Duty of License Holders

A real estate license holder is a fiduciary who must comply with the three core ethical requirements of fidelity, integrity, and competence (TREC Rules 531.2-4 found in Chapter 531 of the Texas Administrative Code). Exercising fidelity as a fiduciary means that the license holder must place the interests of the client above his or her own. This manifests in a variety of specific duties to disclose, inform, and perform at a knowledgeable and professional level (OLDCAR).

It must be remembered, however, that even though a fiduciary duty (including loyalty) is owed by a license holder to the client, the rules also make it clear that there exists a duty of honesty and fair dealing with regard to everyone involved in a real estate transaction—not just clients (RELA Sec. 1101.651(d)(4)). A duty of honesty and fair dealing is not as rigorous as a fiduciary duty, but it is still a high bar. It would most certainly prohibit intentional misrepresentation or concealment of known defects.

Accordingly, by operation of law, the license holder is obligated to act as a force for good and honest dealing in a real estate transaction, even if those around him are rascals and rogues.

Taking all of the foregoing disclosure standards together, it is difficult to imagine a scenario in which an agent or broker representing a seller would be justified in not insisting on full disclosure. If a seller cannot be induced to comply, then the license holder has no choice but to withdraw from the transaction.

The duty of integrity prevails over the duty of fidelity and loyalty to the client. In other words, at no point does a license holder have the option of continuing to be part of a deceptive or fraudulent transaction merely because the client demands it.

The Actual Knowledge Standard

Texas Occupations Code Section 1101.805(e) states that a “license holder is not liable for a misrepresentation, or a concealment of a material fact made by a party to a real estate transaction unless the license holder: (1) knew of the falsity of the misrepresentation or concealment; and (2) failed to disclose the license holder’s knowledge of the falsity of the misrepresentation or concealment.” Accordingly, 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.).

Note that the Sherman case uses the phrase “false or inaccurate.” Would that encompass completeness? Almost certainly. No defense lawyer would want to be in the position of arguing that incompleteness (failure to disclose the total picture) was not a form of dishonesty.

An agent working for Ebby Halliday in Dallas was absolved of liability for failing to disclose prior flooding because it could not be conclusively demonstrated that she had actual knowledge of the condition. A special provisions addendum was involved, and the court emphasized that the agent merely passed this along but had no role in preparing it. Sutton v. Ebby Halliday Real Estate, Inc., 279 S.W.3d 418 (Tex.App.—Dallas 2009).

Similarly, a broker does not become liable for a defect or adverse condition (mold, for example) merely by transmitting a mold inspection report to the buyer. Handling and delivering such a report does not make the broker liable for its contents. Arlington Home Week Inc. v. Peek Environmental Consultants, Inc., 361 S.W.3d 773 (Tex.App.—Houston [14th Dist.] 2012).

It is actual knowledge that is key.

License Holders’ Knowledge of Past Repairs

Imagine purchasing a seven-figure home with an “as is” clause in the contract and not bothering to do an inspection—or even read the contract before signing it. This is what happened in Van Duren v. Chife, 569 S.W.3d 176 (Tex.App.—Houston [1st Dist.] 2018) where the buyers discovered after closing that the house had previously flooded and had mold. The court of appeals ruled that the seller’s broker had no liability. “Knowledge of past repairs did not establish knowledge of present defect, and thus, the fact that sellers’ real estate broker was copied on email correspondence between sellers and builder complaining of ‘construction anomalies’ and ‘code violations’ during building of residential property did not support a reasonable inference that the real estate broker knew of undisclosed defects in a later sale of residential property to buyers in an action against the real estate broker for fraud and negligent misrepresentation.” (The seller in this transaction had clearly failed to disclose a material adverse condition but nonetheless escaped liability on procedural grounds.) Van Duren is the latest in a line of cases that say it is actual knowledge on the part of the broker that matters.

As noted above, a seller’s agent should avoid participating in completing the seller’s disclosure except to advise the seller to complete it truthfully. If the seller confides in the agent that flooding has occurred in the past, the cat is out of the bag: the agent then has actual knowledge which could potentially result in liability unless the condition is fully disclosed.

Section 1101.652 of the Occupations Code states that TREC “may suspend or revoke a license issued under this chapter or take other disciplinary action authorized by this chapter if the license holder, while acting as a broker or salesperson . . . fails to disclose to a potential buyer a defect . . . that is known to the license holder.”

Completing the Seller’s Disclosure Notice

Accurately completing the Seller’s Disclosure Notice is the responsibility of the seller (Prop. Code Sec. 5.008(a),(d)). It should preferably be done in the seller’s own handwriting since liability for non-disclosure does not usually arise unless the license holder has actual knowledge.

In order to help achieve the fullest level of disclosure, a seller’s broker should consider voluntarily supplying repair estimates, invoices, receipts, and the like as attachments to the Seller’s Disclosure. There is no rule against over-disclosing or over-documenting, and it may be smart to do so.

NAR Code of Ethics

Article 1 of the National Association of Realtors Code of Ethics states that information about property defects is not confidential. In other words, an agent or broker has no ethical obligation to become the accomplice of a dishonest seller. Disclosure of known defects is a duty for all members of the NAR.

The NAR canons encompass the requirements of fidelity (a fiduciary duty); integrity, including the duty to use prudence and caution; competency, including not just the exercise of skill and judgment, but also being knowledgeable in the conditions of the market in which the license holder operates; the duty to provide relevant consumer information, specifically including methods by which a complaint may be filed with TREC; the duty of non-discrimination (more on this below); and the duty to provide the Information About Brokerage Services form (IABS).

License Holders Who are Sellers or Investors

Agents and brokers who are also sellers or investors need to be especially concerned about full disclosure of material facts, defects, needed repairs, and adverse conditions and circumstances. Unlike unlicensed real estate sellers and investors, license holders are subject to the Real Estate License Act (RELA, found in Occupations Code Section 1101.652), the rules of the Texas Real Estate Commission (Texas Administrative Code Chapters 531-543), and the canons of professional ethics and conduct (Texas Administrative Code Chapter 531).

Suppose a broker fails to disclose an important personal conflict of interest—for instance, that she is the mother of the seller. Is the earnest money contract void as a result? Probably not, although the broker may be vulnerable to sanctions by TREC. Goldman v. Olmstead 414 S.W.3d 346 (Tex.App.—Dallas 2013, pet. denied). Note, however, that Goldman would likely not prevent a creative plaintiffs’ attorney from alleging that the license holder acted in a civil conspiracy with the seller. Result? The broker must spend time and resources to defend against this charge, whether meritorious or not.

Disclose, disclose, disclose is good advice for both sellers and the license holders who represent them.

Discriminatory Non-Disclosure

Could a license holder’s failure to disclose be potentially linked to discrimination? Possibly. A license holder’s duty of non-discrimination is clear. TAC Section 531.19 states that “No real estate license holder shall inquire about, respond to or facilitate inquiries about, or make a disclosure of an owner, previous or current occupant, potential purchaser, lessor, or potential lessee of real property which indicates or is intended to indicate any preference, limitation, or discrimination based on the following: (1) race; (2) color; (3) religion; (4) sex; (5) national origin; (6) ancestry; (7) familial status; or (8) disability.” Interestingly, age is not on this list, but one day Texas may get there.

Penalties for License Holders

TREC may revoke or suspend the license of a broker or sales agent if the license holder is convicted of any offense involving fraud or engages in misrepresentation, dishonesty, or untrustworthy behavior. TREC may also assess administrative penalties ranging from $100 to $5,000 per day.

RELA Section 1101.652(b)(3) provides that a license holder 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. In the long run, license holders are always better off pursuing a policy of full disclosure that continues throughout the course of the transaction—and insisting that their seller clients do the same.

The Value of Professional Trust

Standards of good conduct in any profession—real estate, law, or any other—are about trust. The profession as a whole has a vested interest in assuring that the public continues to place trust in its licensees. Behavior that has even the appearance of impropriety can result in sanctions, not to mention reputational damage.

Think of one’s professional reputation for honesty and integrity as a mirror. When whole, it reflects a light that people can trust. When broken, there may be no means of putting it back together.

CONCLUSION

Even though: (1) TREC and TXR forms fall short of expressly stating a seller’s full and ongoing duty of disclosure, and (2) the Property Code is missing a comprehensive full and ongoing seller disclosure requirement, full seller disclosure is still the law when it comes to residential transactions in Texas. Both common law and statutory law, collectively considered, clearly make it so.

It must be kept in mind that an aggrieved buyer has multiple legal avenues available when seeking relief against a non-disclosing seller. In rare scenarios where no other common law or statutory cause of action applies, a judge or an emotional jury can still look to the Deceptive Trade Practices Act’s prohibition against “any unconscionable action or course of action by any person” (Bus. & Com. Code Sec. 17.50(a)(3)). This provides ample legal means for a judge or jury to punish the seller for withholding known adverse information about property condition—and it can result in a judgment for treble damages, attorney’s fees, and costs of court.

DISCLAIMER

Information in this article is provided for general educational purposes only and is not offered as specific 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. This firm does not represent you (and no attorney-client relationship is established) unless and until it is monetarily retained and expressly agrees in writing to do so.