Disclosure Obligations of Texas Brokers and Agents

Topics Covered

Real Estate License Act
Fiduciary Duty and Ethical Standards
NAR Code of Ethics
The Actual Knowledge Standard
License Holders who are Investors

Real Estate License Act (RELA)

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.

Summary of License-Holder Obligations

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.

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 are 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).

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.

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 and Actual Knowledge

The 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. EbbyHalliday 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 do 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.

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. 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.

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 and it may be smart to do so in order to minimize seller liability. Disclose, disclose, disclose is good advice for both sellers and the license holders who represent them.

License Holders Who are Sellers or Investors

Unlike unlicensed real estate sellers and investors, agents and brokers 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.

Discriminatory Nondisclosure

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.