Real estate license holders (brokers and agents) face unique challenges when it comes to their obligation to disclose aspects of property condition—specifically, known material defects, adverse conditions, and circumstances that could reasonably affect the decision of a potential buyer to buy or not buy. This can be especially challenging when representing a seller who resists making full disclosure of all known factors affecting property condition.
This article addresses only the obligations of license holders as to disclosure of property condition. It does not discuss other kinds of disclosure requirements that apply to brokers or agents.
The law applicable to license holder disclosure of defects is primarily contained in the Texas Real Estate License Act (“RELA,” Chapter 1101, Texas Occupations Code):
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. . . .
The requirement that a license holder act with integrity would also apply. See TREC Rules found Chapter 531 of the Texas Administrative Code (“TAC”), The Canons of Professional Ethics and Conduct.
Legal Duties of License Holders
The standard that a license holder is also a fiduciary may also come into play in the disclosure context, depending on the circumstances. The fiduciary duty (fidelity) is among the three core ethical requirements of fidelity, integrity, and competence (TREC Rules 531.2-4 found in Title 22 of the TAC, Chapter 531).
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. A fiduciary’s responsibilities are often summed up in the acronym “OLD CAR:” obedience, loyalty, disclosure, confidentiality, accountability and reasonable care and diligence.
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 the 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 these standards together, it is difficult to imagine a scenario in which an agent or broker representing a seller would be justified in not insisting that full disclosure of known material defects be made to a potential buyer. 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 transaction merely because his client demands it.
The Standard for License Holder Liability: Actual Knowledge
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 to a jury that incompleteness (failure to disclose the total picture) was not dishonesty.
An agent working for Ebby Halliday in Dallas was relieved 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).
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—a good way for the seller’s broker to avoid liability, since the seller’s broker does not ordinarily become liable for seller wrongdoing (non-disclosure) unless the broker has actual knowledge of a defect and the failure by the seller to disclose it.
In order to help achieve the fullest level of disclosure, it is recommended practice that available relevant repair estimates, invoices, and receipts be attached as exhibits to the seller’s disclosure. There is no rule against over-disclosing or over-documenting. In doing so, the seller is protecting the seller’s own interests.
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 of course to advise the seller to complete it truthfully. If the seller confides in the agent (for instance) 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.”
NAR Code of Ethics
Finally, note that Article 1 of the National Association of Realtors Code of Ethics makes states that information about defects is not confidential. An agent or broker has no obligation to become the accomplice of a dishonest seller. Disclosure of known defects is in fact a duty for all members of the NAR.
Think of your professional reputation for honesty and integrity as a mirror. When whole, it reflects a light that people can trust. When broken, there is no putting it back together. The canons encompass the requirements of fidelity (the duty to act as a fiduciary); 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, commonly referred to as the IABS.
License Holders Who are also Sellers or Investors
Agents and brokers who are also sellers or investors need to be especially concerned about failing to make full disclosure of material facts, conditions, and circumstances—so long as disclosure would not violate the legitimate duty of confidentiality. 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 contained in Texas Administrative Code (“TAC”) Chapter 531.
Suppose a broker fails to disclose an important personal fact—for instance, that she is the mother of the seller. Does this void the earnest money contract? 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 expend time and resources to defend against this charge, whether meritorious or not.
Discriminatory Non-Disclosure by a License Holder
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. 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.
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 that profession’s licensees. Behavior that has even the appearance of impropriety can result in sanctions, not to mention reputational damage, so license holders should consider it part of their professional duty to walk the extra mile when it comes to disclosure and fair dealing in general. Disclose, disclose, disclose.
Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. 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.
Copyright © 2023 by David J. Willis. All rights reserved. Mr. 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, www.LoneStarLandLaw.com.