Property condition is a central concern for both sellers and buyers of residential property. This article addresses the law applicable to seller disclosure as well as practical steps that can be taken to meet the key property condition goals of the parties.
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 “as is” in its present condition and without representations or warranties, express or implied, and with all oral statements disclaimed.
As an aside, note that 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 buyer’s want?
The buyer’s strategy should be to counter the seller’s position by demanding full disclosure from the seller as to all known defects or adverse conditions affecting the property, regardless of the presence of an “as is” clause in the contract. This is conceptually separate from the usual effort by buyers to negotiate seller allowances and payment for pre-closing repairs. Effectively, the buyer is saying 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 effort by a buyer to secure full disclosure 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 existing legal responsibility to disclose any known condition or circumstance that could 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.
The buyer’s goal should be to know whatever the seller knows when it comes to material facts relating to property condition—and know it before expiration of the option period.
Reminding the Parties of Applicable Disclosure Law
Why is it important to remind sellers of their legal disclosure responsibilities? Because there is a misconception among sellers (and even among some agents and brokers) that conveying a property “as is” relieves the seller of any duty to disclose known issues relating to property condition. In effect, the seller is trying to say to the buyer I’m not telling you anything about the condition of the property. It’s up to you to do your due diligence and find what you can. While this strategy may occasionally work in commercial transactions, it is contrary to Texas law when it comes to residential property—so it is a prudent measure to remind the seller of legal disclosure obligations.
All participants in the transaction (parties and agents) should be on the same page when it comes to the requirement of full and ongoing seller disclosure—even if the transaction is “as is.” This is especially important since agents are routinely checking paragraph 7.D.(1) of the TREC contract now, making “as is” the de facto standard. This can be problematic since both TREC and Texas Realtors contracts (as well as their respective seller disclosures) are less than adequate in explaining just what “as is” means and how it relates to a seller’s continuing obligation to disclose material facts. A good solution is to add a custom special provisions addendum that addresses “as is” and disclosure issues so that no one is in doubt as to what is expected.
TEXAS PROPERTY CODE:
THE 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:
Prop. Code Sec. 5.008(a) A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed 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 (see 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 purpose of the seller’s disclosure is to make 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 routinely state upfront 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.
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. Moreover, there appears to be no provision in the statute providing for a buyer to waive this requirement. Exceptions are specifically listed, and “unless 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.
A practice note for buyers: just because a seller’s disclosure is not required in a particular case should not deter a buyer from attempting to get one or, alternatively, using a custom special provisions addendum to declare that full seller disclosure of known material facts is required as a contract term. The scope and extent of seller disclosure is not just a matter of legality; for a buyer, achieving full and ongoing seller disclosure should be considered a vital goal of the negotiation.
Unimproved Residential Property
Property Code Section 5.013 states a separate seller disclosure requirement for unimproved property 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.”
Seller’s Duty of Disclosure
“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).
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.”
Property Code Section 5.008(d) “requires only that the Notice be completed to the best of the seller’s belief and knowledge as of the date the notice is completed and signed. The statute does not impose a continuing duty to update the Notice.” Van Duren v. Chife, 569 S.W.3d 176 (Tex.App.—Houston [1st Dist.] 2018, no pet.).
Seller’s Duty Not to Misrepresent
Sellers have not only a duty to disclose but also 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.” Coldwell Banker Whiteside Associates v. Ryan Equity Partners, 181 S.W.3d 879, 888 (Tex. App.—Dallas 2006, no pet.).
In the context of seller misrepresentation, the court in Comel v. Birdwell found 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; (4) and in the case of partial disclosure when that partial disclosure creates a false impression in the mind of the buyer. Comel v. Birdwell, 2014 WL 4347815 (Tex.App.—Eastland 2014).
Is there an ongoing duty to disclose?
According to the appeals court in Van Duren v. Chife (above), the answer is no. However, it is important to note that this ruling is limited to the requirements of the Property Code. It does not address the significant potential liability of a seller under the DTPA. In Van Duren, the plaintiff alleged that the defendant seller had actual knowledge of a water leak that occurred subsequent to the date of the disclosure. If true, then the seller would clearly have had a duty of disclosure under the DTPA entirely independent of and in addition to any Property Code requirements. Causes of action under the DTPA are discussed below.
Van Duren is worth discussing further. This case involved a leaky roof at a condominium building. The seller expressly disclosed water penetration in an “as is” contract; the buyer, a commercial real estate broker with a law degree who was also represented by an experienced attorney, and who conducted thorough due diligence after being put on notice of the water leaks, still sued the seller, alleging that both the seller and the seller’s realtor failed to fully disclose the recency and frequency of the leaks. Birnbaum ultimately lost, but only after putting the seller through expensive litigation all the way 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.).
How does the buyer know if a seller’s disclosure is true?
The standard for disclosure is the belief and knowledge of the seller, specifically referring to property items listed in the disclosure itself.
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 now finds 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 get to a lawsuit in order to demonstrate the illegality of withholding known facts about property condition.
And as to the idea of personal belief: this has become such a fluid cultural concept that one can find people who believe in most anything, including (even today) that the world is flat—so anchoring the veracity of a seller’s disclosure to subjective belief is not the most solid of foundations. At the very least, the phrase should encompass both belief and knowledge, which would be less fuzzy and coincides with the standard contained in Property Code Section 5.008(7)(d)—although that still leaves us without confidence that the disclosure is entirely complete. Might there be other adverse conditions that are not mentioned in the form? Quite possibly. See our suggested re-wording below.
Shortcomings of TREC and TR Forms
A serious problem is that neither TREC nor Texas Realtors disclosure forms (nor the promulgated contracts) adequately clarify the seller’s ongoing duty to disclose material facts. It is not enough to counter this point by saying that a seller’s disclosure obligations are expressed elsewhere in statutes like the DTPA or in case law. Buyers and sellers are unlikely to research and read those. 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 fully disclose known material facts and conditions relating to the property should be plainly stated in TREC and TR promulgated forms. At present this is not the case, unfortunately. Combine this with the absence of a clear Property Code statement on the disclosure duty of sellers and it is no wonder that Texas is prone to litigation on this issue. Perhaps it is time that Texas contracts stopped dancing around the duty of full disclosure and state the law plainly within the four corners of the document.
Clarity on the issue of seller disclosure is further clouded by the “no warranty” language (recommended by the statute) which appears at the top of both promulgated disclosure forms. The TREC Seller’s Disclosure Notice states:
THIS NOTICE IS A DISCLOSURE OF THE SELLER’S KNOWLEDGE OF THE CONDITION OF THE PROPERTY AS OF THE DATE SIGNED BY SELLER AND IS NOT A SUBSTITUTE FOR ANY INSPECTIONS OR WARRANTIES THE PURCHASER MAY WISH TO OBTAIN. IT IS NOT A WARRANTY OF ANY KIND BY SELLER OR SELLER’S AGENTS.
The Texas Realtors disclosure is the same except for a change to the last line, which reads:
IT IS NOT A WARRANTY OF ANY KIND BY SELLER, SELLER’S AGENTS, OR ANY OTHER AGENT.
When these disclaimers mention the word warranty, they presumably refer to a mechanical or functional warranty of some kind—for instance, a warranty that the roof will continue shutting out rain for another five years. It’s fine to exclude this possible (but remote) misinterpretation of the disclosure form, but by excluding warranties of any kind this wording would also appear to exclude the warranty of truth; there is such a thing, after all, as a seller making a representation and warranty that the contents of the disclosure are true and correct. The statutorily recommended language, in rejecting warranties of any kind, has the unfortunate effect of also excluding a warranty of truth, accuracy, and completeness.
When criticizing, one has an obligation to offer an alternative. The following would be an excellent addition to the TREC and TR seller disclosure forms:
SELLER ACKNOWLEDGES A LEGAL DUTY OF FULL AND COMPLETE DISCLOSURE (WHICH CONTINUES THROUGH CLOSING) AS TO ALL KNOWN DEFECTS, NEEDED REPAIRS, AND ADVERSE CONDITIONS OR CIRCUMSTANCES THAT COULD REASONABLY AFFECT THE BUYER’S DECISION TO BUY OR NOT BUY THE PROPERTY, NOTWITH-STANDING THAT THIS TRANSACTION MAY BE “AS IS.” SELLER AFFIRMS THAT THE CONTENTS OF THE SELLER’S DISCLOSURE NOTICE ARE TRUE, CORRECT, AND COMPLETE TO THE BEST OF THE SELLER’S KNOWLEDGE.
Future versions of promulgated forms may clarify and affirm the seller’s disclosure obligations. Since we are not there yet, a careful buyer should consider adding a clause (in a special provisions addendum) making it clear that the seller is standing squarely behind the accuracy, truth, and completeness of the seller’s disclosure—as to all known material conditions and independent of the seller’s subjective belief—and further acknowledging that the duty to disclose known material facts continues through closing.
Seller non-disclosure is not a trivial problem. Sellers lie and conceal defects and material facts every day and a significant percentage of disclosure-related disputes reach the courthouse—to the expense and detriment of everyone.
Beyond the Property Code and Promulgated Forms
As noted, the Property Code fails to expressly state that a residential seller has a legal duty of full and ongoing disclosure as to all known defects and material adverse conditions. This is unfortunate. Worse, neither TREC nor Texas Realtors’ contracts state this legal duty in plain language. Even the TREC and TR seller disclosure forms fail to expressly declare that a seller has a legal duty of full and ongoing disclosure. This is a failure of draftsmanship given the abundance of litigation against non-disclosing residential sellers.
Full and Ongoing Disclosure of Material Facts is the Law
The important point for sellers and their agents to recognize is that even though the full and ongoing disclosure requirement may (for now) be missing as an express part of the Property Code and promulgated contracts, it is still the law. Statutory interpretation and case law, taken as whole, make it so. Because of misunderstanding and misconception on the part of residential sellers when it comes to “as is” sales, it is in a buyer’s best interest to expressly and emphatically remind everyone (both parties and agents) of the legal requirement of full disclosure of material facts which starts with property showing and continues through closing. Even though the standard contracts do not adequately address disclosure, there is no good reason why the disclosure requirement cannot (and should not) be incorporated into the contract as a negotiated term. With current TREC and TR contracts, the best way to do this is with a special provisions addendum.
DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT (DTPA)
The Deceptive Trade Practices-Consumer Protection Act (Business & Commerce Code Section 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.” Chastain v. Koonce, 700 S.W.2d 579, 582 (Tex. 1985). Accordingly, misrepresentations or failure by a seller of residential real property to disclose known material defects and adverse conditions are violations of the DTPA.
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)).
The last-mentioned statutory wording bears repeating: any unconscionable action, which is a broad standard indeed. 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?
Low Threshold for Seller Liability under the DTPA
Section 17.50 spells out relief available to consumers. Basically, a consumer who claims to have suffered economic damages or damages for mental anguish may seek relief if the other party’s action was a producing cause of the 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)).
A consumer under the DTPA does not need to have signed a contract with a non-disclosing seller. The Act applies even in the absence of contractual privity, meaning that seller liability for misrepresentation or non-disclosure in a proposed 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.).
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.).
The DTPA is Liberally Construed in Favor of the Consumer
Clearly, the DTPA is very pro-consumer. Section 17.44(a) states that the Act “shall be liberally construed and applied to promote its underlying purposes, which are to protect consumers against false, misleading, and deceptive business practices, unconscionable actions, and breaches of warranty and to provide efficient and economical procedures to secure such protection.” If a seller’s dishonest actions or inactions were a producing cause of loss or detriment to the plaintiff, even if the seller had no intent to harm, and even if the seller could not possibly have foreseen the possibility of harm, then the seller may have significant liability. Again, this is true even if an earnest money contract has not yet been signed.
The key question to keep in mind in evaluating a DTPA claim is this: could the seller’s knowing misrepresentation or failure to disclose have reasonably influenced an ordinary buyer’s decision to buy or not buy? Breaking it down, these are the requirements for seller liability for non-disclosure: “(1) the defendant [seller] knew 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 seller’s duty of disclosure extends to all material facts 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.)
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” (Sec. 17.565).
The DTPA and the Ongoing Duty to Supplement Disclosure
Although the Property Code does not impose an express continuing duty to update the seller disclosure, a broad reading of the DTPA suggests that the duty of disclosure continues as long as the seller has or acquires knowledge of previously undisclosed defects or material facts that could still affect the buyer’s decision to buy or not buy. There is no specific time segment in the interaction between seller and buyer that is carved out by the statute. The Act does not say that its provisions apply solely in the beginning of a real estate transaction (when the seller disclosure notice is first given) but 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 contract-to-closing process. If a defect is discovered by the seller or occurs after the 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.
Expressions of Seller Opinion under the DTPA
Mere puffing or opinion expressed by a seller is exempted from the DTPA. If a seller says, “This is the most beautiful house in the neighborhood,” that is probably not an actionable misrepresentation. It is just the seller’s opinion. “Whether a representation is a warranty or merely an expression of [the seller’s] opinion depends in part upon whether the seller asserts a fact of which the buyer is ignorant, or merely states an opinion or judgment on a matter on which the seller has no special knowledge and on which the buyer may be expected to have an opinion and exert his judgment.” Also, a “general statement concerning a future event . . . should be looked at differently than a statement concerning a past or present event or condition.” Humble Nat’l Bank v. DCV, Inc., 933 S.W.2d 224, 230 (Tex.App.—Houston [14th Dist.] 1996, writ denied).
Attorneys and Real Estate Brokers are Exempt from the DTPA
As long as they are acting honestly in their professional capacities, attorneys and real estate brokers fall within the professional services exemption of Section 17.49(c) of the DTPA—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
Moving on from the DTPA, we find that the Statutory Fraud Act (Tex. Bus. & Com. Code Sec. 27.01) is another potential pitfall for residential sellers who fail to make full disclosure:
Bus. & Com. Code Sec. 27.01 (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.
Elements of statutory fraud under Section 27.01(a) are the same as the elements of common law fraud (discussed below) 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 the plaintiff’s burden of proof under the Act considerably, which increase 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.).
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.
A buyer who believes he has been deceived in a real estate transaction may sue a non-disclosing seller on grounds of common-law fraud, separate and apart from causes of action under the DTPA or the Statutory Fraud Act.
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 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)).
Generally, the plaintiff in a common-law fraud case 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).
A plaintiff must show that a fraudulent misrepresentation was knowingly made by the defendant. 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).
Fraudulent inducement as a cause of action is a subset of general common-law fraud and relates 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).
Can failure to disclose be a 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.
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.
STEPS TO ACHIEVING
BOTH “AS IS” AND FULL DISCLOSURE
Case Law Relating to “As Is”
An “as is” clause, no matter how comprehensive, only protects an honest, disclosing seller. It will not protect a seller in a case of knowing 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).
“When a buyer agrees to purchase something as is, he agrees to make his own appraisal of the bargain and to accept the risk that he may be wrong.” LBM Invs., Inc. v. Caribe Props., Inc., No. 09-13-00060-CV (Tex.App. Oct. 17, 2013). However, 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). “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).
In evaluating the enforceability of an “as is” conveyance, “the nature of the transaction and the totality of the circumstances surrounding the agreement must be considered. Where the ‘as is’ clause is an important part of the basis of the bargain, not an incidental or ‘boilerplate’ provision, and is entered into by parties of relatively equal bargaining position, a buyer’s affirmative agreement that he is not relying on the representations of the seller should be given effect.” Kupchynsky v. Nardiello, 230 S.W.3d 685, 690 (Tex. App.—Dallas 2007, pet. denied).
Concerns of the Seller: Conveyance “As Is”
A seller of residential real estate who seeks to convey the property in “as is” condition should undertake several steps to protect the seller’s interest:
(1) Check the box at 7.D.(1) of TREC 1-4 family contract. This provision states:
D. ACCEPTANCE OF PROPERTY CONDITION: “As Is” means the present condition of the Property with any and all defects and without warranty except for the warranties of title and the warranties in this contract. Buyer’s agreement to accept the Property As Is under Paragraph 7D(1) or (2) does not preclude Buyer from inspecting the Property under Paragraph 7A, from negotiating repairs or treatments in a subsequent amendment, or from terminating this contract during the Option Period, if any
(Check one box only)
_ X_ (1) Buyer accepts the Property As Is.
____ (2) Buyer accepts the Property As Is provided Seller, at Seller’s expense, shall complete the following specific repairs and treatments: ________________
Agents and brokers are now checking paragraph 7.D.(1) as a standard default. This would appear to be driven more by the structure of the form and the blanks that need to be completed rather than by a conscious intention to choose “as is” as a specific strategy.
The “as is” language of paragraph 7.D.(1) is minimally adequate at best. For a seller, it is better than nothing, although not by much since it raises almost as many questions as it answers. The drafting principle that applies here is that it is not just the existence of an “as is” clause that matters, but its quality and strength. Some “as is” provisions are much better than others. Better provisions are also longer. When writing a good “as is” clause, brevity is not a virtue.
One sees more extensive and thorough “as is” provisions in commercial contracts. These often refer to the property being conveyed in its present condition while excluding seller representations and warranties, express or implied. Oral statements by principals and agents are nearly always discerned as well. Just adding these few additional points can vastly improve the quality and effect of an “as is” clause, yet the TREC contract does not give a residential seller that option.
It is worth asking: why should a comprehensive “as is” clause be limited to commercial contracts? Given the value of residential transactions today and the clear legal vulnerability of sellers, is there a valid reason for giving residential sellers second-class treatment when it comes to an effective “as is” clause? Why is it more important to give the seller of a $300,000 commercial warehouse better “as is” protection than the seller of a $3M residence?
(2) Include a custom special provisions addendum to the TREC contract. If a seller wants to maximize the “as is” nature of the conveyance then a more extensive “as is” provision must be included at the contract phase. Since the TREC contract does not offer the ability to do this, a custom special provisions addendum (or “as is” addendum as it is sometimes called) is necessary. This addendum need not be lengthy or complex; but since it is not an officially promulgated form, it must be prepared by an attorney.
A properly drafted special provisions addendum will include two “as is” clauses: one applicable to the contract stipulating that the property is offered for sale “as is” and a second clause, to be included in the warranty deed at closing, stating that the property is conveyed and accepted in “as is” condition. From a legal drafting perspective, these are conceptually different clauses that are designed to be inserted at two different points in the transactional process—the beginning and the end.
The addendum should include the verbatim “as is” language that (by agreement of the parties) will be included in the warranty deed at closing. Doing this has the effect of requiring that whoever drafts the warranty deed must include this exact language. Without such a requirement, the title company attorney (usually the preparer of the seller’s deed) will be under no obligation or incentive to include an “as is” clause in the text of the deed to the buyer.
Just as it is necessary in our health-care system for patients to advocate for their best interests, it is necessary for sellers and buyers in our real estate system to do the same. The professionals with whom residential sellers and buyers work often have a heavy bias against any deviation from what is considered standard (by them). They also have a bias against involving attorneys in residential transactions. In the case of agents and brokers, the reason is clear: adding a custom addendum to a residential contract not only pushes them out of their comfort zone but could jeopardize their commission—so when a seller raises the possibility of including an “as is” addendum to the contract immediate pushback can be expected. There is no remedy for this situation other than for the seller to simply insist.
If the agent or broker says a custom addendum is unnecessary, one might respond by asking “Then why is the courthouse clogged with seller non-disclosure cases?” Real estate lawyers will tell you that they receive at least one or two inquiries per week from residential buyers who want to sue a seller for failing to disclose. (Our favorite is the case where the seller failed to disclose that a rooster would not be included with the chickens that were otherwise being transferred with the property.)
If the seller performs any repairs and treatments prior to closing (as paragraph 7.D.(2) may require) then the “as is” clause should specifically include these repairs within its scope, thereby preventing the buyer from later claiming that such repairs were warrantied by the seller. The promulgated form offers no easy way to do this, so (again) a seller must rely on a custom special provisions addendum.
A Goal for the Seller: No Comebacks
No comebacks after closing should be the goal for sellers, and the time to begin working toward this goal is during the contract phase of the process. Attempts to add an “as is” provision after the contract is signed almost always fail. Adding such a provision would require a formal contract amendment, and a buyer may be reluctant to consent to a new clause that might not be in his best interest. As for the seller, the same agent who previously told him that a custom addendum was unnecessary will now say “Oh, you should have gotten that ‘as is’ clause in the contract if you wanted it.” Again, it is incumbent upon both parties to proactively advocate for their vital interests when dealing with agents and brokers.
Remember, inclusion of an “as is” clause in the contract and warranty deed does not relieve the seller of the obligation to disclose material facts concerning property condition. There is no clause, provision, or waiver that can be added to a residential real estate contract (or any other related document) that eliminates this duty on the part of the seller or that would allow the seller to commit fraud.
(3) Use the seller’s disclosure notice to disclose all known material facts and circumstances relating to property conditions. This is less a separate step in the process and more a consistent theme that should be woven throughout. Sellers are best advised to go beyond the seller’s disclosure form if it is useful to do so in order to provide clarity and detail. Include repair estimates and photos if these are available. Supply supplemental disclosures to the buyer if it seems like a good idea—and never rely on an oral disclosure.
(4) Include an effective “as is” clause in the warranty deed and require that the buyer sign and acknowledge the deed. It may not be sufficient (and it certainly is not safe) for a seller to rely solely on the brief “as is” wording of the TREC contract. Why? Because pursuant to the doctrine of merger, the final closing documents (the deed, note, and deed of trust) usually supersede the contract going forward from closing. “When a deed is delivered and accepted as performance of a contract to convey, the contract is merged in the deed. Though the terms of the deed may vary from those contained in the contract, still the deed must be looked to alone to determine the rights of the parties.” Alvarado v. Bolton, 749 S.W.2d 47 (1988).
Therefore, absent an express provision in the earnest money contract that its terms shall survive closing, a contract is merged into the closing documents, which means that the contract is essentially gone for most legal purposes. The closing documents (especially the warranty deed) and not the contract will prevail in a post-closing dispute between buyer and seller.
Even if one argues that a merger should not apply in a given case, this is a courtroom argument that will need to make later while defending a lawsuit. Why allow matters to get that far? By then, much damage may have been done—including expenditure of perhaps $50,000 or so in attorney’s fees.
Be exceedingly cautious concerning advice along the lines of “Oh, you can always sue for this or that,” or “You can always raise a defense of such and such.” By that time one is at the lawsuit stage one has in many respects already lost. In today’s ultra-expensive litigation environment, the process is the punishment.
If one is a seller (or advising a seller) why not seek to eliminate any possibility that the buyer can even rationally consider suing the seller after closing? The goal should be to entirely close off the possibility of such a post-closing lawsuit. All uncertainty as to which contract terms survive closing and which do not should therefore be expressly eliminated and not left to be argued about in a later lawsuit.
Turning the Warranty Deed into an “As Is” Agreement
It may also be prudent for a seller to require that the buyer sign and acknowledge the warranty deed in order to confirm acceptance of the property entirely “as is.” (This requirement would need to be stated in advance of closing, possibly in a special provisions addendum to the contract.) Doing this squashes any ambiguity about the terms on which the buyer is accepting the property. Acceptance of the “as is” clause by the buyer is no longer implied as is traditionally the case in Texas law. It is express, making life easier for the seller if the buyer decides to file suit after closing.
In drafting legal documents, it never hurts to take an extra step or two in order to be absolutely clear as to the parties’ agreement and intentions. There is nothing wrong with a bit of overlap or redundancy in legal documents.
A Sample Full Disclosure Clause
Buyers want full disclosure of material facts. Just as a special provisions addendum can be used to reinforce the seller’s “as is” position, a buyer may want to include language that emphasizes a seller’s obligation to disclose. Example: Seller acknowledges Seller’s duty under Texas law to disclose all known material facts and circumstances relating to the Property, including defects, inoperative or faulty systems, needed repairs (major or minor), negative facts, adverse conditions, pending or prospective neighborhood changes, and any other fact or circumstance that could reasonably affect Buyer’s decision to buy or not buy the Property, even if paragraph 7d(1) is checked and even if this is intended to be an “as is” sale. Seller represents and warrants that Seller’s Disclosure is true and correct.
Does addition of an “as is” clause affect the requirement of seller disclosure?
No. Inclusion in the contract of an “as is” clause (no matter how extensive) does not relieve the seller of the obligation to disclose material facts. Ritchey v. Pinnell, 357 S.W.3d 410 (Tex.App.—Texarkana 2012, no pet.). A seller of real property cannot avoid liability under the DTPA by conveying the property “as is.” Prudential Ins. v. Jefferson Assocs., 896 S.W.2d 156 (Tex. 1995).
A skillful lawyer cannot draft his way around the duty of seller disclosure in a residential transaction. It simply will not go away. Nothing in the DTPA suggests that the duty to disclose is temporary or disappears at any point.
Is “as is” the default standard now?
Traditionally, conveyance of property “as is” was a specific subset among various possibilities. However, agents and brokers are now checking paragraph 7.D.(1) as a standard default. Apparently, going forward, most every residential transaction in Texas is going to be “as is,” whether or not this is actually an intended and negotiated term. This practice is less than ideal. Conveying a property “as is” is a circumstance that should be intended, negotiated, and clearly stated—not simply assumed or checked as standard.
The Case for an “As Is” Addendum
Existing promulgated forms for the sale of residential property are somewhat deficient in how they address disclosure and “as is” issues. This gives rise to avoidable litigation.
A seller interested in avoiding post-closing liability and lawsuits is always on firmer legal ground if the “as is” nature of the transaction is fully and expressly set forth in both the contract and the closing documents. This means that there should be two full-length “as is” clauses, one in the contract and one in the warranty deed.
A buyer interested in learning about a property’s condition should always seek to emphasize that a seller’s has legal disclosure obligations that are ongoing.
It would be a significant benefit to sellers and buyers alike if a promulgated “as is” contract addendum existed that contained appropriate clauses pertaining to both seller disclosure and the specific wording of an “as is” clause, perhaps giving the parties an opportunity to check a box indicating that a full “as is” clause will be included in the deed at closing. In the absence of such a promulgated form, both buyers and sellers should consider using a custom special provisions addendum to cover these concerns.
Lawsuits Involving Seller Non-Disclosure
A broad view of Texas law makes it clear that buyers have the advantage when it comes to the legal obligation of a seller to disclose material facts in a residential real estate transaction. An aggrieved buyer has multiple effective avenues when seeking relief against a non-disclosing seller. Even in a rare scenario where no other cause of action applies, a judge or an emotional jury can still look to DTPA Section 17.50(a)(3)’s prohibition against “any unconscionable action or course of action by any person.” This provides ample legal means to find a remedy and assess punishment against a seller for withholding known adverse information about property condition—and it can result in treble damages, attorney’s fees, and costs of court.
Real estate investors in particular should take notice of buyers’ many opportunities for recourse. Given that investors are often viewed as greedy predators, investor-sellers who fail to disclose material facts are unlikely to win the fairness argument in court. Judges and jurors are more likely to see themselves in the shoes of the deceived party. Among the best pieces of advice that can be given to all sellers, but to investor-sellers in particular, is to disclose, disclose, disclose. Seller non-disclosure cases comprise the majority of residential property-related real estate lawsuits at the courthouse. Given this very real legal risk (and without resorting to moral arguments) it makes little sense for a seller to avoid full disclosure.
From Our Case Files
Amos loved playing ball in the backyard with his two Labrador retrievers. He had a stressful job, and it was his way of unwinding each evening. His neighbor Leroy had a similar passion for gardening and tending to his rosebushes. Believing that if he raised the rose beds to a higher level they would benefit both from drier soil and better sunlight, Leroy trucked in several loads of rose-friendly soil and built the beds about 18 inches. He also expanded the beds to include most of the backyard, intending to make tending roses his fulltime retirement hobby. The project took nearly a month to complete.
Unfortunately, Leroy did not make adequate provision for drainage. The first thunderstorm of spring brought a deluge that ran directly off Leroy’s elevated rose beds into Amos’ backyard, creating a standing pool of water around 30 feet in diameter and 8 inches deep. The water stayed for weeks with no place to go. Amos was unable to play fetch with his dogs and became incensed.
Discussions between the two neighbors quickly descended into acrimonious name-calling across the property line. Lawyers were engaged and they exchanged scholarly letters on property rights and nuisance law. Leroy began carrying his grandfather’s antique Colt .45 tucked into his waistband while he worked on his rosebushes. Amos searched Google for “how to make a Molotov cocktail” to toss over the fence onto the despised plants.
Summer arrived and the weather dried out a bit. Amos found 5 acres in the country with more room for his dogs and promptly put his house up for sale. It sold immediately to a couple who eagerly waived inspections (since it was a seller’s market) and told Amos that the backyard was perfect for their young children. Amos agreed enthusiastically, saying nothing about the drainage issues. “You’re going to love it!” Amos said as he pocketed their check at closing. They waved goodbye as Amos jumped into his pickup truck and sped toward a rose-free life in the country with his dogs.
ADDENDUM FOR BROKERS AND AGENTS
ON DISCLOSURE OBLIGATIONS
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.
Disclosure Law Applicable to License Holders
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 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 spend 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. 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.
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 educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well since we are not tax practicioners and do not offer tax advice. This firm does not represent you (i.e., no attorney-client relationship is established) unless and until it is retained and expressly agrees in writing to do so.
Copyright © 2023 by David J. Willis. All rights reserved worldwide. Reproduction or re-use of any this material for any purpose without prior written permission and full attribution is strictly prohibited. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, https://www.LoneStarLandLaw.com.