Seller Disclosure in Texas Residential Transactions

Three Rules: Disclose, Disclose, Disclose
by David J. Willis J.D., LL.M.

Introduction

Sellers and buyers have different needs and motivations when it comes to real estate, particularly when it comes to the key issue of property condition. Sellers naturally want to sell “as is” without representations or warranties, with no obligation for repairs and no post-closing liability. Buyers, just as naturally, want transparency from the seller and full disclosure of defects, needed repairs, and adverse conditions—anything that could affect the buyer’s decision to buy or not buy.

Problems can arise when a seller’s obligation to make full disclosure is not clearly stated in the contract and the seller’s disclosure notice. Both TREC and TAR contracts (as well as their respective seller disclosures) are less than adequate in this respect and may have inadvertently contributed to a near epidemic of complaints and lawsuits against sellers for failing to provide full, accurate, and complete disclosure.

Requirement of Seller Disclosure in Residential Sales

A signed seller’s disclosure notice is required in most residential sales pursuant to Section 5.008 of the Property Code:

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.

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 now 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 disclosure was expanded to include new questions about flooding, water penetration, and any previously-filed insurance claims relating to water damage. The TAR disclosure also addresses this subject, just not as extensively.

Statutory Exceptions to the Disclosure Requirement

Property Code Section 5.008(e) states that a Seller’s Disclosure Notice is not required in the case of a transfer:

(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 (this would include newly-built homes);
(11) of real property where the value of any dwelling does not exceed 5% of the value of the property (pure “tear-downs,” in other words).

Note that the statutory exceptions do not include “I have never lived on the property,” a common dodge used by unscrupulous flippers. A seller’s disclosure must still be provided.

How does the buyer know if a seller’s disclosure is true?

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

Unfortunately, the statute stops short of expressly stating that a seller has a legal duty of full and ongoing disclosure as to all defects and material adverse conditions. In fact, a clearly-stated duty of full disclosure on the part of a residential seller appears nowhere in the Property Code. For this we must turn to other statutes, notably the Deceptive Trade Practices Act, the Statutory Fraud Act, and case law (all discussed below) which, taken together, remove all doubt that a residential seller does in fact have a legal duty of full and ongoing disclosure in Texas.

A good summary of the law is found in Myre v. Meletio, 307 S.W.3d 839, 843-44 (Tex. App.—Dallas 2010, pet. denied): “In the context of a 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.” A duty of full disclosure by the seller does exist, according to Myre, but actual knowledge is required. There is a duty to disclose known facts, in other words, but not a duty to know or to investigate. Accordingly, liability cannot be imputed to a seller based on a “should-have-known” theory.

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 who 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 this point in order to establish the truth.

Is this cobbled-together legal mix really the best way to protect buyers and discourage seller deceit? Does the availability of a post-closing DTPA lawsuit adequately counter-balance the absence of contract language that plainly and expressly states the seller’s duty of full disclosure?

The “No Warranty” Language of the Disclosure Forms

The TREC and TAR disclosure forms both stop short of declaring that a seller has a legal obligation to provide full and ongoing disclosure. Clarity on this issues is further clouded by the “no warranty” language (recommended by the statute) which appears at the top of both disclosure forms. The TREC Seller’s Disclosure Notice states:

THIS NOTICE IS A DISCLOSURE OF 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 TAR 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 there may be an unintended result: 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 that the seller has been accurate and truthful.

As noted above, the TAR seller disclosure does state that the seller acknowledges that the notice is true “to the best of Seller’s belief;” at best, however, this leaves us with a mixed-message disclosure form that begins by disclaiming all warranties and ends by warranting that its contents are true. So which is it?

And as to the idea of 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 may not be 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.

Thus an analysis of the wording of Texas disclosure forms suggests the potential for gaps and ambiguity. A careful buyer should consider adding a clause (perhaps contained in a special provisions addendum) that makes it clear that the seller is standing squarely behind the accuracy, truth, and completeness of the Seller Disclosure Notice (independent of the seller’s subjective belief) and also acknowledging that the disclosure duty continues through closing. Competent buyers should be determined to minimize a seller’s wiggle-room on the disclosure issue with a simple requirement: I may be willing to accept the property “as is,” but you must still tell me what you know. All of it. No hiding the ball.

The shortcomings of the TREC and TAR disclosures mirror a similar defect in the contracts to which they are attached: these contracts make no express unambiguous declaration that the seller has a legally-binding duty of full and ongoing disclosure of defects and material facts through closing. This is Texas law (details below), but by not clearly stating this duty, both TREC and TAR contracts may have the potential to muddy the disclosure waters substantially.

Real estate lawyers know that the majority of post-closing residential real estate litigation involve seller non-disclosure and allegations of fraud. Sellers lie and conceal defects and material facts every day. This is far from a trivial problem. At the very least, promulgated Texas contracts and disclosures should not have the unintended effect of aiding and abetting seller wrongdoing. 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.

Seller’s Ongoing Duty to Disclose

Seller disclosure should not be construed as a one-time event that begins and ends with the Seller Disclosure Notice. Any reasonable reading of the DTPA, the Statutory Fraud Act, and associated case law makes it clear that a seller’s duty to disclose continues through closing. This duty continues as long as the seller has or acquires knowledge of previously undisclosed defects or material facts that could, as yet, still affect the buyer’s decision to buy or not buy. If a defect is discovered or occurs after the disclosure is given, then the seller has an unambiguous legal duty to inform the buyer of those circumstances, right up to the moment the buyer tenders the sales price. And yet neither the TREC or TAR contracts nor their respective seller disclosure forms make this clear.

It is not enough to counter this argument by saying that a seller’s disclosure obligations are expressed elsewhere, in statutes or in case law. Buyers and sellers are unlikely to research and read those. In the real world, real estate practicioners are lucky if they can get the parties to read the contracts in front of them.

A relevant case is Comel v. Birdwell, 2014 WL 4347815 (Tex.App.—Eastland 2014), which finds a duty on the part of the seller to update the Seller’s Disclosure Notice in certain specific circumstances: if a confidential or fiduciary relationship exists; when the seller has already disclosed part of the issue (then the rest of it must be disclosed); when a prior representation by the seller would be untrue or misleading without further explanation; and in the case of partial disclosure when that partial disclosure creates a false impression in the mind of the buyer.

Two additional points: firstly, inclusion 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 skillful lawyer cannot draft his way around the duty of seller disclosure in a residential transaction. It simply will not go away. Secondly, merely giving the buyer a copy of an expert report on a certain condition (termites, for example) does not eliminate the requirement that the seller disclose what he knows about that condition (Lawrence v. Kinser, Tex.App.—Dallas 2011, no pet. h.).

Note this interesting case involving a leaky roof at a condominium building: Birnbaum, et al vs. Atwell et al, No. 01-14-00556-CV (Tex.App.—Houston [1st Dist.] 2015, no pet.). The seller disclosed the 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.

The best protection for a buyer is to add a special provisions addendum to the contract, at the offer stage, which expressly sets out the seller’s ongoing duty of full disclosure. Since there is no such “disclosure addendum” available as a promulgated form, an attorney would have to be involved in drafting it.

The Deceptive Trade Practices-Consumer Protection Act (DTPA)

Cases applying the DTPA consistently declare that real estate is a “consumer good” as that term is defined in the statute. Chastain v. Koonce, 700 S.W.2d 579, 582 (Tex. 1985). The DTPA therefore applies to residential real estate transactions.

A key part of the DTPA (Business & Commerce Code Section 17.46) declares 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.

“Mere puffing or opinion” expressed by a seller is carved out by DTPA caselaw. “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).

Bottom line: misrepresentations or failure by a seller to disclose known material defects and adverse conditions affecting residential real property are violations of the DTPA. The key question for a court is whether or not a seller’s knowing misrepresentation or failure to disclose could reasonably have influenced an ordinary buyer’s decision to buy or not buy the property.

The ordinary activities of attorneys and real estate brokers fall within the professional services exemption of Section 17.49(c) of the DTPA, an exemption that is lost, however, in cases of fraud or misrepresentation. This is a consistent theme in Texas business and property law: edgy practices may be permissible, but if actual fraud is involved then the jig is up.

DTPA Suits Against Real Estate Investors

Does it sound as though most any of the itemized grievances in the DTPA might form the basis of a lawsuit against a real estate investor? Count on it. But it does not end there when it comes to investor liability. Section 17.50 adds breach of warranty and “any unconscionable action or course of action by any person” to the list.

Read that wording again: any unconscionable action. Statutory language does not get any broader or more potentially damaging than that. Investor sellers beware: if you fail to disclose a material item, a jury can find that your action was “unconscionable” and award treble damages, attorney’s fees, and court costs against you.

The Statutory Fraud Act Also Applies

The Statutory Fraud Act (Tex. Bus. & Com. Code Sec. 27.01) is another potential pitfall for sellers who fail to make full disclosure:

(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

(2) false promise to do an act, when the false promise is

(A) material;

(B) made with the intention of not fulfilling it;

(C) made to a person for the purpose of inducing that person to enter into a contract; and

(D) relied on by that person in entering into that contract.

(b) A person who makes a false representation or false promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for actual damages.

(c) A person who makes a false representation or false promise with actual awareness of the falsity thereof commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.

(d) A person who (1) has actual awareness of the falsity of a representation or promise made by another person and (2) fails to disclose the falsity of the representation or promise to the person defrauded, and (3) benefits from the false representation or promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.

(e) Any person who violates the provisions of this section shall be liable to the person defrauded for reasonable and necessary attorney’s fees, expert witness fees, costs for copies of depositions, and costs of court.

The above language is tighter than that found in Property Code Section 5.008 or in the common law. Elements of statutory fraud under Section 27.01(a) are the same as the elements of common law fraud, except that Section 27.01(a) does not require proof of knowledge or recklessness as a prerequisite to the recovery of actual damages. This eases the plaintiff’s burden of proof considerably.

For greater clarity on what constitutes a misrepresentation, see Clodwell Banker Whiteside Associates v. Ryan Equity Partners, 181 S.W.3d 879, 888 (Tex. App.—Dallas 2006, no pet.): “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.”

Exemplary or punitive damages are available to plaintiffs who prevail. A plaintiff is entitled to recover exemplary damages in cases of statutory fraud if the false representation is made with actual awareness of the falsity of the representation. Hines v. Hash, 843 S.W.2d 464 (Tex. 1992).

Common-Law Fraud

In addition to statutory causes of action, a deceived buyer may sue on grounds of common-law fraud as well. In other words, various causes of action can be pursued simultaneously and they frequently are. This is known as the “shotgun approach” and is designed to insure that, when the dust settles, at least some lines of attack will have found their mark.

Is “as is” standard now?

“As is” clauses often figure prominently in seller non-disclosure cases. The TREC 1-4 residential contract contains an optional “as is” clause, and the transaction becomes “as is” if the box at paragraph 7.D.(1) is checked. Cherry v. McCall, 138 S.W.3d 35, 39 (Tex.App.—San Antonio 2004, pet. denied). There is a common misconception, however, even among agents and brokers, that by checking paragraph 7.D.(1) a seller is relieved of the duty of full disclosure of known defects and conditions. “There might be defects, there might not, find them if you can!” then becomes the seller’s position.

This is concerning because 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 is bad real estate practice. Conveying a property “as is” is a very specific circumstance that should be negotiated and clearly stated by the parties—not simply assumed by default. Real estate professionals should strenuously resist the trend to make “as is” the Texas standard for residential transactions.

There is no question that conveying residential property “as is” is perfectly legal, although “[t]he 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).

The question is whether or not inclusion of an “as is” clause relieves the seller of the obligation to disclose known defects and issues—and the answer in Texas is clearly no. The rather tricky caveat is that the seller must have provable actual knowledge of the undisclosed defect.

Note the following 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).

Boehl v. Boley was an “as is” case, but it has to be understood (first) in the context of the no-actual-knowledge finding by the trial court; and (second) with awareness of the general tendency of appeals courts to defer to factual findings made by a trial court.

“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).

Conclusion? 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, and it will be no protection 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).

Collectively, the Deceptive Trade Practices Act, the Statutory Fraud Act, the common law, and relevant Texas case law unambiguously convey the message that a seller has a continuing obligation to fully disclose all known defects and material facts that could reasonably affect a buyer’s decision to buy or not buy. Intentionally avoiding full disclosure in any real estate transaction, with or without an “as is” clause, is at best a risky strategy for the seller and, at worst, plainly illegal.

Broker and Agent Liability for the Contents of the Seller’s Disclosure

Accurately completing the Seller’s Disclosure Notice is the responsibility of the seller. 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 in this regard unless the broker has actual knowledge of a defect and the failure by the seller to disclose it. 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 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). Both of these cases say that it is actual knowledge that matters.

As noted, 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.”

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.

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.

Additional Liability for Non-Disclosure by Real Estate License Holders

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. 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 standard Information About Brokerage Services form, commonly referred to as the IABS.

The fiduciary requirement is important. Being a fiduciary means that the license holder must place the interests of the principal 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.

In addition to the fiduciary duty to one’s principal, the rules also make it clear that a license holder has a duty of honesty and fair dealing with regard to everyone, not just clients. Taking all of these standards together, it is difficult to imagine any scenario in which an agent or broker representing the seller would be justified in not insisting that full disclosure be made to a potential buyer.

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.

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.

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.

Suggested Improvements to Promulgated Forms

When offering criticism, one has an obligation to offer an alternative. The following is a suggested inclusion for promulgated contracts:

SELLER ACKNOWLEDGES A LEGAL DUTY OF FULL AND COMPLETE DISCLOSURE (WHICH CONTINUES THROUGH CLOSING) AS TO ALL DEFECTS, NEEDED REPAIRS, AND ADVERSE CONDITIONS OR CIRCUMSTANCES THAT COULD REASONABLY AFFECT THE BUYER’S DECISION TO BUY OR NOT BUY THE PROPERTY. SELLER AFFIRMS THAT THE CONTENTS OF SELLER’S DISCLOSURE NOTICE ARE TRUE, CORRECT, AND COMPLETE TO THE BEST OF SELLER’S KNOWLEDGE.

And although the TREC contract advises in paragraph 23 that one should “consult an attorney before signing,” it would be a significant help to the public if all promulgated forms went further and stated that contract terms are negotiable. Too often the fine points of these contracts are pushed on parties with the assurance that “It’s a standard form, you don’t need an attorney, just go ahead and sign it.” When a smiling and persuasive sales agent is handing you a pen and urging you to act swiftly so as not to lose the deal, an unsophisticated buyer can be excused for believing there is nothing more to be said or done.

From Our Case Files

Within a month after closing we found out that the property has drainage flooding issues. Water often encroaches all the way up to the home, and the sidewalks are often several inches deep in water. We know it’s only a matter of time before water enters the home. Our neighbor wrote a witness statement that the previous owners knew about the drainage. The seller’s disclosure did not mention the drainage issues. The cost to repair is over $18,000. I don’t know what to do.

AT&T has built a cell phone tower directly behind my property, and this caused it to devalue substantially. I was never asked or notified they would do this. It turns out the seller knew all about AT&T’s plans to build this tower and never told us. I have two small children, I believe we are being exposed to radiation as well as high power electric humming that is 24/7. I’m very upset. used to love my house. Now I want to sue for the value of my home because they have destroyed it.

Also, the county has torn up the road in front of our house to widen it, taking four feet off the yard. This project is supposed to take up to 18 months and it has already made our lives a living hell. I called the seller and asked if he knew all of these things were coming. He laughed and said “Why do you think I wanted to sell?”

DISCLAIMER

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. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.

Copyright © 2021 by David J. Willis. All rights reserved worldwide. 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, www.LoneStarLandLaw.com.