BROKER RISK MANAGEMENT
RISK MANAGEMENT TIP
Recently, there has been an increase in the number of sellers who have been reluctant to disclose, or do not understand their disclosure obligations. With a changing market making it more difficult to sell and sales prices declining, sellers are often more reluctant to make full disclosures regarding the material defects affecting their property for fear that doing so may impact the sale price. This Tip addresses a seller’s obligation to disclose and practice tips for handling seller’s disclosure obligations.
SCENARIO NO. 1:
Seller built the home which seller now wishes to sell. Seller has numerous construction documents in storage which seller does not want to retrieve or review, with seller contending that the documents are not reasonably accessible. Seller also claims that seller cannot recall everything about the information which seller has about the property given that seller has lived at the property for over 20 years. What are the seller’s disclosure obligations?
ANSWER:
Under the law, a seller must undertake a reasonable effort to obtain all records and information materially affecting the value or desirability of the property. That reasonable effort would include making inquiry of the holder of those records such as a property manager. If records are in storage and are arguably accessible, a seller has an obligation to retrieve and provide them to the buyer along with any other documents that affect the value or desirability of the property. When in doubt, the seller should be advised to provide the records.
The legal standard for whether a seller needs to disclose documents or investigate the seller’s records and other information, is a reasonable person’s standard. In other words, a court will evaluate whether a reasonable seller in your seller’s situation would have known or should have known about the issue and disclosed it to the buyer. This avoids a situation where a seller “conveniently forgets” material defects. A convenient memory may not be used as a defense for a seller who fails to disclose material issues.
SCENARIO NO. 2:
Seller has retained some disclosure and inspection reports from when seller purchased the property. Are sellers required to provide these records to a buyer?
ANSWER:
If the seller has records from when the seller purchased the property, however long ago, the seller must provide to the buyer all records which affect the value or desirability of the property. This includes all inspection reports and disclosure documents as well as any other documents which could negatively affect the property. If you or the seller have to ask the question, “Should the document be provided?” the answer is always yes.
SCENARIO NO. 3:
Seller received a negative soils report. Seller does not want to provide it to the buyer. Is it required to be disclosed if the seller believes it is inaccurate?
ANSWER:
Yes, just because a seller receives a report that the seller believes is inaccurate does not excuse the seller from disclosing the report to the buyers. However, the seller is free to comment on the report in the seller’s disclosures such as on the Transfer Disclosure Statement or Seller Property Questionnaire. The seller may also obtain a second report which can be provided to a buyer with the original allegedly inaccurate report. For example, if a seller orders a soils inspection and the inspector made derogatory comments about the property, that report must be provided to a buyer. However, the seller may obtain an alternative soils inspection report and provide both reports to a prospective buyer. It is strongly recommended that listing agents, and even agents representing buyers in a counteroffer, provide a seller with the Disclosure Investigation Advisory (form DIA on zipForms). Listing agents should provide the sellers with the DIA as part of a listing package and when delivering the TDS and SPQ to the seller. Agents representing buyers should consider adding the DIA form to the email forwarding buyer’s offer to the seller’s agent asking seller’s agent to forward it to the seller.
PRACTICE TIPS:
- A listing agent should advise the seller in writing of the seller’s obligations to disclose all material facts affecting the value or desirability of the property. To assist listing agents with counseling the seller, listing agents should provide sellers with the DIA no later than the time that the disclosure documents are delivered to seller. Advise the seller to read the DIA since it contains valuable information for a seller to prepare them for fully complying with their disclosure obligations.
- Listing agents should inquire of sellers as to whether they have any “historical records,” meaning documents received from when they purchased the property or otherwise received during their ownership; and advise the sellers to provide all such documents to prospective buyers.
- If a seller inquires as to whether a document should be provided, the answer is always “yes.”
- If the seller has a report which the seller believes is inaccurate, the seller may comment upon that in the seller’s disclosures such as the Transfer Disclosure Statement or SPQ. The seller may also obtain an alternative or second report and provide both reports to prospective buyers.
- Buyer’s agents should consider sending the DIA with buyer’s offer to ensure that the seller is advised of seller’s disclosure obligations.
This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.