Should the Seller Disclose?

Why the broker should be glad that the seller's attorney makes that call


 Debbi Conrad  |    June 06, 2012
DisclosureLRG

The listing agent hands the seller the Real Estate Condition Report (RECR) and asks him to please complete the form, explaining that she wants to have it on hand for prospects who visit the planned open house or come to showings of the seller’s home. The next day, the seller calls the agent to ask if he really has to fill out the RECR because he is unsure about how to respond to some of the RECR statements. Maybe he is uneasy because the neighbor told him that their end of the street used to be an apple orchard so there is a question about lead arsenate in the soils. Maybe it is a concern with potential groundwater contamination from the dry cleaning business that used to operate down the block, or perhaps he is nervous about the leaky basement that the basement contractors supposedly “fixed” a couple of years ago before or an underground storage tank that has never been removed. 

Naturally the seller believes his REALTOR® is an expert in all things involving real estate and can alleviate his concerns and answer his RECR questions. And of course the agent wants to provide excellent service to her client and demonstrate her value to the greatest extent possible, and she should — within reason and within the limits of the law. But when it comes to providing specific guidance regarding the completion of the RECR, the agent must tell the seller to consult with his attorney; the guidance the seller ultimately wants and needs amounts to legal advice and strategy. The listing agent may, however, be able to help provide a little assistance before the seller heads off to his attorney’s office.

Find the facts

Is the apple orchard information the seller heard from the neighbor true? A licensee’s job is not to investigate, but a licensee can point the seller to sources of factual information that may help resolve the seller’s concerns if the issue is new. If the seller has specific documentation regarding the issue, for instance the reports from the basement contractor who fixed that leaky basement, the agent can encourage the seller to assemble this information for the attorney’s review. Once the seller has gathered all available reports and documentation, as well as any general information regarding the issue, it is time for the seller to visit his attorney. 

Is it a defect?

“Defects” are defined in the RECR as those conditions that would have a significant adverse effect on the value of the property; significantly impair the health or safety of future occupants of the property; or if not repaired, removed or replaced, would significantly shorten or adversely affect the expected normal life of the premises. “Am aware” means to have notice or knowledge. The seller, in conjunction with his attorney, needs to decide whether the seller has notice or knowledge of conditions that fit the definition of a defect. 

For example, assume that chemical solvents used in a dry cleaning business down the street caused groundwater contamination. Is that a defect the seller should disclose under item C.17 that says, “I am aware of a defect caused by unsafe concentrations of, unsafe conditions relating to, or the storage of, hazardous or toxic substances on neighboring properties?” Factors entering into that decision may include results of any testing, if available, whether there has been remediation, and what scientists and other experts from the DNR may have reported with respect to the risk of future migration and if there is a distance from the original contamination site that is considered safe. It is the job of an attorney, not a real estate licensee, to review the scientific data and relevant information and determine whether there is a defect in this situation. Any time a legal definition or standard is applied to specific facts, the conclusion reached is considered a legal opinion. 

The attorney advises the seller whether and what the seller should disclose about the dry cleaning store contamination. Does the seller not disclose because the contamination is not on the property and the risk of it reaching the seller’s property is infinitesimal? If the decision is made to not disclose and the buyer’s family later experiences health problems traced back to the contamination, the seller may be sued for intentional misrepresentation or fraud under Wis. Stat. § 985.10 because of the failure to disclose. On the other hand, unnecessarily disclosing information about adverse conditions will detract from the seller’s ability to sell the house.

The bare minimum or the full scoop?

If the attorney decides that the seller should disclose the issue, the next question may be how much the seller should say. The policy behind the RECR, and some of the provisions in the offer to purchase, is to provide the most information possible about the condition of the property so the buyer can make an informed choice regarding whether to proceed with the transaction, seek amendments to the contract or abort the transaction. The seller is the best source of information because the seller has lived in the property or had access to information about the property if the property is rented. 

The WB-11 Residential Offer to Purchase Inspection Contingency encourages sellers to make full and complete disclosures. Lines 425-426 state: “For the purposes of this contingency, Defects … do not include structural, mechanical or other conditions the nature and extent of which Buyer had actual knowledge or written notice before signing this Offer.” If the seller supplies a reasonably detailed description of the issue in the RECR, the seller diminishes the ability of the buyer to revisit the issue in the inspection contingency. If the buyer receives the RECR before signing the offer and the RECR includes a detailed description, it is less likely that the inspection report will disclose any new information about the condition. If, on the other hand, the seller does not disclose or provides a minimal response, then the buyer may be able to list the issue as a defect in the Notice of Defects and thereby put the success of the transaction in doubt.

Despite this Inspection Contingency consideration, attorneys may advise the seller to provide only general information on the RECR. Their concern is that if a seller disclosure on the RECR later becomes an issue in litigation, an artful opposing attorney can more easily find a way to allege that the seller misrepresented the issue or deliberately omitted certain relevant details when a detailed explanation is given. The more the seller says, the more there is for opposing counsel to work with to find a way to allege that the seller misrepresented or concealed information. An attorney with this strategy in mind may advise the seller exactly what should be said, carefully choosing words that convey enough information so that the disclosure is accurate and truthful without giving more details than necessary.

Before or after?

Under Wis. Stat. § 100.18(1), the false advertising statute, a homebuyer can sue a seller who makes a false, deceptive or misleading statement to induce the real estate sale if the buyer suffers a monetary loss as a result. § 100.18 lawsuits can be brought only with respect to representations made before an offer to purchase is accepted. Under § 100.18(11)(a), a successful buyer may recover any monetary loss together with costs and attorney fees from a seller. Some attorneys have advised sellers to not provide the RECR until after an offer has been accepted in order to avoid potential § 100.18 costs and attorney fees.

Is “as-is” the answer?

If the attorney believes the seller should not disclose the issue, the attorney may advise the seller to not complete the RECR and to require that all offers be “as-is.” When a property is sold “as-is,” it generally means that the seller will not make property condition disclosures and will not cure defects. An “as-is” clause alerts the buyer that he or she is responsible to determine the condition of the property being purchased, that is, have the property thoroughly inspected and tested. “As-is” means that if the buyer goes through to closing and defects are later found, the buyer cannot go back to the seller for relief.

The use of an “as-is” clause, however, does not necessarily mean that the seller may still not need to make disclosures about the property. The seller may be liable for misrepresentation if he or she actively conceals a defect or prevents a buyer from investigating the property and discovering the defect. 

The seller also may be liable if he or she makes false affirmative statements about the property, as was shown in Grube v. Daun, 173 Wis. 2d 30, 496 N.W.2d 106 (Ct. App. 1992) where a leaking underground storage tank contaminated the groundwater and the property’s well. The broker had represented to the buyers that the property was suitable for business, residential, recreational and family purposes. The broker asserted that since the property was sold “as-is,” he had no duty to investigate and disclose. The court held, however, that when a seller or an agent of the seller makes an affirmative representation about the condition of the property, the seller or agent is not protected by the “as-is” clause. The buyer is entitled to rely on the affirmative statement and expect full and fair disclosure of all material facts related to that aspect of the property.W

In Green Spring Farms v. Spring Green Farms, 172 Wis. 2d 28, 492 N.W.2d 392 (Ct. App. 1992), the seller failed to disclose that the property was contaminated with salmonella bacteria that had killed some calves. The court found that even if the transaction is “as-is,” the sellers have the duty to fully disclose the existence of conditions — like salmonella or underground storage tanks — which may be material to the decision to purchase and which the buyer is in a poor position to discover. Thus, the use of an “as-is” clause is not always going to provide an escape for the seller from making disclosures. 

With all of these factors to evaluate, perhaps the agent may not want the seller to share his concerns because the agent cannot provide legal advice to the seller regarding whether the issue constitutes a “defect” under the RECR, whether the seller should disclose and how much should be said or whether the seller should sell “as-is”. These are all strategic legal decisions impacting the seller’s potential liability — liability that the agent should not be anxious to share. 

See Legal Update 02.07, “Duty to Disclose,” at www.wra.org/LU0207 and the October 2009 Legal Update, “Diligent Disclosure,” at www.wra.org/LU0910 for further discussion of seller disclosure obligations.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.

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