Are You Aware: Seller’s Disclosures and Real Estate Fraud in Texas
There is a lot of real estate exchanging hands these days, and it’s never been easier in the digital age. People can put in an offer by email, get approved for a loan, and close in a matter of days if no major issues are revealed during the inspection.
A vast majority of the time, informal and professional inspections will identify several points of contention. From the roof down to the plumbing, any damage, deterioration, or defects become quick bargaining chips in the negotiation process and can make or break a deal in short order. But after the transaction is consummated and the keys are in hand, there may yet be damage lurking behind the walls or breaches that do show themselves until the first heavy rainstorm. What now?
Many problems can remain hidden or concealed despite an otherwise thorough inspection of the property, and older construction has its own host of problems. This article explains whether you have any legal recourse for defects and damage that are discovered after the sale is completed.
The Texas Property Code requires sellers of residential real estate provide buyers with very specific “Seller’s Disclosures” before closing. See Tex. Prop. Code 5.008. The standard TREC form (Texas Real Estate Commission) with the required disclosures can be found here.
The required disclosures begin with the following language:
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.
This language does not state or imply that the buyer should not be able to rely on the information contained in the disclosures in deciding whether to purchase the property. Such an interpretation would completely gut the purpose of the Seller’s Disclosures, which is to fully inform the buyer of the property’s condition before the sale is consummated.
On the other hand, the seller does not have a duty to disclose defects and conditions that are not known, and there will rarely be a finding of liability when there is no direct or circumstantial evidence that the seller was made aware of the problem that led to the buyer’s claim.
Most disputes come with information contained (or not contained) in the third, fourth, fifth, and ninth sections of the disclosures form.
- Section 3 asks if the seller is aware of any defects or malfunctioning concerning the major housing components such as the walls, roof, plumbing, foundation, ceilings, and electrical systems.
- Section 4 focuses on specific types of damage and repairs, such as termite damage, water damage, drainage problems, structural or roof repairs, and fire damage.
- Section 5 simply asks if the seller is aware of anything that is need of repair.
- And finally, Section 9 mostly involves knowledge of compliance with local building codes, HOA fees, lawsuits affecting the property, and “any condition on the property which materially affects the physical health or safety of an individual.”
These disclosures are good in theory but create an obvious dilemma for sellers. Should I underplay or simply not disclose certain issues and risk legal liability later, or should I fully disclose everything and drive down the sale price or even lose the sale?
Many sellers who take the first option and get sued are quick to point out the “As Is” clause that will inevitably be found in the sales contract. But what effect does this part of the agreement have on the Seller’s Disclosures and the buyer’s right to rely on those representations when deciding whether to buy? As one former U.S. President famously opined: “It depends upon what the meaning of the word ‘is’ is.”
So what is “As Is”?
Almost every real estate contract in Texas will state the property is being sold “As Is.” This clause is rarely negotiated and reflects the common law doctrine of caveat emptor or “buyer beware.” The agreement to buy property “As Is” is an agreement to accept the risk that a property may have undisclosed or undiscovered defects or damage at the time of sale. The buyer agrees to take the loss if the property turns out to be not as valuable as bargained.
“As Is” Doesn’t Mean It’s Over
However, the Texas Supreme Court has maintained a very important distinction that has been the subject of much litigation, holding in 1995 that: “A buyer is not bound by an agreement to purchase something ‘as is’ that he is induced to make because of a fraudulent representation or concealment of information by the seller.” Prudential Insurance Co. of America v. Jefferson Associates., Ltd., 896 S.W.2d 156, 162 (Tex.1995). The Prudential Court went on to note that a buyer is also not barred from recovery if the seller obstructs an inspection of the property.
But perhaps the most important holding in Prudential is that “the nature of the transaction and the totality of the circumstances surrounding the agreement must be considered.” Two factors to be considered in this analysis are (1) whether the “as is” clause is an important part of the bargain and not an incidental or “boiler-plate” provision; and (2) whether the parties are of relatively equal sophistication and bargaining position.
Other important factors inherent in the “totality of the circumstances” are the nature of the defect or damage and the buyer’s ability to discover the problem before closing. For instance, a buyer would probably have trouble complaining about a shifting foundation and cracks in the wall when those issues can usually be observed and tested during a standard inspection. On the other hand, a buyer would have trouble detecting water damage and deterioration inside the walls as a result of a roof leak that has already been repaired.
Prudential has been upheld as the law of the land in Texas, but the interpretation of this case has been narrowed somewhat by recent decisions examining so called “reliance disclaimers.”
In Italian Cowboy Partners v. Prudential Ins. Co., 341 S.W.3d 323 (Tex. 2011), the Texas Supreme Court held that “in certain circumstances, it may be possible for a contract’s terms to preclude a claim for fraudulent inducement by a clear and specific disclaimer-of-reliance clause.” For example, in Schlumberger Tech. Corp. v. Swanson, the Court held that a “release that clearly expresses the parties’ intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement.” 959 S.W.2d 171, 181 (Tex. 1997).
In Italian Cowboy however, the Court held that the contract at issue contained a “merger clause”–a provision stating that only the explicit terms of the contract control and no other representations or promises have been made–which was not a clear waiver of reliance on any misrepresentations or nondisclosures made by the seller.
Taken together, a clear and unambiguous reliance disclaimer in a real estate contract could preclude a claim for fraud or deceptive trade practices, making the Seller’s Disclosures an empty exercise.
While there are several competing and overlapping issues involved in these cases, they can be boiled down into three major considerations for whether a home buyer has a claim against a seller or a seller has a strong defense:
- Whether there is a significant defect, malfunction, or other damage that was concealed or that could not have discovered by the buyer exercising due diligence and performing a thorough inspection of the property;
- Whether the seller in fact knew about the issue but claimed it was not known in the Seller’s Disclosures; and
- Whether the contract contains an “As Is” clause or other disclaimers that prohibit the buyer from claiming reliance on the Seller’s Disclosures, even if the seller knew about but failed to disclose information about the property.
Anyone dealing with these issues after a sale–buyer and seller–should consult with an attorney who has experience researching and litigating these often complicated cases.