Mtn. Law: Must a seller of real estate disclose defects to a potential buyer?
special to the daily
Must a seller of real estate disclose the property’s defects to a potential buyer? The general rule is caveat emptor (buyer beware). This means buyers are responsible for reasonably investigating what they are buying before buying it. The caveat emptor rule is supported by the language of widely used standard contract forms promulgated by the Colorado Real Estate Commission, which state: “Unless otherwise provided in this Contract, Buyer acknowledges that Seller is conveying the Property to Buyer in an ‘as is’ condition, ‘where is’ and ‘with all faults.'”
There are, however, limits to the caveat emptor rule and the enforceability of an “as is” contract. Basically, property defects are either “patent” (meaning obvious or easy to determine) or they are “latent” (not obvious or easy to determine). Patent defects are subject to the caveat emptor rule and “as is” language of a contract (so a seller generally doesn’t need to disclose them), but a seller can be liable for latent defects that the seller knew about and failed to disclose. This principle is also reflected in the standard contract forms, which state: “Seller shall disclose to Buyer, in writing, any latent defects actually known by Seller.” There is no bright line rule for what defects are considered latent, but courts have found them to include things like soil conditions, environmental issues or insect infestations.
The standard contract forms allow the parties to agree (or not) that the seller will complete a property disclosure form consisting of a list of questions about the subject property. The form states that the seller must answer the questions based on the seller’s “Current actual knowledge.” The term “current” means as of the date of the contract, so, if the seller provided her broker with a property disclosure form when the property was listed for sale and a condition changes before a contract is made, the seller should update the disclosure (and the buyer should insist on this). Sellers might be lulled into thinking that, if there’s not a question about it on the disclosure form, then it doesn’t have to be disclosed. That is not likely the case. If a defect is latent (and serious enough to merit consideration), it should be disclosed regardless of whether it’s on the form.
A common issue for sellers is whether they must disclose something that has been remedied. It is notable that most of the sections of the standard disclosure form simply ask if a condition exists “now,” not ever. The two exceptions are the sections on structural and environmental conditions, which require disclosure whether certain conditions have “ever existed.” That would include conditions that were remedied.
In some circumstances, there are laws indicating whether or not certain information must be disclosed. To give some examples, sellers must disclose any lead-based paint risk assessments or inspections in their possession, and any methamphetamine activity relating to the property (unless the property has been remediated in accordance with Colorado state standards). Sellers in Colorado are not required to disclose conditions that are merely psychological such as where an occupant had or was suspected of having HIV or any other disease “which has been determined by medical evidence to be highly unlikely to be transmitted through the occupancy of a dwelling place” … that a homicide or suicide took place at a property … or that a property may be haunted.
If there’s ever a question whether something should be disclosed, it’s best to disclose, disclose, disclose. Buyers tend to be forgiving of honest disclosures made up-front, but not when they think something has been hidden. It is better for sellers to disclose something and potentially lose a sale than to run the risk of later being accused of fraud.
Noah Klug is principal of The Klug Law Firm, LLC, emphasizing real estate, business, and litigation. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.
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