Required Disclosures in Real Estate Transactions
The purchase and sale of real property is a fast pace and time sensitive procedure. There are numerous players involved, including but not limited to: the buyers, sellers, realtors, title agents, lenders, and associations. While these players hold different and sometimes conflicting interests, they share one common goal: to get a deal to the closing table. However, if you find yourself in this race, don’t forget to take a moment and ensure that disclosures are sufficient under Florida Law and thoroughly review all addendums regarding disclosures.
What is a Disclosure?
Disclosures in a Real Estate contract serve to inform the Buyer of defects or material issues with regards to the property. It basically means that the Seller should speak up if there is a material defect. The courts usually determine that a material defect is one which significantly affects the value of the property. The Seller is supposed to disclose any material defects or problems with the home. The most commonly encountered defects that affect value include significant problems with roofing, air conditioning, leaking, plumbing, unauthorized construction and additions to the home, and improper foundation. The reason these types of defects are most common to see in disclosures, is that they are sometimes invisible to the eye. If the defect is not obvious or notable to the Buyer, it should be disclosed by the Seller.
What are Sellers Required to Disclose?
When should or shouldn’t a Seller speak up? It is usually considered “bad business” to point out every scratch and dent in a property. If a potential Buyer is sent a disclosure with every single bad detail of the home showing all items in poor condition, chances are that Buyer will run for the hills. However, there are some conditions that must be disclosed. Florida has come up with a five part test that will help the Seller and Buyer understand when a Seller should speak up.
Under Florida case law, the test for Fraudulent Misrepresentation of a Defect is:
- Seller knows about the property defect;
- Seller does not disclose;
- Buyer does not know about the defect at time of purchase;
- The defect has a substantial impact on the value of the property; and
- The defect was not readily apparent or easy to discover.
Moreover, in Florida the above test still counts, even if the Buyer signed an “As Is” Contract. Typically when an “As Is” contract is signed the parties assume that no disclosures are needed. This is a wrong assumption. Disclosures of defects that substantially impact value of property still need to be disclosed when all the conditions from the above test are met.
Take the following two examples:
Example 1: Existing Duty to Disclose: Buyer and Seller enter into a contract for sale. The Buyer finds evidence of a leak during the inspection period and notifies the Seller. The Seller, when asked about the extent of the leak, represents that the problem is a minor one and that it has been corrected. The Seller here knew that the leaks are more serious and wants to sell the home to avoid having to deal with the issue again. Days later, water starts pouring through various areas of the home. In this case, if the Seller knew about this issue/defect, he or she has a duty to disclose.
Example 2: No Duty to Disclose: The Seller fills out a checklist and checks the “no” box when asked if they are aware of any improvements or additions to the property done without necessary permits. The parties close on the contract and the Buyer moves into the property. A few years later, the Buyer gets a notice of violations of the city building code due to unpermitted remodeling of the home. It just so happens that the remodeling was done prior to the Seller moving in, and as such the Seller has no knowledge. In this case, the Seller is not liable for fraudulent misrepresentation because there wasn’t knowledge.
Common Disclosures Specified under Florida Statutes
Florida has some material defects that must be disclosed. Florida Statutes, Federal Law, and the Environmental Protection Agency have mandatory disclosures some of which are:
- Coastal Disclosures
- Association Disclosures
- Non Developer Disclosures
- Sale of residential property; disclosure of ad valorem taxes to prospective purchaser
- Radon Gas Disclosure
- EPA- Lead Radon Disclosure
When should a Disclosure take place?
Disclosures should take place at the time of signing the contract for Sale and Purchase. Many times, they can be addendums or additions to the contract that can be signed during the closing process. The best time to disclose is prior to signing the original Purchase. If a defect is disclosed at some time later between the contract and the closing, the Buyer may be entitled to return of the deposit and sometimes reimbursement of costs and fees. However, if this is disclosed early on, then the Buyer, at their own expense, can inspect and decide whether or not to move forward within the inspection period (usually 7-15 days following the signing of the Purchase and Sale Agreement).
An important question to ask is: How does a party prove that a Seller denied existence of the material defect? In order to avoid the “he said/ she said” scenario, the Seller may be asked to sign and execute Seller Representations. These can be found in a simple checklist or can be drafted to your specific concerns. However, regardless of the simplicity of a checklist form, be sure to carefully examine each and every question asked.
Take the following example: A Seller checks “no” on whether they have knowledge of prior plumbing issues. The parties close on the contract. A few months later, the new home owner finds evidence of a wall being patched up behind a leaking sink. The buyer is able to obtain proof that the Seller previously hired a company to fix said repairs. In this situation, a check box form shows that the Seller failed to disclose the material defect. The evidence from the repair company shows knowledge of the defect.
It is highly encouraged that Sellers and/or Buyers review disclosures carefully and under the advice of a Florida Licensed Attorney. Moreover, it is imperative that the Seller does not permit another person or agent to fill out the form on their behalf. It is very common that Sellers state they had no idea that the question was check marked or that they signed a Disclosure.
These disclosures protect the Buyer far beyond the inspection and closing period and expose the Seller to liability. Always keep in mind that these initial legal documents, such as the Purchase and Sale Agreement and Addendums are just as important as the legal documents that will be signed on the day of closing. The best thing to do is to always have your contract reviewed by an Attorney.
What are the Consequences of failing to Disclose?
Failure to disclose defects can lead to a law suit being filed against the Seller. This is usually filed in County Civil Court or Circuit Civil Court depending on the amount of damages claimed. The complaint for the misrepresentation would be filed by the Buyer and served on the Seller. The Seller, thereafter, has 20 days to file a response. If the Judge enters a Judgment against the Seller, the Court may rescind the contract, thereby placing the parties in the position they were before entering into the contract. The court may go further and award costs, attorney’s fees, and other damages associated with the purchase of the property. This is true even if the losses and damages suffered by the Seller were not foreseeable.
What if the Buyer wants to accept the Property with the Damages?
If the buyer wishes to move forward with the Sale of the property, the Buyer has the right to do so. It would, however, be advisable that the Buyer remedy the defect by requesting that the Seller: (1) repair prior to the closing; (2) reduce the purchase price; or (3) provide a contribution at closing to the Buyer for these repairs. It is always a good idea to have an inspector or repair company quote the cost of repairing the defect prior to making any of these concessions. It is also a good idea for the Seller to include this concession in an addendum to the Purchase and Sale Agreement.
Protecting the Buyer’s Interest and the Seller’s Interest.
The best way to protect the interest of both the Buyer and Seller is to timely disclose material defects and get all pertinent information in writing in an Addendum to the Purchase and Sale Agreement. A defect does not necessarily mean the end of the deal. In most cases, the parties will come to some agreement on how to remedy the defect. It is important to reduce the chance of a civil suit by making sure that you are complying with State and Federal laws. Always, as a Buyer, inform your Lender (if you have one) of the defect by forwarding them all Addendums that come in with the original Purchase and Sale Agreement.
It is a good idea to have a Florida licensed attorney review your contract. Remember that communications between you and your attorney are privileged and confidential (unless attorney services are being used to further criminal or fraudulent activity). As such, you are encouraged to communicate fully and frankly with your attorney. In doing so, you may be able to exchange the necessary disclosures and avoid misrepresentations.