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When Do Past Repairs Become “Defects” To Be Disclosed?

If there was one true answer to every question, think how easy conducting business or living life would be. Unless you’d like to change your chosen profession to mathematician,* then you’re in the same boat as most of us who need to make the best decision possible based on numerous factors.

Here’s a real-world scenario providing some parameters for making tricky decisions in real estate transactions that will help limit your risk of a possible claim.

SITUATION

A seller contacted a real estate agent to act as the seller’s agent in a residential home sale. The seller had owned the property for several years. At various times over the years, the seller would notice water intrusion in the front door area, around the transom and windows. The seller would make repairs himself by re-caulking the front door and window area. The leaking and repair cycle occurred three or four times in total, but the problem never completely went away. The seller viewed the repairs as simply a home maintenance issue. The seller never hired a contractor to investigate and fix the problem. The last leaking and repair cycle occurred approximately two years before the sale to the buyer. About one month after closing, a fierce rainstorm produced significant leaking in the front door and front window area of the home.

PROBLEM

The seller had completed a voluntary property disclosure form as part of the sales transaction, using a form provided by the real estate agent (the locale did not require a specific disclosure form by statute or rule). The form included questions about any “defects” in the roof or windows, and if there were any other “defects” known by the seller that would substantially impact the value of the home. The seller asked the real estate agent whether the past leaking and repairs needed to be disclosed, telling the agent that the leaking had last occurred about two years ago but had been “fixed.” The agent advised the seller to tell the truth—if the past leaking was fixed, then it did not need to be disclosed. The buyer sued the seller and the seller filed a third-party complaint against the real estate agent alleging that the agent had instructed the seller on how to complete the disclosure form.

MISTAKE

The listing agreement between the seller and the real estate agent clearly stated that the agent was not providing legal, contracting, or engineering advice. However, the agent gave an opinion, implicitly if not explicitly, to the seller about what qualified as a “defect.” This opinion was given in good faith with no intent to hide information or trick the buyer. Nevertheless, the agent did not think clearly about what was being said and whether a repeated problem that has been “fixed” is close enough to a “defect,” or whether to advise the seller to seek specific legal or a contractor’s advice.

RESULT

After lengthy litigation, the seller settled with the plaintiff-buyer for a substantial sum. The real estate agent made a modest contribution to the settlement via their insurance carrier, after their deductible was exhausted on legal fees. While the legal rules vary from state to state, caution in these types of situations is necessary. For more than 50 years, various state courts have held that a seller is under a duty to disclose defects known to the seller, even if not asked about them, when a reasonably diligent inspection by the buyer would not reveal the defect.

PREVENTION

Don’t offer an opinion about what is a “defect” that must be disclosed. However, there are some situations where you may want to advise your client that a “no defect” answer on a disclosure form should be rethought. For example, a “no defect” answer to the question of roof leaks when you can see water stains on the upstairs bedroom ceiling. Just as you should avoid offering an opinion about what is a “defect,” you don’t want to become a party to fraud through willful ignorance or silence in the face of contrary facts.

As a practical point, if your client asks you if they should disclose something, then the answer is likely “Yes.” Certainly, it is the safer answer. If the repair/problem is significant enough to produce this question, then it is likely close enough to the line to get your client and you in trouble for not disclosing. These decisions may differ from situation to situation, based on how much risk you are willing to shoulder for advising that a repair or problem not be disclosed. This must be weighed against the loss of a sale or reduction in sale price. While no agent wants to lose a sale, you should also consider not only the expense of your deductible being spent in the event of a lawsuit, but also the significant amount of time you will devote to dealing with the lawsuit rather than attending to your business. Likewise, do not discount the mental and emotional toll that dealing with a lawsuit will have on you. These “soft” factors should be placed on the scale next to the “hard” factors of loss, or reduction in price, of a sale when you make your risk management decision. Also, never forget that a jury verdict against you or your agency for fraud, for even one dollar, is still a court judgment for fraud. Avoiding litigation is your best course of action.

*Even in mathematics, there can be numerous ways to arrive at the same answer, or even a more complete answer.