Disclosure Obligations and Liability

Disclosure rules protect buyers by requiring sellers and agents to share known material facts. This section focuses on property condition disclosures, environmental liability, and agent obligations.

Material Facts

Material fact - A fact that could affect a buyer's decision or the value of a property.

Examples include:

• Structural defects
• Water intrusion or mold
• Environmental contamination
• Defective systems (roof, HVAC, plumbing)

Table: Common Disclosure Topics

Failing to disclose a known material fact can create liability for both seller and agent.

Seller Property Disclosure

Most states require a seller disclosure form, but the details vary. For the national exam, focus on these principles:

• Sellers must disclose known defects.
• Sellers are not required to discover unknown defects.
• Buyers should still perform inspections.

Environmental Disclosures

Environmental hazards often require disclosure. Examples include:

• Lead-based paint in older homes
• Known contamination or spills
• Flood zone or flood insurance requirements
• Proximity to waste sites

Stigmatized Property

Stigmatized property - A property affected by a non-physical issue, such as a crime or death. Disclosure rules vary by state. For national exam purposes, know that agents must avoid misrepresentation and follow state law.

Agent Disclosure Duties

Agents owe duties to both clients and customers. They must:

• Disclose known material facts
• Avoid misrepresentation
• Encourage inspections when appropriate

Agents should document disclosures in writing to reduce liability.

Liability for Non-Disclosure

Liability can include:

• Lawsuits for damages
• Rescission of the contract
• License discipline

If a seller conceals a defect and the agent knows, both can be liable.

Applied Scenario: Foundation Crack

A seller knows the foundation has recurring cracks and has patched them for years. If the seller fails to disclose this and the agent is aware, the buyer can sue for damages based on misrepresentation.

Summary

Disclosure obligations focus on material facts and known environmental hazards. Agents should disclose, document, and encourage inspections to reduce risk.

Liability Allocation Basics

Liability can fall on sellers, agents, and sometimes brokers. If an agent knows about a defect and fails to disclose it, the agent can be liable even if the seller stays silent.

Buyers are expected to perform due diligence, but they can still recover damages when sellers or agents misrepresent or conceal material facts.

Exam Application Check

If a question asks who is liable for non-disclosure, the safest answer is both the seller and the agent if both knew the defect.

Disclosure Timing and Documentation

Disclosures should be provided as early as possible so buyers can make informed decisions. If a defect is discovered after the disclosure is delivered, the seller should update the disclosure before closing.

Agents should keep written records of what was disclosed and when. Documentation protects the broker if a dispute arises later.

Liability for Misrepresentation

Misrepresentation can be intentional or negligent. Even if a seller did not intend to deceive, providing false information can create liability. Agents should verify facts when possible and avoid repeating unverified claims.

Inspection Contingency Connection

Inspection contingencies allow buyers to investigate property conditions and negotiate repairs. If a defect is discovered during inspection, the buyer can request repair, a price reduction, or cancellation if allowed by the contract.

Exam Application Check

If a question asks whether a seller must update disclosures when a new defect is found, the answer is yes. If it asks whether an agent can rely on the seller's claims without verification, the safe answer is no when the agent has reason to doubt the claim.

Disclosure vs. Inspection

Disclosures are not a substitute for inspections. A disclosure form reflects what the seller knows, while an inspection is an independent evaluation.

Caveat Emptor (General)

Some states still follow caveat emptor (buyer beware), but even in those states, sellers must disclose known material defects. The national exam focuses on the general rule: disclose known defects and avoid misrepresentation.

Duty to Update Disclosures

If new defects are discovered before closing, the seller must update disclosures. An agent should advise the seller to update forms and notify the buyer.

Exam Application Check

If a question asks whether an agent can remain silent about a known defect, the answer is no. Silence can be treated as misrepresentation.

Seller Disclosure Checklist (General)

While forms vary by state, a typical disclosure form covers:

• Roof condition and prior leaks
• Foundation issues or settling
• Plumbing, electrical, HVAC condition
• Water intrusion or mold history
• Known environmental hazards

Buyer Due Diligence Reminder

Buyers should review disclosures early, order inspections, and verify any red flags. If a disclosure mentions prior flooding, the buyer should consult flood maps, insurance requirements, and potential repair history.

Exam Application Check

If a question asks whether a disclosure replaces an inspection, the answer is no. Both are needed for informed decision-making.

Stigmatized Property and Buyer Questions

Some buyers ask about deaths, crimes, or other non-physical issues. These rules vary by state. For the national exam, remember:

• Do not misrepresent facts.
• Follow state law and brokerage policy.
• Encourage buyers to conduct their own research if permitted.

Exam Application Check

If a question asks whether an agent must disclose a stigmatizing event, the safest national answer is that it depends on state law, but the agent must not lie or mislead.