PROPERTY CONDITION DISCLOSURE FORMS: HOW THE REAL ESTATE INDUSTRY EASED THE TRANSITION FROM CAVEAT EMPTOR TO "SELLER TELL ALL"

Editors' Synopsis: This Article recounts the common law evolution away from caveat emptor in the sale of residential real estate and how some courts began holding brokers liable for seller errors and omissions. Amorphous, court-imposed disclosure requirements invited fact-laden trials with unpredictable outcomes, as litigators wrestled over what information was "material, " latent," "known to the seller or broker," and inaccessible to the buyer. The real estate industry developed a new protocol requiring sellers to disclose known defects in order to cut back on its own expanding liability, to assist buyers to become fully informed about the property before committing to a purchase, and to clarify for sellers exactly what they need to disclose. This Article reviews the issues brokers have resolved in establishing this near-universal regime of property condition disclosure forms, including the selection of the best institution to create and modify the forms, the topics that should be covered, whether compliance should be deemed waivable, and whether sellers should pay for property inspections. Finally, the Article evaluates California's Natural Hazard Disclosure Law, a statute that requires sellers, regardless of personal knowledge, to disclose the existence of area-wide natural and man-made hazards.

I. INTRODUCTION

The house architecture of the 1950s and 1960s, known generically as "mid-century,"1 has now become a favorite of home buyers, design aficionados, and the historic preservation crowd. While 1950s house architecture has returned to the height of fashion, real estate disclosure law has changed significantly in the past half century.

Home sellers in the 1950s had no obligation to mention property defects to buyers as long as they resisted the temptation to conceal latent defects or to lie about the condition of the property.2 To become liable for concealment, sellers would have needed to do more than just keep quiet: they would have needed to do something such as placing a mattress over a gaping hole to hide dry rot and termites3 or painting over water stains from an unrepaired roof leak.4 As one commentator put it, in those days, sellers' lawyers could reasonably have copied a page from Miranda and counseled their clients: "You have the right to remain silent. Anything you say can and will be used against you during the contract negotiations."5

In a typical pre-1950s case, the Massachusetts Supreme Judicial Court rejected a disappointed buyer's claim for relief, made after the buyer discovered his newly purchased home was termite-infested.6 The tightlipped seller had known about the infestation but had said nothing to the buyer. Hewing somewhat reluctantly to the prevailing "rule of nonliability for bare nondisclosure," the court declared: "The law has not yet, we believe, reached the point of imposing upon the frailties of human nature a standard so idealistic as this. That the particular case here stated by the plaintiff possesses a certain appeal to the moral sense is scarcely to be denied."7

By the mid-1960s, the consumer-protective norms applicable to the sale of goods were being applied to the sale of homes for the protection of home buyers. In all but a few states-with Massachusetts still among the holdouts8-home sellers are now expected to provide buyers with a detailed account of known material defects. This requirement is a statutory norm in about two-thirds of the states9 and is an accepted practice of real estate sales agents nationwide.10 Silence is no longer golden. In fact, silence can become extremely costly to unduly laconic sellers and their brokers.

This Article recounts the common law evolution from caveat emptor to "seller tell all" and explains why the courts never imposed upon sellers of used housing the implied warranties required of homebuilders. The Article also explains how, incident to the movement away from caveat emptor, some courts began holding brokers liable for seller errors and omissions that the courts believed brokers, as licensed professionals, should have detected and disclosed to prospective buyers.

Eventually, to keep afloat of the rising tide of consumer expectations and reduce their own exposure to legal liability, brokers endorsed the idea that sellers be given no practical choice but to fill out detailed property condition disclosure forms, which brokers would then transmit to prospective buyers.

The final section of this Article addresses some key questions that brokers needed to answer in the course of establishing seller disclosure as the norm: (1) Should property condition disclosure forms be embedded in state statutes, promulgated by state regulatory agencies, or issued by local Realtors Associations? (2) Should statutes mandate seller compliance or should compliance be voluntary, implemented through language in brokerdrafted listing and residential purchase agreements obligating sellers to make full disclosure? (3) What topics should disclosure forms cover? (4) Should forms be extensive or abbreviated? (5) Should sellers be excused from being required to complete disclosure forms if they pay for professional physical inspections of their properties? (6) Should sellers be able to avoid disclosure through disclaimers and waivers? (7) Should sellers be required to disclose the existence of area-wide natural and manmade hazards, even if they would need to pay firms to gather this information for the benefit of prospective buyers?