Legal Matters: Full disclosure
Posted: 12:09 pm Mon, August 19, 2013
By Dan Heilman
Tags: Brenda Sauro, Chad A. Kelsch, Christopher R. Jones, disclosure, Fuller Seaver Swanson & Kelsch, Hellmuth & Johnson, Minnesota Association of Realtors, Sauro & Bergstrom
The disclosure form gives the buyer an accurate portrait of the condition of the property — especially when it comes to any defects, repairs or other issues.
“It’s something I hear about pretty often,” said Chad A. Kelsch, a bankruptcy and real estate attorney with Fuller, Seaver, Swanson & Kelsch in Golden Valley. “It requires that the seller inform the buyer of anything that could adversely or significantly affect ordinary use or enjoyment of the property.”
A standard form, available from most real estate brokers, will ask the seller a battery of questions about issues that could affect a sale, ranging from whether the electrical system is in good working order to the location of the property’s abstract.
The form asks whether certain issues in the home currently exist or have previously existed.
One mistake sellers often make is to answer accurately about current issues but not prior ones, according to Brenda Sauro, a construction defect litigator with Sauro & Bergstrom in Woodbury.
“That’s a huge problem because the point is to alert potential buyers and help them decide if they want to continue the transaction or hire their own inspector,” Sauro said. “It’s supposed to allow the inspector to walk into a home with the information that the basement was once flooded, so they can verify that it was fixed.”
Should have known?
A complete and accurate disclosure statement is required by Minnesota statutes 513.52-60 for all residential real estate transactions. Residential transactions between family members, resulting from foreclosure or involving new homes are exempt from the disclosure requirement, and buyer and seller can agree to waive the statement.
The Minnesota Association of Realtors formerly offered a disclosure form for commercial transactions, but discontinued the form due to the nature of commercial transactions. Since a much wider variety of potential issues can arise in commercial deals — many of them specific to a single property — a standard form probably wouldn’t work, attorneys say.
“Commercial transactions generally are between more sophisticated parties,” said Christopher R. Jones, a construction and real estate attorney with Hellmuth & Johnson in Edina. “They’re likely to have a specifically drafted contract that will deal with disclosure issues.”
Where problems with residential disclosure statements arise is when a seller either neglects or conveniently forgets to list an issue. Because most forms preface questions with the phrase “To your knowledge,” sellers sometimes take that as an invitation to fudge. For that reason, attorneys recommend that a housing inspector look over the statement on behalf of the buyer.
“There’s often a dispute over what the seller knew, or should have known,” Jones said. “Sometimes there’s evidence of repairs, but there usually isn’t a smoking gun. But if there’s water in the basement every time it rains, it defies belief that the seller didn’t know about it.”
The truth comes out
Sellers have numerous reasons for incorrectly filling out a disclosure statement. Perhaps the seller had repairs done without the proper city permits being pulled and considered it easier to just not mention the repairs at all.
But that can backfire.
Kelsch said one client was warned about false information on a disclosure statement by the seller’s neighbor.
Another common end-around is for sellers to state that the home is being sold “as is,” figuring that a disclosure statement isn’t necessary under such a circumstance.
Not so, according to Sauro.
“You can’t apply ‘as-is’ to something that’s hidden and material but known to you,” she said. “A scratch on the floor — that’s an acceptable ‘as is.’ The buyer can see it,” Sauro said. “But if it’s something that’s hidden and could affect a buyer’s use and enjoyment of the property, and the seller knows about it, they have to bring that forward.”
If the purchase agreement for a property contains an arbitration clause signed by both buyer and seller, disputes arising from a disclosure statement will be resolved through arbitration.
Otherwise, the obvious route for the buyer is a lawsuit for fraud, misrepresentation or breach of contract.
Even at arbitration, the penalty can be stiff for sellers. Sauro had a case in which the seller didn’t disclose a significant basement flood. An arbitrator later ordered the seller to repurchase the property and pay engineering and other fees incurred by the buyer.
“I would try to impress on sellers that it isn’t worth trying to hide things,” Kelsch said. “My recommendation is to over-disclose.”