Basics of Real Estate Disclosures in Arizona

&

The Legal Consequences of Misrepresentation

By: Benjamin Skinner, Attorney at Law

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What exactly does a property seller have to disclose to a potential buyer in Arizona?

In Arizona, sellers of real estate are legally required to disclose all important facts about the property they are selling.

• Hill v. Jones (1986) – Termite Damage:The buyer filed suit after learning of a termite infestation after they had entered into a contract.

• Lombardo v. Albu (2000):The seller sought damages from the buyer’s broker for failing to inform the seller that the buyer may have been unable to fulfill the contract because of financial difficulties.

Examples of important facts to disclose:•Water leakages

•Sewage and plumbing issues

•Heating and air conditioning

•Foundation cracks or instabilities

• Lead paint (this is required under the Lead-Based Paint Hazard Reduction Act for houses built before 1978)

•Insect infestations, termites

•Problems with title to the property

•Roof defects

•Property drainage problems

•Neighbor issues

The information that must be disclosed may depend on the type of property involved.

Commercial Land Residential

Disclosure for Commercial Properties

AAR has developed forms for commercial transactions:1. Commercial Purchasers Contract2. Commercial SPDS

• Zoning issues• Leases• Contracts• Termites• Security lighting• Parking• Signage

Disclosure for Vacant Land• Water rights• Soil issues• Utilities• Land surveys• Current and past land use• Zoning

Disclosure for Residential Properties

The SPDS is divided into 6 sections:

• Ownership & Property• Building & Safety Information• Utilities• Environmental Information • Sewer/Waste Water Treatment• Other Conditions & Factors

• Any information that may affect the property’s value or use, or a potential buyer’s decision.

The SPDS is designed to cover electrical issues, scorpions, termites, pool/spa problems, noise issues, and roof/plumbing leaks.

Anything “material” must be disclosed.

The Arizona Association of Realtors created a 6-page disclosure form, the Residential Seller’s Property Disclosure Statement (SPDS) to assist sellers in fulfilling their legal obligations.

Case Examples:

Hill v. Jones (1986):Warren & Gloria Hill entered into a contract to buy the home of Ora & Barbara Jones. The Hills filed seeking rescission of the sale based on misrepresentation after learning of a termite infestation.

When a seller is aware of a material fact that could affect the value the property, they are obligated to disclose that information.

Pima Capital Management Co. (2001):A vendor has the duty to disclose defects in the physical condition of the property being sold.

Latent defects of a property sold “as is” known by the vendor must be disclosed to the purchaser.

The vendor may be held liable for negligent disclosure if the purchaser is precluded by the vendor from discovering any defects.

What Information is Not Required to Disclose in Arizona?Under A.R.S. § 32-2156, sellers & brokers have no liability for failing to disclose the following:

• Whether or not the property is located in an area with a sex offender.

• Whether or not the property was previously owned by someone diagnosed with AIDS, exposed to HIV, or diagnosed with any other disease not known to be transmitted through occupancy.

• Whether or not a suicide, natural death, murder, or any other felony was committed at the property.

What Must a Real Estate Broker Disclose?

Brokers Independent Obligations of Disclosure:

1. Disclosure of status as inactive licensee (reason for rule is sophistication of licensee, including educational background).

2. Disclosure of licensee as a principal in L.L.C. or similar entity.

3. Disclosure of immediate family member with financial interest in the transaction.

What Must a Real Estate Broker Disclose?

• Data about the buyer’s financial ability to buy the property.

• Whether the broker and the seller or buyer had a previous or have an existing personal relationship.

• Any other information that would affect the seller’s or buyer’s power to complete the sale.

What Must a Real Estate Broker Disclose? Types of defects that are required to disclose:

• No gas line to property

• Sewer backup

• Foreclosure of home nearby (may affect property value)

• Change in zoning of adjacent lot (which may authorize construction that could obstruct views)

• Homebuilder lost contractor’s license because of poor construction

• No legal access, landlocked property

• Brown spots on lawn: no disclosure required if they only show up in the summer; disclosure required if the seller knows that the treatment cost is $2,500

How Do I Know Whether or Not to Disclose Something?

When in doubt, disclose.

What is Misrepresentation?

• Negligent Misrepresentation: The individual does not make a statement that they know to be false, but they make a statement without having any reasonable reason to believe it’s true.

• Innocent Misrepresentation: The individual makes a statement with a reasonable reason to believe it’s true, but they did not check to verify the truth of the statement.

• Fraudulent Misrepresentation: The individual makes a statement with reckless disregard as to its truth.

Misrepresentation is a false statement of fact which induces someone into a contract. There are three different kinds of misrepresentation:

Negligent Misrepresentation

• False representation of a past or existing fact (statements about the future do not apply, nor do opinions or “car salesmen” phrases).

• The representation must have been intended to induce the other party (buyer) to rely on it; it helped you make the deal.

• As a result of the misrepresentation, the other party suffered damages.

• The individual who made the statement must have no reasonable reason to believe that the statement was true (if this does not apply, it is innocent misrepresentation).

• The other party must have believed the statement and relied upon it.

Misrepresentation can be hard to prove, as it is often difficult to exhibit the intentions or past beliefs of another person.

You can only sue for misrepresentation in civil court for false pretenses. The general remedy is to void the contract and return all property or money back to the original parties, as if the incident never occurred.

Misrepresentation & Real Estate Brokers

There must be proof of false statement or concealment in order to prove misrepresentation against a real estate broker. A real estate agent or real estate licensee must not misrepresent known facts, but they are not required to investigate unknown facts and report them to the buyer.

Even if the broker has knowledge of the problem, silence is generally not sufficient to impose liability, especially if there was an opportunity for the buyer to discover the truth on their own.

Breaching fiduciary duty: as a fiduciary, a licensed real estate broker must exercise loyalty and good faith in their duties for their client.

A broker may not be protected by the rule of caveat emptor (imposes no duty upon the seller to disclose information about the property), nor are they protected by the principle that the seller’s obligations under the contract are merged into the deed. In addition, a broker might not be protected by the language contained in the contract.

Grammer v. Turits

Actor Kelsey Grammer accused his broker of negligent misrepresentation after he hired the broker to find him an oceanfront summer rental in the Hamptons.

Grammer specifically noted that he desired peace and quiet, but when he arrived at the rental property, he discovered constant construction next door.

Grammer vacated the rental and sued his broker. The New York Appellate Division denied the broker’s motion to have the case dismissed,

Hill v. JonesBuyers of a home discovered after closing that the termite damage done to their home was far more severe than they had believed upon signing the contract.

The buyers accused the seller, realtor, the home inspector, and the termite inspector of misrepresenting the extent of the termite damage.

The courts dismissed the claims holding that silence is not sufficient to support an action for fraudulent misrepresentation, “particularly where the plaintiffs were on notice of the condition prior to closing and failed to discover the severity of the problem.”

TPL Associates v. Helmsley SpearA seller accused a broker of fraudulent misrepresentation after the broker assured the seller that the broker’s members would own less than 10% of the purchaser. The broker in fact owned a larger percentage of the purchaser.

The court ruled in favor of the seller stating that the failure to disclose was a breach of the broker’s duty of liability to the seller.