Your duty to disclose
What the courts have ruled about your obligation, and how to protect yourself from a losing lawsuit.

Read more about disclosure.

by Gary L. Pate  The garden-variety lawsuit against real estate agents and brokers inevitably involves allegations of misrepresentation. To add punch to the lawsuit, plaintiffs often plead their claims under the Texas Deceptive Trade Practices/Consumer Protection Act (DTPA) to obtain, under certain conditions, treble damages (three times actual damages). The real estate brokerage is commonly added as a party to the lawsuit, because therein lies the deep pockets. Add a few termites, a sagging foundation, or a stolen chandelier, and you have a rather typical lawsuit.

Despite this gloomy depiction, real estate agents and brokers can take some encouragement in a favorable ruling by a state district court in Fort Bend County, which subsequently was affirmed in 2004 on appeal. In the lawsuit, the buyers sued the seller, the listing agent, and the listing broker for negligence, gross negligence, fraud, and violations of the DTPA for failing to disclose certain defects and a prior lawsuit involving the property. Some of the more-interesting facts of the case involved the seller’s completion of the standard Texas Association of REALTORS® Seller’s Disclosure Notice.

The lawsuit before the lawsuit
During the meeting at which the seller was completing the seller’s disclosure, the seller asked the agent whether she needed to disclose a prior lawsuit, filed in 1994 involving the same property. In the 1994 lawsuit, the current seller sued the prior homeowner for failing to disclose certain defects involving the property. The 1994 lawsuit was settled prior to the beginning of the transaction that was the subject of the second lawsuit. The settlement was rather limited and did not provide enough money to effect all of the necessary repairs, such as repairs to the crack in the driveway. The agent answered that the 1994 lawsuit did not need to be disclosed, but that the seller needed to disclose the condition of the driveway.

Of course, we know the rest of the story. The buyers later discover that that there was a prior lawsuit involving the property, and soon thereafter everyone ends up unhappy and in court.

Good news, bad news
The court ruled in favor of the agent and broker, dismissing the real estate defendants on a directed verdict. A directed verdict for a defendant is a favorable ruling by a court that, at the conclusion of the plaintiff presenting his or her evidence at trial, there is not sufficient evidence to submit the case to a jury.

In this instance, although the agent’s and broker’s case was not submitted to the jury, the seller’s case was presented to the jury for deliberation. The seller received an unfavorable verdict.

A key word is missing
In regard to the agent and broker, the court found that, although the seller’s disclosure asked for information regarding “any lawsuits [or other legal proceedings] directly or indirectly affecting the Property,” in a strict interpretation of the statute setting forth the precise wording of the seller’s disclosure, the plain language of the statute was not broad enough to include “prior” lawsuits. The court noted that, in the Texas Legislature’s drafting of the Texas Property Code §5.008 of what language should be included in any seller’s disclosure notice, the Legislature used the terms previous flooding, previous structural or roof repair, and previous termite damage.

The court reasoned that the Legislature, if it chose, could have used the word previous in conjunction with its requirement of disclosure of lawsuits affecting the property. Because the Legislature did not use the word previous in connection with lawsuits but did use the word previous in other portions of the disclosure statute, one can reasonably infer that it was not the intent of the Legislature to include the disclosure of previous lawsuits.

The court further supported its ruling based on the statutory language embodied in the disclosure statement asserting: “This is a disclosure of the condition of the property as of the date signed by the seller.” The court reasoned that the disclosure notice is seeking current information, which would include current legal proceedings affecting the property. As such, a lawsuit that was resolved by settlement four years earlier had no current relevance.

What knowledge of which facts?
In another interesting twist to this story, the listing agent was named in discovery documents filed in the 1994 lawsuit as a “person with relevant knowledge of facts.” The buyers claimed that this demonstrated that the agent knew specific facts about the prior defects and the limited settlement funds that would be inadequate to effect all necessary repairs.

In ruling in favor of the agent, the court noted that the agent’s being named as a “person with relevant knowledge of facts” does not alone specify which facts he has knowledge of and is not sufficient evidence that the agent had knowledge of specific defects or unfinished repairs.

Other favorable decisions
The ruling of the Fort Bend County Court was affirmed in 2004 on appeal. This ruling falls in line with a developing body of law that is favorable to real estate agents and brokers. Specifically, the ruling is consistent with the prominent holdings of Kubinsky vs. Van Zandt, REALTORS®, (Tex.App.-Fort Worth 1991) holding that the listing real estate agent has no legal duty to inspect listed property for defects over and above asking the sellers if such defects exist; Pfeiffer vs. Ebby Halliday Real Estate Inc., (Tex.App.-Dallas 1988) holding that “repairs correct defects, not prove their continued existence”; and Hagans vs. Woodruff, (Tex.App.-Houston [14th Dist.] 1992) holding that a broker does not have to inspect the property and disclose all facts that momentarily affect the value or desirability of the property.

Protect yourself
Thinking on the defensive for a moment, this case leaves us with a few valuable lessons worthy of reflection. Take note of a few highlights that may help you avoid the hassles of spending time in court and depositions rather than at your real estate business.

• You can do everything right and still be sued. Even the best agents and brokers get sued.

• When a property is the subject of a lawsuit and money gets
paid, whether through a settlement or judgment, the prospects of another lawsuit involving essentially similar facts when the property goes up for sale the next time is about as predictable as Hollywood releasing a sequel to a very profitable movie.

• Words do matter. Although oral agreements are, as a general rule, excluded from evidence in a transaction regarding the sale of real property (Texas Statute of Frauds involving the Sale of Land), good plaintiff’s attorneys know that by making claims under the Deceptive Trade Practices Act (see the sidebar at right), those conversations that go on while the seller is filling out the disclosure notice or while the prospective buyer is walking through the house come back to life again and are real evidence. The client may be your friend today, but he may be the star witness a year from now.

• Remember that neighbors talk. Conversations that begin, “Hey, just between us, do you think I need to disclose … ” should cause us to pause. Neighbors derive great delight by telling newcomers to the neighborhood the entire history of the home. What is hidden today will be revealed, given a little time and talkative neighbors.

The current trend in lawsuits involving real estate agents and brokers and the duty to disclose continues to be the same story rehashed a thousand times. The facts of these lawsuits will inevitably change to add some new twists, such as termites, inspectors with less-than-good eyesight, plumbing leaks, or missing knobs on the kitchen cabinets, but one document that has been, and will continue to be, Plaintiff’s Exhibit A is the Seller’s Disclosure Notice.

It is always important to remember that the Texas Real Estate License Act requires agents and brokers to disclose to potential purchasers any latent structural defects or other defects known to the broker or salesperson. Although the seller has a duty to be truthful in completing the disclosure statement, the broker and agent have their own independent duties under the law to be truthful and forthright. Those who make their living defending agents and brokers never rest assured that these same facts tried in a different court will produce a similar favorable outcome. Neither should you.

Gary L. Pate (713/632-1759) is an attorney with Martin, Disiere, Jefferson & Wisdom LLP in Houston. He defends real estate agents and brokers in civil lawsuits and administrative complaints filed with the Texas Real Estate Commission.

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