3. Duties & Disclosures to Third Parties

SECTION 5.008 OF THE TEXAS PROPERTY CODE (SELLER'S DISCLOSURE OF PROPERTY CONDITION)

According to TREC, this form "provides a vehicle for disclosure of defects or items in need of repair." Conditions such as the presence of lead-based paint, termite damage, and flooding are also addressed. updated every two years If the notice is not given before the effective date of the contract for sale, the purchaser may terminate the contract for any reason within seven days after receiving the notice. The mistake made by many sellers and real estate licensees, therefore, is to presume that only items shown on the Seller's Disclosure of Property Condition need be addressed by the seller. Yet liability under the Texas Deceptive Trade Practices—Consumer Protection Act (DTPA) can accrue to a seller of property for failure to disclose any "material" fact that would influence a reasonable buyer's decision to purchase, whether or not the type of defect is listed on the form. That includes both physical defects and intangible facts or "psycho- logical stigmas" The seller (not the agent) should complete the form, and the agent should carefully explain each section of the form to ensure complete compliance with the law.

Megan's Law

An issue related to Sanchez v. Guerrero is the federal law concerning the registration of individuals convicted of child molestation and other dangerous sex crimes. The federal government now requires states to develop and implement registration procedures for released sex offenders living in their communities. The federal law requiring such registration is commonly known as Megan's Law. Texas law exempts owners of single-family residences and real estate agents from a duty to disclose information relating to sex offenders to prospective buyers or tenants. Licensees should refer their buyer-clients to the DPS database to conduct their own research regarding sex offenders in the area.

■ AVOIDING DISCLOSURE AND MISREPRESENTATION PROBLEMS

Fraud is a type of misrepresentation where the misrepresentation is committed knowingly with the intent to deceive. Misrepresentations may occur when a licensee or a party makes a false statement to a potential buyer or when a licensee or an owner fails to disclose to the buyer important facts about the property. Licensees and owners have a duty to disclose material facts, if they are aware of them, affecting the value and desirability of a property. a licensee must take considerable care to clarify whether a statement is merely an opinion or a fact.

■ NONFIDUCIARY DUTIES

Nonfiduciary duties are duties that are owed to customers (nonclients) and to the general public (consumers). a Texas broker also owes general duties of honesty and fairness to all parties in a transaction This includes not only parties to the sales agreement, but also third parties such as the lender, appraiser, service providers, and the like. A broker is liable to third parties for misrepresentations, particularly for failure to disclose certain material defects that may affect the buy- er's good judgment and sound business practice.

Physical Stigmas

Physical stigmas arise when some negative or detrimental physical or environ- mental condition exists that may not directly affect the property but may affect the health or safety of the occupants. These conditions may have real or imagined health-related problems, but in either case the property suffers a loss in market- ability or value. Problems in this area may include asbestos, lead hazards, electromagnetic fields (EMFs), radon, chlorofluorocarbon emissions, hazardous waste disposal, underground storage tanks, soil or groundwater contamination, and previous use of premises for manufacture of methamphetamines.

Prohibited Disclosures to Third Parties

Prohibited disclosures relate to race, color, religion, sex, national origin, familial status, or handicap. If the potential buyers have concerns relating to these matters, they should be advised to seek information through their own independent investigations.

■ MATERIAL FACTS

The Language of Real Estate, John W. Reilly de nes and dis- cusses a material fact as follows: [A material fact] is any fact that is relevant to a person making a deci- sion. Agents must disclose all material facts to their clients. Agents must also disclose to buyers material facts about the condition of the property, such as known structural defects, building code violations, and hidden dangerous conditions. Brokers are often placed in a no- win situation of trying to evaluate whether a certain fact is material enough that it needs to be disclosed to a prospective buyer, such as the fact that a murder occurred on the property 10 years ago or the fact that the neighbors throw loud parties. It is sometimes dif cult to distinguish between "fact" and "opinion." The statement "real prop- erty taxes are low" is different from "real property taxes are $500 per year." Even though brokers act in good faith, they may still be liable for failure to exercise reasonable care or competence in ascertaining and communicating pertinent facts that the broker knew or "should have known."

■ DEFINE THIRD PARTY AND OBLIGATIONS TO THIRD PARTY

The doctrine of caveat emptor or "let the buyer beware" has been steadily eroded and replaced with sellers and their brokers having duties to purchasers under theories of public policy, ethical codes, statutory obligations, or case law regarding malpractice and deceptive trade practice. The listing broker owes a buyer or tenant customer duties of honesty, fairness, competency, good faith, and disclosure of all material facts. While these duties are nonfiduciary in nature, they are strong duties under Texas license law and regulation, professional association codes of ethics, tort law, and deceptive trade practice law.

Material Facts Relating to Survey Issues

These problems may include discrepancies in the area of the property, boundary lines, encroachments, or the overlapping of improvements from one property onto the property of another. Note that these types of problems are specifically excepted from the standard title policy as shown. Surveys are generally required when ■ conveying a portion of a given tract of land, ■ obtaining a mortgage loan, ■ government entities acquire land through condemnation procedures, ■ showing the location of new or existing improvements, and ■ determining legal descriptions of properties.

Material Facts Relating to Title Issues

Title insurance is a contract between the insurance carrier and the policyholder to indemnify the holder for defects in title up to the policy limits. Standard coverage includes the following: ■ Defects found in public records ■ Forged documents ■ Incompetent grantors ■ Incorrect marital statements ■ Improperly delivered deeds ■ Lack of access to and from land ■ Lack of good and indefeasible title Standard exceptions in Texas policies are as follows: ■ Deed restrictions or covenants ■ Existing liens listed in policy ■ Unrecorded title defects ■ Governmental rights of limitation and eminent domain ■ Shortages in area or discrepancies in boundaries, encroachments, or overlap- ping of improvements ■ Issues relating to bankruptcy ■ Taxes for the current and subsequent years Additional coverage (endorsements) may be purchased to include the following: ■ Property inspection ■ Rights of parties in possession (such as tenant's rights) ■ Examination of survey ■ Unrecorded liens not known of by policyholder ■ Environmental Protection Agency (EPA) lien endorsement (concerning claims related to EPA violations) ■ Homestead or community property or survivorship rights ■ Tax liability due to changes in land usage (rollback taxes) ■ Title defects relating to personal property

■ GENERAL DUTIES OF HONESTY AND FAIRNESS

fairly does not mean "equally" in the context of comparative duties owed to a client versus those owed to a customer. However, when fair or fairly is used in discussing the treatment of—and comparative duties owed to—one customer versus another customer, the concept of equal treatment is much more relevant. This is particularly germane when applying federal fair housing laws to the required treatment of members of protected classes. Licensees have the duty of honesty to customers and consumers, members of the public (TREC Rules 535.156(d) and 1101.652(b)(3-7)). However, the licensee must balance the fiduciary duty of confidentiality with the duty of honesty

■ STIGMATIZED PROPERTIES

license holder is not required to inquire about, disclose, or release information relating to whether: (1) a previous or current occupant of real property had, may have had, has, or may have AIDS, an HIV-related illness, or an HIV infection as de ned by the Centers for Disease Control and Prevention of the United States Public Health Service; or (2) a death occurred on a property by natural causes, suicide, or accident unrelated to the condition of the property. Texas law, as quoted here, requires that only a homicide be affirmatively disclosed. However, it is reasonable to believe that many buyers might be affected negatively if any type of death has occurred at the property. Remember that any type of death (or other issue) may be disclosed with permission of the client. Nearby activities that might concern a reasonable purchaser include ■ persistent criminal activity, ■ drive-by shootings, ■ planned rezoning of vacant lot, ■ large airport considering extending its flight path over the neighborhood, ■ numerous pet disappearances/killings, ■ planned sewage treatment plant, and ■ noisy, obnoxious neighbors.

Mortgagee's (Lender's) Title Insurance

sometimes is confusing when buyers who have negotiated title polcies to be furnished by sellers are charged for a mortgagee's title policy at closing. This policy is a separate policy to ensure that the lender has a valid lien against the property. The amount of coverage is for the original loan amount, and cover- age decreases as the loan balance decreases, while the owner's title policy is for the sales price and remains constant.

■ LIABILITY FOR MISREPRESENTATION

to file a successful misrepresentation claim against a broker, the plaintiff must prove that the ■ broker made a misstatement (oral or written) to the buyer or failed to dis- close a known material fact to the buyer, ■ broker either knew or should have known that the statement was not accurate or that certain undisclosed information should have been disclosed, ■ buyer reasonably relied on such statement, and ■ buyer was damaged as a result. Under a successful cause of action led under the DTPA, plaintiff remedies include ■ monetary damages, ■ rescission of the contract, and ■ forfeiture of the broker's commission. Under TRELA, enforcement actions against licensees include the following: ■ Criminal Prosecution (§ 1101.756) ■ State Civil Penalty (§ 1101.753) ■ Administrative Penalty (§ 1101.701) ■ Court Injunctions (§ 1101.751)

Guidelines for Disclosure of Stigmatized Properties

■ Determine whether the information is fact or fiction. ■ Check state law. ■ Determine materiality. ■ Discuss disclosure with the sellers.