Seller Disclosure Issues

I receive a substantial number of questions about disclosure statements and inspection reports. As a framework for discussing some of the issues, let me give you a situation posed by an experienced Austin area broker. She writes “Here is the situation I would like you to address. A previous client, who we represented as a buyer’s agent during the purchase of property, returned two years later and asked our company to represent him in the sale of the property. The client indicated on the seller's disclosure statement that he could not find his purchase inspection. The agent who previously represented this client as a buyer's agent, and who is now representing the client as a seller's agent, has the previous inspection report in both his own and the brokerage company file. Should we have retained the inspection report in our file? What are the disclosure responsibilities of the seller? What are our responsibilities? Can the seller instruct his agent not to disclose the previous report which the agent has in his file? What should our response be if we are instructed not to disclose the report?”

For discussion purposes, I am going to assume there is some negative material in the inspection report. If you receive a report which does not have anything negative about the property in it, I suggest that you not only retain it but frame it and hang it in your lobby.

There are two threshold questions to address. One, should the broker and agent have been given a copy of the report in the first place and second, should they have retained the report in their files?

I believe it is entirely appropriate for a broker and agent to insist upon receiving a copy of the inspection report. However, these reports are usually ordered by and paid for by a buyer. If I were an inspection company, I would deliver my report only to the buyer. Once the buyer has received the report, it is up to her to decide who should receive the report.

If a buyer refuses to give a copy of the report to her agent, I do not believe the agent has the authority to compel release of the report. However, I would be very leery of continuing to work with a buyer who would not share the report. After all, if there are problems with the property which later result in litigation, I think it is a foregone conclusion that the broker and agent representing the buyer will be included as defendants. You have an obligation to yourself and your broker to know the condition of the property.

Once the buyer broker and agent have received the inspection report, I believe it should become part of their permanent file regarding the transaction. I can think of no compelling reason to discard the report after the transaction has closed. The fact that it might contain negative information about the condition of the property is certainly not a reason to discard the report. In fact, that is probably a compelling reason to keep the report. It documents that the buyer was aware of these conditions prior to closing and chose to proceed with the purchase.

In a subsequent sale of this property, if the seller states that she cannot find her report, there are a couple of options. One, the agent and broker who retained the report can make it available to the seller so that it can be provided to the buyer. Two, the buyer could state on the disclosure statement that she cannot find her report, and she could forbid her broker to release the report to the buyer. Three, the buyer could use the statutory disclosure form, rather than the TAR or ABOR form, which does not address previous inspection reports. Fourth, the buyer could simply refuse to sign a seller disclosure statement.

What is important in this situation is not whether the seller releases a prior inspection report to the buyer, but whether she discloses the required information about the property. The law requires the seller to disclose any material fact regarding the condition of the property which would influence the purchase decision of a reasonable buyer. To my knowledge, there is no requirement that a seller release a confidential inspection report received when she purchased the property. What is required is that any relevant negative property conditions be disclosed to the buyer.

In the hypothetical situation posed, if the seller refuses to release the previous inspection report to the buyer and fails to properly disclose the defect in the property to the buyer, the representing broker and agent have a choice. They can continue to represent the seller and proceed to closing or they can terminate their representation and withdraw from the transaction. They cannot, without permission of the seller, release the report or discuss the condition of the property without violating a fiduciary duty to the seller.

There simply is no absolute text book answer as to what a broker or agent should do in these situations. It all depends on the facts of the situation. If there is a serious defect in the property which will affect value and future marketability and the seller refuses to disclose the condition to the buyer, your decision is, I think, obvious. You should immediately document with your seller your objection to the refusal to disclose the defect and withdraw from representation.

On the other hand, if the report contains some minor problems which have been completely repaired and your seller refuses to release the report, you might elect to continue representation. There is no requirement that the report be released and, in this situation, no negative property conditions to disclose.

When you are attempting to decide what you believe should be disclosed to a buyer don’t get caught up in all the nuisances of the law. Just ask yourself one simple question. “If the buyer was my mother, would I want her to know of this condition before she purchased?” If the answer is yes, make the disclosure.