TO DISCLOSE OR NOT TO DISCLOSE?- Potential Perils for Sellers

At the time I was in law school, Colorado was known as a “buyer beware” state when it came to residential real estate.  In other words, the buyer had the burden of discovering any defects in the residential property he or she might be interested in purchasing.  On the flip side, the seller was legally obligated to disclose to potential buyers any latent defects (i.e., defects not readily apparent) of which the seller was aware.  The failure to disclose such defects could amount to fraud and result in liability for the seller.

            In the late 1980s, the Colorado Real Estate Commission began a series of modifications to the form contracts it approved for use in Colorado.  Among other things, the Commission added provisions obligating the seller to provide a property disclosure statement, authorizing the inspection of the property by the potential buyer and allowing the buyer to terminate the contract due to unsatisfactory conditions.  The Commission also approved a “Seller’s Property Disclosure” form, or SPD, to be completed by the seller as part of the sales process. 

            It soon became common practice for (1) sellers to complete the SPD (typically without guidance from attorneys or real estate professionals), (2) buyers to provide the SPDs to home inspectors (who then examine the property for visually apparent defects), and (3) buyers and sellers to negotiate the repair of any deficient items or a reduction in the purchase price to account for the deficiencies.  This process assumes full disclosure by sellers, since latent defects, by definition, are not readily apparent to an observer.

            For a variety of reasons, sellers may not believe it is in their best interests to disclose defects they may know about, latent or otherwise.  In addition, some real estate attorneys and real estate professionals may effectively discourage full disclosure by advising their clients to abstain from completing an SPD or to just check the “Do Not Know” box for all matters.  But, as the recent Colorado case of In re Estate of Gattis makes clear, sellers have a legal obligation, separate and apart from any contractual obligation, to disclose latent defects and other material information relevant to the property, or the sale, of which they are aware, and can be held liable for not complying with that obligation. Further, the completion of the SPD, in and of itself, may not always be sufficient to satisfy all of a seller’s disclosure obligations.

            The facts in the Gattis case were especially egregious.  The sellers controlled the entity that purchased the property (which was damaged due to expansive soils) for purposes of repair 7and resale.  The sellers also controlled the entity which did the repairs.  Yet, the sellers responded to the inquiry on the SPD that, “To Seller's current actual knowledge, do any of the following conditions now exist or have they ever existed: sliding, settling, upheaval, movement or instability of earth or expansive soils on the Property?” by writing across the entire page, “Seller has no personal knowledge of property/Seller has never lived at property.”

            Those facts, coupled with misleading statements on the SPD concerning the repair of the property, provided the Court with the opportunity to reinforce for all sellers, and the professionals advising them, their obligations to fully disclose all defects and other material information relevant to the property, or the sale, known to them both on the SPD and otherwise.  The Gattis case serves as a reminder to all sellers, and their advisors, that the failure to disclose known defects can have significant legal and financial ramifications.

Robyn W. Kube is a Boulder attorney who has been with Dietze and Davis, P.C. for thirty years.