Disclosure Issues – Part 1

Once upon a time and throughout the land, the basic rule of buying anything, including real estate, was “Caveat Emptor” – that is, “Buyer Beware.” In more general terms it was consumer beware and applied to a purchaser of any product or service. The seller or landlord had no responsibility to disclose defects in what he was selling or leasing and had no liability for any problems the buyer or tenant had following the transaction.

Things have changed, particularly regarding real estate. Over the past several decades, the legislatures and courts have put more and more burden on sellers and landlords to fully disclose defects in the real property they are selling or leasing.

It is very important that adequate disclosure be made by sellers and landlords to buyers and tenants, respectively, in order to avoid (1) risk of misunderstandings and disputes and/or (2) violation of laws, either of which can be costly. While many disclosure issues are important only in sales transactions, other issues can potentially also be of concern in a leasing transaction. Adequate disclosure is far less time-consuming, costly, and stressful than is litigation.

Discussions in this article are based on general legal principles that apply to many states. However, as with most issues regarding real property transactions, one must know and understand the laws of his state and local governments and/or consult with a competent real estate attorney experienced in the particular area of law at issue.

Although states vary regarding protections provided to buyers and tenants, all states provide significantly more than was the case a few decades ago. Most states require disclosure of known defects and many require disclosure regarding certain specific issues.

Most states no longer allow a seller to escape liability for known defects by selling the property “as is” except for certain transactions such as foreclosures or sales by government agencies (e.g. bankruptcy courts). Most states also provide for tenant protection against “as is” by statute and/or, for residential leasing, through the legal principle of “warranty of habitability.”

Typical disclosure laws require a seller to notify a buyer of certain things regarding the property’s physical condition, material defects, or major repairs that might affect a buyer’s decision to purchase the home. Some states have disclosure laws that require the seller or agent to reveal events such as crimes.

While there are issues specific to only a buyer or to only a tenant, certain issues must be disclosed to both buyers and tenants. The latter includes the lead paint disclosure that is required by federal law for properties built before 1978 and, in some jurisdictions, by more stringent state and/or local laws. Furthermore, some issues are solely or more relevant to residential than to commercial properties.

The temptation to not disclose known material facts should always be resisted by sellers and landlords. Other than the fact that the failure could be considered misrepresentation or fraud, one should expect that the information will eventually be discovered by the buyer or tenant. For serious issues, later discovery sometimes results in litigation.

Discovery by the buyer or his agent before close of a sale escrow may result in cancellation or require renegotiation of the contract. This will result in loss of time and may even be costly, depending on the specific circumstances.

If discovered by the tenant soon after moving in, he may be able to legally break the lease. If a serious material fact that was known, or should have been known by the seller or landlord (or agent thereof) is discovered after it has caused injury or damage, the failure to disclose may result in a lawsuit against the seller or landlord (and probably any agent thereof), usually a costly event no matter what the outcome.

A majority of the states require written disclosure of various issues that might be a material factor in deciding whether to purchase a property and how much to pay for it. In some of those states, the requirement is limited to residential properties of four or fewer units. If the buyer is represented by an agent, such a disclosure will likely be required by the broker even when not required by law.

Many states have also made disclosure of certain non-physical matters an issue, either through legislation or court decisions. For example, a buyer’s agent who has reason to believe that his client cannot perform for some reason could be held liable to the seller if the buyer cannot close escrow because of that issue, as could the buyer himself. Similarly, a listing agent could become liable to the buyer for the inability of the seller to close escrow because of an issue known to the listing agent, as could the seller himself. Examples include (1) the seller is planning to file bankruptcy and (2) a divorce is underway.

Courts have generally extended the idea of fair dealing to apply to buyers and sellers as individuals, whether or not a real estate agent is involved.

As a seller, if you have knowledge of a potentially material fact, disclose it as early as practical in order to minimize possible waste of time and money for all parties.

If you are a buyer, require written disclosure regarding all issues of material concern to you. Written disclosure serves two purposes. First, it points out potential issues before you spend the time and/or money to look for them. Second, it gives you additional legal recourse in the future if full and truthful disclosure is not made.

The disclosure statement should cover such items as known (1) zoning, building code, or permit violations, (2) utility services (including whether or not on city water and sewer), (3) soil stability problems, (4) environmental issues such as mold or asbestos, (5) prior significant damage to the property or any of the structures from fire, earthquake, floods, etc., and (6) any pending or potential legal actions involving the property.

Habitability Standards – As a result of shoddy and improper maintenance by landlords, American courts began to hold that there is an “implied warranty of habitability” in housing that is offered for rent. Many states have codified that concept by statute and landlords can now even be held criminally responsible for neglecting certain maintenance in some states.  Both civil and criminal liabilities can be very substantial when related to health or safety issues, even when those issues are not explicitly covered by laws.

Habitability standards apply regardless of how low the rent is and require that rental units meet certain standards for safety, health, and cleanliness. The federal guideline standards are quite low compared to those of many states and local governments. The strictest of the different levels of government for the location of a property will be the safest standard to follow.

The type of disclosures required varies significantly among states. Examples of disclosure items required in some states include (1) the name of the owner and/or any other person authorized to receive legal papers, (2) the bank where the security deposit is kept, (3) any planned condominium conversion, (4) existence of illegal drug waste, (5) the landlord’s tax number if the tenant needs it in order to file for the state’s low-income tax credit, (6) availability of an official registered sex offender database, and (7) existence of “dangerous” mold.

In general, most states require disclosure of issues that could cause injury or substantially interfere with the tenant’s safe enjoyment and use of the property (e.g., asbestos) and under general legal principles, failure to disclose such things would increase risks in litigation related to them even if not an issue covered by statute or ordinance.

Landlords should disclose likely material facts, particularly those disclosures that are required by law, as early as practical in order to minimize possible waste of time and money by sellers and possible buyers or by landlords and possible tenants.

Rent control properties can have additional disclosure requirements. In most controlled jurisdictions, the tenant must be provided the name and address of the government agency or the elected board that administers
the control ordinance.

Question:

I have potential renters, but they do not want to move in for another month. Am I legally allowed to require a deposit to hold the property for them and not look for another tenant?

Answer:

It depends both on what type of deposit it is and what the deposit agreement says, with the terms being in accordance with any state statutes on the subject.

If it is considered a security deposit, either by written words, by spoken words, or by some action or implication that might make a judge consider it to be a security deposit, the applicant might be considered to have become a tenant even without a lease having been signed by both parties – in other words the parties had entered into an oral lease. Oral leases up to one year are valid in most states. Unfortunately, it is usually difficult to prove the terms of oral leases. Therefore, any deposit taken should be accompanied by an adequately detailed statement of terms that is signed by both the landlord and the applicant.

A holding deposit is sometimes used to protect the landlord against taking the unit off the market for a specified time, with the landlord being allowed to keep some or all of the deposit if the applicant does not follow through with paying the funds and signing a lease agreement and can be used to allow the applicant time to get his move-in funds together. A properly worded agreement can protect a landlord from financial loss due to the failure of the applicant to perform as agreed. However, the landlord cannot rent the unit to another applicant unless the original applicant has materially defaulted on the terms of the agreement, preferably in a way that is indisputable.

If I understand your question correctly, you’d like to take the deposit without giving the applicant the right to rent the unit if you happen to find another tenant at any time. I think that this would only be acceptable to a reasonably intelligent applicant if you promised to return the deposit in full if a new applicant was accepted before the original applicant was ready to close the deal.

Question:

What do you do if a tenant just up and leaves the home with one day notice under a 2 year contract?

Answer:

If the tenant provided evidence of his intention to return possession to the landlord – e.g., gave written notice about leaving, turned in keys in a way that can be proven, left a message that was recorded or witnessed – you can immediately take possession, rekey locks, and begin preparing the unit for the next tenant. At the same time, unless the tenant agreed to make good on any damages and on the rent until you have a new tenant and you have a written promise or have other reason to think he might do so, you should proceed with a lawsuit.

From your stated “with one day notice” I assume you probably meet the criteria to proceed in this manner. However, I’ll mention a couple of possible other scenarios just in case I misinterpreted your statement or for possible future use.

If there is a reasonable question regarding the tenant returning possession, it can get a lot more complicated. For example, simply disappearing may not signify intent to return possession. Even when it appears the tenant has “abandoned” the premises, many states require following specific procedures before the landlord can take possession.

There are similar possible issues when a tenant has left behind personal property– e.g., clothing or furniture. Again, many states require specific procedures before the landlord can legally dispose of the property. In both the abandonment matter and the personal property matter, failure to follow the law can result in damages being assessed against the landlord if the tenant takes the matter to court.

If you need additional input regarding your current problem, feel free to ask, providing as much detail as you can.

Question

How do I locate a previous tenant who owes me back rent money?

Answer

There are many ways to attempt to locate a previous tenant. An adequate discussion is well beyond the scope of this forum.  Accordingly, I refer you to our Mini Training Guide titled “9 Steps to Collecting a Judgment” and to our larger related eCourse titled “Collecting Judgments,” more specifically to Lesson 15 of the eCourse. Both of these items have discussions regarding locating tenants, whether for demanding repayment or for collecting court judgments against them. I also refer you to the Mini Training Guide titled “9 Fair Debt Collection Practices Act Issues” and to Lesson 10 of the referenced eCourse which provide information that will allow you to avoid violating state and federal statutes regarding collection procedures.

In order to file a lawsuit against a person, you must know where he is so that he can be served with a complaint and summons. Once you locate the debtor you can then not only demand payment but also file a lawsuit against him. One can usually obtain a judgment for valid claims, sometimes by default when a properly served defendant does not answer the complaint or appear in court.

Having a judgment is an important tool because it increases the chances of a voluntary payment at some date in the distant future when the debtor must remove the judgment from his credit record in order to borrow money, get a job, or even rent another property. Judgments are typically good for five or more years, depending on the state, and can be renewed for one or more extensions. Also, interest accrues on unpaid judgments, the rate being significantly higher in most states than one can earn from most other investments. Finally, when the judgment is obtained in the proper state of jurisdiction (where the debt was incurred) it can be collected in any other state, although at some extra effort and expense.

Mini Training Guides and eCourses can be reached from the LandlordOnline.com member home page following logging onto the site.

If, after perusing the referenced resources, you have specific questions, feel free to post again.