Disclosure of Material Facts Real Estate Transfer Disclosure Statement Anatomy of the Real Estate Transfer Disclosure Statement Question & Answer Review I Licensee's Superior Knowledge Easton vs. Strassburger Question & Answer Review II Disclosure of Material Facts Real Estate Transfer Disclosure Statement Anatomy of the Real Estate Transfer Disclosure Statement Question & Answer Review I Licensee's Superior Knowledge Easton vs. Strassburger Question & Answer Review II Disclosure of Material FactsThe real estate licensee's duty to disclose is specifically related to facts which are material, which affect the value or desirability of the property. The misrepresentation of a single material fact may result in an accusation of intentional fraud in certain circumstances.
There is no absolute standard for determining if a fact is material in a particular situation. A fact may or may not be material depending upon the circumstances of each transaction.
Material Fact: Generally, a matter is considered material if the other party would not have entered into the contract had he or she known the true facts.
However, this definition is much too general and subjective to be used on a day-to-day basis by licensees working in the trenches.
Some facts are so obviously material that there is no doubt that prior knowledge of that fact would have affected the desirability of the property. For example, a disclosure of unstable soil or fill, even in small quantities, would obviously be crucial to any buyer. Other matters such as, structural defects, building code violations, or termites and dry rot would also be obvious facts that any reasonable seller would know are of major concern to a buyer. Matters like these can be difficult to discover by inspection but are still material to the transaction.
The fact that the seller does not have the proper permits to operate a particular business on the premises that the buyer wants to operate, or the fact that the business use violates city zoning ordinances, would drastically change both the value and desirability of the property to the buyer. The existence of an easement, or the lack of a proper water system for the intended use of the property, are also material facts that affect the buyer's decision to buy. Other matters which are obviously material include land that has experienced past flooding, buildings which may need substantial structural repairs, and land that is not connected to the public sewer system.
The materiality of these types of facts are objective in nature and can be determined by examining whether the undisclosed fact had a measurable effect on the marketability, the value of the buyer's highest and best use of the property, or the buyer's or appraiser's opinion of value.
A factor can still be considered material even though it does not affect the structural or physical aspects of the property. In one case, the court held the fact that the buyer's check, in the form of a post-dated check, was a material fact that had to be disclosed to the seller. In another case, the court found that the one-year due date on a purchase-money secured obligation, and the construction nearby of new competition property, were material facts.
The use of an objective or subjective standard to determine if a fact is material can be key depending on the circumstances of a particular case. The test of materiality referenced by most court decisions describes a matter as material when it affects the value or desirability of the property. An objective standard would require that the matter affect either (1) the value and desirability of the property, or (2) a matter which affects the desirability of the property or the transaction where the seller knows that the particular fact is or could be important to the buyer.
Property located on a busy street or in a flight path where there is a great deal of noise might be a fact which is objectively material to most buyers, but a location near a school, which may be desirable to a buyer with children, may be unsatisfactory to a buyer who works a graveyard shift and sleeps during the day, when the noise of the school could be a problem. This type of fact would be material only if the seller or the seller's agent is aware of the buyer's peculiar sensitivity. As you can see, a subjective standard for determining materiality can complicate certain situations.
Recently, the courts have considered this issue of subjective materiality in a case where it was not disclosed to the buyer that ten years earlier a gruesome multiple-murder had taken place at the the house. The court decided that in a case like this, where the alleged matter does not relate to the physical condition of the property, the test of what fact is material relates to several very objective tests: (1) the gravity of the harm inflicted by nondisclosure, (2) the fairness of imposing the duty of discovery on the buyer as an alternative to disclosure by the seller, and (3) the impact on the stability of contracts if rescission is permitted. These tests were developed by the court to protect against an unreasonable rescission of the contract based on only the subjective sensitivity of the buyer. Based on the court's analysis, the nondisclosure of these murders did produce a quantifiable effect on the market value of the property. Thus, the court determined that any time a fact would affect a provable depression in the market value of the property, the seller must disclose the fact. The court went on to clarify that its decision is not based on the very subjective personal sensitivity of the buyer and that even an insensitive buyer, (one who does not care about the murders), is entitled to recourse because he or she must disclose this fact upon resale, and the market value would be less when there is a disclosure. By tying their decision to a loss in market value, the courts have kept their standard objective to protect the stability of contracts by not allowing irrational objections as a basis for rescinding a contract.
This type of objective standard still allows the buyer or seller to mention any subjective matters which are material to them, even though they might not be objectively material to a reasonable person or have a measurable effect on market value. In one case, the seller had a bad relationship with his neighbor and he made it clear that he did not want the neighbor to have the use or possession of his property. The buyer represented that he had no relationship with the neighbor when in fact he was the neighbor's nephew. The neighbor's nephew then bought the property and then resold it to the neighbor. After the property was resold to the neighbor, the court awarded the seller punitive damages. As you can see, the seller specifically mentioned his unique situation with his neighbor and established this matter as a material fact. If the seller had known that the buyer was his neighbor's nephew, he may have asked much more for the property or may not have sold to this buyer at all.
When neither party specifically mentions a unique subjective matter as being important, the objective test of materiality that measures the effect of the undisclosed fact by its effect on market value should be used as a workable standard. The agent and his or her client should be able to determine, in most cases, what facts will affect the value and desirability of a particular property. Also, although not comprehensive, the statutory requirements for disclosure should be used by the real estate professional to establish guidelines for determining the type and class of matters that are material and should be disclosed.
The seller also must disclose any material change in the condition of the property or the title that occurs or is discovered by the seller after the contract is executed and prior to the close of escrow. In this situation, the parties may still be obligated contractually, but the disclosure might affect the buyer's decision to complete the transaction. Nondisclosure of this type of fact may deprive the buyer of his or her right to rescind.
For example, in one case, two parties entered into an option agreement. The day before the option was exercised, the owner dedicated a public easement across the property and included an exception for utility easements in the contract. Although there was insufficient evidence of damages, the court stated that the seller had a duty to disclose this material change and by failing to do so, he deprived the buyer of the right to withdraw from the purchase.
There is a seemingly unlimited number of duties to disclose particular facts to one or both of the parties to a real estate transaction scattered throughout the codes. Many of these duties are imposed on the seller, on the seller's agent, or on both. It is not our intent with this course to discuss every single detail regarding disclosure in real estate but we will try to cover the most common and most important disclosure requirements encountered on a day to day basis.
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