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Let the buyer - and seller - beware

By: Jim Flynn
June 9, 2018 Updated: June 11, 2018 at 11:32 am
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photo - Jim Flynn - Business (2013)
Jim Flynn - Business (2013) 

In the old days (meaning maybe 60 years ago), anyone buying real estate (or a horse.) was subject to a "buyer beware" rule of law. (The fancy lawyer term for this is "caveat emptor," which means "Let the buyer beware" in Latin). The risk of defects, even if known to the seller, was solely on the buyer.

But the unfairness of this eventually resulted in a series of court decisions moving the law, in fits and spurts, in the direction of sellers must disclose. The seller-must-disclose rule, however, has limitations. Notably, it only applies to defects known to the seller. This becomes especially important with "latent" defects.

A latent defect is one that is hidden and would not be discovered by a reasonable inspection performed by a buyer. During a pre-purchase inspection, buyers aren't expected to tear up carpeting, remove drywall, drill holes in a basement slab, etc. But, they are expected to look for defects discoverable by a non-invasive, diligently performed, inspection. (In a 2002 decision, the Colorado Court of Appeals rejected a buyer's claim against a seller involving a defective septic system, concluding the buyer should have discovered the problem through the buyer's inspection.) Because a seller's duty to disclose latent defects is limited to defects known by the seller, buyers must remember they are at risk of latent defects a seller didn't know about. (Plus, proving what a seller knew can be challenging.)

The standard purchase-and-sale contract used in Colorado for resales of residential property, approved by the Colorado Real Estate Commission, tries to deal with this by making something called the Seller's Property Disclosure part of the contract. A new version of this document debuted earlier this year. The form contains a long and detailed list of property attributes for each item, the seller is instructed to check a "yes" box if the seller has any knowledge of a problem ever existing - not just currently existing - affecting that item. Sellers can easily get in trouble by not being wholly truthful and thorough in completing this form, and the form regularly shows up as plaintiff's Exhibit 1 when an unhappy buyer decides to sue a seller over a defect in the property. The form, although now more detailed, doesn't cover every possible defect and, if the form doesn't address a defect known to the seller, the seller darn well better disclose that defect anyway. Otherwise, the disclosure form states (in boldface type, on the first page): "Seller's failure to disclose a known material defect may result in legal liability."

For their part, buyers need to drill down on any defects the seller discloses. They also need to look for problems the seller didn't disclose. That's because, once the transaction closes, all risks associated with defects the seller disclosed, or that could have been discovered in a reasonable non-invasive inspection, shift to the buyer and, well, caveat emptor.

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