What Bay Area Home Sellers Need to Know about Material Facts

In real estate transactions, the disclosure of material facts is a cornerstone of ethical practice and legal compliance. Understanding what constitutes a material fact, the obligations of sellers and agents, and the potential consequences of non-disclosure is essential for all parties involved.  This article will help Bay Area homeowners understand what their legal obligations are regarding disclosure of material facts, so that they can sell their homes and rest easy with little worry of “blowback” once the sale has closed.

When a seller signs a standard California Residential Listing Agreement, one of the documents in the package is the Seller’s Advisory form. This form says right up front:

General Disclosure Duties

You must affirmatively disclose to the buyer, in writing, any and all known facts that materially affect the value or desirability of your Property. You must disclose these facts whether or not asked about such matters by the buyer, any broker, or anyone else. This duty to disclose applies even if the buyer agrees to purchase your Property in its present condition without requiring you to make any repairs. If you do not know what or how to disclose, you should consult a real estate attorney in California of your choosing. Broker cannot advise you on the legal sufficiency of any disclosures you make. If the Property you are selling is a residence with one to four units except for certain subdivisions, your broker also has a duty to conduct a reasonably competent and diligent visual inspection of the accessible areas and to disclose to a buyer all adverse material facts that the inspection reveals. If your broker discovers something that could indicate a problem, your broker must advise the buyer.

Defining Material Issues and Material Facts

A material fact in real estate refers to any information that could influence a buyer’s decision to purchase a property, or affect the property’s value, desirability, or safety. This encompasses a wide range of factors, including structural and even cosmetic defects, environmental hazards, legal issues, neighborhood nuisances, and so much more. Unfortunately, the determination of what is material can be somewhat subjective, and it’s better to be cautious and over-disclose; better to be safe, rather than sorry!

Determining Materiality: Material vs. Immaterial Facts

Distinguishing between material and immaterial facts can be challenging. Generally, a fact is considered material if a reasonable person would find it significant in making a decision about the property. For instance, a minor cosmetic issue like a small scratch on the floor is typically deemed immaterial, whereas a structural defect like a foundation crack is material. When in doubt, it’s prudent to err on the side of disclosure.

Seller’s Obligation to Disclose

Sellers are legally obligated to disclose known material facts about the property. This duty ensures that buyers have all pertinent information to make informed decisions. Failing to disclose material facts can lead to legal consequences, including rescission of the sale or damages. Even if a seller believes a fact is immaterial, disclosing it can prevent potential disputes and foster trust.

What about unknown material facts?  Fortunately the seller has no obligation to disclose anything that they are not aware of – and cannot be held liable in court for failing to disclose any issues of which they had no knowledge.  If there is some issue with the property that crops up after closing, and the buyer takes the extreme action of taking the seller to court for lack of disclosure, the burden of proof is on the buyer to prove that the seller had actual knowledge of a material issue and failed to disclose it.  In some cases, this may be an easy bar to meet; in others, it will be difficult or impossible.  Regardless, the seller’s best defense is always to make a thorough and accurate disclosure of all issues that they aware of which may be considered material.

I have a pretty easy rule of thumb that helps sellers know what to disclose.  When you are going through the disclosure forms, and you are asked a question about a particular aspect of your property, you may wonder, “Well, does X count?”

My rule of thumb is:  if you are wondering if it counts, it counts.  You may be concerned that over-disclosing will impact marketability of your property, but I can say after decades in the business that this is never the case, because buyers rarely pay much attention to the minutiae of a seller’s disclosures, and even when they do, it is often quickly forgotten.  So when in doubt, disclose, disclose, disclose!

Ready? Get It Sold.

Real Estate Agent’s Duty to Disclose

Real estate agents have a fiduciary duty to act in the best interests of their clients. This includes disclosing known material facts about a property, even if the seller chooses not to or otherwise fails to disclose them. Agents must balance their duty to their client with their obligation to treat all parties honestly and fairly. Failing to disclose material facts can result in disciplinary action and legal liability against the agent.

Another nuance of the law is that if the agent knows something about a property, the agent’s knowledge automatically extends to the seller. For example, if the agent knows that the siding used on houses in the subdivision is faulty and prone to rapid deterioration, but the seller does not know this – the agent is required to disclose it on behalf of the seller, it is their fiduciary responsibility to do so, in order to protect the seller from post-sale litigation when the buyer talks to the neighbors and finds out that all houses in the neighborhood, including the one they just bought, have a known issue with the siding.

Notable Court Cases on Non-Disclosure

Several court cases highlight the importance of disclosing material facts. In Reed v. King, the seller failed to disclose that a multiple homicide had occurred in the house, which was deemed a material fact affecting the property’s value.

The Reed v. King case, decided by the California Court of Appeal in 1983, is a landmark decision in real estate law, particularly concerning the duty of sellers to disclose non-physical defects that materially affect a property’s value.

Case Summary:

• Facts: Dorris Reed purchased a house from Robert King. Neither King nor his real estate agents disclosed that a woman and her four children had been murdered in the house ten years earlier. After moving in, Reed learned of the murders from neighbors, who also informed her that the property’s value was negatively impacted due to its history.
• Issue: Whether the seller’s failure to disclose the property’s history of a multiple homicide constituted a material fact that should have been disclosed to the buyer.
• Holding: The court held that the murders were a material fact affecting the property’s value and that the seller had a duty to disclose this information to the buyer.

Key Takeaways:

• Expansion of Material Facts: The case established that material facts are not limited to physical defects but also include non-physical factors, such as a property’s history, that can affect its value or desirability.
• Seller’s Duty to Disclose: Sellers are obligated to disclose known facts that materially affect the property’s value or desirability, even if these facts are not physically apparent.
• Impact on Real Estate Transactions: The decision emphasizes the importance of transparency in real estate transactions, encouraging sellers to disclose any information that could influence a buyer’s decision.

The Reed v. King case underscores the necessity for sellers to provide comprehensive disclosures, including non-physical factors, to ensure informed decision-making by buyers and to uphold the integrity of real estate transactions.

In Stambovsky v. Ackley, the court ruled that the seller’s failure to disclose the house’s reputation for being haunted was a material omission. These cases underscore the broad scope of what can be considered material. The case, decided by the New York Supreme Court, Appellate Division, in 1991, is a notable example of how non-physical factors can influence real estate transactions.

Case Overview:

• Parties Involved: Jeffrey M. Stambovsky (Plaintiff) and Helen V. Ackley (Defendant).
• Facts: Jeffrey Stambovsky entered into a contract to purchase a house from Helen Ackley in Nyack, New York. Unbeknownst to Stambovsky, Ackley had previously publicized the house as being haunted, sharing stories with both national and local media. After learning of the house’s haunted reputation, Stambovsky sought to rescind the contract, arguing that the haunting adversely affected the property’s value and that Ackley should have disclosed this information.
• Legal Issue: Whether a seller’s failure to disclose a property’s reputation for being haunted constitutes a material omission justifying rescission of the contract.
• Court’s Decision: The court held that, given Ackley’s promotion of the house’s haunted status, she was estopped from denying its existence. The court concluded that the haunting was a material condition affecting the property’s value, and Ackley’s failure to disclose it entitled Stambovsky to rescind the contract.

Key Takeaways:

• Material Facts Beyond Physical Defects: The case illustrates that material facts in real estate are not confined to physical defects but also include non-physical factors, such as a property’s reputation, that can influence its value or desirability.
• Seller’s Duty to Disclose: Sellers are obligated to disclose known conditions that could materially affect a property’s value. In this case, Ackley’s prior public declarations about the haunting created a condition that she was required to disclose to potential buyers.
• Equitable Relief: The court emphasized the role of equity in real estate transactions, allowing rescission of the contract to prevent an unjust outcome due to the seller’s non-disclosure of a material fact.

Implications for Real Estate Practice:

The Stambovsky v. Ackley decision underscores the importance of transparency in real estate transactions. Sellers should disclose any known factors that could affect a property’s value or desirability, even if they are non-physical in nature. This case also highlights the potential for equitable remedies in situations where non-disclosure leads to an unfair result.

For anyone considering selling their home in the Bay Area, the case serves as a reminder to thoroughly investigate and disclose all material facts about a property to ensure informed decision-making by buyers and to uphold ethical standards in the industry.

Common Material Facts Often Not Disclosed

Common material facts that have led to disputes when not disclosed include:

• Structural Defects: Issues like foundation problems or roof leaks.
• Environmental Hazards: Presence of asbestos, lead paint, or mold.
• Legal Issues: Zoning violations or pending litigation.
• Title issues:  undisclosed easements and encroachments on the property
• Property History: Past events such as crimes or deaths on the property.

Disclosure Forms: TDS and SPQ

In California, the Transfer Disclosure Statement (TDS) and Seller Property Questionnaire (SPQ) are standard forms used to facilitate comprehensive disclosures. The TDS is mandated by California Civil Code Section 1102, and is required in almost all sales of 1-4 unit residential properties in California.  This form requires sellers to disclose numerous bits of information about the property’s condition, however the form has not been updated in decades and does not contain information about many things which today’s Bay Area buyers might consider material – such as, for example, the availability or lack thereof of high speed Internet.

On the other hand, the SPQ was created by the California Association of REALTORS and is frequently updated.  It addresses specific details about the property’s history and any known issues. I tell my clients that each question on the SPQ is there because it addresses some aspect or potential issue of the property that a seller failed to disclose to a buyer and ended up getting sued over.

Of course, there are countless material facts which are not addressed by the TDS and SPQ forms – such as including esoteric details like hauntings, but also more mundane ones like availability of high-speed Internet, or the fact that to have the garbage collected, the owner of house needs to drag the cans a quarter mile down a private road to the pick-up spot every week.

There is a single question on the SPQ which asks if there are any other material facts not otherwise disclosed to the buyer.  You would be well advised to think carefully about any other potential flash points or undesirable features your property may have, and make sure that this is adequately disclosed to the buyer.  Again, better safe than sorry!

Amending Disclosures and Buyer’s Rights

If a seller needs to amend the TDS after providing it to the buyer, the buyer is entitled to additional time to review the changes.  This is true even if the buyer has released their inspection contingency, or never had an inspection contingency to begin with, in the case when the buyer makes a non-contingent offer. It should be noted that the seller does not actually have to formally amend the TDS form for this additional buyer contingency for review of material facts to be created; if the seller or seller’s agent provides buyer any information which should have been or should now be disclosed on the TDS, whether it be via email, text message, phone call, voice mail, or any medium or media – the buyer automatically receives an extension on their inspection contingency.

This extension allows the buyer to reconsider the transaction in light of the new information and can serve as a de facto inspection period, providing an opportunity to withdraw from the contract if desired.  This is yet another reason why it’s important for the seller to make sure that they have made a complete and up-front disclosure of any and all material facts to the buyer so that no revisions to the disclosures are required.

Conclusion

Understanding and properly disclosing material facts are crucial components of real estate transactions. Both sellers and agents must be diligent in identifying and disclosing information that could affect a buyer’s decision. Utilizing standard disclosure forms and erring on the side of transparency can help prevent legal disputes and ensure a fair and smooth transaction process.

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