Seller Disclosure Notices: A Tale of Two Forms
Section 5.008 of the Texas Property Code requires sellers of single-dwelling residential property (with some exceptions) to give a written notice to the buyer disclosing facts relating to the condition and use of the property. The notice must be provided on or before the effective date of the sale contract. The buyer has the right to terminate the transaction within seven days of receiving the notice—even if the notice is provided after the effective date but before closing.
The required disclosures are based on the “seller’s knowledge of the condition of the property as of the date [the notice is] signed by the seller ….” Section 5.008(b) of the Code lays out the content and format of the notice, and obligates the seller to give the buyer a notice that is “at a minimum … substantially similar” to the prescribed form.
To digress, it should be stressed that the statute establishes minimum required disclosures. Sellers of residential property generally have a duty to disclose all known material facts about the property, particularly hidden defects that the buyer would not discover through reasonable diligence. Seller is generally not required to inspect or investigate the condition of the property for the benefit of the buyer, and has no duty to disclose information seller does not know. And buyers who learn about a problem with the home, like an inspection that finds water intrusion or a crack in the foundation, are deemed to know whatever facts a reasonable inspection would reveal. On the other hand, a seller who affirmatively misrepresents material facts about the property should expect legal trouble. A fact or condition is “material” if it would influence a reasonable buyer’s decision to purchase the property at the negotiated price.
Back to the statutory notice requirements of the Texas Property Code: the Texas Real Estate Commission (TREC) provides a form Seller’s Disclosure Notice that Texas real estate brokers and sales agents can use to comply with § 5.008. The three-page TREC form (No. OP-H) is a plain-Jane notice that sets out the minimum disclosures required by the statute. The Texas Association of Realtors (TAR), Texas’ trade association for real estate brokers and sales agents, also promulgates a Seller’s Disclosure Notice (in English or Spanish), but the TAR form goes beyond the statutory requirements and asks the seller to make additional disclosures (TAR-1406). The rubric at the top of the form states: “This form complies with and contains additional disclosures which exceed the minimum disclosures required by the Code.”
TAR’s five-page Seller’s Disclosure Notice asks the seller to attach additional information in a number of situations, for example, if the house was built before 1978 and is subject to lead-based paint regulations, or there is flood insurance. And the seller is required to identify any written inspection reports received within the prior four years, and to attach any such reports to the Notice.
In the spirit that fulsome disclosure protects both seller and buyer, I usually recommend that sellers use the TAR-1406 Seller’s Disclosure Notice rather than the bare-bones TREC form. When sellers ask the question, “Do I need to disclose X or Y?,” I tell brokers and agents the answer should be “yes.” The disclosure may not be legally required, but the more disclosure there is, the less likely there will be the gnashing of teeth after closing. Better to lose a buyer than buy a lawsuit.
Recall that the additional disclosures called for by the TAR form are not required by § 5.008. The TAR form goes beyond what is legally required as a minimum, for the benefit of both sellers and buyers.
But a recent opinion handed down by the Dallas Court of Appeals seems to say that if a seller chooses to use the enhanced TAR Seller’s Disclosure Notice, he may be imposing on himself a contractual duty to provide the supplemental information required by the TAR form but not the statute, even if the seller actually disclosed the existence of the defect or fact at issue.
In Aflalo v. Harris, No. 05-16-01472-CV, 2018 Tex. App. LEXIS 3659 (Dallas, May 23, 2018), the seller used the TAR form and checked the flood insurance box “yes.” The form stated that if the box was checked “yes,” seller Aflalo should provide TAR form 1414 to the buyers. The buyers were Devin Harris, a veteran guard with the Dallas Mavericks, and his wife. They agreed to pay $1.45 million for the property.
TAR-1414 is a generic informational form that talks about flood insurance and related issues; it does not disclose any information about the specific property being sold. The buyers’ agent noticed the missing TAR-1414, and asked the listing agent to provide it. It was not provided, however, and the buyers terminated the contract the day before closing. Aflalo sued the buyers seeking specific performance (a judgment that the buyers must purchase the property), but lost at trial, and ended up liable to the buyers for over $140,000 in attorney’s fees.
The three-justice panel that heard the appeal issued a fractured decision with a dissent and a concurrence. Two justices affirmed the judgment against Aflalo, but could not agree on why the judgment should be affirmed. The dissenting justice pointed out that the TAR Seller’s Disclosure Notice was not a part of the sale contract, and argued the buyers were not entitled to terminate the contract based on Aflalo’s failure to provide the supplemental TAR-1414 informational form, especially since Aflalo had disclosed to the buyers that there was flood insurance.
Aflalo filed a motion for rehearing, and the Texas Association of Realtors filed an amicus (friend of the court) letter in support of the motion. TAR’s letter argued that the panel decision would have the perverse effect of making sellers nervous about using the TAR Seller’ Disclosure form with its enhanced disclosure requirements. If use of the TAR form increases a seller’s legal exposure or gives buyers an excuse to walk away from the contract, sellers will use the TREC form and provide only the minimum information required by § 5.008.
The court of appeals has now requested a response to Aflalo’s motion for rehearing by all 13 justices of the Dallas Court of Appeals (en banc rehearing). This augurs possible reconsideration of the panel decision by the full court, particularly given the fact the three panel justices failed to agree on how to decide the case, and the input from TAR.
Hopefully, the Dallas Court of Appeals will grant rehearing and reverse the judgment against the seller Aflalo. To be sure, Seller should have provided the TAR-1414 form (especially when buyers’ agent asked for it), but seller was not required to provide the form by either § 5.008 or the sale contract. There is no cause of action for breach of a promulgated form. And the buyers were aware of the flood insurance, and the facts implied by the existence of flood insurance. The buyers were not entitled to lay behind the log and not investigate the elevation/floodway status of the property, and then use the non-production of the TAR-1414 form as an excuse to terminate the contract on the eve of closing.
Sellers should not be penalized or placed at greater risk because they choose to provide the enhanced disclosures required by the TAR Seller’s Disclosure Notice. The failure to provide supplemental forms that tell the buyer what the buyer already knows (or should know after reasonable investigation), and which are not required by the parties’ contract, cannot be an excuse for terminating a sale contract.