WP: Disclosure: Source of the Duty to Disclose

III. Source of the Duty to Disclose

A. Common Law

The broker’s duty to disclose is derived from contract and tort common law notions that in a transaction where one party lacks the faculties to ascertain the truth, or where important facts are solely within the knowledge of one party, that party possessing superior knowledge must deal honestly, fairly, and non-fraudulently with the other party.

The doctrine of caveat emptor started to wane as courts began to realize that although the buyer may have an opportunity to inspect the property prior to purchase, the buyer was not in the best position to uncover defects. Rather, the seller would necessarily be better informed of the condition of the property. In step with the blossoming wave of consumerism, courts began to rethink the relationship between buyer and seller, giving heed to notions of fairness and economic efficiency. Because the landowner was in the best position to learn of defects not open to observation or discoverable upon a reasonable investigation, fairness dictated that the landowner inform prospective buyers of these conditions. The landowner could no longer use his or her superior knowledge to the detriment of the purchaser. Contractual relationships were engrafted with the requirement of fair dealing. Similarly, in tort law, equality of knowledge between the parties was important. The courts saw more economic efficiency in requiring disclosure regarding defects from the party best able to have knowledge of defects – the seller. Thus, the duty to disclose arose out of the inequality of knowledge between the buyer and seller, regarding defects that are not observable or discoverable by the purchaser upon a reasonable inspection.

B. State Statutory Law – Residential Property Disclosure Forms

Sellers, and by extension brokers, now have a statutory duty to disclose material defects of the property that are actually known. All sellers must in good faith provide buyers with a comprehensive disclosure form regarding these physical conditions. A violation of the statute may allow a buyer to rescind the purchase agreement.

The seller of residential real estate is required to prepare a comprehensive disclosure form on the physical condition of the property. OHIO REV. CODE ANN. § 5302.30 (2002). The seller must disclose in writing certain material defects actually known without regard to observability or discoverability. Residential real estate is defined to include any real estate improved with a building or other structure that has one to four dwelling units. There are a few minor exceptions in the statute, i.e. property in an estate, but generally the requirement applies to all residential real estate improved with one to four dwelling units.

The seller must disclose material matters relating to the physical condition of the property, including the water supply source, the nature of the sewer system, and conditions of the roof, foundation, walls, and floors. OHIO REV. CODE ANN. § 5302.30(D). A “catch-all” provision requires the seller to disclose any material defects in the property that are within seller’s actual knowledge. Id. The seller does not have a duty to inspect his or her property or otherwise acquire additional knowledge of the defects of the property. Good v. McElhaney, 1998 Ohio App. LEXIS 4763 (Athens Cty. Sept. 30, 1998).

The disclosures made by a seller on this form must be made in good faith, which the law defines as “honesty in fact.” The buyer is still encouraged, however, to obtain his or her own professional inspection. OHIO REV. CODE ANN. § 5302.30(D). The statute does not provide a penalty for a seller who fails to disclose known defects, but it provides equitable relief, allowing a buyer to seek rescission of the purchase agreement before the title transfer.

Some Ohio courts state that this law modifies the common law doctrine of caveat emptor because it requires homeowners to disclose all known latent defects as well as patent defects. Belluardo v. Blankenship, 1998 Ohio App. LEXIS 2409, at *11 (Cuyahoga Cty. June 4, 1998) (caveat emptor now applies only to patent conditions not enumerated by the statutory requirements). These courts believe that it would be inconsistent to require sellers to complete the form honestly and at the same time allow them to omit obvious defects from the form. Hanson v. Rieser, 1999 Ohio App. LEXIS 5256, *20 (Franklin Cty. Nov. 9, 1999).

Other courts state that buyers remain responsible for discovering defects that are patent. Riggins v. Bechtold, 2002 Ohio 3291 (Hamilton Cty. June 28, 2002). In Riggins, the sellers gave the buyers two property disclosure forms that stated that the house had settlement cracks and a crack in the breakfast room wall. Id. at 2. The buyers contracted to buy the 70-year-old home, had the home inspected, bought the home, lived in it for six months, and then noticed several other areas of the home that allowed water seepage. The buyers sued the sellers for fraudulent failure to disclose the defects. Id. at 5. The court ruled in favor of the sellers because inspectors had characterized the holes that leaked in the house as “obvious,” and the buyer had an unimpeded opportunity to inspect those portions of the home before the closing. Id. The sellers were not liable because they had not failed to disclose any known latent defects. Id.