When does a seller or seller’s agent have a duty to disclose?

As we discussed last week, caveat emptor limits a seller or seller’s agent’s duty to disclose issues with used real estate. This week we delve a little deeper into the seller or seller’s agent’s responsibility to disclose.

Exceptions to Caveat Emptor

Alabama law provides that a seller or seller’s agent has a duty to disclose information about used real estate in three scenarios – 1) Defects affecting health and safety, 2) where a fiduciary relationship exists, and 3) upon specific inquiry by the buyer. See Moore, 849 So. 2d 914 (Ala. 2002); see also Ala. Code § 6-5-102 (1975).

Health and Safety

The Health or Safety Exception is relatively straightforward. A seller or seller’s agent has a duty to disclose when he or she –

1) has knowledge of a
2) material defect or condition
3) that affects health or safety, and
4) the defect or condition is not known to or readily observable by the buyer.

If the seller or seller’s agent fails to disclose when under this duty, then he or she is liable for damages resulting from the nondisclosure. Moore, 849 So. 2d 914 (Ala. 2002) (quoting Fennell Realty Co. v. Martin, 529 So. 2d 1003 (Ala. 1988)).  Alabama courts interpret this exception narrowly, requiring the complaining party to specifically show that the defect is a direct threat to health or safety. See Teer v. Johnston, 60 So. 3d 253, 256 (Ala. 2010) (citing Blaylock v. Cary, 709 So. 2d 1128 (Ala. 1997). Thus, buyers must overcome a high bar in order to satisfy this exception.

One Note - This exception does not impose upon a seller or seller’s agent a proactive duty to inspect. Blackmon v. First Real Estate Corp., 529 So. 2d 955, 956-7 (Ala. 1988). In other words, the seller is not legally required to inspect the used real estate for health or safety issues. However, if a seller knows of an issue qualifying under this exception, the seller must disclose it. Once disclosed, further action by the seller is part of the negotiations. 

Fiduciary Relationship

Alabama law imposes a duty to speak when there is a fiduciary relationship between the parties. Cato v. Lowder Realty Co., 630 So. 2d 378 (Ala. 1993). To determine whether a fiduciary relationship exists, an Alabama court will look at a variety of factors on a case-by-case basis. Richard Brown Auction & Real Estate, Inc. v. Brown, 583 So. 2d 1313 (Ala. 1991). These factors include the existence of a relationship of trust or confidence between the parties, the value of a particular fact, the relative knowledge or inequality of condition of the parties, or other circumstances. Brown. For a seller’s agent, it is important to clearly establish the relationships of the parties in writing and verbally throughout the process. This is especially important in situations where the buyer views the house with the listing agent instead of having his or her own agent.

Specific Inquiry 

When a buyer asks a specific question of a seller or seller’s agent, the seller or seller’s agent is under a duty to respond truthfully and provide information on known defects. See Boswell, 519 So. 2d 493 (Ala. 1987); Lisenby, 579 So. 2d 1291 (Ala. 1991). This exception mandates providing the whole truth and prohibits equivocal, evasive, or misleading answers provided in a calculated way to convey a false impression. Boswell. However, if you serve as a “conduit of information” between the seller and the buyer, Alabama law does not hold you responsible for any incorrect information you provide, absent bad faith on your part. See Moore, 849 So. 2d 914, 926 (Ala. 2002).

A few notes - Alabama courts have dismissed fraud claims by buyers, even when a seller provided incorrect information, when the buyer signs a purchase agreement with an “as is” clause. See Massey v. Weeks Realty Co., 511 So. 2d 171 (Ala. 1987). However, an “as is” clause does not exempt you from the requirements of the Alabama Real Estate License Act and the NAR Code of Ethics.

Reminder: Impact of “as is” Clause

As we discussed last week, several of these exceptions are limited by the presence of an “as is” clause in a purchase agreement. An “as is” clause generally provides that the real estate is being sold “as is” and/or specifically disclaims reliance by the buyer upon any representations or assertions by the seller or seller’s agent. When looking at the impact of an “as is” clause on a seller’s (or seller’s agent’s) duty to disclose, Alabama courts have consistently dismissed lawsuits by buyers, even for fraud or negligence, except when a fiduciary relationship exists with the buyer. For the seller’s agent, this would occur when serving as a dual agent. See Potter v. First Real Estate Co., 844 So. 2d 540 (Ala. 2002). (Article on “As Is” Clauses by the AREC Legal Office – here on page 2).

License Law

Remember that the license law imposes specific duties upon a real estate licensee, including a duty of loyalty to your client, a duty to disclose all material information, and a duty of confidentiality. See Ala. Code §§ 34-27-84; 34-27-85(a); 34-27-36. These duties may seem to overlap and even contradict one another at times, so seek information from your broker and the Alabama Real Estate Commission’s Legal Division when specific issues arise. Here are articles from AREC’s Legal Division on caveat emptor (article one on seller disclosure, go to page 2; and article two on fraudulent suppression, go to page 5).

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