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A seller of real property has certain disclosure obligations to the buyer. These disclosure obligations originate from both common law and statute.
The Seller’s Common Law Duty to Disclose
A seller has a duty to disclose facts materially affecting the value of the property that is not readily observable and is not known to the buyer. This duty was delineated by the court in Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (App. 1986).
In Hill v. Jones, the buyers and sellers entered into a contract for a home with a wood floor. The sellers disclosed no past termite damage and the termite report indicated no visible evidence of infestation or previous treatment. The termite inspector did not see the treatment holes in the patio because of stacked boxes and did not find the termite damage inside the house because a large plant covered the area.
After the close of escrow in the Hill case, the buyers learned from a neighbor that the house had past termite infestation, and the buyers discovered that part of the wood flooring was crumbling. When the lawsuit was filed, the buyers learned that the sellers had received two termite guarantees from the previous owner, had treated the house twice for termites and that existing termite damage had not been repaired. In examining the case, the court announced the seller’s duty to disclose material facts to the buyer in Arizona and stated that under certain circumstances nondisclosure of a known fact may be equivalent to the assertion that the fact does not exist. Therefore, nondisclosure may be equated with and given the same legal effect as fraud and misrepresentation.
And, as the Arizona Court of Appeals recently made clear, an “AS IS” clause provision in a contract does not shield the seller from liability for failure to disclose known material defects in the property. S. Development Corp. v. Pima Capital Management Co., 201 Ariz. 10, 31 P.3rd 123 (App. 2002). The seller is obligated to make the required disclosures regardless of the “AS IS” clause.
Further, if the buyer asks the seller about an aspect of the property, the seller has a duty to disclose the information, regardless of whether or not the seller considers the information material. Universal Inv. Co. v. Sahara Motor Inn, Inc., 127 Ariz. 213, 215, 619 P.2d 485, 487 (1980). Sellers also have a legal duty to disclose facts when disclosure is necessary to prevent a previous statement from being misleading or a misrepresentation: for example, if something changes. However, a seller does not generally have a legal obligation to correct defects in the property, as long as the defects are disclosed.
The Seller’s Statutory Duty to Disclose
In addition to the common law duty to disclose, there is an ever-increasing number of specific disclosures that sellers are required by statute to make, such as:
- Lead-based paint disclosure in pre-1978 properties (Title X)
- Swimming pool barrier disclosure (A.R.S. § 36-1681(E))
- PUD/Condo disclosure information (A.R.S. § 33-1806 & 33-1260)
- Notice of soil remediation (A.R.S. § 33-434.01 & 49-701.02)
- Disclosure affidavit for land in unincorporated areas, except subdivided (A.R.S. § 33-422)
- Military airport (A.R.S. § 28-8484) (public airport information at A.R.S. § 28-8486)
- Subdivision disclosures/public reports (e.g., A.R.S. § 32-2183)
- Drug lab disclosure (A.R.S. § 12-1000)
The SPDS Assists in Making these Disclosures
The Arizona Association of REALTORS® (“AAR”) Seller’s Property Disclosure Statement (“SPDS”) is designed to assist sellers in making these legally required disclosures and to avoid inadvertent nondisclosures of material facts. The first page of the SPDS is a Seller Advisory to help educate sellers about their disclosure obligations and to assist sellers in completing the form.
AAR developed the SPDS fifteen years ago to assist sellers to fulfill their disclosure obligations. The SPDS protects the seller by evidencing the seller’s disclosure of material facts to the buyer. However, it has been suggested in the past that the use of the SPDS may be detrimental to the seller, resulting in some questions and concern. Following are answers to some of those questions and concerns.
Does the SPDS unfairly “shift the risk” from the listing broker to the seller?
No. The seller has an obligation to make the required disclosures regardless of whether the seller is represented by a broker or uses the SPDS.
Are all the questions on the SPDS material in every transaction?
No. Some of the questions on the SPDS are simply for informational purposes. What is material depends on the facts and circumstances of the transaction.
If the seller answers the questions on the SPDS that are not material in that particular transaction, is the seller harmed?
No. To coin a phrase: if it is material, the seller must disclose it; if it is not material, why not disclose it?
Since every question on the SPDS may not be material, wouldn’t it be better if sellers made their disclosures of material fact on a blank piece of paper, rather than utilizing the SPDS form?
If a seller could remember all the material details of the property that need to be addressed, a writing would suffice. However, the SPDS serves to address statutory disclosures of which the seller may not be aware, to prompt the seller to disclose information the seller may not realize is material, and to assist the seller to make these disclosures fully and accurately.
Does the SPDS operate as a “warranty” of the condition of the property?
No. The SPDS is not a warranty, but simply a disclosure of facts of which the seller is aware. The SPDS requires the buyer to acknowledge that the information in the SPDS is based only on the seller’s actual knowledge and is not a warranty of any kind. (See SPDS lines 286-287.)