Caveat emptor--"let the buyer beware"--has long been the law in the District regarding real estate transactions. Unless the buyer specifically asked the seller about potential defects in the house, the seller was under no legal obligation to disclose any such problems.
Modern consumer protection acts have imposed disclosure requirements on sellers and, sometimes, real estate brokers. In the District, the Seller Disclosure Act became law April 20. Although the law is quite complex and will likely be the subject of much litigation for years to come, the basic purpose of the new law is quite simple.
Sellers of residential real estate in the District must disclose to their potential buyers known defects or information about water and sewage-treatment systems; insulation; structural systems, including roof, walls, floors, foundation and basement; plumbing; electrical, heating and air-conditioning systems; fixtures; and much more.
"Each disclosure required by this act shall be made in good faith," the law says. "Good faith" means honesty in fact in the making of the disclosure.
Who must comply with the new act? Sellers of residential real estate in the District containing one to four residential dwelling units. However, the seller is obligated to provide the disclosures only if the potential buyer states, in writing, an interest in personally residing in the property. In other words, the law is designed to protect consumers, not investors.
It should be noted that the disclosure requirement is placed exclusively on the seller. Realty brokers, management firms, condominium associations and cooperative associations are not obligated to provide any such disclosure, although there are more disclosure requirements regarding the purchase and sale of condominiums and cooperative apartments.
The disclosure form must be provided to the prospective buyer before or at the time the parties execute a sales contract. If the disclosures are not given until after there is a sales contract, the buyer has the right to terminate the contract and receive a full return of the good-faith earnest money deposit not more than five calendar days after receipt of the disclosure statement. There are, however, three limitations on this right to terminate:
* The buyer makes an application for a mortgage loan, and the lender discloses that the right to rescind terminates on submission of the application.
* The buyer goes to settlement or takes early possession of the property.
* Occupancy by the buyer in the case of a lease with an option to purchase.
As with any consumer protection legislation, the law contains a number of exemptions, otherwise known as loopholes. For example, the law does not apply in these situations:
* Transfers by the borrower to the lender in default situations, otherwise known as "deeds in lieu" of foreclosure.
* Transfers pursuant to a foreclosure sale. Thus, if you buy real estate at a foreclosure sale--or from the bank that owns the property after foreclosure--no disclosures are required. In these cases you buy the property "as is," which means that what you see is what you get.
* Transfers between spouses under a divorce decree or property settlement pursuant to a divorce.
* Transfers made to the transferrer's spouse, parent, grandparent, child, grandchild or sibling, or any combination.
The law requires that any seller covered by the act shall deliver to a prospective buyer the real estate disclosure statement on a form to be approved by D.C. Mayor Anthony A. Williams. This form has not yet been approved, raising questions as to how a seller can comply with the law without having the approved form. Although the forms have not yet been produced and approved, sellers would be well advised to disclose to potential buyers any known defects in their houses.
How does this affect potential buyers? It must be noted that a disclosure form is but one small tool in the arsenal of a buyer. It should not be relied on exclusively. Potential buyers still need to engage their own independent home inspector, and make sure that the contract is contingent upon obtaining a satisfactory report from that inspector. You may want to provide a copy of the seller's disclosure form to your inspector, but I would wait until the inspection has been completed so as not to cause prejudice.
How does this affect sellers? At first reading, one would think that it will have serious impact, especially where they know of defects in their house. However, by giving full and honest disclosure upfront at the time the contract is signed, this should avoid future problems--and potential litigation--from buyers. There are numerous cases in which sellers have been sued by their buyers, claiming that the sellers lied and misrepresented the condition of the house.
Full, complete and accurate disclosure of any problems before a contract is signed will be a significant deterrent to future litigation. It will also be a valid legal defense should litigation be brought.
Caveat emptor has no place in the residential real estate market and the D.C. Council has taken a good first step by enacting the Seller Disclosure Act.
Kass is a Washington lawyer. Readers may send questions to him at Suite 1100, 1050 17th St. NW, Washington, D.C. 20036.