Disclosures in Residential Real Estate Transactions

Regionally, spring is a busy time for residential real estate transactions.  It is a time when many home sellers decide to list their property, and buyers often step up their intensity when searching for a new home.  Some of the most common inquiries real estate attorneys receive, especially at this time of year, relate to seller’s disclosures in residential real estate transactions.  Common questions are: What do I need to disclose? What are the potential liabilities for failing to disclose? And, how can I recover if I think a seller failed to disclose certain information during a sale?  This article will answer these questions, and serve as a reference for both sellers and buyers.

You may have heard of the term caveat emptor (“let the buyer beware”).  The concept had its roots in the English common law, and generally puts the burden on the buyer of real property to ensure that the property is free of defects.  However, today, both Minnesota and Wisconsin have statutory disclosure duties for sellers of residential property.

Chapter 709 of the Wisconsin Statutes contains a statutory “Real Estate Condition Report”.  Wisconsin Statute § 709.03 provides an actual form that an owner of property “shall furnish, not later than 10 days after acceptance of a contract of sale… to the prospective buyer…”  See Wis. Stat. § 709.02(1).  The form contains specific information related to potential defects in many facets of a home.  The form is detailed and relatively self explanatory.  Obviously, it behooves a buyer to review the seller’s disclosures carefully prior to closing on a sale. Of note, the disclosure is not required of certain persons, such as personal representatives, trustees or conservators, if such persons never occupied the property.

The remainder of this discussion relates to Minnesota disclosures.  In Minnesota, in most arms-length transactions, a seller must make a written disclosure of all information that the seller has about the property that could: (i) adversely and significantly affect the buyer’s use and enjoyment of the property; or (ii) any intended use of the property of which the seller is aware, unless the buyer waives receipt of the disclosure in writing.  The disclosure must occur prior to signing an agreement to convey the property.  However, unlike Wisconsin, there is no statutory form.  That said, many Minnesota real estate agents and attorneys use forms approved by industry associations.

The Minnesota disclosure is required for property that is occupied or intended to be occupied as a single family residence – including a unit in a common interest community (i.e. condo, townhome, etc.).  It applies to any transfer of an interest in residential real estate, whether by sale, exchange, deed, contract for deed, lease with an option to purchase, or any other option.  See Minn. Stat. § 513.53.  There are some exceptions, however, that are listed at Minn. Stat. § 513.54 that relate to specific types of transfers, such as transfers by gift, through a will, to family members or pursuant to new construction.

What specifically must be disclosed?  Again, the disclosure statute requires that the seller provide a written disclosure of all “material facts of which the seller is aware” that could “adversely and significantly” affect:

• An ordinary buyer’s use and enjoyment of the property; or
• Any intended use of the property of which the seller is aware.

“Material facts” may include, among other things, existing damage to the property, physical defects, construction defects, roof leaks, basement leaks and failed mechanical systems.

The disclosure must be in “good faith” and “based upon the best of the seller’s knowledge” at the time of the disclosure. See Minn. Stat. § 513.55, Subd. 1.  This is important language that is central to many of the disclosure questions that people have.  Essentially, a seller is not liable for failing to disclose information that they don’t have.  Therefore, for a buyer to have a successful claim against a seller for violation of the disclosure requirements, the buyer must prove: (1) the seller was aware; (2) of material facts related to a condition of the property; (3) that could adversely and significantly affect a buyer’s use and enjoyment of the property; and (4) the seller failed to disclose the material facts.

To clarify, Minn. Stat. § 513.57 provides that a seller has no liability for any error, inaccuracy, or omission of any information delivered to the buyer that was “not within the personal knowledge of the seller…”, provided that ordinary care was exercised in transmitting the information.  Moreover, a seller is not liable for failing to disclose information that could only be obtained through inspection or observation of inaccessible portions of the property, or could be discovered only by a person with expertise in a science or trade beyond the knowledge of the seller.  For example, a seller does not have to open walls or pull up flooring to inspect for mold if there is no knowledge that such mold exists, and a seller does not have to opine on potential technical engineering/design inadequacies that are unknown to the seller.

How do pre-sale property inspections play a role?  Pursuant to Minn. Stat. § 513.56, if a buyer has obtained, or been provided with, a written report from a professional inspector that discloses information related to a defect in the property, then the seller does not need to disclose the defect.  However, if the seller knows about information that contradicts the information in the report, there is a duty to disclose such information.

Finally, if there is proof that a seller failed to disclose a material fact in violation of the disclosure requirements, the seller can be liable for: (i) damages to the buyer resulting from the failed disclosure, and (ii) equitable relief, such as rescission of the sale.  Such a claim must be commenced by a buyer, through a lawsuit, within two years after the date on which the buyer closed on the purchase or transfer of the property.  See Minn. Stat. § 513.57, Subd. 2.  A statutory disclosure claim can be combined with other actions based on fraud or negligent misrepresentation.

The disclosure requirements discussed in this article seek to alleviate surprises related to defects known to the seller.  The lesson is to play fair as a seller; and to closely review all the information that is provided when you are a buyer.

Matthew Hanka is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the area of Litigation, Arbitration, Land Use and Zoning, Labor Law, Contracts, Collections, Employment Law, General Municipal Law, Insurance Claims and Annexation and Municipal Boundaries. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.