Failure to Disclose Known Defects by a Seller during the Sale of a Home

The Seller’s Duty and Seller’s Broker’s Duty to Disclose

            Buying a home is traditionally the most expensive purchase a person will make in their lifetime. Colorado requires sellers to fill out a form known as the Seller’s Property Disclosures (“SPD”), a mandatory form from the Colorado Real Estate Commission. The completed SPD is provided to buyers so that buyers can evaluate whether they want to move forward with the purchase of a home fully understanding the risks of the purchase. Buyers receive an SPD because of the vast information gap between the seller, who has lived in the home for a period of years, and the buyer, who has spent perhaps an hour inside the home.

The SPD requires sellers to disclose actually known “adverse material facts” affecting the property or its occupants. Adverse material facts may include, but are not limited to: water and/or moisture damage such as flooding or mold growth; prior insurance claims for hail, wind, or storm damage; erosive soils that causing sinking or settling; prior contractor repairs for major defects on a home; electric wiring that is unsafe or outdated; and a whole host of other negative facts that would affect a buyer’s decision to purchase a home.

            The seller’s duty to disclose also extends to adverse material facts actually known by the seller’s real estate broker. This duty is created not only by the express terms of the SPD, but also by Colorado statute. As such, if the seller fails to disclose an adverse material fact, the seller’s real estate broker must step in and disclose the nondisclosed adverse material fact.

Actionable Legal Claims based on the Failure to Disclose in a SPD

            The failure to disclose an adverse material fact by a seller or a seller’s broker creates several viable legal claims for relief, including but not limited to: (1) false representation; (2) fraudulent concealment; (3) fraudulent nondisclosure; (4) negligent misrepresentation by the seller; (5) negligent misrepresentation causing financial loss in a business transaction by the seller’s broker; (6) professional negligence; (7) breach of contract; and (8) breach of the statutory duty of disclosure.

            The economic loss rule typically will not limit a plaintiff in these cases to a breach of contract claim. This is because, under Colorado law, tort claims based on misrepresentations that caused a plaintiff to enter into a contract are not barred by the economic loss rule because those breaches violate an independent duty in tort separate from any obligation created by the contract.

            In circumstances where any fraud-based claim survives (false representation, fraudulent concealment, or fraudulent nondisclosure), a buyer-plaintiff may seek exemplary, or punitive damages, as such claims are “attended by circumstances of fraud, malice, or willful and wanton conduct.” See C.R.S. § 13-21-102(1)(a). Such circumstances allow a plaintiff to recover up to double the plaintiff’s “actual damages.” Id.

Actual Damages and Exposure for Failure to Disclose in a SPD

            Actual damages for a fraud claim based on a seller’s nondisclosure of an adverse material facts include, but are not limited to: (a) costs of repair; (b) diminution in value; (c) storage costs while one could not occupy the home; (d) noneconomic damages for mental suffering and emotional distress; (e) noneconomic damages for the loss of the use and enjoyment of the property; and (f) statutory interest at 8% compounding annually pursuant to C.R.S. § 5-12-102 for money “wrongfully withheld.” All of these damages can then doubled where fraud can be proven to determine a defendant-seller’s exposure to the buyer.

            This hypothetical demonstrates the value of a fraud claim for failure to disclose:

Buyer intends to purchase a home for $300,000. During the sale, the seller fails to disclose that a portion of the house was sinking and that, before the sale, the seller and seller’s broker hired a contractor to “fix” the sinking portion of the home. The buyer purchases the home, suspecting no material defects. Three months into owning the home, the buyer notices significant cracking to a third of the home. The buyer hires a contractor to perform repairs, who repairs the home for $50,000. The contractor tells the buyer that it appears that the home was previously repaired multiple times to cover up that it was sinking. The buyer now suspects that the seller knew about the home’s sinking defect but did not disclose it. The buyer will, at a subsequent sale, now need to disclose that the home is sinking and needed prior repairs.

Because of the stigma associated with homes with poor foundations, despite the repair, the home will suffer diminution in value. If diminution in value is 5%, diminution in value damages would be another $15,000 on top of repair damages. Assume storage of items in the sinking portion of the home had to be stored in a storage facility at a cost of $1,000 during repairs. Assume that the homebuyer had a child with a disability and purchased the home believing that the now-sinking area would be their child’s specific play area and plaintiff therefore suffered $25,000 in mental suffering and emotional distress. Finally, assume that the jury awards $10,000 for the loss of the use and enjoyment of that area of the home.

In this hypothetical, compensatory damages are $101,000. Assume that trial occurs two years after the home sale, therefore statutory interest totals $16,806.40. In this hypothetical, the plaintiff would be entitled to $117,806.40 in actual damages and, potentially, up to another $117,806.40 in exemplary damages. Thus, a defendant-seller’s exposure is $235,612.80 for the failure to disclose the known material defect on a $300,000 home sale.

Fraud and Conduct Warranting Punitive Damages are Easier to Prove in the era of email and text

            Increasingly, sellers and their brokers communicate by email and text message. These written forms of communication between a seller and broker have made proving fraud and conduct supporting exemplary damages far easier. Before the early 2000’s, seller and broker communications predominantly occurred by telephone. Such oral conversations are difficult to prove because memories fade and perceptions differ.

By contrast, written forms of communication, such as email and text message, continue to exist well beyond deletion by the user on a computer or cell phone. This is because the cell phone still stores “deleted” material in other areas of the phone. The same is true on a computer or even on the server that holds a user’s emails. Expert witnesses can obtain even deleted material from a phone and provide that to a lawyer in the form of a cell phone extraction report. If your cell phone syncs to an app or apple device that records your heartrate, a cell phone data extraction expert can even pull what your heartrate was on a given day. The author has utilized cell phone data extraction experts in numerous lawsuits, including in order to prosecute two life sentence criminal cases: People v. Wright (sexual assault on a child; 700 pages of text messages between defendant and child-victim) and People v. Martinez-Perez (first degree murder; defendant called sister seven times before calling 911). In each of those cases, the opposing party had deleted text messages which we could not only admit as admissions by a party opponent, but also as consciousness of guilt because the extraction report showed that the defendant “deleted” the message.

There are multiple ways to obtain this evidence at varying stages of a lawsuit. First, a litigant must provide these communications from the seller to the broker as a result of Colorado’s initial disclosure rule, C.R.C.P. 26(a)(1). That Rule requires disclosure of a copy of all “documents, data compilations, and tangible things” … “as though a request for production of those documents had been served pursuant to C.R.C.P. 34.” Second, if an opposing party does not disclose these communications in their initial disclosures, one may ask that the opposing party disclose those communications as it is presumptively suspect that they did not disclose such communications. Third, if the opposing party does not disclose those communications voluntarily, one can file C.R.C.P. 34 request for production for all communications between the seller and the broker and between the sellers, via email or text message or any other written form of communication (e.g. Instagram; more and more brokers are utilizing social media). The author has obtained email and text communications between sellers and their broker via all three of the above methods.

Past Successes and the future of failure to disclose in a real estate transaction

            The author has represented both buyers and sellers in the above circumstance. In Hardy v. Flood, 2019 WL 5092445 (D. Colo. Oct. 11, 2019), the author, along with co-counsel, successfully defended the lawsuit and obtained an outright dismissal of the case. There, they drafted and filed a motion in limine that caused the court to exclude the condition that plaintiff alleged was an adverse material fact. As a result, the plaintiffs were forced to voluntarily dismiss the lawsuit.

            We anticipate that this area of law will only continue to expand. In 2020, the number one reason that Colorado real estate brokers were sued was for failure to disclose an adverse material fact while operating as a seller’s broker.