New Legislation Increases Disclosure Requirements for Home Sellers
By: MARK W. VYVYAN
One of the most difficult issues for a home seller is how much to disclose regarding the home's physical condition. The Minnesota legislature passed legislation that becomes effective January 1, 2003, requiring sellers of residential real property to disclose all known material facts pertaining to adverse physical conditions of the property which could adversely and significantly affect (i) an ordinary buyer's use and enjoyment of the property, or (ii) any intended use of the property of which the seller is aware. The enactment of this legislation comes a year after the Real Estate Brokers Act that requires brokers and salespersons to make similar disclosures regarding the physical condition of properties they are selling. That legislation was discussed in the Fall 2001 issue of the Real Estate Focus.
The new disclosure provisions for sellers have a broad scope beyond previous disclosure requirements. The provisions require disclosure of adverse facts regarding all types of "residential real property," including single family residences and units in common interest communities such as town homes and condominiums. They apply to most transfers of any interest in residential real estate, whether by sale, exchange, contract for deed, lease with purchase option, or any other type of purchase option. Some types of transfers are, however, specifically excluded from the disclosure requirements, including those of non-residential real property, pursuant to court order, resulting from a decree of marriage dissolution, and of newly constructed residential property that has not yet been inhabited.
While Minnesota Statutes already required the disclosure of certain items, including wells and septic systems, and some local ordinances required disclosure of the condition of the physical components of the home, most Minnesotans were not previously required to disclose the condition of their home. In fact, under Minnesota common law, one party to a transaction generally has no duty to disclose material facts to the other. Klein v. First Edina Nat'l Bank, 196 N.W.2d 619 (Minn. 1972). Perhaps the most significant exception to this general rule required a party with "special knowledge" of a material fact to which the other party did not have access, to disclose that fact to the other party. The new disclosure legislation expands on that common law exception, requiring disclosure of material facts which could adversely and significantly affect an ordinary buyer's use and enjoyment of the property or an intended use of the property of which the seller is aware, without regard to whether the seller has "special knowledge" of the condition or whether the purchaser is without access to facts regarding the adverse condition.
There are some exceptions to the disclosure requirements. The new legislation provides that a home seller is not required to disclose information regarding the physical condition of the property if a written report disclosing the information prepared by a qualified third party, such as a home inspector, has been provided to the prospective buyer. This exception is not likely to eliminate the need to disclose adverse conditions, however, because the new legislation requires disclosure of those facts before a purchase agreement is signed. Under current Minnesota practice, most home inspections are conducted after the purchase agreement has been signed. Like the legislation enacted last year for brokers and salespersons, the new legislation provides that home sellers are not required to disclose certain types of potentially adverse facts. These include:
- If the property is or was occupied by someone who is, or was suspected to be, infected with the HIV virus or AIDS.
- If the property was the site of a suicide, accidental death, natural death, or perceived paranormal activity.
- If the property is located in a neighborhood containing an adult family home, community based residential facility or nursing home.
- Information regarding the presence of sexual predators, provided the seller gives written notice that information about predatory offender registry and registered offenders may be obtained by contacting local law enforcement agencies or the Department of Corrections.
The new disclosure legislation is especially significant in that it creates a new cause of action for home buyers under Minnesota law. The legislation specifically allows a buyer to commence a civil action seeking damages or other equitable relief in the event of a failure to comply with the disclosure provisions. An action under the new legislation must be initiated within two years from the date of closing. Importantly, the new disclosure provisions do not preclude liability based on common law theories such as fraud and negligent misrepresentation. For more information regarding these theories, please see the Winter 2001 issue of the Real Estate Focus.