Seller Disclosure Lawsuit May Not Be Valid

Q: I inherited a nine-unit apartment complex from my father, fixed it up, and sold it about six years ago. The buyer, who is a licensed real estate broker, is now suing us and our agent, claiming we didn’t fill out a disclosure form. The buyer is now claiming that he did not know that half of the units in the complex are on sewer and the other five are on septic.

I made no representations one way or the other, as we didn’t know. Our listing agent listed the sewer as unknown on the listing for the complex. We were never asked to fill out a transfer disclosure statement and it my understanding that one is not required for commercial properties.

The buyer’s main complaint seems to be that our agent gave him, as a courtesy and at no charge, a home inspector’s report paid for by a previously interested party saying the property was on sewer. However, neither our agent nor I paid for that report and have nothing to do with it.

The property was also sold as is, and on the contract the buyer put declined to inspect the “sewer/septic systems”.

Do we have any liability here? Isn’t there a statute of limitations? Our agent has errors and omissions insurance and her lawyer is dealing with the claim on her behalf. Can he also represent us? It seems silly for us to hire a separate lawyer and pay thousands of dollars for what seems to be a frivolous case.

A: There are times that you may do everything right and still find yourself sued by a person who is unhappy with a turn of events and trying to get something out of you.

Most states have seller disclosure laws for residential sales. Under these seller disclosure laws you must deliver to a buyer a document that outlines defects that you know of that affect the property. In many cases if you fail to disclose honestly, the buyer may have the right to sue you and receive damages for harm the buyer might have sustained by the failure to disclose the defect as the seller should have.

But most of those seller disclosure laws have a timetable that would require the buyer to make a claim against you within a certain number of years. In some cases, if a buyer receives the disclosure and finds something that should have been disclosed and was not and the closing has not occurred, the buyer can walk from the deal and get his money back.

And where a disclosure should have been delivered and was not, the buyer can decide not to close. But under some seller disclosure laws, if the buyer closes on the deal without a disclosure form, the buyer later can’t complain about not having received the form.

In most cases, the seller disclosure laws require a claim to be brought against a seller within a year or so after the deal closes. Some states may have a longer time period to bring a claim than others and it really will depend on a state by state basis.

While most states have seller disclosure laws for residential properties, those laws do not apply to commercial real estate transactions. But that does not mean that a seller in a commercial transaction has no responsibility to disclose known defects.

In some states certain fraud laws may still require a seller to make certain disclosures in limited cases and under certain circumstances. Unless it was required specifically under the laws of the state in which the property is located, you probably wouldn’t have to disclose whether a property was on sewer or on septic.

Still, it seems that because the property is a nine-unit building, it’s likely that the sale would be considered a commercial transaction and any seller disclosure requirement should be in the context of a commercial and not a residential transaction.

It’s interesting that it has taken the buyer six years to discover the situation and come forward. It seems highly unusual that the buyer never maintained the septic system for the units over this period of time. And if the septic system wasn’t maintained, it took quite some time for a problem to develop.

It might even be fair to say that any problems with the septic system might have been caused by the buyer’s lack of maintenance of the septic system.

The buyer might argue that he would have maintained the septic system but relied on the seller’s delivery of the inspection report to believe that the entire property was on the sewer system.

So the key question in your situation is whether it was reasonable for the buyer to rely on the inspection report that was given to the buyer, particularly in a commercial transaction and that the sale was as-is.

At first glance, it seems as though you’re in the clear, but the inspection report is somewhat troubling.

What was the purpose in delivering the report? If the purpose was to have the buyer see the problems the property might have and for the buyer to rely on that report, you may have a problem. If you had nothing to do with the delivery of the report and the real estate broker did it entirely on her own, the agent may have a problem.

However, if the buyer’s sole claim is that you failed to deliver a disclosure to the buyer and there is no requirement in your state for a disclosure in your transaction and no requirement to disclose septic systems, you should be able to have an attorney represent you and have these issues taken care of in your favor.

Finally the six years that have passed may also absolve you of responsibility for the issues the buyer claims, but you should consult with your own attorney on this issues.

And on that subject, you unfortunately need your own attorney to make sure that person evaluates the case on your behalf, especially if the real estate agent delivered that inspection report to the buyer without your knowledge or consent. That could potentially put you and the agent on opposite sides of the table, and in that case, you’ll want to be represented.


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