Striking the correct legal balance between full and candid disclosure of material facts and maximizing the sale value of a residential home in Arizona is the name of the game. Fail to correctly advise a homeowner on the disclosure of material information implicating the value of real property, and you or your client may be facing potential civil liability for damages. On the other hand, over-disclosure of materially irrelevant facts may discourage valuable prospective buyers and dramatically reduce the fair market value of a property for no reason.
This balancing act can even be a challenge for some of the most experienced legal professionals in the Arizona real estate field. How we expect our clients in the general public, therefore, to grapple with questions of “material relevancy” and how such relevancy implicates valuation is a genuine mystery. After all, not all properties are made or used equally. And, unfortunately, neither is the public in their consensus of interpretation. So how should we know how to advise our clients in satisfying a legal burden during the pendency of a sale of their home—one of the more stressful times of their lives?
Let’s start at the easy part: the standard. Arizona law requires the disclosure of material facts affecting the value or desirability of a property which are known to a seller, but not readily available or observable to a buyer. To be clear, this does not flip the usual standard of caveat emptor on its head entirely. But it does create a more significant duty to speak than would ordinarily be found in your average arms-length sale or business transaction. As prior owners of homes, we are expected to have important information that can really only be revealed over time through intimate ownership. Yet, this concept will not go so far as to demand complete disclosure of every fact just because it implicates the home.
A property owner need not, therefore, generate a laundry list of disclosure items for things that are open and readily observable. Disclosing every scratch, dent, or other scar that is out in the open in a decades-old home may scare aware buyers faster than a marriage proposal on a first date. Sellers should be encouraged by legal counsel to focus on things that an ordinary home inspection would not, and could not, reveal. If you cannot see it at all times, special caution and attention should be exercised in disclosure. Past water damage, surrounding intermittent nuisances, or problems concealed behind walls are all quintessential examples of the kind of information sellers have a duty to speak about.
But, again, this still begs the question of what a “material fact” is, and how will our clients know it affects the value or desirability of their home? Value (not to be confused with the terms recognized by the Uniform Standards of Professional Appraisal Practice) and desirability seem to be inherently subjective. What one person finds to be an acceptable and harmless attribute to a property may be revolting to another.
A common tool of assistance utilized in Arizona to maximize candor of disclosure is the Arizona Association of Realtors’ standard Seller’s Property Disclosure Statement (commonly referred to as the “SPDS”). Those of us in the real estate legal field, however, have seen these forms enough times to know that completion of all questions does not equal satisfaction of our clients’ legal duty. Although a great supplement, the SPDS is just that—a tool of assistance. Any disclosure form must be used cautiously and never treated as an exhaustive list, no matter who creates it. Property owners must also understand this limitation.
While attorneys are not required to oversee real property transactions in Arizona (a discussion for another day), our guidance is still sought from time-to-time for these specific reasons. An attorney providing guidance to a prospective seller should not, therefore, simply spend time reviewing the perceived completion and adequacy of a form with her client. We should first schedule a call or sit down with our clients to make sure that the legal concepts that underpin the disclosure obligations are fully understood and can be flexibly applied. Once we have confirmed this comprehension, our assistance in choosing adequate language to ensure completeness of disclosure of events and categories of issues will then become much simpler.
On a final note, a legal concept that is frequently misunderstood in Arizona is how these disclosure requirements relate to properties being sold in an “as-is” condition. Many incorrectly believe such transactions absolve the seller of meeting the legal disclosure requirements discussed in this article. In reality, “as-is” deals merely mean a seller will not perform any repairs. Sellers must still disclose known material information bearing relation to the value and desirability of a property, regardless of whether repairs will be made.
These and other issues highlight the need for attorneys to take a more active role in the assistance of preparing adequate disclosures in the sale of real property. Attorneys should not just be seen as reactive players, only to be retained after an issue has already arisen. The potential cost of a lawsuit for misrepresentation is simply too high to wait.
