Always Disclose Prior Inspection Reports

Feb 25, 2014

By: Richard Hargis

Disclosure of prior property inspection reports is always unsettling for sellers and brokers. A bad prior report (typically from a busted contract) can adversely affect the continued marketing and sale of a property. A favorable or neutral inspection report would have the opposite effect.

Regardless of how much it might hurt to disclose a prior inspection report, sellers and brokers should always weigh on the side of disclosure. It is well-settled that prior inspection reports constitute material facts concerning the property which a purchaser is entitled to know in making the decision whether to buy the property.

Recent court decisions make it clear that sellers have the duty to disclose information from prior inspection reports obtained by buyers. In one such case from Texas, the jury held sellers liable for failing to disclose the existence of foundation defects revealed in a prior prospective buyer's engineering report, where the prospective buyer terminated the earnest money contract based on the report.

The facts of the case are illustrative of the court's ruling. The prior buyer discussed the unfavorable engineering report with the sellers and offered to sell them a copy of it. The sellers refused, stating that they did not intend to put any additional money into the house before selling it. Thereafter, the sellers listed the property with another broker, but did not disclose knowledge of foundation defects on the state-mandated Seller Disclosure Notice. After the listing terminated without a sale, the sellers advertised the house for sale on their own.

A new buyer prospect responded to one of the advertisements, which described the house as being in "excellent" condition. Although the new buyer noticed minor cracks and a slight slope to the floor, the sellers assured them that the cracks were superficial and routine for a house in that area. The engineer hired by the buyer to do a "walk through" inspection failed to detect defects in the foundation, and the sellers never disclosed the results of the prior inspection.

The buyer purchased the house, and lived there for approximately 3 years before attempting to sell the house. An interested buyer was provided copies of the inspection reports prepared for the current owners when they purchased the home. The buyer decided to hire his own inspector and, by chance, contacted the same engineer who prepared the report withheld from the current owners by the previous sellers, which showed the foundation was defective. The buyer demanded to be released from the contract, and the owners complied. Thereafter, the current owners brought suit against the previous seller.

The jury found that the previous seller knowingly engaged in a false, misleading, or deceptive act or practice and an unconscionable action or course of action, and assessed punitive damages.

In addition to pointing out the need for sellers to reveal information in prior inspection reports, the court's ruling also says, very clearly, that a seller is not absolved from liability just because a buyer had the opportunity to have his own inspections performed. The seller cannot use the failure of the buyer's inspector to find defects as a defense.

The message is clear: Prior reports constitute material facts. A seller's duty to disclose his knowledge of defects does not end when he completes a written Seller Disclosure Notice during the listing appointment. Rather, the seller's knowledge encompasses prior inspection reports obtained by prospective buyers. Sellers have the ongoing duty to disclose any defects revealed in those reports.

J. Richard Hargis is a practicing Houston attorney, Hargis & Harpold, L.L.P. He is a frequent speaker on real estate topics for continuing education programs and before businesses and trade associatons. His articles are regularly featured in local and state real estate publications.

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