In a real estate transaction, there will be items the owner should disclose and items the real estate agents should be revealing. How do you tell which is which? When does the obligation rest with the agent or with the broker?
Rules of the road
A residential seller, per Wis. Stat. § 709.03, completes a Real Estate Condition Report (RECR) to disclose known defects: conditions that would have a significant adverse effect on the value of the property; significantly impair the health or safety of future occupants of the property; or, if not repaired, removed or replaced, would significantly shorten or adversely affect the expected normal life of the premises. The RECR is completed by the seller, with any legal advice coming from the seller’s attorney.
The broker should review the RECR. If it is inaccurate or incomplete, the broker may have a duty to disclose under Wis. Stat. § 452.133 if there are material adverse facts the buyer does not know and cannot discover through vigilant observation. The agent must judge whether the undisclosed condition or information would have a significant adverse effect on the property value; significantly reduce the structural integrity of the property; present a significant health risk or indicate that a party cannot or will not meet their contractual obligations. If the undisclosed information is important enough that it would impact a party’s decision to enter into the contract or would affect a party's decision about contract terms, then it is a material adverse fact that the agent must disclose in writing to the parties in a timely manner. If the information suggests the possibility of a material adverse fact, the licensee should disclose the information and recommend that the parties draft contingencies so they may obtain expert assistance to investigate and evaluate the situation.
Consider the following scenarios in this article.
Lead-based paint in rental properties
Vera Verbal is purchasing a four-unit property built during the 1950s and will work with Paula M, a property manager, to rent out the units. Are either Vera or Paula obligated to provide tenants with a LBP disclosure if Vera is not using written rental agreements and will instead have verbal month-to-month tenancies?
Federal lead-based paint (LBP) law requires that no written or oral leases or rental agreements on residential housing built prior to 1978 can become binding without first providing mandatory LBP disclosures and pamphlets unless the rental is exempt, for instance, short-term rentals for less than 100 days. The federal LBP disclosure rules require landlords of such housing to:
- Disclose the presence of known LBP.
- Provide tenants with any available records or reports about any LBP present in the housing.
- Provide a mandatory warning statement and required disclosure and acknowledgement language.
- Provide tenants with a federally approved lead hazard information pamphlet, such as “Protect Your Family From Lead Based Paint.”
Moving forward, Vera and Paula have several options:
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Owner disclosure: Vera can complete the WRA Addendum L to Lease — Lead-Based Paint Disclosures and Acknowledgments and distribute it, along with the mandatory Environmental Protection Agency (EPA) brochure, “Protect Your Family From Lead in Your Home,” to tenants at the beginning of the lease or rental term.
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Property manager disclosure: If Vera gives Paula authorization in the property management agreement or elsewhere in writing, Paula may fill out the landlord’s LBP disclosures and otherwise take the steps necessary to comply with the LBP disclosure law, including completion of Addendum L.
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Agent ensures compliance: The federal LBP rules provide that each agent shall ensure compliance with all the requirements of the rules. “Agent” is defined to include any party who enters into a contract with a lessor for the purpose of renting target housing. The HUD and EPA commentary to the final rules indicates that to ensure compliance with the rules, Paula must inform Vera of her disclosure obligations under the federal LBP rules, ensure that she performs all activities required under the rules, or personally ensure compliance with the federal LBP requirements. Paula can complete the required tasks for Vera if Paula cannot “make Vera” do so.
The penalties for noncompliance with the LBP law are federal ($11,000 fee per violation, triple damages plus attorney fees in private enforcement action or potential jail time) and apply not only to the landlord, but also to the agents in the rental transaction who do not ensure compliance.
LBP resources
Pipe in ground of foreclosure property
Barry Buyer has an accepted offer on a foreclosed property. A week before closing, Amanda Appraiser and Sam Subagent noticed a small capped pipe sticking up from the ground in one of the appraisal photographs. There was no prior mention of any underground storage tank (UST), but Sam and Amanda know a vent or fill pipe is a telltale indicator of a UST. Sam also knows that Barry’s lender will likely withhold the loan commitment until there is confirmation that there is no UST and no contamination. Barry is moving from an apartment and will have no place to live should the closing be delayed. He will have to pay additional money to extend his loan rate lock as well. What should be disclosed and who should make the disclosure?
An out-of-service UST used for storing heating oil or an out-of-service UST of 1,100 gallons or less used for storing motor fuel for noncommercial purposes is required by Wisconsin law to be registered and closed by a certified tank professional. According to the Department of Agriculture, Trade and Consumer Protection (DATCP), which now administers the UST regulations, a certified UST remover can remove and properly dispose of the UST, handle the notifications and paperwork required, and generally see that the job is done properly. Whenever a UST is not removed or is removed without complying with the UST regulations, licensees are generally obligated to disclose this fact to all parties pursuant to Wis. Admin. Code § REEB 24.07(2).
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Possible material adverse fact: Either Sam or the listing agent can disclose the photograph of the pipe as information suggesting the possibility of a material adverse fact. It is not clear if there is a UST in the ground, if there was a UST that was removed, or if there is UST removal documentation confirming no signs of contamination. A sample material adverse fact disclosure letter is available on page 26 of the October 2009 Legal Update, “Diligent Disclosure,” at www.wra.org/LU0910 or on zipForm.
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Attorney time: The agents should refer the parties to their attorneys so they may determine, once the facts are established, whether to amend the offer to extend the closing date, amend the offer to add an investigation contingency, rescind the offer if the seller failed to disclose, or take other action.
UST resources
Possible wetlands
Penny Purchaser is writing an offer on a property, and although there are no water lilies or cattails in sight, a lender friend of Penny’s buyer’s agent indicated that the Department of Natural Resources (DNR) wetland indicator map shows a potential wetland on the property. The lender said that another party had applied for a purchase loan on the property but had immediately terminated the transaction when the wetland possibility was discovered. The seller completed a Vacant Land Disclosure Report that includes item C. 4. “I am aware that all or a portion of the property is in a floodplain, wetland, or shoreland zoning area under local, state, or federal regulations,” but did not report any wetlands. What should the buyer’s agent do?
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Possible material adverse fact: The buyer’s agent should disclose the information indicating the possibility of a material adverse fact. The agent should be careful to simply disclose the facts, attribute the source and not draw any conclusions: the lender recounted a transaction where it was concluded from the DNR maps that the property may include wetlands.
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Map experts: Correctly reading and interpreting wetlands maps is best done by appropriate experts, not real estate agents who are not generally required to investigate whether a property includes wetlands.
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Addendum W: Encourage the parties to consult with appropriate experts and include a contingency or an Addendum W in the offer.
Wetland resources
Removing asbestos floor tile
Sidney Seller is removing tile flooring in his family room and installing carpet before putting his home on the market. The carpet installer says the existing flooring looks like asbestos tile that should be tested. Testing reveals the flooring is 6 percent asbestos. If Sidney removes the asbestos, must that be disclosed to a buyer? If Sidney hires a professional to remove the flooring, must that be disclosed?
Per the Wisconsin Department of Health Services (DHS) rules in Wis. Admin. Code § DHS 159.04, “asbestos-containing material” (ACM) is (1) material or product containing more than 1 percent of asbestos and (2) material meeting the definition of “suspect ACM.” Suspect ACM means: (1) vermiculite insulation, unless EPA sampling and analysis protocol proves that it does not contain asbestos, and (2) any untested materials used in or on building components, except for metal, glass, wood and fiberglass.
Chapter DHS 159 requires that many types of workers be certified, including flooring contractors who disturb or remove more than one waste bag (no larger than 60” by 60” properly filled and sealed) of building materials known or suspected to contain asbestos. Many flooring products contain asbestos, including asphalt and vinyl floor tile and linoleum. Exemptions from the training and certification requirements for asbestos workers include homeowners working on their own single-family, non-rental residential property.
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Seller disclosure: The level of asbestos in the flooring is greater than 1 percent, so Sidney can disclose in item C. 16 of the RECR that there had been asbestos floor tile and explain the removal protocol, depending on his attorney’s advice.
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Possible material adverse fact: If Sidney removes the asbestos himself, there may be no way to know if he used safety precautions to avoid creating a hazard. The agent may need to disclose information suggesting the possibility of a material adverse fact.
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Professional removal: If Sidney hires a certified flooring contractor to remove the floor tiles, the agent would have to consider what techniques were employed, were certified personnel involved and was there supporting documentation in deciding whether any disclosure was needed.
Asbestos resources
Meth lab
A property had been used as a methamphetamine lab, and the owner is throwing out contaminated materials. The entire house will be cleaned and repainted according to the county health department requirements. What must be disclosed to buyers?
Short-term exposure to high concentrations of chemical vapors in a functioning meth lab can cause severe health problems or even death. Unsuspecting people can also touch meth residue and have symptoms similar to those experienced by meth users.
Once the main chemicals related to the former lab have been removed, the health department typically assesses the property for hazards and long-term exposure risks from residual chemicals. There are no predetermined, acceptable levels of cleanup for the many chemicals associated with meth labs. Thus, testing can be done after cleanup, but the DHS does not recommend it.
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Seller disclosure: The owner may disclose the presence of hazardous or toxic substances in item C. 15 of the RECR and explain the remediation steps.
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Listing broker disclosure: If the owner does not disclose the property’s history, the broker may choose to disclose the prior meth lab as information suggesting the possibility of a material adverse fact. The broker may see if any reports from the agencies involved can be used as disclosure documents.
Meth lab resources
Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.