As in any fall following a rain-filled summer, licensees have questions about basements ranging from leaking to foundation issues. And without fail, listing agents ask, what is my responsibility when it comes to disclosing basement issues?

The following is a collection of scenarios listing agents are often confronted with when listing a home with basement defects. For further reference of leaky basement cases and other real estate related cases, review the August 2010 Legal Update," Case Law Update 2010" at www.wra.org/LU1008. Additional Resources include the October 2009 Legal Update, "Diligent Disclosure," at www.wra.org/LU0910 and the July 2002 Legal Update, "Duty to Disclose," at www.wra.org/LU0207. 

Scenario 1. During the pre-listing walk-through, the listing agent noticed the basement walls were recently painted. 

Response: Be alert when inspecting the property prior to executing the listing contract if you see nicely painted basement walls. It may be wise to ask questions about whether there have been any basement water problems or when the painting occurred. A false advertising claim under Wis. Stat. § 100.18 does not necessarily require a written or a verbal misrepresentation – a party’s actions may fulfill that element in the right circumstances.

Wis. Admin. Code § RL 24.07(1)(b) requires the listing broker prior to the execution of the listing contract to inspect the real estate and make inquiries of the seller on the condition of the structure, mechanical systems and other relevant applicable aspects of the property. This rule also requires the licensee to ask the seller to respond in writing. This inquiry and the seller’s written response generally take the form of the Real Estate Condition Report (RECR).

With respect to the listing broker’s inspection of the property, no written record is required, but prudent listing brokers will require all agents to keep a written record of their observations, using a form like the WRA Listing/Selling Visual Inspection Form. This form, WRA-LAI, is available in zipForm^®. 

Scenario 2. The seller asks the listing agent to complete the RECR, including disclosing seepage in the basement. 

Response: The listing agent should remember that the responsibility to complete a RECR falls solely upon the shoulders of the seller. If the seller wants specific guidance as to what to disclose or not disclose, the agent should refer him to his attorney for legal advice. An agent who tells a seller how to answer RECR questions risks liability as to the validity and correctness of the information. This act is also considered providing a party legal advice and would subject the licensee to both litigation and discipline by the Department of Regulation and Licensing (DRL). § RL 24.06(1) prohibits licensees from engaging in activities that constitute the unauthorized practice of law.

Scenario 3. The seller disclosed to the listing agent that last month their basement took water but does not want to disclose the information on the RECR. 

Response: If a seller fails to disclose a defect and it is not disclosed elsewhere, the licensee must promptly disclose the information or condition in writing if it constitutes a material adverse fact (§ RL 24.07(2)).

The licensee is required to make this disclosure to all parties in the transaction, even if the client directs the licensee not to disclose. This includes if a party to the transaction were to so indicate, or if a competent licensee would generally recognize that this fact is of such importance that it would affect a reasonable party’s decision to enter into a contract or would affect the party’s decision about the terms of the contract.

A material adverse fact: (1) has a significant adverse affect on the value of the property; (2) significantly reduces the structural integrity of the property; (3) presents a significant health risk to the occupants of the property or; (4) is information that indicates that a party to the transaction is not able to or does not intend to meet their obligations under the contract. If the licensee knows or is aware of information suggesting the possibility of a material adverse fact, § RL 24.07(3) states that the licensee will be practicing competently if the licensee makes timely written disclosure of the information suggesting the material adverse fact to all parties to the transaction, recommends the parties obtain expert assistance to inspect or investigate for the possible material adverse fact, and, if directed by the parties, draft appropriate inspection or investigation contingencies.

Since there is not a state-approved form for a licensee to make this disclosure, the WRA has created the disclosure of material adverse fact letter. A sample material adverse fact disclosure letter is available on page 26 of the October 2009 Legal Update at www.wra.org/LU0910. This document, WRA-DMAF, is also available on zipForm^®. Another helpful resource is the April 2007 Broker Supervision Newsletter, "Material Adverse Facts: Disclose What? Disclose When?"at www.wra.org/online_pubs/broker_supervision/2007/br0704.asp. 

Scenario 5: The seller completed the RECR at the time of the listing. 30 days later, heavy rains left standing water in the basement. 

Response: Wis. Stat. § 709.035 requires the sellers to amend the RECR prior to the acceptance of a contract if the sellers obtain information or become aware of any condition that would change a response on their RECR. The sellers may choose to attach a copy of an inspection report or test results to the RECR to accomplish disclosure for future transactions. If the sellers amend the RECR, it gives the buyer the right to rescind the offer to purchase. In addition, if the seller makes a full disclosure on the RECR, a disclosure by the licensee is not needed. If the seller does not amend the RECR, the broker in the transaction has a duty to disclose material adverse facts to all parties, in writing and in a timely manner.

Scenario 6: The seller has never lived in the home and believes they are not legally required to disclose the basement foundation issues to a buyer. 

Response: Chapter 709 generally applies to all persons who transfer real estate containing one to four dwelling units, including condominium units, time-share property, living quarters in a commercial property, etc. Unless the buyer agrees to waive rights under Chapter 709, all sellers subject to Chapter 709, whether broker-assisted or FSBO, must complete a Chapter 709 RECR or risk rescission of the offer to purchase. Chapter 709 allows the buyer to waive the right to rescind and the right to receive a RECR.

DRL Discipline – Don’t Do This! 

The salesperson listed a property and the sellers accepted an offer. Several days later the salesperson learned there was some amount of water in the basement, and the buyers noted the basement carpet had been removed and the basement floor had been freshly painted. The salesperson verbally informed the buyers that there had been water in the basement, but did not do so in writing.

• LAWS/RULES VIOLATED: By failing to inform the buyer, in writing, that the property had had a build-up of water in the basement, as required by § RL 24.07(2), the salesperson demonstrated incompetency to act in a manner which safeguards the interests of the public.
• PENALTY IMPOSED: The salesperson’s license was reprimanded, and he was required to pay costs of $450 to complete seven hours of education including study of a licensee’s disclosure duties.

Cori Lamont is Director of Brokerage Regulation and Licensing for the WRA.

 Editor’s note: The DRL became the DSPS in 2011. Information above may not be current.