The Colorado Court of Appeals recently decided Gattis v. McNutt, serving as a reminder of sellers’ disclosure obligations in transactions involving residential real property. Sellers of residential property in Colorado generally fill out and provide buyers with Colorado’s standard Seller’s Property Disclosure (“SPD”), the form of which is approved by the Colorado Real Estate Commission and can be accessed here. The SPD contains a lengthy list of components of real property, such as “Structural Conditions,” “Mechanical” and “Environmental Conditions,” and asks sellers to disclose whether they are aware of any issues with respect to each item listed.
Although sellers are not statutorily required to complete the SPD, buyers and their brokers will almost certainly expect sellers to complete and provide the SPD during the due diligence period, and the SPD helpfully contains a fairly thorough list of areas of real property that could contain defects. As a result, sellers of residential property should fill out the SPD to the best of their knowledge as a standardized and convenient means of disclosing known defects.
However, Gattis reiterates that sellers of residential property, unlike sellers of commercial property, have an independent disclosure obligation beyond truthfully providing the information requested by the SPD. Gattis involved the sale of a home which sustained structural damage after the sale due to expansive soils on the property. The buyers and sellers used Colorado’s standard form residential real estate contract, which included an SPD. The sellers were aware of the expansive soils and completed the SPD truthfully, but did not specifically disclose the structural issues to buyers. The buyers sued not on breach of contract, but for a non-disclosure tort based on an independent seller disclosure obligation outside of the purchase contract.
The court allowed the claim, holding that under Colorado law, sellers of residential property have an affirmative duty to disclose all latent defects of which the sellers are aware, regardless of whether the item is included in one of the categories listed in the SPD and regardless of whether the purchase contract requires the sellers to make such dislcosures. Latent defects are defects which are not readily visible, such as a cracked basement wall that has been covered with drywall and painted. Although the Gattis decision may have been based in part on the court’s perception of some bad faith on the seller’s part, if sellers have any doubt as to whether a condition should be disclosed, the best practice in a residential transaction is to disclose the condition in writing to the buyer. The SPD includes an “Other” category for sellers to disclose any other defects of which they are aware, so the SPD is most often the best way for residential sellers to make these disclosures.
In contrast, sellers in commercial property transactions do not have the same duty under Colorado law to disclose latent defects of which they are aware. Under Colorado law, sellers in commercial transactions generally have no legal duty to disclose latent or patent (i.e., readily visible) defects as long as buyers are given the right to inspect the property. In commercial transactions, the old adage “caveat emptor,” or “buyer beware,” generally requires that buyers of commercial real property undertake and rely on their own investigations concerning the property. Nevertheless, commercial sellers must be truthful in any disclosures that they do make, as they could still be liable under Colorado law for misrepresentation and fraud.
Although Colorado law imposes somewhat more relaxed disclosure obligations on sellers of commercial property, commercial sellers should not take unfair advantage of this fact. If a commercial seller knows about a latent defect, in most cases the seller should disclose the defect to the buyer through the purchase contract. Not disclosing the defect would be, at best, a questionable business practice in most cases and, at worst, could be considered fraud in some cases.
As a result, sellers of commercial property should not use Colorado’s form residential purchase contract and should carefully analyze what information to disclose to buyers and how to disclose it. Any seller disclosures should only be made in the seller’s purchase contract with the buyer, and the purchase contract should clearly state that the only statements that the seller is making about the property are those contained in the purchase contract. Any disclosures, statements, representations and warranties not expressed in the purchase contract should be disclaimed. In this manner, sellers of commercial property are usually able to gain better control over exactly what statements they are making about the condition of the property, how those statements are made and the extent to which buyers may rely on them. It is generally good practice for the purchase contract to clearly state that the buyer is relying on its own investigations regarding the property and that, except as provided in the contract, the seller will convey the property to the buyer on an “as-is” basis. For residential transactions involving luxury homes with high values or other complex aspects, some of the foregoing protections could also be used to help protect sellers in those transactions.
This alert is intended to contain only a brief summary of Colorado law and provide a few helpful suggestions. Before undertaking any real estate transaction, sellers of real property should consult with an attorney as they decide whether and how to disclose property conditions to buyers and for assistance in preparing contracts accordingly and in a manner that complies with applicable law.