Buyers Beware: Statutes Shield Real Estate Brokers and Sellers Who Do Not Disclose that Properties are Psychologically Tainted

Real estate sellers and their brokers were traditionally not required to disclose any information about property because the controlling doctrine was caveat emptor . The protection provided by that doctrine has gradually been eroded by judicial application of the theory of common law fraud, under which sellers are required to disclose conditions that the buyer could not be expected to discover by a diligent inspection, but which the seller knows or should know would materially affect the value of the property to the buyer. That disclosure obligation has been expanded in some states to the listing broker and the selling broker. In response, brokers have made a concerted effort to shift the burden onto sellers by enacting state statutes requiring sellers to make written disclosures about property conditions.

In response to the uncertainty created by case law and the Fair Housing Act, twenty-nine states and the District of Columbia passed laws to provide protection for brokers and sellers involved with psychologically impacted property. California began the trend in 1987. The NAR subsequently adopted a policy to encourage states to pass such legislation and drafted model legislation that declared psychological impacts "not material facts."' But these statutes are not a panacea. The stigmatizing events are not uniform. Some statutes are overly complex. Some statutes provide procedures that allow buyers to inquire about stigmatizing events if the buyer follows the proper procedure. Not all protect both the brokers and sellers. None makes clear whether the brokers should or can inform buyers about the existence of these shield laws, which places diligent brokers in an awkward position. This article will review and contrast the current statutes. A chart is included as an appendix to aid the reader in obtaining an overview of the law. Then, following an analysis of the statutes' unintended negative effects, a solution is proposed.