Transcript Commercial Real Estate: Listing Properties

Property Disclosure:
The Real Estate Professional’s
Guide To Reducing Risk
Marcia L. Russell, DREI
Introduction To Property
Disclosure
Why Property Condition
Disclosure Is Important

NAR statistics regarding lawsuits

E & O statistics regarding lawsuits
Elimination of Caveat Emptor in
most states
 New focus on environmental
problems

Remedies For Failure To
Disclose Defects

Actual damages
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Punitive damages
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Rescission of the transaction
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License suspension or revocation

Board of REALTORS® disciplinary
action
Misrepresentation

Definition

What is a material fact?

Opinion versus material fact
Theories of Legal Liability

Active fraud
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Passive fraud

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Cooper & Co. v. Lester
Naghad v. Century 21 Page One Realty
Negligent misrepresentation
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Hamtil v. J.C. Nichols Real Estate
Theories of Legal Liability

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Negligent non-disclosure
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Amato v. Rathbun Realty
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Gouveia v. Citicorp

Easton v. Strassburger
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Tri-Professional Realty, Inc. v. Hillenburg
Negligent advice

Gerard v. Peterson
Reliance on Statements
Made by Sellers

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When brokers may
be liable for
incorrect
statements made
by sellers
Hoffman v. Connell
Other Bases of
Misrepresentation Liability

Code of Ethics of National
Association of REALTORS®

Licensing Act Liability
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Consumer Protection Laws

Carter v. Gugliuzzi
Duty to Disclose

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Analysis of “who
represents whom”
in a real estate
transaction
Parahoo v. Mancini
Seller Disclosure

Use of property condition disclosure
forms

Benefits of using disclosure forms

Trend toward mandatory disclosure
Property Disclosure Benefits

The seller

The purchaser

The real estate professional
Case Summary on Property
Condition Disclosure Forms
Amyot v. Luchini
 Englehart v. Kramer
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Limiting Liability for
Misrepresentation Claims

Implement procedures designed to
reduce liability

Effective use of property condition
disclosure forms

Involving third-party experts
Limiting Liability for
Misrepresentation Claims

Conduct an inspection and watch for
red flags

Document, document, document

Don’t predict the future

Answer questions carefully
The Role of Home
Inspectors



Value of obtaining a
professional
evaluation of the
property
Pre-listing home
inspection
Wisdom of buyers
conducting their own
inspections
Stigmatized Property,
Megan’s Law &
Neighborhood Safety
Stigmatized Property

Property psychologically
impacted

Event occurred or
suspected to have
occurred on property

No physical impact
Stigmatized Property

Most states have laws
that declare stigmas are
not material facts.

Stigmas include
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Murder

Natural death

Suicide

Assault

Sexual assault
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Felony crimes

AIDS and HIV
AIDS Disclosure

AIDS is a fatal disease

AIDS can be transmitted through
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Sexual contact
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Inoculation with HIV infected blood
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Pregnancy
AIDS Disclosure

Fair housing concerns

HUD position

National Association of REALTORS®
position
Disclosing Other Stigmas
Determine whether the information
is fact or fiction
 Check state laws
 Determine materiality
 Discuss disclosure with the sellers

Disclosing Other Stigmas
Benefits of disclosing other stigmas
 New York Court reviews parties’
duties to disclose house was
haunted


Stambovsky v. Ackley
Megan’s Law
Background
 Federal law mandates community
notification of location of sex
offenders

Megan’s Law

The role of the real estate
professional


Exemption for licensees in some states
Check state laws and licensing
standards for guidelines on disclosure
of sex offenders.
Constitutionality Concerns
Opponents argue sex offenders are
being punished over and over by
publishing their names and location.
 Megan’s Laws declared
unconstitutional in Hawaii and
Connecticut.

Constitutionality Concerns

2003 U.S. Supreme Court Ruling

Connecticut’s Megan’s Law declared
constitutional
Neighborhood Safety

Responding to questions
regarding neighborhood
safety

Property Managementcrimes and dangerous
conditions

Elizondo v. Brightwood
Townhomes
Lead-Based Paint
Disclosure
Lead-Based Paint Disclosure

Purpose of The Lead-Based
Paint Hazard Reduction Act

Involves housing built prior
to 1978

HUD and EPA have issued
joint regulations requiring
the disclosure of known
information on lead-based
paint/hazards in target
housing.
Regulations

The Regulations do not require
testing or removal of lead-based
paint.

If the lead paint is in good condition,
it typically does not pose a problem
Lead Poisoning and Its
Effects on Children and
Others

Major sources of lead exposure

Children between the ages of 18
months & 6 years are at greatest
risk

Testing for lead poisoning
Lead Poisoning and Its
Effects on Children and
Others
Lead-based paint is the most
common cause of lead poisoning in
children.
 Health problems include:

Damage to the brain and nervous
system
 Behavior and learning problems
 Slowed growth
 Hearing problems
 Headaches

Lead Poisoning and Its
Effects on Children and
Others
The best way to determine if a child
has high levels of lead in the blood
is to do a blood test
 Toxic signs

Lead Poisoning in Adults

Lead in drinking
water
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Pregnant women

Symptoms in
adults
Brief History of Lead

The many uses of lead

Efforts to restrict the uses of lead
Summary of Housing Not
Covered

Housing built after 1977

Zero bedroom units

Housing for the elderly or persons with
disabilities

Leases for less than 100 days

Foreclosure sales

Rental housing certified as lead-free
Definitions

Agent

Lead-based paint
hazard
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Housing for the
elderly
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Risk assessment
Lead-based paint

Target housing

Zero bedroom
units

Essential Requirements of
Sellers/Lessors

Prior to ratification of a contract—

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Sellers & lessors must disclose known leadbased paint and/or hazards & provide available
reports to buyers & renters.
Buyers & renters must be given the pamphlet
Protect Your Family From Lead in Your
Home.
Buyers must be given a 10-day opportunity to
conduct an inspection or risk assessment
Lead warning statements
Essential Requirements of
Sellers/Lessors

Prior to ratification of a contract —



Records must be maintained for three
years
Sample contract contingency
Sellers, lessors and real estate agents
share responsibility for compliance
Essential Requirements of
Sellers/Lessors

Buyers must
acknowledge receipt of
the Pamphlet, the
required disclosures,
and the 10-day
opportunity to conduct a
risk assessment or
inspection for the
presence of lead-based
paint
Enforcement

HUD penalties up to $11,000
for each violation

EPA—Civil penalties up to
$11,000 per violation;
Criminal penalties up to
$11,000 per violation

Private action with treble
damages available
Testing

Paint inspection

Risk assessment

Testing methods
New Regulations for
Federally Assisted Housing

HUD-issued rules require notification,
evaluation and reduction of lead-based
paint hazards in housing that receives
federal assistance

Covered properties
Lead-Based Paint
Pre-Renovation Rules

What is covered

Who is covered

What is required

When to give notice
Case Law

EPA imposes first civil penalties
totaling $439,725.

EPA sites building owners for 46
violations of Lead-Based Paint Rules
Large Settlements in
Property Management

Padilla v. Jois Realty

Hiraldo v. Kahn
Mold: A Growing Concern
Mold and How It Affects
Real Estate

Latest environmental scare
Response by the real estate
profession
 Response by the insurance industry
 Debate on health effects of mold
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What Is Mold?
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Type of fungi
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Common indoor molds
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CDC position on heath concerns
What Is Mold?

Type of fungi
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Common indoor molds
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CDC position on heath concerns
CDC: Making Your Home
Less Mold Friendly




Maintain indoor
humidity below
50%
Use air
conditioners and
dehumidifiers
during humid
months
Maintain adequate
ventilation
Add mold
inhibitors to paint
How Molds Reproduce

Food source

Source of moisture

Optimal temperature
Building Materials and
Construction

Tight building
construction

Moisture control
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New building
materials
Common Sources of Indoor
Moisture
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Overflow from sinks
and sewers
Wet and damp areas
Moisture from cooking
and bathing
Humidifiers
Flooding
Plumbing leaks and
broken pipes
Condensation on
improperly insulated
pipes
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Leaking roofs
Clothes dryer not
properly vented
Firewood stored
indoors
Over watering
plants
Older doors that
lack good seals
Cracks or holes in
the building
Toxic Mold—Stachybotrys
Chartarum



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Thrives on
materials high in
cellulose
Can create
mycotoxins
Adverse reactions
to toxic mold
People affected
more than others
Health Effects of Mold
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Allergies
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Infections
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Irritations
Health Effects of Mold
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Common health
effects

Serious health
effects
EPA: A Brief Guide to Mold,
Moisture and Your Home

Guidelines for cleaning up mold
problems
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Guidelines for preventing mold
growth
EPA: A Brief Guide to Mold,
Moisture and Your Home
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Key to mold control is moisture
control
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Moisture and mold control
prevention tips from the Guide
Removing Mold
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Proper equipment
Shut down
systems
Minimize spreading
of spores
Remove visible
mold
Disinfect surface
Mold in My Home: What Do
I Do?
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How can I tell if I have
mold?
Should I test for mold?
General clean-up
procedures
What should I save or toss?
Mold Issues and the Real
Estate Professional
The real estate agent duties
 State law requirements regarding
disclosure of latent defects
 California Code

Mold Issues and the Real
Estate Professional

Risk Reduction Tips
Education
 Visual inspection by concerned party
 Seller disclosure

Crisis in the Insurance
Industry

Multi-million dollar judgments

Debate as to proven health effects

CDC position

Texas Medical Association
Texas—Mold’s Ground Zero

70% of claims in 2001 were in Texas

Mold claims skyrocketed from 1,050
in Q1 of 2000 to 14,706 in Q4 of
2001.
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Mold tax
Texas: Paid Losses for
Water Damage Claims
$800
$700
Sharp increase in water losses were
obviously part of the problem.
$600
$500
$400
$300
$200
$100
$0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*
Source: Texas Department of Insurance
* 2001 (estimate based on Jan. - Mar. data)
The Response from the
Insurance Industry
Homeowners’ insurance becoming
unavailable and unaffordable
 Exclusionary endorsements
 Other options

The Lawsuits
California homeowner awarded
$18.5 million
 Tenants awarded $1 million in
Delaware
 Ed McMahon sued for $20 million
 Multi-million dollar Texas mold
verdict reduced
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Other Environmental
Concerns
Hazardous Materials

Effect on property values

Testing requirements by lenders

Health concerns
The Real Estate
Professional’s Role

Become familiar with common
hazards in market

Recognize potential hazards

Avoid making representations about
environmental condition of property
The Real Estate
Professional’s Role

Environmental contingency clause

Seller property condition forms

Home inspectors
CERCLA and SARA

Creates liability for cleanup
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Innocent landowner’s defense

Potentially responsible parties

Liability of the real estate agent
Environmental Due Diligence

The process of taking all appropriate
and reasonable steps to ascertain
there is no contamination at the
site.
Evaluating Environmental
Hazards

Preliminary Site Assessment

Phase 1 Environmental Assessment
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Phase 2 Environmental Assessment
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Phase 3 Environmental Assessment
De Minimis Settlement

The EPA will consider a de minimus
settlement with innocent landowners
that would limit the amount that
must be contributed for the cleanup.

Factors considered by EPA to
establish de minimus settlement.
Asbestos
Naturally occurring silicate mineral
 Link to cancer
 Use in construction materials
 When asbestos is dangerous
 Litigation update

Common Places Where
Asbestos Is Found

Vinyl flooring material

Patching compounds & textured paint
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Ceiling tiles & sprayed ceilings
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Stove & furnace insulation
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Door gaskets
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Pipe insulation & wall/ceiling insulation
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In some appliances, roof shingles, &
siding
Removal of Asbestos

Damaged asbestos should be
repaired, enclosed or removed by a
trained professional.

EPA publication Asbestos in the
Home: A Homeowner’s Guide
Radon

Radon is a naturally occurring
odorless, tasteless radioactive gas

Radon is the second leading cause
of lung cancer after cigarette
smoking

EPA estimates that 1 out of 15
homes has radon levels in excess
of its guidelines
Radon

Testing for radon
Easy and affordable
 Costs
 Charcoal canister and alpha tract
detector
 Factors to consider when testing


Real estate transactions and radon
Radon

Radon reduction methods
Increase natural ventilation
 Seal cracks and openings
 Seal floors in basements
 Naturally ventilate the crawl space
 Filter the water through a bed of
granular activated carbon

Radon

The EPA Guidelines

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If buying or selling a home, have it tested.
If buying a new home, ask if radonresistant construction features were used
and if the home has been tested.
Fix the home if the radon level is 4 Pico
Curies per liter or higher.
Radon levels of less that 4 pCi/L still pose a
risk and in many cases may be reduced.
Underground Storage Tanks

Definition

EPA regulation under RCRA

EPA updated regulations

Exempt tanks
Underground Storage Tanks

The role of the real estate
professional

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Red flags
Leaking underground storage tanks
Waste Disposal Sites

Golf courses and
office buildings are
being constructed
on landfill sites.

Impact on the real
estate industry
Noise

Noises that are known
should be disclosed to
purchasers

Noise is a major
source of stress

Alexander v. McKnight