In an interesting paradox, residential property disclosures by sellers are required in most states, while commercial property disclosures are not. However, Florida statutes say that brokers have an obligation to disclose latent defects in a residential property, while a seller has no such obligation if the buyer intends to buy the residential property for commercial use, such as rental.

This makes brokers legally responsible to make disclosures on properties they don't even occupy, a tricky situation when dealing with the seller, who may benefit from withholding such information.

With a third of homes sold in the U.S. last year as second homes or investments, this is an issue that Realtors need to know about -- do they have more responsibility to disclose latent defects than sellers?

Explains Florida real estate attorney Hank Sorenson, "In Florida, residential sellers have an obligation to disclose known defects to a buyer, under Florida law. Chapter 475 governs real estate brokerage operations under Florida statutes. It says brokers have an obligation to disclose defects in residential property, so that statute defines residential property as a land with existing improvements, with four units or less, a quadraplex, duplex, or it can be vacant land that is intended for improvements of four units or less, or agricultural property of ten acres or less. They have to disclose latent defects."

In 1985 there was a case in Florida called Johnson v. Davis, explains Sorenson. "That court case and its progeny, said that a seller and a real estate broker have an obligation to disclose latent defects, and other cases said this also applies to a broker, so Chapter 475 was amended to make it a statutory duty. So, in 2003 there is a Agrobin v. Botanica Development case which says that if you are a seller, your disclosure is governed by the purpose of the purchase. If you are using a property for rental or investment, the seller isn't under the same obligation or common law duty of disclosure. A broker still has statutory duties to make disclosures, and no case has extended it to residential properties. Court cases cannot override statutes, so now brokers have greater disclosure obligation than sellers!"

What can be done?

"What I recommend, is to include in listing agreements, a statement that the seller is permitting the broker to forward all known facts and latent defects to the buyer's broker regardless of the purpose of the purchase," suggests Sorenson. "Put it into listing agreements, and they will authorize the broker to forward that information, and if the broker didn't tell him, the seller is authorizing the broker to forward regardless of the purpose of the purchase."

What's interesting is that in Florida, home inspection requires no more than an occupational license. "You need a permit to fix it," says Sorenson. "When the Agrobin case came out, it wasn't talked about in the brokerage community. I can see a seller getting angry with the broker for forwarding information that may tank a sale, because under commercial property statutes, the seller isn't obligated to tell you a thing. The reason it's different in a commercial context is the assumption that the buyers are sophisticated purchasers, and we the government have to protect them if they aren't, and now the courts have said even if it is zoned residential, we will superimpose the sophistication of investment. Don't invest as a hobby and we are going to assume you have that sophistication. If you have a vacation home, if you have it one month a year, and give it to a property managers the rest of the time, the seller isn't' obligated to tell me a thing about the condition of the property."

It's an interesting paradox -- brokers have greater obligations on residential properties than sellers. "A person that doesn't live in the property has a greater disclosure obligation," says an incredulous Sorenson. "It is court cases that are deciding common law, and that conflicts with brokerage statutes."

Can anything else be done? "A modification that could be done, is a new definition of residential property, as any property that is zoned residential that isn't being purchased for a commercial purpose, but there are still problems. If you buy a duplex and rent out the other half -- how do you get a court to say it's all residential or commercial? The court would look like an idiot because the commercial analysis applies to only one-half of the property that was deeded as one property. There may be a case that decides the issue some day."

Published: March 22, 2005

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