Disclosure addendums are a relatively recent development in the real estate industry. For years, real estate agents have used their client’s contract as a risk management vehicle for themselves. For instance, most real estate sale forms contain clauses in which the parties waive reliance on the statements of the agents. Sales forms often contain warnings of legal consequences – for instance: “Buyer’s election to waive the right of inspection is solely the Buyer’s decision and at the Buyer’s own risk.” Acknowledgement of legal rights, like the seller’s obligation to make a property disclosure and the buyer’s right to revoke their offer under state property disclosure statutes, are common as well.
Such warnings, waivers, disclosures and statements of consequences are thought to protect the agents from both misrepresentation and lack of diligence claims by buyers and sellers. For example, requiring the parties to acknowledge their rights and obligations under the state property disclosure laws is thought to protect agents who fail to explain these rights and obligations to their clients. Statements of consequences, on the other hand, are thought to undermine the client’s reliance on the diligence of their agent. Waivers are similarly aimed at the reasonableness of the client’s reliance on the statements, or lack of statements, by the agent. Such form contract tactics are common in sales industries where the transaction is conducted on forms provided by the salesperson.
Disclosure addendums are a natural extension of the use of the client’s contract for the agent’s risk management. As the number of potential problems in real estate sales has increased to include everything from the type of siding to the type of smoke alarms, brokers have responded with their own homemade addendums chock full of warnings, disclosures, consequence statements, waivers and the like. Some of these addendums run to several pages. It is not uncommon today to see competing multi-page addendums from both brokers appended to deals and signed by all parties.
Disclosure addendums, because they are attached to all transactions, have no real bearing on the specific transaction to which they are attached. Although universally presented as mutual agreement addendums, they are in fact single party addendums. That is the case because they do not propose additional substantive terms or seek to modify the parties’ agreement. Disclosure addendums, because they contain only general statements applicable to all property, rather than statements specific to the property actually purchased, have no real affect on agent liability.
Agent liability in a real estate transaction flows either from misrepresenting the property or failing to protect the client’s interests. A general statement, for instance, that houses can sometimes contain mold that may be harmful to humans, says nothing about the condition of any specific property. An agent who misses telltale signs of mold while showing a house, or fails to disclose that the seller had mold cleaned and painted over, will not be helped by a general warning to buyers about mold contained in a Disclosure Addendum. Their liability, with or without the addendum, will be based on what they knew or should have known about this particular piece of property.
The effect (actually lack of effect) of Disclosure Addendums on professional malpractice claims is even worse. Diligence is about using training and knowledge to protect and advance the client’s interest. An addendum warning generally about mold and siding and smoke alarms and asbestos and radon and oil tanks and wells and insulation and so on serves to warn the agents as much as it serves to warn the buyer or seller. If the buyer should be unfortunate enough to purchase a home infested with mold or having “illegal alarms” or defective siding, or asbestos or any thing warned of in the Disclosure Addendum, the agents will have to explain what steps they took, given the potential risk cited in the addendum (e.g., suggested inspections, reported of similar incidents in the area, were diligent in listing the property, called the buyer’s attention to “red flags” during showing, etc.).
As if the effectiveness, or lack thereof, and even the danger to agents created by Disclosure Addendums were not enough, they also can create problems in formation of the contract. Buyers are often, as they should be, reluctant to sign Disclosure Addendums. Deals may then flounder, not on terms of the transaction proposed for the benefit of the buyer or seller, but on those proposed for the benefit of the agents.
There is little the individual agent can do about Disclosure Addendums. The practice is well established and brokers are often willing to forgo transactions if a buyer is unwilling to sign the company’s addendum. Although Disclosure Addendums are usually legally ineffective, a real estate licensee cannot offer an opinion on their legal effectiveness without risking the unlicensed practice of law. For that reason, most agents just present the things with a vague explanation that the other company “requires” the addendum.
Hopefully, Disclosure Addendums will become a thing of the past as the industry matures into a professional services industry and leaves its “sales” origin behind. In a professional services industry, client risk management is done between the professional and their client in private and is never made part of the client’s business with third- parties. Providing general information and even warnings to one’s own client in private is common in the provision of professional services.
Eventually, buyer and seller advisories, client information letters, engagement letters, diligence checklists and the like will be developed to manage client risk. Disclosure will then return to being deal specific. In the meantime, about all an agent can do is be aware that Disclosure Addendums are not good risk management tools because they are ineffective, have the potential to increase agent risk, and may interfere with bringing the parties together.
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