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Caveat Emptor Eroding in Maryland
By Aimee Bader
As of October 1, 2005, a seller of single-family residential
real property will be required by statute to disclose certain latent defects
to buyers, amending the current law and further eroding in Maryland the common
law of caveat emptor – let the buyer beware.
The current law already in effect in Maryland gives a seller
the choice of providing to a buyer either a “Residential Property Disclosure
Statement”
or a “Residential Property Disclaimer Statement.” Both statements
are promulgated and adopted in a regulation by the Maryland Real Estate Commission.
If a seller elects to disclose defects or other information about the condition
of the property actually known by them, they complete the Disclosure that includes
18 questions pertaining to things such as water and sewer systems, structural
systems, plumbing, electrical, heating, infestation of wood-destroying insects
and any other material defects affecting the physical condition of the property.
If the seller elects not to disclose, he or she opts out
by using the Disclaimer Statement. In the Disclaimer, the seller makes no representations
or warranties as to the condition of the real property or any improvements
and the purchaser is receiving the real property “as is,”
with all defects that may exist, except as otherwise provided in the contract
of sale.
When the state’s present law went into effect in 1994,
Maryland became one of roughly two-thirds of the states with a statute requiring
some level of disclosure and/or disclaimer in the sale of real property. The
types of disclosure statements vary dramatically nationwide. For example, Arizona’s
disclosure statement asks sellers if they have seen any scorpions, bee swarms,
owls or rabid animals on their property. Utah and many other state disclosures
contain questions pertaining to mold. A minority of state forms asks a seller
to indicate the zoning classification, zoning violations and additions or conversions
possibly made without building permits to the property.
There is, however, virtually no case law interpreting disclosure
statutes in Maryland or elsewhere. Prior to the enactment of these statutes,
the courts turned to the evolving common law of caveat emptor to ascertain
a seller’s duty to disclose information to a buyer. While the origin
of the Latin phrase caveat emptor has been traced by scholars to Roman law,
the English court’s adaptation of it to a variety of scenarios in which
sellers seek to limit their liability to buyers became a part of the common
law established in the United States. Now, depending on the jurisdiction, caveat
emptor may still be the rule, be entirely abandoned or be partially relevant.
Before these statutes were enacted, a buyer would file suit
against a seller for property defects oftentimes under theories of misrepresentation,
concealment and failure to disclose known defects. Lawsuits upheld under these
theories were not only brought against the sellers but also the brokers because
of their duties to the public. The code of ethics of many real estate associations
and ethics rules promulgated and adopted by the Maryland Real Estate Commission
require all real estate licensees to protect the public against fraud, misrepresentation
or unethical practices in the real estate field. A licensee is further required
to “make a reasonable effort to ascertain all material facts concerning
every property…in order to fulfill the obligation to avoid error, exaggeration,
misrepresentation, or concealment of material facts.”
The increasing number of cases nationwide holding real estate
brokers liable for property defects led the real estate industry to push for
legislation requiring the sellers to make these disclosures, instead of putting
the onus on the real estate industry.
When the new law becomes effective in October 2005, the seller
will no longer have the opt-out provision previously available under the Disclaimer
Statement. The new Disclaimer Statement requires the seller to disclose any
latent defects not visible during an inspection that pose a direct threat to
the health or safety of the buyer or occupant. Similarly, when amended, the
new Disclosure shall add latent defects to the checklist of items to be disclosed
by the seller.
How Maryland courts will determine what elements constitute
a “known, latent, material defect that pose a health or safety issue” and
to what degree the common law of caveat emptor has been abrogated by statute
is yet to be seen.
Governor Robert L. Ehrlich, Jr., enacted the legislation
originating in both houses of the General Assembly that would amend Section §10-702
of the Real Property Article, Annotated Code of Maryland. Ehrlich signed Senate
Bill 192 on April 26, 2005, and House Bill 412 on May 26, 2005, with almost
verbatim language – the House Bill will control as it was signed into
effect later.
Aimee Bader is a principal with the Law Office of Aimee M. Bader, LLC,
and is an Associate Broker with Coldwell Banker Residential Brokerage and
Coldwell Banker Commercial NRT in Baltimore.
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