Maryland Bar Bulletin
Publications : Bar Bulletin : August 2005

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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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Publications : Bar Bulletin: August, 2005

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