Disclosure of Material Defects and Adverse Facts in Colorado – Brokers Caught in the Middle

Our Colorado Real Estate and Failure to Disclose Lawyers Discuss Broker Disclosure Issues

So, your client has told you about his previous use of his basement to grow marijuana. Upon finding a buyer, he does not want to disclose this and does not want you to disclose this fact either. But, he may be only looking at the civil liability side of the disclosure issue. You want to protect your license and thus your livelihood and ponder the question – “do you have a higher standard of disclosure than your client”? The answer is, yes, you do and if you want to keep your broker license, then you should disclose this fact or remove yourself from the transaction.

If a Colorado real estate broker has knowledge of any adverse fact about the property being offered to the public for sale, he or she must disclose it. Repercussions for not disclosing an adverse fact have damning consequences for a broker, the Colorado Real Estate Commission has the power to punish brokers by fining, public reprimand, requiring additional CE, requiring additional supervision, suspension or even revocation of a Licensee’s license. Separately, a broker may be sued civilly under the lower standard of failure to disclose a known latent material defect, the same standard that any seller is subject to which prevents sellers from defrauding buyers.

To keep you from appearing before the Real Estate Commission to defend your license, below are a few things to think about when considering disclosures and adverse facts.

What is an adverse fact?

An adverse fact is anything, which in the eyes of the buyer, reduces a property’s value. It could affect the property’s physical condition, such as the structural integrity, or it could be an environmental hazard that presents a health risk to the future occupants. But it could be much less serious such as a condition that previously existed but which the seller believes has been resolved. Or even conditions outside of the property itself.

For example, a seller may have grown a few marijuana plants in the basement but has not done so in several months or years before placing the home on the market.  If he tells you this, it is an adverse fact. Because when the buyer buys the home and subsequently finishes the basement into a bedroom for her young child and learns from the neighbors that the seller used to grow marijuana in the basement, she will be upset. She may consider this a fact, that had she known before purchase, she would have paid less or not purchased the house at all. Thus, if she makes a complaint to the Commission, the Commission will see this undisclosed fact by the broker (assuming knowledge on the part of the broker) as an adverse fact. 

When do brokers need to disclose an adverse fact?

Brokers are compelled by law to disclose any known adverse fact – meaning, if a broker gains knowledge of the existence of the potentially adverse fact then he or she must disclose it. A broker might become aware of an adverse fact because the seller told them or because he or she saw it with his or her own eyes. If a broker has no knowledge then he or she cannot be held responsible for the disclosure. 

Other possible remedies to dealing with adverse facts

Sometimes a broker may be stuck between a rock and, well, an upset client. If a client demands that the broker not disclose the adverse fact, a broker can:

1. Convince the client that disclosure on the part of the client/seller is better for the client, as litigation never arrives at a convenient time, nor is it convenient or inexpensive (even if you prevail).
2. Disclose the adverse fact against the client’s wishes. A broker has this right in the Listing Agreement because a disclosure is the only way for a broker to protect himself of herself.
3. Terminate the Listing Agreement allowing a new broker to step in who has no knowledge or duty to discover the adverse fact.

While it may be tempting to turn a blind eye to adverse facts, or pretend a client didn’t tell you about an existing adverse fact, which is not a known latent material defect, it’s never worth doing so, especially with such long lasting repercussions for the broker’s career, livelihood and professional reputation.

For brokers who would like further information on adverse material facts and real estate disclosure, contact us at 303-688-0944 to request an assessment with one of our real estate attorneys at Robinson & Henry, P.C.