Effective October 1, 2005, Maryland law requires a seller of single family residential real property to disclose specified information about latent defects to a purchaser before entering into a sales contract. With this radical change in Maryland law, caveat emptor is dead.

The complete maxim, caveat emptor, qui ignorare non debuit quod jus alienum emit, translates “let a purchaser, who ought not to be ignorant of the amount and nature of the interest which he is about to buy, exercise proper caution.”

Historically, home sellers had no obligation to mention property defects to buyers so long as the sellers resisted the temptation to actually conceal latent defects or to lie about the condition of the property. Absent some affirmative act, like painting over water stains from an unrepaired basement leak, sellers could simply provide in the sales contract that the transaction was “as is” to avoid liability for the physical condition of the property.

Following a national shift that had its roots in the consumer protection trends of the 1960s, and advanced by the real estate brokerage industry after courts began holding brokers liable for seller errors and omissions, Maryland adopted statutorily mandated disclaimer and disclosure statements. Under the current law, a seller of a used single family home has the option of giving a buyer, before executing a contract of sale, a disclaimer statement indicating that the property is being sold “as is”, or giving that buyer a disclosure statement about the condition of the property utilizing a checklist style form issued by the Maryland Real Estate Commission. That disclosure statement includes information, of which the seller has actual knowledge, about: water and sewer systems; insulation; structural systems; plumbing, electrical, heating and air conditioning systems; infestation of wood destroying insects; land use matters; hazardous or regulated materials; whether a smoke detector provides an alarm in the event of a power outage; and, any other material defects about which the seller knows.

But, under the newly enacted law, a seller may not simply execute the current regulatory disclaimer statement indicating the property is being sold “as is”, but rather the seller must disclose specified information about ‘latent defects’ to a purchaser before entering into a sales contract.

For the purposes of this new disclosure requirement,Annotated Code of Maryland, Real Property Article, Section 10-702, provides ‘latent defects’ means “material defects in real property or an improvement … that: (1) a purchaser would not reasonably be expected to ascertain or observe by a careful visual inspection of the real property; and (2) would pose a direct threat to the health or safety of: (i) the purchaser; or (ii) an occupant of the real property …”

The new statutorily mandated disclosure must be made to a buyer using a revision to the existing Standardized Residential Property Disclosure And Disclaimer Form, yet to be issued by the Real Estate Commission. At the time the disclosure is delivered, each buyer must date and sign a written acknowledgment of receipt, which must be included in or attached to the contract of sale.

The new disclosure does not apply to the initial sale of single family residential property; nor does it apply to foreclosure sales or other court ordered sales. But beyond the very narrow exceptions listed in the law, these new seller’s obligations to a buyer “may not be waived in the contract of sale and any attempted waiver is void.” That is, very significantly, the parties can not agree among themselves that the sale is simply, “as is”.

Also of great import is that a buyer who does not receive the “disclaimer statement on or before entering into the contract of sale has the unconditional right, upon written notice … to rescind the contract of sale at any time before the receipt” of the disclaimer statement or within 5 days following receipt.

In the debate over who benefits from this radical change from caveat emptor to ‘seller tell all’ the legislature was told, by the real estate brokerage industry, that the obligations of disclosure already existed in Maryland law. The argument was made that the 1976 amendments expanding theMaryland Consumer Protection Act to cover consumer real estate transactions, created a private cause of action for the failure to state a material fact that “deceives or tends to deceive” and may constitute a deceptive practice. But, no Maryland appellate court has yet applied the Act in that manner.

The real estate brokerage industry further lobbied Senate Bill 05-192 arguing that its real estate agent members were, by the Code of Ethics adopted by the Real Estate Commission, required to “to ascertain all material facts concerning every property for the licensee accepts the agency, in order to fulfill the obligation to avoid error, exaggeration, misrepresentation, or concealment of material facts.” It is clear that real estate brokers were the driving force behind this new law and that that industry is the beneficiary of the enactment to the detriment of home sellers.

Despite that the new disclosure requirement can not be waived, a seller of single family residential real property can still shield himself from post settlement claims from a buyer with a carefully drafted contract of sale. Unfortunately the real estate brokerage industry forms in common usage do not contain a provision to shield the seller from continuing liability.

One possibility for limiting seller liability occasioned by the new disclosure requirement is the application of the Doctrine of Merger that provides that upon acceptance of the deed, a contract of sale for real property becomes merged into the deed consummating the transaction, and the contract does not survive settlement such that it could be separately enforced. Sellers may now want to include appropriate language in contracts of sale, making clear that their contract (including any representations associated with disclosure of latent defects) merges into the deed at settlement and that the buyer will have no right to bring an action against the seller arising out of the transaction after settlement.

In conclusion, sellers of single family residential real property, entering into a sales contract after October 1, 2005, must be aware that they must disclose information about latent defects to a purchaser, utilizing a yet to be released format, before entering into that contract. And given that the new disclosure requirement can not be waived, a carefully drafted contract form is more important than ever in shielding a seller from claims of a buyer arising after settlement.