What Makes an Item “Material” for Disclosure?
By Mark J. Bainbridge
Brokers and sellers often struggle with analysis of whether a particular item must be disclosed to the buyer. Obviously, the SPDS sets forth some very specific items that need to be disclosed. But the seller is only required to disclose items they know about. Sometimes a buyer will ask the broker or seller about a particular item of concern. The seller may not view the item as important, so what is the seller’s obligation?
Arizona law is clear that when a purchaser makes inquiry about an item, it is automatically material and must be disclosed. See Hill v. Jones, 151 Ariz. 81, 85, 725 P.2d 1115, 1119 (Ariz. Ct. App. 1986) (duty to disclose arises where the buyer makes inquiry, regardless of whether or not the fact is material); Universal Investment Co. v. Sahara Motor Inn, Inc ., 127 Ariz. 213, 215, 619 P.2d 485, 487 (Ariz. Ct. App. 1980) (inquiry by buyer regarding electrical system would impose duty to disclose).
The disclosure laws are designed to foster the free flow of information from seller to buyer so that the buyer can make an informed decision. The cases cited above are consistent with that notion. Essentially, what the law says is that if the buyer asks about a particular item, the seller is obligated to make the appropriate disclosure. In other words, any question about the materiality of the item is irrelevant once the buyer makes inquiry. The disclosure must be accurate and avoid any omissions. Typically, the way such a dispute will arise will be when the buyer claims to have inquired about an item and later claims that the seller wasn’t truthful or complete in their disclosure. Essentially, this takes the form of a non-disclosure by omission.
I would suggest that the seller make the disclosure in writing to document the disclosure. This can be as simple as an email. Of course, the broker has a duty to disclose material items in writing under Arizona Administrative Code R4-28-1101. Accordingly, for the broker’s protection, such disclosures should always be made in writing.
Obviously, the failure of either the seller or broker to make appropriate disclosures can have dire consequences. In this market especially, buyers can and will sue for non-disclosure of material items. In a non-disclosure lawsuit, buyers will sometimes seek the remedy of rescission. Essentially, this is a request by the buyer that the court order the seller to buy the property back for what was paid plus improvements. In this declining market, no seller wants to do that. That is why accurate disclosure is very important.
Disclosure disputes can also occur in the leasing context. Our firm handles a variety of residential and commercial real estate disclosure disputes. Mark J. Bainbridge is the founder of The Bainbridge Law Firm, L.L.C., a real estate and business litigation firm in Phoenix. Ph: 602-902-1930.