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By: James Meseck, Rachel Ryckman, Tracy Zuckett, and Diana Mendez with a special thank you to Savannah "Savvi" Neufer

Colorado, like most states of the union, has adopted a statute that excuses sellers of residential real estate and their brokers from having to disclose certain facts that may psychologically stigmatize real property.  Unfortunately, Colorado does not have a bright line rule as to what psychologically stigmatizing circumstances do not need to be disclosed versus those that must be disclosed.  The controlling Colorado statute on this issue is broad in nature, but has been expanded upon through other statutes and interpretations.  A recent position statement by the Colorado Real Estate Commission suggests that the circumstances psychologically impacting real property should be narrowly defined.  This has created a grey area, instead of assisting sellers and their brokers in navigating the difference between that which should be disclosed and that which is expressly excluded from disclosure.

Generally, Colorado real estate brokers representing a seller have a duty to disclose their actual knowledge of adverse material conditions.  The disclosure duties owed by a seller’s agent or a landlord’s agent are as follows:

(3) (a) A broker acting as a seller's or landlord's agent owes no duty or obligation to the buyer or tenant; except that a broker shall, subject to the limitations of section 38-35.5-101, C.R.S., concerning psychologically impacted property, disclose to any prospective buyer or tenant all adverse material facts actually known by such broker. Such adverse material facts may include but shall not be limited to adverse material facts pertaining to the title and the physical condition of the property, any material defects in the property, and any environmental hazards affecting the property which are required by law to be disclosed.

C.R.S. § 12-61-804(3)(a).  Likewise, Colorado transaction-brokers also must disclose adverse material facts actually known by the broker but must first obtain the seller’s consent before disclosing “(e) Any facts or suspicions regarding circumstances which may psychologically impact or stigmatize any real property pursuant to section 38-35.5-101, C.R.S.;…”.  C.R.S. § 12-61-807(2)(b)(VII) & (3)(e).

C.R.S. § 38-35.5-101 creates an exception to the general rule of disclosure identified for both seller’s agents and transaction-brokers, in that it provides for nondisclosure of information that is psychologically impacting or stigmatizing.  This statutory exception reads as follows:

(1) Facts or suspicions regarding circumstances occurring on a parcel of property which could psychologically impact or stigmatize such property are not material facts subject to a disclosure requirement in a real estate transaction. Such facts or suspicions include, but are not limited to, the following:

(a) That an occupant of real property is, or was at any time suspected to be, infected or has been infected with human immunodeficiency virus (HIV) or diagnosed with acquired immune deficiency syndrome (AIDS), or any other disease which has been determined by medical evidence to be highly unlikely to be transmitted through the occupancy of a dwelling place; or

(b) That the property was the site of a homicide or other felony or of a suicide.

(2) No cause of action shall arise against a real estate broker or salesperson for failing to disclose such circumstance occurring on the property which might psychologically impact or stigmatize such property.

C.R.S. § 38-35.5-101.

The language chosen by the Colorado legislature is very interesting in several important respects.  First, the Colorado legislature expressly declares that facts or suspicions regarding circumstances that could psychologically impact or stigmatize property are not material facts subject to disclosure.  The Colorado general assembly then provides a couple examples of what is considered a psychologically impacting fact.  The first specific example is that an occupant of real property is or was suspected to be infected with HIV, or diagnosed with AIDS or any other disease determined by medical science to be highly unlikely to be transmitted through the occupancy of a dwelling.  The other example is that the subject property was the site of a homicide, felony or suicide.

At first glance, Colorado’s statutory language regarding nondisclosure of psychologically impacting factors seems broad and straight forward.  However, that language becomes unclear when read in conjunction with Colorado Real Estate Commission Position Statement 46 entitled “Commission Position on Broker Disclosures of Adverse Material Facts” (“CP-46”).  CP-46 advises brokers that they need only disclose facts of which the broker has actual knowledge.  CP-46, p. 1.  CP-46 goes on to acknowledge the duty not to disclose circumstances that may psychologically impact or stigmatize real property, but limits the duty to the specific examples identified within the statute.  In CP-46 the Colorado Real Estate Commission announced their interpretation of a broker’s obligation not to disclose facts or suspicions regarding circumstances which may psychologically impact or stigmatize real property to mean “the two examples set forth by law previously discussed: (1) regarding a disease highly unlikely to be transmitted through the occupancy of a dwelling; and (2) when a homicide or other felony, or a suicide occurred on the premises.”  CP-46, p. 2.

CP-46 follows the modern trend in consumer transactions by moving away from a strict construction and application of the maxim caveat emptor (“let the buyer beware”) and toward the maxim caveat venditor (“let the seller beware”).  CP-46 expresses this view several times.  “The Commission believes that disclosure of known adverse material facts is an important requirement that brokers must undertake in order to protect Colorado buyers and sellers.” CP-46, p. 1.  “A broker’s obligation to avoid disclosure of circumstances which may psychologically impact or stigmatize real property should not impede a party’s right to be informed about all known adverse material facts.” CP-46, p. 2.  The Colorado Real Estate Commission urges brokers to have a “robust conversation” with their clients about the disclosure process, with the goal of full disclosure.  The Commission further encourages brokers to obtain client consent to disclose even those facts which fall within the two statutorily defined exceptions of § 38-35.5-101.  CP-46, p. 2-3.

Problems arise when a broker and their client are aware of potentially psychologically impacting facts, but do not want to disclose the information.  Many times, real life fact patterns develop that raise questions about what actually stigmatizes property and what must actually be disclosed to a potential buyer.  The case of  Milliken v. Jacono, provides an excellent illustration of this issue. 96 A.3d 997 (Pa. 2014).  The real property at issue in Milliken had been the sight of a murder-suicide.  The murder-suicide was not disclosed to the buyer by the seller or the seller’s agent even though they were both aware of the incident.  The buyer sued after later learning about the murder-suicide from a neighbor.  The Pennsylvania Supreme Court held that purely psychological stigmas are not material defects of property that sellers must disclose to buyers and, therefore, a failure to disclose the same to the buyer of a house does not constitute fraud, negligent misrepresentation, or a violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.  Id.

The Pennsylvania Supreme Court rejected the buyer’s claims for two reasons relevant to this discussion.  First, the Milliken court found that the murder-suicide did not constitute a material defect in the real property.  Second, the Milliken court wanted to avoid the “Sisyphean task” of defining what traumatizing events would have to be disclosed and which would not.  Id. at 1001.  “One cannot quantify the psychological impact of different genres of murder, or suicide — does a bloodless death by poisoning or overdose create a less significant ‘defect’ than a bloody one from a stabbing or shooting? How would one treat other violent crimes such as rape, assault, home invasion, or child abuse? What if the killings were elsewhere, but the sadistic serial killer lived there? What if satanic rituals were performed in the house?”  Id.

Although the Colorado statute expressly includes the murder-suicide exception to disclosure, the Milliken decision raises questions we in Colorado need to be asking ourselves.   Colorado courts should follow the Milliken rationale in limiting material defects to physical or structural problems.  Material defects should not include traumatizing events that may have occurred in the physical space.  The Colorado statute regarding psychologically impacted property should be read broadly, consistent with its purpose and expressed intent, rather than as suggested by the Colorado Real Estate Commission.  The Colorado Real Estate Commission focuses too narrowly on the specific examples of HIV/AIDS, homicide and suicide.  This is inconsistent with the statutory construction, which specifically contemplates that there may be other factors that psychologically impact property that are not specifically enumerated.  This is clear by the qualifying language immediately preceding those examples which expressly indicates that such psychologically impacting factors “include, but are not limited to, the following:”.  C.R.S. § 38-35.5-101(1).

There are several scenarios, as suggested in Milliken, that could psychologically impact a property but not pose any actual defect. The approach by the Colorado Real Estate Commission casts doubt upon what was an otherwise clear and broad-reaching statute, and causes uncertainty for sellers and brokers of real property.  This invites litigation and greases a slippery slope as to what constitutes a material defect.

So how does a seller and their broker decide what is and what is not psychologically impacting?  How does a transaction broker navigate the nondisclosure requirement without a clear formula to do so?  The unfortunate answer is there is no clear rule.  Sellers and brokers need to take extra care when discussing, identifying and disclosing psychologically impacting or stigmatizing facts, and should consider whether the fact is merely psychologically impacting, or may give rise to a potential material defect.

While the statutory scheme and modern trend in consumer protection tends to protect home buyers, home buyers should not be relieved of taking personal responsibility for their investment choices.  Broadly defining what may psychologically impact real property and narrowly defining material defects promotes public policy goals of maximizing both the use and value of real property.  It will also help honest sellers and real estate agents to navigate the complexities of the law and avoid lawsuits over nondisclosure or disclosure of information that is not required to be disclosed.

Article originally published at Cres Insurance Services.

By James Meseck, Rachel Ryckman and Tracy Zuckett

First Page of Defending CO Real Estate

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