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To Disclose or Not To Disclose - That is the Question John Seligman Voula T. Katsoris e-mail this article URL At first sight, a dramatic shift of the burden of disclosure to sellers of residential real property seems to have taken place. On November 13, 2001, Governor Pataki signed into law the Property Condition Disclosure Act (the "PCDA") (effective for all contracts entered into from and after March 1, 2002). The PCDA adds a new article 14 to the Real Property Law, which requires every seller of residential real property (which is defined as real property improved by a one-to-four-family dwelling used or occupied, or intended to be used or occupied, wholly or partly, as the home or residence of one or more persons, but excludes (i) condominiums, (ii) cooperatives, (iii) unimproved real property and (iv) property in a homeowners' association that is not owned in fee simple by the seller) to complete and deliver to his or her buyer, or the buyer's agent, prior to the buyer's execution of a binding contract of sale, a signed, completed statutory form of disclosure statement in which the seller makes required representations as to the real property based on the seller's actual knowledge of the same. The PCDA was enacted so that the disclosure statement could supplement information provided by professional inspections and tests and provide sellers and buyers with a better basis for negotiation of a purchase and sale agreement. The disclosure statement consists of 48 questions covering general, structural, mechanical and environmental information on the real property in question. Sellers must answer each of the questions with a response of "yes", "no", "unknown," or "not applicable" and a copy of the statement must be attached to the contract of sale. The PCDA expressly provides that sellers are not required to undertake or provide for any investigation or inspection of the property or any public records in connection with the giving of the disclosure statement, as sellers must respond based upon their actual knowledge only. As a matter of fact, the PCDA warns prospective purchasers that the disclosure statement is not a warranty of any kind by the seller and should not be treated as a substitute for the purchaser's own independent inspections and tests of the property or the purchaser's own inspections of the public records pertaining to the property. The following provides a brief summary of the PCDA's effects on negotiations between sellers and buyers of residential real property. First, it is important to note that under the PCDA a seller is not forced to provide a disclosure statement. If a seller fails to provide a purchaser with a disclosure statement, the purchaser is simply entitled to receive a $500 credit at closing. There is no further liability for a seller's non-compliance. The only issue here is whether the unwillingness of the seller to provide a disclosure statement will cause the purchaser to wonder whether a crucial defect with the property exists. Giving the seller the option to buy out of the disclosure requirement for $500 seems like a small price to pay for avoiding potential liability that could be many times more costly. One provision of the PCDA specifically provides that a seller who provides a disclosure statement could incur liability in two ways. First, where the statement contains a knowingly false or incomplete statements by the seller and, second, where a seller fails to provide the purchaser with a revised disclosure after acquiring knowledge that renders a previously provided disclosure statement materially inaccurate. (In such a case, the seller must deliver a revised disclosure statement to the buyer as soon as practicable, but in no event after the transfer of title from the seller to the buyer or occupancy by the buyer, whichever date is earlier.) A willful breach of either of these obligations results in the seller being liable for the actual (although not punitive) damages suffered by the purchaser, in addition to any other remedies at law, in statute or in equity. Second, it should be noted that the PCDA does not state that its protections cannot be waived. Therefore, with proper disclosure and drafting, the parties can waive all the effects of the statute. A clause in the contract of sale could thus be drafted in which the seller and buyer waive the requirements of the disclosure statement as well as the $500 credit to buyer. What is the broker's responsibility, if any, under the PCDA? According to Section 466, an agent representing a seller has the duty to "timely" inform the seller of the seller's obligations under the PCDA. An agent representing a buyer has the same duty to inform the buyer, but before the buyer signs a binding contract. Once the agent has performed these duties, the agent has no liability to any party under the PCDA. In summary, sellers now have three options available to them when negotiating a contract of sale for residential real property. First, sellers can provide the disclosure statement pursuant to the PCDA based on their actual knowledge of the condition of the real property in question. In this scenario, sellers face liability only if the statement contains a knowingly false or incomplete statement or where a seller fails to provide the purchaser with a revised disclosure when necessary. Second, sellers can opt out of the disclosure statement requirement by crediting the buyer with $500 at closing. Third, the seller and buyer can agree in the contract of sale to waive the requirements of the disclosure statement and of the $500 credit to buyer. Therefore, even though the PCDA may be viewed by some as a revolutionary departure from the rule of "caveat emptor", its benefits of increasing the ability of buyers to obtain information concerning a home purchase and sale are questionable, and have yet to be tested by time. Our standard form of contract of sale will reflect the sellers' options under the PCDA. Copies of the disclosure statement required by the PCDA are available upon request. Please do not hesitate to contact us with any questions regarding this new requirement. © 2002 Davis & Gilbert LLP       Davis & Gilbert LLP • 1740 Broadway • New York, NY 10019 tel: 212.468.4800 • fax: 212.468.4888   Privacy Policy • Terms & Conditions