Disputes often arise between parties to a real estate purchase contract when the purchaser belatedly discovers some type of defect within the property. In such cases, the outcome of the litigation often hinges upon the question as to whether the prior owner had a duty to disclose the defect to the purchaser prior to the execution of the sale. As a result, an emerging body of law has developed concerning the scope of the seller’s disclosure obligations.

In Coldwell Banker Whiteside Assos. v. Ryan Equity Partners, Ltd., 181 S.W.3d 879 (Tex. App. 2006), the Texas Court of Appeals was recently asked to further define the seller’s disclosure obligations under a real estate contract. In that case, the purchase contract for the sale of an apartment building complex state that, to the best of the seller’s knowledge, the seller was not aware of any “material defects” to the property. After the sale was completed, the purchaser discovered that the property was not zoned for multifamily housing use. Ultimately, the city required the purchaser to tear down the complex. The purchaser then filed suit against the seller for breach of contract, breach of the duty of good faith, fraud, and breach of fiduciary duty.

The court ruled that the property’s nonconformance to applicable zoning laws did not constitute a “material defect” requiring disclosure under the real estate contract. Id. at 885-86. In reaching this conclusion, the court noted that the term “material defect” was not defined in the purchase contract or by statute. Under general principles of contract interpretation, the words were to be given their plain and ordinary meaning. Id. at 886. The word “defect” has been defined as an “irregularity in a surface or a structure that spoils the appearance or causes weakness or failure.” Id. (quoting Webster’s Third New International Dictionary 591 (1981)). This definition “addresses tangible aspects of the Property, whether its physical appearance or its physical structure.” 181 S.W.3d at 886. The court found that this dictionary reference to tangible aspects of the property accords with plain understanding and usage, as people refer to something as “defective” when it is “blemished, broken, deficient, or imperfect in some physical sense.”

Zoning laws, on the other hand, do not relate to the physical condition of the property. Instead, zoning ordinances regulate the use of the property. As a result, the court concluded that the legal status of the apartment complex pursuant to a zoning ordinance could not be a “material defect” requiring disclosure under the real estate purchase contract.

In addition, the court found that the seller had no general duty of disclosure outside the terms of the purchase contract. In this regard, the court emphasized that a general principle of contract law is that the parties to a contract are presumed to know and take into consideration the laws affecting the matters about which they contracted. Because the purchaser was presumed to know the law affecting the apartment building complex, the seller had no duty to disclose and explain the law to him. Even so, the court left open the question as to whether the seller might have had a duty to disclose the property’s zoned status if the purchaser was not a sophisticated commercial entity but, rather, a simple consumer.