Should You Require Your Owners to Complete the New Disclosure Forms?

When the AAR created the new Residential Lease Owner’s Property Disclosure Statement, many property managers raised concerns about how their owner clients would respond to any requirement to fill out this document.  There is a fear that listing every single issue the owner knows has ever been a problem on the property may cause a potential renter to be wary of renting the home or that failing to list an issue because of forgetfulness may create automatic liability.  Each broker needs to consider the pros and cons of using the new form and institute a consistent policy in their office to avoid fair housing concerns.  A brief analysis of some of the current concerns of using the form may help guide brokers through this discussion.

While it is true that Arizona state law does not require the use of any specific forms for disclosing information about the property, case law and R4-28-1101B (which governs Realtors), do require a landlord to disclose any known material issues that affect the property.  The balancing act becomes the question of what has to be disclosed, what should be disclosed and what is protected from disclosure.  The analysis is not always easily made and reasonable minds may differ.  The follow up question also then becomes what potential liability the owner and the Realtor have if they fail to disclose something that the court subsequently deems should have been disclosed.  

To begin the analysis, we need to first discuss what the law requires the landlord and his agent to disclose.  The Arizona Residential Landlord and Tenant Act generally govern all residential leases.  The ARLTA requires all essential terms of the lease to be disclosed including the amount of the monthly rent, when and where rent is to be paid, who is responsible for utilities and the formula the landlord uses if they charge separately for utilities.  The ARLTA also requires the disclosure of the name of the person authorized to manage the property, and the owner’s information or the person who is authorized to accept notices, demands, and service of process on behalf of the owner.  Finally, the ARLTA requires the landlord to provide the tenant a copy of the executed lease upon move-in and a move-in form for specifying any existing damages to the property to be filled out by the tenant.  

The next step in the analysis is the discussion of what information is not necessarily required to be disclosed but that really should be disclosed and what information is protected from disclosure.  Stigmatized properties are statutorily protected from disclosure of otherwise material information.  Death in any manner is but one example of protected information.  Once again, in lay man’s terms, this law protects the owner of the property from being required to disclose certain information that would make the home un-rentable.  When determining what should be disclosed, it is interesting to note that the ARLTA does not require the landlord to provide the tenant with a list of all known issues, including repairs.  The ARLTA does, however, impose an obligation of good faith in the performance and enforcement of every action that is covered by the Act.  This means that every landlord and tenant is required to act honestly in their dealings with each other.  It is here that the area of what should be disclosed becomes much grayer, especially when an owner chooses to use a Realtor in the transaction.

The Arizona Legislature crafted a law (ARS 32-2153) that specifically makes it grounds for denial, suspension, or revocation of a license if the Realtor pursued a course of misrepresentation or made false promises in a transaction.  The Department of Real Estate has further addressed this issue in R4-28-1101 which requires a licensee to disclose in writing to all other parties any information that materially or adversely affects the consideration to be paid by any party to the transaction.  Because these rules govern only Realtors and not the owners of the property, the agent has to determine whether they can represent an owner who refuses to disclose information that the Realtor believes is material.  

As more and more owners are simply investors that have never resided on the property, the owner may claim that they are unaware of any issues because they have not lived in the home.  This position may be true if the home was recently purchased, however, the fact is that most purchases occur after the buyer has completed a home inspection by a qualified home inspector.  The report from the inspector puts the owner on notice of material issues that probably must now be disclosed as well as the steps the owner has taken to address the problem.  Additionally, if the owner has used a Realtor to manage the property, the property manager clearly is aware of issues that have been raised during the management of the home.  This knowledge is imputed to the owner and the owner can’t claim ignorance of the repairs when the invoices were paid on their behalf.

Arizona courts have long ruled that the professional standard of care is an appropriate guideline to follow when determining whether a party breaches a legal duty.  The creation and use of the new Disclosure Form for residential rental properties has potentially raised the standard of professional care for all Realtors.  The failure or refusal to use the form may be seen by some judges as an intentional choice that creates a presumption that the landlord knew and refused to disclose a latent defect.  It is this writer’s belief that the argument to use the form or not to use the form has been essentially decided by the very creation of the form by AAR and that its timely use is the safest form of protection for Realtors against potential liability in a suit brought by a disgruntled tenant.  A good rule of thumb is to disclose fully, disclose often, and update the disclosure form with each new tenant.  In closing, brokers must determine for themselves if they are willing to accept the potential liability for undisclosed material facts if their owners refuse to complete the disclosure forms.  They must also consider whether they can protect their company by crafting specific language in their property management agreement that will indemnify them for any breach of the disclosure duty, and whether their E & O policy will cover those specific sets of facts.  The next few years will illuminate how the courts will apply the existence of the form created by a professional association of persons in the industry as well as the consequence for the failure to provide the form to all tenants