Disclosure Rules Texas Real Estate Agents Need to Know

Real estate agents in Texas operate under a strict set of disclosure obligations to ensure transparency and protect both buyers and sellers. These requirements are outlined in The Real Estate License Act (TRELA) and aim to prevent fraud and maintain ethical standards within the industry.

Failure to comply with disclosure requirements can have profound consequences for real estate agents. Here’s what agents need to know.

Key Disclosure Obligations

Material Facts: Agents have a duty to disclose any material facts about a property that could significantly influence a buyer’s decision. Material facts encompass a wide range of information, including:

• Property Defects: Structural issues, water damage, mold, pest infestations, and other known problems.
• Environmental Hazards: Lead paint, asbestos, radon, and proximity to environmental contaminants.
• Legal Issues: Zoning restrictions, easements, and any pending legal actions affecting the property.
• Neighborhood Issues: Existence of utility districts (water, sewer, and electricity), proximity to nuisances (airports or highways), flood plains, and planned development projects.

Agency Relationships: Agents must disclose their agency relationships to all parties involved in a transaction. This includes whether they represent the seller or the buyer. Additional disclosures are required if the brokerage represents both parties as an intermediary. Further, all agents must deliver a completed Information About Brokerage Services Notice at the time of their first substantive communication about a property with any person.

Conflicts of Interest: If any of the following are party to a transaction, that fact must be disclosed in writing prior to execution of the contract:

• the agent,
• the agent’s spouse, parent or child,
• a business entity in which the agent owns more than a 10 percent interest, or
• a trust where the agent is acting as trustee or where the agent, agent’s spouse, parent, or child is a beneficiary.

Material Misrepresentations: Agents are prohibited from making false or misleading statements about a property. This includes exaggerating details, such as square footage or amenities, withholding information, or actively concealing defects.

Disclosures Regarding Property Condition: Texas Property Code requires most residential sellers to complete a Seller’s Disclosure Notice, which outlines the property’s condition. While agents are not responsible for completing this form, they must ensure that the seller provides it to the buyer and advise the buyer to refer to the contract that sets out the consequences if the seller fails to provide it.

Consequences of Non-Disclosure

Administrative Action: As the administrative agency that regulates the licenses of Texas real estate practitioners, the Texas Real Estate Commission (TREC) has the statutory power to discipline license holders who have violated its statutes or rules. Depending on whether the failure to disclose was intentional or not, TREC can also invoke its statute against agent negligence for enforcement purposes. TREC’s discipline options include revocation, suspension—including probated revocation or suspension and issuing administrative penalties. Those penalties are issued based on a penalty matrix established by rule. With one limited exception, TREC cannot award damages to a complainant. So, it is likely that if the buyer or seller suffers a loss due to the agent’s failure, a civil lawsuit will be filed against the agent, either in addition to or in lieu of a TREC complaint.

Civil Lawsuits: The causes of action for a civil lawsuit for an agent’s failure to disclose are based on legal grounds other than just TREC statutes and rules. Lawsuits against real estate agents often arise due to allegations of negligence, misrepresentation, or failure to meet professional standards where the plaintiffs allege they have suffered financial loss. Civil lawsuits against real estate agents and brokers frequently stem from these leading causes of action:

• Failure to Disclose Material Facts: Real estate agents have a legal duty to disclose all known material facts about a property that could affect a buyer’s decision. Common allegations include concealing defects, failure to inform about zoning laws or property use restrictions, and undisclosed hazards.
• Misrepresentation or Fraud: Misrepresentation occurs when an agent provides false or misleading information about a property, whether intentionally or unintentionally. Fraudulent misrepresentation, if proven intentional, can result in more severe consequences for the agent, including punitive damages. Examples include overstating property values and advertising inaccuracies.
• Breach of Fiduciary Duty: Real estate agents owe fiduciary duties to their clients, which include loyalty, confidentiality, and acting in the client’s best interest. Common breaches include conflict of interest, negligence in handling offers, omissions in negotiations, and giving improper legal or financial advice beyond their expertise.
• Negligence: This encompasses a wide range of errors or omissions, such as giving inaccurate information on market conditions or property values, failing to properly advise clients, inadequately researching or verifying key information about the property, failing to ensure all necessary documents are properly executed, and timely delivery.

Legal Grounds for Civil Suit for Failure to Disclose

In Texas, several legal grounds may support a civil suit against a real estate agent for failure to disclose. For each of these causes, the plaintiff must prove that the undisclosed matter was significant enough to influence a reasonable buyer’s decision and that there was a direct link between the agent’s failure to disclose and the harm suffered.

Common Law Fraud: This is a well-established legal doctrine that requires the plaintiff to prove the following elements:

• Material Misrepresentation: The agent must have knowingly withheld or misrepresented a crucial fact that would significantly influence a reasonable buyer’s decision to purchase a property. This could include undisclosed defects, environmental hazards, or property history.
• Scienter (intent to deceive): The agent must have had the intent to deceive the buyer or acted with reckless disregard for the truth. This means the agent knew the information was false, should have known it was false, or chose to withhold important information.
• Justifiable Reliance: The buyer must have reasonably relied on the agent’s misrepresentation or omission.
• Damages: The buyer must have suffered actual financial harm as a result of the undisclosed information. This could include diminished property value, costly repairs, or emotional distress.

Statutory Fraud (Texas Business & Commerce Code §27.01): This statute provides a separate avenue for legal recourse. A key distinction from common law fraud is that scienter is not always required. This means liability can be established even if the agent did not intentionally deceive the buyer. However, the statute still requires proof of a false statement or omission that was intended to induce reliance and resulted in actual damages.

Texas Deceptive Trade Practices Act (DTPA): Real estate agents are generally exempt from DTPA action when acting within the scope of their license. However, this exemption does not apply in cases of fraud or misrepresentation. The DTPA is a broad consumer protection statute that may apply if the agent’s conduct constitutes a deceptive or misleading act. This could include failing to disclose known defects, making false or misleading statements about the property’s condition or history, and engaging in other deceptive practices to induce the buyer to proceed with the transaction. The DTPA provides for a wide range of remedies, including:

• Actual Damages: Compensating the buyer for financial losses.
• Exemplary Damages: Punitive damages to punish the agent for egregious misconduct.
• Attorney’s Fees: Recovering legal costs incurred by the buyer.

Breach of Fiduciary Duty: If an agency relationship exists between the client and the agent, such as a listing agreement or buyer’s representation agreement, the agent owes a fiduciary duty to the client. This duty requires the agent to act in the client’s best interests, including full disclosure of all material facts. A breach of this duty can form the basis for a legal claim.

Applicability of Standard of Care for Negligence

In cases where the failure to disclose was not intentional by the agent, both TREC and civil litigators will look to see if the agent was negligent. Negligence is a failure to do what a reasonable and prudent person would do in a similar situation. In other words, did the real estate agent follow the ordinary standard of care that other real estate agents would follow in a given situation?

In addition to the disclosure requirements set out in TRELA, TREC has enacted rules referred to as the Canons of Professional Ethics and Conduct, (22 Texas Administrative Code Chapter 531). These Canons outline specific standards for fidelity, integrity, and competency, requiring among other things that agents put their client’s interest above their own. They require agents to be scrupulous and meticulous in performing their duties, employ prudence and caution to avoid misrepresentation by acts of commission or omission, exercise judgment and skill in the performance of brokerage activities, and be knowledgeable about the geographic area and specific type of real estate being brokered. In a civil action, litigators will also look at the National Association of Realtors (NAR)’s Code of Ethics to determine the ordinary standard of care for a real estate agent who is a member of NAR.

Preventative Measures

To avoid license discipline and lawsuits, agents should:

• Maintain clear and honest communication with clients.
• Document all disclosures and advice provided.
• Stay updated on Texas real estate laws and regulations.
• Maintain geographic competence.
• Consult legal or financial experts for matters beyond their expertise.

Texas real estate agents bear significant responsibility for ensuring transparency and ethical conduct in all transactions. By diligently fulfilling their disclosure obligations, agents protect the interests of their clients, maintain public trust, and avoid litigation.

Nothing in Tierra Grande should be considered legal advice. For advice or representation on a specific situation, consult an attorney.

Kerri Lewis, J.D. ([email protected]) is a member of the State Bar of Texas and former general counsel for the Texas Real Estate Commission (TREC).