Fraud- Failure to Disclose- Common Real Estate Issues In Colorado

The simple fact is that most residential real estate transactions in Colorado follow a basic pattern. A seller and buyer hire a licensed real estate agent. The buyer’s agent shows the houses and submits an offer to the listing agent on behalf of the buyers. The listing agent discusses the offer with the seller and eventually, they decide if they will accept, reject, or counter. This is important because most buyers and sellers hire real estate agents. Real Estate agents while trained in certain aspects of real estate law are not attorneys. As such, they cannot draft legal documents. Instead, they are allowed to fill out certain legal documents such as buy and sell agreements.

 The Colorado Department of Regulatory Agencies (CORA) has a real estate division that governs real estate agents. This division publishes contracts that are often used in the real estate world in Colorado.

PLEASE DO NOT RELY ON ANY PORTION OF THIS ARTICLE AS VALID LAW. THE PURPOSE OF THIS ARTICLE IS TO GIVE THE READERS A BRIEF OVERVIEW OF FRAUD AND BREACH OF CONTRACT AS THEY RELATE TO FAILURE TO DISCLOSUSE ISSUES IN THE REAL ESTATE WORLD. THIS IS NOT LEGAL ADVICE. LAWS AND RULES CHANGE ON A REGULAR BASIS. CONTACT AN ATTORNEY FOR THE MOST UP TO DATE LAWS.

Contained in this type of contract is a section covering the Seller’s obligation to disclose certain defects to the buyer. I pulled the residential version from the CORA website. The current version as of 12/13/2024 reads, “10.1 Seller agrees to deliver to Buyer the most current version of the applicable Colorado Real Estate Commission’s Seller’s Property Disclosure form completed by Seller to Seller’s actual knowledge and current as of the date of this Contract,” and “10.2. Disclosure of Adverse Material Facts; Subsequent Disclosure; Present Condition. Seller must disclose to Buyer any adverse material facts actually known by Seller as of the date of this Contract. Seller agrees that disclosure of adverse material facts will be in writing. In the event Seller discovers an adverse material fact after the date of this Contract, Seller must timely disclose such adverse fact to Buyer. Buyer has the Right to Terminate based on the Seller’s new disclosure on the earlier of Closing or five days after Buyer’s receipt of the new disclosure. Except as otherwise provided in this Contract, Buyer acknowledges that Seller is conveying the Property and Inclusions to Buyer in an “As Is” condition, “Where Is” and “With All Faults.”  

Why is this important? If you are buying or selling residential property in Colorado your real estate contract most likely has this language or similar language. If is a fact is material, it is adverse, and it is actually known by the seller then it must be disclosed. Failure to do so may result in a breach of contract action based on this clause.

So, let’s say Seller A knows that the house a rodent infestation. The house while otherwise great becomes home to hundreds of mice from 2-4 in the morning. Most people would consider this a material fact, it is adverse, and something that the Seller most likely knew about beforehand. As such, if you are the buyer finding this out for the 1st time while you sleep, you may be wondering if you have a claim. The answer is that you may. I generally use a smell test when looking for failure to disclose issues. Does the issue seem like something that should have been disclosed? Does it seem like a big deal? Was it obvious? If the answer is yes, you should have someone look into it. Where there is smoke there is typically fire. The key to winning these types of cases is drawing an obvious straight line.

On the flip side, the language described above uses what is called an actual knowledge standard meaning the Seller has to know. It does not mean they should have known. That is typically the deal killer on these types of cases. If the house had termites but they were in the wall then it may not have been obvious. Hence the Seller may not have known.

So, your 1st line of defense as a Buyer is potentially bringing a breach of contract action based on the Sellers failure to disclose. As always, the other elements of breach of contract would need to be proved but this is the starting step.

But what if they deleted or modified this clause, it was the real estate agent versus the seller, or other.  While you may still have a claim. One of my favorite claims is fraud. It is extremely versatile and applies in a ton of scenarios that you would not think that it applies in. A great case that illustrates the elements of fraud is the Morrison v. Goodspeed case.

PLEASE DO NOT RELY ON ANY PORTION OF THIS ARTICLE AS VALID LAW. THE PURPOSE OF THIS ARTICLE IS TO GIVE THE READERS A BRIEF OVERVIEW OF FRAUD AND BREACH OF CONTRACT AS THEY RELATE TO FAILURE TO DISCLOSUSE ISSUES IN THE REAL ESTATE WORLD. THIS IS NOT LEGAL ADVICE. LAWS AND RULES CHANGE ON A REGULAR BASIS. CONTACT AN ATTORNEY FOR THE MOST UP TO DATE LAWS.

“The constituents of fraud, though manifesting themselves in a multitude of forms, are so well recognized that they may be said to be elementary. They consist of the following: (1) A false representation of a material existing fact, or a representation as to a material existing fact made with a reckless disregard of its truth or falsity; or a concealment of a material existing fact, that in equity and good conscience should be disclosed. (2) Knowledge on the part of the one making the representation that it is false; or utter indifference to its truth or falsity; or knowledge that he is concealing a material fact that in equity and good conscience he should disclose. (3) Ignorance on the part of the one to whom representations are  made or from whom such fact is concealed, or the falsity of the representation or of the existence of the fact concealed. (4) The representation or concealment made or practiced with the intention that it shall be acted upon. (5) Action on the representation or concealment resulting in damage. Morrison v. Goodspeed, 68 P.2d 458, 462 (Colo. 1937)

Sound familiar. While it should because it is very close to the contract standard we described above with a couple of twists. In addition to actual knowledge, it also allows for utter indifference. Fraud also applies to those scenarios where the seller may attempt to conceal information. While much more element heavy fraud makes a great additional claim which can broaden the coverage area beyond the standard breach of contract claim.

For example, Real Estate Agent A finds black mold in the house but does not tell the seller or buyer. Rather, they cover it with a board. This could constitute fraud. While a seller could be liable under a breach of contract action it would be a question of law if the real estate agent would be liable since they are not a party to the contract. In other words, there is no privity of contract meaning they have no obligation to the Buyer (Ignoring ethics and other statutes that may make this obligation). But with a fraud claim privity is not a requirement meaning you can leap frog that argument.

As such, it is important to understand the nuisances between a fraud and breach of contract action. If you have been the victim of an obvious failure to disclose issue, contact an attorney.

PLEASE DO NOT RELY ON ANY PORTION OF THIS ARTICLE AS VALID LAW. THE PURPOSE OF THIS ARTICLE IS TO GIVE THE READERS A BRIEF OVERVIEW OF FRAUD AND BREACH OF CONTRACT AS THEY RELATE TO FAILURE TO DISCLOSUSE ISSUES IN THE REAL ESTATE WORLD. THIS IS NOT LEGAL ADVICE. LAWS AND RULES CHANGE ON A REGULAR BASIS. CONTACT AN ATTORNEY FOR THE MOST UP TO DATE LAWS.