Imagine that you own a house, condominium unit, or parcel of land in Tennessee, and that you want to sell it. Tennessee law requires that, before you actually make the transfer to a buyer, you first give that person a disclosure statement. This disclosure is intended to put the buyer on notice of any known material defects with the property.
What is a “defect”? A defect could be anything from an unstable foundation to a mold infestation. Making these disclosures prevents the buyer from having an unfortunate surprise before--or after--the closing. If you’re selling property in Tennessee, what exactly must you disclose, and how?
Tenn. Code Ann. § 66-5-201 et seq. broadly covers disclosure requirements for home sellers in Tennessee. As a home seller, you generally must provide the buyer with a disclosure statement before a purchase contract is signed.
A disclosure statement is a short document signed by the seller that lists “any material defects known to the owner” about the property. Tenn. Code Ann. § 66-5-202 requires that the statement also include a notice to prospective purchasers buyers that they may wish to obtain professional advice or inspections of the property.
However, the buyer is permitted to waive his or her right to receive a full disclosure statement under this law. A buyer may do that if, for example, his or her intention is to demolish the entire home anyway, or if time is of the essence in the transaction.
If the buyer does make this waiver, then you must provide what is known as a disclaimer statement. In a disclaimer statement, you are telling the buyer that you make “no representations or warranties as to the condition of the real property” and that buyer will be receiving the real property “as is;” that is, with all defects that may exist. Like the disclosure statement, the disclaimer must be given to the buyer before a purchase contract is signed.
Your disclosure statement must identify any material defects in the property about which you have actual knowledge. Tennessee’s legislature conveniently provides a model form within Tenn. Code Ann. § 66-5-202, which fulfills all of the statutory requirements. The Tennessee Realtors Association also promulgates a similar seven-page form, which is available online for free. Speak with your own real estate attorney or agent to see whether he or she has a preferred disclosure form.
Regardless of which form you use, it will contain a few dozen questions, which you can answer with “Yes,” “No,” or “Unknown.” These concern various aspects of the home, ranging from your legal title (for example, whether any contractors have placed liens on the home after a payment dispute) to the condition of the plumbing system (for instance, whether the sewer lines or outdoor sprinkler system works).
Remember, you are required only to check “Yes” or “No” if you actually know the answer to the question being asked. There is nothing wrong with checking “Unknown” if you truly do not know.
Beyond the questions contained in the disclosure form given to the buyer before the purchase contract is signed,Tenn. Code Ann. § 66-5-202 also requires certain specific disclosures to be contained in the purchase contract itself. You must disclose “the presence of any known exterior [water] well”; the results of any known “percolation test or soil absorption rate performed on the property”; the existence of a “sinkhole” on the property; and any known “groundwater erosion causing a surface subsidence of soil, sediment, or rock.” Obviously, these potentially hazardous environmental conditions would be of interest to a potential buyer.
There are certain issues you need not disclose. Like many states, Tennessee has a specific section of its statuteproviding that home sellers do not need to provide any information to potential buyers about whether or not prior residents were “afflicted with human immunodeficiency virus (HIV) or other disease which has been determined by medical evidence to be highly unlikely to be transmitted through the occupancy of a dwelling place.” Similarly, you do not need to disclose whether the property was the site of a homicide or suicide. All of these topics might spook certain potential buyers, but the legislature acknowledges that they should not be relevant to the sale.
You also do not need to perform research on your home. According to Tenn. Code Ann. § 66-5-201, a seller “shall not be required to undertake or provide any independent investigation or inspection of the property in order to make the disclosures.” In other words, you are not required to hire a mechanical engineer to make sure that the HVAC system works before submitting the disclosure statement to the buyer. You merely need to answer the questions on the disclosure form to the best of your own personal knowledge. If you do provide the buyer with an expert reportm such as the inspection report of a licensed land surveyor or engineer, you are not liable for its contents. According to Tenn. Code Ann. § 66-5-204, an owner “shall not be liable for any error, inaccuracy or omission” contained therein. It is up to buyers whether to believe the expert’s report, or commission a report of their own.
Any Tennessean selling a property wants the transaction to go as smoothly as possible, while also fetching the highest possible purchase price. You have most likely taken pains to make your home look perfect to prospective buyers, perhaps by painting the walls or mowing the grass. Won’t telling the buyer about defects undermine your efforts?
In the short term, it might. Undoubtedly, Tennessee buyers will take note of major defects that you disclose and haven't repaired. It would be reasonable for major defects to influence the price the buyer is willing to pay for the home.
In the longer term, however, the law gives you important incentives to be fully honest. First of all, there are strict statutory penalties against you as the seller if the buyer discovers an undisclosed material defect after closing. According to Tenn. Code Ann. § 66-5-208, the buyer has specific remedies for an owner’s misrepresentations. Damages include an action “for actual damages suffered as a result of defects existing in the property as of the date of execution of the real estate purchase contract….” This means that the buyer can recoup the costs of repairing or replacing whatever the material defect was. For example, if you failed to disclose a busted heat pump, you could be on the hook for replacing the pump.
Note that Tenn. Code Ann. § 66-5-201 also mandates that the seller make the disclosures in good faith.” In this context, “good faith” essentially means “no funny business.” The legislature wants you to be open and honest, and not to try to obfuscate defects or intentionally mislead the prospective buyer.
Beyond these fears of possible litigation, the practical benefit of disclosure is simple: It creates trust. If you tell a buyer about a problem, he or she is more likely to want to do business with you. It shows that you are not trying to pretend that your property is flawless. Could this honesty lower the purchase price, or maybe even scare a buyer away? Maybe. But most Tennessee sellers know that honesty today could save them headaches tomorrow.