Dealmaking and the Duty to Disclose

One of the thornier issues of any agreement to transfer property is whether and, if so, the extent to which the seller has a duty to disclose relevant information. The law generally presumes that contracting parties have equal bargaining power and requires buyers to do their own due diligence, thereby minimizing a seller’s disclosure obligations.

In real estate deals, this presumption is often referred to as caveat emptor (buyer beware). In non-real estate deals, the idea of an arm’s length transaction is also often invoked, meaning that the buyer and seller are presumed to be independent of one another, to stand on relatively equal footing, and to be competent and sophisticated enough to evaluate the risks and benefits of the deal for themselves.

However, the buyer’s due diligence duties don’t entirely eliminate the seller’s disclosure obligations. Obviously, a seller isn’t permitted to tell outright lies about the condition of the property. And although perhaps more subtle, the seller also has a duty not to conceal defects or problems, such as by painting over shoddy workmanship or omitting relevant business data from reports. Furthermore, if a seller is aware of hidden facts that could significantly affect the deal and if the facts wouldn’t readily be found by a typical buyer, the seller may be legally required to disclose those facts to the buyer.

Of course, not all transactions are arm’s length. When the buyer and seller have a special relationship with one another (such as close relatives or friends, for instance), the seller may have heightened duties to disclose relevant facts to the buyer, regardless of whether the buyer conducts her own due diligence.

As you can probably see, balancing the disclosure obligations of sellers with the due diligence obligations of buyers is often very difficult. Moreover, the road to an enforceable deal is often strewn with minefields of potential problems. A knowledgeable and experienced attorney can help you sidestep these pitfalls and avoid costly mistakes.