Texas Court Says HOA Has No Duty to Disclose Latent Defects to Prospective Home Buyer

Texas Appellate Court decision (July 31, 2014).

Plaintiffs in this action purchased property located in a common interest development that had an “equalizer channel” underneath the improvements on the property that was not disclosed. Prior to closing the sale, the homeowners association provided the buyer with a “Resale Certificate for Property Subject to Mandatory Membership in an Owners’ Association” (resale certificate) in accordance with Texas law. In the resale certificate, the association indicated that it had no actual knowledge of conditions on the Property that were in violation of the association’s governing documents.
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The buyers filed suit against multiple defendants, including the homeowners association based on claims of negligence, negligent misrepresentation, common law fraud, civil conspiracy, fraud by nondisclosure, unlawful taking and diminished value of the subject property, violations of the Texas Deceptive Trade Practices Act, and breach of fiduciary duty. The buyers contended that the homeowners association failed to disclose the existence of the equalizer and that they “intentionally, willfully and fraudulently stated” on the resale certificate that they had no knowledge or information about any conditions of the property that were in violation of the owners’ association’s rules and bylaws that prohibited building structures on common elements. The buyers argued that the equalizer channel was a common element and that because a home had previously been built on the subject property above a common element, the property was in violation of the association’s rules and therefore the association had a duty to notify the buyers of the violation. In their suit, the buyers claimed damages resulting from the diminished value of the property based on the possibility of sinkholes caused by the equalizer channel.

The appellate court upheld the trial court’s dismissal of the buyers’ action on summary judgment after finding that the homeowners association did not have a duty to notify the buyers of the existence of the equalizer channel. Under Texas law, when a member of an owners’ association is selling property to a prospective purchaser, the duty imposed on a homeowners association is to disclose the information listed in Texas Property Code section 207.003(b), which does not include latent defects. Thus, the court found no reason to require the homeowners association to disclose any information that was not required by existing Texas law. Accordingly, the court concluded that the association did not have a duty to disclose the existence of the alleged latent defect.

See case decision: Smith_v._Aramark_Corp._(Tex._App._2014)1