Why this matters: Learn the seller broker duty to inspect and disclose their observations and knowledge about a property’s condition to prospective buyers, preparation and delivery of the seller’s Transfer Disclosure Statement (TDS) and recognize the home inspection report (HIR) as a risk mitigation activity.
Follow along with an audio reading of this article adapted as a chapter from our upcoming Real Estate Practice course update.
TDS mandated on one-to-four residential units
The seller of a one-to-four unit residential property completes and delivers to prospective buyers a statutory form called a Transfer Disclosure Statement (TDS), more generically called a Condition of Property Disclosure Statement. [Calif. Civil Code §§1102(a), 1102.3; See RPI Form 304]
The seller’s use of the TDS form, with few exceptions, is mandated in the marketing of all one-to-four unit residential properties. The TDS is for the seller to prepare, honestly and in good faith, based on the seller’s awareness of property amenities and conditions. The seller does so whether or not they retain a seller broker to inspect the property and review the seller-prepared TDS and deliver it to prospective buyers and buyer agents. [CC §1102.7]
When preparing the TDS, the seller sets forth any property defects known or suspected to exist by the seller. The seller broker is obligated to advise the seller on the purpose served by delivery of the TDS to prospective buyers, mandated as soon as practicable (ASAP) on initial inquiry about the property.
The seller needs to disclose any conditions known to them which may negatively affect the value and desirability of the property for a prospective buyer, whether or not itemized on the TDS. Disclosures to the buyer are not limited to only the conditions preprinted for comment on the form. [CC §1102.8]
Also, the buyer cannot waive delivery of the statutory TDS, as delivery is mandated before entering into any purchase arrangements. Any attempted waiver, such as the use of an “as-is” clause in the purchase agreement, is void as against public policy.
The words “as is” are improper in the context of any real estate transaction. “As is” implies a failure to disclose something adverse known to the seller or the seller broker, a prohibited activity. [CC §1102.1(a)]
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Delivery of the disclosure statement
While the seller prepares the TDS, it is the broker representing the seller who transmits the TDS to prospective buyers. Disclosures are delivered on inquiry into the property, either directly or via a broker representing the buyer. A seller negotiating directly with a buyer without a transaction agent — principal-to-principal — is obligated to deliver the TDS to a prospective buyer on their expressing an interest in the property. [CC §1102.12]
When a sales transaction has closed, the prior failure of the seller or any of the brokers involved to deliver the seller’s TDS to the buyer is not grounds for rescission of the closed transaction. However, the seller and the seller broker are both liable for the actual monetary losses incurred by the buyer due to defects known to them or failed to be discovered and disclosed prior to the buyer and seller entering into a purchase agreement. [CC §1102.13]
Further, a seller acting without a broker needs to hand the TDS to the buyer before the seller accepts a purchase agreement offer submitted by a buyer.
When the buyer receives the TDS after the seller enters into a purchase agreement, the delivery is untimely and in violation of TDS rules, and the buyer may:
- cancel the purchase agreement on discovery of undisclosed defects known to the seller or the seller broker and unknown and unobserved by the buyer or the buyer broker prior to acceptance [CC §1102.3];
- make a demand on the seller to correct the defects or reduce the price accordingly before closing escrow [See RPI Form 150 §12.2]; or
- close escrow and make a demand on the seller for the costs incurred to cure the defects. [Jue Smiser (1994) 23 CA4th 312]
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Buyer’s right to cancel on delayed disclosure
The seller or the seller broker needs to deliver the TDS to prospective buyers ASAP on commencement of negotiations. Negotiations commence when a buyer, after receiving preliminary marketing information on a property, makes further inquiries by asking questions or seeking more information relating to the property marketed for sale.
Delivery of the seller’s TDS to the buyer occurs when:
- the TDS is delivered on a request from a prospective buyer or their agent for information about the property for sale — ASAP on the commencement of negotiations; or
- the seller attaches the TDS to their counteroffer. [CC §1102.3]
Too often in a seller’s market, the seller or the seller broker delivers the TDS after the buyer and seller enter into a purchase agreement. Worse, escrow may close without any delivery of the TDS. This failure to submit the TDS before entering into a contract permits the buyer to cancel the purchase agreement under a statutory three-day right to cancel. This right of the buyer to cancel runs for three days following the day the TDS is handed to the buyer and five days when delivered by mail. [CC §1102.3]
However, the buyer already in escrow under a purchase agreement when they receive an unacceptable TDS or home inspection report (HIR) is not limited to simply cancel the purchase agreement and “go away.” They also have monetary remedies available to recover lost value or costs to correct the defects when they seek to enforce the purchase agreement or have already closed escrow.
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Demand to cure an undisclosed material defect
An alternative remedy to cancelling the purchase agreement exists for a buyer when they receive an unacceptable TDS or HIR after the seller accepts their offer and before escrow closes. A contingency provision in a purchase agreement referencing only the statutory right to cancel the transaction for nondisclosure does not limit the buyer’s remedies for the failure to disclose. Here, the buyer makes a demand on the seller to cure the defects which:
- affect the property’s value or the buyer’s use of the property which were not disclosed prior to contracting; and
- were known or should have been known by the seller or the seller broker as an observation prior to acceptance of the buyer’s offer.
Further, when the seller broker knew of defects or would have observed the defects during a competent inspection of the property, the demand to cure the defects is also made on the seller broker. [See RPI Form 269]
When the seller or seller broker does not voluntarily cure the defects on demand, the buyer has one of two remedies when acquiring the property:
- before escrow closes, the buyer tenders an amount equal to the agreed price less the cost to repair or replace the undisclosed defects [See RPI Form 150 §12.2]; or
- the buyer closes escrow and pursues recovery for the property value lost due to the defects or the costs incurred to correct the defect.
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Home inspection report, prudent to mitigate risk
A concerned seller broker aggressively advises the seller to authorize the broker to retain a home inspector to obtain a home inspection report (HIR) when entering into the seller representation agreement. The HIR is used by the seller to prepare a TDS, and both are used by the broker to market the property to prospective buyers.
The hired inspector conducts a physical examination of the property to determine the condition of its component parts. On the home inspector’s completion of their examination, an HIR is prepared noting their observations and findings, which is delivered to the seller broker.
The seller broker uses the HIR in their review and to make notations on the seller-prepared TDS. The broker presents both the TDS and the HIR to prospective buyers before the seller accepts an offer, a disclosure activity which mitigates the risks of claims later made by a buyer over property conditions.
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Read more about the HIR and visual inspection.
The seller broker duty: inspect and inform buyers
A seller broker is obligated to personally conduct a competent visual inspection when they enter into a seller representation agreement to market a one-to-four unit residential property for sale. This property inspection is not an obligation of the buyer broker.
Following completion of the seller broker’s mandatory visual inspection, they review the TDS the seller has filled out. Here, the broker determines whether they have observed defects the seller has not listed, which the broker adds to the TDS. Additionally, and to shift liability from the seller and the broker to a home inspector, an HIR is ordered and reviewed for conditions not listed in the TDS by the seller or observed on the broker’s inspection.
A buyer of a one-to-four unit residential property has two years from the close of escrow to pursue claims they have against the seller broker for the broker’s negligent failure to observe or disclose property defects. Defects undisclosed and unknown to the buyer, but known or observable by the seller broker, permit the buyer to recover the cost to cure the defect or the lost property value. [CC §2079.4]
However, the buyer is unable to recover their losses from the seller broker when the seller broker inspected the property and, as a reasonable and competent broker, did not observe the defect and did not actually know the defect existed. This situation is when the HIR comes to the rescue of all involved. [CC §1102.4(a)]
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A home inspection report: the liability shield for a seller’s broker
The unlawful “as-is” sale, as lacking diligence
Consider a seller broker who, on conducting their visual inspection of a property, has reason to believe the property fails to conform to building and zoning codes and ordinances.
The broker is aware a prospective buyer interested in making an offer does not know about the possible violations and may view the property’s value differently if they knew of the potential violations.
The buyer submits a purchase agreement offer. The broker prepares a counteroffer and includes an “as-is” clause which the seller signs. The provision states the broker “makes no representations about the property and incurs no liability for any defects, the buyer agreeing to purchase the property ‘as is.’” The broker submits the counteroffer to the buyer who accepts it.
After closing, the city refuses to provide utility services to the property due to building code and zoning ordinance violations.
An “as-is” clause, a disclaimer of diligent effort
Continuing our previous example, the buyer makes a demand on the seller broker for the buyer’s money losses due to overpricing and the cost of corrective repairs. The buyer claims the seller broker breached their general agency duties owed the buyer. They failed to disclose material defects in the property known to the broker, but not the buyer.
The seller broker claims the buyer waived their right to collect money losses when they signed the purchase agreement with the “as-is” disclaimer provision.
Does use of an “as-is” disclaimer provision shield a seller broker from liability for the buyer’s losses caused by the building and zoning violations which were suspected to exist by the broker and not known or suspected by the buyer?
No! The seller broker has a general duty, owed to all participants in the transaction, to personally conduct a competent visual inspection of the property sold. The inclusion of an “as-is” disclaimer provision in a purchase agreement in lieu of providing the buyer with disclosures covering property defects has no effect on the seller broker obligations to a buyer. The “as is” provision does not justify the breach of the seller broker’s duty to inspect and disclose their known and observable property defects which are potential adverse conditions. [Katz v. Department of Real Estate (1979) 96 CA3d 895]
“As is” provisions are never appropriate in any real estate documentation. The seller or the seller broker simply discloses the defects ASAP on property inquiry by a prospective buyer, whether the seller agrees to make repairs or not.
Further, public policy prohibits the sale of one-to-four unit residential property “as is.” Rather, all buyers of any type of property always purchase the property:
- “as disclosed” by the seller and the seller broker prior to entering into agreements to sell or lease; and
- as actually known or observed by the buyer prior to entering the purchase or lease agreement.
When the seller or seller broker discloses defects prior to entering a purchase agreement, negotiations may call for the seller to correct some or all the disclosed defects. When they do not correct disclosed defects, the buyer takes ownership of the property subject to all those defects as disclosed prior to the time the seller accepts the buyer’s offer. [CC §1102.1(a)]
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Targeted property sales and exempt sellers
Unless a seller is exempt, sellers of one-to-four unit residential real estate need to fill out and furnish prospective buyers with a statutory TDS ASAP on initial inquiry, and always before entering a purchase agreement. [CC §1102]
Whether or not the seller is exempt from using the TDS, the seller broker is never exempt from:
- conducting a visual inspection of a one-to-four unit residential property, sold or acquired by any seller or buyer [CC §2079]; and
- disclosing their observations and knowledge about the property on a TDS form or other separate document. [CC §1102.1]
Transactions which exempt the seller (but not the seller broker) from preparing and delivering the statutory TDS to a buyer include transfers:
- by court order, such as probate, eminent domain or bankruptcy;
- by judicial foreclosure or trustee’s sale;
- on the resale of real estate owned (REO) property acquired by a mortgage loan originator on a deed-in-lieu of foreclosure, or by foreclosure;
- from co-owner to co-owner;
- from parent to child;
- from spouse to spouse, including property settlements resulting from a dissolution of marriage;
- by tax sale;
- by reversion of unclaimed property to the state; and
- from or to any government agency. [CC §1102.2]
The seller broker is not exempt from preparing and delivering a TDS to a buyer of a one-to-four unit residential property.
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