Why this article matters: Conditions which adversely affect the use of a property, and thus its value, are disclosed by the seller agent to any individual or their agent seeking additional detailed information about a parcel of real estate marketed as available for sale. Some of these disclosures are specifically earmarked by legislation as mandatory by sellers and seller agents, and all others are judicially identified as disclosures of material aspects when known or readily available to the seller or their agent in a transaction.

Here, we examine the public policy of symmetric awareness of a property’s fundamentals by the seller and buyer in all real estate transactions.

Disclosures by legislative fiat and case law

The contents of a complete property marketing package for presenting a property available for sale is evidence of a seller agent’s compliance with their general duty to fully inform prospective buyers about the property offered for sale.

The moment a prospective buyer first inquires into the details of a property marketed as available for sale, the seller agent owes the buyer and the buyer agent a general duty to voluntarily provide critical information about the nature of the property. The property information disclosed includes all conditions which might adversely affect its value as viewed for its use by an informed and prudent buyer, called material facts.

Property facts are disclosed by the seller agent using a series of forms — some of which are legislatively mandated, and all others are judicially required as contributing to a buyer’s evaluation of the property.

Forms for mandated disclosures in one-to-four-unit residential real estate transactions include:

  • Condition of Property Disclosure — Transfer Disclosure Statement (TDS); [See RPI Form 304]
  • Agency Law Disclosure; [See RPI Form 305]
  • Natural Hazard Disclosure (NHD) Statement; [See RPI Form 314]
  • Disclosure of Sexual Predator Database. [See RPI Form 319]

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Transfer Disclosure Statement (TDS)

A seller of a one-to-four unit residential property complies with disclosure codes when they personally complete and deliver to a prospective buyer, directly or via the transaction agents, a statutory form called a Transfer Disclosure Statement (TDS), more generically called a Condition of Property Disclosure Statement. Its name is ironic and misleading. It has nothing to do with the transfer of property and everything to do with a potential buyer’s initial inquiry, which is the moment when negotiations commence and disclosures are handed over. [Calif. Civil Code §§1102(a), 1102.3]

The timing for delivery of the TDS to the potential buyer is as soon as practicable (ASAP) after the buyer begins negotiations, and always before the seller accepts a purchase agreement offer submitted by a buyer. It is seller agent negligence to let their seller enter into a purchase agreement without having previously delivered the TDS to the buyer.

The SFR seller’s use of the TDS form as part of the property disclosure activity is legislatively mandated. The seller is required to respond to all listed items in the form by making entries with honesty and in good faith. The objective is for the seller to fully reflect their knowledge about conditions on the property — whether or not a seller agent is retained to review the seller’s entries as correct and complete. [CC §1102.7]

When preparing the TDS, the seller sets forth any property defects known to them or suspected to exist.

Any conditions known to the seller which might negatively affect the value and desirability of the property for a prospective buyer are disclosed by the seller using the TDS. Even though the defect may not be a boilerplate item listed on the form, it needs to be disclosed by inclusion in the TDS. Disclosures to the buyer are not limited to conditions preprinted for comment on the form. [CC §1102.8]

A property is always sold “as disclosed” in the TDS — never “as is.”

Further, the buyer cannot waive the seller’s delivery of the statutorily-mandated TDS, even when it is not handed to the buyer before entering into a purchase agreement for the property. Any attempted waiver, such as the use of an “as-is” clause in the purchase agreement or counteroffer, is void as against public policy.

The words “as is” are never used in the context of a real estate transaction. “As is” implies a failure to disclose something adverse about the property known to the seller or the seller’s agent, a prohibited activity. [CC §1102.1(a)]

Along with the TDS, the seller agent voluntarily delivers the Hazard Disclosures Booklet to the buyer, but there is no legal mandate to do so. It’s just good practice for the brokerage firm. [CC §2079.7(b); [See RPI Form 316-1]

The booklet contains general information on a variety of environmental hazards, none of which might physically exist on the subject property. The booklet discusses the significance of hazardous materials and conditions, and tips for identifying, locating and mitigating the hazards, as well as the symptoms experienced by humans resulting from the hazards.

Agency Law Disclosure as mandated

Agency disclosure codes were enacted by the California legislature to eliminate licensee misconceptions about the duties they owe to participants in a transaction and the public’s lack of awareness of those duties. The legislative objective is to have a better-informed public — and more competent licensees. [See RPI ebook: Real Estate Practice Chapter 7]

The Agency Law Disclosure is delivered to all participants in all brokered sales and leasing transactions, beginning with representation agreements entered into with owners (as sellers or landlords), buyers, and all tenants for a term greater than one year, concerning properties such as:

  • single family one-to-four unit residential property;
  • multi-unit residential property with more than four dwelling units;
  • commercial property;
  • vacant land;
  • a ground lease coupled with improvements; or
  • manufactured homes. [CC §§2079.13(j); 2079.14]

However, the Agency Law Disclosure is not required on negotiations and agreements with consumers of brokerage services in the following transactions:

  • property management;
  • mortgage arrangements; and
  • month-to-month rental agreements.

The disclosure describes the various agency roles licensees undertake on behalf of their principals and other participants in a real estate related transaction.

The Agency Law Disclosure is attached to the following documents and signed by all parties in all transactions:

  • a seller representation agreement; [See RPI Form 102]
  • a buyer representation agreement; [See RPI Form 103]
  • a tenant representation agreement when a lease greater than one year is anticipated; [See RPI Form 105.1]
  • a commercial landlord representation agreement; [See RPI Form 106]
  • a purchase agreement; [See RPI Form 150and 151]
  • an option to purchase; [See RPI Form 161 and 161-1]
  • an exchange agreement; [See RPI Form 171]
  • a counteroffer, by attachment or by reference, to a purchase agreement containing the disclosure as an attachment; [See RPI Form 180]
  • any letter of intent (LOI) prepared and submitted on behalf of a buyer or tenant; [See RPI Form 185]
  • a residential or commercial lease agreement for a term exceeding one year; and [See RPI Form 550 and 552 – 552-8]
  • an offer to lease. [See RPI Form 556]

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Compensation Disclosure in a Real Estate Transaction, used by an agent when negotiating a sale, lease, or mortgage and the agent will receive otherwise-undisclosed compensation arising out of the transaction. For example, when:

  • the broker or their agent holds a direct or indirect ownership interest in the real estate, including a partial ownership interest in a limited liability company (LLC) or other entity which owns or is buying, leasing or lending on the property;
  • an individual related to the broker or one of their agents by blood or marriage holds a direct or indirect ownership interest in the property or is the buyer;
  • an individual with whom the broker or a family member has a special pre-existing relationship, such as prior employment, significant past or present business dealings, or deep-rooted social ties, holds a direct or indirect ownership, leasehold, or security interest in the property or is the buyer; or
  • the broker or their agent concurrently represents the opposing party, a dual agency situation. [See RPI Form 119]

Other disclosures the broker needs to deliver when agency conflicts arise include the:

  • Affiliated Business Arrangement Disclosure Statement — Residential Broker (Regulation X (RESPA)), used by a broker and their agents when referring an owner or buyer to others who provide services in real estate sales, leasing or mortgage transactions and whose earnings are shared with the broker, to disclose the business relationship and the financial or other benefit the referral may provide the broker; and [See RPI Form 519]
  • Conflict of Interest Disclosure — Kinship, Position or Undue Influence, used by an agent or broker when a conflicting situation arises between the agent or broker and another principal or third-party to the transaction, to disclose relationships or positions held by the broker, their agents or family members which may be in conflict with the agency duties owed the client. [See RPI Form 527]

Natural Hazard Disclosure (NHD) Statement

Whether a seller markets a property for sale with a broker or markets the property themselves, the seller discloses to all prospective buyers any natural hazards known to the seller, including those contained in public records — which are readily available to seller brokers through city or county agencies.

Editor’s note — The NHD needs to be handed not only to buyers, but also to potential tenants of ground leases, leases with an option to purchase, and to participants in a property exchange. In good practice, leasing agents practice risk mitigation by providing all commercial tenants with an NHD. [CC §1103(b)]

To streamline the disclosure of natural hazards affecting a property, a uniform presentation is used by all sellers and in turn all seller agents, to hand to buyers interested in a property offered for sale. The uniform form is statutory as created by the California legislature, entitled the Natural Hazard Disclosure (NHD) Statement.[See RPI Form 314]

Compliance by the seller and seller agent with delivery of the NHD Statement to the buyer is documented as mandated in a purchase agreement provision. [See RPI Form 150 §4.3]

The buyer agent has the duty to hand the buyer the NHD Statement the buyer agent receives from the seller or the seller agent, called delivery, accomplished before the buyer signs a purchase agreement offer. [Calif. Civil Code §1103.12(a)]

Sellers and seller agents offering any type of real estate for sale prepare the NHD Statement when the property is located in a/an:

  • area of potential flooding;
  • very high fire hazard severity zone;
  • state fire responsibility area;
  • earthquake fault zone; or
  • seismic hazard zone. [CC §1103.2]

The timing of the disclosure is ASAP. In fact, the natural hazards form needs to be prepared, like all other property disclosures, for inclusion in the seller agent’s property marketing package for delivery to prospective buyers or their agents on first contact seeking additional property information. Since natural hazards affect a property’s value, with timely delivery of disclosures, a prospective buyer is able to review the content when negotiations commence — as mandated — and before setting the price or rent for submission in an offer. [CC §1103.3]

Required notices

Several mandated notices the buyer must receive are contained within the purchase agreement. [See RPI Form 150 §13]

These notices include the:

  • Notice Regarding Sales Data; [RPI Form 150 §13.1]
  • Notice Regarding Registered Sex Offenders; [RPI Form 150 §13.2]
  • Notice Regarding Appraisal Objectivity; [RPI Form 150 §13.3]
  • Notice Regarding Gas and Hazardous Liquid Pipelines; [RPI Form 150 §13.4] and
  • Notice of Your Supplemental Property Tax Bill. [RPI Form 150 §13.5]

The Notice Regarding Sales Data informs the buyer of the broker’s duty to report the sale, including its price and terms, with multiple listing services (MLS’s). [See RPI Form 150 §13.1]

The Notice Regarding Appraisal Objectivity notifies the buyer of their ability to rebut an appraisal when the buyer believes the appraisal has been conducted in a discriminatory manner. The notice also informs buyers the method for contesting a discriminatory appraisal. [RPI Form 150 §13.3]

The Notice Regarding Gas and Hazardous Liquid Pipelines informs buyers how to find information about the location of gas and hazardous liquid pipelines. [RPI Form 150 §13.4]

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Notice of sexual predator database

Purchase agreements are statutorily required to include a provision regarding the sex offender registry and its website, www.meganslaw.ca.gov.

Thus, the legislature shifted to the buyer and their agent the responsibility to investigate the existence of sex offenders in the neighborhood surrounding the property before making an offer. However, a diligent buyer agent researches the sex offender status in the neighborhood of a property selected for making an offer and advises their client on the results, especially when young children are to reside in the property. [Calif. Penal Code §290.46, CC §2079.10a; see RPI Form 150 §13.2]

Another parallel website, www.crimereports.com, provides information volunteered by police departments about criminal activity in a given neighborhood. The site includes the location of registered sex offenders. These tools are an informative resource for a buyer agent to gather and pass value-affecting information to their clients.

Prudent practice by a seller agent is to obtain and attach these crime maps which are readily accessible from these websites to a neighborhood security disclosure addendum — an essential part of any property disclosure package. The local crime rate is part of a property’s attributes and always influences a buyer’s decision-making process — is it this location we buy and if so at what price? [See RPI Form 321]

In addition to a property’s physical condition, neighborhood and area conditions which adversely affect the property’s value and desirability are also considered material facts. Disclosure of neighborhood facts which have a negative effect on the value of property is required regardless of whether the negative effect is explicitly stated on the pre-printed transfer disclosure statement (TDS) form. Anything less is deceit, and thus a fraud on the buyer by the seller’s broker and agent. [CC §§1102(a), 1102.3, 1102.8; see RPI Form 304]

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Supplemental Tax Bill

The seller — and thus the seller agent — has the sole responsibility, by statute, to deliver to a prospective buyer a disclosure notice regarding supplemental property taxes. [CC §1102.6c]

The Notice of Supplemental Property Tax Bill discloses the buyer’s responsibility after closing the transaction to pay supplemental property tax bills separately from any mortgage impound account established with the mortgage holder.

To conform, all RPI purchase agreements include the statutory statement about the Notice of Supplemental Property Tax Bill since the notice is mandated in all real estate sales transactions. However, the Supplement Property Tax Bill Notice is not included in the Option to Purchase. [CC §1102(a); See RPI Forms 161; 161-1]

Thus, when negotiating an Option to Purchase with a tenant, the brokers need to include as an addendum a separate Notice of Supplemental Property Tax Bill. [See RPI Form 317]

Not mandated — but a risk-mitigation necessity

In addition to the TDS, the seller broker discloses external factors unique to the subject property or surrounding area which affect a property’s value. To make the disclosures the seller broker uses a form which specifically references the conditions.

Other disclosures — which are not mandated, but the seller agent does disclose as material facts — when marketing a one-to-four-unit property as available for sale, are the:

  • Ordinance Compliance — Local Option Disclosure — allows the seller agent to disclose the property’s compliance with city or county ordinances in a written document handed to prospective buyers and tenants; [See RPI Form 307]
  • Unique Factors and Conditions Affecting Property — used by a seller agent to disclose to prospective buyers the existence of unique factors or conditions which may adversely affect the property or its immediate vicinity; and [See RPI Form 308]
  • Seller’s Neighborhood Security Disclosure — describing criminal activity in the neighborhood and surrounding area which adversely affects the property’s value and desirability — material facts. [See RPI Form 321]

Several factors which arise in uniquely located properties may influence a buyer’s decision to purchase or the price they are willing to pay for a particular property. These factors and conditions are disclosed by a seller agent using the Unique Factors and Conditions Affecting Property form which includes:

  • Notice of Airport in Vicinity — the property may be subject to some of the annoyances or inconveniences associated with proximity to airport operations; [See RPI Form 308 §2]
  • Notice of Right to Farm — the property is located within one mile of a farm or ranch land designated on the current county-level geographic information system (GIS) “Important Farmland Map,” issued by the California Department of Conservation, Division of Land Resource Protection; [See RPI Form 308 §3]
  • Notice of San Francisco Bay Conservation and Development Commission Jurisdiction — the use and development of property within the commission’s jurisdiction may be subject to special regulations, restrictions and permit requirements; [See RPI Form 308 §4]
  • Notice of Mining Operations — the property is located within one mile of a mine operation for which the mine owner or operator has reported mine location data to the Department of Conservation pursuant to Public Resources Code §2207; [See RPI Form 308 §5]
  • Notice of Industrial Use Zone — the property is located in or next to an Industrial Use Zone which allows manufacturing or commercial uses, or is affected by a nuisance resulting from its proximity to an Industrial Use Zone; [See RPI Form 308 §6]
  • Notice of State or Federal Ordnance — the property is located within one mile of a former state or federal ordnance location, such as those used for military training purposes; [See RPI Form 308 §7]
  • Notice of Contamination of a Controlled Substance — the property or immediate vicinity has been identified by a governmental health official as being contaminated by methamphetamine or another controlled substance or was the site of a former meth lab; [See RPI Form 308 §8]
  • Notice of Death — a death has occurred on the property within the prior three years; [See RPI Form 308 §9]
  • Notice of Insurance Claim Affecting the Property — an insurance claim affecting the property has been filed within the previous five years; [See RPI Form 308 §10]
  • Notice of Domestic Water Storage Tank — a water storage tank has been provided by the state and may not be conveyed with the property on a sale; and
  • Entry of Other Conditions affecting the property or immediate vicinity. [See RPI Form 308 §11 & §12]

Property condition disclosures

Other disclosures which are required — depending on the property and situation — include:

  • Homeowners’ Association (HOA) Addendum — used by a seller agent when preparing an offer to purchase, exchange or lease a unit controlled by an HOA, to provide as an addendum a checklist of HOA items the buyer has received in the marketing package delivered by the seller’s agent or will receive and review for further approval or cancellation of the transaction. [See RPI Form 309]
  • Lead-based Paint Disclosure — On Sale of Real Estate — mandated to be delivered to any buyer or lessee when the subject property was constructed prior to 1978. [See RPI Form 313]
  • Residential Earthquake Hazards Report — used by a seller or seller agent when selling a one-to-four unit residential property built prior to 1960, to prepare and hand to prospective buyers for their review, together with a copy of the “Homeowner’s Guide to Earthquake Safety,” identifying the property’s potential earthquake weaknesses. [See RPI Form 315]