This article identifies natural hazards to be disclosed in all sales and explains how a seller’s broker avoids non-disclosure liability by the up-front use of a natural hazard expert.
A unified disclosure for all properties
Gone are the days, legislatively speaking, of minimal or delayed property disclosures. Or worse, none.
As boom times devolve into a recession, everyone’s behavior in real estate transactions changes. Buyers fast learn they have the right to demand delivery of the disclosures they are entitled to, voluntarily and upfront — included in the property’s marketing package prepared by the seller’s agent to profile the property.
In terms of the disclosure of natural hazards, hazards are more important than improvements. The hazards a buyer faces come with the location of a parcel of real estate. Unlike property improvements, which can be fixed or replaced, natural hazards run with the land, with little humans can do to alter their effect on property and humans.
Locations where a property’s location is likely to be subject to natural hazards include:
- special flood hazard areas, a federal designation;
- potential flooding and inundation areas;
- very high fire hazard severity zones;
- wildland fire areas;
- earthquake fault zones; and
- seismic hazard zones. [Calif. Civil Code §1103(c)]
The existence of a hazard due to the geographic location of a property affects its desirability, and thus its value — pricing — to prospective buyers. Hazards, by their nature, limit an owner’s ability to develop the property, obtain insurance or receive disaster relief.
Whether a seller lists the property for sale with a broker or markets the property themselves, it is the seller who is obligated to timely disclose to prospective buyers any natural hazards actually known to the seller and known as discoverable by a seller in a search of public records.
To unify and streamline the disclosure of natural hazards to a prospective buyer of a property, a statutory form was created entitled the Natural Hazard Disclosure Statement (NHD). [See RPI Form 314]
The NHD form for uniformity of disclosures
The NHD form is used by a seller and the seller’s agent, and when prepared by an NHD expert, on all types of real estate held out for sale. The form discloses natural hazard information known to the seller and seller’s agent (and the NHD expert) and readily available as shown on maps in the public records of the local planning department. [CC §1103.2; See RPI Form 314]
While use of the NHD Statement by sellers and their agents is mandated, specific classes of sellers (but not their agents) are excluded. Thus, the form — filled out and signed by the seller (unless excluded) and the seller’s agent (never excluded), or prepared by an NHD expert and signed by the seller and their agent — is included in marketing packages handed to prospective buyers when they initially seek additional information on a property.
Transactions when the seller’s use of the NHD Statement form is not mandated include:
- court-ordered transfers or sales;
- deed-in-lieu of foreclosures;
- trustee’s sales;
- lender resales after foreclosure or a deed-in-lieu;
- estates on death;
- transfers between co-owners;
- transfers to relatives/spouses; or
- transfers to or by governmental entities. [CC §1103.1(a)]
Sellers specifically excluded from using the form still need to make the disclosures referenced in the NHD. It is just that they do not need to use the statutory NHD Statement to make those disclosures. Thus, for excluded sellers, the NHD is the optional method for making the mandatory disclosure of natural hazard information to their buyers.
On the seller’s agent’s receipt of the NHD report, the agent:
- reviews the report with the seller;
- adds what they and the seller know about hazards which are not included in the expert’s report,
- signs the NHD statement accompanying the report;
- hands the entire NHD package to prospective buyers as part of the marketing package; and
- completes all these activities before an offer is accepted or a counteroffer submitted to a prospective buyer.
Editor’s note — Any attempt by a seller or seller’s agent to use an “as-is” provision or otherwise provide for the buyer to agree to waive their right to receive the mandatory seller’s NHD Statement is void as against public policy. [CC §1103(d)]
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Mandated delivery of NHDs
Delivery of the information — whether disclosed by the use of one form or another — is not optional. A natural hazard disclosure is mandated when marketing any type of property for sale. [CC §1103.1(b)]
All sellers, and any seller’s or buyer’s agents involved, have a general duty owed to prospective buyers to disclose conditions on or about a property which are:
- known to them;
- might adversely affect the buyer’s willingness to buy; or
- might influence the buyer’s setting of the price and terms of payment they are willing to offer.
When a hazard is known to any agent (as well as the seller) or available in public records, it is to be disclosed to the prospective buyer before they enter into a purchase agreement on the property. When not disclosed, the buyer has the option to cancel the transaction, called termination, or continue to perform the agreement and close the transaction.
Further, when the transaction has closed escrow and the buyer discovers a hazard affecting the property’s value, the buyer may rescind the sale and be refunded their investment, called restoration. [Karoutas v. HomeFed Bank (1991) 232 CA3d 767]
The NHD is delivered to prospective buyers as soon as practicable. The practical moment for delivery comes at the earliest opportunity and always before a buyer enters into a purchase agreement or otherwise sets the price and terms or conditions for its payment. [Calif. Attorney General Opinion 01-406 (August 24, 2001); CC §1103.3(a)(2)]
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Investigating the existence of a hazard
Natural hazard information is obtained from the public records. When not retrieved by someone, the seller and seller’s agent have failed to gather the information and data needed to voluntarily make these compulsory disclosures to prospective buyers.
To obtain the natural hazard information, the seller and the seller’s agent exercise ordinary care in gathering the information. They may pull the information from public records themselves, or the seller may employ an NHD expert to gather information and prepare the NHD Statement.
When an expert prepares the NHD form for the seller and the seller’s agent, they review it, add any comments about hazards not included by the expert, sign the NHD, and have it available for delivery to prospective buyers. [CC §1103.4(a)]
When prepared by an NHD expert, the NHD report will also note whether the listed property is located within two miles of an existing or proposed airport, an environmental hazard zone called an airport influence area or airport referral area.
The buyer’s occupancy of property within the influence of an airport facility may be affected by noise and restrictions, now and later, imposed on the buyer’s use as set by the airport’s land-use commission. [CC §1103.4(c)]
Also, the expert’s report notes whether the property is located within the jurisdiction of the San Francisco Bay Conservation and Development Commission.
Avoiding liability for errors
The expert who prepares the NHD is liable for any errors it contains, not the seller or seller’s agent who rely on the report of a qualified expert they selected to fulfill their duty to check the public records. Neither the seller nor the seller’s agent need enter into an indemnification agreement with the natural hazard expert to avoid liability for errors made by the expert they selected.
However, an indemnity agreement entered into by the expert in favor of the seller’s broker covers the cost of any litigation which might unnecessarily haul the broker into court. [See RPI Form 131]
A word of caution about nondisclosure before acceptance: The seller’s agent’s tardy delivery of an expert’s NHD to the buyer or the buyer’s agent — after the offer or a counteroffer has been accepted — will not protect the broker from liability for the buyer’s lost property value.
Liability exposure due to delayed NHD disclosures includes:
- costs the buyer may incur to correct or remedy the undisclosed hazardous condition; and
- the portion of the agreed price which exceeds the property’s fair market value (FMV) based on the hazard undisclosed at the time the purchase agreement was entered into. [CC §1103.13]
Further, the agents, seller and expert are not exposed to liability from third parties to the sale who might receive their erroneous NHD Statement and rely on it to analyze the risk they undertake by their involvement. Third parties include insurance companies, lenders, governmental agencies and other providers who may become affiliated with the transaction. [CC §1103.2(g)]
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Documenting compliance with NHD law
The seller and seller’s agent delivery of the NHD Statement to the buyer is documented by a provision in the purchase agreement. [See RPI Form 150 §11.5]
However, the seller is statutorily penalized by their agent’s failure to disclose natural hazards up front when purchase agreement provision calls for the seller’s agent to comply untimely with an “in escrow” disclosure.
The buyer on an in-escrow disclosure has the right to terminate the purchase agreement and avoid the transactions by exercising:
- a three-day right of cancellation after the NHD Statement is actually handed to the buyer; or
- a five-day right of cancellation when the NHD Statement is mailed to the buyer. [CC §1103.3(c)]
Further, buyer claims due to a late delivery of the NHD expose the seller and seller’s agent to liability, but not the buyer’s agent. The amount of liability exposure is the amount of money losses (including a lesser property value than the price paid) inflicted on the buyer by an untimely in-escrow disclosure when:
- the buyer chooses not to exercise their right to cancel; and
- proceeds with performance of the purchase agreement and closes escrow before demanding restitution. [CC §1103.13; Jue Smiser (1994) 23 CA4th 312]
Delivery of the NHD to the buyer
The buyer’s agent, on receiving the NHD form from the seller or seller’s agent, reviews it for any hazards which might affect the property’s value or its desirability for their buyer. [CC §1103.12(a)]
Further, the buyer’s agent counsels the buyer about their recommendations or explanations concerning the adverse consequences of any hazards it discloses. [CC §§1103.2, 1103.12]
When the buyer does not have a broker, the seller’s agent is responsible for delivering the NHD Statement to the prospective buyer. However, unlike the buyer’s agent, the seller’s agent has no duty to counsel or explain to the buyer the effect hazards have on the property or the buyer.
When the buyer is not represented by an agent, the buyer undertakes the duty to protect themselves and investigate the consequences of the NHD information handed to them.
Delivery of the NHD to a buyer may be in person or by mail. Delivery is considered to have been made when the NHD is received by the spouse of the buyer. [CC §1103.10]
Sellers occasionally engage in “For Sale by Owners” (FSBOs) transactions, negotiating a sale of their property directly with a buyer or the buyer’s agent. Here, the seller is responsible for preparing or obtaining an NHD statement and delivering the NHD Statement to the prospective buyer or their agent — and as always, prior to entering into the purchase agreement.
No warranty, just awareness by disclosure
A seller’s NHD Statement is not a warranty or guarantee by the seller or seller’s agent of the natural hazards affecting the property. Rather, the NHD Statement is a report prepared by the seller or the seller’s agent (or the NHD expert’s) of their actual knowledge together with information available in public records of any natural hazards affecting the property, called actual and constructive knowledge.
The NHD is intended to assist prospective buyers who rely on its content to make decisions as to whether they want to buy the property, and at what price and on what terms when deciding to prepare an offer to buy. To be meaningful, the buyer needs property information before the price and terms are set so the seller’s agent avoids misleading the buyer and their agent about conditions affecting the use of the property, called deceit. [AG Opin. 01-406]
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Disclosures concerning the value and desirability of a property, such as an NHD Statement, are considered price-sensitive information. When not timely disclosed, the seller and seller’s agent subject themselves to money claims for price adjustments (offsets) which the buyer is entitled to make either before or after closing. Alternatively, the buyer may exercise their statutory right to cancel the purchase agreement and have their deposit fully refunded.
As good brokerage practice, the seller’s agent prepares and arranges to deliver the NHD for a property to prospective buyers before they submit an offer, and definitely before or as part of a counteroffer. From the first moment of a buyer’s inquiry for more information the property and until an acceptance takes place, the buyer is a prospective buyer entitled to disclosures. Disclosures are not to be delayed until the prospect has become the buyer under a purchase agreement.
As a matter of proper practice, the purchase agreement offer includes a copy of the seller’s NHD Statement as an addendum (along with all other disclosures), noting the transaction was entered into in compliance with NHD (and TDS/etc.) rules of licensee conduct.
An escrow officer handling a sales transaction where the seller’s agent has failed to deliver an NHD to the buyer or their agent prior to opening escrow, has no duty to prepare, order out or deliver the NHD (or the TDS or other reports) to the buyer. The obligation is imposed solely on the seller and seller’s agent. However, escrow may accept instructions to perform any of these activities, in which case escrow becomes obligated to act as instructed. [CC §1103.11]
Types of hazards disclosed
Sellers and seller’s agents of any type of real estate are to disclose whether the property is located in:
- an area of potential flooding;
- a very high fire hazard severity zone;
- a state fire responsibility area; • an earthquake fault zone; and
- a seismic hazard zone. [CC §1103.2]
Another flooding disclosure which needs to be made on the NHD Statement arises when the property is located in an area of potential flooding. [See RPI Form 314 §2]
An area of potential flooding is a location subject to partial flooding when sudden or total dam failure occurs. The inundation maps showing the areas of potential flooding due to dam failure are prepared by the California Office of Emergency Services. [Calif. Government Code §8589.5(a)]
Additional information concerning flood hazard areas is available in the Community Status Book. The book lists communities and counties participating in the NFIP and the effective dates of the current flood hazard maps available from FEMA.
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When a property is in an area where the financial responsibility for preventing or suppressing fires is primarily on the state, the real estate is located within a State Fire Responsibility Area. [Calif. Public Resources Code §4125(a)]
Notices identifying the location of the map designating State Fire Responsibility Areas are posted at the offices of the county recorder, county assessor and the county planning agency. [Pub Res C §4125(c)]
When the property is located within a wildland area exposed to substantial forest fire risks, the seller or the seller’s agent is to disclose this fact, as it requires maintenance by the owner to prevent fires.31 [See RPI Form 314 §4]
Additionally, the NHD Statement advises the prospective buyer of a home located in a wildland area that the state is not responsibile for providing fire protection services to the property, unless the Department of Forestry and Fire Protection has entered into a cooperative agreement with the local agency. [See RPI Form 314 §4]
A Seismic Hazard Zone map identifies areas exposed to earthquake hazards, such as:
- strong ground shaking;
- ground failure, such as liquefaction or landslides; [Pub Res C §2692(a)]
- tsunamis; [Pub Res C §2692.1] and
- dam failures. [Pub Res C §2692(c)]
When a property is susceptible to any of the earthquake (seismic) hazards, the seismic hazard zone disclosure on the NHD Statement is to be marked “Yes.” [See RPI Form 314 §6]
Seismic hazard maps are available at the California Department of Conservation.
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