Property disclosures, explained

A seller of a one-to-four unit residential property completes and delivers to a prospective buy­er a statutory form called a Transfer Disclosure Statement (TDS), more generically called a Con­dition of Property Disclosure Statement. [CC §§1102(a), 1102.3; see firsttuesday Form 304]

The seller uses the TDS to set forth any property defects known or suspected to ex­ist which nega­tively affect the value and desirability of the physical property. Disclosures to the buyer are not limited to the general items preprint­ed on the form. [CC §1102.8]

The seller prepares the mandatory TDS with honesty and in good faith. This standard applies whether or not the seller:

• has a bro­ker and seller’s agent to assist them with TDS preparation; or
• has obtained a home inspection report (HIR). [CC §1102.7]

If the seller does retain an agent, it is the agent’s duty to review, correct and deliver the TDS to the prospective buyer, together with any HIR they have relied on. Otherwise, a sales transaction directly between the seller and buyer, without the partici­pation of an agent, requires the seller to deliver the TDS to the buyer directly. [CC §1102.12]

The seller provides the disclosure to the buyer as soon as possible and, in any event, before the price of the property is agreed to by acceptance of an offer or counteroffer.

Use of the TDS is not mandated for commercial property transactions. However, these sellers still need to disclose material facts about the conditions of the property as soon as practicable at the outset of negotiations.

Some residential transactions exempt the seller from providing the TDS. Transactions which exempt the seller (but not the seller’s agent) from preparing and delivering the statutory TDS to the 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 property (REO) acquired by a lender 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]

A seller who is exempt from the use and delivery of the TDS to buyers still has a common law duty owed to prospec­tive buyers to disclose all known defects. In ex­empt transactions — including the sale of commercial properties — the seller and seller’s agent may use a separate document to make the disclosures, or they may use the TDS form to list the defects known or suspected by them to exist to avoid de­ceit. [CC §1102.1(a)]

The existence of a hazard due to the geographic location of a commercial or residential property affects its value and desir­ability to prospective buyers. Thus, the seller needs to disclose the natural hazards that come with the location of the property — this excludes man-made as­pects of the property.

Natural hazard disclosures are required whether the seller markets their property themselves or lists the property with a broker.

Locations where a property might 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. [CC §1103(c)]

The California legis­lature created a statutory form called the Natu­ral Hazard Disclosure (NHD) Statement for use by all sellers and their agents to disclose natural hazard information. Disclosed information includes facts that are both known to the seller and agent, and readily available on maps in the public records of the local planning department. [CC §1103.2; see firsttuesday Form 314]

Use of the NHD Statement is mandated on the sale of one-to-four unit residential properties. It is to be included in listing packages handed to prospective buyers or buyer’s agents requesting more information on the property.

Sellers of property other than one-to-four unit residential property do not need to use the statutory NHD Statement to make their natural hazard disclosures. However, delivery of the information by use of one form or another is mandated on all types of property. So, the form is generally used for all natural hazard disclosures. [CC §1103.1(b)]

The seller and seller’s agent may obtain nat­ural hazard information:

• directly from the public records them­selves; or
• by employing a natural hazard expert, such as a geologist.

When an expert is employed, the expert prepares the natural hazard disclosure form for the seller and the seller’s agent to review, add comments, sign and deliver to prospective buyers. [CC §1103.4(a)]

Natural hazard disclosure reports 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; or
• within the jurisdiction of the San Francisco Bay conservation and develop­ment commission.

Natural hazard disclosures, like all property disclosures, need to be prepared, signed and available for delivery to prospective buyers before an offer is accepted or a counteroffer is made. [Calif. Attor­ney General Opinion 01-406 (August 24, 2001); CC §1103.3(a)(2)]

Environmental hazards are noxious or annoying conditions which are man-made hazards, not natural hazards. As environmental hazards, the conditions are classified as either:

• injurious to the health of humans; or
• an interference with an individual’s sensitivities.

Environmental hazards have an adverse effect on a property’s desirability and thus its value. As adverse conditions which have an effect on value, when known or readily available, they need to be disclosed to prospective buyers as material facts affecting value on the sale, exchange or lease of all types of property.

Environmental hazards located on the property which pose a direct health threat to occupants due to construction materials, the design of the construction, or as introduced into the soil on or near the property’s location, include:

• asbestos-containing building materials and products used for insulation, fire protection and the strengthening of materials [Calif. Health and Safety Code §§25915 et seq.];
• formaldehyde used in the composition of construction materials [CC §2079.7(a); Calif. Business and Professions Code §10084.1];
• radon gas concentrations in enclosed, unventilated spaces located within a building where the underlying rock contains uranium [CC §2079.7(a); Bus & P C §10084.1];
• hazardous waste from materials, products or substances which are toxic, corrosive, ignitable or reactive [Health & S C §25359.7; Bus & P C §10084.1];
• toxic mold [Health & S C §§26140, 26147];
• smoke from the combustion of materials, products, supplies or substances located on or within the building [Health & S C §§13113.7, 13113.8];
• security bars which might interfere with an occupant’s ability to exit a room in order to avoid another hazard, such as a fire [CC §1102.16; Health & S C §13113.9]; and
• lead.

Environmental hazards located off the property, but which have an adverse effect on the use of the property due to noise, vibrations, odors, airborne particles, toxic plumes or some other ability to inflict harm on occupants, include:

• military ordnance sites within one mile of the property [CC §1102.15];
• industrial zoning in the neighborhood of the property [CC §1102.17];
• airport influence areas established by local airport land commissions [CC §§1103.4(c), 1353; Bus & P C §11010(b)(13); see firsttuesday Form 308]; and
• ground transportation arteries which include train tracks and major highways in close proximity to the property.

Providing environmental hazard disclosures to prospective buyers is the obligation of the seller. However, it is the seller’s agent who has the duty of care and protection to place their seller in compli­ance with the environmental hazard disclosure requirements.

Thus, the seller’s agent is required to deliv­er — or confirm the buyer’s agent has delivered — a copy of the environmental hazard book­let approved by the California Department of Health and Safety (DHS) to the buyer. Delivery of the booklet is confirmed in writing by use of a provision in the purchase agreement. [See firsttuesday Form 150 §11.6; see firsttuesday Form 316-1]

The notice of any environmental hazard needs to be given in writing, though no separately mandated form exists for this purpose. The TDS and the purchase agreement are currently used as the vehicles for written delivery.

Some environmental hazards are the subject of provisions in the TDS, such as hazardous construction materials and waste, window security bars and release mechanisms, and environmental noise. [See firsttuesday Form 304 §§A and C]

All other known environmental hazards may be separately itemized in the TDS. Environ­mental hazards emanating from off-site loca­tions — such as nearby industrial zoning or a military ordnance area — are generally well known by the buyer’s agent and disclosed through provisions in the purchase agreement. [See firsttuesday Form 150 §11.7]

For residential properties constructed before 1978, the seller’s agent needs to additionally deliver to the buyer the federal lead-based paint (LBP) disclosure. [See firsttuesday Form 313]

The seller has no obligation to hire an expert to investigate and report on whether an environ­mental hazard is present on or near a prop­erty. The seller is also not obligated to remove, eliminate or mitigate an environmental hazard, unless they become obligated under the terms of their purchase agreement with the buyer.

However, if not included in the TDS or the pur­chase agreement, a counteroffer by the seller is needed to disclose — as soon as possible (ASAP) — the seller’s and their agent’s knowledge of environmental hazards located both on and off the property. If the disclosure is delayed until after entry into a purchase agreement, it is deceitful conduct.

A seller of commercial property is required to disclose material facts about the property which adversely affect the value or use of the property.

It is common practice for the seller or their agent to provide prospective buyers with a marketing package detailing operating and user aspects of the property. The marketing package needs to include information about:

• the physical conditions of soil and improvements;
• land use and title conditions consisting of encumbrances, such as easements, CC&Rs, legal descriptions or trust deed provisions;
• operating income and expenses, such as utili­ties, sanitation, property taxes, yard and pool maintenance, insurance, etc. [See firsttuesday Form 352];
• the zoning or other use restrictions which may affect the buyer’s future use of the property; and
• location hazards and surrounding area impact.

However, this information is only required if it includes material facts that affect the value of the property or conflict with the buyer’s intended use.

Disclosing facts about the potential future use of a commercial property extends beyond disclosure of title and zoning conditions. For example, a broker marketing property as an income-producing investment owes a duty to a buyer to disclose operating income and expense data sufficient for the buyer to determine whether the property produces adequate income to meet expenses and mortgage payments.

Additionally, sellers of commercial properties that are 5,000 square feet or larger are required to disclose information about the property’s energy usage in a Data Verification Checklist (DVC) handed to prospective buyers, tenants and mortgage lenders. [20 Calif. Code of Regulations §1683]

See related article:

Commercial energy benchmarking, explained

The seller’s agent only owes the prospective buyer a limited, non-client general duty to vol­untarily provide information on the material facts affecting a commercial or residential prop­erty they are marketing. The information disclosed by the seller’s agent need only be sufficient enough to place the buyer on notice of known facts which may have an adverse effect on the property’s value or the buyer’s use — material facts.

On all types of properties, facts to be disclosed about the integrity of the physical condition of a property are limited to the seller’s agent’s prior knowl­edge about the property, including their observations while conducting a visual in­spection of the property. On one-to-four unit residential properties, the agent has a duty to make the disclosures by using the statutory TDS form.

The seller’s agent serves as a conduit through which property information provided by the seller is fil­tered before the seller’s agent passes it on to the prospective buyer.

The seller’s agent has no duty to further investi­gate any of the information or data provided by the seller to authenticate its accuracy or truthfulness before passing it on to the prospec­tive buyer.

However, as a minimum effort to be made be­fore handing a prospective buyer information re­ceived from the seller, the seller’s agent is required to:

• review the information received from the seller;
• include comments about the agent’s ac­tual knowledge and observations which expose any inaccuracies, incon­sistencies or omissions in the seller’s statements; and
• identify the source of the information as the seller, except for the agent’s comments.

The seller’s agent does not owe a duty to pro­spective buyers to give them advice, comment on the extent of the adverse facts disclosed, offer assistance, investigate, state an opinion or explain the effect on the buyer of any facts about the property’s physical, natural or environmental conditions which have been provided by the seller’s agent.

It is the buyer’s agent (or the buyer if they have no representation) who has a duty to care for and protect the buyer’s best interests once the material facts have been brought to their attention by the seller’s agent. The buyer’s agent’s duty includes determining and advising on the extent to which disclosed facts interfere with the buyer’s evaluation and use of the property.

However, when the seller’s agent is asked by the prospective buyer or a buyer’s agent about any aspect, feature or condition which relates to the property or the transaction in some way, the seller’s agent is duty-bound to respond fully and fairly to the inquiry. The seller’s agent needs to disclose material facts, to the extent of their knowledge, about the subject matter of the inquiry, free of half-truths and misleading statements.

Public policy prohibits the sale of one-to-four unit residential property “as is.” All buy­ers on entering into a purchase agreement purchase a property:

• “as disclosed” by the seller, the seller’s broker and the broker’s agents prior to putting the prospective buyer under contract; and
• “as observed” by the buyer prior to enter­ing into the purchase agreement.

When defects are not disclosed to the prospective buyer during negotiations and prior to the seller’s acceptance of the buyer’s purchase agreement offer, later disclosures during the escrow period can result in the seller correcting some or all of the untimely disclosed defects. If disclosed up front during negotiations, the buyer takes title subject to the defects as disclosed. [CC §1102.1(a)]

The breach of this seller’s agent’s duty by failure to disclose their knowledge or observations about potential adverse conditions before the seller accepts or counters a buyer’s purchase offer is not excused by writing an “as-is” disclaimer into the purchase agreement or counter offer in lieu of pre-contract factual disclosures. [Katz v.Department of Real Estate (1979) 96 CA3d 895]

Any attempt to have the buyer waive delivery of the statutorily-mandated TDS, such as by use of an “as-is” provision in the purchase agreement, is void as against public policy. A prudent seller’s agent does not use the words “as is” in any agreement. Use of the term implies a fail­ure to disclose something known to the seller or the seller’s agent. [CC §1102.1(a)]

The failure of the seller or any of the agents involved to deliver the seller’s property disclosures to the buyer does not invalidate a sales transaction after the conveyance of ownership (legal or equitable) and transfer of possession. However, the seller and the seller’s broker are both liable for the actual monetary losses incurred by the buyer due to an undisclosed defect or adverse material fact observable or known to them at the time the buyer and seller entered into the purchase agreement. [CC §1102.13]

Further, if disclosures (specifically, the TDS) are delivered to the buyer after the seller enters into a purchase agreement, the delivery is in violation of disclosure rules and the buyer may, among other remedies:

• cancel the purchase agreement on discov­ery of undisclosed defects known to the seller and unobserved by the buyer or the buyer’s agent (on an inspection) prior to acceptance [CC §1102.3];
• make a demand on the seller to correct the defects or reduce the price accordingly before escrow closes [See firsttuesday Form 150 §11.2]; or
• close escrow and make a demand on the seller for the costs to cure the defects known to the seller and not disclosed prior to acceptance. [Jue Smiser (1994) 23 CA4th 312]

A buyer has two years from the close of escrow to pursue the seller’s broker and agent to recover losses caused by the broker’s or agent’s negligent failure to timely disclose observable and known defects affecting the property’s physical condition and value. Undisclosed and unknown defects permitting recovery are those observable by a reasonably competent broker during a visual on-site inspection of the subject property. A seller’s agent is expected to be as competent as their broker in an inspection. [CC §2079.4]

However, the buyer will be unable to recover their losses from the seller’s broker if the seller’s broker or agent inspected the property with reasonable care and did not observe the defect or know it existed. [CC §1102.4(a)]

Editor’s note — To avoid liability for property defects, sellers and seller’s agents are encouraged by legislative policy to obtain and rely on the contents of an HIR to prepare their TDS for delivery to prospective buyers. The HIR describes any material defects a qualified home inspector finds or suspects, makes recommendations about the conditions observed and suggests any further evaluation needed to be undertaken by other experts. [Bus & P C §7195(c)]

All prospective buyers of the property are entitled to rely on the existing HIR, thus imposing liability on the home inspector for any failure to exercise care when examining the property and reporting defects. Liability for the defects is imposed on the home inspector regardless of the fact that the home inspection contract and report contained a provision restricting its use solely to the person who originally requested it. [Leko v. Cornerstone Building Inspection Service (2001) 86 CA4th 1109]

For more information on the energy benchmarking disclosure requirements, see: Energy benchmarking: disclosing commercial property energy use

A discussion about selling a property “as is” may be found here: Brokerage Reminder: Does “as-is” mean “no disclosures”?

For a review of the TDS, see: Transfer disclosure statement – The disclosure of property conditions mandate

For more information about the NHD, see: The Natural Hazard Disclosure Statement (NHD): included in marketing packages to create transparency and attract buyers

For more on commercial property information, see: Nonresidential property survey sheet – a tenant or buyer-occupant checklist for suitability