California Real Estate Disclosures

1. California was the first state to abandon caveat emptor in the real estate arena, enacting numerous statutes and handing down even more decisions, like Easton, that provide a buyer with sufficient information for him/her to make an educated judgement in buying his/her home. Even though real estate practitioners know that statutory and common law impose strict duties of disclosure on sellers, the amount of litigation arising from inadequate disclosure suggests that seller and agent disclosure duties are gravely misunderstood. This section highlights some of the most significant disclosure duties imposed on sellers and agents by statutory and common law. This section presents an overview of important real estate disclosure requirements. It is limited to disclosures concerning the condition of property being transferred. Because the laws concerning disclosure obligations may change, you should use this section only as a general source of information.

There are four primary sets of statutes that contain disclosure duties that are relevant to nearly all sales of residential real property:

a. Transfer Disclosure Statement.
b. Duty to Prospective Purchaser.
c. Natural hazard disclosures, required by the Federal Government.
d. Miscellaneous statutes that require disclosure of facts not within the scope of the disclosure forms (TDS and NHDS) provided by the State.

With very limited exceptions, whenever there is a sale or transfer of property, the transferor must deliver a written transfer disclosure statement ("TDS") to the prospective transferee in the form prescribed by statute. Cal. Civ. Code § 1102.6. The TDS requires that the seller provide certain information regarding the physical condition of the property. While not a warranty, the TDS provides information that prospective buyers may rely on in deciding whether and on what terms to purchase the property. 1 Miller & Starr, California Real Estate 2d, § 1:123, at 425 (1989). Remember: TDS exemptions relate exclusively to the seller's Section 1102 disclosure obligations and do not relieve brokers of their independent Section 2079 inspection disclosure duties. Where a sale or transfer is subject to a TDS exemption, the brokers is still under an obligation to make all material disclosures in a separate writing. Most importantly, Section 1102 disclosures have no effect on other disclosure obligations including obligations to disclose any material facts affecting the value or desirability of the property.

Any provision that requires the buyer to accept the property "as is" merely means that the buyer accepts the property in the condition that is observable by him. As a result, "as is" provisions are ineffective in shielding the seller and agent from any fraud liability arising from nondisclosure. A common trap sellers and agents fall into is when the seller's property needs rehabilitation, but the seller cannot afford to complete the necessary repairs. The seller and agent attempt to sell the property by discounting the price and selling the property "as is" to avoid disclosure. Even in such circumstances, the seller and agent have a duty to disclose all known material defects or face significant liability. There is no buyer "economic assumption of risk."

Civil Code Section 1102.4 provides that required disclosures may be provided by public agencies or contractors acting within the scope of their professional license or expertise. The delivery of required disclosures to a prospective transferee by any agency or contractor acting within the scope of their expertise will relieve the seller and agent of any further duty with respect to that item of information. Problems arise, however, when the professionally prepared disclosure report contains errors, omissions, or inaccuracies. The problems are compounded when the inaccurate disclosure report is prepared by a professional outside the scope of his/her expertise. Unfortunately, it is not uncommon to find negligence on the part of these "experts." In order to shift the liability to the expert preparer of the disclosure report pursuant to Section 1102.4, the seller and agent must exercise ordinary care in obtaining the disclosure information. Thus, a seller and agent will be liable for inaccurate disclosures if the disclosures are prepared by (1) someone acting outside the scope of his/her expertise or (2) a substandard disclosure expert. .

Where there are red flags that a seller living on the property reasonably should have noticed, then there is a duty to disclose those red flags, or a duty to make further investigations or inspections to determine whether or not there are problems. Due to the potential for confusion, the California legislature clarified its position with the enactment of Civil Code section 1102.5. This section provides that if an item of required disclosure information is unknown or unavailable to the seller, the seller and the seller's agent must make a reasonable effort to ascertain it. Thus, a duty to investigate is imposed solely for the purposes of satisfying the statutory disclosure requirements.

The California legislature included a requirement of good faith in the course of satisfying the disclosure obligations it imposed. To satisfy this good faith requirement, both the seller and the seller's agent have an affirmative duty to disclose to the prospective buyer all facts which materially affect the value or desirability of the property that are known to them and are not known to, or within reach of, the buyer. For the agent, this same duty exists whether s/he obtains this knowledge from or independently from his principal.

1. Civil Code Section 2079 specifically addresses the disclosure obligations of licensed real estate brokers, listing brokers, and selling brokers. Section 2079 is a codification of the expansion of a broker's duty to inspect and disclose found in Easton v. Strassburger, 152 Cal. App. 3d 90 (1984). In Easton, the seller's agents noticed "red flags" of possible soil problems during their visual inspection of the property. Despite the agents' knowledge of what these red flags could indicate, they made no further inquiry or investigation regarding past soils problems. Shortly after the property was sold for $170,000, it suffered massive earth movement which reduced its value to $20,000, prompting the buyer to sue the listing broker for negligence. In this seminal case, the Court, for the first time, ruled that a real estate broker acting for a seller of residential real property has an "affirmative duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal." In reviewing the lower court proceedings, the Court determined that the jury was "well within the bounds of reason when it concluded that a reasonably diligent and competent inspection of the property would have included something more than a casual visual inspection and a general inquiry of the owners," and that the judgment for negligence against the broker was amply supported by the evidence. Section 2079 creates a duty of inspection on brokers to conduct a "reasonably competent and diligent visual inspection of the property offered for sale" and disclosing to the prospective purchaser "all facts materially affecting the value or desirability of the property that such an inspection would reveal." This disclosure can be made via Sections III and IV of the TDS form or in a separate writing. Further, the real estate broker's standard of care owed by the real estate broker is defined as "the degree of care that a reasonably prudent real estate licensee would exercise and is measured by the degree of knowledge through education, experience, and examination, required to obtain a license." This standard, which is higher than the reasonably prudent person standard applicable to most common law tort claims (including misrepresentation), was adopted by the legislature because equity demands that a broker who holds himself out to the public as an experienced, licensed professional in the field of residential real property transactions, and who financially benefits as a result of so doing, should be held to a standard of care commensurate with that position.

Repeated floods, fires and earthquakes, plus increasing ability to map the areas susceptible to natural disasters, prompted legislators to mandate sellers to tell buyers more about the home they may buy. In addition to the usual Transfer Disclosure Statement, a seller or the seller's agent must make the appropriate natural hazard disclosures if the property is in one or more of the following zones or areas:

1. Zone A or Zone V (Special Flood Hazard Area).

Zone A or Zone V (Special Flood Hazard Area) as designated by the Federal Emergency Management Agency ("FEMA"). The seller's agent or the seller if acting without an agent, must make this disclosure if: the seller or seller's agent has actual knowledge that the property is in a special flood area; or the local jurisdiction has compiled a list of parcels that are in a special flood area and has posted at the offices of the county recorder, county assessor and county planning agency a notice regarding location of the list. Government Code § 8589.3. .

An Area of Potential Flooding as shown on a map as an area which will be inundated if a dam fails. The seller's agent, or the seller if acting without an agent, must make this disclosure if: the seller, or seller's agent, has actual knowledge that the property is within a delineated inundation area; or the local jurisdiction has compiled a list of parcels that are in the inundation area and has posted at the offices of the county recorder, county assessor, and county planning agency a notice regarding the location of the list. Government Code § 8589.4. .

A designated Very High Fire Severity Zone the seller must make this disclosure if: the seller, or seller's agent, has actual knowledge that the property is in a designated very high fire severity zone; or the local jurisdiction has received maps of such properties which includes the seller's property and has posted at the offices of the county recorder, county assessor, and county planning agency a notice regarding location of the map and any changes to it. Government Code § 51183.5. .

A designated Wildland Fire Area ("State Responsibility Area") that may contain substantial forest fire risks and hazards. The seller must make this disclosure if: the seller, or the seller's agent, has actual knowledge that the property is in a designated wildland fire zone; or the city or county has received a map of such properties which includes the seller's property and has posted at the offices of the county recorder, county assessor, and county planning agency a notice regarding the location of the map and any changes to it. Public Resources Code § 4136.

An Earthquake Fault Zone the seller's agent, or the seller if acting without an agent, must disclose that the property is in one of these zones if: the seller, or the seller's agent, has actual knowledge that the property is within a delineated earthquake fault zone; or the city or county has received a map of such properties which includes the seller's property and has posted at the offices of the county recorder, county assessor, and county planning agency a notice regarding the location of the map and any changes to it. Public Resources Code § 2621.9.

A Seismic Hazard Zone in an earthquake, properties in one of these zones may be subject to strong ground shaking, soil liquefaction, or landslide. The seller's agent, or the seller if acting without an agent, must disclose that he property is in one of theses zones if: the seller, or seller's agent, has actual knowledge that the property is within a delineated seismic hazard zone; or the city or county has received a map of such properties which includes the seller's property and has posted at the offices of the county recorder, county assessor, and county planning agency a notice regarding the location of the map and any changes to it. Public Resources Code § 2694.

These disclosures must be made on the Natural Hazard Disclosure Statement ("NHDS") or on the Local Option Real Estate Transfer Disclosure Statement ("LORETDS"), provided the local jurisdiction has mandated use of a LORETDS for some disclosure purpose and the information and warnings are substantially the same as on the NHDS. In the event that a transfer is exempt from the use of an NHDS form, the required disclosures must be made in a separate writing. The following is the required format for the NHDS as provided by Cal. Civ. Code Section 1102.6c:

NATURAL HAZARD DISCLOSURE STATEMENT

This statement applies to the following property: ______________________________________________________:

The transferor and his or her agent(s) disclose the following information with the knowledge that even though this is not a warranty, prospective buyers may rely on this information in deciding whether and on what terms to purchase the subject property. Seller hereby authorizes any agent(s) representing any principal(s) in this action to provide a copy of this statement to any person or entity in connection with any actual or anticipated sale of the property.

The following are representations made by the seller and his or her agent(s) based on their knowledge and maps drawn by the state. This information is a disclosure and is not intended to be part of any contract between the buyer and the seller.

THIS REAL PROPERTY LIES WITHIN THE FOLLOWING HAZARDOUS AREA(S):

A SPECIAL FLOOD HAZARD AREA (Any type Zone 'A' or 'V') designated by the Federal Emergency Management Agency.

Yes ______ No ______ Do not know and information not available from local jurisdiction _____.

AN AREA OF POTENTIAL FLOODING shown on a dam failure inundation map pursuant to Section 8589.5 of the Government Code. Yes _______ No ______ Do not know and information not available from local jurisdiction _____.

A VERY HIGH FIRE HAZARD SEVERITY ZONE pursuant to Section 51178 or 51179 of the Government Code. The owner of this property is subject to the maintenance requirements of Section 51182 of the Government Code. Yes _______ No ______

A WILDLAND AREA THAT MAY CONTAIN SUBSTANTIAL FOREST FIRE RISKS AND HAZARDS pursuant to Section 4125 of the Public Resources Code. The owner of this property is subject to the maintenance requirements of Section 4291 of the Public Resources Code. Additionally, it is not the state's responsibility to provide fire protection services to any building or structure located within the wildlands unless the Department of Forestry and Fire Protection has entered into a cooperative agreement with a local agency for those purposes pursuant to Section 4142 of the Public Resources Code. Yes _______ No ______

AN EARTHQUAKE FAULT ZONE pursuant to Section 2622 of the Public Resources Code. Yes _______ No ______

A SEISMIC HAZARD ZONE pursuant to Section 2696 of the Public Resources Code. Yes (Landslide Zone) _______ Yes (Liquefaction Zone) __________ No _______ Map not yet released by state _________

THESE HAZARDS MAY LIMIT YOUR ABILITY TO DEVELOP THE REAL PROPERTY, TO OBTAIN INSURANCE, OR TO RECEIVE ASSISTANCE AFTER A DISASTER. THE MAPS ON WHICH THESE DISCLOSURES ARE BASED ESTIMATE WHERE NATURAL HAZARDS EXIST. THEY ARE NOT DEFINITIVE INDICATORS OF WHETHER OR NOT A PROPERTY WILL BE AFFECTED BY A NATURAL DISASTER. BUYER(S) AND SELLER(S) MAY WISH TO OBTAIN PROFESSIONAL ADVICE REGARDING THOSE HAZARDS AND OTHER HAZARDS THAT MAY AFFECT THE PROPERTY.

Seller represents that the information herein is true and correct to the best of the seller's knowledge as of the date signed by the seller.

Signature of Seller _________________________ Date __________

Agent represents that the information herein is true and correct to the best of the agent's knowledge as of the date signed by the agent.

Signature of Agent __________________________ Date _________

Signature of Agent __________________________ Date _________

Buyer represents that he or she has read and understands this document.

Signature of Buyer __________________________ Date _________

IMPORTANT NOTE: Although the Natural Hazard Disclosure Statement form is mandated only for properties subject to the Civil Code article entitled "Disclosure Upon Transfer of Residential Property", the appropriate disclosures must be made in some manner when any real property located in one of the zones is sold.

Federal and state agencies have identified certain areas once used for military training during World War II and which may contain live ammunition and other explosive devices. A seller of residential property, with actual knowledge that the property is located within one mile of such a potential hazard, must give the buyer written notice as soon as practicable before transfer of title. Civil Code §§ 1102.15, 1940.7..

An owner of property or the owner's agent is required to disclose to the buyer or tenant the manner or occurrence of the occupant's death upon the real property if the death occurred within three (3) years of the transferee's offer to purchase, lease or rent the property. Civil Code § 1710.2. T.

Every lease or rental agreement for residential property and every contract for the sale of real property must contain the following notice in not less than eight-point type: NOTICE: THE CALIFORNIA DEPARTMENT OF JUSTICE, SHERIFF'S DEPARTMENTS, POLICE DEPARTMENTS SERVING JURISDICTIONS OF 200,000 OR MORE AND MANY OTHER LOCAL LAW ENFORCEMENT AUTHORITIES MAINTAIN FOR PUBLIC ACCESS A DATA BASE OF THE LOCATIONS OF PERSONS REQUIRED TO REGISTER PURSUANT TO PARAGRAPH (1) OF SUBDIVISION (A) OF SECTION 290.4 OF THE PENAL CODE. THE DATA BASE IS UPDATED ON A QUARTERLY BASIS AND A SOURCE OF INFORMATION ABOUT THE PRESENCE OF THESE INDIVIDUALS IN ANY NEIGHBORHOOD. THE DEPARTMENT OF JUSTICE ALSO MAINTAINS A SEX OFFENDER IDENTIFICATION LINE THROUGH WHICH INQUIRIES ABOUT THE INDIVIDUAL MAY BE MADE. THIS IS A "900" TELEPHONE SERVICE. CALLERS MUST HAVE SPECIFIC INFORMATION ABOUT THE INDIVIDUAL THEY ARE CHECKING. INFORMATION REGARDING NEIGHBORHOODS IS NOT AVAILABLE THROUGH THE "900" TELEPHONE SERVICE. The delivery of this notice is deemed to be adequate to inform the tenant or buyer regarding the proximity of registered sex offenders. Civil Code § 2079.10a.

As a result of the Loma Prieta earthquake of October 17, 1989, the legislature declared that the disclosure of earthquake deficiencies should be provided to a prospective purchaser along with information on the possible vulnerabilities of the dwelling being purchased. The transferor of real property containing a residential dwelling built prior to January 1, 1960, is required to give the transferee a copy of the "Homeowner's Guide to Earthquake Safety" and complete the earthquake hazards disclosure regarding the property as soon as practicable before the transfer. The "Homeowner's Guide to Earthquake Safety," which is published by the Seismic Safety Commission, and includes maps and information on geological and seismic hazard conditions for all areas of the state. Business & Professions Code § 10149, Government Code §§ 88971.1, 8897.5, Civil Code § 2079.8).

The transferor or his agent of a building constructed of precast ("tilt-up") concrete wall construction or reinforced masonry buildings with inadequate wall anchorage to wood frame floors or roofs, built before January 1, 1975, must deliver to the purchaser a copy of the "Commercial Property Owner's Guide to Earthquake Safety" as soon as practicable before the sale, transfer, or exchange. The Commercial Guide is also published by the Seismic Safety Commission, and includes similar information. Business & Professions Code § 10147, Government Code §§ 8875.6, 8893.2, 8893.3, Civil Code § 2079.9.

Lead-based paint was banned for residential use in 1978 due to its potential health hazards. The Federal Environmental Protection Agency (EPA) publishes a pamphlet titled "Protect Your Family From Lead In Your Home." This pamphlet describes ways to recognize and reduce lead hazards. A seller (or lessor) of target housing must deliver this pamphlet to a prospective buyer (or tenant) before the contract is formed. In addition, the seller (or lessor) is required to deliver to the buyer (or tenant) a form, which contains lead-based paint hazards disclosures, a Lead Warning Statement. The buyer's (or tenant) must execute the form to indicate acknowledgment of receipt of that information, which should then be included as an attachment to the contract. Sellers (or lessors) and agents must retain this document for three years from the completion of the sale (or commencement of the lease/rental). A real estate agent must ensure that: his/her principal (seller or lessor) is aware of the disclosure requirements; the transaction documentation includes the required notifications and disclosures; the buyer or lessee/renter receives the EPA pamphlet; and in case of a sale, the buyer is offered an opportunity to conduct a risk assessment for lead-based paint. 42 U.S.C.S. § 4852d.

The seller or seller's agent must disclose to a buyer all environmental hazards within the actual knowledge of the seller or seller's agent. The seller or seller's agent should give the buyer of real property a pamphlet titled "Environmental Hazards: A Guide for Homeowners, Buyers, Landlords and Tenants." Civil Code § 2079.7.

The Mello-Roos Community Facilities District Act of 1982 authorizes the formation of community facilities districts, the issuance of bonds, and the levying of special taxes to finance designated public facilities and services. The seller of a property consisting of one-to-four dwelling units subject to the lien of a Mello-Roos community facilities district must make a good faith effort to obtain from the district a disclosure notice concerning the special tax and give the notice to a prospective buyer. Civil Code § 1102.6b.

A seller must disclose on the Transfer Disclosure Statement ("TDS") or, if mandated, the Local Option TDS, the existence of window security bars and any safety release mechanism on the bars. Civil Code § 1102.16.

Whenever a sale (or exchange) of a single family dwelling occurs, the seller must provide the buyer with a written statement representing that the property is in compliance with California law regarding smoke detectors. Health and Safety Code §§ 13113.7, 13113.8, 18029.6

The law does not require that a structural pest control inspection be performed prior to transfer of any real property. However, if required by the contract or by the lender, the seller or the seller's agent must deliver to the buyer a copy of a report and written certification, prepared by a registered structural pest control company, regarding the presence or absence of wood-destroying organisms. Delivery must occur before transfer of title and the real estate broker responsible for delivery must retain for three years a record of the actions taken to effect delivery. Civil Code § 1099; Business and Professions Code § 8519 et seq. and 10148.

State law prescribes minimum energy conservation standards for all new construction. Local Governments also have ordinances that impose additional energy conservation measures on new and/or existing homes. Some local ordinances impose energy retrofitting as a condition of the sale of an existing home. The seller and or agent(s) should disclose to a prospective buyer the requirements of the various ordinances, as well as who is responsible for compliance. Federal law requires that a "new home" seller (including a subdivider) disclose in every sales contract the type, thickness, and R-value of the insulation which has been or will be installed. Federal Trade Regulation § 460.16; Public Resources Code § 25402 et seq.

Federal law requires that a buyer of real property must withhold and send to the Internal Revenue Service (IRS) 10% of the gross sales price if the seller of the real property is a "foreign person." The primary grounds for exemption from this requirement are: (1) the seller's non-foreign affidavit and U.S. taxpayer I.D. number; (2) a qualifying statement obtained through the IRS attesting to other arrangements resulting in collection of, or exemption from, the tax; or (3) the sales price does not exceed $300,000 and the buyer intends to reside in the property. 26 U.S.C. § 1445.

In some sales transactions, the buyer must withhold 3 1/3% of the total sale price as state income tax and deliver the sum withheld to the State Franchise Tax Board. The escrow holder, in applicable transactions, is required by law to notify the buyer of this responsibility. A buyer's failure to withhold and deliver the required sum may result in the buyer being subject to penalties. If the escrow holder fails to notify the buyer, penalties may be levied against the escrow holder. Transactions to which the law applies are those in which: the seller shows an out of state address, or sale proceeds are to be disbursed to a financial intermediary of the seller; the sales price exceeds $100,000.00; and, the seller does not certify that he/she is a resident of California or that the property being conveyed is his/her personal residence, as defined in Section 1034 of the Internal Revenue Code. Revenue & Taxation Code §§ 18805,18815, and 26131.

In an escrow transaction for the purchase or exchange of real property where a policy of title insurance will not be issued to the buyer or to the parties to the exchange, the following notice must be provided to the buyer or the parties exchanging the real property, which must be signed and acknowledged in a separate document in the escrow: "IMPORTANT; IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN ORDER TO ENSURE YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING." [Note: While the statute does not expressly assign the duty, in practice the delivery of the notice has become an obligation of the escrow holder. A real estate broker conducting an escrow pursuant to the exemption set forth in Financial Code Section 17006(d) would, therefore, be responsible for delivery of the notice.] Civil Code § 1057.6.

The seller of any real property must certify in writing to a prospective buyer that the water heater has been braced, anchored or strapped to resist falling or horizontal movement due to earthquake motion. The California Plumbing Code enumerates the minimum standards required. Health and Safety Code § 19211).

The seller of a separate interest in a common interest development such as a community apartment project, condominium project, planned development, or stock cooperative must provide a prospective buyer with certain specified documents, such as financial statements of the homeowners' association or other required documents as specified in the code. Civil Code §§ 1368, 1375, and 1375.1.

1. Material Fact. A fact is material as a matter of common law fraud if "a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question." To avoid a completely useless subjective standard, undisclosed facts are considered material if they have a "significant" and "measurable" effect on the market value of the property.

While the seller should realize what facts detrimentally affect the value of the property, sellers often fail (or refuse) to recognize material facts. Thus, the agent should not rely solely on the seller's interpretation of what facts will affect the value and desirability of the property to a reasonable buyer. Some facts are so obviously material that there is no issue as to materiality. In one case, the buyer successfully sued the seller and the agents for fraud for selling him a house and failing to disclose that

1. The seller had performed electrical and other work without a permit and in violation of building codes,
2. The security gate was improperly wired,
3. The driveway had been painted over to conceal defects, and
4. The seller and agents failed to disclose that a main line of the Santa Fe Railroad was located on a hill across the street from the property (train passed 14 times a day!).

Finding all of these facts material, a jury awarded the buyer the difference in value from what he believed to purchase and what he actually received.

In another case, the sellers and their agents were held liable for fraud for failing to disclose that two bathrooms were in violation of zoning ordinances. The bathrooms required demolition and the judgment against the sellers and agents was $108,867 in general damages, $34,900 in punitive damages, $12,290 in interest, $44,000 in attorney fees, and $2,000 in costs.

The following conditions represent the most common examples of what the courts have repeatedly found to be so material so that a seller's failure to disclose them is actionable:

• unstable soil
• seismic hazards
• filled soil (even in small quantities)
• prior slide
• zoning violations
• environmental hazards
• water seepage
• structural defects
• building code violations
• condemnation
• foundation defects
• unstable retaining wall
• defective septic system
• insect damage/infestation
• nuisances

The materiality of each of the facts listed above is objectively determinable; in each case the undisclosed fact had a measurable economic effect on the market value of the property or the value of the buyer's use of the property.

Sellers should disclose a prior problem even though they believe it has been corrected. In 1982, a California court held that a seller had to disclose prior slides and seepage even though the seller believed the cause of the condition had been corrected. In the case of a nuisance, if an injunction to stop the nuisance has been repeatedly violated, the seller is not in good faith if he does not disclose the prior problems.