California law requires sellers of residential property to make various disclosures to a prospective buyer. Specifically, among other things, sellers must deliver a statutory Transfer Disclosure Statement (the “TDS”) to the buyer prior to executing a sales contract. In turn, the TDS contains a checklist, notifying the prospective buyer of problems (or potential problems) with the property and stating that the representations are those of the sellers exclusively and not the sellers’ real estate agent. If the sellers are represented by an agent, the agent has a portion of the TDS to complete, as well.
Under California law, what are the disclosure obligations of sellers and their agents? This article is not exhaustive, but it sets forth some helpful pointers regarding the nature and scope of these obligations.
An Agent’s Disclosure and Inspection Obligation Generally. Under California Civil Code Section 2079, a seller’s agent must (a) “conduct a reasonably competent and diligent visual inspection of the property” and (b) disclose to the prospective buyer “all facts materially affecting the value or desirability of the property that an inspection would reveal.” (Cal. Civ. Code § 2079(a).) Of note, such an inspection does not include “areas that are reasonably and normally inaccessible” or areas that are off the site of the property. (Id. at § 2079.3.) Neither is the agent required to inspect public records or permits concerning the title or use of the property. (See id.) As for what “material” means in this context, courts have held that “[u]ndisclosed facts are material if they would have a significant and measurable effect on market value.” (Assilzadeh v. Calif. Fed. Bank, 82 Cal.App.4th 399, 410 (2000) (italics added).)
An Agent Must Follow Up on “Red Flags.” As noted above, a seller’s agent must “conduct a reasonably competent and diligent visual inspection of the property.” (Cal. Civ. Code § 2079(a).) This means that, if an agent observes “red flags” indicating potential problems during an investigation, the agent has a duty to further investigate those “red flags.” In Easton v. Strassburger, 152 Cal.App.3d 90, 104 (1984), for instance, the Court of Appeal found the seller’s agents should have requested a soils report or taken other steps to ascertain the existence of soil problems – given that the agents knew the home was built on fill soil and that settlement and erosion problems are commonly associated with such soil. Moreover, the agents had also observed uneven floors during their inspection. In sum, the Easton decision emphasizes that agents’ obligations are to conduct a “diligent” investigation (with the goal being to make accurate disclosures); to be cognizant of “red flags”; and to not bury their heads to the obvious.
Disclose Only Facts, Not Opinions. Sellers and their agents should disclose only facts–not opinions–in their disclosures to a prospective buyer. For instance, let’s say that the property has a water leak, and the sellers know with certainty the cause of that leak. In such instance, the sellers should disclose that information to the prospective buyer. But if the sellers are less than certain about the cause, they should not speculate, surmise, or offer their opinions as to the cause of the leak. Facts, not opinions, are what the disclosure obligation requires–and volunteering any information beyond just the facts is not required or advisable.
Disclose Only Facts, Not the Purported Legal Ramifications. Relatedly, given that the paramount objective is to disclose only facts (and nothing else), it follows that sellers (and their agents) should refrain from making representations about the purported legal ramifications of certain facts. For example, let’s say sellers disclose that their property is subject to certain zoning restrictions. The disclosure obligation ends there; they are not required to also disclose information about the purported adverse legal ramifications or consequences of such zoning restrictions. As one court stated, “[I]t is not the obligation of the seller to research local land-use ordinances and advise a buyer as to their effect on the realty.” (Sweat v. Hollister, 37 Cal.App.4th 603, 609 (1995).) Indeed, the “existence and effect of city ordinances . . . constitute information as readily available to the [buyers] as to the [sellers].” (Id. at 608.)
“Short Sale” Status. What about a seller’s obligation to disclose the property’s “short sale” status? One court has spoken relatively directly on this issue. In Holmes v. Summer, 188 Cal. App.4th 1510, 1514 (2010), the property at issue was “overencumbered” and could not be sold at the agreed-upon purchase price–“unless either the lenders agree[d] to short sales or the seller deposit[ed] . . . $392,000 in cash into escrow to cover the shortfall.” Against this backdrop, the Court of Appeal found that the seller’s agents were required to disclose to the buyers that there was a “substantial risk that the seller could not transfer title free and clear of monetary liens and encumbrances.” (Id. at 1515.)
Disclose Both Prior and Pending Lawsuits. As noted before, sellers are required to deliver a TDS to the buyer before executing the sales contract. Among other things, on the TDS, the sellers must disclose lawsuits affecting the property. One question is whether the sellers must disclose only pending lawsuits, or alternatively, prior lawsuits as well. In Calemine v. Samuelson, 171 Cal.App.4th 153 (2009), the Court of Appeal addressed this question. There, the seller had disclosed the fact of the condominium’s prior water intrusion–but had failed to disclose two prior lawsuits relating to this issue. The Court of Appeal reversed the trial court’s decision and held that there was a triable issue of fact “as to whether the prior litigation was a material fact which should have been disclosed.” (Id. at 155.) In light of this decision, sellers are well-advised to disclose both pending as well as prior lawsuits.
Fortunately, for sellers and their agents, the onus does not fall solely on them. Prospective buyers must also exercise reasonable care to protect themselves, including those facts known to the prospective buyers or within their diligent attention and observation. (See Cal. Civ. Code § 2079.5.) Regardless, sellers and their agents should be thorough, detailed, and above all, fact-based in their disclosures to prospective buyers.