The recent appellate decision of Richman v. Hartley is critical for California real estate agents and sellers to know as it clarifies the mandatory disclosure requirements for property sales.
Richman v. Hartley dealt with the sale of a mixed-use property in Ventura, California. The property was improved with a residential duplex and a commercial building. Plaintiff-seller and defendant-buyer entered into the standard AIR purchase agreement (which is commonly used in commercial transactions) with a two year escrow. During the escrow period, the buyer-to-be leased the property. After the two year period ended, the buyer refused to close escrow because seller had not given him a Transfer Disclosure Statement (TDS). Seller then sued buyer for breach of contract.
The AIR contract included the following provision: “Seller shall make to Buyer, through escrow, all the applicable disclosures required by law…concerning the property….” This clause is a reference to Cal. Civ. Code § 1102.3, which provides in relevant part, “The transferor of any real property subject to this article shall deliver to the prospective transferee the written statement required by this article, as follows: (a) In the case of a sale, as soon as practicable before transfer of title.” Under Cal. Civ. Code § 1102(a), the disclosure requirement applies to “real property or residential stock cooperative, improved with or consisting of not less than one nor more than four dwelling units.”
The court affirmed the trial court’s decision to grant summary judgment in favor of the buyer. The court held that a seller’s duty to provide a TDS applies to ANY transfer of real property improved with one-to-four dwelling units, even if the property ALSO has commercial improvements. The seller argued that since the subject property had both residential and commercial buildings on it, the Code did not apply. The seller further argued that it was not the legislative intent to protect the buyer by providing a TDS in what the seller considered a commercial transaction.
The appellate court disagreed with the seller’s position, finding the language in Cal. Civ. Code § 1102(a) that states that a TDS is required for property “improved with or consisting of [residential property].” (emphasis added) was clear and unambiguous, and thus the disclosure requirement applied to mixed-use property, as long as the property included “one nor more than four dwelling units.” The court reasoned that had the legislature wanted to exclude mixed-use property, it would have included an explicit exclusion in the statute.
Additionally, the court held that a provision in the purchase agreement stating that the property was being sold in an “as is condition with all its faults” did not waive seller’s obligation to give the buyer a TDS. The court observed that the provision did not equate to a waiver of seller’s statutory duty because the transfer disclosure law states that any such purported waiver is void as against public policy. Cal. Civ. Code §1102(c).
Although all sellers of real property must disclose material defects in the property known by the seller, this case clarifies that strict compliance with Cal. Civ. Code §1102 is required anytime property with one to four residential units are included in the sale. However, this case did not address whether the TDS needs to address issues related the commercial property in addition to the residential property, so only time will tell how the Courts interpret that issue.
AUTHOR’S COMMENT – The buyer-to-be most likely chose not to close due to a change in the economy and prices for real property. However, due to seller’s omission, the buyer was able to get out of what he likely considered a bad deal based on this failure to provide a mandatory disclosure.
Brewer Offord & Pedersen LLP assist in the purchases and sales of property regularly, and are here to help. If you have any questions about this issue, or any real estate legal issues, please contact us at (650) 327-2900, or on the web at www.brewerfirm.com.