By: Kenneth W. Chung
As a general rule, all sellers of residential real estate property containing one to four units in California must complete and provide written disclosures to the buyer. The most commonly used form for such disclosures is the Transfer Disclosure Statement that the sellers will complete and sign.
What must be disclosed? Under California law, all material facts that affect the value or desirability of the property must be disclosed to the buyer. There is no specific definition or rule on what is considered to be a material fact. The circumstances of each case will be evaluated in determining whether the undisclosed fact was material or not. A fact will generally be deemed material if it has a significant and measurable effect on the value of the property. For example, if a buyer would not have purchased the property or would have paid less for the property had the buyer known about the undisclosed fact, then such fact would generally be deemed material which the seller was legally required to disclose. Examples of material facts that must be disclosed include structural problems with the house, soil problems, a leaking roof, unpermitted construction, neighborhood noise problems, and anything else that a buyer would deem to be important. If there is any doubt about whether a fact should be disclosed, then that fact should be disclosed so that the seller may be protected against the claim that the undisclosed fact was material and was intentionally concealed.
When should the disclosure be made? It's best to give the disclosures to the buyer as soon as possible so the buyer can make an informed decision. If a buyer will cancel the purchase because of the disclosed fact, it is better to know that earlier so that the seller may quickly put the property back on the market. The California Association of Realtors Residential Purchase Agreement requires the seller to provide all disclosures within seven days from when the purchase agreement has been accepted. Many sellers will prepare all disclosure documents prior to listing their property so that everything is ready to be presented as soon as an offer is accepted. Even after a buyer has waived all purchase contingencies, the buyer will have an additional five days to cancel the purchase transaction from the date that he receives a late disclosure. This cancellation period may vary depending on what is stated in the contract. Therefore, it is to the seller's benefit to provide the disclosures as soon as possible after accepting the offer.
Does the seller have to make disclosures when the property is being sold "AS-IS"? The answer is YES. A common misunderstanding by sellers is that disclosures are not necessary if the buyer agrees that the property is being purchased in its "as-is" condition. An "as-is" sale generally means that the buyer is accepting the defects on the property that are visible. The "as-is" sale does not excuse the seller from failing to disclose material facts or conditions that are not easily visible. For example, generally structural or soil problems are not visible to an ordinary person. Therefore, if the seller is aware of such problems, they must be disclosed to the buyer regardless of the "as-is" sale. The safer practice in an "as-is" sale is to include visible problems in the disclosure so as to avoid the possible argument as to whether a problem was visible or not. For example, although a defect on the floor may clearly be visible after the seller has moved out, the buyer claims that it was previously covered by a rug or furniture and thus was not visible.
Does the seller have to disclose a defect that has been repaired? Whether the seller must disclose a prior defect which the seller believes has been repaired is not currently clear under the law. Some court decisions state that if the defect was repaired, then the buyer would not be damaged from the seller's failure to disclose the prior defect and therefore the seller should not be liable. However, in another court decision, the court ruled that the seller was required to disclose prior mudslides on the property even though the seller believed it had been repaired. In addition to the uncertain state of the law, the other issue is how certain must the seller be that the defect was properly and fully repaired so as to avoid disclosure. As most sellers are not engineers or contractors, a defect that the seller honestly believes has been repaired may be susceptible to future recurring failures. Under these circumstances, defects that the seller believes have been fully repaired should still be disclosed to the buyer.
Death in property: Details that you do not need to disclose include whether a prior occupant had Acquired Immune Deficiency Syndrome (AIDS) or whether someone died on the property, as long as the death occurred more than three years before the current potential buyer's purchase offer. However, if a buyer asks you if anyone died at the property, you must still answer truthfully even if the death occurred more than three years before.
What happens if a seller fails to make required disclosures? If a required disclosure is not timely made, then the buyer will have the right to cancel the purchase within the time period stated in the contract. If required disclosures are not made at all, the seller may then be responsible for the cost of repairs and other damages resulting from the undisclosed defect. A seller could also be ordered by the court to take back the property and to reimburse the purchase price and other damages to the buyer. A seller can be held responsible for the buyer's attorney's fees. If the seller intentionally concealed a material disclosure, then the seller may also have to pay punitive damages to the buyer.
Since the consequences of failing to disclose may be quite significant, a seller's duty to disclose should be taken very seriously. In addition to avoiding the potential legal and monetary consequences, the seller will have the benefit of having peace of mind after making the required disclosures. The buyer may file a lawsuit against the seller for fraud and concealment for a period of three years from when the problem is discovered or when it reasonably could have been discovered. Therefore, rather than worrying about a potential lawsuit for three years, the better choice is to make all legally necessary disclosures. In some cases, what a seller believes to be a serious defect may not be as important to a buyer, or the defect can sometimes be resolved by negotiating a repair credit to the buyer during escrow. Sellers should consult with an experienced real estate attorney regarding any disclosure questions, and for assistance in documenting any settlements with the buyer.
Kenneth W. Chung is the managing partner of the real estate litigation and transactions department at Kring & Chung, LLP which is a full service law firm with 27 attorneys. He is a licensed real estate broker and has been licensed since 1986. He may be contacted at (949) 261-7700 or firstname.lastname@example.org