120 Week 4 F /For WIZARD KIM

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Chapter 13: Property related charges 85

After reading this chapter, you will be able to:

• assess the conditions and circumstances a broker is to disclose in a real estate transaction;

• recognize a broker’s general or agency duties owed to others to inspect, confirm, and report the physical, financial, legal and regulatory conditions of a property; and

• identify circumstances when a broker can or cannot be held liable for failing to disclose property information in a real estate transaction.

Learning Objectives

Property related charges

Chapter

A broker and their sales agents are to disclose the physical nature and condition of a property when first providing property information to individuals interested in making an offer to purchase. Thus, brokers and agents have a duty to timely disclose to all parties involved in a real estate transaction any significant physical aspects of a property that may affect the property’s market value or the buyer’s decision to purchase.

A broker has a general duty to all parties in any type of sales transaction to disclose to buyers at the earliest possible moment their awareness of any

Sold “as-is” is a prohibited disclaimer — property is sold “as-disclosed”

Annual Property Operating Data Sheet (APOD)

as-is clause

eminent domain

further-approval contingency

material fact

Transfer Disclosure Statement (TDS)

Key Terms

For a further discussion of this topic, see Ethics Chapter 3 of Agency, Fair Housing, Trust Funds, Ethics and Risk Management.

86 Real Estate Principles, Second Edition

property defects. The duty to disclose known conditions on one-to-four unit residential property requires the seller’s broker to provide prospective buyers or their agents with the seller’s Transfer Disclosure Statement (TDS).

To be effective, property disclosures including the TDS are to be provided to the buyer as soon as practicable – meaning as soon as possible – upon the commencement of negotiations and prior to making an offer.1 [See RPI Form 304; see Chapter 15]

If the disclosures are not timely made, the buyer may:

• cancel the offer on discovery of the broker’s failure to disclose prior to the buyer entering into a purchase agreement with the seller; or

• close escrow on the purchase and seek recovery of the costs to cure the untimely disclosure of known defects.

Any attempt to have the buyer of a one-to-four unit residential property waive their right to the mandated property disclosure statement (TDS) is unenforceable. 2

For example, a seller’s broker is aware the seller’s residence fails to conform to building and zoning regulations. The defect, if known to a buyer, would likely affect the price they are willing to pay. The defect is more commonly known as a material fact.

The broker knows the buyer who is interested in making an offer is not aware of the violations and might reconsider the price they are willing to pay for the property if they learn of the violations. The broker decides not to disclose their knowledge of the defect.

In an attempt to cover the omission, the broker writes an “as-is” disclaimer into the purchase agreement. The “as-is” provision states the buyer accepts the property in its current “as-is” condition.

After the buyer acquires the property, the city refuses to provide utility services to the residence due to the building and zoning violations.

The buyer demands their money losses from the broker, claiming the broker breached their general agency duty to disclose conditions of the property known to the broker before the buyer agreed to purchase.

The broker claims the buyer waived their right to collect money damages when they signed the purchase agreement with the “as- is” disclaimer.

Does an “as-is” disclaimer shield the broker from liability for the buyer’s losses caused by the building and zoning violations?

No! The seller’s broker has a general duty owed to all parties to a transaction. The general duty requires the seller’s broker to disclose all property conditions known, or ought to have been known, to the seller’s broker due to their

1 Calif. Civil Code §§1102 et seq

2 CC §1102

All property conditions disclosed

material fact A fact that, if known, might cause a prudent buyer or seller of real estate to make a different decision regarding what price to offer or demand for a property or whether to remain in a contract or cancel it.

as-is clause An unenforceable provision stating the buyer accepts the property without a full disclosure of known conditions. Properties are sold “as-disclosed,” never “as-is.”

Transfer Disclosure Statement (TDS) A mandatory disclosure prepared by a seller and given to prospective buyers setting forth any property defects known or suspected to exist by the seller, generically called a condition of property disclosure. [See RPI Form 304]

Chapter 13: Property related charges 87

mandated inspection that affect the value and marketability of the property. The duty is not excused by writing an “as-is” disclaimer into the purchase agreement in lieu of making the factual disclosures before an agreement is entered into with the seller. 3

Consider a buyer who makes an offer to purchase a residence. The seller’s broker is aware of a large structural crack in the foundation of the residence that is not apparent on a visual inspection. The broker delivers a TDS to the buyer’s agent, who in turn hands it to the buyer, stating the residence has no defective conditions. Based on the report, the buyer acquires the property. [See RPI Form 304]

More than two years later, the buyer discovers the crack. The buyer claims the seller’s broker is liable for the cost of repairing the foundation since the broker failed to disclose the crack. The broker claims the buyer’s action is barred by the two-year statute of limitations for misrepresentation since the broker only owed the buyer the statutory duty to disclose defects which would be revealed by a visual inspection.

Is the broker liable to the buyer for intentionally misrepresenting the existence of the crack known to the broker, in spite of the two-year statute of limitations for negligent misrepresentations?

Yes! The buyer’s claim is not time-barred under statutes requiring the broker to visually inspect and disclose observable defective property conditions. Liability is imposed on the broker for their intentional misrepresentation, by omission, of their actual knowledge of a condition of the property not readily visible when they stated defective conditions did not exist in the seller’s TDS.4

Consider a broker who is the exclusive agent of a buyer in the purchase of a one-to-four unit residential property. Without first receiving a survey or title report to verify their representations, the broker advises their buyer about the amount of acreage and the extent of an easement on the property.

The buyer enters into a purchase agreement and acquires the property in reliance on the broker’s verbal representations about the size and easement on the property. A further-approval contingency calling for the buyer to confirm the representations is not included in the purchase agreement.

More than two years after closing, the buyer discovers the acreage and easement representations made by the broker are false. The property was worth less than the price paid.

The buyer seeks to recover the difference in property value from the broker. The broker claims the buyer’s recovery is barred by a two-year statute of limitations for breach of a broker’s agency duty to inspect and disclose defects on one-to-four unit residential property.

3 Katz v. Department of Real Estate (1979) 96 CA3d 895

4 Williams v. Bennet Realtors (1997) 52 CA4th 857

No coverage under the statute of limitations

Real estate size and boundaries will be accurately represented

further-approval contingency A provision in an agreement calling for the further approval of an event or activity by the seller, buyer or third party as a condition for further performance or the cancellation of the transaction by a person benefitting from the provision. [See RPI Form 185 §9 and 279 §2]

88 Real Estate Principles, Second Edition

The buyer claims their action is not time-barred since the two-year statute of limitations only applies to negligent misrepresentations, not to the recovery of a loss caused by the broker’s intentional misrepresentations about facts related to the property’s physical condition.

Is the buyer entitled to recover their loss in property value?

Yes! The broker intentionally misrepresented the property’s size and easement without first confirming what they consisted of. The two-year statute of limitation only applies to a broker who inspects the property and, as a result of the inspection, negligently fails to disclose facts that a reasonably diligent on-site inspection would have revealed.

Here, the broker made representations as fact without first verifying the information. Nor did the broker advise the buyer of their source of information and that the information was not verified. Thus, a three-year statute of limitations for intentional misrepresentation applies, commencing on the date the buyer discovers the falsity of the broker’s representation.5

A broker and their agents need to accurately represent the title restrictions, potential use, and any conditions, covenants and restrictions (CC&Rs) controlling real estate to a prospective buyer or tenant.

Further, a broker’s duty to disclose a known potential future use of a property extends beyond disclosure of title and zoning conditions.

For example, a buyer is interested in purchasing undeveloped property for commercial development. The property is located next to a maintenance yard owned by the state.

The seller’s broker has been previously contacted by the state regarding its intent to someday acquire the property to expand the maintenance yard through condemnation, also known as eminent domain.

During purchase negotiations, the buyer asks the seller’s broker if the state is interested in the property. The seller’s broker informs the buyer the state has no interest in acquiring the property.

The buyer enters into a purchase agreement with the seller. During escrow, the buyer has plans drawn and obtains the necessary permits for development and construction on the property.

Just before escrow closes, the buyer discovers the state intends to acquire the property through condemnation.

The buyer proceeds to take title to the property and later grants the property to the state in a condemnation proceeding.

Here, the seller’s broker is liable for the out-of-pocket losses incurred by the buyer for their lost use of the property. The broker is also liable for punitive damages for the intentional failure to disclose the state’s interest in acquiring 5 Field v. Century 21 Klowden-Forness Realty (1998) 63 CA4th 18

Disclosure of potential and

future use

eminent domain The right of the government to take private property for public use on payment to the owner of the property’s fair market value.

Chapter 13: Property related charges 89

the property. The buyer relied on the broker’s information regarding the state’s activities when they determined whether the property was suitable for their future development plans.6

A broker and their agents need to advise a prospective buyer or tenant of any known material facts that may affect the value or desirability of the purchased or rented property.

Four categories of conditions contribute to or detract from the value of property:

• physical condition of soil and improvements;

• land use and title conditions;

• operating income and expenses; and

• location hazards and surrounding area impact.

For example, a buyer seeks property for investment purposes. The broker recommends an apartment complex as the source of spendable income and equity buildup for the buyer.

The broker analyzes the suitability of an income property which is for sale by preparing an Annual Property Operating Data Sheet (APOD) and reviewing it with the buyer. [See Form 352 accompanying this chapter]

However, the property’s scheduled rental income is represented to be far greater than the actual income. Additionally, the broker represents the property is in excellent physical condition. However, the property requires extensive renovation due to deferred maintenance.

The broker makes these representations based on information received from the seller. The broker does not investigate maintenance, expense, and income records of the property to check the accuracy of the seller’s representations. Further, the broker does not advise the buyer the seller is the source of the property information.

At the urging of the seller, the buyer is dissuaded from inspecting the property by the broker.

Relying solely on the broker’s representations as to the operating income and condition of the property, the buyer purchases the property.

After closing, the buyer realizes the operating income is far less than the scheduled income stated on the property operating statement. The buyer discovers tenants are delinquent in the payment of rent and incurs extensive deferred maintenance expenses. These conditions collectively reduce the projected net spendable income, and in turn the property’s market value.

Eventually, the buyer defaults and loses the property in foreclosure.

6 Storage Services v. Oosterban (1989) 214 CA3d 498

Marketability disclosure

Annual Property Operating Data Sheet (APOD) A worksheet used when gathering income and expenses on the operation of an income producing property, to analyze its suitability for investment. [See RPI Form 352]

90 Real Estate Principles, Second Edition

A broker marketing property as an income-producing investment owes a duty to a buyer to research and disclose whether the property produces adequate income to meet expenses.

Alternatively, the broker may include a contingency provision in the purchase agreement calling for the buyer to confirm the representations or cancel the agreement prior to closing.

Brokers cannot merely pass on statements made by the seller as to the property’s condition and income and expenses generated by the property

Form 352

Annual Property Operating Data Sheet (APOD)

Page 1 of 2

Chapter 13: Property related charges 91

Form 352

Annual Property Operating Data Sheet (APOD)

Page 2 of 2

without first reviewing them for apparent inaccuracies. When property information is passed on to others, the broker needs to advise them about the source of the information and any known need for further investigation into their accuracy. Thus, the broker is liable to the buyer for the buyer’s lost property value.7

7 Ford v. Cournale (1973) 36 CA3d 172

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Brokers and agents are to disclose to all parties involved in a real estate transaction all significant physical aspects of a property which may affect the property’s market value or a buyer’s decision to purchase. Property disclosures will be made to the buyer before offers are prepared and prices agreed to.

A broker is obligated to disclose the physical condition of soil and improvements of a property, the land use and title conditions, the operating income and expenses of the property, and location hazards and the impact of the surrounding area. Further, the actual legal size and boundaries of a property need to be disclosed by a broker. A broker needs to also accurately represent the title restrictions and potential future use of real estate to a prospective buyer or tenant.

A broker marketing property as an income-producing investment owes a duty to a buyer to research whether the property produces adequate income to meet expenses.

Annual Property Operating Data Sheet (APOD) .................. pg. 89 as-is clause ...................................................................................... pg. 86 eminent domain ........................................................................... pg. 88 further-approval contingency .................................................. pg. 87 material fact ................................................................................... pg. 86 Transfer Disclosure Statement (TDS) ....................................... pg. 86

Chapter 13 Summary

Chapter 13 Key Terms

Quiz 4 Covering Chapters 13-17 is located on page 609.

A broker of one-to-four unit residential property is relieved of the responsibility of verifying the representations regarding property conditions they receive from others and pass on to buyers as long as the source of information is disclosed to the buyer.

The source of information is typically the seller, the seller’s broker or a home inspector.8

Further, the broker only has a duty to inspect and disclose material facts observable or known to them, not to independently verify the claims of their disclosed source.9

8 CC §§2079 et seq.

9 Robinson v. Grossman (1997) 57 CA4th 634

Verifying representations

from others

Chapter 14: The seller’s agent and the prospective buyer 93

After reading this chapter, you will be able to:

• distinguish an agent’s specific agency duty owed to their client from the limited general duty they owe to others in a transaction;

• conduct a due diligence investigation to observe property conditions adversely affecting value for disclosure to prospective buyers;

• protect your seller by ensuring all readily known material facts on the listed property are disclosed to prospective buyers before the seller enters into a purchase agreement; and

• understand the need to qualify your representations in a transaction when they are opinions and not based on the results of an investigation into the facts.

A seller’s agent and the prospective buyer

Chapter

A seller’s broker and their agents have a special fiduciary agency duty, owed solely to a seller who has employed the broker, to diligently market the listed property for sale. The objective of this employment is to locate a prospective buyer who is ready, willing and able to acquire the property on the listed terms.

On locating a prospective buyer, either directly or through a buyer’s agent, the seller’s agent owes the prospective buyer, and thus also the buyer’s

fiduciary duty

general duty

title conditions

Transfer Disclosure Statement (TDS)

Key Terms

Learning Objectives

For a further discussion of this topic, see Chapter 22 of Real Estate Practice.

General duty to voluntarily disclose

94 Real Estate Principles, Second Edition

agent, a limited, non-client general duty to voluntarily provide critical factual information on the listed property, collectively called disclosures of material facts.

What is limited about the duty is not the extent or detail to which the seller’s agent may go to provide information, but the minimal quantity of fundamental information and data about the listed property which the seller’s agent will hand to the prospective buyer or the buyer’s agent before the seller enters into a purchase agreement.

The information disclosed by the seller’s agent need only be sufficient enough in its content to place the buyer on notice of facts which may have an adverse effect on the property’s value or interfere with the buyer’s intended use.

In California’s public policy pursuit of transparency in property information between sellers and buyers, the disclosure obligations of the seller’s agent to voluntarily inform prospective buyers about the fundamentals of the listed property act to eliminate asymmetry and power relationships in sales transactions.

The seller’s agent may not:

• deliver up less than the minimum level of information to put the buyer on notice of the property’s fundamentals affecting value;

• give unfounded opinions or deceptive responses in response to inquiries; or

• stifle inquiries about the property in a vigorous pursuit of the best financial advantage possible for the seller (or the seller’s broker).

The methods for gathering adverse facts about a property’s fundamental characteristics, as well as facts which enhance value, require the seller’s agent to actively take steps to make specific disclosures when marketing a one-to-four unit residential property for sale, actions which include:

• conducting a visual inspection of the property to observe conditions which might adversely affect the market value of the property, and then enter any observations of adverse conditions on the seller- prepared Transfer Disclosure Statement (TDS), also known as a Condition of Property Disclosure, if not already noted on the TDS by the seller or if inconsistent with the seller’s disclosures, whether or not a home inspector’s report has or will be received by the seller [See first tuesday Form 304];1

• assuring seller compliance with the seller’s duty to deliver statements to prospective buyers as soon as possible by providing the seller with statutory forms at the listing stage to be filled out, signed by the seller, and returned to the agent for inclusion in the marketing package to be handed to prospective buyers on their inquiry into additional property information;

1 Calif. Civil Code §2079

general duty The duty a licensee owes to non-client individuals to act honestly and in good faith with up-front disclosures of known conditions which adversely affect a property’s value. [See RPI Form 305]

fiduciary duty That duty owed by an agent to act in the highest good faith toward the principal and not to obtain any advantage over their principal by the slightest misrepresentation, concealment, duress or undue influence.

Transparency as public

policy objective

Gathering facts on adverse features

Chapter 14: The seller’s agent and the prospective buyer 95

• reviewing and confirming, without further investigation or verification by the seller’s agent, that all the information and data in the disclosure documents received from the seller are consistent with information and data known to the seller’s agent;

• advising the seller on risk avoidance procedures by recommending the seller obtain third-party inspections of the property’s condition and its components (roof, plumbing, septic, water, etc.), to reduce the exposure to claims by a buyer who might discover deficiencies in the property not known to the seller or the seller’s agent; and

• responding to inquiries by the prospective buyer or buyer’s agent into conditions relating to any aspect of the property with a full and fair answer of related facts known to the seller’s agent which are or might be considered detrimental to the value of the property.

A seller’s agent’s statutory duty owed to prospective buyers to disclose facts about the integrity of the physical condition of a listed one-to-four unit residential property is limited to prior knowledge about the property and the observations made while conducting the mandatory visual inspection.

To complete the disclosure process, 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.

Accordingly, all property information received from the seller is reviewed by the seller’s agent for any inaccuracies or untruthful statements known or suspected to exist by the seller’s agent. Corrections or contrary statements by the seller’s agent necessary to set the information straight are included in the document or the document corrected before the information may be used to market the property and induce prospective buyers to make an offer to acquire the property.

The extent to which disclosures about the physical condition of the property will be made is best demonstrated by what the seller’s agent is not obligated to disclose. All facts adversely affecting value and known to the seller’s agent will be disclosed – brought to the attention of prospective buyers at the earliest opportunity.

On the other hand, buyer’s agents need to understand that seller’s agents have no duty to investigate any of the information or data disclosed as provided by the seller — the seller’s agent need not make an effort to authenticate its accuracy or truthfulness before passing it on to the prospective buyer.

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

• review the information received from the seller;

• include comments about the agent’s actual knowledge and observations made during the visual inspection of the property which expose the inaccuracies, inconsistencies, false nature or omissions in the seller’s statements; and

The pass- through of filtered information

agent, a limited, non-client general duty to voluntarily provide critical factual information on the listed property, collectively called disclosures of material facts.

The seller’s agent may not:

• deliver up less than the minimum level of information to put the buyer on notice of the property’s fundamentals affecting value;

• give unfounded opinions or deceptive responses in response to inquiries; or

• stifle inquiries about the property in a vigorous pursuit of the best financial advantage possible for the seller (or the seller’s broker).

1 Calif. Civil Code §2079

Transparency as public

policy objective

Gathering facts on adverse features

96 Real Estate Principles, Second Edition

• identify the source of the information as the seller.

A seller’s agent on a one-to-four unit residential property owes no affirmative duty to a prospective buyer to gather or voluntarily provide the prospect with any facts unknown to the seller’s agent about:

• the property’s title conditions [See Chapter 51 and 52];

• the operating expenses for the property (and any tenant income) the buyer will experience during ownership;

• the zoning or other use restrictions which may affect the buyer’s future use of the property, except for the existence of industrial zoning which affects the property, and nearby military ordnance locations;

• the income tax aspects of the buyer’s acquisition (or seller’s disposition) of the property [See Chapter 72];

• the suitability of the property based on the facts disclosed to actually meet the buyer’s objectives in the acquisition; and

• information or data on any mixed use of the property.

However, when 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 response includes material facts known to the seller’s agent about the subject matter of the inquiry and is free of half-truths and misleading statements.

Conversely, it is the buyer or the buyer’s agent who has a duty to care for and protect the buyer’s best interests in the purchase of property. The buyer’s agent, not the seller’s agent, is to determine what due diligence efforts are necessary to learn the extent to which the facts disclosed by the seller’s agent interfere with the buyer’s expectations for the use and enjoyment of the property before allowing the buyer to make the decision to purchase or close escrow.

A seller’s agent on a one-to-four unit residential property owes no duty to a prospective buyer to address the existence, much less the nature, of an easement located on the listed property since they are public records.

However, when the seller’s agent responds to an inquiry by the prospective buyer by providing information on the easement, the seller’s agent is to state fully and fairly, without deceptive or misleading wording, their knowledge of the easement.

Further, the seller’s agent needs to:

• identify the source of information if they have not confirmed its accuracy or correctness; or

The “dumb agent” rule

for SFRs

title conditions Encumbrances such as liens, conditions, covenants and restrictions and easements which affect title to property.

Respond fully and fairly

In response to an inquiry

Chapter 14: The seller’s agent and the prospective buyer 97

• condition the response in such a way as to prevent the prospective buyer from justifying their reliance on the information without further investigation.

The buyer’s inquiry is entitled to a response based on the seller’s agent’s working knowledge of the underlying facts or identification of the source of the information given. If the seller’s agent lacks sufficient knowledge to comment, they are duty-bound to say so.

A seller’s agent locating a prospective buyer for their client’s one-to-four unit residential property owes a duty to the prospective buyer to conduct a reasonably diligent visual inspection of the property for defects which adversely affect the value of the listed property.

On completing the inspection, the seller’s agent is to note on the (seller’s) TDS any defects observable or known to the seller’s agent which are not already noted by the seller or are inconsistent with the seller’s disclosures. The TDS is to be handed to prospective buyers as soon as practicable (ASAP).2

However, the visual inspection and investigation of one-to-four unit residential property by the seller’s agent and the disclosure of their knowledge and observations excludes other readily available information not already known to the seller’s agent, such as knowledge that may be obtained by:

• the inspection of areas reasonably and normally inaccessible to the broker;

• the investigation of off-site areas and areas surrounding the property; and

• the inquiry into or review of public records or permits concerning title or use of the property.3

However, the minimum disclosure rule for seller’s agents does not apply to a buyer’s broker or agents, much less limit the buyer’s agent’s duty to fully and fairly inform and advise on what investigations the buyer ought to undertake.

Further, the minimum one-to-four unit inspection and reporting requirements imposed on seller’s agents excludes the common law duty still imposed on seller’s agents of other types of property to further investigate and disclose to buyers or sellers any material facts the agent discovers regarding:

• title conditions;

• the financial consequences of owning the property, such as the property’s operating costs; or

• the tax aspects of the transaction (seller only).

2 CC §§2079 et seq.

3 CC §2079.3

Minimum level of disclosure

Common law duty

98 Real Estate Principles, Second Edition

A seller’s agent owes a limited general duty to any prospective buyer to voluntarily provide information on the property which may affect its value, collectively called disclosures.

These disclosures are to be sufficient to place the buyer on notice of facts that may affect the property’s value or the buyer’s use. This non- fiduciary duty of good faith and fair dealing prevents the seller’s agent from exploiting a prospective buyer by:

• providing less than the minimum required disclosures;

• giving unfounded opinions or deceptive responses; or

• stifling the buyer’s attempts to learn more about the property.

All property information received from a seller is reviewed by the seller’s agent for inaccuracies or untruthful statements. However, a seller’s agent need not investigate the seller’s claims any further before using the information to market the property so long as they are not known to the agent to be false.

A seller’s agent owes a duty to the prospective buyer to conduct a reasonably diligent visual inspection of the property for defects which adversely affect the value of the listed property. The seller’s agent notes on the Transfer Disclosure Statement (TDS) any defects observable or known to the seller’s agent which are not already noted by the seller or are inconsistent with the seller’s disclosures. The TDS is handed to prospective buyers as soon as practicable, putting the buyer and the buyer’s agent on notice of physical defects in the property which are observable or known to the seller or the seller’s broker and their agents.

fiduciary duty ................................................................................ pg. 94 general duty ................................................................................... pg. 95 title conditions .............................................................................. pg. 96 Transfer Disclosure Statement (TDS) ....................................... pg. 94

Chapter 14 Summary

Chapter 14 Key Terms

Quiz 4 Covering Chapters 13-17 is located on page 609.

The one-to-four unit disclosure limitation on seller’s agents serves to set a minimum level of information and data to be disclosed to put the buyer and the buyer’s agent on notice of physical defects in the property which are observable or known to the seller or the seller’s broker and their agents.