120 Week 3 A /For WIZARD KIM

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Chapter 15: Condition of property: the seller’s disclosures 99

After reading this chapter, you will understand:

• the affirmative duty a seller and the seller’s agent have to inspect and disclose their observations and knowledge about the property’s condition to a prospective buyer;

• the general duty of the seller and seller’s agent owed to prospective buyers to prepare a Transfer Disclosure Statement (TDS) presenting known conditions of property improvements with an adverse effect on value and hand it to a buyer or buyer’s agent before the seller enters into a purchase agreement; and

• the role of a home inspection report (HIR) to identify and disclose property conditions as a warranty of the property’s condition.

Learning Objectives

Condition of property: the seller’s disclosures

Chapter

The seller of a one-to-four unit residential property completes and delivers to a prospective buyer a statutory form called a Transfer Disclosure Statement (TDS), more generically called a Condition of Property Disclosure Statement.1 [See Figure 1, RPI Form 304]

The seller’s mandated use of the TDS requires it be prepared with honesty and in good faith, whether or not a seller’s agent is retained to review its content.2

1 Calif. Civil Code §§1102(a), 1102.3

2 CC §1102.7

Mandated on one-to-four residential units

home inspection home inspector

For a further study of this discussion, see Chapter 24 of Real Estate Practice.

Key Terms

100 Real Estate Principles, Second Edition

When preparing the TDS, the seller sets forth any property defects known or suspected to exist by the seller.

Any conditions known to the seller which might negatively affect the value and desirability of the property for a prospective buyer are to be disclosed, even though they may not be an item listed on the TDS. Disclosures to the buyer are not limited to conditions preprinted for comment on the form.3

Also, the buyer cannot waive delivery of the statutorily-mandated TDS. Any attempted waiver, such as an “as-is” provision in the purchase agreement, is void as against public policy.

3 CC §1102.8

Figure 1

Form 304

Condition of Property Disclosure

For a full-size, fillable copy of this or any other form in this book that may be used in your professional practice, go to realtypublications.com/forms

Chapter 15: Condition of property: the seller’s disclosures 101

While it is the seller who prepares the TDS, the TDS is delivered to the buyer by the agent who directly receives the purchase agreement offer from the buyer.

The failure of the seller or any of the agents involved to deliver the seller’s TDS to the buyer will not invalidate a sales transaction after it has closed. However, the seller and the seller’s broker are both liable for the actual monetary losses incurred by the buyer due to an undisclosed defect known to them.4

The TDS is handed to the buyer before the seller accepts a purchase agreement offer submitted by a buyer. If the TDS is delivered to the buyer after the seller enters into a purchase agreement, the delivery is untimely in violation of TDS rules, and the buyer may:

• cancel the purchase agreement on discovery of undisclosed defects known to the seller or the seller’s agent and unknown and unobserved by the buyer or the buyer’s agent prior to acceptance;5

• make a demand on the seller to correct the defects or reduce the price accordingly before escrow closes [See RPI Form 150 §11.2]; or

• close escrow and make a demand on the seller for the costs to cure the defects.6

The TDS is to be delivered to prospective buyer as soon as practicable on commencement of negotiations. As with the delivery of the Natural Hazard

4 CC §1102.13

5 CC §1102.3

6 Jue v. Smiser (1994) 23 CA4th 312

Delivery of the disclosure statement

Buyer’s right to cancel on delayed disclosure

Figure 1

Form 304

Condition of Property Disclosure Cont’d

102 Real Estate Principles, Second Edition

Disclosure Statement (NHDS), which has been dictated by the California Attorney General to be delivered ASAP, the TDS is delivered before entry into a purchase agreement.7

If the TDS is belatedly delivered to the buyer — after the buyer and seller enter into a purchase agreement — the buyer may elect to cancel the purchase agreement under a statutory three-day right to cancel. The buyer’s statutory cancellation right runs for three days following the day the TDS is actually handed to the buyer (five days if delivered by mail).8

As an alternative remedy to canceling the purchase agreement on receipt of an unacceptable TDS, the buyer may make a demand on the seller to cure any undisclosed material defect (affecting value) known to the seller or the seller’s agent prior to entering into the purchase agreement. If the seller’s agent knew or is charged with knowledge of the undisclosed defects at the time the buyer and seller entered into the purchase agreement, the buyer’s demand to cure the material defect may also be made on the seller’s agent. [See RPI Form 269]

If the seller will not voluntarily cure the defects on demand, the buyer may close escrow and recover the cost incurred (or valuation lost) to correct the defect without concern for the purchase agreement contingency provision stating the alternative statutory right to cancel the transaction. Defects known and undisclosed, or inaccurately disclosed, by the seller or the seller’s agent at the time the seller accepts the buyer’s purchase offer impose liability on those who knew or are charged with knowledge.9

Another alternative for the buyer is to perform on the purchase agreement by tendering a price reduced by the cost to repair or replace the defects known to the seller and untimely disclosed or discovered by the buyer while under contract. [See RPI Form 150 §11.2]

A competent seller’s agent will aggressively recommend the seller retain a home inspector before they market the property. The inspector hired will conduct a physical examination of the property to determine the condition of its component parts. On the home inspector’s completion of their examination, a home inspection report (HIR) will be prepared on their observations and findings, which is forwarded to the seller’s agent. [See Chapter 21]

A home inspector often detects and reports property defects overlooked by the seller and not observed during a visual inspection by the seller’s agent. Significant defects which remain undisclosed at the time the buyer goes under contract tend to surface during escrow or after closing as claims against the seller’s broker for deceit. A home inspector troubleshoots for defects not observed or observable to the seller’s agent’s eye.10

7 Calif. Attorney General Opinion 01-406 (August 24, 2001)

8 CC §1102.3

9 Jue, supra

10 Calif. Business and Professions Code §7195

Demand to cure an

undisclosed material

defect

Include a home

inspector

home inspector A professional employed by a home inspection company to inspect and advise on the physical condition of property improvements in a home inspection report for reliance by the seller, the seller’s agents and the buyer as a warranty of the condition of improvements.

Chapter 15: Condition of property: the seller’s disclosures 103

To greatly reduce the potential of buyer claims, and eliminate to the extent possible the risk of negligent property improvement disclosures, the HIR is coupled with preparation of the seller’s TDS. Both are presented to buyers before the seller accepts an offer.

A seller’s agent (or seller’s broker) is obligated to personally carry out a competent visual inspection of the property. The seller’s disclosures and defects noted in the HIR are entered on the TDS and reviewed by the seller’s agent for discrepancies. The seller’s agent then adds any information about their knowledge of material defects which have gone undisclosed by the seller (or the home inspector).

A buyer has two years from the close of escrow to pursue the seller’s broker and agent to recover losses caused by the broker’s or agent’s negligent failure to disclose observable and known defects affecting the property’s physical condition and value. Undisclosed and unknown defects permitting recovery are those observable by a reasonably competent broker during a visual on- site inspection. A seller’s agent is expected to be as competent as their broker in an inspection.11

However, the buyer will be unable to recover their losses from the seller’s broker if the seller’s broker or agent inspected the property and would not have observed the defect and did not actually know it existed.12

Following their mandatory visual inspection, the seller’s broker or agent needs to make disclosures on the seller’s TDS in full reliance on specific items covered in a home inspector’s report the seller obtained on the property. If the HIR is relied on after the seller’s agent property inspection when preparing the TDS and the TDS is later contested by the buyer as incorrect or inadequate in a claim on the broker, the broker and their agent are entitled to indemnification – held harmless – from the home inspection company issuing the report.13

Unless a seller is exempt, sellers of one-to-four unit residential real estate are required to fill out and furnish buyers with a statutory TDS when entering into a purchase agreement.14

Transactions which exempt the seller (but not the seller’s agent) from preparing and delivering the statutory TDS to the buyer include transfers:

• by court order, such as probate, eminent domain or bankruptcy;

• by judicial foreclosure or trustee’s sale;

• on the resale of real estate owned property acquired by a lender on a deed-in-lieu of foreclosure, or by foreclosure;

• from co-owner to co-owner;

11 CC §2079.4

12 CC §1102.4(a)

13 Leko v. Cornerstone Building Inspection Service (2001) 86 CA4th 1109

14 CC §1102

Mandatory inspection by the seller’s broker

home inspection A non-invasive examination of the mechanical, electrical and plumbing systems of a dwelling, as well as the components of the structure, such as the roof, ceiling, walls, floors and foundations.

Controlled and exempt sellers

104 Real Estate Principles, Second Edition

• from parent to child;

• from spouse to spouse, including property settlements resulting from a dissolution of marriage;

• by tax sale;

• by reversion of unclaimed property to the state; and

• from or to any government agency.15

The best property disclosure tool for exempt sellers is the preparation and delivery of the statutory TDS form (and a property inspector’s report) to prospective buyers or buyer’s agents on every type of transaction. If the transaction is exempt or concerns property other than one-to-four residential units, the form as a practical matter needs to be used.

15 CC §1102.2

If the TDS is belatedly delivered to the buyer — after the buyer and seller enter into a purchase agreement — the buyer may elect to cancel the purchase agreement under a statutory three-day right to cancel. As an alternative remedy to cancelling the purchase agreement on receipt of an unacceptable TDS, the buyer may make a demand on the seller to cure any undisclosed material defect affecting value that known to the seller or the seller’s agent prior to entering into the purchase agreement.

home inspection ......................................................................... pg. 103 home inspector ............................................................................ pg. 102

Chapter 15 Summary

Chapter 15 Key Terms

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

Chapter 16: Environmental hazards and annoyances 105

After reading this chapter, you will be able to:

• identify man-made environmental hazards which exist on a property, such as asbestos-containing building materials, radon gas or smoke;

• distinguish environmental hazards which exist off a property, such as military ordinance sites and airport influence areas;

• advise on the effect an environmental hazard has on the value and desirability of a property; and

• apply the rules for disclosure of environmental hazards to prospective buyers.

Environmental hazards and annoyances

Chapter

Environmental hazards are noxious or annoying conditions which are man-made hazards, not natural hazards. As environmental hazards, the conditions are classified as either:

• injurious to the health of humans; or

• an interference with an individual’s sensitivities.

In further analysis, environmental hazards which affect the occupant in use and enjoyment of the property are either:

• located on the property; or

• originate from sources located elsewhere.

environmental hazards Noxious or annoying man-made conditions which are injurious to health or interfere with an individual’s sensitivities.

Noxious man- made hazards

carcinogen

environmental hazards

hazardous waste

Learning Objectives

Key Terms

For a further discussion of this topic, see Chapter 30 of Real Estate Practice.

106 Real Estate Principles, Second Edition

Environmental hazards located on the property which pose a direct health threat on occupants due to construction materials, the design of the construction, the soil or its location, include:

• asbestos-containing building materials and products used for insulation, fire protection and the strengthening of materials;1

• formaldehyde used in the composition of construction materials;2

• radon gas concentrations in enclosed, unventilated spaces located within a building where the underlying rock contains uranium;3

• hazardous waste from materials, products or substances which are toxic, corrosive, ignitable or reactive;4

• toxic mold;5

• smoke from the combustion of materials, products, supplies or substances located on or within the building;6

• security bars which might interfere with an occupant’s ability to exit a room in order to avoid another hazard, such as a fire;7 and

• lead. [See Chapter 18]

Environmental hazards located off the property, but which have an adverse effect on the use of the property due to noise, vibrations, odors or some other ability to inflict harm, include:

• military ordnance sites within one mile of the property;8

• industrial zoning in the neighborhood of the property;9

• airport influence areas established by local airport land commissions [See RPI Form 308];10 and

• ground transportation arteries which include train tracks and major highways in close proximity to the property.

Environmental hazards have an adverse effect on a property’s value and desirability. Thus, they are considered defects which, if known, are disclosed as material facts: the hazards might affect a prospective buyer’s decision to purchase the property.

The disclosure to prospective buyers of environmental hazards related to a property known to a seller’s and seller’s agent is required on the sale, exchange or lease of all types of property.

1 Calif. Health and Safety Code §§25915 et seq.

2 Calif. Civil Code §2079.7(a); Calif. Business and Professions Code §10084.1

3 CC §2079.7(a); Bus & P C §10084.1

4 Health & S C §25359.7; Bus & P C §10084.1

5 Health & S C §§26140, 26147

6 Health & S C §§13113.7, 13113.8

7 CC §1102.16; Health & S C §13113.9

8 CC §1102.15

9 CC §1102.17

10 CC §§1103.4(c), 1353; Bus & P C §11010(b)(13)

Hazards on the property

The effect on value and

desirability

Chapter 16: Environmental hazards and annoyances 107

While the disclosure of an environmental hazard is the obligation of the seller, it is the seller’s agent who has the agency duty of care and protection owed to the seller to place them in compliance with the environmental hazard disclosure requirements.

Further, and more critically, the seller’s agent also has an additional, more limited duty owed to prospective buyers of the listed property. The seller’s agent on taking a listing will personally conduct a visual inspection of the property for environmental hazards (as well as physical defects), and do so with a level of competence equal to that of their broker. In turn, the seller’s agent uses a Transfer Disclosure Statement (TDS) form to advise prospective buyers of their observations (and knowledge) about conditions which constitute environmental hazards.11 [See Chapter 15]

To conclude the seller’s agent’s disclosure of environmental hazards and eliminate any further duty to advise the prospective buyer about the environmental hazards, the seller’s agent delivers, or confirms the buyer’s agent has delivered a copy of the environmental hazard booklet approved by the California Department of Health and Safety (DHS) to the buyer. Delivery of the booklet is confirmed in writing through a provision in the purchase agreement. [See RPI Form 150 §11.6 and Form 316-1]

However, the seller’s agent might be subjected to an inquiry by either the prospective buyer or the buyer’s agent about environmental hazards on or about the property. Here, the seller’s agent is duty bound to respond fully and honestly to the inquiry.

The notice of any environmental hazard to be delivered to a buyer by a seller is delivered in writing. No special form exists for giving the buyer notice of environmental hazards, as is provided for natural hazards. Until the real estate industry or the legislature develops one, the TDS and the purchase agreement are currently used as the vehicles for written delivery.

The TDS is delivered at the time a prospective buyer inquires further about a listed property; a counter offer may be needed to make the additional disclosures covered by purchase agreement provisions.

Some environmental hazards are itemized in the TDS, such as a direct reference to hazardous construction materials and waste, window security bars and release mechanisms, and an indirect reference to environmental noise. [See RPI Form 304 §§A and C]

All other known environmental hazards are added by separate itemization in the TDS. As for environmental hazards emanating from off-site locations, they are disclosed through provisions in the purchase agreement since they are typically known to buyer’s agents who are familiar with the area. [See RPI Form 150 §11.7]

11 CC §2079

Visual inspection for hazards

Method of disclosure

108 Real Estate Principles, Second Edition

Editor’s note — The environmental hazard booklet is not a disclosure of known defects on the property. The booklet merely contains general information on a few environmental hazards, none of which might actually exist on the property. It is voluntarily delivered to the buyer by an agent, but with no legal mandate to do so. [See RPI Form 316-1]

Regardless of the method of delivery, the seller’s agent is to give the environmental hazard disclosures to the prospective buyer as soon as practicable, meaning as soon as reasonably possible. As with the disclosure of natural hazards, the legislature intended for the environmental hazard disclosures to be made prior to entry into a purchase agreement.12

For the seller’s agent to properly anticipate the need to have the disclosures available to deliver to prospective buyers, the effort to promptly gather the information from the seller begins at the moment the listing is solicited and entered into.

The seller and the seller’s agent have numerous good reasons to fully comply at the earliest moment with the environmental hazard disclosures (as well as all other property-related disclosures). The benefits of a full disclosure, up front and before the seller accepts an offer or makes a counteroffer, include:

• the prevention of delays in closing;

• the avoidance of cancellations on discovery under due diligence investigation contingencies;

• the elimination of likely renegotiations over price or offsets for corrective costs due to the seller’s agent’s dilatory disclosure or the buyer’s discovery during escrow;

• the shortening of the time needed for the buyer to complete their due diligence investigation; and

• control by the seller of remedial costs and responsibilities by terms included in the purchase agreement, not by later offsets or demands by the buyer or a court.

The seller’s agent needs to document in writing (for the agent’s file only) the agent’s inquiry of the seller about environmental hazards which are known or may be known to the seller. The agent’s list is to itemize:

• all the environmental hazards which might possibly exist on or about a property and the construction materials which contain them;

• the age or date of construction to elicit a review of probable hazardous construction materials used at the time of construction; and

• information known about the property on disclosures the seller received when the seller purchased the property or were brought to the seller’s attention on any renovation of the property.

12 Attorney General Opinion 01-406 (August 24, 2001)

Need and motivation

for disclosure

Inquiries documented

Chapter 16: Environmental hazards and annoyances 109

Also, the seller’s agent’s inquiry into hazardous materials ought to precede the seller’s preparation of the TDS. Thus, the seller is mentally prepared to release information about knowledge of defects in the condition of the property. Finally, the seller’s agent’s visual inspection needs to be conducted before the seller prepares the TDS so the observations may be discussed.

The seller has no obligation to hire an expert to investigate and report on whether an environmental hazard is present on or about the property. The seller is also not obligated to remove, eliminate or mitigate an environmental hazard, unless the seller becomes obligated under the terms of the purchase agreement with the buyer.

It is the seller’s and the seller’s agent’s knowledge about the property which is disclosed on the TDS. The off-site environmental hazards which affect the use of the property are generally well known by the buyer’s agent for inclusion in the purchase agreement. If not included in the TDS or the purchase agreement, a counteroffer by the seller is necessary to disclose — as soon as possible — the seller’s and the seller’s agent’s knowledge of environmental hazards located both on and off the property.

Asbestos is any of a diverse variety of fibrous mineral silicates which are commercially mined from natural deposits in the earth. In the 1940’s manufacturers began mixing asbestos fibers with substances commonly used to produce materials for the construction of residential and non-residential real estate improvements.13

However, asbestos is a known carcinogen. As an occupant of a building continues to inhale asbestos fiber, they increases their risk of developing negative health conditions.

Construction materials which contain friable asbestos are those that can be crumbled, pulverized or reduced to powder by hand pressure when dry.

Construction materials which contain non-friable asbestos cannot be crushed by hand pressure. Of course, on the removal of stucco or plaster, the asbestos may become friable since the material is disturbed and broken down for removal, creating particles which may become airborne and inhaled.

The seller of a property constructed with asbestos-containing building materials is under no obligation to investigate or have a survey conducted to determine the existence of asbestos on the property — whether friable or non-friable.

Further, the seller is not obligated to remove or clean up any adverse asbestos condition. However, the condition, if known, will be disclosed. As a result, a prospective buyer may well condition the purchase of a property containing friable asbestos on its clean up and removal by the seller.

13 Health & S C §25925

Asbestos in construction materials

carcinogen A substance which causes cancer in human beings.

110 Real Estate Principles, Second Edition

Formaldehyde is a colorless, pungent gas contained in most organic solvents which are used in paints, plastics, resins, pressed-wood fiberboard materials, urea-formaldehyde foam insulation (UFFI), curtains and upholstery textiles. Gas emitted from these materials and products contains formaldehyde.

Formaldehyde is a probable carcinogen which is likely to cause cancer in humans who inhale the gas emitted by formaldehyde-containing material.

The use of UFFI occurred in construction during the 1970s and was banned in residential property constructed after 1982. However, formaldehyde emissions decrease over time. As a result, properties built during the 1970s and early 1980s with formaldehyde-containing materials give off levels of formaldehyde no greater than newly constructed homes. Over time, emissions decrease to undetectable levels. However, an increase in humidity and temperature will increase the level of emissions.

Radon is a naturally-occurring radioactive gas. It is not visible, cannot be tasted and has no odor. Radon gas is located in soils with a concentration of uranium in the rock, e.g., granite or shale, beneath it.

Radon is a known human carcinogen and enters a building from the soil beneath the structure.

Radon is sucked into ground floor residential space by interior heating on cold weather days and the use of exhaust fans in the kitchen and bathrooms since these conditions create a vacuum within the lower area of the structure.

However, California residences rarely experience elevated and harmful levels of radon gas emission. Radon does appear in approximately one percent of housing in California. Proper ventilation avoids the buildup of harmful concentrations of radon in a home or other enclosed space, a function of its design and operation.

Waste is hazardous if it has the potential to harm human health or the environment. Hazardous waste is released into the environment, primarily the soil, by the leaking of underground storage tanks, drum containers, poorly contained landfills or ponds, accidental spills or illegal dumping.

Hazardous waste materials include any product, material or substance which is toxic, corrosive, ignitable or reactive, such as is generated by oil, gas, petrochemical and electronics industries, and dry cleaner and print shops.

Information is available to prospective buyers on their inquiry into the location and status of hazardous waste sites in the vicinity of a home from the “Cortese list” maintained by the California Environmental Protection Agency (EPA).

Formaldehyde gas emissions

Radon gas in soil

hazardous waste Any products, materials or substances which are toxic, corrosive, ignitable or reactive.

Hazardous waste on site

Chapter 16: Environmental hazards and annoyances 111

Mold produces spores which become airborne. There are many different kinds of spores, each having differing effects, if any, on humans. Some may be a mere annoyance, irritating the sensitivities of an individual. Others might be a threat to the health of those who inhale them.

The uncertainty of the toxic nature of mold spores has led to a sort of intellectual moratorium on determining just what kinds of molds have an adverse or harmful effect on humans.

It has also spawned a number of lawsuits as the unknown nature of “toxic mold” has been allowed by politicians and lawyers to stir the fears of the general public.

Sellers are under no obligation to investigate whether the improvements contain mold. If it is known the structure does contain mold, the seller has no obligation to determine if the mold is a threat to human health.

The DHS has not yet set any standards for disclosures regarding the existence of mold or guidelines for the remediation of mold threats. However, the DHS has published multiple consumer-oriented booklets on mold on its website at www.cdph.ca.gov.

Until uniform disclosure standards are produced and implemented, the prospective buyer will receive only a generic informational brochure and a writing from the seller and the seller’s agent in the form of a TDS advising the buyer of any awareness or knowledge the seller or the seller’s agent may have that mold exists on the property. No common knowledge exists for sellers or seller’s agents to visually distinguish between harmful and benign molds.

If the seller is aware of mold, regardless of type, the seller is to disclose any awareness of the mold’s existence, as well as any other reports or knowledge about the variety of mold which exists.

Mold: the rogue in vogue

Environmental hazards are noxious or annoying conditions which are man-made hazards, not natural hazards. As environmental hazards, the conditions are classified as either:

• injurious to the health of humans; or

• an interference with an individual’s sensitivities.

Environmental hazards are defects which, if known, are disclosed as material facts as the hazards might affect a prospective buyer’s decision to purchase the property, and on what terms.

The seller’s agent needs to competently conduct a visual inspection of the property for environmental hazards before preparing the Transfer Disclosure Statement (TDS) and advise prospective buyers of their observations (and knowledge) about conditions which constitute environmental hazards. The notice of any environmental hazard

Chapter 16 Summary

112 Real Estate Principles, Second Edition

to be delivered to a buyer by a seller is delivered in writing. The TDS and purchase agreement are currently used as the vehicles for written delivery. Further, the seller’s agent delivers, or confirms the buyer’s agent has delivered a copy of the environmental hazard booklet approved by the California Department of Health and Safety (DHS) to the buyer.

The seller has no obligation to hire an expert to investigate and report on whether an environmental hazard is present on or about the property. It is the seller’s and the seller’s agent’s knowledge about the property which is disclosed on the TDS.

carcinogen ................................................................................... pg. 109 environmental hazards ............................................................ pg. 105 hazardous waste ......................................................................... pg. 110

Chapter 16 Key Terms

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

Chapter 17: Natural hazard disclosures by the seller’s agent 113

After reading this chapter, you will be able to:

• identify the various types of natural hazards which need to be disclosed as related to value and desirability;

• comply with mandated disclosures of natural hazards on all types of property; and

• avoid liability by the use of a natural hazard expert to investigate the public record for known hazards.

Learning Objectives

Natural hazard disclosures by the seller’s agent

Chapter

Natural hazards come with the location of a parcel of real estate, not with the man-made aspects of the property. Locations where a property might be subject to natural hazards include:

• special flood hazard areas, a federal designation;

• potential flooding and inundation areas;

• very high fire hazard severity zones;

• wildland fire areas;

• earthquake fault zones; and

• seismic hazard zones.1

1 Calif. Civil Code §1103(c)

A unified disclosure for all sales

natural hazards Risks to life and property which exist in nature due to a property’s location.

Alquist-Priolo Maps

natural hazards

Natural Hazard Disclosure (NHD) Statement

restoration

termination Key Terms

For a further discussion of this topic, see Chapter 28 of Real Estate Practice.

114 Real Estate Principles, Second Edition

The existence of a hazard due to the geographic location of a property affects its desirability, and thus its value to prospective buyers. Hazards, by their nature, limit a buyer’s ability to develop the property, obtain insurance or receive disaster relief.

Whether a seller lists the property with a broker or markets the property themselves, the seller is to disclose to prospective buyers any natural hazards known to the seller, including those contained in public records.

To unify and streamline the disclosure by a seller (and in turn the seller’s agent) for a uniform presentation to buyers concerning natural hazards which affect a property, the California legislature created a statutory form entitled the Natural Hazard Disclosure (NHD) Statement. [See Form 314 accompanying this chapter]

The NHD form is used by a seller and the seller’s agent for their preparation (or acknowledgement on the form prepared by an NHD expert of their review) and disclosure of natural hazard information. The form is to include information known to the seller and seller’s agent (and the NHD expert) and readily available to them as shown on maps in the public records of the local planning department.2 [See Form 314]

Actual use of the NHD Statement by sellers and their agents is mandated on the sale of all types of properties, with some sellers (but not agents) being excluded. While some sellers need not use the form when making the NHD disclosures, agents are never excluded. Thus, the form, filled out and signed by the seller (unless excluded) and the seller’s agent (never excluded), is included in marketing packages handed to prospective buyers seeking additional information on every type of property.

Editor’s note — Any attempt by a seller or seller’s agent to use an “as-is” provision or otherwise provide for the buyer to agree to waive their right to receive the seller’s NHD statement is void as against public policy.3

However, sellers who are excluded from using the form still need to make the disclosures referenced in the NHD. Use of the NHD form to make property disclosures is not required on:

• court-ordered transfers or sales;

• deed-in-lieu of foreclosures;

• trustee’s sales;

• lender resales after foreclosure or a deed-in-lieu;

• estates on death;

• transfers between co-owners;

• transfers to relatives/spouses; or

• transfers to or by governmental entities.4

2 CC §1103.2

3 CC §1103(d)

4 CC §1103.1(a)

Natural Hazard Disclosure (NHD) Statement A report provided by a local agency or NHD vendor and used by sellers and seller’s agents to disclose natural hazards which exist on a property held out for sale. [See RPI Form 314]

The NHD form for uniformity

Chapter 17: Natural hazard disclosures by the seller’s agent 115

Delivery of the hazard information, whether disclosed by the use of one form or another, is not optional. Disclosure of a natural hazard is mandated on all types of property.5

All sellers, and any seller’s or buyer’s agents involved, have a general duty owed to prospective buyers to disclose conditions on or about a property which are known to them and might adversely affect the buyer’s willingness to buy or influence the price and terms of payment the buyer is willing to offer.

Natural hazards, or the lack thereof, irrefutably affect a property’s desirability, and thus value to a prospective buyer.

If a hazard is known to any agent (as well as the seller) or noted in public records, it is to be disclosed to the prospective buyer before they enter into a purchase agreement on the property. If not disclosed, the buyer may cancel the transaction, called termination. And if the transaction has closed escrow, the buyer may rescind the sale and be refunded their investment, called restoration.6

The need for an NHD when a prospective buyer is located, an anticipation held by every seller’s agent on taking a listing, requires the NHD to be prepared, signed and part of the property marketing package.

Natural hazard information is obtained from the public records. If not retrieved by someone, the seller and seller’s agent cannot make their required disclosures to prospective buyers.

To obtain the natural hazard information, the seller and the seller’s agent are required to exercise ordinary care in gathering the information. They may gather the information themselves or the seller may employ an NHD expert to gather the information. When an expert is employed, the expert prepares the NHD form for the seller and the seller’s agent to review, add any comments, sign and have ready for delivery to prospective buyers.7

Thus, the seller and seller’s agent may obtain natural hazard information:

• directly from the public records themselves; or

• by employing a natural hazard expert, such as a geologist.

For the seller and the seller’s agent to rely on an NHD report prepared by others, the seller’s agent need only:

• request an NHD report from a reliable expert in natural hazards, such as an engineer or a geologist who has studied the public records;

• review the NHD form prepared by the expert and enter any actual knowledge the seller or seller’s agent may possess; and

5 CC §1103.1(b)

6 Karoutas v. HomeFed Bank (1991) 232 CA3d 767

7 CC §1103.4(a)

Natural hazards are to be disclosed

termination The cancellation of a transaction before escrow has closed or a lease has ended.

restoration The return of funds and documents on a rescission of a purchase agreement or transaction sufficient to place all the parties in the position they held before entering into the agreement or closing the transaction.

Investigating the existence of a hazard

116 Real Estate Principles, Second Edition

Form 314

Natural Hazard Disclosure Statement

Page 1 and 2

• sign the NHD Statement provided by the NHD expert and deliver it with the NHD report to prospective buyers or buyer’s agents.8

When prepared by an NHD expert, the NHD report needs to also note whether the listed property is located within two miles of an existing or proposed airport, an environmental hazard zone called an airport influence area or airport referral area.

8 CC §1103.2(f)(2)

Chapter 17: Natural hazard disclosures by the seller’s agent 117

The buyer’s occupancy of property within the influence of an airport facility may be affected by noise and restrictions, now and later, imposed on the buyer’s use as set by the airport’s land-use commission.9

Also, the expert’s report is to note whether the property is located within the jurisdiction of the San Francisco Bay Conservation and Development Commission.

9 CC §1103.4(c)

Form 314

Natural Hazard Disclosure Statement

Page 2 of 2

118 Real Estate Principles, Second Edition

The Natural Hazard Disclosure scheme encourages brokers and their agents to use natural hazard experts to gather and report the information available to all from the local planning department rather than do it themselves. The use of an expert to gather information from the public record and prepare the report relieves the seller’s agent of any liability for errors not known to the agent to exist.

While an agent is not mandated to use of an expert, the practice is prudent as a risk mitigation step undertaken to manage liability on sales listings. The other NHD risk for seller’s agents is eliminated by the timely delivery of the NHD to prospective buyers before going under contract.

Neither the seller nor any agent, whether the seller’s or the buyer’s agent, is liable for the erroneous preparation of an NHD Statement they have delivered to the buyer, if:

• the NHD report and form is prepared by an expert in natural hazards, consistent with professional licensing and expertise; and

• the seller and seller’s agent used ordinary care in selecting the expert and in their review of the expert’s report for any errors, inaccuracies and omissions of which they have actual knowledge.10

Caution: The seller’s agent’s dilatory delivery of an expert’s NHD to the buyer or the buyer’s agent, after the offer has been accepted, will not protect the broker from liability for the buyer’s lost property value due to the nondisclosure before acceptance. If the agent knew or ought to have known of a natural hazard noted in the readily available planning department’s parcel list, the agent is exposed to liability.

Compliance by the seller and seller’s agent to deliver the NHD Statement to the buyer is required to be documented by a provision in the purchase agreement.11 [See RPI Form 150 §11.5]

However, when the seller’s agent fails to disclose a natural hazard and then provides in the purchase agreement for the compliance to be an untimely “in escrow” disclosure, the seller is statutorily penalized.

The buyer on an in-escrow disclosure after entering into a purchase agreement and as an alternative to a money claim, has a statutory remedy allowing them to terminate the purchase agreement and avoid the transactions by exercising:

• a three-day right of cancellation when the NHD Statement was handed to the buyer; or

• a five-day right of cancellation when the NHD Statement was mailed to the buyer.12

Further, delivery of the NHD after acceptance of an offer imposes liability on the seller and seller’s agent, but not the buyer’s agent. Liability is based

10 CC §§1103.4(a), 1103.4(b)

11 CC §1103.3(b)

12 CC §1103.3(c)

Broker uses experts to

limit liability

Documenting compliance

with NHD law

Chapter 17: Natural hazard disclosures by the seller’s agent 119

on any money losses (including a reduced property value) inflicted on the buyer by an untimely in-escrow disclosure for those buyers who chose not to exercise their right to cancel and instead proceed with performance of the agreement and close escrow before demanding restitution.13

It is the buyer’s agent who has the duty to hand the buyer the NHD Statement the buyer’s agent receives from the seller or the seller’s agent, called delivery.14

The buyer’s agent, on receiving the NHD form from the seller’s agent, owes the buyer a special agency duty to care for and protect the buyer’s best interest. This is accomplished by reviewing the NHD Statement themselves for any disclosure which might affect the property’s value or its desirability for the buyer. The buyer’s agent then delivers the NHD to the buyer and makes any recommendations or explanations they may have regarding the adverse consequences of its content.15

If the buyer does not have a broker, the seller’s agent is responsible for delivering the NHD Statement to the prospective buyer.

The task of explaining the consequence of living with a natural hazard is the duty of a buyer’s agent. If the buyer is not represented by an agent, the buyer undertakes the duty to protect themselves and investigate the consequences of the NHD information handed to them.

Delivery may be in person or by mail. Also, delivery is considered to have been made if the NHD is received by the spouse of the buyer.16

Sellers occasionally act as “For Sale By Owners” (FSBOs) and directly negotiate a sale of their property with buyers and buyer’s agents. Here, the seller is responsible for preparing or obtaining an NHD statement and delivering the NHD Statement to the prospective buyer – prior to entering into the purchase agreement.

A seller’s NHD Statement is not a warranty or guarantee by the seller or seller’s agent of the natural hazards affecting the property. The NHD Statement is a report of the seller’s and seller’s agent’s (or the NHD expert’s) knowledge (actual and constructive) of any natural hazards affecting the property.

As a matter of proper practice, the purchase agreement offer includes a copy of the seller’s NHD Statement as an addendum (along with all other disclosures), noting the transaction was entered into in compliance with NHD (and TDS) law.

13 CC §1103.13; Jue v. Smiser (1994) 23 CA4th 312

14 CC §1103.12(a)

15 CC §§1103.2, 1103.12

16 CC §1103.10

Delivery of the NHD to the buyer

No warranty, just awareness

120 Real Estate Principles, Second Edition

The NHD Statement handed to a prospective buyer is unrelated to the environmental hazards and physical deficiencies in the soil or property improvements. These hazards are disclosed by use of the Transfer Disclosure Statement (TDS) and provisions in the purchase agreement. [See RPI Form 304 §C(1); see Chapter 16]

The NHD Statement discloses risks to life and property which exist in nature due to the property’s location, risks known and readily available from the public records (planning department).

Sellers and seller’s agents of any type of real estate are to disclose whether the property is located in:

• an area of potential flooding;

• a very high fire hazard severity zone;

• a state fire responsibility area;

• an earthquake fault zone; and

• a seismic hazard zone.17

Editor’s note — The following discussion details these different hazards which are disclosed on the NHD Statement.

Investigating flood problems was facilitated by the passage of the National Flood Insurance Act of 1968 (NFIA).

The NFIA established a means for property owners to obtain flood insurance with the National Flood Insurance Program (NFIP). The Federal Emergency Management Agency (FEMA) is the administrative entity created to police the NFIP by investigating and mapping regions susceptible to flooding.

Any flood zone designated with the letter “A” or “V” is a special flood hazard area and is to be disclosed as a natural hazard on the NHD Statement. [See Form 314 §1]

Zones “A” and “V” both correspond with areas with a 1% chance of flooding in any given year, called 100-year floodplains, e.g., a structure located within a special flood hazard area shown on an NFIP map has a 26% chance of suffering flood damage during the term of a 30-year mortgage.

However, Zone “V” is subject to additional storm wave hazards.

Both zones are subject to mandatory flood insurance purchase requirements.

Information about flood hazard areas and zones come from:

• city/county planners and engineers;

• county flood control offices;

• local or regional FEMA offices; and

17 CC §1103.2

Other disclosure

statements distinguished

The natural hazards

disclosed

Flood zones

Chapter 17: Natural hazard disclosures by the seller’s agent 121

• the U.S. Corps of Engineers.

Another flooding disclosure which needs to be made on the NHD Statement arises when the property is located in an area of potential flooding. [See Form 314 §2]

An area of potential flooding is a location subject to partial flooding if sudden or total dam failure occurs. The inundation maps showing the areas of potential flooding due to dam failure are prepared by the California Office of Emergency Services.18

Once alerted by the seller’s agent to the existence of a flooding condition, the buyer’s agent is to inquire further to learn the significance of the disclosure to the buyer.

Areas in the state which are subject to significant fire hazards have been identified as very high fire hazard severity zones. If a property is located in a very high fire hazard severity zone, a disclosure needs to be made to the prospective buyer. [See Form 314 §3]

The city, county or district responsible for providing fire protection have designated, by ordinance, very high fire hazard severity zones within their jurisdiction.19

The fire hazard disclosure on the NHD form mentions the need to maintain the property. Neither the seller nor the seller’s agent need to explain the nature of the maintenance required or its burden on ownership. Advice to the buyer on the type of maintenance and the consequences of owning property subject to the maintenance are the duties of the buyer’s agent, if they have an agent.

If a property is in an area where the financial responsibility for preventing or suppressing fires is primarily on the state, the real estate is located within a State Fire Responsibility Area.20

Notices identifying the location of the map designating State Fire Responsibility Areas are posted at the offices of the county recorder, county assessor and the county planning agency. Also, any information received by the county after receipt of a map changing the State Fire Responsibility Areas in the county needs to be posted.21

If the property is located within a wildland area exposed to substantial forest fire risks, the seller or the seller’s agent is to disclose this fact. If the property is located in a wildland area, it requires maintenance by the owner to prevent fires.22 [See Form 314 §4]

18 Calif. Government Code §8589.5(a)

19 Gov C §51179

20 Calif. Public Resources Code §4125(a)

21 Pub Res C §4125(c)

22 Pub Res C §4136(a)

Very high fire hazard

State Fire Responsibility Area

122 Real Estate Principles, Second Edition

In addition, the NHD Statement advises the prospective buyer of a home located in a wildland area that the state has no responsibility for providing fire protection services to the property, unless the Department of Forestry and Fire Protection has entered into a cooperative agreement with the local agency. No further disclosure about whether a cooperating agreement exists need be made by the seller or seller’s agent. [See Form 314 §4]

However, if property disclosures place the property in a wildland area, the buyer’s agent has the duty to advise the buyer about the need to inquire and investigate into what agency provides fire protection to the property.

To assist seller’s agents in identifying whether the listed property is located in an earthquake fault area, maps have been prepared by the State Geologist.

The State Mining and Geology Board and the city or county planning department have maps available which identify special studies zones, called Alquist-Priolo Maps.23

The maps are used to identify whether the listed property is located within one-eighth of a mile on either side of a fault.

Also, the NHD Statement requires both the seller and the seller’s agent to disclose to a prospective buyer or the buyer’s agent whether they have knowledge the property is in a fault zone. [See Form 314 §5]

A Seismic Hazard Zone map identifies areas which are exposed to earthquake hazards, such as:

• strong ground shaking;

• ground failure, such as liquefaction or landslides;24

• tsunamis;25 and

• dam failures.26

If the property for sale is susceptible to any of the earthquake (seismic) hazards, the seismic hazard zone disclosure on the NHD Statement is to be marked “Yes.” [See Form 314 §6]

Seismic hazard maps are not available for all areas of California. Also, seismic hazard maps do not show Alquist-Priolo Earthquake Fault Zones. The California Department of Conservation creates the seismic hazards maps.

If the NHD indicates a seismic hazard, the buyer’s agent is to then determine which type of hazard, the level of that hazard and explain the distinction to the buyer, or be certain someone else does. The seller’s agent has no such affirmative obligation to explain the impact of the disclosures to the buyer.

23 Pub Res C §2622

24 Pub Res C §2692(a)

25 Pub Res C §2692.1

26 Pub Res C §2692(c)

Earthquake fault zones

Alquist-Priolo Maps Maps which identify earthquake fault areas available from the State Mining and Geology Board and the city or county planning department.

Seismic hazards

Chapter 17: Natural hazard disclosures by the seller’s agent 123

For example, property located in Seismic Zone 4 is more susceptible to strong ground shaking than areas in Zone 3. But which zone the property is located in is a question the buyer’s agent needs to answer. Most of California is in Zone 4, except for the southwest areas of San Diego County, eastern Riverside and San Bernardino Counties, and most of the Northern California Sierra Counties.

Homes in Zone 4 are able to be damaged even from earthquakes which occur a great distance away.

Ground failure is a seismic hazard which refers to landslides and liquefaction. Liquefaction occurs when loose, wet, sandy soil loses its strength during ground shaking. Liquefaction causes the foundation of the house to sink or become displaced. The condition is prevalent in tidal basins which are fills.

A tsunami is a large wave caused by an earthquake, volcanic eruption or an underwater landslide. Coastal areas are the ones at risk for loss of property and life.

Dam failure results in flooding when an earthquake ruptures a dam which serves as a reservoir. The city or county planning department has maps showing areas which will be flooded if a local dam fails.

Areas susceptible to inundation due to dam failure caused by an earthquake are also noted on the NHD Statement as a potential flooding area.

Manifestations of seismic hazards

124 Real Estate Principles, Second Edition

The existence of a hazard due to the geographic location of a property affects its desirability, and thus its value to prospective buyers. A seller of property is to disclose any natural hazards affecting the property known to the seller, as well as those contained in public records to the buyer. Natural hazards are disclosed using the statutory Natural Hazard Disclosure Statement (NHD).

The NHD Statement discloses risks to life and property which exist in nature due to the property’s location, risks known and readily available from the public records (planning department) and are unrelated to the risks to life and property from man-made physical and environmental conditions disclosed by a TDS. The NHD assists buyers determine whether they are to buy the property, and if so, on what price and on what terms.

To obtain the natural hazard information to disclose to prospective buyers, a seller and their agent consult publically available records themselves. The use of an expert to gather information from the public record and prepare the report relieves the seller’s agent of any liability for errors not known to the agent to exist.

Sellers and seller’s agents of any type of real estate are to disclose whether the property is located in:

• an area of potential flooding;

• a very high fire hazard severity zone;

• a state fire responsibility area;

• an earthquake fault zone; and

• a seismic hazard zone.

Alquist-Priolo Maps ................................................................... pg. 122 natural hazards ........................................................................... pg. 113 Natural Hazard Disclosure (NHD) Statement .................... pg. 114 restoration .................................................................................... pg. 115 termination .................................................................................. pg. 115

Chapter 17 Summary

Chapter 17 Key Terms

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

Chapter 18: Lead-based paint disclosures 125

After reading this chapter, you will be able to:

• use the federal lead-based paint (LBP) disclosure to timely disclose the existence of a lead-based paint hazard on residential properties built prior to 1978;

• determine when to deliver the LBP disclosure to a buyer; and

• advise owners and buyers on the conditions of the LBP disclosure.

Lead-based paint disclosures

Chapter

An agent, prior to meeting with the owner to list an older SFR property for sale, gathers facts about the property, its ownership and its likely market value.

As the first step, the agent pulls a property profile on the SFR from a title company website. On receipt of the profile, the agent confirms their suspicion that the structure was built prior to 1978. The agent is now aware the property is the target of separate state and federal environmental protection disclosure programs designed to prevent the poisoning of children by the presence of lead-based paint.

The agent meets with the owner to review the requisite listing and marketing requirements laid down by the agent’s broker. To prepare for the meeting, the agent fills out the listing agreement and attaches all the information disclosure forms needed to properly market the property and locate a buyer, called a listing package.

Crystal clear transparency

lead-based paint Any surface coating containing at least 1.0 milligram per square centimeter of lead, or 0.5% lead by weight. [See RPI Form 313]

lead-based paint lead-based paint hazard Key Terms

Learning Objectives

For a further discussion of this topic, see Chapter 31 of Real Estate Practice.

126 Real Estate Principles, Second Edition

A lead-based paint hazard is any condition that causes exposure to lead from lead-contaminated dust, soil or paint which has deteriorated to the point of causing adverse human health effects.3

The LBP disclosure form includes the following:

• the Lead Warning Statement as written in federal regulations [See Form 313 §1];

• the owner’s statement disclosing the presence of known lead-based paint hazards or the owner’s lack of any knowledge of existing lead- based paint [See Form 313 §2];

• a list of records or reports available to the owner which indicates a presence or lack of lead-based paint, which have been handed to the seller’s agent [See Form 313 §2.2];

• the buyer’s statement acknowledging receipt of the LBP disclosure, any other information available to the owner and the lead hazard information pamphlet entitled Protect Your Family From Lead in Your Home [See Form 313 §3.1; see RPI Form 316-1];

• the buyer’s statement acknowledging the buyer has received a 10-day opportunity to inspect the property or has agreed to reduce or waive the inspection period [See Form 313 §3.2];

• the seller’s agent’s statement noting the owner has been informed of the owner’s disclosure requirements and that the agent is aware of their duty to ensure the owner complies with the requirements [See Form 313 §4]; and

• the signatures of the owner, buyer and seller’s agent.4

The owner and the seller’s broker each keep a copy of the disclosure statement for at least three years from the close of escrow on the sales transaction.5

Further, the disclosure form is to be written in the language of the purchase agreement. For example, if the purchase agreement is in Spanish, then the LBP disclosure will also be in Spanish.6

A prospective buyer of a residence built prior to 1978 is put on notice of LBP conditions by handing them the disclosure forms before they make an offer. The disclosures advise them they have a 10-day period after their offer

2 24 CFR §35.86; 40 CFR §745.103

3 24 CFR §35.86; 40 CFR §745.103

4 24 CFR §35.92(a)(7); 40 CFR §745.113(a)(7)

5 24 CFR §35.92(c); 40 CFR §745.113(c)

6 24 CFR §35.92(a); 40 CFR §745.113(a)

Lead-based paint and hazards

lead-based paint hazard Any condition that causes exposure to lead from lead- contaminated dust, soil or paint which has deteriorated to the point of causing adverse human health effects. [See RPI Form 313]

LBP disclosure content

Opportunity to evaluate risk

Among other informational forms for this pre-1978 SFR property, the agent includes two forms which address lead-based paint conditions on the property:

• the Federal Lead-based Paint (LBP) disclosure [See RPI Form 313 accompanying this chapter]; and

• the California Transfer Disclosure Statement (TDS). [See RPI Form 304]

On review of the listing agreement with the owner, the agent explains the owner’s legal obligation, owed to prospective buyers and buyer’s agents, to provide them with all the information:

• known to the owner or readily available to the owner’s agent on observation or inquiry; and

• which might adversely affect the value of the property.

A full disclosure to the prospective buyer about adverse conditions on the property does not entail a review or explanation by the seller’s agent about their effect on the buyer or the property once the facts are disclosed. Application of the facts disclosed and the potential consequences flowing from the facts which may affect the prospective buyer’s use, possession or ownership of the property are not among the seller’s agent’s duties of affirmative disclosure.

However, federal LBP rules do require the seller’s agent to advise the owner about the requirements for disclosures to be made to prospective buyer before they enter into a purchase agreement. It is the seller’s agent who insures compliance by the owner before entering into a purchase agreement.

Editor’s note — The owner has no obligation to have the property inspected or a report prepared on the presence of lead-based paint or any lead-based paint hazards. Also, the owner need not perform any corrective work to clean up or even eliminate the lead-based paint conditions, unless agreed to with the buyer.1

Thus, the owner cooperates in the LBP disclosure and their agent’s other marketing efforts by:

• filling out and signing the federal LBP disclosure form required on all pre-1978 residential construction [See Form 313];

• filling out and signing the TDS containing the lead-based paint, environmental and other property conditions [See RPI Form 304];

• making a physical home inspection report available to prospective buyers as an attachment to the TDS form; and

• providing the seller’s agent with copies of any reports or documents containing information about lead-based paint or lead-based paint hazards on the property.

1 24 Code of Federal Regulations §35.88(a); 40 CFR §745.107(a)

Disclosed on two forms

Seller’s agent insures

compliance

Chapter 18: Lead-based paint disclosures 127

A lead-based paint hazard is any condition that causes exposure to lead from lead-contaminated dust, soil or paint which has deteriorated to the point of causing adverse human health effects.3

The LBP disclosure form includes the following:

• the Lead Warning Statement as written in federal regulations [See Form 313 §1];

• the owner’s statement disclosing the presence of known lead-based paint hazards or the owner’s lack of any knowledge of existing lead- based paint [See Form 313 §2];

• a list of records or reports available to the owner which indicates a presence or lack of lead-based paint, which have been handed to the seller’s agent [See Form 313 §2.2];

• the buyer’s statement acknowledging the buyer has received a 10-day opportunity to inspect the property or has agreed to reduce or waive the inspection period [See Form 313 §3.2];

• the signatures of the owner, buyer and seller’s agent.4

The owner and the seller’s broker each keep a copy of the disclosure statement for at least three years from the close of escrow on the sales transaction.5

Further, the disclosure form is to be written in the language of the purchase agreement. For example, if the purchase agreement is in Spanish, then the LBP disclosure will also be in Spanish.6

2 24 CFR §35.86; 40 CFR §745.103

3 24 CFR §35.86; 40 CFR §745.103

4 24 CFR §35.92(a)(7); 40 CFR §745.113(a)(7)

5 24 CFR §35.92(c); 40 CFR §745.113(c)

6 24 CFR §35.92(a); 40 CFR §745.113(a)

Lead-based paint and hazards

LBP disclosure content

Opportunity to evaluate risk

128 Real Estate Principles, Second Edition

is accepted to evaluate the lead-based paint risks involved. When timely disclosed, the buyer may not later, when under contract, use the existence of lead-based paint as justification for cancellation.

The buyer may agree to a lesser period of time or simply waive all their rights to the federally permitted risk evaluation period. However, disclosures about the SFR property cannot be waived by the use of an “as-is” sale provision or otherwise.7 [See Form 313]

7 40 CFR §745.110(a)

Form 313

Lead-Based Paint Disclosure

Chapter 18: Lead-based paint disclosures 129

Exempt from the Federal LBP disclosures are foreclosure sales of residential property.8

Yet, a foreclosing lender still has a common law duty to disclose property defects known to them at the time of the foreclosure sale. A foreclosing lender is not protected from liability for intentional misrepresentation (negative fraud by omission – deceit) when the property is sold “as-is” at a foreclosure sale and the foreclosing lender previously fails to disclose a known defect to the bidders.9

However, the LBP foreclosure exemption does not apply to the resale of housing previously acquired by the lender at a foreclosure sale, commonly called real estate owned (REO) property, or to the resale by a third party bidder who acquired the property at a foreclosure sale.

Thus, if a lender or other bidder who acquired property at a foreclosure sale is reselling it, the resale needs to comply with the lead-based paint disclosure requirements.10

8 24 CFR §35.82(a)

9 Karoutas v. HomeFed Bank (1991) 232 CA3d 767

10 61 Federal Register 9063

Foreclosure sale exemption

130 Real Estate Principles, Second Edition

Lead-based paint, defined as any surface coating containing at least 1.0 milligram per square centimeter of lead, or 0.5% lead by weight, was banned by the Federal Consumer Product Safety Commission in 1978. A lead-based paint hazard is any condition that causes exposure to lead from lead-contaminated dust, soil or paint which has deteriorated to the point of causing adverse human health effects.

An owner of residential property built prior to 1978 cooperates in the LBP disclosure and their agent’s other marketing efforts by:

• filling out and signing the federal LBP disclosure form required on all pre-1978 residential construction;

• filling out and signing the TDS containing the lead-based paint, environmental and other property conditions;

• making a physical home inspection report available to prospective buyers as an attachment to the TDS form; and

• providing the seller’s agent with copies of any reports or documents containing information about lead-based paint or lead-based paint hazards on the property.

Exempt from the Federal LBP disclosures are foreclosure sales of residential property. Yet, a foreclosing lender still has a common law duty to disclose property defects known to them at the time of the foreclosure sale.

lead-based paint ......................................................................... pg. 125 lead-based paint hazard ............................................................ pg. 126

Chapter 18 Summary

Chapter 18 Key Terms

Quiz 5 Covering Chapters 18-23 is located on page 610.