Q: I represent the Buyer who is trying to buy a home that the Sellers renovated to be more energy efficient. The home was advertised as having a solar system on the roof, new windows and a built-in security/alarm system. My client is stretched pretty thin to qualify for this home but she can just cover the mortgage, taxes and other anticipated monthly and annual taxes and fees. The Sellers were exempt from completing the TDS and they answered “No” to every question on the Exempt Seller Disclosure (“ESD”).
Right after the inspection contingency was removed, the Sellers disclosed that the solar panels and the security system are leased. After insisting that we needed to see the relevant paperwork, the Buyer has just now received the leases. Both leases require monthly service fees that my client cannot afford; that paperwork also makes it clear that it is very expensive to remove either of these leased systems. These additional, unexpected costs will make it impossible for my Buyer to afford this home.
The Listing Agent insists that the Buyer must assume the leases or she must pay to remove those systems. The Listing Agent claims that we should have determined all of these issues during the inspection contingency period and that since the Sellers were exempt, providing this new information at this point in the escrow process does not create a rescission right.
My client wants to cancel by using her only remaining contingency – financing. Even though the Lender indicates that she is qualified for the stated financing in the C.A.R. RPA, my client has not yet removed that contingency. I am concerned that the Buyer may not be acting in good faith if she uses her financing contingency to terminate this transaction. Can my Buyer safely cancel this escrow?
A: Based upon the information that has been provided, the Buyer may well have a right to cancel but not based upon the financing contingency. The Buyer’s ability to cancel would be based upon whether or not the Purchase Agreement contains a contingency to review and approve the lease documentation.
This type of problem is quite common and frequently occurs when Listing Agents and Sellers are not paying attention to those items in, or attached to, the home that are not owned but instead subject to a lease. Energy efficient devices, such as solar panels, can reduce the monthly electrical bills but, if they are leased, that material fact must be disclosed regardless of which Disclosure forms are completed by the Sellers.
Buyers have a contractual right to review and approve all leases regarding personal property items and systems that are included in the sale but are not owned by the Seller. This Weekly Tip will focus on the Disclosure Requirements regarding leased items and systems as well as the Buyer’s contractual rights.
General Information About Leased Personal Property
All of the standard Purchase Agreement forms specify that any personal property attached to the Property that is owned by Seller is transferred to the Buyer unless the Parties agree otherwise. Personal property includes security and alarm systems, solar systems, TV satellite dishes, water softening and purifying systems and propane tanks. If any items or systems are being leased by Sellers, it is likely that the lease will specify that the lease transfers to the new owner when the property transfers. These leases often last for many years because the vendor will install the equipment for free and the vendor then recovers its costs over the life of the lease payments.
However, the Seller is not obligated to transfer those aspects of the Property that are leased items and the Buyer is not obligated to accept those aspects of the Property that are leased. The Seller is obligated to disclose if any items or systems are leased and the Buyer has the right to review that documentation.
There are many aspects of these leases that may not be appealing to Buyers. For example, many solar equipment leases are for 15 to 20 years. These leases can also contain extension periods of various durations. In some cases, the leases will automatically renew for the indicated extension period unless written cancellation notice is given to the vendor within a specified time period before termination of the current lease period.
If a consumer breaks a lease, the leasing company will pursue the consumer, either the original owner or the current owner – who may not have been aware of the lease at the time the home was purchased. This creates expensive and time-consuming legal entanglements. The vendor/lessor will also remove the equipment from the property if the lease is breached and the penalty provisions include requirements that the consumer pay for the cost of removing the system.
C.A.R. Approach
The C.A.R. Seller Property Questionnaire (“SPQ”) question V-C (2) asks whether the solar system, water softener system, water purification system, alarm system or propane tank(s) are leased.
The C.A.R. Purchase Agreement was changed a few years ago to create a separate Contingency in the Residential Purchase Agreement (“RPA”) regarding leased and liened items in Paragraph 8B (5) – the red portions of that Paragraph relate specifically to Leased Items:
LEASED OR LIENED ITEMS AND SYSTEMS: Seller shall, within the time specified in paragraph 14A, (i) disclose to Buyer if any item or system specified in paragraph 8B or otherwise included in the sale is leased, or not owned by Seller, or specifically subject to a lien or other encumbrance, and (ii) Deliver to Buyer all written materials (such as lease, warranty, etc.) concerning any such item. Buyer’s ability to assume any such lease, or willingness to accept the Property subject to any such lien or encumbrance, is a contingency in favor of Buyer and Seller as specified in paragraph 14B and C.
Once the Seller delivers all relevant documents to the Buyer, the Buyer has an opportunity to determine if the Buyer is able to assume that lease. If the Buyer cannot assume the lease, then the Buyer can exercise her contingency right as long as the written cancellation notice is sent in a timely fashion The time frame for that contingency is found in Paragraph 14B (3). The pre-printed or default time frame is 5 days from receipt of that documentation or the time frame specified in Paragraph 14B (1) whichever is later.
Thus, unless the Buyer in this scenario had removed or waived all contingencies, including the separate right to review and approve all leases, the Buyer has the right in the C.A.R. Residential Purchase Agreement to cancel within 5 days of receipt of the lease documentation.
PRDS Approach
The newly-issued PRDS Seller Supplemental Checklist also seeks information about items or systems that are leased in each section of the Disclosure that relates to those items or systems (such as Solar Systems V-J-1). The San Francisco Seller Disclosure does not contain a specific question on this issue.
The PRDS Real Estate Purchase Contract creates a separate obligation in Paragraph 5C for the Seller to identify what included items are not owned by Seller and the Seller is obligated to “Deliver to Buyer all documents (leases, contracts, terms of use, etc.) related to those non-Seller-owned items”. This disclosure obligation exists whether or not the Seller is exempt from completing the TDS.
The PRDS Real Estate Purchase Contract details all Contingencies in Paragraph 8. The first 5 Contingencies (Financing, Appraisal, Property Condition, Lead-Based Paint and Title) are specifically excluded if there is no stated time frame. Paragraph 8F sets up a separate contingency for leased items:
Buyer shall have 5 (or ____) days from Delivery of all documents pertaining to any
leased or liened items or systems to review and approve these documents and to be approved by the lease/lien holder(s), if applicable.
Thus, unless the Buyer in this scenario had removed or waived all contingencies, including the separate right to review and approve all leases, the Buyer has the right in the PRDS Residential Purchase Contract to cancel within 5 days of receipt of the lease documentation.
SFAR Approach
The SFAR Purchase Agreement also obligates the Seller to identify all leased items within 3 days of Acceptance and to “deliver to Buyer all leases, contracts, terms of use, and warranties, which shall be subject to Buyer’s reasonable approval. If Buyer does not remove this contingency within 12 or ___ days after receipt of documents, either Party may terminate this Contract.”
Unlike CAR and PRDS, SFAR obligates all Sellers (whether or not they are exempt) to complete the San Francisco Seller Disclosure form. Unfortunately, that form does not specifically seek any information about leased items or systems; however, the Seller is nonetheless obligated to disclose the information and deliver the relevant leased documentation.
PRACTICE TIPS
LISTING AGENTS:
- When taking a Listing, make a note of any solar systems, security systems and the other types of equipment and systems mentioned above that may not be owned by the Seller. Regardless of which Purchase Agreement form is to be used, ask the Seller if any equipment or systems are owned or leased.
- If any existing equipment or systems are leased, obtain copies of the leases from the Seller and provide all of that documentation to the Buyer at the same timeas all other Seller-provided disclosures and documents are provided to the Buyer.
SELLING AGENTS:
- Buyers should factor in the costs of leased equipment or systems in determining whether or not they can afford to buy any type of Property.
- As is true with all other Seller-provided documentation, Buyers should be advised to carefully review all lease documentation and raise any questions or concerns they may have about assuming the leases and/or removing the leased equipment.
- Buyers should be discouraged from waiving and/or removing any contingency rights regarding review and approval of the lease documentation.
- Buyers should be encouraged to contact the vendor/lessor directly to clearly understand the lease terms and their obligations and rights under the lease, prior to removal of their contingency regarding review and approval of the leases.
- As always, refer your Buyers to a qualified California attorney if they have any questions about the lease, its terms or how it affects the Buyers’ rights.
We will be covering liened personal property items in a future Weekly Practice Tip.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
©Copyright Broker Risk Management 2017 10/27/17