Q: We are taking a listing of a mixed-use property; the ground floor is retail space and there are two residential units upstairs. Because of the residential component, we want the Seller to complete the standard disclosure forms but the Seller is refusing to complete the forms because when he bought the Property ten years ago, he did not receive any residential disclosure forms; he sees no reason why he should do so now. Does the Seller need to complete the TDS?
A: Unless the Seller is otherwise exempt, Sellers of mixed-use properties that have a residential component of 1 to 4 units must complete all of the standard seller disclosure forms. The Seller may not have received any disclosures when the Seller purchased the property because at that time there was no judicial guidance on this subject. However, since 2014, we have had an Appellate Court decision to direct our actions.
RICHMAN vs. HARTLEY (2014)
The Appellate Court determined that a Seller is required to provide the Buyer with a completed and signed TDS in any transfer of real property that is “improved with or consisting of not less than one nor more than four dwelling units,” even if the property has other non-residential uses, such as commercial or retail uses.
The fact that a property may be primarily classified as “non-residential” does not change the basic rule that if there is a residential component of 1 to 4 units, the Seller (unless exempt) must give the Buyer the TDS form and this statutory obligation is not “waivable” (i.e., the principals cannot simply agree that the TDS law does not apply to the transaction).
The Richman Court expressly stated that they would not render any opinion as to what disclosure obligations that a Seller might have as to the non-residential portions of the property. This judicial side-step has created uncertainty amongst real estate attorneys as to precisely what disclosures the Seller must make about the non-residential components of the property.
In particular, there is now considerable debate as to whether or not the Seller’s disclosures regarding the nonresidential portions of the property must be included in the same TDS form that was used by the Seller to make disclosures about the residential portions. On the one hand, the Seller’s information about the non-residential aspects of the residential mixed-use property could be included as an Addendum to the TDS form or, the alternative approach is that the Seller’s non-residential information is kept completely separate from the TDS form. In the absence of any clear legislative or judicial direction as to which course of action the Seller must take, organized real estate has not been willing to take a definitive stand on how to resolve this legal conundrum in the seven years since the Richman case was decided.
ADVISING SELLERS AND BUYERS
Since there are a large number of residential mixed-use properties in San Francisco, the San Francisco Association of REALTORS® (SFAR) created its “Mixed-Use”/1-4 Residential Unit Property Disclosure Advisory and Acknowledgment” form which is available on the CAR forms platform. CAR does not have its own Advisory on this topic.
Attached is the Broker Risk Management Mixed-Use Advisory for use by our clients outside of San Francisco. This form was created so that there would be a consistent, statewide standard of care for dealing with mixed-use properties.
The attached Advisory should be provided to Sellers and Buyers of residential mixed-use property at the same time that they are provided with the TDS. If your brokerage is currently handling a mixed-use transaction, please double check to make sure that the TDS form was used.
PRACTICE TIPS:
- Whenever an Agent is listing or selling a San Francisco “mixed-use” property that has a residential 1-4 component, the Agent should provide the client with the SFAR “Mixed Use”/1-4 Residential Unit Property Disclosure Advisory and Acknowledgment form at the same time as the client is provided with the TDS.
- Whenever an Agent is listing or selling a “mixed-use” property that has a residential 1-4 component that is located outside of San Francisco, the Agent should provide the client with the attached Mixed–Use Advisory form at the same time as the client is provided with the TDS.
- If a mixed-use transaction is about to close and no TDS was used, the Agent should report the matter to the Broker/Branch Manager to work out a corrective plan on a case-by-case basis with input from legal counsel.
- If a mixed-use transaction has already closed and no TDS was used, there is nothing that can be done to rectify the absence of the TDS and thus no further action should be taken.
ATTORNEY-CLIENT PRIVILEGED COMMUNICATION: 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 2021 11/19/21
ADVISORY FOLLOWS:
MIXED-USE ADVISORY FOR SELLERS AND BUYERS
Property: ______________________________
Real property is considered to be “residential mixed-use” when it has both a residential use and at least one other type of use such as commercial, industrial, or retail space. A common example is a 2-story building with one or more residential units above a commercial storefront unit or a “live/work” space.
Regardless of the type of real property, California law obligates sellers to fully disclose all material facts known to them that affect the use, value or desirability of the property. Brokers/Agents recommend that sellers make these disclosures in a timely fashion, in writing. However, if the property is a “mixed-use” property that has “not less than one nor more than four dwelling units,” sellers are obligated to provide buyers with a statutory disclosure form entitled Real Estate Transfer Disclosure Statement (“TDS”) California Civil Code §1102, unless the seller is statutorily exempted under §1102.2.
When a TDS is required for a “residential mixed-use” property, sellers must fully complete and sign that form as to the residential portion of the property. Brokers/Agents will then complete their portion(s) of the TDS as part of satisfying their inspection/disclosure obligations under §2079 but current law specifies that the Brokers/Agents’ inspection duty only applies to the residential portion of the property.
Presently, there is a legal uncertainly as to whether a seller of “residential mixed-use” property who completes a TDS regarding the residential portions of the property also has a duty to complete that form in connection with the non-residential portion of the property. Sellers could satisfy all possible common law and statutory disclosure obligations by providing buyers with a TDS as to all aspects of the property with a supplemental form regarding any material facts not addressed by the TDS; however, this method might cause confusion since the statutorily mandated TDS form seems to be primarily focused on residential property. Until this legal uncertainty is resolved by legislative or appellate court action, Brokers/Agents recommend that sellers of “mixed use” properties with 1 to 4 dwelling units seek the advice of a qualified California real estate attorney before completing the TDS and/or preparing any other disclosure documents.
The undersigned acknowledge receipt of this Advisory.
Date: ______________________ Seller: ________________________________
Date: ______________________ Seller: ________________________________
Date: ______________________ Buyer: ________________________________
Date: ______________________ Buyer: ________________________________
REAL ESTATE LICENSEES CAN ADVISE ON REAL ESTATE TRANSACTIONS ONLY. FOR LEGAL OR TAX ADVICE, CONSULT A QUALIFIED CALIFORNIA REAL ESTATE ATTORNEY OR CPA.