Note: See Part 1 “Natural Hazard Reports” for details and definitions published on March 29, 2019.
WHAT ARE THE RESCISSION RIGHTS UNDER THE NHD LAW?
Q: We represent a Buyer who has been in contract for ten days. She received the Seller’s TDS, was satisfied with the inspection reports, and removed all of her contingencies. Today, the Seller’s Agent emailed me the NHD Report which contained the 2-page Natural Hazards Disclosure Statement (“NHD Statement”) signed by the Seller; I gave the NHD Statement to the Buyer and she is concerned that the Property is in a flood zone, which was not previously disclosed. Does the Buyer have a right to rescind even though her contingencies have been removed? How long does the Buyer have to rescind? Am I required to sign the NHD Statement?
A: Yes, there are rescission rights under the NHD Law which neatly track the rescission rights in the TDS law. Effective January 1, 2019, Civil Code Section 1103.3 was amended to provide that if the 2-page NHD Statement is delivered “after the execution of an offer to purchase,” the buyer has “three days after delivery in person, five days after delivery by deposit in the mail, or five days after delivery” by means of an email to terminate the transaction by delivering a “written notice of termination to the seller or the seller’s agent.”
The statutory right to rescind is completely separate and apart from the status of any contractual contingencies and thus the Buyer’s right to rescind is not affected by the removal or waiver of any contingencies.
WHO SIGNS THE NHD STATEMENT? The NHD Law requires that the Seller must sign the NHD Statement indicating whether the Seller completed the information in the form or, the preferred method, the Seller used a reputable third-party NHD Statement report provider to complete the form. The third-party company signs the form as well but that signature can be pre-printed in that document. The Seller’s Agent is also required to sign the NHD Statement. The Buyer should sign acknowledging receipt of the NHD Statement. The only party who is not obligated to sign the NHD Statement is the Buyer’s Agent.
WHEN DOES THE RESCISSION PERIOD START? Unlike the recent changes to the TDS law, there is no statutory definition of a “fully completed” NHD Statement. However, the CAR Residential Purchase Agreement (“RPA”) specifies in Paragraph 10-A (1) that if the Seller is required by law (Civil Code Section 1103, et seq.) to provide the NHD Statement to the Buyer, then the document must be “fully completed.” Paragraph 10-A (2) of the RPA specifies that statutory disclosures such as the NHD Statement are considered to be “fully completed” when the questions on the form have been answered and signed by both the Seller and the Seller’s Agent.
The PRDS® Purchase Contract also requires the Seller to “fully complete” the NHD Statement including signing the form. The SFAR Purchase Agreement is silent on that issue.
The logical commencement of the right to rescind (regardless of which Purchase Agreement was used) is when the Buyer or Buyer’s agent first receives the “fully completed” NHD Statement IF it is delivered after the Buyer signs the Offer. Thus, an incomplete or unsigned NHD Statement should not be included in any disclosure packet since that may delay the Buyer receiving the “fully completed” form.
The Seller and Seller’s Agent are not obligated to investigate or verify the information supplied by a third-party NHD provider; Sellers and their Agents are also not obligated to notify Buyers if information supplied by a third party NHD provider has become inaccurate. However, if the Seller or the Seller’s Agent has any knowledge of any inaccuracy, the NHD Statement may be amended but if material amendments are made after the Buyer has signed the offer, the Buyer will have a new rescission period.
WHO IS EXEMPT FROM PROVIDING THE NHD STATEMENT? Generally, if a Seller is exempt from completing the TDS, the Seller is exempt from providing the NHD Statement. However, the one exception to that rule is new construction; there is no exemption for any type of new construction whether or not a Public Report is required.
PRACTICE TIPS:
BUYER’S AGENTS:
- The law puts the burden of delivering the NHD Statement on the Buyer or the Buyer’s Agent. Therefore, make sure that a “fully completed” NHD Statement is provided to the Buyer.
- If the NHD Statement is not fully completed (it is incomplete and/or it is not signed by the Seller and/or the Seller’s Agent), send it back to the Seller’s Agent with a written request (such as an email) that it be “fully completed.” Make certain the Buyer is copied on that email.
- If the NHD Statement is delivered after the Buyer signs the Offer, make certain that the Buyer is made aware of their right to rescind.
SELLER’S AGENTS
- Sellers and their agents can legally rely on the information supplied by “reputable” third-party NHD Statement vendors. Therefore, only recommend NHD Companies approved by your broker.
- Before providing the NHD Statement to the Buyer or Buyer’s Agent, make certain that it is fully completed – that all questions have been answered, and Seller and you have signed it. The sooner the fully-completed and signed NHD Statement is delivered to the Buyer or Buyer’s Agent, the better.
This Weekly Practice Tip is an attorney-client privileged document 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 2019 Broker Risk Management April 5, 2019