Q: If Sellers are exempt from completing the TDS, is the Exempt Seller Disclosure (“ESD”) form required? What changes were made to the CAR ESD form? What is the right way to use the ESD?
A: Although some Sellers may be exempt from completing the TDS, all Sellers have both common law and statutory disclosure obligations that must be met. This Tip will focus on why the Exempt Seller Disclosure form is required and the right way to use the newly-revised CAR ESD form by Sellers who are exempt from completing the TDS.
I. IS THE EXEMPT SELLER DISCLOSURE A REQUIRED FORM?
A. Contractual and Common Law Disclosure Obligations
In both the CAR and PRDS purchase contract forms, Sellers who are exempt from completing the TDS must fully complete the Exempt Seller Disclosure; the ESD is thus contractually required.
More importantly, the general common law rule is that ALL Sellers of ALL properties of ALL types must disclose to buyers ALL conditions and defects which materially affect the value or desirability of the property being sold. The ESD was created to facilitate the exempt Seller’s disclosure obligations.
Since 1983, in Reed v. King the California courts have held that:
“. . . a seller of real property has a duty to disclose: ‘where the Seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the Seller is under a duty to disclose them to the buyer.’ This broad statement of duty has led one commentator to conclude: “The ancient maxim, caveat emptor (‘Let the buyer beware.’), has little or no application to California real estate transactions.”
California courts have routinely held that irrespective of a Seller’s duty to complete a TDS, all Sellers must disclose all known negative conditions and defects which affect the value or desirability of the property.
B. Statutory Disclosure Obligations
In addition to the common law Seller disclosure requirements, there are a number of statutory disclosures that all Sellers must make that are not contained in the TDS form. For example, death on the Property within the past three years, release of an illegal controlled substance, and whether there are plumbing fixtures on the Property that are “non-compliant” with state water conservation laws are statutory disclosures.
CAR, PRDS and SFAR have all created supplemental disclosure forms that are designed to be used with the TDS (e.g., the SPQ, the PRDS SSC and the SFAR SFSD) so as to enable those Sellers to make the statutorily-required disclosures.
The ESD is specifically designed to enable Sellers who are exempt from completing the TDS, to make disclosures about all statutory, contractual and common law issues.
II. WHAT CHANGES WERE MADE TO THE CAR EXEMPT SELLER DISCLOSURE?
The new CAR ESD (revised June 2021) has two significant improvements:
A. Paragraph 2B now states that the ESD can be used with Single Family and Multi-Family unit properties.
B. The “catch-all” paragraph asking about the Seller’s awareness of “Any other material facts or defects affecting the Property” was hard to find because it was in-between Questions 4I and 4K. This catch-all question is now in the last paragraph (new paragraph 4K), making it much easier for Sellers to see. This important question has also been expanded to include the obligation of a Seller to disclose if Seller has any material documents in Seller’s possession.
In the newly-revised form, Paragraphs 4A through 4J inquire as to whether the Seller is aware of any of the specific statutory and contractual disclosures while new Paragraph 4 K asks if the Seller is aware of “Any other material facts or defects affecting the Property, or material documents in Seller’s possession affecting the Property, not otherwise disclosed to Buyer.”
III. THE RIGHT WAY TO USE THE CAR EXEMPT SELLER DISCLOSURE?
A. Timing of Delivery
Although Buyers do not have a right to rescind the transaction when a Seller is exempt from completing the TDS, if the Seller completes the ESD, it should be delivered to the Buyers as early as possible, preferably at the same time that the Listing Agent’s AVID is delivered to the Buyer.
B. Explaining the ESD to Sellers
To enable Sellers to better understand the breadth and depth of their disclosure obligations, when the ESD is provided to the Sellers, the Listing Agent should provide the Seller with either the CAR Disclosure Obligation form (“DIA”) or the PRDS Seller Advisory Regarding Completing the Real Estate Transfer Disclosure Statement and Other Seller Disclosure Forms (“SARC”) and follow Tip #4 below.
PRACTICE TIPS:
- If the Seller is exempt from completing the TDS, the Seller should NOT complete a TDS. Listing Agents handling residential property should provide all exempt Sellers with the ESD form and, at the same time, provide either the CAR DIA or PRDS SARC form.
- Listing Agents should tell exempt Sellers to pay special attention to 4K; this is where Sellers need to fully and completely disclose ALL known facts that materially affect the Property’s value or desirability.
- Because the ESD has very little blank space available, Listing Agents should encourage Sellers to use additional sheets of paper, or an Addendum, to fully make all of their required disclosures, including their explanations for any of the Sellers’ “Yes” responses to questions 4A-4J.
- Listing Agents should give Sellers a “Sample” copy of the TDS and a sample TDS Supplement (e.g., SPQ or SSC) with a warning that; those two forms are not to be completed; they are to be used merely as a checklist or reminder of the types of things a Seller should consider in completing the ESD form.
For more information about which Sellers are exempt from completing a TDS, see Weekly Practice Tip: “Exemptions from Seller Completing a TDS” (June 19, 2015).
For a detailed explanation of how to determine if a Trustee is exempt from completing a TDS, see Weekly Practice Tip: “Sale of Property Held in Trust – Disclosure” (October 15, 2018)
For a list of the types of things all Sellers must disclose, see Weekly Practice Tip: “Transfer Disclosure Statement – The Right Way” (January 8, 2021).
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is attorney client-privileged and 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 6/04/21