Even though the Transfer Disclosure Statement (“TDS”) has been around for more than thirty years, there is still confusion as to what constitutes the proper procedures to complete the TDS and obtain the required signatures. This Week’s Tip is a guide to completing and handling the TDS the right way.
For information about completing the AVID, see Weekly Practice Tip: “Agent Visual Inspection Disclosure form (“AVID – The Right Way”)
I. BACKGROUND
1. When is a TDS Required to be Completed by the Seller? The TDS Law (Civil Code Sec. 1102 et seq.) requires that Sellers, unless exempt, complete the TDS on transfers by sale, exchange, installment land sale contract, lease with an option to purchase, option to purchase, or ground lease, coupled with improvements, of real property (or a residential stock cooperative) improved with one-to four-dwelling units. (An almost identical statute applies to manufactured homes and mobile homes classified as personal property and intended to be used as a residence.)
FULLY COMPLETING THE TDS IS A NON-WAIVABLE STATUTORY DUTY OF THE SELLER; it is against the law for Buyers and Sellers to enter into an agreement to eliminate that duty.
2. When is a Seller Exempt from Completing a TDS? There are numerous exemptions which provide that certain Sellers are not required to complete a TDS. Common exemptions are: sales pursuant to a public report, probate sales, trust sales (unless the trustee of a revocable trust is a natural person who previously owned the property in their own name, or lived in it within the last year), transfers from one co-owner to another, and most transfers between family members.
3. Buyer Right to Cancel. If a TDS is required and it is delivered to Buyer or Buyer’s Agent after Buyer’s offer has been presented to Seller or Seller’s Agent, Buyer has a 5-day right to cancel the Purchase Agreement (3 days if delivered in person) from the date of the delivery. This 5/3 day cancellation right also applies to any amended TDS delivered to Buyer.
For additional information about the TDS, see CAR Legal Memorandum entitled “Transfer Disclosure Statement Law” at:
https://www.car.org/en/riskmanagement/qa/disclosure-folder/transfer-disclosure-statement
II. TDS SELLER’S SECTIONS I AND II
1. Best Practices for Listing Agent:
A. Give Sellers a copy of the TDS at the same time as taking the listing. Make it clear to the Sellers that this is the second most important document in the transaction after the purchase agreement. Honesty, thoroughness and candor are imperative.
B. Provide All Sellers with the Disclosure Information Advisory (“DIA”) at the same time as providing the TDS (or Exempt Seller Disclosure form). Sellers often claim during litigation that they did not understand that they had to disclose the item which is the subject of the lawsuit. Providing the DIA with the TDS can effectively defeat that type of claim. (If using the PRDS Purchase Agreement, use the PRDS Seller Advisory Regarding Completing the R.E.T.D.S., Form SARC.)
C. Document that the DIA has been provided to the Seller. A signed copy of this Advisory in the Broker File would be evidence that the Listing Agent provided the Sellers will all of the relevant information about the Seller’s disclosure obligations.
D. Review the Sellers’ disclosures to make sure that the Seller has fully completed all required sections of the forms. This review needs to occur before providing the TDS to anyone. Listing Agents are not required to verify the Seller’s disclosures; Listing Agents just need to make sure that the disclosures are fully completed.
2. Advising Sellers Regarding Their Disclosure Obligations:
A. Point out to Sellers their provisions of the TDS (Sections I and II) and encourage Sellers to carefully go over the DIA in connection with the TDS. Remind Sellers to take as much time as is necessary. Preferably, ask the Sellers to walk throughout all structures and grounds to help remind them of any additions, alterations and repairs made before or while they have owned the property.
NOTE: All purchase agreements define what constitutes a “fully completed TDS.” Review the purchase agreement form that you will be using with the Sellers so that they are aware of their contractual requirements.
B. Seller Must Check a Box in Section I: In Section I of the TDS, Supplemental Disclosures, Sellers MUST check one of the three boxes.
For detailed information on this requirement, see Weekly Practice Tip: “Newly-Revised Section I of the TDS” 05-01-20.
C. Seller Must Disclose Disclosures, Reports, etc. in Their Possession: Remind Sellers to gather all of the documents currently in their possession which concern the value or desirability of the Property to make sure they complete their disclosures fully and because those documents must be provided to the Buyers with their disclosure forms. The age of the documents is not relevant and it does not matter whether the Sellers got those documents before during or after Close of Escrow. As noted in the DIA, Sellers need to provide Buyers with all disclosures, inspection reports, engineering reports and surveys, estimates for repairs, bids, permits, governmental notices and correspondence with neighbors regarding any issue.
D. Emphasize the Best Practices Recommendations Sellers should follow contained in the DIA.
(1) Remind Sellers that even if a defect or condition has been repaired, that defect or condition must still be disclosed so that Buyer has the opportunity to check out the condition, and the completeness of the repair.
(2) Sellers need to disclose all pending or resolved Lawsuits, Arbitrations and Mediations Affecting the Property. Sellers should identify any such lawsuit, arbitration or mediation by name of the case and the court or arbitration/mediation service and case number (e.g., Oscar Owner v. XYZ Contractor, San Francisco Superior Court, Case 2345-21). Sellers should consult with the attorney who represented them as to what information needs to be disclosed.
(3) Section II.A of the TDS asks about items that the Property has. This is not a contract document thus Sellers should check all of the existing items whether or not the Sellers intend to take those items with them. Sellers must also identify any included items not in operating condition to the best of their knowledge and describe that condition.
(4) Explanations needed for all “Yes” responses. If Sellers check any “Yes” box in Section II-B or Section II-C, make sure that the Sellers give details in the blank lines or attach additional pages explaining those answers. Failure to do so could lead to claims that the TDS is not fully completed and/or that Sellers failed to fully disclose all known information.
(5) Sellers’ Disclosures Should Be in Sellers’ Own Words and in Sellers’ Handwriting. Listing Agents should not write anything in Sections I or II, not even to make a quick correction on a computer.
(6) Basic Rule(s) of Thumb: If Sellers question whether to disclose any condition or issue, Listing Agents should use two good “rules of thumb:” (a) “If you have to ask the question, you should disclose” and (b) “When in doubt – disclose.” Also, remember: “What Buyers learn during escrow, they forgive, what they learn after Close of Escrow, they sue over.”
E. Sellers Sign and Date ONLY at the end of Section II, at the top of page 3. At this point, do not have Sellers sign in Section V at the bottom of Page 3, as this is space that should be used for Sellers to sign after they receive a completed TDS back which has been signed as having been received by Buyers. In addition, you do not want the changes to the TDS, by the comments of the agents in Sections III and IV, above the Seller’s signature.
F. If a TDS is required, Sellers do not need to complete CAR form “Water Heater and Smoke Detector Statement of Compliance” (“WHSD”).
G. Remind Sellers that if there are any changes or additions to their disclosures after the TDS and related disclosure documents have been completed and delivered to you, Seller must advise you so that an appropriate Amendment or addition can be prepared prior to delivery to a Buyer.
3. Exempt Sellers Should NOT Complete a TDS. All Sellers in California are required to disclose all facts known to them affecting the value or desirability of their property, regardless of whether they are required to complete a TDS. Any Seller who is exempt from completing a TDS should NOT make their disclosures on the TDS form. Seller should use the Exempt Seller Disclosure (“ESD”) form. Special attention should be paid to question 4.J of the ESD form since that is the “catch all” question asking the Seller to disclose whether Seller is aware of any “Material facts or defects affecting the Property not otherwise disclosed to Buyer.”
See Weekly Practice Tip entitled: “Exempt Seller Disclosures”
III. TDS COMPLETION AND DELIVERY
1. Listing Agents’ Steps in Completing the TDS:
A. If more than 30 day have elapsed between when the Seller fully completed and signed the TDS, Listing Agents should ask their Sellers to update the TDS before giving it to any actual or potential Buyer. Ask Sellers to review their TDS to see if anything has changed since it was signed. This procedure will hopefully pick up any information that might otherwise fall through the cracks and not be disclosed.
(1) Even if there are many changes needed before the TDS is delivered to anyone, do not have the Seller complete a new TDS because both forms will need to be provided to the Buyer and it can prove embarrassing to Sellers if there are any inconsistencies between the two forms.
(2) The best method of handling Sellers’ changes is to add an Addendum to the TDS which explains the new issues
B. Add your completed and signed AVID by checking the box in Section III, attach your AVID to the TDS, then sign your name and add the date to Section III.
2. Buyer’s Agents:
A. Check the TDS for Completeness. When you receive the TDS from the Listing Agent, review the TDS to make sure the Seller has answered all questions. Buyers are entitled to receive a completed TDS and the law puts the burden on the Buyer’s Agent to obtain that form for the Buyer. Confirm there are no unanswered questions and confirm that any “Yes” answer has an explanation in the blanks or on a separate Addendum to the TDS or other attached paper.
B. If the TDS received is incomplete, point the omissions out to the Buyer and, at the direction of the Buyer, demand a fully-completed TDS from the Listing Agent.
C. Assuming that the TDS is delivered after the contract is presented, the Buyer’s 5/3-day right to rescind commences when Buyer, or the Buyer’s Agent, has received a fully-completed TDS from the Seller. Under common law agency principles, delivery of the TDS to the Buyer’s Agent is deemed to be delivery to the Buyer thus the Buyer’s Agent should not delay forwarding the TDS to the Buyer after confirming that the form is fully completed.
D. DRE auditors and investigators are reported to be checking TDSs to see whether the Seller left any “Yes” answers without a written explanation. If there are unexplained “Yes” answers, DRE will be looking at the Buyer’s Agent’s file to see if there is:
(1) A written communication from the Buyer’s Agent to the Buyer asking if the Buyer wants an explanation to the “Yes” answers, and Buyer’s response that they either do want that explanation or are OK without it; and/or
(2) A written request from the Buyer’s Agent to the Listing Agent (e.g., an email) that a written explanation for each “Yes” answer be provided; and/or
If the DRE auditor or investigator does not see that documentation, they can and have issued Citations to the Buyer agent which can be as much as $2,500.
E. Promptly upon receipt of the TDS from Seller’s Agent, add your completed and signed AVID by checking the box in Section IV, attach your AVID, print and sign your name and add the date. Then deliver the TDS with your attached AVID to the Buyer.
F. Have Buyer Sign the TDS. The Buyer should sign the TDS in Section V, acknowledging receipt of the completed TDS. Note: The Buyer’s 5/3-day right to rescind starts when the Buyer or Buyer’s agent gets the TDS, not when the Buyer’s Agent delivers the TDS to the Buyer or when Buyer signs it. In fact, the right to rescind starts and ends even if the Buyer never signs it. Most purchase agreement forms, including the CAR RPA form, require the Buyer to return signed statutory disclosures, including the TDS, within the specified time or the Seller can, after giving the required notice, cancel the contract. It is the best practice to PROMPTLY deliver the TDS to the Buyer, and to have the Buyer immediately sign the TDS and acknowledge receipt when you give it to them.
G. Advise Buyer of the 5/3-day Right to Rescind. Advise Buyer that the 5/3-day right to rescind starts when a completed TDS is first initially received by either the Buyer’s Agent or Buyer, and, if Buyer intends to cancel the contract based on that document, they must do so within those 5/3 days.
H. Return the Signed TDS to Listing Agent. Give a copy to the Buyer and keep a copy for your files and then return a copy of the signed TDS to the Listing Agent.
I. Buyer’s Obligations: Early in your relationship with your Buyers, let them know that they will be receiving disclosures and reports and that it is their job to read them and ask you if they have any questions. If they ask you questions, assist them in getting answers. Let your Buyers know that you may be able to answer some of their questions, but they may have to get the assistance of other professionals, such as contractors or tax or legal advisors, and that they will likely have to incur expenses for this advice.
3.Seller’s Agents. Have your Sellers sign the TDS in Section V on the bottom of page 3 acknowledging receipt. Give the Seller a copy of the fully-signed disclosure and then send a copy to the Buyer’s Agent, and keep a copy for your files.
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 01/08/21