BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Broker Risk Management (“BRM”) receives more questions regarding the Transfer Disclosure Statement (“TDS”) than any other topic or issue. Given the breadth and frequency of recent questions, a brief refresher of the TDS seems to be appropriate.
Unless an exemption applies, a TDS is required by Civil Code §1102, et seq. for all residential one to four unit properties when sold by partnerships, corporations, LLCs, limited liability companies, and individual sellers even if they have never lived in the property (But, see the below exception to this exemption for certain trustees.) This obligation is not waivable.
EXEMPTIONS: Exemptions include the following: properties being sold: (1) between co-owners; (2) by a lender after foreclosure sale; (3) by the government; properties sold by the railroad; and (4) for which a final public report was issued by the Department of Real Estate (a subdivision).
CERTAIN TRUSTEES ARE EXEMPT: In addition, there is a separate exemption for a trustee seller who: (1) has not either been on title previously in their own name or has not occupied the property in the last year; and (2) is a natural person (e.g., not a bank trust department); and (3) the trust is a revocable trust. (See the BRM Trustee TDS Exemption Chart for guide to this exemption.) All other trustees must complete a TDS.
The following covers frequently asked questions and answers:
QUESTION NO. 1: The seller inherited the property and is selling it pursuant to a trust. The seller has not lived in it for the last five years. Is a TDS required?
ANSWER: No. Because your client is a trustee and has not lived at the property for the last year, a TDS is not required. As a simple point of reference, BRM has attached its diagram reflecting when a TDS is required where the property by a trust.
QUESTION NO. 2: I am a listing agent and my seller is a flipper who states that he is exempt because he is an LLC, has never lived in the property and knows nothing about the property. Is he exempt?
ANSWER: No. None of those are valid exemptions from completing a TDS in the absence of some other valid exemption. In fact, flippers know a lot about the property. They likely received seller disclosures, inspection reports, etc. when they bought the property. When remodeling, the flipper learns details about the existing conditions and defects at purchase which were either repaired, ignored or simply covered or painted over. All of the above must be disclosed to a buyer. (See, E.G., SPQ paragraph 7F with details required to be disclosed by a flipper based on a recent California law.)
QUESTION NO. 3: If a TDS is not required, does the seller complete a TDS anyway or another form?
ANSWER: If a seller is exempt from the TDS, it is recommended that a seller not complete a TDS. By completing a TDS, the seller may be expanding the seller’s duties of exposure owed to a buyer. It is recommended that a seller complete Exempt Seller Disclosure (CAR Form “ESD”) or other TDS supplement require by a non-CAR purchase agreement (e.g, the PRDS Seller Supplemental Checklist). However, you may provide the seller a blank TDS instructing seller not to complete it, but to use as a reminder of the items a seller should be disclosing.
QUESTION NO. 4: If a seller is exempt from a TDS, does the seller have to complete a Seller Property Questionnaire (“SPQ”)?
ANSWER: The answer depends on whether the SPQ is required by the contract. As a reminder, the TDS is required by statute, but the SPQ is required by CAR residential contract forms. If the contract does not require an SPQ, or other TDS supplement form, it does not have to be provided. The seller should also consider whether the seller wishes to counter out the SPQ, if the buyer requests it as part of the contract.
QUESTION NO. 5: Does the buyer have an automatic right to cancel the transaction after receipt of a TDS?
ANSWER: Likely. Civil Code §1102 et seq. states that a buyer has a right to cancel the transaction after three days from hand-delivery of a completed TDS or five days from delivery by email or mail. Completed is defined by the CAR Residential Purchase Agreement as completed by the seller and listing agent (Sections I and II). Please note that while the Civil Code indicates that a buyer has a right to cancel a transaction, in the past sellers have challenged that right unless the buyer can identify a material fact set forth in the TDS that caused the buyer to cancel. Given that California law contains an implied covenant of good faith and fair dealing, and the CAR purchase agreement forms contain an express provision stating that the parties will act in good faith toward each other, it is advisable that a buyer have a good faith reason for canceling the transaction, even if the cancellation is within three to five days of receipt of the TDS. If a buyer is canceling without a good faith reason, it is advisable to refer the buyer to a qualified California real estate attorney before canceling.
QUESTION NO. 6: What does completed TDS mean?
ANSWER: A completed TDS includes: (A) Checking one of the boxes in Section I of the TDS; (B) seller answering ALL questions in Section II of the TDS and providing a written explanation of any “Yes” answers; and (C) completion of a reasonable visual inspection of the property by the listing agent and the results of that inspection reported in the listing agent’s completed Agent Visual Inspection Disclosure delivered to buyer preferably with the TDS.
QUESTION NO. 7: Does the buyer have an automatic right to cancel after receipt of a Seller Property Questionnaire?
ANSWER: No. The TDS right to cancel is set forth in the Civil Code. The Civil Code does not address an SPQ; the RPA requires an SPQ. However, disclosures made by Seller in an SPQ may give a buyer a right to cancel pursuant to buyer’s Investigation Contingency if that has not been removed.
PRACTICE TIPS:
- If an agent has any questions as to whether a TDS is required, the agent should consult with their manager. Please also refer to BRM’s Trustee TDS Exemption Chart.
- If a buyer wishes to cancel a contract based on the Transfer Disclosure Statement, and the buyer does not have a specific reason, it is recommended that the buyer’s agent refer the buyer to qualified California real estate counsel to discuss the buyer’s rights of cancellation.
- A buyer does not have an automatic right to cancel based on the Seller Property Questionnaire.
- If a buyer wishes to cancel the contract and either does not have a specific reason or has waived the buyer’s contingencies, buyer’s agents should refer the buyer to a qualified California real estate attorney before cancellation to discuss the risks.
- For more information on the TDS law and information go to CAR Legal Q&A at:
https://www.car.org/riskmanagement/qa/disclosure-folder/transfer-disclosure-statement
Attachment: Trustee TDS Exemption Chart
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 PC. 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 practice.