Seller disclosures speak to the legal obligation to disclose all material facts about the property that could affect its value or desirability. Failing to properly disclose these facts can lead to legal disputes, financial penalties, and even the rescission of the sale. Seemingly in a majority of cases, disputes and litigation arise even when a seller’s omission might have been inadvertent. This speaks to the high-risk nature of the disclosure process, and is a great reason to go into it with thoughtfulness and care. Here’s a quick introduction to sellers’ disclosure duties under California law and along with 6 best practices.
Understanding the Duty to Disclose
California follows a strong “buyer beware” principle, but it balances this with strict disclosure requirements for sellers. Under California Civil Code Section 1102, sellers of residential properties (one to four units) must disclose all material facts that could impact the buyer’s decision.
A material fact is any information about the property that could influence a reasonable buyer’s decision to purchase or affect the price they are willing to pay. A material fact is, generally, one that measurably impacts the market value of the property. There are virtually unlimited possibilities as to what could be a material fact. But some very common examples of material facts include:
- Structural defects (e.g., foundation cracks, roof leaks, termite damage)
- Water damage or mold issues
- Past repairs and renovations
- Environmental hazards (e.g., lead-based paint, asbestos, radon gas)
- Neighborhood nuisances (e.g., excessive noise, crime, or planned developments nearby)
- Zoning or legal violations
- Death on the property within the last three years (required by California law)
Failure to disclose material facts can lead to serious consequences, including lawsuits for fraud, negligence, or breach of contract.
Seller disclosures are also subject to the common law of fraud, which includes fraudulent concealment as the result of failing to disclose a known, material fact.
Required Disclosure Forms
To satisfy their duty to disclose, sellers must complete several standardized forms, including:
1. Transfer Disclosure Statement (TDS)
The TDS is the most critical disclosure document in California real estate transactions. Sellers must complete this form honestly and in good faith, answering questions about the property’s condition and any known defects. The TDS covers aspects such as:
- Structural integrity
- Plumbing, electrical, and HVAC systems
- Pest infestations
- Legal issues affecting the property
2. Natural Hazard Disclosure Statement (NHD)
The NHD informs buyers if the property is located in:
- A special flood hazard area
- A very high fire hazard severity zone
- A state or federal seismic hazard zone
This report is usually prepared by third-party companies that specialize in analyzing natural hazard risks, such as Property ID NHD.
3. Lead-Based Paint Disclosure (for homes built before 1978)
Federal law requires sellers of homes built before 1978 to provide buyers with a Lead-Based Paint Disclosure form. This includes any knowledge of lead-based paint hazards and must be accompanied by an EPA-approved pamphlet on lead hazards.
4. Seller Property Questionnaire (SPQ)
While not legally required, the SPQ is often used in conjunction with the TDS to provide further details on the home’s history, including any legal disputes, remodeling permits, or neighborhood issues.
5. Mello-Roos and HOA Disclosures
If the property is subject to Mello-Roos taxes or is located in a homeowners association (HOA), the seller must disclose this information and provide relevant documents to the buyer. Be expansive here and include the complete set of CC&Rs, amendments, and other governing documents. As well as any information relating to the property being out of compliance with the HOA’s rules and guidelines.
Some Best Practices for Sellers to Comply with Disclosure Duties
1. Be Thorough and Honest
Sellers should disclose all known issues. If a seller is unsure whether something needs to be disclosed, it is best to err on the side of transparency. A best practice is also disclosing major renovations and repairs. Even though a repair or renovation isn’t a “defect,” per se, they’re material for their significance and focuses the buyer’s due diligence to avoid surprises later. Such as if there’s a later problem with the renovation or repair.
Don’t forget about easy to miss topics such as neighborhood nuisances (think of neighborly noise, a future construction project, or an abundance of cars parked in the street). Here, what might not be a nuisance to one person could be one to another. So it’s important to think outside of the box. Spending some time with the forms, thinking about them, and revisiting them before turning them over are small but important methods of making them more complete.
2. Get a Pre-Sale Home Inspection
While not required, obtaining a professional home inspection before listing the property can help identify potential issues early. This allows the seller to address problems before they become a sticking point in negotiations. Hold on to the inspection report and give it to the buyer or interested buyer. It’s critical to understand, however, that giving a report doesn’t satisfy a seller’s responsibility to independently disclose known material facts. Thus, stay away from putting things like “see inspection report” in the TDS and SPQ.
3. Keep Records of Repairs and Permits
Providing documentation of past repairs, renovations, and permits reassures buyers and demonstrates transparency. It can also help prevent future legal claims by showing that issues were properly addressed. Specific to the area of ADUs, sellers of properties with ADUs should take care to ascertain whether their ADUs are permitted. Unpermitted or non-compliant ADUs are a hot topic in litigation, due to their rising popularity and presence.
4. Consult with a Real Estate Attorney
Working with a knowledgeable real estate attorney can ensure sellers complete all required forms accurately and in compliance with California law. They can also provide guidance on specific disclosure concerns. This is especially critical in For-Sale-By-Owner (FSBO) sales in which the seller is not working with a listing agent. Under this circumstance, a seller still owes duties of disclosure required by law. Put differently, self-representation of a house sale doesn’t excuse a seller’s failure to use the legally required TDS or make other disclosures typically provided by third parties, such those natural hazard related.
An excellent real estate agent adds value to and simplifies the selling process. But disclosures are a legal obligation, and therefore a real estate agent can’t advise a seller as to whether the disclosures meet the legal standard that applies.
5. Deliver Disclosures Early in the Transaction
Providing disclosures early in the transaction allows buyers time to review the information and prevents surprises later. This can help avoid delays, renegotiations, or the buyer backing out of the deal.
6. Disclose Material Facts Even If “As-Is”
People often confuse an “as-is” sale with freedom from the obligation to disclose. Selling a home “as-is” and seller disclosures are two distinct concepts. Selling a property “as-is” doesn’t exempt sellers from disclosure obligations. This is because buyers still have the right to know about any material defects before purchasing the property in its then condition, whatever that may be. Adding “property sold as-is” or language to this effect doesn’t add any legal protection and could give the appearance of caginess. “As-is” sales are already the legal standard in California, which co-exists with the duty to disclose.
Consequences of Failing to Disclose
Failing to disclose material facts can lead to:
- Legal action: Buyers may sue for misrepresentation, fraud, or negligence.
- Rescission of sale: Courts may allow buyers to cancel the purchase and recover their money.
- Financial penalties: Sellers could be responsible for repair costs, attorney fees, and damages.
Final Thoughts
Satisfying disclosure obligations is one of the most important responsibilities for sellers of residential real estate in California. By being transparent, completing required forms accurately, proactively addressing potential concerns, and seeking good counsel, sellers can protect themselves from legal issues while fostering a smooth transaction. Remember, honesty is not only the best policy—it is the law.
Do you need help with your disclosures? Contact attorney Jonathan A. Sanders today for a free consultation.