Member Legal Services Tel (213) 739-8282 Fax (213) 480-7724 Sep. 2, 2009 (revised)
The seasonal firestorms we experience in California raise several legal questions for REALTORS® and their clients. The following questions and answers may be helpful for property owners and residents who have suffered a loss, or for buyers who are in escrow to purchase property involved in the disaster.
Q 1. What are the general rules concerning who bears the risk of loss in a real estate transaction where an "Act of God" or other disaster, such as fire, affects the property?
A If the purchase contract between the parties does not specify who is to bear the risk of damage or loss to the premises during the time between the execution of the contract and the transfer of title, the liability of the parties is governed by the California Uniform Vendor and Purchaser Risk Act (Cal. Civ. Code § 1662). Under the provisions of this statute (assuming no fault on the part of the buyer), the risk of loss or damage to the premises is carried by the seller until the buyer receives either title or possession. (Note: C.A.R.'s Residential Purchase Agreement and Joint Escrow Instructions, Standard Form RPA-CA, revised 10/02, does not dictate how risk of loss is allocated between a buyer and a seller.)
If all or a material part of the premises are damaged before title or possession is given to the buyer, the buyer can cancel the contract and recover any portion of the purchase price paid. It is not clear whether the buyer can alternatively elect to enforce the contract with a reduction in the purchase price equal to the loss of value or cost of repair. (Cal. Civ. Code § 1662.)
After the buyer has taken possession or has received title, the buyer bears the risk of loss or damage to the premises (assuming no fault on the part of the seller). Therefore, if the premises are damaged, the buyer must still complete the contract and pay the balance of the purchase price. (Cal. Civ. Code § 1662.)
If the purchase contract does contain a risk of loss provision, that provision will govern to the extent it is different from or more specific than the Uniform Vendor and Purchaser Risk Act (Uniform Act) (Cal. Civ. Code § 1662).
Q 2. May a buyer get out of a purchase contract under the Uniform Act if the damage or loss caused by fires to the property is minor?
A Probably not. The Uniform Act implies that the seller may still enforce the contract if the damage is not material. However, a purchase agreement may require the seller to repair such damage. For example, Paragraph 7A of C.A.R.'s Residential Purchase Agreement requires the property to be maintained in substantially the same condition it was in on the date of acceptance. Under this language, a seller could be obligated to repair fire-related damage to his or her property.
Q 3. May a buyer get out of a purchase contract under the Uniform Act if the damage or loss caused by fires to the property is major?
A Yes. To repeat, if (1) neither legal title nor possession has transferred from the seller to the buyer, and all or a material part of the real property is destroyed by fire, and (2) no express contract provision to the contrary exists, then, under the Uniform Act the seller cannot enforce the purchase contract and the buyer may cancel and recover any portion of the purchase price already paid. (Cal. Civ. Code § 1662.)
Q 4. If the damage is not severe, does the timing of the fires (whether they occur before or after an inspection) affect the right to cancel?
AYes. If the damage occurs before the buyer has removed an inspection contingency in his or her purchase contract, the buyer can, of course, exercise any inspection, disapproval, and cancellation rights provided by the contract.
If the damage occurs after the buyer has removed his or her inspection contingency, the buyer generally does not have an automatic right to reinspect the property and approve or disapprove of its condition under most purchase contracts (including C.A.R.'s Residential Purchase Agreement). However, the seller may be obligated to repair the property. See Question 2.
A purchase agreement may, however, require a seller to disclose fire-related information, which in turn may give a buyer a right to cancel a transaction, even if he or she has already removed contingencies. For example, Paragraphs 5A(3) and (4) of C.A.R.'s Residential Purchase Agreement provide that if, prior to the close of escrow, the seller becomes aware of adverse conditions materially affecting the property, the seller must provide a subsequent or amended disclosure or notice, which then gives the buyer a right to cancel the agreement.
Q 5. Must a seller disclose major fire damage that has not been repaired when attempting to sell the property?
A Yes. For sales of residential one-to-four unit properties, the Real Estate Transfer Disclosure Statement (TDS), Section II (Seller's Information), paragraph C.9, asks:
"C. Are you (Seller) aware of any of the following: . . . 9. Major damage to the property or any of the structures from fire, earthquake, floods, or landslides. ______ Yes ______ No." (Cal. Civ. Code § 1102.6 (emphasis added).)
In addition, for both residential one-to-four unit and other properties, the seller is required to inform a buyer whether the property is located in a "very high fire hazard severity zone" (which has certain maintenance requirements) or a "state responsibility area" (which may contain substantial forest fire risks and for which the state has primary financial responsibility for fire prevention and suppression). (Cal. Civ. Code §§ 1103.2 et seq.) The disclosure of these and other natural hazard zones is discussed more fully in C.A.R.'s legal article, Natural Hazard Disclosure Statement.
For all types of property, the general requirement of disclosing known material facts affecting the value or desirability of property applies.
Q 6. Must a seller disclose the fact of a fire when there was no major damage to the property?
A Yes, if it is a material fact affecting the value or desirability of the property to the buyer. Even though the property may not have suffered major fire damage, the seller may be aware of other facts related to the fire that the buyer might not be aware of. Of course, a buyer must also exercise reasonable care to protect himself or herself in a real estate transaction, and is not excused from discovering problems that are within his or her diligent attention and observation.
Q 7. Must a seller disclose the fact of a fire when there was major damage to the property but it has been repaired?
A California law does not clearly answer whether a seller must disclose past property defects and repairs. At the present time, the law does not appear to require disclosure of past defects and repairs unless the problems may be persistent. In other words, a defect which has been fully repaired and no longer threatens the value or desirability of the property probably need not be disclosed. On the other hand, defects which are difficult to remedy and which may continue to plague the property may have to be disclosed. Given some uncertainty in this area of the law, many sellers may prefer to resolve doubts in favor of disclosure to minimize the risk of liability.
Q 8. What are the tax effects of destruction of a property?
A Federal income tax law provides for the deduction of "casualty losses," which include destruction of property by "Acts of God" including fire, theft, and certain other types of losses. (See 26 U.S.C. §165.)
The following is a brief summary of the rules:
(1) For business property, the casualty loss is fully deductible. (26 U.S.C. §165(a).)
(2) For non-business property of individuals, losses from "casualties," including floods, earthquake, fire, storm, or other natural occurrences, are generally deductible only to the extent that the total of such losses exceeds 10 percent of the taxpayer's adjusted gross income for the year of loss. Any loss is deductible only by a taxpayer who itemizes deductions. Each loss is subject to a $100 floor. The amount of a casualty loss is the lesser of, (a) the difference between the value of the property immediately before and after the loss, or (b) the adjusted basis of the property immediately before the loss. (26 U.S.C. §165(c)(3) and (h).)
(3) If the loss results from a disaster that the President determines to be eligible for federal assistance, the taxpayer has the choice of deducting the disaster losses on his or her return either, (a) for the year in which the loss occurred, or (b) for the preceding tax year. (26 U.S.C. §165(i).)
Please contact an accountant or tax attorney for further details about the tax effects of fire losses on a particular transaction.
Q 9.Can a landlord or tenant terminate a lease or a rental agreement if all or parts of the premises are destroyed by fire?
A Yes. Under California Civil Code Section 1933(4), the agreement is terminated automatically if the entire premises are destroyed, unless the parties have agreed to something different. In the event the premises are only partially destroyed, the tenant can terminate the lease by notice to the landlord if the landlord had reason to believe at commencement of the lease or rental agreement that the portion destroyed was a "material inducement" to the tenant to enter into the lease (Cal. Civ. Code §1932(2)).
Again, any contrary agreement between the parties will govern.
Q 10. Can a landlord collect further rent after the lease or rental agreement is terminated due to destruction of the premises?
A No. The obligation to pay future rent is extinguished when the rental agreement is terminated. However, a tenant may still owe back rent.
Q 11. Where can I obtain additional information?
A Additional information is available on the Real Estate Resources page on C.A.R. Online. Look for the category, "Fire Disaster Assistance." This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at www.car.org. For a list of important contact numbers, please see Appendix A below.
This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit car.org.
Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at (213) 739-8282, Monday through Friday, 9 a.m. to 6 p.m. and Saturday, 10 a.m. to 2 p.m. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739-8350 to receive expedited service. Members may also submit online requests to speak with an attorney on the Member Legal Hotline by going to http://www.car.org/legal/legal-hotline-access/. Written correspondence should be addressed to:
CALIFORNIA ASSOCIATION OF REALTORS® Member Legal Services 525 South Virgil Avenue Los Angeles, CA 90020
The information contained herein is believed accurate as of Sep. 2, 2009. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney. Revised by Sonia M. Younglove, Esq.
State and federal agencies and disaster relief organizations have begun to set up disaster hotlines to help victims of the recent devastating firestorms in California. The following preliminary listing represents some of the more important telephone numbers and addresses REALTORS® and other readers may find helpful.