December 15, 2011
Transactions and Regulatory Committee
Legislative Committee
(This material is for discussion purposes only and has not been approved by the Transactions and Regulatory, Legislative or Executive Committees or the Board of Directors)
Issue:
Should C.A.R. sponsor legislation to repeal the exemption from the TDS for REO properties, and thereby force foreclosing lenders complete a TDS?
Action:
Optional
Options:
1. Do Nothing. Maintain existing law.
2. Sponsor legislation to require foreclosing lenders to provide a completed TDS (Transfer Disclosure Statement) in connection with an REO sale.
3. Other
Status/Summary: Some existing disclosure statutes, including the TDS and NHD statutes, exempt foreclosing lenders from the requirement for completed statutory form disclosures. However, lenders are bound by the same obligation as any other seller to disclose material facts in their possession. Some REALTORS® have reported an unwillingness of lenders to make any disclosures and insist on an "as is" transaction that does not include formal disclosures.
Discussion:
Caveat emptor ("let the buyer beware") is not the rule in California real estate, if indeed it ever was. In response to the landmark case of Easton vs. Strassburger, C.A.R. sponsored legislation that clarified (and thus limited) the liability exposure of sellers and agents by codifying disclosure duty and created a statutory form for compliance. The resulting Transfer Disclosure Statement (TDS) in Civil Code Section 1102 and following has been a standard of residential resale transactions since the late 1980s.
Agents' duties, and a standard of care, were similarly codified in Section 2079 and following of the same code. A 1993 case, Loughrin v. Superior Court made it clear that one could not escape disclosure liability simply by characterizing a sale as "as is." C.A.R. legislation responded to that trap for unwary sellers and agents by requiring the Transfer Disclosure Statement (TDS) to be used in "as is" sales too.
Existing Exemptions: Civil Code 1102.2 contains a lengthy list of transfers that are not required to utilize a TDS. They are generally either transfers that are not "arm’s length" transactions (e.g. intra-family transfers) or those in which the transferor/seller has not actually had possession of the property or lived in it (e.g. a probate sale). One of these exempt classes of transactions (CC 1102.2(c) is for foreclosing lenders. As a result, an REO sale by a lender is not subject to the CC1102 Article, and a TDS need not accompany the sale.
Even though exempt from the TDS, foreclosing lenders are not exempt from common law duties and other statutory disclosure duties. The standard forms REO Advisory (C.A.R. form REO, 11/09) sets out a list of requirements that apply, including:
1. Material fact disclosures;
2. Hazard Zones;
3. Smoke detector certification;
4. Water heater strapping;
5. Lead-based paint;
6. FIRPTA (Foreign Investment in Real Property Tax Act) withholding; and,
7. Megan's Law.
Unfortunately, anecdotal reports (including from C.A.R.'s Legal Hotline) suggest that lenders' asset managers are unaware of the obligation to "tell what you know."
The existing TDS (Civil Code Sec. 1102.6) is not dependent upon the disclosing seller occupying the property; indeed, it contains a check box to alert recipients of the form that the disclosing seller is not an occupant. The check off is not an excuse for non-disclosure, but is instead an alert to the prospective purchaser that the disclosure may be incomplete because of a non-occupant’s lack of knowledge of some features.
Should the foreclosing lender's exemption in Civil Code Section 1102.2(c) be repealed?
Please note that the Buyer's Inspection Advisory (C.A.R. form BIA-B) already recommends that buyers conduct additional and comprehensive inspections of the property.
Natural Hazard Disclosures. The Natural Hazard Disclosure statute in CC 1103 is modeled after the TDS statute, and contains the same exemption for foreclosing lenders. However, unlike the items on the TDS, the NHD is typically a list of mapped hazard areas and almost always purchased as a report generated by a third party consultant. In contrast to the TDS, sellers are rarely equipped to complete the disclosure from their own knowledge.
Perhaps because there is an explicit duty in other statutes to make various hazard disclosures, it is common for an REO seller to provide an NHD report. None the less, the apparent exemption in the NHD statute itself (Civil Code 1103.1) may cause confusion about the duty to provide it.
Should the exemption from NHD requirements for REO sellers be repealed?
