In March 2014, the California Court of Appeals issued an opinion in Richman v. Hartley (2014) 224 Cal.App.4th 1182, which makes clear that California law requires sellers of real estate to provide a ‘Transfer Disclosure Statement’ (TDS) to the buyer if the property is a mixed-use property . A ‘mixed use’ property is a property that contains residential and commercial improvements.
Buyer entered into a contract with Seller to purchase Seller’s real estate in Ventura, California. The property was a single parcel, but included two buildings: a residential duplex and a commercial structure. The parties used a standard contract of sale used for the purchase of commercial real estate. The agreement contained the following provision: “Seller shall make to Buyer, through escrow, all applicable disclosures required by law…with respect to the property…” The agreement also contained language stating that the sale would be non-contingent and on an “as is” basis.
Buyer refused to close on the scheduled date because, it asserted, Seller failed to provide required disclosure statements. Specifically, Buyer argued that Seller failed to provide Buyer with the TOS as required by the Transfer Disclosure Act, Civil Code § 1102(a), and ss. California Civil Code § 1102(a) makes it clear that the disclosure requirement applies to “residential real estate or stock cooperatives, improved with or consisting of not less than one nor more than four dwelling units,” to unless the property is expressly exempt. Civil Code § 1102.02 lists the types of real property transfers to which the Transfer Disclosure Law does not apply, and a ‘mixed-use’ property is not included among them. The seller argued that the Transfer Disclosure Act only applied to property sales that only involved residential structures.
The Seller sued the Buyer for breach of the purchase contract. During litigation, Buyer sought summary judgment and prevailed because, as a matter of law, Seller failed to establish that it complied with its legal and contractual obligation to provide the TOS. The trial court granted summary judgment in favor of the Buyer and the Seller appealed. The court of appeal upheld the decision of the court of first instance.
The seller asserted on appeal that the Transfer Disclosure Act only applied to real property “consisting of not less than one nor more than four dwelling units,” and that his property consisted of residential and commercial buildings. The seller argued that the law was not intended to protect what are, in essence, business transactions.
The Court of Appeals noted that the Legislative Assembly enacted the law in 1985 and its express wording requires a seller to deliver to the buyer a real estate TDS in “any transfer…of real estate” enhanced by or consisting of not less one or more than four dwelling units. (Civ. Code § 1102(a).) It held that these words are clear and unambiguous and that there is no limitation to parcels of property where only residential improvements exist. The addition of commercial structures and uses on the property does not negate the consumer protections the law was intended to provide.
The court noted that it was true that the Legislature did not intend the Transfer Disclosure Act to apply to commercial real estate transactions. The court stated that it was not necessary to characterize the nature of the transaction as “residential” or “commercial” because the statute creates the need for a TDS simply by having a dwelling unit in it. Presumably, a parcel of land that is used primarily for commercial purposes but has a seemingly insignificant dwelling unit is also considered mixed use, thus requiring a TDS. If a parcel of property is mixed-use, to what extent does the TDS apply: to the dwelling unit only, or to the commercial portions of the property as well? The court did not address this issue.
The case highlights the results of not providing information to the buyer. It has simply been a common occurrence for parties to a transaction to believe that a parcel of ownership that can be characterized as primarily business means that the Transfer Disclosure Act does not apply. This means that there are many sellers who have violated disclosure laws. Even more frightening for sellers and their brokers is the potential scope of the disclosure involving parcels of mixed-use land. It would certainly have significant adverse consequences on the real estate market if a court were to rule that the disclosure requirements apply even to the business portions of the property, but that is a question for another court to resolve. The takeaway here is that it’s usually worth the effort to overdisclose.