Provide a transfer disclosure statement to the buyer in California mixed-use property sale

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 both residential and commercial improvements.

Buyer contracted with Seller to purchase Seller’s real estate in Ventura, California. The real estate was a single parcel, but it included two buildings: a residential duplex and a commercial structure. The parties used a standard sales contract used for commercial real estate purchases. The agreement contained the following provision: “The Seller shall make to the Buyer, through an escrow, all applicable disclosures required by law … with respect to the property …” The contract also contained language that indicated that the sale would be non-contingent and on an “as is” basis.

The buyer refused to close on the scheduled date because, it claimed, the seller did not provide the required disclosure statements. Specifically, the Buyer argued that the Seller did not provide the TDS as required by the Transfer Disclosure Act, Civil Code § 1102 (a), and seq. California Civil Code § 1102 (a) clarifies that the disclosure requirement applies to “real estate cooperatives or residential housing, improved with not less than one and not more than four housing units,” unless the property is expressly exempt. Civil Code § 1102.02 lists the types of real estate transfers to which the Transfer Disclosure Law does not apply, and a ‘mixed use’ property is not among them. The Seller argued that the Transfer Disclosure Act only applied to sales of properties that only involve residential structures.

The Seller sued the Buyer for breach of the purchase contract. During the litigation, the Buyer requested a summary judgment and prevailed because, as a matter of law, the Seller could not establish that it fulfilled its legal and contractual duty to provide the TOS. The trial court granted a summary judgment in favor of the Buyer and the Seller appealed. The appeals court upheld the lower court’s decision.

Seller asserted on appeal that the Transfer Disclosure Act only applied to real property “consisting of not less than one and not 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 Legislature enacted the law in 1985 and, by its express wording, requires a seller to provide the buyer with a real estate TDS on “any transfer … of real property” enhanced with or consisting of no less than one or more than four housing units. (Civ. Code § 1102 (a).) It was held that these words are clear and unambiguous and that there is no limitation for parcels of property where there are only residential improvements. The addition of commercial uses and structures on the property does not nullify the consumer protections the law was intended to provide.

The court noted that it was true that the Legislature did not intend for the Transfer Disclosure Act to apply to commercial real estate transactions. The court ruled that it was unnecessary to characterize the nature of the transaction as “residential” or “commercial” because the statute triggers 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: only to the dwelling unit, or also to the commercial parts of the property? The court did not address this issue.

The case highlights the results of not providing disclosures to the buyer. It has simply been a common fact for parties to a transaction to believe that a parcel of property that can be characterized as primarily commercial means that the Transfer Disclosure Act does not apply. This means that there are many sellers who have violated disclosure laws. Even scarier for sellers and their brokers is the potential scope of disclosure involving mixed-use parcels of land. It would certainly have significant adverse consequences in the real estate market if a court ruled that the disclosure requirements apply even to the commercial portions of the property, but that is an issue for another court to resolve. The take-away lesson here is that it’s generally worth the effort to over-reveal.