Legal Update

SELLER’S FAILURE TO DELIVER TRANSFER DISCLOSURE STATEMENT TO BUYER GIVES BUYER THE RIGHT TO CANCEL THE PURCHASE EVEN THOUGH BUYER INTENDS TO DEMOLISH THE BUILDING

  • July 14th, 2003
  • Print

The California Court of Appeal in the 4th District ruled on July 7, 2003 that a seller’s failure to deliver a TDS disclosure statement gave the buyer the legal right to cancel the purchase even though buyer was unconcerned with the condition of the residence because buyer was purchasing the property as-is, and intended to demolish the residence and replace it with a commercial building. Realmuto v. Gagnard 110 CA4th 193 (2003).

FACTS
A Buyer entered into a standard form residential purchase agreement for the purchase of a single family residence in Alpine CA. Buyer was an investor who planned to assign the property to an Indian tribe for possible development as a casino. Seller was aware that the buyer was purchasing the property for investment and not for use as a residence. Seller was required by the contract and by law to provide buyer with a completed “TDS” (transfer disclosure statement) form disclosing conditions of the property which could adversely affect its value or desirability. Buyer had 3-5 days following receipt of the disclosure to either accept the condition of the property or cancel the agreement. The contract stated the property was sold “as-is”. There were apparently no contingencies in the contract. Seller never provided the TDS disclosure form to the buyer. The Indian tribe decided not to purchase the property so buyer refused to close the purchase. Seller sued buyer for specific performance and damages. The trial court dismissed the lawsuit by summary judgment on the grounds that the seller failed to provide the required TDS form to the buyer.

ISSUE
Is seller required to provide buyer with a TDS disclosure statement for residential property even though the property is sold “as-is” and buyer intends to demolish the residence and redevelop the property for commercial purposes?

DECISION
The trial court and the Court of Appeal both ruled that the seller’s legal obligation to provide buyer with the TDS disclosure statement was a non-waivable condition which seller was required to perform both by contract and by statute (C.C. §1102 et. seq.). Seller contended the buyer waived their right to a disclosure statement by failing to request one during escrow, by informing seller the buyer was not purchasing the property as a personal residence, by failing to inspect the property, by extending the escrow, and by failing to conduct a final walk-through. All of this was evidence that buyer had no concern about the condition of the property. The Court of Appeal disagreed and pointed to the language of C.C. §1102 which clearly states that any waiver of the disclosure requirement was “void as against public policy”. The statue does not exempt the transaction from coverage merely because the buyer did not contemplate using the home as a personal residence. The required disclosures are not limited to the condition of the residence, they also include a host of potential defects relating to the condition of the land. The buyer had no duty to perform when no disclosure statement was provided to him.

Seller also contended his failure to deliver the disclosure statement was not fatal to his right to enforce the contract because C.C. §1102.13 stated that no transfer shall be invalidated solely because of the failure of any person to deliver the disclosure. However the Court of Appeal interpreted this statute to apply only to a situation where the buyer has already closed escrow and title has been transferred despite the seller’ failure to comply with the statutory disclosure requirements. Where as here, escrow had not closed and the transfer had not yet taken place, the seller’s failure to deliver the disclosure permitted buyer to cancel the agreement.

ANALYSIS
It is evident from the facts of this case that the buyer backed out of this transaction because his plan to re-sell the property fell through and not because of the seller’s failure to properly advise him of the condition of the property. Nevertheless the court was bound to enforce compliance with the disclosure statute, even though it was not relevant to the buyer’s refusal to perform. Buyer should have been liable for his breach. Sellers should make sure they fully comply with the disclosure statute even where the buyer has no interest in the disclosure. When the seller does not comply, buyer has a free pass out of the transaction.