Providing a transfer disclosure statement to the buyer for sale of California mixed-use property

In March 2014, the California Court of Appeals issued an opinion in Richman v. harley (2014) 224 Cal.App.4th 1182, which makes it 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 entered into an agreement with Seller to purchase Seller’s real property 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 sales contract 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 contract 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 claimed, Seller failed to provide required disclosure statements. Specifically, Buyer argued that Seller failed to provide 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 “real property or residential stock cooperatives, enhanced by 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 Act 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 involved only residential structures.

Seller sued Buyer for breach of purchase contract. During the litigation, Buyer sought summary judgment and prevailed because, as a matter of law, Seller was unable to establish that it complied with its legal and contractual obligation to provide the TDS. The trial court granted summary judgment in Buyer’s favor and 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, commercial transactions.

The Court of Appeals noted that the Legislative Assembly promulgated the law in 1985 and by its express wording requires a seller to deliver to the buyer a real estate TDS in “any transfer… of real estate” enhanced with or consisting of no less than of 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 on which only residential improvements exist. The addition of structures and commercial uses 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 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 business purposes but has an apparently insignificant housing 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 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 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 on the property market if a court were to rule that the disclosure requirements apply even to commercial portions of the property, but that is a matter for another court to decide. The takeaway here is that over-disclosure is usually worth the effort.