Providing a Transfer Disclosure Statement To Buyer In Sale of California Mixed Use Property

In March 2014, the California Appellate Court issued an opinion in Richman v. Hartley (2014) 224 Cal.App.4th 1182, that makes it clear that California law requires real estate sellers to provide a ‘Transfer Disclosure Statement’ (TDS) to the buyer if the property is a mixed use property. A ‘mixed use’ property is property that contains both residential and commercial improvements.

The Buyer contracted with the Seller to buy Seller’s real property 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: “Seller shall make to Buyer, through escrow, all the applicable disclosures required by law… concerning the property… ” The contract also contained language stating the sale would be non-contingent and on an “as-is” basis.

Buyer refused to close on the scheduled date because, he asserted, Seller failed to provide the required disclosure statements. Specifically, Buyer argued that Seller did not give him the TDS as required by the Transfer Disclosure Law, Civil Code § 1102(a), et seq. California Civil Code § 1102(a) makes it clear that the disclosure requirement applies to “real property or residential stock cooperative, improved with or consisting of not less than one nor more than four dwelling units,” unless the property is expressly exempted. 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 listed among them. The Seller argued that the Transfer Disclosure Law only applied to property sales that only involve residential structures.

Seller sued Buyer for breach of the purchase contract. During litigation, Buyer moved for summary judgment and prevailed because, as a matter of law, Seller could not establish that he performed his statutory and contractual duty to provide the TDS. The trial court granted summary judgment in Buyer’s favor and Seller appealed. The appellate court affirmed the trial court’s decision.

Seller asserted on appeal that the Transfer Disclosure Law only applied to real property “consisting of not less than one nor more than four dwelling units,” and that his property consisted of both residential and commercial buildings. Seller argued that the law was not intended to protect what are, in essence, commercial transactions.

The Court of Appeals noted that the Legislature enacted the law in 1985 and by its express wording it requires a seller to deliver to the buyer a real estate TDS in “any transfer… of real property” improved with or consisting of not less than one nor 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 there only exists 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 the Transfer Disclosure Law to apply to commercial real estate transactions. The court stated 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 on it. Presumably a parcel of land that is primarily used for commercial purposes but which has a seemingly insignificant dwelling unit on it 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 just the dwelling unit, or also the commercial portions of the property? The court did not address this issue.

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