The Legislature Volleys Back…. May 1, 2007
Recently, I wrote about new case law in Washington that was making it more difficult for buyers of real property to make post-closing claims against the seller for property condition related matters. The Washington legislature has just amended the state’s residential property condition disclosure law to put additional burdens on sellers and will soon require a disclosure form when “unimproved” residential property is sold.
Here are some highlights of SSB 5895 which go into effect on July 22, 2007:
- New Form for Unimproved Residential Real Property. The law now covers “unimproved residential real property”. Under the law, unimproved residential real property means property zoned for residential use that is not improved by residential dwelling units, a residential condominium, a residential timeshare, or a mobile or manufactured home (emphasis added). A new disclosure form applies to such transfers and this form is different than the one used for improved residential property. Thus, the seller of vacant land (in whatever quantity of lots) that is zoned for residential use is required to provide the disclosure form, unless exempt or waived by the buyer.
- New Question About Access Rights. The new law adds some additional disclosures to Form 17. A significant addition is a question that asks: “Is there a private road or easement agreement for access to the property?” If the seller answers “No” or “Don’t Know”, and the title commitment later provides information on such an easement, the law requires the seller to either remove the easement (not likely) or amend the disclosure form and provide the buyer with a new three day right of rescission.
- New Environmental Section. Both Form 17 and the new unimproved property form now have a section entitled “Environmental”. This was formerly called “General” under the prior law. A variety of questions have been added including a question that asks: “Are there any shorelines, wetlands, floodplains or critical areas on the property?” Keeping up with local critical areas ordinances will be a trick in order to answer this question properly.
- Limitation on Buyer Waiver. Under the old law, a seller (e.g. homebuilder) could refuse to sell property to a buyer unless the buyer waived their right to receive a completed form. Now, if the answer to any of the questions in the “Environmental” section would be “yes”, the buyer may not waive the receipt of that section of the form.
- Elimination of Lienholder Exemption. The old law exempted a lienholder who acquired property through foreclosure or deed-in-lieu. That exemption is gone and lienholders who take property back must now comply with the law.
Some practical thoughts….
- For Builders. Clearly, the law will have more of an impact on you than in the past. If you are developing and selling vacant residential lots, you will either have to provide the new disclosure form or obtain the buyer’s waiver. Remember, though, there are new limitations on the ability for a buyer to waive the right to receive the completed Environmental section of the form. This limitation on waiver will likewise apply to the sale of a completed new construction home and careful analysis has to be made in order to avoid a situation where a buyer is not provided the form and prior to closing asserts a right to rescind because the Environmental section was not provided. The new “critical areas” question will be a significant one to address in this regard.
- For Agents. When taking a listing, make sure to advise your seller client to order a preliminary commitment of title insurance. This should provide adequate information in order to answer all of the title questions in the form. Commercial brokers should be aware of the potential for the law to apply to any property zoned, in whole or part, for residential use. This could apply to a commercial building on property that was rezoned residential or to a split-zoned property.
- For Buyers. The disclosure form has never been intended to replace a diligent inspection or to act as a contractual warranty. The law is clear that the only remedy directly related to the disclosure form is the pre-closing right of rescission. Once you close, especially in light of recent case law, your rights to sue the seller for property condition related defects may be severely limited.
- Transition Period. As has been the case with previous amendments to this law, the legislature did not provide guidance concerning its application to transactions already in progress as of July 22, 2007. For sales of “unimproved residential real property”, I would consider using the new form immediately as there is nothing that prohibits the voluntary use of a disclosure form prior to July 22. By doing so, you will effectively address any transition issues. You will, however, want to insert some disclaimer language in the purchase and sale agreement so make sure to consult your attorney. For transactions involving Form 17, you should consult your attorney for specific advise on how you should handle the transition.
Check out these related posts:
- Russ, NO! Please Say It Ain’t SO!
- Legal Description, Revisited
- Back-to-school clothing drive is back!!!!
Article Tags>> legal | real-estate | Washington
- Posted in : General Real Estate
- Author : Russ Cofano
Comments»
Thanks for the information Russ.
I’ll second the importance of agents ordering pre-liminary title report the day of taking the listing. It helps to avoid the situation that we encountered several months ago when the owner of record did not match the owner on the purchase and sale agreement. Awkard to say the least for the listing agent and their broker. In the end it all worked out.
Russ, do sellers have much of an out if they mark “n/a” or “unsure” on the form (sorry, I can’t remember what the specific term on the form is…I sound like a Seller!).
Thank you, Russ. Great information and insights. The environmental area might be one of the biggest areas of concerns in rural areas. Seller will have to understand the issues. We’ll see how it plays out…… Looks like we’ll have a new series of training sessions coming up!
Rhonda
Form 17 can be the basis of a fraud claim. If the seller marks “Don’t Know” but really DOES know, that will amount to a misrepresentation. The key question is whether the buyer would be able to prove all of the other elements of a fraud claim including the fact that they reasonably relied on the misrep.
Russ
I’m not sure if I agree with your title, Russ. This act, while certainly helpful to buyers, does not do anything to address the disadvantages created by the Alejandre case. Indeed, the act was approved by the Senate just nine days after the Court issued the decision. Accordingly, the act was most of the way through the legislative process before the case was decided.
Hopefully, the legislature really does “volley back” after the Alejandre case. While a three day right of rescission beats a poke in the eye, buyers remain at a disadvantage after closing. To prevail on a fraud claim, the buyer must prove the nine elements by “clear and convincing” evidence, a burden of proof greater than the typical “preponderance of evidence” standard. Moreover, the Alejandre Court’s discussion of the buyer’s ability to negotiate warranties and “allocate risk” has little basis in the realities of a typical transaction. A legislative remedy could provide buyers with a reasonable and approprriate mechanism by which they could more likely recover from a dishonest seller.
Craig
I agree. I guess in tennis lingo, it was a weak volley where the savvy seller can still slam it in for the kill shot.
I believe the law is where it should be. Seller’s must disclose what they know and not lie nor conceal defects. Buyer’s must exercise due diligence and thoroughly investigate the property and its title. In the end, the market conditions will dictate what level of additional protections via warranties that the buyer can extract from the seller.
This will make the job of the agent to actually “negotiate” terms of the sale that much difficult.
Russ
Russ:
But is it reasonable to expect agents to have the knowledge necessary to adequately negotiate warranties or other methods of allocating the risks associated with potential defects? And wouldn’t such negotiation, at least arguably, run afoul of the limits created by Cultum v. Heritage House?
Furthermore, while I can appreciate the position that the market should sort out the protections to which buyer’s are entitled, that position is not consistent with the realities of the modern economy. Government regulation (whether directly or indirectly, as through the Consumer Protection Act) is a fact of life, largely to protect buyers and consumers from harms that they would otherwise suffer if we were to rely solely on “market conditions” for their protection. I believe that buyers should be afforded greater protection against seller deception or dishonesty — perhaps a new cause of action arising out of the Seller Disclosure Statement where the buyer need only prove by a preponderance of the evidence that the seller was dishonest.
What if the seller did a patch job on the roof, and didn’t reveal that the roof had ever leaked, BUT the inspector found that leak and revealed it to the buyer, and told the buyer the house needed a new roof.
Would the latter negate the buyer’s recourse on the former? If the due diligence revealed what the seller did not, is the issue whether or not the buyer knew vs. who told him?
Craig
The Consumer Protection Act (and most other government regulatory schemes) are typically designed to protect consumers from businesses. Not consumer (private buyer) from consumer (private seller). Common law contract and tort law have historically been the basis of “regulation” between private buyers and private sellers. I too question the ability of some agents to have the understanding to effectively negotiate warranties. They will need to be able to explain what they mean, their scope and the impact they will have on either the buyer or the seller. Will that go afoul of Heritage House? Maybe the letter of Heritage House but not the spirit. I think good agents can learn this stuff to be effective.
-Russ
Russ — Good point about the CPA, but certainly common law claims can be modified to suit the needs of the modern society. For example, medical malpractice claims, although arising out of the common law, are governed by statute. I think this is just such a situation. After all, what motivation will brokers and agents have to complicate the process by introducing the concepts of warranties and allocation of risk? Complicating the process before closing (i.e. the negotiation and formation of contracts) will at least slow the pace, if not reduce the number, of transactions. Since agents and brokers have a personal interest in closing deals (that’s when they get paid), they’re unlikely to embrace this apparently necessary complication.
Moreover, I dispute that this will be consistent with the spirit of Heritage House. The court was clearly concerned about the extent to which agents would be allowed to practice law. If agents are expected to “be able to explain what [warranties] mean, their scope and the impact they will have on either the buyer or the seller,” they have taken a significant step beyond the authority — in both letter and spirit — granted by Heritage House.
Ardell — yes, discovery of the defect would prevent buyer from recovering on a subsequent fraud or concealment claim. To prevail, the buyer needs to show that he reasonably relied on the alleged misrepresentation. If buyer knows the truth about the defect, the buyer cannot show that any reliance on the misrepresentation was reasonable.
If I am reading Ardell’s question right, here in NC, it doesn’t matter who tells the buyer of defect, if there is one, he can get out of the contract reguardless of who told him. The seller of the propert does not have to revel anything however, the buyer’s agent and the selling agent MUST DISCLOSE material fact and in this case, the roof is material fact. But then some roof cases can slide as the courts said we do not have to climb under houses or walk the roofs to discover as in many of these cases it will compromise our own safety but for someone like me who is afraid to death of heights, lets just say the court best better not say a leaking roof is material fact or else I’ll make the judge walk the roof of the courthouse!
Hi-
If an obvious modification is done to a 1944 1 car garage making it able to park a small car but possibly not other sizes of cars and the seller marked don’t know on the other defect portion of the disclosure, could the seller be liable if the buyers car does not fit? Would the buyer need to measure to see if his own car would fit during the inspection? Would this be a misrepresentation if the advertisement and MLS listing both advertise an attached garage-
is there any law saying exactly what size a 1 car garage should be or what it should be able to accommodate?