BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Hannah-Beth Jackson, Chair 2015-2016 Regular Session AB 1750 (Dodd) Version: April 18, 2016 Hearing Date: June 14, 2016 Fiscal: No Urgency: No TH SUBJECT Real Property Transactions: Definitions DESCRIPTION This bill would clarify that a seller or broker is not required to provide additional information concerning common environmental hazards that can affect real property to a transferee in connection with the transfer of real property, including transactions for the creation of a leasehold exceeding one year's duration, provided the seller or broker transmits to the transferee a specified consumer information booklet concerning such hazards. BACKGROUND Prior to 1984, existing law required a real estate broker to disclose to a buyer those material defects of a property that were known to the broker but unknown to and unobservable by the buyer. (See e.g. Lingsch v. Savage (1963), 213 Cal.App.2d 729.) In 1984, Easton v. Strassburger (1984), 152 Cal.App.3d 90, clarified that the duties owed by a broker also included the duty to disclose defects which the broker should have discovered through reasonable diligence. The Easton court held that real estate licensees owed certain additional duties of care to property buyers, and after the Easton decision, there was extensive discussion in the real estate industry as to how these duties were to be interpreted. The Legislature responded to the Easton decision with SB 453 (Robbins, Ch. 223, Stats. 1985), which clarified certain duties of real estate brokers and buyers in real property transactions. However, the law after SB 453 AB 1750 (Dodd) Page 2 of ? was still unclear as to real estate brokers' disclosure duties to buyers. In Smith v. Rickard (1988) 205 Cal.App.3d 1354, 1360, the court, after examining statutory construction and the Easton case, held that real property brokers had a duty to inspect a property and to disclose to a buyer any material defects affecting the value or desirability of the property. In 1995, the Easton decision, and the disclosure duties owed by real estate brokers, were further clarified and codified in SB 467 (Leonard, Ch. 428, Stats. 1995), which required real estate listing and selling agents of residential property to provide specified disclosures to buyers and sellers. Those disclosures require the real estate listing and selling agents to disclose, among other things, whether the agent represents the buyer, the seller, or both the buyer and seller (known as dual agency). Importantly, SB 467 specified that its provisions applied not only to sales of real property, but also to the creation of a leasehold exceeding one year's duration. Prior to SB 467, the Legislature passed AB 983 (Bane, et. al., Ch. 969, Stats. 1989), which created a safe harbor provision concerning the disclosure of common environmental hazards that can affect real property. SB 467 directed the Department of Real Estate to develop a booklet to educate and inform consumers on the following: common environmental hazards that are located on, and affect, real property, including asbestos, radon gas, lead-based paint, formaldehyde, fuel and chemical storage tanks, and water and soil contamination; the significance of common environmental hazards and what can be done to mitigate these hazards; and sources that can provide more information on common environmental hazards for the consumer. SB 467 further provided that if this booklet were delivered to a transferee in connection with the transfer of real property, a seller or broker would not be required, nor have a duty, to provide additional information concerning those common environmental hazards described in the booklet. Unlike AB 983, SB 467 did not explicitly state that its provisions applied to property transfers in the form of leaseholds exceeding one year's duration. This bill would extend the disclosure safe harbor created by AB 983 to real estate brokers who conduct transactions that create AB 1750 (Dodd) Page 3 of ? leaseholds in excess of one year by applying to that safe harbor the definitions enacted by SB 467. CHANGES TO EXISTING LAW Existing law requires a real property seller, or the seller's agent, to disclose to buyers any material facts that would have a significant and measurable effect on the value or desirability of the property if the buyer does not know, and would not reasonably discover, those facts. (Karoutas v. Homefed Bank (1991) 232 Cal.App.3d 767; Reed v. King (1983) 145 Cal.App.3d 261.) Existing law requires a seller's real estate broker to conduct a reasonably competent and diligent visual inspection of a property offered for sale, and to disclose to potential buyers any facts revealed that would materially affect the value or desirability of the property. (Civ. Code Sec. 2079.) Existing law does not relieve a buyer or prospective buyer of the duty to exercise reasonable care to protect himself or herself, including those facts which are known to or within the diligent attention and observation of the buyer or prospective buyer. (Civ. Code Sec. 2079.5.) Existing law states that if a specified consumer information booklet is delivered to a transferee in connection with the transfer of real property, a seller or broker is not required to provide additional information concerning, and the information shall be deemed to be adequate to inform the transferee regarding, common environmental hazards, as described in the booklet, that can affect real property. Existing law states that nothing in this provision either increases or decreases the duties, if any, of sellers or brokers, or alters the duty of a seller or broker to disclose the existence of known environmental hazards on or affecting the real property. (Civ. Code Sec. 2079.7.) Existing law requires additional specified disclosures by listing and selling agents to be provided to a buyer and seller of residential real property, and defines the duties owed by those agents to the buyer and seller. (Civ. Code Sec. 2079.12 et seq.) Existing law , for purposes of the above provision, defines real estate listing and selling agent, buyer, seller, and specifies AB 1750 (Dodd) Page 4 of ? that "real property" means any estate in property which constitutes or is improved with one to four dwelling units, any commercial real property, any leasehold in these types of property exceeding one year's duration, and mobilehomes, when offered for sale or sold through an agent. (Civ. Code Sec. 2079.13.) This bill provides, for purposes of the safe harbor provision concerning delivery of a specified consumer information booklet describing common environmental hazards, that the above definitions shall apply. COMMENT 1.Stated need for the bill The author writes: Existing law provides for the development of the Environmental Hazards Booklet, which may voluntarily be provided to buyers of single family one-to-four unit properties. While the law does not relieve the seller or broker of the duty to disclose the existence of known environmental hazards on or affecting the real property, the law does provide that if a seller or broker delivers the booklet to a buyer, the seller or broker enjoys protections from liability for the disclosure of common environmental hazards that are included in the booklet. The presumption provides a powerful incentive to use the booklet. Therefore, it has become a standard of practice for sellers and agents to use the booklet to inform purchasers of potential environmental hazards. The distribution of the booklet by landlords has been encouraged, partly, by the title assigned to the booklet by the state: "California Environmental Protection Agency Residential Environmental Hazards: A Guide for Homeowners, Homebuyers, Landlords and Tenants." However, the existing law does not specifically mention landlords and tenants . . . , even though many landlords already distribute the booklet. This bill would specify that the definitions in [Civil Code Section 2079.13] also apply to Section 2079.7. By clarifying that the definitions provided for in Section 2079.13 apply to Section 2079.7, this bill ensures that parties to a real estate transaction are clear on their rights and responsibilities with respect to the Environmental Hazards AB 1750 (Dodd) Page 5 of ? Booklet. This bill does not alter existing definitions, but it does make clear that the definitions provided in statute are applied to Section 2079.7 as well. This clarity will benefit consumers by providing more direction on roles and responsibilities and encouraging landlords to provide the Environmental Hazards Booklet to renters. 2.Providing effective environmental hazard disclosures For over 20 years, California has authorized real estate brokers to make disclosures concerning common environmental hazards like asbestos, radon gas, and lead-based paint, by providing purchasers of real property with an environmental hazards booklet produced by the Bureau of Real Estate. Typically, this booklet is provided as part of a sale transaction in satisfaction of a broker's duty to inform the purchaser about general environmental hazards that can affect real property. Providing this booklet does not discharge a broker of his or her duty to disclose known environmental hazards that affect the particular property being bought or sold, but it does, by operation of law, discharge the duty to disclose general information about environmental hazards that affect real property. Existing law does not explicitly offer a similar safe harbor to brokers who sell more limited interests in real property, such as leases of specified dwelling units lasting longer than one year. This bill would have the effect of extending the existing disclosure safe harbor to brokers who sell such leasehold interests, and by doing so would ensure that purchasers of long-term leases receive general environmental hazard disclosures that are identical to those provided to other purchasers of real property. Expansion of the environmental hazard disclosure safe harbor would also help brokers satisfy their existing disclosure duties, in part, by providing a clear metric to determine what level of disclosure is needed to adequately inform consumers about these common hazards. This bill would not alter any duty of a broker to disclose information about common environmental hazards, but would instead provide a secure path by which a broker may discharge this duty. Support : North Bay Association of Realtors AB 1750 (Dodd) Page 6 of ? Opposition : None Known HISTORY Source : California Association of Realtors Related Pending Legislation : AB 685 (Irwin, 2016) would, among other things, clarify that a seller or broker is not required to provide additional information concerning common environmental hazards that can affect real property to a transferee in connection with the transfer of real property, including transactions for the creation of a leasehold exceeding one year's duration, provided the seller or broker transmits to the transferee a specified consumer information booklet concerning such hazards. Prior Legislation : SB 467 (Leonard, Ch. 428, Stats. 1995) See Background. AB 983 (Bane, et. al., Ch. 969, Stats. 1989) See Background. SB 453 (Robbins, Ch. 223, Stats. 1985) See Background. Prior Vote : Assembly Floor (Ayes 76, Noes 0) Assembly Judiciary Committee (Ayes 9, Noes 0) **************