New disclosure obligations for sellers of real property
May, 2007
Recently, we reported on new case law in Washington making it more difficult for buyers of real property to make post-closing claims against the seller for property condition matters. Now, the Washington legislature has just amended the state's residential property condition disclosure law to put additional burdens on sellers and now requires a disclosure form when "unimproved" residential property is sold.
Washington's Residential Real Property Transfer Disclosure Act (RCW 64.06), also known as the Form 17 law, was originally enacted in 1995 to require sellers of improved residential real property to provide a disclosure form (i.e. Form 17) to buyers before closing. The law provides the buyer with a three business day right of rescission after receipt of the form. Residential real property was defined as any property improved by one to four dwelling units and also included other improved property like condos, timeshares and mobile homes. At the same time, certain transfers were exempt (e.g foreclosures, gifts, dissolutions, etc.). In addition, a buyer could waive their right to receive a completed form and some sellers (notably many builders) would make the waiver a requirement of any sale. The amendments under SSB 5895 now alter some key portions of the old law.
Here are some highlights:
- 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. Interestingly, the new law would also apply to transfers of property that are improved for commercial use and either wholly or partially zoned residential. Whether this was truly intended may be borne out in future litigation.
- 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. (Note: this obligation to cure or amend the form applies to all questions on the form).
- New Environmental Section. Both Form 17 and the new unimproved property form now have a section entitled "Environmental" which replaces the section formerly entitled "General". 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.
- Effective Date. The amendments will become effective on July 22, 2007.
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.
- 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.