Article Written By: Rinat B. Klier Erlich
The recent California Governor executive order and the continued practice of brokers require a refresher on the brokers’ duties of inspection so that brokers understand what they may or may not do. One of those duties is the broker’s duty of physical inspection, which is required before completing the Transfer Disclosure Statement (TDS) and the Agent Visual Inspection Disclosure (AVID). The AVID was created by the California Association of Realtors to assist agents in their disclosure duties, and it is, therefore, the ‘standard of care’ for brokers practicing in California. If California brokers stop using the AVID form, it will no longer be the gold standard. The TDS however, is a statutory form and it cannot be waived. Civil Code Section 1102(c) explains that “any waiver of the requirements of this article [providing statutory disclosures including, TDS] is void as against public policy.” The Section also states: “It is also the intent of the Legislature that the delivery of a [TDS]. . . may not be waived in an “as is” sale.” This article explains why a broker’s physical inspection cannot be waived, but also why it may no longer hold brokers back from completing sales transactions.
Civil Code Section 1102 (TDS) is the brokers’ vehicle for providing their required disclosures. As we all know, disclosure regarding the property’s physical condition is set forth on the TDS form itself. The form, in fact, is taken verbatim from Civil Code section 1102.6. In Section III of the TDS form brokers are supposed to record their findings. The form states:
“THE UNDERSIGNED, BASED ON THE ABOVE INQUIRY OF THE SELLER(S) AS TO THE CONDITION OF THE PROPERTY AND BASED ON A REASONABLY COMPETENT AND DILIGENT VISUAL INSPECTION OF THE ACCESSIBLE AREAS OF THE PROPERTY IN CONJUNCTION WITH THAT INQUIRY, STATES THE FOLLOWING:”
The TDS is a statutory requirement that compels compliance by sellers and brokers alike. Section 1102(a) states: “The Legislature intended the statement [TDS] to be used by transferors making disclosures required under this article and by agents making disclosures required by Section 2079 on the agent’s portion of the real estate disclosure statement, in transfers subject to this article.”
The “standard of care” of how/what a broker should inspect, is promulgated in a different Code section, Civil Code section 2079(a) which states: “It is the duty of a real estate broker or salesperson, licensed under Division 4 . . . to a prospective buyer of single-family residential real property . . . to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective buyer all facts materially affecting the value or desirability of the property that an investigation would reveal.”
There is a synergic connection between Civil Code Section 1102 (TDS) and Section 2079 (the broker’s inspection duty). Such relationship is mentioned in e.g., Section 2079.10a(c), 2079.10.5(c), 2079.8(b) and 2079.6(b) which state: “Nothing in this section shall alter any existing duty of the lessor, seller, or broker under any other statute or decisional law including . . . the duties of a seller or broker under Article 1.5 (commencing with Section 1102). . .” as well as Civil Code Section 2079.25: “The provisions of subdivision (d) of Section 1102.1 shall apply to this article.”
So now that we are reminded that a TDS is absolutely required and that it must be completed by a physical visual inspection, we can look at what the inspection is not supposed to include. As pointed above in the language on the TDS form, the disclosure is based on a “diligent visual inspection of assessable areas.” Section 2079.3 explains: “The inspection to be performed pursuant to this article does not include or involve an inspection of areas that are reasonably and normally inaccessible to this type of an inspection.” It is possible, therefore, that courts will find that in light of the Governor’s executive order, it is impossible for brokers to conduct their diligent visual inspections under the Code, as it will cause them to violate the order; an offense punishable by a misdemeanor. Also, while brokers can advise their clients to wait until the brokers are able to physically inspect the property, brokers cannot and do not control what clients decide to do, and clients do not need brokers’ consent to close escrow.
Hence, does the executive order make a property inaccessible to inspect, or merely unadvisable to inspect? Logic holds that the order suspends duties, but which? Clearly, we still need to comply with driving rules when we drive our vehicles. As it relates to inspection duties, unfortunately, case law that interpreted Civil Code Section 2079 duty of inspection does not give us an answer, because the cases relied on other measures, for example, Assilzadeh v. California Fed’l Bank, FSB (2000) 82 Cal.App.4th 399, 413) and Padgett v. Phariss (1997) 54 Cal.App.4th 1270 in limiting the brokers’ duties of inspection, relied heavily on the buyers’ own duty to conduct an investigation and due diligence.
Will exculpatory clauses help explain to the parties what brokers can and cannot do? Under common law, exculpatory provisions were not always dispositive [e.g., Manderville v. PCG&S Group, Inc. (2007) 146 Cal.App.4th 1486 holding that in cases of misrepresentation, exculpatory clauses as to zoning and other laws restricting development did not preclude, as a matter of law, the buyers’ showing of justifiable reliance, and thus, did not bar the buyers’ claim for misrepresentation against the brokers].
So what is the solution? As discussed, a duty to inspect may not be waived, but compliance with the duty may be impossible given the executive order. Also, disclaimers may not be enough to bar all claims. One way to resolve this predicament is to modify the parties’ contract. Duties of brokers are defined by contract (in addition to statute) and the brokers’ contracts can be limited. [Carleton v. Tortosa (1993) 14 Cal.App.4th 745, 755 limiting the broker’s duty to discover tax issues]. Therefore, at the very least, brokers should amend their contracts. They should have buyers and sellers sign disclaimers that explain the more limited duties that the brokers can undertake to perform, in light of the executive order including, brokers’ inability to violate the Governor’s executive order and physically inspect the property. If brokers feel compelled to work despite the order, they can at least try to best protect themselves and their clients.
The Author
Rinat B. Klier Erlich
Partner
rke@manningllp.com
(213) 624-6900 Ext. 2434
