LEASE TRANSACTIONS: HOW SHOULD YOU HANDLE DISCLOSURES?

July 25th, 2012 at 7:06 pm

As you know, in today’s market, leases have become a much larger part of our business. It seems that every office I visit is doing more leases than ever and, as a result, has a lot more questions about how to handle those transactions. While most of these questions relate to things like the security deposit and commission, one thing we need to think about is the disclosures that we make to potential tenants. After all, despite the fact that the Civil Code does not require a Transfer Disclosure Statement (“TDS”) in a lease transaction, it seems logical that a prospective tenant would want to know about the physical condition of the property they may move into. With that in mind, what should you do as the agent, and how should you handle this issue.
First, you should always remember that more that 90% of our lawsuits relate to non-disclosure issues and the condition of the subject property. With that truth in mind, it is easy to see that the better our disclosure is, the less likely it is that we or our client gets sued. It is for that reason that we are required to disclose all material facts and we tell you to disclose everything you know. It is also the reason we recommend that you tell your client that making full disclosure is actually like buying insurance against a lawsuit. If you disclose everything, you will probably not get sued. And that is as true in a lease as it is in a sale.

As a result, even though the law does not require it, we should strongly recommend to our landlords that they fill out a TDS and give it to the tenant. If they refuse, which they are within their rights to do, you should still treat the transaction as a sale, do your visual inspection of the property and disclose everything you know to the tenant. In my mind, your disclosures should be exactly what they would have been had the transaction been a sale. That way, you will at least make sure the tenant knows what you know about the property and protect everyone from claims regarding those issues.

Furthermore, without the normal disclosure forms, there are other items or facts that your tenant should know but doesn’t. For example, and as you know, there is a relatively new law requiring carbon monoxide detectors in all homes in California. Since the seller is asked about that issue in the TDS, this disclosure is covered in most sale transactions. In a lease without a TDS, however, it is not. As a result, you need to check on that issue or, at least, give the tenant a Carbon Monoxide Detector Notice (Form CMD) in every deal.

In short, even though the law does not require a TDS in leases, there is information about the property that the tenant needs to know. So do not rely on the Civil Code and ignore disclosure. Doing so is only asking for trouble. Rather, get yourself and your client insurance: Treat the deal like a sale, do your inspection and make full disclosure. That way, everyone will be happy and, when the tenant buys a house, they may hire you because of the good job you did in their lease.
As always, let us know if you have any questions.

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