June 29th, 2020 at 1:25 pm
Short Answer: A seller in possession of inspection reports will generally check Box 2 in Section I of the TDS, whereas a seller without any inspection reports will generally check Box 3.
Background: The TDS law gives certain homebuyers a 3- or 5- day right to cancel upon receipt of a TDS. This law was recently revised effective January 1, 2020 to clearly state that the right to cancel begins when the seller and listing agent complete Sections I, II, and III of the TDS, and deliver the completed document to the buyer or buyer’s agent. Section I of the TDS previously had only 2 checkboxes, but starting January 1, 2020, now has a third checkbox. To complete the TDS, a seller must check at least one of the 3 boxes in Section I concerning substituted disclosures that have or will be made with the same subject matter as that in the TDS.
For 35 years since the TDS law was originally enacted, no one has been quite sure what the first 2 checkboxes mean or whether to check them. Hence, sellers and agents have largely ignored Section I altogether. However, if neither of the 2 boxes in Section I are checked, the section appears to be incomplete. Hence, C.A.R. sponsored new legislation to create the third box that essentially says that neither Box 1 nor Box 2 applies.
Box 1 Explained: Box 1 states that there are “Inspection reports completed pursuant to the contract of sale.” However, sellers generally complete the TDS before they even have a buyer, and they expect the buyer to order their own inspection reports. Because sellers generally have no intention at the time they are completing the TDS to have or cause to be made an “inspection report pursuant to the contract of sale,” they generally will not check Box 1.
Box 2 Explained: Box 2 states that there are “Additional inspection reports or disclosures.” Sometimes, a seller will have an inspection report from when the seller purchased the property, or as provided by the seller’s previous buyer(s) who ended up not purchasing the property. In those situations, the seller should check Box 2. If the seller checks Box 2, the seller should also identify the inspection report in the blank space provided and attach a copy of that report to the TDS. Otherwise, to check Box 2 but not provide the actual inspection report to the buyer could expose the seller to potential liability for concealment.
Box 3 Explained: The new Box 3 states “No substituted disclosure for this transfer.” This language is ambiguous at best, but based on the legislative intent, Box 3 apparently means: “Neither Box 1 nor Box 2 applies.” Sellers who do not check Box 1 or Box 2 should check Box 3 as a way of showing the buyer that Section I has been completed. The seller, however, should be sure to provide a date next to the seller’s signature on the TDS as a way of disavowing any knowledge of any new inspection reports that may materialize at a later date.
Agents Beware! Listing agents do not want to be involved in a situation where a buyer has received all disclosures and has removed all contingencies, but nevertheless attempts to cancel and keep the deposit by claiming that the TDS was not complete because none of the boxes in Section 1 had been marked. To avoid that potential problem, make sure that your sellers check one of the 3 boxes in Section I of the TDS, as well as sign and date the TDS accordingly.
-Thank you to John Closson (Pacific Palisades Manager) for suggesting this week’s legal tip.
Like what you see here? Sign up for more! Our free e-newsletter informs you of listings in your community, insider real estate tips, the latest in home trends, and more.
