REGULARS

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MCLE SELF-STUDY

Failure to comply with 1998 law may render seller of property or agent liable for actual damages

The legislation mandates the specific form of disclosure that must be made for certain types of residential sales. The new consolidated natural hazard disclosure statement (NHDS) must be provided if: (1) the sale is subject to the real estate transfer disclosure statement (TDS) requirement of California Civil Code §§1102 through 1102.17 and the (2) the property is located within one of six designated natural hazard areas.

The TDS and NHDS requirements apply only to residential transactions and generally only to resale transactions, as most new subdivision sales are exempt. The NHDS represents a consolidation of six independent statutory disclosure requirements, three of which became law under the new legislation (special flood hazard area, dam inundation failure area, and high fire severity), and three of which were existing disclosure statutes amended by the new legislation (earthquake fault zone, seismic hazard area, and wildland fire area).

Each separate disclosure statute applies to the sale of "real property" and is not restricted to transactions where a TDS is required to be provided. If the TDS requirement applies, the NHDS disclosure form must be made but the seller or agent may elect the form of disclosure to be given.

One purpose of the NHDS requirement was to locate in one area existing disclosure requirements set forth in different codes and often missed. One unexpected side effect is that it unearthed disclosure requirements previously thought by many to be applicable only to residential resale transactions. It is possible that subsequent legislation may reduce the scope of these disclosure requirements. Unless and until this occurs, however, the statutory language encompasses all real estate sales transactions. (AB 248 (Torlakson), currently pending in the Senate, proposes changes in some of the requirements.)

WHEN MUST THE DISCLOSURE BE MADE?

Disclosure must be made if the seller or seller's agent has actual knowledge that the property is located within one of the designated hazard zones. Disclosure also must be made without regard to actual knowledge if the local jurisdiction has been provided with either (1) a list by parcel of the properties within the area (special flood and dam failure inundation areas) or (2) the required maps (high fire severity zones, wildland fire area, earthquake fault zones, and seismic hazard zones), and the required notice regarding the location of the list or map has been posted in the applicable local governmental offices. Thus, sellers and their agents will be considered to have constructive knowledge of any hazard area information available through local agencies.

HOW DO YOU DETERMINE IF THE PROPERTY IS IN A HAZARD ZONE?

The immediate challenge to sellers, their agents and their attorneys is how to determine whether the property is located within one of the designated hazard areas. There are six natural hazard areas covering three types of hazards: flood, fire and earthquake. Each hazard has two types of designated areas: flood (100-year flood plain and dam failure inundation area); fire (high fire severity zone and wildland fire area); and earthquake (earthquake fault zone and seismic hazard zone).

Public and private sources for information are available. As might be expected, the legislation has sparked new business opportunities. A number of private businesses, including companies, will research a particular piece of property and provide a report for a fee. Appropriate due diligence should be taken to assess the qualification and financial strength of the provider as well as any contractual limitations on the provider's liability if the report is in error. Contractual limitations are to be expected as the current fees charged for this service are not significant (approximately $60 to $75 per report). The seller or the seller's agent remains ultimately responsible to the buyer for any errors; and, as noted below, the potential liability may be significant.

The author, in a random and unscientific test of city and county agencies for information on hazard areas within their jurisdictions, found the experience frustrating and futile. Inquiries were met with silence or "Let me transfer you to another department." It is hoped that as information about the new requirements spreads, local agencies eventually will prove to be a good information source. Until this occurs, state agencies and private providers remain the most effective sources.

For those choosing to do the research on their own or to supplement or verify information provided by others, set forth below is a brief description of each hazard area and sources for information about whether a particular piece of property is located within the area.

Special flood hazard areas
(FEMA - Zones A and V)

This area includes properties within Zones A and V of the flood insurance rate maps issued by the Federal Emergency Management Agency (FEMA). Zone A is the 100-year flood plain and Zone V is a 100-year coastal flood area. FEMA flood maps are readily available and most sales agents are familiar with the maps. The best source for confirmation of whether the property is located in a flood zone is the local planning department. Copies of FEMA's flood insurance rate maps can be obtained directly from FEMA for a small charge through its MAP Service Center (1-800/358-9616). A community panel number is necessary to obtain the correct map for a particular piece of property. This number should be available through the local planning or public works department. Additional information is available on FEMA's website at www.fema.gov.

Dam failure inundation area

This area includes properties designated by the State Office of Emergency Services (OES) as subject to potential flooding in the event of partial or total failure of any dam that would result in death or personal injury. The OES has the responsibility to distribute inundation maps for these areas, and the maps are to be kept on file with the OES and the State Department of Water Resources. A notice is to be posted at the county recorder's office, county assessor's office, and county planning agency office that identifies the location of the map and any subsequent information received by the county regarding changes to the inundation areas.

Every county in California (except Del Norte) contains one or more dams with a designated inundation area, and OES has delivered maps to each of these counties. According to OES, the best current source for finding the location of these maps is the county's local office of emergency services. This office will either have the map or know where the map is located. Map information is available on the internet. OES's web site is www.oes.ca.gov.

High fire severity zone

In response to the Oakland hills fire, the legislature passed California Government Code §§51175 through 51188 to identify areas that are subject to a very high fire risk, to establish certain fire prevention maintenance standards, and to require disclosure to prospective purchasers of property in these areas. The Director of Forestry and Fire Protection is required to identify very high fire hazard severity zones and to transmit the information to all local agencies. If a county receives an official map identifying high fire zones within the county, it is required to post a notice in the county recorder's, assessor's, and planning agency's offices that identifies the location of the map.

As of June 1, 1999, maps were prepared for high fire severity zones in 25 counties. Each map covers one county. The maps are 36 inches by 48 inches and include roads, water features and other landmarks to aid in determining whether a particular property is located in the area. Maps may be ordered from the Teale Data Center, P.O. Box 13436, Sacramento CA 95813, 916/263-1767. The website is www.gislab.teale.ca.gov. The cost is $35 per map plus $10 shipping and tax. It is anticipated that the maps eventually will be available on the internet. Further information can be obtained from the State Board of Forestry in Sacramento.

Wildland fire area

Wildland fire areas (or state responsibility areas) include properties where the state (rather than any local or federal agency) has the primary financial responsibility to prevent and suppress fires. The seller must disclose to any prospective purchaser that: (1) the property is located in the area, (2) the area may contain substantial fire risks and hazards, and (3) the property is subject to the fire prevention measures contained in California Public Resources Code §4291, such as the maintenance of firebreaks around all structures.

In addition, if the county has not assumed fire suppression responsibility in all areas of the county (including state responsibility areas), the seller must disclose that the state has no responsibility to provide fire protection to any building or structure located within the wildlands absent a cooperative agreement with the local agency under California Public Resources Code §4142.

The State Board of Forestry is required to classify wildland fire areas and to provide maps identifying the areas to the county assessor of each county that contains such areas. Notices are to be posted in the county recorder's, assessor's, and planning agency's offices identifying the location of the map.

Maps have been prepared for wildland fire areas in 56 counties (all but San Francisco and Sutter) and may be ordered from the Teale Data Center as described above. Each county map will show both the wildland fire areas and any high fire severity zones located in that county. Further information can be obtained from the State Board of Forestry in Sacramento

Earthquake fault zone
(Alquist-Priolo Act)

This area covers property located within a delineated earthquake fault zone as shown on an official earthquake fault zone map. The State Geologist is required to compile maps that delineate earthquake fault zones that encompass all potentially and recently active traces of the San Andreas, Calaveras, Hayward and San Jacinto faults. The State Geologist also is required to include such other faults that are sufficiently active and well-defined as to constitute a potential hazard to structures from surface faulting or fault creep. The zones are to be one-quarter mile or less in width but the State Geologist may designate a wider zone. The State Geologist is to provide copies of the official maps to each city and county with jurisdiction over the property located within the zone. Counties receiving maps must post notices in the county recorder's, assessor's, and planning agency's offices identifying the location of the maps.

As of May 1999, maps had been issued for earthquake fault zones in 100 cities in 36 counties. In order to obtain a copy of the map, you must first determine the name of the map. This can be done by obtaining a copy of Special Publication No. 42 entitled "Fault-Rupture Hazard Zones in California" issued by the California Division of Mines and Geology (DMG). It can be ordered for a small fee from DMG at 916/445-5716 (Sacramento), 213/620-3560 (Los Angeles), or 415/904-7707 (San Francisco). With the map name in hand, the map may be ordered for a small fee from BPS Reprographics Services, 149 Second St., San Francisco 94105, 415/512-6550. Additional information regarding earthquake fault zones may be obtained over the internet from DMG's website www.consrv.ca.gov/dmg.

Seismic hazard zone

Seismic hazard zones are areas delineated by the State Geologist that may be subject to strong ground shaking, liquefaction, landslides or other ground failures, and other seismic hazards caused by earthquakes. On completion of each official map identifying such areas, the State Geologist must provide copies to each city and county having jurisdiction over lands within the zone. Upon receipt of a map, the county must post a notice in the county recorder's, assessor's, and planning agency's offices identifying the location of the map.

As of March 25, 1999, 40 official maps have been issued for seismic hazard areas in four counties (Los Angeles, Orange, San Francisco and Ventura). The map name is necessary in order to obtain a copy of the map. The map name can be obtained from the "Seismic Hazard Mapping Bulletin" issued by DMG. It can be ordered from DMG as described above and also is available from the internet at www.consrv.ca.gov/dmg/shezp/disclose.htm. The map itself can be ordered from BPS Repro-graphics as described above.

WHAT IF YOU ARE UNSURE WHETHER THE PROPERTY IS IN A HAZARD ZONE?

For certain hazard areas (earthquake fault zone, seismic hazard zone, high fire severity zone or wildland fire area), if a map is available but the map or accompanying information is not of sufficient accuracy or scale that a reasonable person can determine whether the property is within the area, the seller or seller's agent must assume that the property is located within the area, mark "yes" on the applicable NHDS provision, and provide the NHDS to the buyer. "No" can be marked if an expert's report prepared pursuant to California Civil Code §1102.4(c) verifying that the property is not in the area is attached to the NHDS. Presumably in this situation, the NHDS still must be provided to the buyer (along with the expert's report) even if the NHDS shows the property is not within any of the six areas. The requirement to disclose if "unsure" does not apply to properties within FEMA Zone A or V or a dam failure inundation area. Apparently, the legislature felt that the information available on these areas is sufficiently clear to identify properties located within their boundaries.

It is uncertain whether the duty to disclose if "unsure" applies to TDS-exempt transactions. The statutory language presumes that the buyer will be provided with an NHDS, and TDS-exempt transactions are not required to use the NHDS. Corrective legislation may be necessary to clarify this ambiguity. Until this is resolved, the prudent course would be to assume that the duty to disclose if "unsure" applies to all real estate transactions in earthquake fault zones, seismic hazard zones, high fire severity zones and wildland fire areas.

WHO MUST MAKE THE DISCLOSURE?

The seller's agent has the primary responsibility to make disclosure for properties located in an earthquake fault zone, seismic hazard zone, FEMA Zone A or V, and dam failure inundation area. If the seller has no agent, the seller must make the disclosure. The seller is charged with the direct responsibility for making the disclosure for properties located in high fire severity zones and wildland fire areas.

HOW MUST THE DISCLOSURE BE MADE?

If the transaction is subject to the TDS requirement, the disclosure must be made using either the NHDS set forth in California Civil Code §1102.6c(b) or a local form as long as the form includes substantially the same information and same warning required by the statutory disclosure form.

The mandated disclosure form contains a warning in bold print that the hazards may limit the buyer's ability to develop the property, to obtain insurance, or to receive assistance after a disaster.

For transactions where the seller is not required to provide a TDS but is subject to the independent statutory disclosure requirements, it may be advisable to use the mandated form or at least incorporate the substantive provisions of the form. The NHDS represents a convenient, consolidated and state-authorized mechanism for providing the necessary disclosures. It also may become the standard that establishes the minimum disclosure that must be met.

Practitioners should be aware, however, that the NHDS may not be sufficient in every transaction. A property's unique circumstances may require disclosure of additional hazard area information. The new requirements expressly provide that the specific disclosure obligations do not limit or abridge any disclosure duty created by any other provision of law (including presumably a common law disclosure duty) or required in order to avoid fraud, misrepresentation or deceit in the transaction.

WHAT HAPPENS IF THE DISCLOSURE IS NOT MADE?

Failure to make the required disclosure will not invalidate the transaction; however, any person who willfully or negligently fails to make the required disclosure is liable in the amount of actual damages suffered by the transferee.

It takes little imagination to see the significant and frightening exposure a failure to disclose may mean to sellers and their agents. Fire, flood or earthquake victims may now have a new source of potential recovery, particularly if insurance proceeds are inadequate or nonexistent. It is uncertain whether the legislature understood that this new law has the potential of converting unwitting sellers into insurers against natural disasters. In the past, property owners generally have had little recourse when nature wreaks havoc; now many may be scrambling for their sales documents to see if the proper disclosures were made.

This potential exposure for failure to disclose has been applicable to earthquake fault zones and seismic hazard areas for a number of years. The duty to disclose, however, was abated for some time because the maps were not available. With maps now available and information about disclosure obligations more widely known, liability for failing to disclose may rise dramatically.

Sellers of homes in large subdivisions sold in multiple phases over a period of years must be prepared to periodically check the hazard area information available for such projects. The releasing of hazard area maps is an ongoing process. Previously unmapped property may find itself eventually within a mapped hazard zone triggering a disclosure duty.

CAN INFORMATION PROVIDED BY OTHERS INSULATE SELLERS AND AGENTS FROM POTENTIAL LIABILITY?

Sellers and agents in transactions subject to the TDS disclosure requirements may receive some liability protection from California Civil Code §1102.4 if they rely on information received from public agencies or qualified experts. Neither the seller nor the agent is liable for any error, inaccuracy or omission if: (1) it is based on information received from a public agency or qualified expert; (2) the error, inaccuracy, or omission was not within the personal knowledge of the seller or agent; and (3) the seller or agent exercised ordinary care in obtaining and transmitting the information. A "qualified" expert may be a licensed engineer, land surveyor, geologist, structural pest control operator, contractor or other expert dealing with matters within the scope of the professional's license or expertise.

It is uncertain whether this liability protection extends to transactions exempt from the TDS disclosure requirements. Each of the six separate statutory disclosure requirements specifically incorporates the liability provisions of California Civil Code §1102.13 (see discussion above), but none incorporates the liability protection provisions of §1102.4. There appears to be no reason for not extending these protections to TDS-exempt transactions. It is hoped the failure to do so was a legislative oversight that future legislation will correct.

Conclusion

It remains to be seen whether this new legislation simply adds more to the seller's already large disclosure pile or whether it also shifts significant liability on to sellers and agents. Most property owners understand and accept nature's risks and protect themselves as best they can through insurance. Few seek to blame human error for damages wrought by natural disasters.

This may no longer be the case, and therein lies the problem with this new legislation.

Courts hopefully will be reluctant to tag a mere careless seller or agent with enormous disaster damages. This risk, however, may be too great to await a judicial response.

The legislature needs to act swiftly to address this liability issue. In the meantime, practitioners should notify their clients of these new disclosure requirements so that they do not find themselves as unwitting insurers against natural disasters.

Jeffrey G. Wagner is a partner in the law firm of Luce, Forward, Hamilton & Scripps, LLP, specializing in real property law with an emphasis in common interest developments.