When your deal goes up in smoke

Wildfires are an unfortunate reality of living in California. In the last few years the Golden State’s reputation has shifted from ‘earthquake territory’ to ‘fire country’. So what happens when you’re selling or buying a property that is damaged by fire? The California Association of Realtors has answers. The following questions and answers may be helpful for property owners and residents who have suffered a loss, or for buyers who are in escrow to purchase property involved in disaster.

Q 1. What are the general rules concerning who bears the risk of loss in a real estate transaction where an “Act of God” or other disaster, such as fire, affects the property? 
If the purchase contract between the parties does not specify who is to bear the risk of damage or loss to the premises during the time between the execution of the contract and the transfer of title, the liability of the parties is governed by the California Uniform Vendor and Purchaser Risk Act (Cal. Civ. Code § 1662). Under the provisions of this statute (assuming no fault on the part of the buyer), the risk of loss or damage to the premises is carried by the seller until the buyer receives either title or possession.
If all or a material part of the premises are damaged before title or possession is given to the buyer, the buyer can cancel the contract and recover any portion of the purchase price paid. It is not clear whether the buyer can alternatively elect to enforce the contract with a reduction in the purchase price equal to the loss of value or cost of repair. (Cal. Civ. Code § 1662.)
After the buyer has taken possession or has received title,the buyer bears the risk of loss or damage to the premises (assuming no fault on the part of the seller). Therefore, if the premises are damaged, the buyer must still complete the contract and pay the balance of the purchase price. (Cal. Civ. Code § 1662.)
If the purchase contract does contain a risk of loss provision, that provision will govern to the extent it is different from or more specific than the Uniform Vendor and Purchaser Risk Act (Uniform Act) (Cal. Civ. Code § 1662).

Q 2. May a buyer get out of a purchase contract under the Uniform Act if the damage or loss caused by fires to the property is minor?
Probably not. The Uniform Act implies that the seller may still enforce the contract if the damage is not material. However, a purchase agreement may require the seller to repair such damage.

Q 3. May a buyer get out of a purchase contract under the Uniform Act if the damage or loss caused by fires to the property is major?
Yes. To repeat, if (1) neither legal title nor possession has transferred from the seller to the buyer, and all or a material part of the real property is destroyed by fire, and (2) no express contract provision to the contrary exists, then, under the Uniform Act the seller cannot enforce the purchase contract and the buyer may cancel and recover any portion of the purchase price already paid. (Cal. Civ. Code § 1662.)

Q 4. If the damage is not severe, does the timing of the fires (whether they occur before or after an inspection) affect the right to cancel?
Yes. If the damage occurs before the buyer has removed an inspection contingency in his or her purchase contract, the buyer can exercise any inspection, disapproval, and cancellation rights provided by the contract.
If the damage occurs after the buyer has removed his or her inspection contingency, the buyer generally does not have an automatic right to reinspect the property and approve or disapprove of its condition under most purchase contracts (including C.A.R.’s Residential Purchase Agreement). However, the seller may be obligated to repair the property. See Question 2.

Q 5. Must a seller disclose major fire damage that has not been repaired when attempting to sell the property?
Yes. For sales of residential one-to-four unit properties, the Real Estate Transfer Disclosure Statement (TDS), Section II (Seller’s Information), paragraph C.9, asks:
“C. Are you (Seller) aware of any of the following: . . . 9. Major damage to the property or any of the structures from fire, earthquake, floods, or landslides.
______ Yes ______ No.” (Cal. Civ. Code § 1102.6)
In addition, for both residential one-to-four unit and other properties, the seller is required to inform a buyer whether the property is located in a “very high fire hazard severity zone” (which has certain maintenance requirements) or a “state responsibility area” (which may contain substantial forest fire risks and for which the state has primary financial responsibility for fire prevention and suppression). (Cal. Civ. Code §§ 1103.2 et seq.) The disclosure of these and other natural hazard zones is discussed more fully in C.A.R.’s legal article, Natural Hazard Disclosure Statement. For all types of property, the general requirement of disclosing known material facts affecting the value or desirability of property applies.

Q 6. Must a seller disclose the fact of a fire when there was no major damage to the property?
Yes, if it is a material fact affecting the value or desirability of the property to the buyer. Even though the property may not have suffered major fire damage, the seller may be aware of other facts related to the fire that the buyer might not be aware of. Of course, a buyer must also exercise reasonable care to protect himself or herself in a real estate transaction, and is not excused from discovering problems that are within his or her diligent attention and observation.

Q 7. Must a seller disclose the fact of a fire when there was major damage to the property but it has been repaired?
California law does not clearly answer whether a seller must disclose past property defects and repairs. At the present time, the law does not appear to require disclosure of past defects and repairs unless the problems may be persistent. Given some uncertainty in this area of the law, many sellers may prefer to resolve doubts infavor of disclosure to minimize the risk of liability.

Q 8. Where can I obtain additional information?
Additional information is available on the Real Estate Resources page on C.A.R. Online. Look for the category, “Fire Disaster Assistance.” This legal article is just one of the many legal publications and services offered by C.A.R. to its members. (For the complete release, click here.)

JERRY BAKER

GMAC REAL ESTATE PROFESSIONALS

530-524-8806

JBAKER@REDDINGLISTINGS.COM