SB652 Changes Disclosure Requirements for Homeowners Involved in Construction Defect Claims

Effective July 1, 2014, the Real Estate Transfer Disclosure Statement (TDS) will be revised to require disclosure of whether a seller of residential property is aware of certain construction claims under SB800 (California Civil Code Section 895, et seq.).  SB652, which was signed into law on Sept. 30, 2013, amends question 16 of Section 11C of the current TDS to inquire as to whether the seller is aware of any of the following claims threatening to or affecting the real property:  (1) claims for damage by the seller based on construction defects under Cal. Civil Code Sections 910 and 914; (2) claims for breach of warranty under Cal. Civil Code Section 900; or (3) claims for breach of an enhanced protection agreement under Cal. Civil Code Section 903, including any lawsuits or claims for damage under Section 910 or 914 alleging a defect of deficiency in the real property or common areas.

With the greatly enhanced and specified disclosures that will be included in the new TDS, homeowners who become involved in construction defect actions are likely to take a greater interest in the claims asserted by their attorneys and experts.  The now common practice for plaintiffs in construction defect cases of producing over-inclusive defect reports to increase the potential value of the claim will need to be re-evaluated as homeowners become concerned that they will be required to disclose these aggressive claims as part of any future sale.  This likely will have the greatest effect on claims that have become time-barred pursuant to various statutes of limitations set forth in SB800.  Currently, many plaintiffs’ attorneys include claims that may be time-barred, such as acoustical claims, as an avenue to increase the overall claim value.  However, once they understand that these claims rarely succeed and, as a result, repairs to address them do not occur, homeowners will be less likely to approve making such claims because they would need to disclose them to future buyers and explain why the repairs were not made.

While initially it may appear that these changes to the TDS would curb frivolous and over-exaggerated construction defect claims, the actual result may be vastly different.  If homeowners understand that they must disclose every claim made, it may become increasingly difficult to resolve many defect cases where the initial claims were significantly overstated.  Homeowners may be less willing to compromise knowing that regardless of how the case resolves, they will still be required to disclose all the claims made.  While this ultimately is a client control issue for plaintiffs’ attorneys, it affects the way defense attorneys approach and evaluate these cases on a go forward basis.

Plaintiffs’ attorneys will need to educate their clients as to these new requirements so that they can make educated decisions about how to pursue potential defect claims.  Attorneys may ask homeowners to sign agreements stating that they have read and understand the defect reports and understand that they will need to disclose these claims to future buyers.  Not only will this protect the attorney from potential future claims by the homeowners, but it will force the homeowners to make early decisions about what claims are truly important to them.   While the actual impact of SB 652 is yet to be seen, one thing that is certain is that educated homeowners will have a bigger say in what defect claims they choose to make as well as how those claims are presented.

Image courtesy of Flickr by Great Valley Center