When a church or nonprofit sells its property, the commercial property disclosures required by California law are one of the most overlooked parts of the deal, and one of the most dangerous to get wrong. Sellers often assume that signing the property over “as-is” ends their obligations. It does not. A seller who hides a known problem can be sued for fraud years after the sale closes, and I have seen well-meaning church boards exposed to exactly that risk because no one walked them through what had to be disclosed.
Residential vs. Commercial — Why the Distinction Matters
To know which commercial property disclosures apply, you first have to know what kind of property you are selling. Most municipalities define property types in their zoning code, but the general definitions are essentially the same. Residential property is generally one to four dwelling units, such as a single-family house or duplex. With some nuances for mobile homes and vacant land, commercial property is everything else, including residential buildings of more than four units, such as apartment complexes. Most church property falls on the commercial side of that line.
The Required Commercial Property Disclosures
California imposes statutory commercial property disclosures in every sale or exchange of real property. Depending on the property, a seller may need to disclose whether the property sits in a hazard area, such as a special flood hazard area, potential flooding area, very high fire hazard severity zone, earthquake fault zone, seismic hazard zone, or wildland area. Sellers must also disclose environmental hazards, deliver a Department of Real Estate booklet on hazardous substances, certify the strapping of water heaters, disclose whether the seller is a foreign person, deliver an earthquake guide for commercial property, and disclose whether the property sits within an airport influence area.
More recently, California requires the seller of commercial property above a certain square footage to provide the building’s energy use information, including energy usage data from the prior twelve months and the building’s ENERGY STAR performance score.
What Actually Has to Be Disclosed
Beyond the required commercial property disclosures, California law also requires sellers to disclose, in writing, any material fact about the property that could affect its desirability or the price a buyer would pay, including latent, or hidden, defects. A seller can be found liable for failing to disclose when three things are true: the seller knows or has reason to know of the defect; the defect is not apparent and the seller knows the buyer is unlikely to discover it on an ordinary inspection; and the defect is serious enough that it would likely make a buyer reconsider.
Material facts most often involve the property’s walls, ceilings, floors, insulation, roof, windows, doors, foundation, driveways, sidewalks, fences, electrical systems, or plumbing. But that list is not exhaustive. Any fact about any part of the property can be material if it affects the property’s value, desirability, or intended use.
“As-Is” Does Not Mean What Sellers Think
This is the point I most often have to correct. A general disclaimer that the property is being sold “as-is” is not enough to overcome fraud, concealment, or failure to disclose material defects. “As-is” does not let a seller or agent use three words to escape liability. Material defects still have to be disclosed. If the buyer then chooses to purchase anyway, the sale is “as-is” with those known defects, which is a very different thing from “as-is” as a shield against the ones the seller hid.
Failure to Disclose Is Actual Fraud
California courts have been clear on this for sixty years. As the court held in Lingsch v. Savage (1963) 213 Cal.App.2d 729, where a seller knows of facts materially affecting the value or desirability of the property that are known or accessible only to the seller, and knows those facts are beyond the buyer’s diligent attention and observation, the seller has a duty to disclose them, and failing to do so constitutes actual fraud.
A fraud claim based on nondisclosure has five elements: nondisclosure of facts materially affecting value or desirability; the seller’s knowledge of those facts and that they are beyond the buyer’s reach; the seller’s intent to induce the buyer to act; the buyer’s action in reliance on the nondisclosure; and resulting damages.
As for what that costs, California Civil Code §3343 provides that a person defrauded in the purchase, sale, or exchange of property may recover the difference between what they paid and the actual value of what they received, plus additional damages arising from the transaction.
The Bottom Line
A buyer can only hold a seller responsible for a known defect if the buyer could not have found it through a reasonable, independent inspection. So the defect cannot have been readily visible or observable. The practical takeaway on commercial property disclosures for any church selling property is simple. Reveal every true fact about the condition of the property, especially the ones that are not visible on an ordinary walk-through. When it comes to commercial property disclosures, full disclosure is always far cheaper than a fraud lawsuit.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.
