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New Washington Law First to Require Disclosure of Environmental Conditions in Commercial Real Estate Transactions

September 17, 2010

Under a new law that took effect in June and is the first of its kind in the U.S., sellers of commercial real estate in Washington State are now required to disclose a wide range of “environmental conditions” to prospective buyers, exposing them to new liabilities. The law (SB 6749),[1] which is based on disclosures required for residential properties and unanimously passed by the State House and Senate, requires sellers to fill out a new disclosure form (Form 17 Commercial) before closing a transaction involving commercial property. The law was designed to resolve an ambiguity in Washington’s existing disclosure requirements that at times complicated commercial real estate transactions. However, the broad environmental disclosure requirements in the law could compel sellers to ensure that they disclose even minor past contamination, and risk rescission for failure to do so.

Overview of Form 17 Commercial

Form 17 Commercial applies to nearly all “commercial real estate” transactions, based on an existing, broad definition of “commercial real estate”:

a fee title interest or possessory estate in real property located in this state except an interest in real property which is (a) improved with one single-family residential unit or one multifamily structure with four or less residential units, or (b) unimproved and the maximum permitted development is one to four residential units or structures under the county or city zoning ordinances or comprehensive plan applicable to that real estate, or (c) classified as farm and agricultural land or timber land for assessment purposes pursuant to chapter 84.34 RCW, or (d) improved with single-family residential units such as condominiums, townhouses, timeshares, or stand-alone houses in a subdivision that may be legally sold, leased, or otherwise disposed of on a unit-by-unit basis. Real estate will be considered commercial real estate if the commission agreement so provides, or if it meets the definition contained in this section on the date of the disposition.[2]

The law contains seven exemptions from disclosure requirements, such as foreclosures, family gifts, and other less typical transactions, that track prior exemptions from residential disclosure requirements listed at RCW 64.06.010.

The scope of Form 17 Commercial, set out at RCW 64.06.013, is similar to existing disclosure requirements for residential property, and covers issues involving title and use, water rights, sewage systems, structural and building issues and permits, systems and fixtures, and environmental issues. Several of the questions relating to environmental issues are relatively straightforward, such as whether the property has been impacted by flooding, earthquakes, or fire, or whether the property contains shorelines, wetlands, floodplains, or critical areas. However, the Form 17 Commercial also includes extremely broad questions relating to actual or potential contamination, such as:

  • Are there any substances, materials, or products in or on the property that may be environmental concerns, such as asbestos, formaldehyde, radon gas, lead-based paint, fuel or chemical storage tanks, or contaminated soil or water?
  • Is there any soil or groundwater contamination?
  • Has the property been used as a legal or illegal dumping site?

Each question requires the seller to state, based on the seller’s actual knowledge at the time of completing the disclosure, whether the answer is “yes,” “no,” or “don’t know.” Any questions that the seller answers “yes” require elaboration. Particularly in an urban environment, it is likely that the majority of commercial properties either contain “substances, material, or products” that “may be environmental concerns,” have some level of soil/groundwater “contamination,” or have received frequent litter. Because the disclosure does not define “contamination,” include a threshold of how much of a substance constitutes contamination, or what constitutes a “dumping site,” nearly all sellers will likely be required to answer “yes” to these questions, and explain their answers.[3]

Developing the information to answer these questions properly will require careful review of potentially voluminous documents and considerable time. Although the disclosure is based on the seller’s “actual knowledge” at the time of completing the form, sophisticated parties involved in commercial transactions likely consult with multiple parties and consultants, all of whom develop and retain information related to the properties. To determine the scope of “actual knowledge” and ensure that disclosures include all relevant information, sellers of commercial properties will likely need to review not only their own files, but also the files of agents and consultants who have evaluated or worked on the property.

Remedies and Requirements

While sellers of commercial properties may face difficulty in assembling and reviewing information related to “environmental conditions” of the subject property, prospective buyers face an even tighter time frame in which to digest and intelligently respond to the information contained in the disclosure form. Under the law, sellers of commercial real estate must complete the Form 17 Commercial within five business days after mutual acceptance of a written purchase and sale agreement between the parties, unless the parties agree to a different schedule. Although buyers generally can waive their right to receive the disclosure form, they cannot waive their right to receive disclosures regarding “environmental conditions.”[4] Presumably, then, sellers must at least complete the “environmental conditions” portion of the disclosure form to comply with the law, even if a particular buyer waives its right to receive the disclosure form as a whole.

The law expressly limits the buyer’s right of rescission based on the disclosures made in the Form 17 Commercial to three business days after receiving the disclosure. Because an experienced prospective purchaser of commercial property will usually have conducted an extensive environmental review before entering into a purchase and sale agreement, and so long before receiving the disclosure form, the three-day review period presumably will be limited to determining whether the form contains new information that is substantially different than what has already been received.

After three days have passed, if the buyer does not rescind, buyers cannot directly rely on the disclosures in a subsequent claim. Incorporating elements from existing residential disclosure requirements, the law explicitly exempts disclosures from the Washington Consumer Protection Act (CPA),[5] and states that (1) the disclosure statement “shall not be considered part of any written agreement between the buyer and seller,” (2) “shall not be construed as a warranty of any kind by the seller or any real estate licensee involved in the transaction,”[6] and (3) shall not “create any new right or remedy for a buyer of real property other than the right of [rescission] exercised on the basis and within the time limits provided in this chapter.”[7] However, the law also states that the disclosure requirements do not “extinguish or impair any rights or remedies of a buyer of real estate against the seller … otherwise existing pursuant to common law, statute, or contract ….”[8]

Interpreting these provisions in the context of residential disclosure statements, Washington courts have held that plaintiffs cannot bring CPA or common law claims based solely on the representations made in the disclosure statements, but that they may bring common law claims that do not stem from the disclosures.[9] As a result, although it is unlikely that sellers of commercial property would face rescission or direct liability based on inaccurate disclosures, it is possible that subsequent common law claims, such as misrepresentation, associated with the information presented in a disclosure could linger well after the transaction is completed. That is, although a buyer would not be able to bring a cause of action based solely on the disclosure form, the statements made in that form could be, potentially, used as evidence of what the seller knew or asserted about a property at the time of sale to support a common law claim.

Implications

At the very least, Washington’s new commercial disclosure law imposes a new paperwork step in nearly all commercial transactions. Sellers should ensure that they timely prepare the Form 17 Commercial, and will need to work with lawyers, environmental consultants, and other related entities to ensure that they disclose all potentially relevant information that could be construed as within their “actual knowledge.” Prospective buyers will also have to be ready to integrate any new information received in a disclosure, and determine whether to exercise their statutory right of rescission. As a practical matter, the new commercial disclosure merely underscores the necessity for prospective sellers and purchasers of commercial real estate to complete their environmental review far before the transaction is closed, to ensure that no surprises are encountered on the eve of closing.

For more information regarding Washington’s new commercial disclosure law or environmental issues related to commercial transactions, please contact any member of our Property Development practice group.

[1] Codified at Chapter 64.06 RCW.

[2] RCW 64.06.005; 60.42.005.

[3] Also noteworthy is that the preamble to the disclosure form states that the Form 17 Commercial contains “disclosures of existing material facts or material defects,” while the questions refer to any substances, materials, or contamination.

[4] RCW 64.06.013; 64.06.010(7).

[5] RCW 64.06.060.

[6] RCW 64.06.013.

[7] RCW 64.06.070.

[8] Id.

[9] See Svendsen v. Stock, 143 Wn.2d 546, 554-58 (2001) (holding that plaintiffs could not bring claims based on fraudulent concealment or the CPA against real estate broker if those claims were based solely on the seller disclosure statement, but that they could bring claims that were independent of the representations made in the statement); Haas v. Kartashev, 2010 WL 706282, *7 (Wn. App. Mar. 2, 2010) (holding that RCW 64.06.060 bars CPA claims brought by buyers of residential property premised on a residential disclosure statement, but that plaintiffs may bring independent causes of action, such as those connected to lack of repair of known defects, that are unconnected to the seller disclosure requirements).

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