Attack of the killer Seller Addendum

Recently, I’ve noticed a new trend rearing its ugly head in apartment deals in LA: the Seller Addendum.

What’s a Seller Addendum? It’s an addition to the normal sale and purchase agreement that severely limits Seller’s liability during and after the sale process. For example, the Seller Addendum might limit damages to which Buyer is entitled in the event Seller fails to disclose some problem with the property. Or it might try to give seller the right to unilaterally cancel the contract at any point before closing.

During 2008-10, when I first started buying apartment buildings, you very rarely saw sellers trying to impose crazy terms. They were just happy to be able to sell at all. So where did these Seller Addenda come from?

I think the precedent comes from sales of REO (bank-owned) properties, which have obviously sky-rocketed over the past few years.

Every bank selling property demands the buyer sign its own draconian addendum limiting the bank’s liability in all kinds of ways. This makes sense: The bank never lived in the property or managed it (except under duress, with no books, records, or leases). So it’s not really fair for the bank to be subject to the same duties to disclose problems as a normal seller (since, how would it know about any problems?). As a buyer of REO property, you know you’re getting a deal on price and you’re therefore pretty willing to do whatever the bank wants.

Normal sellers are another story. Typically, you’re not getting such a great deal. And the seller is in position to know everything about the property. So the Seller Addendum is just a naked attempt by the seller to leverage the fact that market power has shifted decisively in favor of sellers.

Fortunately, my guess is that many of the most draconian terms in Seller Addenda won’t end up being enforceable in court. There’s a doctrine in CA law that says, basically, you can’t defraud someone by doing something bad to them which they don’t know about, then getting them to sign a release releasing you from liability for doing the bad thing to them. So, a seller who fails to disclose a problem with a building is still probably going to be liable for fraud, regardless of whatever ridiculous addendum they go the buyer to sign.

This does not mean you should sign whatever the seller wants you to sign. Read everything. Object. Ask questions. Negotiate. But know that the most likely outcome is that some other buyer comes along who IS willing to sign. So, ultimately, if you want the building, you’re going to have to take a view. It’s a caveat emptor world… so the buyer ought to do his diligence.

Note: I am not a lawyer and the above is definitely not legal advice. Consult a lawyer before signing anything.