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AB 1406

Attached residential condominium sales: liquidated damages.

2025-2026 Regular Session Introduced by Chris Ward and 2 co-sponsors

Allows pre-closing disbursement of a purchaser’s deposit to cover project costs in undeveloped subdivisions, with strict DRE review and safeguards.

Read second time. Ordered to third reading.
#attachedresidentialcondominiumsales #liquidateddamages
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Bill Summary · AB 1406

AB 1406 — Subdivisions: disbursements of deposits (Ward)

Status: In committee — set for second hearing; hearing canceled at author's request
Introduced: February 21, 2025
Adds: Section 11013.7 to the Business and Professions Code

Purpose / Intent

AB 1406 allows a purchaser’s deposit held in escrow under a binding sales contract for a lot or parcel in an undeveloped subdivision to be disbursed before closing to pay project-related costs, provided specific consumer-protective conditions are met and reviewed by the Department of Real Estate (DRE). The bill also adjusts how liquidated-damages limits apply where advance disbursements occur.

Key provisions

  • Creates Business & Professions Code §11013.7 authorizing pre-closing disbursements of purchaser deposits to pay project construction costs (including repairs in conversions, architectural/engineering/legal/finance fees, and other incidental project expenses).
  • Disbursement allowed only if all of the following are satisfied:
    1. DRE has issued an effective date for the developer’s preliminary public report.
    2. Developer has recorded the project’s declaration and bylaws.
    3. Developer submits to DRE:
      • A project budget showing all costs required to complete the project (lease payments, taxes, construction, professional fees, financing).
      • Evidence of sufficient funds to complete the project (purchaser funds, equity, loan commitments, etc.).
    4. DRE reviews and approves the proposed disbursement (DRE required to complete review within 30 days per bill digest).
    5. Purchaser gives express informed consent to the disbursement.
  • Additional required submissions when funds will be disbursed before construction completion:
    • Executed construction contract, building permit.
    • Satisfactory security for completion (examples: completion/performance bond equal to 100% of construction cost or remaining cost, irrevocable letter of credit, or other DRE‑approved instrument).
    • Bonds/letters of credit must include a provision notifying DRE before any payment to beneficiaries.
    • Prominent notice in the developer’s public report describing the pre‑closing disbursement practice.
  • Purchaser remedies: purchaser is entitled to a full refund of the deposit if unable to close at time of project completion (as specified).
  • Liquidated damages: notwithstanding existing limits (commonly 3% cap), the bill permits disbursement and permits liquidated damages to exceed 3% where the statutory conditions are satisfied; in those cases the liquidated damages amount must equal the deposit.

Who is affected

  • Homebuyers/purchasers of lots/parcels in subdivisions not yet constructed (5+ lots/parcels).
  • Developers and their lenders/contractors/sureties.
  • Escrow agents and the DRE (additional review and oversight duties).
  • Surety companies and financial institutions issuing bonds or letters of credit.

Procedural / timeline notes

  • Introduced Feb 21, 2025. Amended and re-referred to Judiciary and Business & Professions committees. Multiple scheduled hearings were canceled at the author’s request (most recently April 21, 2025).
  • DRE review deadlines are included in the bill digest (30 days).

Potential impacts / considerations

  • Pros: may provide developers earlier access to funds needed to complete projects, possibly reducing financing costs and delays; built‑in consumer safeguards (DRE approval, bonds/letters of credit, informed consent, public report disclosure).
  • Cons / risks: purchasers face potential increased exposure if security instruments fail or are insufficient; changes relax the practical effect of the existing liquidated-damages cap when conditions are met.
  • Effectiveness depends on DRE review capacity and the rigor of required security instruments and disclosures.

Also makes nonsubstantive wording changes to an unrelated provision in the Private Investigator Act.

Compiled from official sources — confirm details with the bill’s official record.

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