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SHORT INTRODUCTION TO CALIFORNIA REAL ESTATE PRINCIPLES, 

 

1994 by Home Study, Inc. dba American Schools

 


Click on link to go to:
Table of Contents; Chapter I: Real Property; Chapter II: Legal Ownership; Chapter III: Agency & Ethics; Chapter IV: Contracts; Chapter V: Real Estate Mathematics; Chapter VI: Financing; Chapter VII: Mortgage Insurance; Chapter VIII: Appraisal; Chapter IX: Transfers of Real Estate; Chapter X: Property Management; Chapter XI: Land Control; Chapter XII: Taxation; Chapter XIII: Fair Housing Laws; Chapter XIV: Macroeconomics; Chapter XV: Legal Professional Requirements; Chapter XVI: Notarial Law; Chapter XVII: Selling Real Estate; Chapter XVIII: Trust Funds Handling; Glossary; Index.

PART II: LAND CONVEYANCE

 

Chapter III: Agency and Ethics

 

Educational Objectives: Learn about Types of Agency, New Agency Disclosure Requirements, Ethical Considerations (B&PC SECTION 10175-10177), Easton Case, R. E. TERMS GLOSSARY, Index.

 

Existence of Agency

 

In the majority of real estate transactions, the agency relationship is used on at least two occasions. First, a real estate broker is employed as an agent for the owner of real estate for the purpose of finding a buyer. Second an escrow agent is ordinarily used to consummate the transaction.

 

An agency is the relationship between a principal and an agent whereby the agent represents the principal in dealing with a third party.

 

Agency is referred to as a triangular relationship, in the ordinary sales transaction whereby the broker is the agent for the seller, the principal in dealing with a third party, the buyer. (see California Civil Code 2295)

 

According to the California Civil Code, there are two kinds of Agency, either actual or ostensible.

 

An agency is actual when the agent is really employed by the principal. On the other hand, an agency is ostensible when the principal intentionally, or by want of ordinary care, causes a third person to believe another to be his agent who is not really employed by him.

 

An agency relationship in real estate can exist in a number of forms. Following are the three most prevalent.

 

An exclusive right to sell or exclusive authorization to sell listing entitles the listing broker to a commission no matter who sells the property during the listing period including the owner. This is the most widely used listing in the United States. The advantage to the broker is that the money and effort the broker expends on advertising and showing the property will be to the broker's benefit. The advantage to the owner is that the broker will more likely put more effort into selling a property if the broker holds an exclusive right to sell than if the broker has an exclusive agency or an open listing.

 

The exclusive agency listing is similar to the exclusive right to sell, except that the owner may sell the property himself during the listing period and not owe a commission to the broker. The broker, however, is the only broker who can act as an agent during the listing period. The broker is less enthusiastic and may not expend as much effort on advertising and showing the property as with an exclusive right to sell. Open listings carry no exclusive rights. An owner can give an open listing to a number of brokers at the same time, and the owner can still find a buyer and avoid a commission. A commission will be earned only if the broker is the one who actually makes the sale. A broker may be reluctant to accept an open listing, since the broker may spend a great deal of time and money trying to market the property only to discover that no commission has been earned because another broker has found a buyer, or the property has been sold by the owner.

 

Creation of Agency

 

The relationship of principal and agent can be created by contract by ratification, or by estoppel. The most common form of relationship in real estate is creation of an agency by contract. The basic principles of contract law apply, however, consideration is not always essential. Although one may gratuitously undertake to act as an agent, generally, there is a contract, and consideration is necessary. Consideration occurs in a unilateral contract when the principal signs a listing agreement promising compensation (commission) for services rendered by the agent, and the agent subsequently renders the services requested. Consideration occurs in a bilateral contract when the broker makes a counter promise to "use due diligence" in finding a purchaser.

 

An agency relationship can also be established when a broker acts under an oral contract of employment, such as an oral open listing agreement. An agency relationship can be implied from the acts of the parties.

 

The first form by which an agency relationship is created is an Agency by Agreement. This form is consensual in nature, and normally arises by agreement of the parties.

 

An agency by agreement must be based upon mutual consent through some indication or manifestation by the principal to the agent that P consents to having A act on P's behalf, and a similar manifestation of consent by A to act for P.

 

The agency agreement may be either expressed or implied from the conduct of the parties. No formalities are required to create an agency, thus the relationship may be created by word of mouth, by conduct, or m writing. However, in real estate it is normally created by an express contract, the listing agreement. Remember that only a person having the capacity to contract may be a principal and appoint an agent. Therefore, minors, insane persons o other persons who are legally incompetent cannot appoint agents.

 

The second form by which an agency relationship is created is an Agency by Ratification. This occurs when a principal accepts the benefits of a contract negotiated by someone who was not an agent. If the principal is made aware of all material facts of the transaction when the contract is accepted the principal becomes bound by the statements of the ratified agent.

 

A principal is only bound by the action of an agent who is acting within the scope of actual or ostensible authority. An agent who has very limited authority is called a "special agent." In most cases a broker is a special agent who is authorized to act only as an intermediary to bring together a buyer and a seller. If an agent acts beyond the scope of authority, the principal is not bound. A third person who reasonably relied on the agent's statement that the agent had sufficient authority may sue for damages, claiming the agent breached an "implied warranty of authority."

 

The third and most common form by which an agency is created is an Agency by Estoppel. This occurs where the principal intentionally or negligently causes a third person to reasonably believe another to be his agent. When the third person relies in dealing with the supposed agent, the principal will be estopped to deny the agency. The principal is bound by the acts of the "ostensible agent" as if an actual agency agreement existed between them.

 

This differs from "ostensible authority," where there is an actual agency between the parties, but the principal's actions cause third parties to believe that the agent has powers greater than those actually conferred upon him.

 

Effects of Agency Relationship

 

There are three levels of agency, universal, general and specific. In a universal agency the principal gives the agent legal power to transact all types of matters on the principal's behalf. An example is an unlimited power of attorney, however universal agencies are rare. In a general agency the agent is given the power to bind the principal in a particular business. Two examples are a salesperson is a general agent of the employing broker, and a property manager is a general agent for a property owner. In a special agency the principal empowers the agent to perform a particular act. One example is a real estate listing while another is a power of attorney to sign a deed on behalf of someone else.

 

In real estate, there are four dominant agency relationships. These are the broker-seller, broker-buyer, broker-salesperson, and broker-broker relationships.

 

Broker-Seller Relationship

 

In California, listing agreements are required to be in writing when a commission is to be paid for securing a buyer. The "equal dignities" rule states that when a contract (purchase contract) is required by the statute of frauds to be in writing, the authority (listing agreement) to enter into such a contract must also be in writing to be enforceable. Thus any agreement authorizing or employing a broker to sell or purchase real estate is invalid unless it is in writing and signed by the person to be charged (or their agent).

 

Broker-Buyer Relationship

 

A buyer can be either the principal or the customer of a broker. A buyer acting as a principal usually hires a broker to locate a parcel of real estate with certain characteristics or for a specific use, often seeking commercial or industrial property. The broker and buyer usually draw up a commission agreement detailing the property desired and the broker's compensation.

 

When treating a buyer acting as a customer, the broker (as agent of the seller) must use extreme caution and be well aware of the laws and ethics that affect this relationship. A broker must be careful of the statements that the broker or agents make about a parcel of real estate.

 

The broker must be careful of any transaction which might be considered a dual agency. The California Real Estate Law prohibits a broker from representing and collecting compensation from both parties to a transaction without their prior, mutual knowledge and consent.

 

Broker-Salesperson Relationship

 

A salesperson is a subagent of the broker under whom licensed responsible only to that broker, and can only carry out responsibilities assigned by that broker.

 

A salesperson's activities must be performed in the name of the broker, who is fully responsible for the actions of any salesperson licensed under the broker. Salespeople are engaged by brokers as either employees or independent contractors. California law requires that a broker must have a written agreement with each salesperson that defines the obligations and responsibilities of their relationship. The employer-employee relationship allows a broker to exercise certain controls over salespeople who are employees. The broker may require an employee to adhere to certain regulations, may provide the employee with certain benefits, and is required to withhold and pay certain taxes from wages paid to employees.

 

A broker's relationship with an independent contractor differs in that the broker may control what the independent contractor will do but not how it will be done. An independent contractor assumes responsibility for paying his own taxes and employee benefits. The majority of real estate salespeople are independent contractors.

 

Broker-Broker Relationship

 

Most listing contracts in common use authorize the listing broker to delegate much of the work of procuring a buyer to cooperating brokers. In such a situation, the co-broker, like the listing broker, will be a fiduciary to the principal and must act with the loyalty and good faith expected of a fiduciary. The co-broker becomes a subagent much like the listing broker's own salespersons.

 

The cooperating broker may not generally sue the seller of the property for a commission. However, a cooperating broker acting with express permission of the listing broker has been held liable to the seller of the property for damages sustained by the seller on account of misrepresentations by the cooperating broker. (See Kruse v. Miller, 143 CA 2d 656, and Hale v. Wolfsen, 276 CA 2d 285.)

 

Duration and Termination

 

An agency is ordinarily terminated by the acts of one or both of the parties or by operation of law. It may be terminated by the expiration of its term, extinction of its subject matter, or the death or incapacity of either principal or agent.

 

Mutual Agreement

 

If both parties, the broker and seller, wish to terminate the agency, the agreement is considered ended by mutual agreement.

 

Agent Renounces

 

The broker/agent can refuse to fulfill the listing agreement at anytime but may be subject to damages for breach of contract. The agent is liable for damages that result from the breach but the principal may not demand specific performance of the contract. Since the contract is a personal services contract, whereby the agent agrees to provide personal and professional skills, the courts will not force the agent to perform.

 

Principal Revokes

 

The principal may fire the agent (revoke his authority) at any time without good cause, but the principal will have breached the contract and is liable for damages to the agent resulting from the breach. The principal is liable for expenses incurred by the agent's pursuit of a buyer before revocation. If the broker produces a ready, willing, and able buyer prior to expiration of the agency's term, the principal may be liable for the commission.

 

The principal's absolute power to revoke an agency is limited if the agency is coupled with an interest. Civil Code states that if an agency was created by a recorded instrument, the revocation of the agency is not effective unless in writing and acknowledged and recorded in the same place as the instrument creating the agency.

 

In an open listing with no fixed term the listing may be revoked at any time without liability prior to production of a ready, willing and able buyer. In an open listing with a fixed term, it is possible that despite revocation, the commission will be earned if the broker produces such a buyer within the time specified.

 

An exclusive listing contract must contain a specified date of termination. If the listing does not contain a specified termination date, the listing is unenforceable by the agent and the claim or receipt of any fee by the agent (under the agreement) is a cause for disciplinary action against the agent's license. (See the Business and Professions Code, Section 10176.)

 

Expiration of the Term

 

The exclusive agency agreement and the exclusive authorization to sell have a specified termination date. These listings will end automatically on the stated date unless terminated by some other manner prior to that date. Other types of listings do not require a termination date since they can be terminated at any time. However, when no time is specified by the parties, a "reasonable time" is implied and may be determined by the surrounding circumstances.

 

Extinction of the Subject

 

When the real estate (subject matter of the agency) is sold, destroyed, damaged, or other change of circumstance, the agency agreement is terminated. Included are destruction by fire, loss through mortgage foreclosure, eminent domain proceedings, and a sudden change in value so as to affect the listed sales price.

 

Death or Incapacity

 

The agency is terminated before execution if either the principal or the agent dies or is declared legally incompetent or insane. Agents should note that such a termination is automatic, and does not depend on the agent acquiring knowledge of the principal's death. Generally, the agent has no authority to act after the principal's death, even if the agent is unaware of the death. Any transaction by the agent after the death or insanity of the principal is not binding on the principal or the principal's estate.

 

However, an exception in California Civil Code section 2356 provide that any "bona fide transaction" with a third party who had no knowledge if the death or incapacity of the principal shall be binding on the principal or his estate. The reasoning is that it is unjust to penalize third parties dealing with an agent because of the unknown death or incapacity of the principal.

 

Another exception is that agencies "coupled with an interest" do not terminate upon the death or incapacity of the principal, and their exercise binds the estate.

 

Bankruptcy

 

The bankruptcy of either the principal or the agent will terminate the agency.

 

Notice Required to Terminate

 

Generally an agent's authority continues until the agent knows, or has reason to know, of a change which would terminate the authority. No particular form of notice is required. Notice is equally effective whether the principal informs the agent directly, or the agent quits independently of the event which terminates the authority.

 

However, as stated above, an agent's authority is generally destroyed without notice upon the death or incapacity of the principal (except when "coupled with an interest.")

 

Scope and authority

 

There are two types of authority granted to the agent in California, actual and ostensible authority.

 

Actual authority is defined by the California Civil Code (Section 2316) as that which "a principal intentionally confers upon the agent, or intentionally or by want of ordinary care allows the agent to believe himself to possess."

 

Therefore, actual authority is that which is expressly or impliedly given by the principal. The principal is bound by contracts made within the scope of the agent's actual authority.

 

An express actual authority is communicated to the agent in express oral or written terms. It includes all acts incidental or necessary to accomplish the principal's specific instructions. A power of attorney, (which is discussed in Part Iv-A below), is the best example of express authority. Also, if a principal ratifies an agents unauthorized act by accepting the benefits it is equivalent to having authorized the agent's actions in advance.

 

An implied actual authority is an authority which is implied as necessary to the performance of an express authority. It can be conferred by the conduct of the principal, or by the custom or usage of the trade. An agent has the implied authority to act as necessary to perform the duties expressly authorized in the agency agreement (unless expressly restricted by the agency agreement).

 

Ostensible (or apparent) authority is defined by the California Civil Code (Section 2317) as that which "a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess." It is also referred to as authority by estoppel. Ostensible authority results from either

 

(1) when a principal manifests that another is his agent to a third person rather than to the agent himself, or

 

(2)   when the principal has intentionally or negligently caused or allowed a third person to believe that his agent has authority to do that which he is not authorized to do, and the third person detrimentally relies so that it would be unjust to allow the principal to deny the agent's authority.

 

The principal will be bound by the acts of the agent who performed within the scope of the agent's ostensible authority. The declarations of the agent alone or the mere impression by a third party that the agent is authorized cannot establish the ostensible authority. However, if the principal is aware of the agent's declarations or acts or remains silent and makes no effort to denounce the authority, then the ostensible authority is established.

 

The question focuses on whether or not the agent had the power to bind the principal within the scope of authority granted to the agent by the principal.

 

An agent's powers are generally strictly construed. An agent is deemed to have only powers which are specifically given or reasonably required to perform according to the principal's granted authority.

 

The California courts have held that a third party which knows of the agency is under a duty to ascertain its scope. If an agent acts beyond his actual authority, the third party cannot look to the principal unless the principal's conduct misled the third party or conferred ostensible authority on the agent.(See Ernst v. Earle, 218 Cal. 233 1933).

 

In most cases, a principal does not expressly grant detailed power to the agent but gives a general authority, such as selling a piece of property. Such a grant of authority carries with it the power to do acts which are incidental (reasonably necessary or customary ) to accomplish the authority granted by the principal.

 

An agent given authority to sell the principal's real property has certain incidental powers and authority, such as:

 

1.   To warrant the title of the principal and to give the usual covenants of warranty.

 

2.   To receive payment of the purchase price according to the terms the principal authorized.

 

3.   Note that in real estate, an authority "to sell" is only an authority to find a purchaser to whom the principal may sell. The authority to negotiate and conclude a sale must be a specified authority beyond the mere authority "to sell."

 

This also applies where the agent is specifically given the "exclusive right to sell" since such language is deemed to only protect the agent's right to a commission, not to authorize him to convey title. Thus where the authority "to sell" is given to a real estate broker, it usually means that the broker has no actual power to convey title or even to contract to convey.(See Mason v. Mazel, 82 Cal. App. 2d 769, 1947).

 

An agent is deemed to have certain powers by virtue of the fact that he is an agent even if the principal has specifically denied him the powers. These powers are referred to as inherent powers since they are not dependent upon the principal's grant of authority and are recognized only where necessary to protect third persons. Inherent powers include any powers which a third person would reasonably suppose the agent to have, as customary under the circumstances, unless the third person were put on notice that the principal had limited the agent's authority.

 

The agent's power to make representations to third persons concerning real estate is an inherent power. Every agent is generally deemed to have this power, even though he has been specifically instructed by the principal not to make representations, thus the principal is liable for the agent's unauthorized misrepresentations to third persons.

 

An agent authorized to sell property on behalf of the owner has the inherent power to make the usual covenants of warranty concerning the property as are implied by law or customary in the community in connection with sales of such property. (See Lindow v. Cohn, 5 Cal. App. 388 1907).

 

Customary warranties in the sale of real property include the description, size, character of soil, boundary lines, and title. In the sale of a business, warranties concerning income, expenses, assets and liabilities are customary. An agent authorized to purchase property on behalf of the principal is generally deemed to be empowered to make warranties regarding the principal's credit, assets and liabilities in order to qualify the principal as a purchaser.

 

Since the power to warrant may increase the principal's liabilities, courts in general narrowly construe the agent's authority to warrant.

 

Duties of agents

 

The agency relationship is a fiduciary relationship whereby the agent is a fiduciary with respect to the principal. As a fiduciary, the agent must act within the standards of loyalty and good faith because the relationship is based on trust and confidence. The standard owed by a fiduciary requires the agent to serve the principal's best interests.

 

Under California law, the real estate agent also owes a special duty to the buyer in transactions of one to four unit dwellings. The agent has the duty to make a reasonably thorough inspection of the property and to disclose to the buyer all facts that materially affect the property's value and desirability.

 

Following are duties owed by the agent toward the principal in real estate transactions:

 

Duty of Disclosure (Duty to Notify)

 

Of crucial importance is the duty of an agent to make a full disclosure of all "material facts" which might influence the principal. The agent must utilize ordinary care to communicate to the principal knowledge acquired during the agency regarding material facts of the sale.

 

Any fact which would influence the principal's judgment or decision should be revealed. This includes the price that can be obtained; the possibility of a sale at a higher price; dealing with the property in a different fashion; the tax consequences of sale or an exchange if certain improvements would make the property more saleable; and any other matter that a disinterested and skillful agent would think relevant. (See Fisher v. Losey, 7~ CA 2d 121, 1947)

 

One reason for this duty is that the principal is presumed by law to have knowledge of all facts disclosed to the agent, and vice versa. An agent is liable if he breaches this duty by failing to communicate relevant information that can affect the principal's judgment.

 

Duty to Submit All Offers

 

When a real estate agent learns of an offer on a principal's property, his duty is to submit the offer in a timely fashion. An offer should be presented whether it is written or oral. The listing broker should inform the seller of an oral offer and give the cooperating broker a reasonable time period within which the oral offer can be written. When a second offer is presented to the listing broker before the first is presented to the principal, both offers should either be presented at the same time, or else one after the other, the seller being made aware of both.

 

Note that according to the Real Estate Commissioner, an agent has responsibility to disclose to the client any information of which he has knowledge (i.e. a more advantageous offer about to be submitted, etc.) which might be of assistance to the client in determining whether to accept or reject the offer.

 

Duty Not To List Overpriced Properties

 

The seller should be told a the time of the listing of the property's real estate market value. If the seller insists on listing at too high a price, the broker should decline to take the listing.

 

If a broker deliberately evaluates a property far in excess of its reasonable market value in order to get a listing, and the property does not sell or sells for its true market value, the broker has breached his fiduciary duty and, will be disciplined if proven. Duty of Faithful Performance and Obedience

 

This duty means that the agent is to obey all legal instructions given by the principal, and to apply best efforts and diligence to carry out the objectives of the agency. A real estate broker must perform as promised in the listing contract and can be held liable for any loss caused by the failure to obey the principal's instructions. A broker who promises to make a "reasonable effort" or apply "diligence" in finding a buyer and then does not promote the listing gives the owner legal grounds to terminate the listing. Faithful performance also means not departing from the principal's instructions. If the agent does so (except in extreme emergencies not foreseen by the principal), it is at the agent's own risk. If the principal consequently suffers a loss, the agent is responsible for that loss. Faithful performance also means that the agent must personally perform the tasks delegated to him. This protects the principal who has selected an agent on the basis of trust and confidence from finding that the agent has delegated that responsibility to another person. However, listing agreements should usually include a statement that the listing broker is authorized to secure the cooperation of other brokers and pay them part of the commission from the sale to protect himself in case a large part of the success in finding a buyer for a property results from the cooperative efforts of other brokers and their salespeople.

 

Duty of Loyalty (Duty of Fidelity)

 

The agency relationship is based on confidence and loyalty is a must. The agent must place the principal's interests above the interests of a third party by refusing to reveal confidential information, such as the principal's financial condition or the willingness of the principal to accept a lower price, unless the principal has authorized such disclosure. The broker must disclose to the principal any direct or indirect conflicts of interest. The agent is under a duty not to compete himself, or to act for persons who are in competition with his principal, unless he has the consent of the principal.

 

1.   Failure to disclose the agent's role as a purchaser. The agent cannot buy the principals property without the knowledge and consent of the principal. If the broker attempts to buy such property through a nominee, dummy, straw buyer or corporation, the principal may avoid paying a commission or have the agreement of sale set aside because the broker has violated his fiduciary trust. If the property has been resold by the agent, the principal can hold the agent liable for its value and any profits realized by the agent. The exception to the rule against self-purchase is that it does not generally apply in a net listing where the agent is authorized to sell property for a certain net price and to keep any excess as his commission. In this case there is no injury to the principal from a purchase by the agent. (See Allen v.Dailey, 92 Cal. App. 308,1928).

 

      Similarly, an agent authorized to purchase certain property for his principal cannot purchase for himself without his principal's consent. If he does, the principal is entitled to whatever the agent obtained, on whatever terms the agent acquired it and the agent is deemed to hold the property as constructive trustee for his principal.

 

Even where the agent has not been given specific authority to purchase a certain property, he owes the principal the right of first refusal if he knows that the principal would be interested in purchasing this type of property. The agent should inform his principal that such property is available, or offer it to the principal on the same terms on which he acquired it.

 

2.   Secrets profits, advantages, benefits: Anything which an agent obtains by virtue of the agency belongs to his principal. The retention of any benefit, advantage, or profit which he derives through the agency, without the principals consent, is a breach of fiduciary duty. If an agent is offered a secret profit, he has a duty to let the principal know.

 

      Also, the broker may not allow others to make a secret profit with his knowledge.

 

      The broker must also be careful to inform the principal of the true value of his property, if such information is known to the broker. If the broker fails to inform the principal of the property's true value and the broker subsequently purchases it for himself, he has broken his fiduciary duty by failing to reveal all material facts and thus has gained a secret profit.

 

      It is proper for the broker to buy the principal's property for himself and then resell if for a profit, provided the broker informed the principal of the true value of the property before the principal knowingly consented to the sale.

 

3.   Dual Agency: An agent acting for more than one principal in the same transaction is a dual agent and is liable for fraud to either principal unless there is a full disclosure to and consent by all principals according to the provisions of A.B. 1034

 

Duty of Reasonable Care (Duty to Perform Competently)

 

The real estate agent is deemed to have superior knowledge and skills in the real estate field, and is under an obligation to exercise greater care and skill than the ordinary person. He will be held to a higher standard of care and is liable for negligence or incompetence in the performance of his duties. The real estate law is designed "to protect the public not only from the conniving real estate salesperson but also from the uninformed, negligent, or unknowledgeable salesperson." (See, Handeland v. D.R.E., 58 CA 3d 513, 1976, and Richards Realty v. R.E. Commissioner, 144 CA 2d 357, 1956.)

 

The skill required includes an ordinary professional knowledge concerning the title and natural characteristics of the property the broker is selling. Further, an agent has a duty to the principal to act with standard care, with skill that is standard in the locality in the real estate field, and to exercise any special skills that he may possess. Since the broker is charged with superior knowledge, he has a duty either to make an investigation of any matter pertaining to the agency relationship of which he does not have sufficient knowledge to allow him to make reliable recommendations or to disclose to the client the fact that he lacks such knowledge. There is a duty to refer a certain situation to a specialist if the agent does not have adequate experience to handle it.

 

The duty of reasonable care also requires an agent to take proper care of property entrusted to him by his principal. If a broker is entrusted with a key to an owner's house to show it to prospects, it is the broker's responsibility to see that it is used for only that purpose and that the house is locked upon leaving. Also, if a broker receives a check as an earnest money deposit, he must properly deposit it in a bank trust account and not carry it around for several weeks. Such acts can give rise to liability on the agent's part for any loss due to negligence in the exercise of poor judgment.

 

Duty of Accounting

 

The broker must be able to report upon demand the status of all funds entrusted to him by the principal. The law requires brokers to give copies of documents to all parties affected by them and to keep copies of such documents on file for a period of three years. The law also requires brokers to deposit immediately all funds entrusted to them in a special trust account or in a neutral escrow depository and makes it illegal for brokers to commingle such monies with personal funds.

 

If a broker places money belonging to a client or customer in his own personal account (commingling) it is grounds for suspension or revocation of the broker's real estate license. The reason is that it results in conversion, the agent's personal use of money belonging to others. Also, clients' and customers' money placed in a broker's personal bank account can be attached by court's to pay personal claims against the broker.

 

If a broker receives a check as an earnest money deposit with instructions that it remain uncashed, the broker may comply as long as the seller is informed when the offer is presented. The broker can also accept a promissory note if he informs the seller. Disclosure of all material facts to the seller that might influence his decision to accept or reject the offer is crucial. If a deposit accompanying the offer is not cash is a material fact. If the broker withholds this information, there is a violation of the agency relationship.

 

A broker's trust account must be balanced daily, reconciled monthly, and open for inspection. The broker must keep columnar or cash receipt and cash disbursement journals for each beneficiary or transaction which must show dates, check numbers, etc., and include checks which are never deposited or held uncashed. The broker can keep up to $100 of his own funds in the trust account to cover check fees, etc. Earned commissions may remain in the trust account for no longer than 30 days. Trust accounts must the demand deposit non-interest-bearing checking accounts. A broker may not withhold trust funds as an offset against another debt owed him by either the owner or the buyer.

 

Duties owed other parties

 

An agent's obligations are primarily to the principal who has employed him. State law nevertheless makes certain demands on the agent in relation to third parties dealt with on behalf of the principal. Paramount duties owed to third parties are honesty, integrity, fair business dealing, and the absence of negligence. The ancient rule of caveat emptor ("let the buyer beware") has little application in today's real estate market. The buyer cannot be charged with knowledge of what is hidden or latent. The seller's agent is under the same duty as the seller to disclose to the buyer material facts affecting the value and desirability of the property which are known or discoverable. The agent is jointly and severally liable with the seller for the buyer's damages resulting from fraud for nondisclosure of material facts.

 

A 1984 California case, Easton v. Strassburger (152 CA 3rd 90), widened the liability of real estate agents. Agents are now required to be aware of all material facts negatively influencing the value of a property, whether obvious or not, and must disclose these facts to all prospective buyers. In the Easton case, the appellate judge stated that a real estate broker has a "...duty to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal."

 

The Easton decision has broadened the agent's duties in that agents can not only be held liable for defects they know about but for defects about which they should be known. Real estate agents must carefully inspect properties to determine obvious defects or red flags. A "red flag" warns a reasonably observant agent that there may be an underlying problem. The agent is responsible for disclosing this fact to the seller and any prospective buyers. 

 

Furthermore, California case law requires disclosure of:

 

1)   improvements that were added without a building permit (see Barter v. McClung, 93 CA 2d 692,1949),and

 

2) improvements that were added in violation of building codes (see      Curran v. Heslop, 115 CA 2d 476, 1953).

 

Real estate agents, by the nature of their business, are continuously making representations to prospects concerning property offered for sale. A representation may be an expression of opinion or "puffing" on the part of the agent. However, if it is reasonably understood by both agent and prospective purchaser to be a factual representation, it becomes a part of the agreement. An agent may be held liable for representations purporting to be fact, which are false or misleading.

 

The California Civil Code sets out the following duties of agents to third persons.

 

2343. One who assumes to act as an agent is responsible to third persons as a principal for his acts in the course of his agency, in any of the following cases, and in no others:

 

1. When, with his consent, credit is given to him personally in a

 

      transaction.

 

2.   When he enters into a written contract in the name of his principal, without believing, in good faith, that he has authority to do so; or

 

3. When his acts are wrongful in their nature.

 

2344. If an agent receives anything for the benefit of his principal, to the possession of which another person is entitled, he must, on demand, surrender it to such person, or so much of it as he has under his control at the time of demand, on being indemnified for any advance which he has made to his principal, in good faith, on account of the same; and is responsible therefore, if, after notice from the owner, he delivers it to his principal.

 

Agency liabilities

 

The unjustified failure to perform the material part of a contract is a breach. Any measurable injury resulting from a breach damages. A total breach excuses performance by the innocent party while a partial breach only excuses performance for a material breach. A partial breach is more likely to be considered material at the beginning, rather than after substantial performance. Breaches occur either after nonperformance without good faith or repudiation of a contract covenant.

 

Liability on an agent's contracts depends on whether the agent acted with or without the principal's authority. Where an agent purportedly acted on behalf of a principal but in fact acted without authority or in excess of authority, without a subsequent ratification of acts. Otherwise, the agent would be solely liable to the third party. The rationale is that the agent's liability is not under the contract but is based on a breach of warranty.

 

A breach occurs when the agent impliedly warrants that he has authority to bind a principal, but actually was not authorized or exceeded his authority. Although an agent might in good faith believe that he is authorized, he is liable if the third person relies on the warranty. However if the third person knows that the agent was mistaken as to his authority, the agent is not liable. An agent is free from liability on the contract, if he clearly indicates to a third person that he is uncertain of his authority.

 

Although an agent's implied warranty of authority does not include a warrant of a principal's performance of a contract, it does warrant the principal's competence. A third party's performance of a contract is enforceable by the agent, if he acted without authority, unless 1) the principal ratifies the contract or 2) if the third party executed the contract on the knowledge he was dealing with the principal and would have refused to deal directly with the agent. If an agent exceeds his authority and the third party under the contract, the third party may be entitled to sue the principal in quasi-contract for any benefits conferred. The principal cannot repudiate the agent's representations and still retain the third party's benefits.

 

If the agents acts were authorized, the principal alone is bound t the contract with the third party. However, rights and liabilities of the parties vary whether the principal's identity was disclosed or undisclosed. If the agent negotiates a contract in the name of the principal, the agent is not a party, is not liable, and is not entitled to enforce the contract. The third party is directly liable to the principal. The agent need not specifically state he is acting for the principal, it is sufficient if the third party knows or should know that he is dealing with an agent for another person.

 

If no agency relationship is between the parties, the contract is usually held binding on both the agent and the principal. However, if the signature or description of the agent establishes that he signed in a representative capacity only, the principal alone is liable. (See Carlesimo v. Schwebel, 87 Cal. App.2d 482, 1948).

 

An undisclosed principal and agency exist when the agent's name alone appears on the contract with no statement regarding the fact of agency or the principals. The agent is personally obligated on the contract since the third party relied on his credit and reputation. The agent has rights against the undisclosed principals if the agent is held by a third party. If the principal's identity is made known, he also may be held liable under a contract where the agent's acts were authorized.

 

In some situations, the third party may know an agent's identity but not that of the principal. The courts generally apply the same rules of "undisclosed principals" to such cases of "partially disclosed principals". The agent discloses the agency and agent, but since the principal's name is not in the contract, the agent is still personally liable (unless otherwise agreed by the parties).

 

Finally, if the third person knows the principal's identity, the principal is "disclosed" although his name is not in the contract. The agent is therefore not a contract party. Although the principal's identity is not known at the time of contract, if the third party subsequently acquires such knowledge, then any further dealing with the agent are subject to the principal's rights.

 

In order to avoid the possibility of an agent's personal liability the principal's name must appear on the contract. The manner in which an agent signs a contract on behalf of the principal may determine whether the agent has any personal liability to the third party. Ordinarily an agent should enter the name of the principal as the contracting party and should then sign the contract "by" himself as agent for the principal. The agent is practically assured that he will not be held liable on the contract if the fact of agency and the name of the principal are both disclosed.

 

Breach of fiduciary duties

 

The agent's fiduciary duties may be properly fulfilled by 1) performing his duties personally, 2) following the principal's instructions, and 3) making a full disclosure of all material facts. Otherwise, a breach of the agent's fiduciary duties may occur.

 

1)   Discretionary acts of the agent should be performed personally by the agent while ministerial or mechanical functions may be assigned. Discretionary acts may be delegated with only the principal's approval. It is common in real estate for a broker to delegate discretionary acts to a salesperson, however, without the principal's consent, the broker will be liable for the salesperson's actions.

 

2)   Since the agent must follow the principal's instructions in good faith, an agent's deviation is a misuse of authority and will result in damages.

 

3). The agent's duty to disclose material facts can be breached by the agent's failure to provide a full and immediate disclosure of all such facts.

 

An agent's failure to meet his fiduciary duties can lead to the revocation of his license. The most common areas of agency violations in California are misrepresentation, false promise, commingling and/or conversion, secret profit, and dual agency. The agent's violation of his fiduciary duty is both a breach of contract (agency) and a tort (fraud). The principal has the following choice of remedies:

 

1)   The agent may be held accountable for any damages proximately caused to his principal by being required to disgorge any secret profits or advantages obtained.

 

2)   Any agent transaction with the principal which violates fiduciary duty is voidable by the principal, regardless whether the agent received any personal gain. The principal may rescind a sale upon discovering the agent was buying or selling the principal's property for himself.

 

3)   Equity may impose a constructive trust on the property or where an agent has obtained property for himself from a third party in violation of his fiduciary duty to obtain it for the principal.

 

Misrepresentation

 

A misrepresentation may be material or immaterial whether or not it has a measurable affect on the people relying on it. An agent who misrepresents his authority to act as an agent for someone else may be liable to the person who relies on it. Statements such as "this is the best house" are opinions and are usually considered "puffing" or exaggerations rather than misrepresentation. The three types of misrepresentation are innocent misrepresentation, negligent misrepresentation, and fraudulent misrepresentation.

 

1)   Innocent misrepresentations are false statements that are not known to be false at the time made. These statements can cause a rescission of a contract whereby all parties involved would be reinstated to their original positions. An agent is generally not held legally liable for such statements.

 

2)   Negligent misrepresentations are statements believed to be true but are false since made without reasonable grounds. An agent is legally liable for negligent statements made to buyers or sellers. Such statements are in effect deceit.

 

3)   Fraudulent misrepresentations are statements made when an agent knows the statements are false. A contract made while influenced by fraudulent information may become void. An agent making such fraudulent statements may be liable for civil or criminal fraud.

 

      The failure to disclose a material fact about a property is known as misrepresentation by silence. Civil liability and disciplinary action against a licensee may result from a failure to disclose. The duty to disclose is discussed in detail above.

 

The tort of misrepresentation requires a false statement of material fact; knowledge; intent to deceive; justifiable reliance; and damages. Crucial to liability for representation, is whether the agent making the statements was actually or apparently authorized by the principal.

 

An agent may be expressly directed by the principal to give certain information to third parties. Any misrepresentations made by the agent while giving such information are deemed to have been "expressly authorized" by the principal.

 

A principal who authorizes an agent to deal on his behalf in transactions where representations are customarily made, such as in real estate, the principal is deemed to have impliedly authorized the representations unless authority was specifically withheld. The principal will be held liable unless the third party knows, or should know, that the representations are unauthorized. The broker is deemed to have implied authority to make representations concerning the property involved and the seller is liable for any misrepresentation made by the broker whether or not express authority was given. This implied authority is "incidental" or a natural part of the broker's authority to sell real estate. (See Speck v. Wylie, CA 2d 625, 1934) Any misstatement by a broker is imputed to the principal, so that any person relying on the broker's misrepresentation may rescind the transaction or sue the principal for fraud.

 

Principals, in an attempt to avoid liability for misstatements mad by brokers, insist on "exculpatory" provisions in their contracts such as, "Representations not contained herein are not part of our agreement, and shall be given no effect". Such provisions will normally relieve the principal from liability for damages for fraudulent statements made by his agent. However, if the principal knew of the agent's misstatements when the contract was executed, he may also be liable for damages.

 

When an agent makes an innocent misrepresentation believing it to be true, and without the intent to deceive, the principal is generally not liable for any tort damage, since tort liability requires knowledge of falsity and intent to deceive. Neither the agent nor the principal can be held liable without both conditions present. However, if the principal knows that the agent is not unaware of the true facts, and permits the agent to innocently misrepresent him, the principal is directly responsible for damages to an innocent third person resulting from reliance on the misrepresentations.

 

Negligence

 

An agent is liable to his principal if he is negligent m the performance of his duties to the principal. Moreover, if the principal is liable to a third party by reason of the agent's negligence, the agent will be liable to the principal for any loss suffered by the principal. In the case of Walters v. Marler 83 CA 3d 1, 1978, for example, real estate agents representing a purchaser failed to disclose all of the material facts regarding a transaction to the purchaser. The court found that the agents were guilty of negligent misrepresentation to their principal and were thereafter liable for compensatory damages to the principal.

 

Another case of negligence, Banville v. Schmidt, 37 CA 3rd 92, 1974, involved a cabin listed by principal (plaintiff) with broker (defendant). The purchaser (also defendant) made an offer to principal to take two notes back on two pieces of property. The broker informed principal that the maker of the note was a "financially substantial individual". Principal accepted a $12,000 note. The property was to be held as security, however, the purchaser recorded the deed conveying the property, and defaulted on the note, in effect, plaintiff had no security, which is what he had bargained for, and therefore he was out his $12,000. Principal won the case against purchaser for fraud and misrepresentation and against broker for negligent misrepresentation.

 

A broker is liable not only for his own negligence, but also for the negligence of his salespeople under the doctrine of respondeat superior. The case of Merrill v. Buck, 58 CA 2d 552, 1964, is for personal injuries sustained by a lessee as the result of a fall. A judgment for $65,700 was awarded against: (1) the owner of the property (lessor); (2) the real estate salesperson who showed the house to the plaintiff and, negotiated the lease; and (3) the real estate broker. Plaintiff had not been cautioned that closet door actually led directly to the basement. Plaintiff's claim against the broker and salesperson rested on their voluntarily undertaking to show her the house and on their negligence in failing to warn her of the existence of the doorway, the stairs, and the basement. The court was satisfied that, having affirmatively undertaken to show the house to the plaintiff in the regular course of their business, with the purpose of earning a commission, the defendants were under a duty of care to warn her of concealed dangers of which they were reasonably aware and from which her injury might be reasonably foreseen.

 

Consequences of liability

 

The first area of agent's liability is that of torts. A tort is a civil wrong that is not a breach of contract. It is a negligent or intentionally wrongful act caused by a breach of duty, imposed by law. Real estate torts include such wrongs as fraud and misrepresentation.

 

In real estate practice, the most common tort liability results in the area of misrepresentation. The broker and principal will be held liable for any willful or negligent misrepresentations made to a potential purchaser.

 

In agency, the agent is not relieved of liability for the torts he commits, however, the principal will also be liable for the agent's torts if committed within the scope of his employment. If outside the scope of the agent's employment, consider whether the principal may be liable for breach of his independent duty of due care in hiring the agent whose act caused the injury. If the employer should have known that the person in his employ (servant, agent or independent contractor) was not qualified to perform the duties assigned, or was likely to perform in a negligent or dangerous manner, the employer (principal or broker) is probably liable for the acts of his agent or subagent.

 

Although the principal is liable for the acts of the agent within the scope of his employment, the agent is not liable for statements made by the seller which the agent believes to be true and passes on to the buyer. The agent should protect himself by incorporating the seller's assertions into the listing agreement. This establishes the seller as the source and authority to relate the information to prospective customers.

 

The agent warrants that he has the authority to represent another person. A written listing gives an expressed warranty of authority to offer the property for sale. A problem arises when an agent offers to sell a property without a listing. An agent can be liable if a buyer relies on the agent's represented authority. An agent gives an implied warranty of authority to act for a seller by merely showing the property. When dealing with third parties, the agent attests only to his right to represent the principal and does not warrant the capacity of the principal to perform. If the principal lacks the capacity to perform, then the third party can sue the principal and not the agent. If an agent represents a seller who does not want his identity known, it is best to identify the seller to the buyer upon the acceptance of his offer. This relieves the agent of any liability and establishes that he is not selling his own property.

 

An agent must look out for principals who wish to act illegally or unethically in making a sale. The agent should advise against and have no part of such actions. Otherwise, the seller and broker may be sued by an innocent buyer. Also, the broker may be sued by the seller if the broker did not discourage the seller's actions.

 

Errors and omissions insurance has recently become popular due to the high number of suits against brokers. An annual fee to an insurance company will defend the broker and pay legal costs and judgments. Such insurance does not cover punitive damages, intentional acts to deceive, and negligence or misrepresentation for one's own dealings.

 

In-house sales

 

In-house sales are where the entire sales transaction is handled by one office. Usually one agent represents the seller and another the buyer. However, the primary loyalty of both agents is to the seller. The fiduciary duty to the seller must be disclosed to the buyer by the agent to avoid the buyer being mislead.

 

A broker's sales associates are general agents of the broker. A sales associate owes the broker the duties of competence, obedience, accounting, loyalty and disclosure. The broker's obligations to the sales associate are compensation, reimbursement, indemnification and performance. In addition, the broker will authorize the extent to which the sales associate can bind the broker. Since a sales associate is an agent of the broker and the broker is an agent of the principal, the sales associate is sometimes called a subagent of the broker.

 

The Commissioner's Regulations provide that every real estate broker must have a written agreement with each of his salespersons, whether licensed as a salesperson or a broker under a broker- salesperson arrangement. An employment contract between broker and salesperson may establish the relationship between them only to the extent that the provisions do not conflict with the law.

 

Cooperative sales

 

Agreements between brokers cooperating in the sale of real property for a division of commission or fees are not illegal nor against public policy and will be construed and enforced the same as other contracts not required to be in writing. No partnership or joint venture is created by such an agreement between cooperating brokers in their efforts to sell property listed with one of them. Where a cooperating broker has been the procuring cause of the sale and this broker's services are completed, this broker is entitled to recover the selling broker's share of the commission from the listing broker. Where the original broker fixed the compensation at a certain sum, the original broker cannot deprive the assisting broker of a portion of the commission by settling with the principal for a lesser sum. An implied warranty exists that the owner will pay the amount of the commission as specified, and the original broker is liable to the other broker for the other broker's portion regardless of what the original broker settles for, unless the consent of the assisting broker is obtained. The listing broker is liable to the cooperating broker for the payment of the commission only if the listing broker has received a commission from the seller. If the cooperating broker abandons an agreement for the division of a commission, the listing broker may then sell the property without being liable to the other broker for a share of the commission earned.

 

The general rule is that the listing broker can delegate duties to a cooperating broker unless the principal forbids him from doing so. Custom dictates that a listing broker cooperate with other brokers rather than monopolize the listing. This is to the principal's advantage as the principal obtains the most exposure and thus can more readily market his property, which is just what the listing broker is hired to do. A property listed with a broker who is a member of a Multiple Listing Service (MLS) receives the advantage of greater sales exposure which can mean a better price and quicker sale. It is highly improbable that a broker can perform his duty to use his "best efforts" and not cooperate with other brokers.

 

The use of a cooperating broker (through a Multiple Listing Service or otherwise), lets the cooperating broker represent the principal in the same manner as does the listing broker, when approved by the principal. Although the law is somewhat unclear, the listing broker is not responsible to third parties for the acts of the cooperating broker, rather the principal is liable. Should an agent utilize a cooperating broker without the authority from the principal, the cooperating broker is his agent and the principal has no connection with the cooperating broker.

 

It should be borne in mind, however, that if a cooperating broker is authorized by the seller, the broker will be liable to the seller for any misrepresentations by him to a buyer even though the cooperating broker has never met the seller. The seller may incur liability to third persons for the acts of the subagent. Granberg v Turnham 166 CA 2d (1958) and Johnston v.Seargeants 152 CA 2d 1957 determined that a subagents knowledge will be imputed to the seller who is responsible for the acts of the subagent towards a prospective purchaser.

 

Statute indicates that the cooperating broker owes fiduciary duty to the seller and there are a number of cases concerning cooperating brokers duties. In one case the court mentioned that under the form of MLS agreements used in many areas, a broker on the multiple listing is by virtue of the agreement an agent of the seller.

 

This conflicts with the assumption of many buyers, that since the cooperating broker has contact with them, by virtue of the fact that he is trying to locate a suitable property for the buyer, rather than the seller, he is representing them. This situation can raise serious problems if the subagent identifies more closely with the buyer, but stands in a fiduciary relationship to the seller; the seller may be liable for the acts of a subagent he has never met. A subagent may be an agent of the buyer at the same time that an agency relationship exists with the seller. (Walters v. Marler 83 CA 3d 1, 147, 1978).This dual relationship, frequently unperceived, can easily lead to violations of the fiduciary duty owed by the broker to one or the other of the principals in the transaction. As stated, agreements between brokers need not be in writing, although it is obviously preferred. The ratio for dividing the commission may vary, but typically it is 50% to the listing broker and 50% to the broker who sells the property. Agreements between brokers and salesmen must be in writing.

 

Single Agency

 

A general principle of agency law is that an agent may not represent more than one principal with respect to a transaction unless the agent makes full disclosure, including potential conflicts and the interest of the agent, to both principals. The rational to this principle is that the interests are obviously adverse. If a broker represents a seller, it is the broker's duty to obtain the highest price and the best terms possible for the seller, while if the broker represents a buyer, the broker's duty is to obtain the lowest price and terms for the buyer.

 

The general principle has been strictly construed with respect to transactions involving real estate licensees to the point where "dual agency" (i.e. anything other than "single agency") is severely restricted. In Smith v.Zak, 98 Cal. Rptr. 242, CA 3d 785, the court, in applying Civil Code Sections 2228, 2235, and 2322, and Business and Professions Code Section 10176, held that a real estate licensee should refrain from dual representation in a real estate transaction unless full disclosure is made to both principals and both principals consent to the dual representation.

 

In a dual agency, the agent is under no duty to disclose, and has a duty not to disclose, to one principal confidential information given to him by the other. To eliminate any claim of an unknown dual agency, it should be specifically set forth in writing in the listing agreement and in the purchase contract and separately initialed by the respective parties so they are aware that it exists. If a cooperating broker wants to solely represent the buyer, and not the seller (but still receive a portion of the commission), this too should be disclosed in writing, severing any agency relationship the broker may have with the seller and indicating that all fiduciary duty is owed to the buyer. A potential conflict of interest thereby should be avoided.

 

There is no uniformity regarding what constitutes a dual agency and as recently as 1985 there remained sharp differences within the real estate community as to whether dual agency is a problem and, if so, what should be done about it. The California Association of Realtors proposed legislation designed to educated buyers and sellers about the agency relationship and the California Bureau of Real Estate recognized that there existed a need for clarification of the law. An Assembly Bill (Connelly-Grisham No.1034) was passed and becomes operative January 1, 1988 that requires all brokers to disclose who they are representing and to confirm that in writing on the offer and acceptance.

 

Buyer brokerage

 

Representation can be resolved if the buyer hires a broker whose task is to find properties for sale and present them to the buyer for consideration. Under these circumstances it is clear that the buyer's broker is loyal to the buyer and working to get the best deal possible for the buyer. An advantage of buyer representation is that with the present system buyers are shown only "listed properties". A buyer's broker can investigate properties offered for sale by owners and can approach owners who have not put their properties on the market.

 

A drawback to buyer's brokerage is that most people are accustomed to a system wherein the seller pays the full cost of marketing a property. A solution is for the buyer's broker to present an offer based on the net amount the seller will receive. As an example, a $100,000 property listed at 6% commission and sold the traditional way using a cooperating broker and a 50/50 split: The buyer pays the seller $100,000 and the seller pays the listing broker $6,000, who pays $3,000 of that to the cooperating broker. Using a buyer's broker, the buyer pays his broker $3,000 and the seller $97,000. The seller's broker is paid $3,000 and splits with no one. The net result is that either way, the seller receives $94,000 and the brokers each receive $3,000.The difference is that in the second case, the buyer has a broker whose loyalty and efforts are clearly for the buyer. When acting as the buyer's broker the broker must notify the seller that they are the buyer's broker, and should obtain an acknowledgment for protection against possible disciplinary action or civil liability.

 

Full Disclosure

 

(The following is quoted by permission from the CalBRE Reference Book, p.210)

 

A California Statute, Civil Code Section 2079 et seq., was enacted and provides:

 

1. A real estate broker has a duty to the buyer of residential real property of one to four units (including manufactured homes) to conduct a reasonably competent and diligent visual inspection of property offered for sale, and to disclose to said purchaser all facts materially affecting the value or desirability of the property that such an investigation would reveal if the broker has a written listing contract with the seller to find/obtain a buyer or is a broker who acts in cooperation with such a broker to find/obtain a buyer.

 

2.   The above provision in (1) also applies to leases of such residential property with an option to buy and to real sale property contracts as defined in Civil Code Section 2985.

 

3.   The standard of care owed by a broker under this statute is the degree of care that a reasonably prudent real estate licensee would exercise and is measured by the degree of knowledge through education, experience, and examination, required to obtain a license under Part 1 (commencing at Section 10000) of Division 4 of the Business and Professions Code.

 

4.   The inspection to be performed does not include or involve an inspection of areas that are reasonably and normally inaccessible to such an inspection, and if the property comprises: a unit in a planned development as defined in Section 11003.1 of the Business and Professions Code, a condominium as defined in Civil Code Section 783, or a stock cooperative as defined in Section 11003.2 of Business and Professions Code. It does not include an inspection of more than the unit offered for sale, if the seller complies with Section 1360 of the Civil Code (seller of such property shall furnish buyer copies of covenants, conditions, and restrictions, by-laws, delinquent assessments and penalties, etc.).5.Nothing in this article relieves a buyer or prospective buyer of the duty to exercise reasonable care to protect themselves including those facts which are known to or within the diligent attention and observation of the buyer or prospective buyer.

 

(End of CalBRE Reference Book excerpt)

 

ETHICS, PROFESSIONAL CONDUCT AND LEGAL ASPECTS OF REAL ESTATE.

INTRODUCTION, ETHICS IN GENERAL

 

In common parlance the word "ethics" has different meanings to different people, but most commonly it is considered synonymous to morality. The origin of the word is from Greek indicating though, custom, use and character, only, with no moral or religious connotation. One legal definition of ethics is: the principles of conduct governing an individual or a profession. Ethical rules are rules that proscribe certain conduct and when not observed or followed, lead to disciplinary action on the part of the governmental authority overseeing that particular public activity. To be effective, ethics must be expressed as a set of principles or values, a standard of conduct by which the individual guides his or her own behavior and judges that of others. It refers then to our conduct socially and in business, and in attitudes toward others. Whenever one person who has the status of being an expert or knowing a great deal more about a particular field than others, assumes the duty of directing the business, health, investment, or general well-being of another upon a fee basis, there is vested in such person a high degree of confidence and trust. Such trust expects ethical behavior.

 

When one takes advantage of this position of trust to the detriment of another party solely for the purpose of one's own gain, we say that this person is unethical. Professional courtesy and ethics should not stop at those things which have been sanctioned by law. The individual who tries only to stay on the border of the law inevitably at some time steps across.

 

As much as the terms ethics and morality might be confused, the law is quite specific that a professional license may not be granted or taken away on just general notions of moral character. This is made clear by the Business & Professions Code Section 475 c) as follows (emphasis added):

 

475. (a) Notwithstanding any other provisions of this code, the provisions of this division shall govern the denial of licenses on the grounds of:

(1) Knowingly making a false statement of material fact, or knowingly omitting to state a material fact, in an application for a license.

(2) Conviction of a crime.

(3) Commission of any act involving dishonesty, fraud or deceit with the intent to substantially benefit himself or another, or substantially injure another.

(4) Commission of any act which, if done by a licentiate of the business or profession in question, would be grounds for suspension or revocation of license.

(b) Notwithstanding any other provisions of this code, the provisions of this division shall govern the suspension and revocation of licenses on grounds specified in paragraphs (1) and (2) of subdivision (a).

(c) A license shall not be denied, suspended, or revoked on the grounds of a lack of good moral character or any similar ground relating to an applicant's character, reputation, personality, or habits.

 

The act justifying the denial of the license cannot be just wrong but it has to have a certain close relation to the profession for which a license is applied for. Thus the B&PC 480 (3) reads in part (emphasis added):

The board may deny a license pursuant to this subdivision only if the crime or act is substantially related to the qualifications, functions or duties of the business or profession for which application is made.

 

Department of Real Estate Commissioner's Regulation 2910 Criteria of Substantial Relationship states (emphasis added):

 

(a) When considering whether a license should be denied, suspended or revoked on the basis of the conviction of a crime, or on the basis of an act described in Section 480(a)(2) or 480(a)(3) of the Code, the crime or act shall be deemed to be substantially related to the qualifications, functions or duties of a licensee of the Department within the meaning of Sections 480 and 490 of the Code if it involves:

 

(1) The fraudulent taking, obtaining, appropriating or retaining of funds or property belonging to another person.

 

(2) Counterfeiting, forging or altering of an instrument or the uttering of a false statement.

 

(3) Willfully attempting to derive a personal financial benefit through the nonpayment or underpayment of taxes, assessments or levies duly imposed upon the licensee or applicant by federal, state or local government.

 

(4) The employment of bribery, fraud, deceit, falsehood or misrepresentation to achieve an end.

 

(5) Sexually related conduct causing physical harm or emotional distress to a person who is an observer or non‑consenting participant in the conduct.

 

(6) Willfully violating or failing to comply with a provision of Division 4 of the Business and Professions Code of the State of California.

 

(7) Willfully violating or failing to comply with a Statutory requirement that a license, permit or other entitlement be obtained from a duly constituted public authority before engaging in a business or course of conduct.

 

(8) Doing of any unlawful act with the intent of conferring a financial or economic benefit upon the perpetrator or with the intent or threat of doing substantial injury to the person or property of another.

 

(b) The conviction of a crime constituting an attempt, solicitation or conspiracy to commit any of the above enumerated acts or omissions is also deemed to be substantially related to the qualifications, functions or duties of a licensee of the department.

 

(c) If the crime or act is substantially related to the qualifications, functions or duties of a licensee of the department, the context in which the crime or act were committed shall go only to the question of the weight to be accorded to the crime or acts in considering the action to be taken with respect to the applicant or licensee.

 

The course of conduct set forth in the Federal or State Codes and specifically the Real Estate Regulations, is that which a licensee must observe.

Once a license was obtained, the main body of ethical rules to be found in State Law is expounded in the BUSINESS AND PROFESSIONS CODE in SECTION 10175-10185 as follows (titles are added):

 

10175.

Upon grounds provided in this article and the other articles of this chapter, the license of any real estate licensee may be revoked or suspended in accordance with the provisions of this part relating to hearings.

10175.2.

(a) If the Real Estate Commissioner determines that the public interest and public welfare will be adequately served by permitting a real estate licensee to pay a monetary penalty to the department in lieu of an actual license suspension, the commissioner may, on the petition of the licensee, stay the execution of all or some part of the suspension on the condition that the licensee pay a monetary penalty and the further condition that the licensee incur no other cause for disciplinary action within a period of time specified by the commissioner.

(b) The commissioner may exercise the discretion granted under subdivision

(a) either with respect to a suspension ordered by a decision after a contested hearing on an accusation against the licensee or by stipulation with the licensee after the filing of an accusation, but prior to the rendering of a decision based upon the accusation. In either case, the terms and conditions of the disciplinary action against the licensee shall be made part of a formal decision of the commissioner.

(c) If a licensee fails to pay the monetary penalty in accordance with the terms and conditions of the decision of the commissioner, the commissioner may, without a hearing, order the immediate execution of all or any part of the stayed suspension in which event the licensee shall not be entitled to any repayment nor credit, prorated or otherwise, for money paid to the department under the terms of the decision.

(d) The amount of the monetary penalty payable under this section shall not exceed two hundred fifty dollars ($250) for each day of suspension stayed nor a total of ten thousand dollars ($10,000) per decision regardless of the number of days of suspension stayed under the decision.

(e) Any monetary penalty received by the department pursuant to this section shall be credited to the Recovery Account of the Real Estate Fund.

10176.

The commissioner may, upon his own motion, and shall, upon the verified complaint in writing of any person, investigate the actions of any person engaged in the business or acting in the capacity of a real estate licensee within this state, and he may temporarily suspend or permanently revoke a real estate license at any time where the licensee, while a real estate licensee, in performing or attempting to perform any of the acts within the scope of this chapter has been guilty of any of the following:

MISREPRESENTATION

(a) Making any substantial misrepresentation.

FALSE PROMISE

(b) Making any false promises of a character likely to influence, persuade or induce.

CONTINUED MISREPRESENTATION

(c) A continued and flagrant course of misrepresentation or making of false promises through real estate agents or salesmen.

UNDISCLOSED DUAL AGENCY

(d) Acting for more than one party in a transaction without the knowledge or consent of all parties thereto.

COMMINGLING

(e) Commingling with his own money or property the money or other property of others which is received and held by him.

LACK OF DEFINITE DATE

(f) Claiming, demanding, or receiving a fee, compensation or commission under any exclusive agreement authorizing or employing a licensee to perform any acts set forth in Section 10131 for compensation or commission where such agreement does not contain a definite, specified date of final and complete termination.

SECRET PROFIT

(g) The claiming or taking by a licensee of any secret or undisclosed amount of compensation, commission or profit or the failure of a licensee to reveal to the employer of such licensee the full amount of such licensee's compensation, commission or profit under any agreement authorizing or employing such licensee to do any acts for which a license is required under this chapter for compensation or commission prior to or coincident with the signing of an agreement evidencing the meeting of the minds of the contracting parties, regardless of the form of such agreement, whether evidenced by documents in an escrow or by any other or different procedure.

UNDISCLOSED PROFIT FROM OPTION

(h) The use by a licensee of any provision allowing the licensee an option to purchase in an agreement authorizing or employing such licensee to sell, buy, or exchange real estate or a business opportunity for compensation or commission, except when such licensee prior to or coincident with election to exercise such option to purchase reveals in writing to the employer the full amount of licensee's profit and obtains the written consent of the employer approving the amount of such profit.

DISHONEST DEALING

(i) Any other conduct, whether of the same or a different character than specified in this section, which constitutes fraud or dishonest dealing.

UNAUTHORIZED OBTENTION OF SIGNATURES

(j) Obtaining the signature of a prospective purchaser to an agreement which provides that such prospective purchaser shall either transact the purchasing, leasing, renting or exchanging of a business opportunity property through the broker obtaining such signature, or pay a compensation to such broker if such property is purchased, leased, rented or exchanged without the broker first having obtained the written authorization of the owner of the property concerned to offer such property for sale, lease, exchange or rent.

10176.5.

(a) The commissioner may, upon his or her own motion, and shall upon receiving a verified complaint in writing from any person, investigate an alleged violation of Article 1.5 (commencing with Section 1102) of Chapter 2 of Title 4 of Part 4 of Division 2 of the Civil Code by any real estate licensee within this state. The commissioner may suspend or revoke a licensee's license if the licensee acting under the license has willfully or repeatedly violated any of the provisions of Article 1.5 (commencing with Section 1102) of Chapter 2 of Title 4 of Part 4 of Division 2 of the Civil Code.

(b) Notwithstanding any other provision of Article 1.5 (commencing with Section 1102) of Chapter 2 of Title 4 of Part 4 of Division 2 of the Civil Code, and in lieu of any other civil remedy, subdivision (a) of this section is the only remedy available for violations of Section 1102.6b of the Civil Code by any real estate licensee within this state.

10177.

The commissioner may suspend or revoke the license of a real estate licensee, or may deny the issuance of a license to an applicant, who has done any of the following, or may suspend or revoke the license of a corporation, or deny the issuance of a license to a corporation, if an officer, director, or person owning or controlling 10 percent or more of the corporation's stock has done any of the following:

FRAUDULENT PROCURING OF A LICENSE

(a) Procured, or attempted to procure, a real estate license or license renewal, for himself or herself or any salesperson, by fraud, misrepresentation, or deceit, or by making any material misstatement of fact in an application for a real estate license, license renewal, or reinstatement.

CRIMINAL CONVICTION

(b) Entered a plea of guilty or nolo contendere to, or been found guilty of, or been convicted of, a felony or a crime involving moral turpitude, and the time for appeal has elapsed or the judgment of conviction has been affirmed on appeal, irrespective of an order granting probation following that conviction, suspending the imposition of sentence, or of a subsequent order under Section 1203.4 of the Penal Code allowing that licensee to withdraw his or her plea of guilty and to enter a plea of not guilty, or dismissing the accusation or information.

FALSE ADVERTISING

(c) Knowingly authorized, directed, connived at, or aided in the publication, advertisement, distribution, or circulation of any material false statement or representation concerning his or her business, or any business opportunity or any land or subdivision (as defined in Chapter 1 (commencing with Section 11000) of Part 2) offered for sale.

VIOLATIONS OF LAWS AND REGULATIONS

(d) Willfully disregarded or violated the Real Estate Law (Part 1 (commencing with Section 10000)) or Chapter 1 (commencing with Section 11000) of Part 2 or the rules and regulations of the commissioner for the administration and enforcement of the Real Estate Law and Chapter 1 (commencing with Section 11000) of Part 2.

MISUSE OF TRADE NAME

(e) Willfully used the term "realtor" or any trade name or insignia of membership in any real estate organization of which the licensee is not a member.

CONDUCT WARRANTING DENIAL

(f) Acted or conducted himself or herself in a manner that would have warranted the denial of his or her application for a real estate license, or has either had a license denied or had a license issued by another agency of this state, another state, or the federal government revoked or suspended for acts that, if done by a real estate licensee, would be grounds for the suspension or revocation of a California real estate license, if the action of denial, revocation, or suspension by the other agency or entity was taken only after giving the licensee or applicant fair notice of the charges, an opportunity for a hearing, and other due process protections comparable to the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340), Chapter 4 (commencing with Section 11370), and Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code), and only upon an express finding of a violation of law by the agency or entity.

GROSS NEGLIGENCE OR INCOMPETENCE

(g) Demonstrated negligence or incompetence in performing any act for which he or she is required to hold a license.

FAILURE TO SUPERVISE

(h) As a broker licensee, failed to exercise reasonable supervision over the activities of his or her salespersons, or, as the officer designated by a corporate broker licensee, failed to exercise reasonable supervision and control of the activities of the corporation for which a real estate license is required.

VIOLATON OF GOVERNMENT TRUST

(i) Has used his or her employment by a governmental agency in a capacity giving access to records, other than public records, in a manner that violates the confidential nature of the records.

OTHER DISHONEST CONDUCT

(j) Engaged in any other conduct, whether of the same or a different character than specified in this section, which constitutes fraud or dishonest dealing.

VIOLATION OF RESTRICTED LICENSE

(k) Violated any of the terms, conditions, restrictions, and limitations contained in any order granting a restricted license.

PANIC SELLING INDUCEMENT

(l) Solicited or induced the sale, lease, or listing for sale or lease of residential property on the ground, wholly or in part, of loss of value, increase in crime, or decline of the quality of the schools due to the present or prospective entry into the neighborhood of a person or persons of another race, color, religion, ancestry, or national origin.

FRANCHISE INVESTMENT TAX VIOLATION

(m) Violated the Franchise Investment Law (Division 5 (commencing with Section 31000) of Title 4 of the Corporations Code) or regulations of the Commissioner of Corporations pertaining thereto.

SECURITIES OR CORPORATE CODE VIOLATIONS

(n) Violated the Corporate Securities Law of 1968 (Division 1 (commencing with Section 25000) of Title 4 of the Corporations Code) or the regulations of the Commissioner of Corporations pertaining thereto.

UNDISCLOSED OWNERSHIP INTEREST

(o) Failed to disclose to the buyer of real property, in a transaction in which the licensee is an agent for the buyer, the nature and extent of a licensee's direct or indirect ownership interest in that real property. The direct or indirect ownership interest in the property by a person related to the licensee by blood or marriage, by an entity in which the licensee has an ownership interest, or by any other person with whom the licensee has a special relationship shall be disclosed to the buyer. If a real estate broker that is a corporation has not done any of the foregoing acts, either directly or through its employees, agents, officers, directors, or persons owning or controlling 10 percent or more of the corporation's stock, the commissioner may not deny the issuance of a real estate license to, or suspend or revoke the real estate license of, the corporation, provided that any offending officer, director, or stockholder, who has done any of the foregoing acts individually and not on behalf of the corporation, has been completely disassociated from any affiliation or ownership in the corporation.

10177.1.

The commissioner may, without a hearing, suspend the license of any person who procured the issuance of the license to himself by fraud, misrepresentation, deceit, or by the making of any material misstatement of fact in his application for such license.

The power of the commissioner under this section to order a suspension of a license shall expire 90 days after the date of issuance of said license and the suspension itself shall remain in effect only until the effective date of a decision of the commissioner after a hearing conducted pursuant to Section 10100 and the provisions of this section.

A statement of issues as defined in Section 11504 of the Government Code shall be filed and served upon the respondent with the order of suspension. Service by certified or registered mail directed to the respondent's current address of record on file with the commissioner shall be effective service.

The respondent shall have 30 days after service of the order of suspension and statement of issues in which to file with the commissioner a written request for hearing on the statement of issues filed against him. The commissioner shall hold a hearing within 30 days after receipt of the request therefore unless the respondent shall request or agree to a continuance thereof. If a hearing is not commenced within 30 days after receipt of the request for hearing or on the date to which continued with the agreement of respondent, or if the decision of the commissioner is not rendered within 30 days after completion of the hearing, the order of suspension shall be vacated and set aside.

A hearing conducted under this section shall in all respects, except as otherwise expressly provided herein, conform to the substantive and procedural provisions of Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code applicable to a hearing on a statement of issues.

10177.2.

The commissioner may, upon his or her own motion, and shall, upon the verified complaint in writing of any person, investigate the actions of any licensee, and he or she may suspend or revoke a real estate license at any time where the licensee in performing or attempting to perform any of the acts within the scope of Section 10131.6 has been guilty of any of the following acts:

FALSE STATEMENT OF FACTS

(a) Has used a false or fictitious name, knowingly made any false statement, or knowingly concealed any material fact, in any application for the registration of a mobilehome, or otherwise committed a fraud in that application.

NONDELIVERY OF PROPER DOCUMENTS

(b) Failed to provide for the delivery of a properly endorsed certificate of ownership or certificate of title of a mobilehome from the seller to the buyer thereof.

FRAUDULENT DISPOSITION OF STOLEN PROPERTY

(c) Has knowingly participated in the purchase, sale, or other acquisition or disposal of a stolen mobilehome.

WORTHLESS FINANCIAL INSTRUMENTS

(d) Has submitted a check, draft, or money order to the Department of Housing and Community Development for any obligation or fee due the state and it is thereafter dishonored or refused payment upon presentation.

10177.4.

(a) Notwithstanding any other provision of law, the commissioner may, after hearing in accordance with this part relating to hearings, suspend or revoke the license of a real estate licensee who claims, demands, or receives a commission, fee, or other consideration, as compensation or inducement, for referral of customers to any escrow agent, structural pest control firm, home protection company, title insurer, controlled escrow company, or underwritten title company. A licensee may not be disciplined under any provision of this part for reporting to the commissioner violations of this section by another licensee, unless the licensee making the report had guilty knowledge of, or committed or participated in, the violation of this section.

(b) The term "other consideration" as used in this section does not include any of the following:

(1) Bona fide payments for goods or facilities actually furnished by a licensee or for services actually performed by a licensee, provided these payments are reasonably related to the value of the goods, facilities, or services furnished.

(2) Furnishing of documents, services, information, advertising, educational materials, or items of a like nature that are customary in the real estate business and that relate to the product or services of the furnisher and that are available on a similar and essentially equal basis to all customers or the agents of the customers of the furnisher.

(3) Moderate expenses for food, meals, beverages, and similar items furnished to individual licensees or groups or associations of licensees within a context of customary business, educational, or promotional practices pertaining to the business of the furnisher.

(4) Items of a character and magnitude similar to those in paragraphs (2) and (3) that are promotional of the furnisher's business customary in the real estate business, and available on a similar and essentially equal basis to all customers, or the agents of the customers, of the furnisher.

(c) Nothing in this section shall relieve any licensee of the obligation of disclosure otherwise required by this part.

10177.5.

When a final judgment is obtained in a civil action against any real estate licensee upon grounds of fraud, misrepresentation, or deceit with reference to any transaction for which a license is required under this division, the commissioner may, after hearing in accordance with the provisions of this part relating to hearings, suspend or revoke the license of such real estate licensee.

10178.

When any real estate salesman is discharged by his employer for a violation of any of the provisions of this article prescribing a ground for disciplinary action, a certified written statement of the facts with reference thereto shall be filed forthwith with the commissioner by the employer and if the employer fails to notify the commissioner as required by this section, the commissioner may temporarily suspend or permanently revoke the real estate license of the employer, in accordance with the provisions of this part relating to hearings.

10179.

No violation of any of the provisions of this part relating to real estate or of Chapter 1 of Part 2 by any real estate salesman or employee of any licensed real estate broker shall cause the revocation or suspension of the license of the employer of the salesman or employee unless it appears upon a hearing by the commissioner that the employer had guilty knowledge of such violation.

10180.

The commissioner may deny, suspend or revoke the real estate license of a corporation as to any officer or agent acting under its license without revoking the license of the corporation.

10182.

As a condition to the reinstatement of a revoked or suspended license, the commissioner may require the applicant to take and pass a qualifying examination.

10185.

Any person, including officers, directors, agents or employees of corporations, who willfully violates or knowingly participates in the violation of this division shall be guilty of a misdemeanor punishable by a fine not exceeding ten thousand dollars ($10,000), or by imprisonment in the county jail not exceeding six months, or by a fine and imprisonment."

 

The law is always succinct in its expression. Therefore the Real Estate Commissioner has elaborated and given the following examples that constitute proscribed conduct within above quoted Sections of the B&PC:

 

Reprinted by permission from the California Bureau of Real Estate Reference Book 1997, pages 21-24:

 

Examples of Unlawful Conduct Sale, Lease, or Exchange

 

In a sale, lease, or exchange transaction, conduct such as the following may result in license discipline under Sections 10176 or 10177 of the Business and Professions Code:

 

1. Knowingly making a substantial misrepresentation of the likely value of real property to:

A. Its owner either for the purpose of securing a listing or for the purpose of acquiring an interest in the property for the licensee's own account.

B. A prospective buyer for the purpose of inducing the buyer to make an offer to purchase the real property.

 

2. Representing to an owner of real property when seeking a listing that the licensee has obtained a bona fide written offer to purchase the property, unless at the time of the representation the licensee has possession of a bona fide written offer to purchase.

 

3. Stating or implying to an owner of real property during listing negotiations that the licensee is precluded by law, by regulation, or by the roles of any organization, other than the broker firm seeking the listing, from charging less than the commission or fee quoted to the owner by the licensee.

 

4. Knowingly making substantial misrepresentations regarding the licensee's relationship with an individual broker, corporate broker, or franchised brokerage company or that entity's/person's responsibility for the licensee's activities.

 

5. Knowingly underestimating the probable closing costs in a communication to the prospective buyer or seller of real property in order to induce that person to make or to accept an offer to purchase the property.

 

6. Knowingly making a false or misleading representation to the seller of real property as to the form, amount and/or treatment of a deposit town the purchase of the property made by an offeror.

 

7. Knowingly making a false or misleading representation to a seller of real property, who has agreed to finance all or part of a purchase price by carrying back a loan, about a buyer's ability to repay the loan in accordance with its terms and conditions.

 

8. Making an addition to or modification of the terms of an instrument previously signed or initialed by a party to a transaction without the knowledge and consent of the party.

 

9. A representation made as a principal or agent to a prospective purchaser of a promissory note secured by real property about the market value of the securing property without a reasonable basis for believing the truth and accuracy of the representation.

 

10. Knowingly making a false or misleading representation or representing, without a reasonable basis for believing its truth, the nature and/or condition of the interior or exterior features of a property when soliciting an offer.

 

11. Knowingly making a false or misleading representation or representing, without a reasonable basis for believing its truth, the size of a parcel, square footage of improvements or the location of the boundary lines of real property being offered for sale, lease or exchange.

 

12. Knowingly making a false or misleading representation or representing to a prospective buyer or lessee of real property, without a reasonable basis to believe its truth, that the property can be used for certain purposes with the intent of inducing the prospective buyer or lessee to acquire an interest in the real property.

 

13. When acting in the capacity of an agent in a transaction for the sale, lease or exchange of real property, failing to disclose to a prospective purchaser or lessee facts known to the licensee materially affecting the value or desirability of the property, when the licensee has reason to believe that such facts are not known to nor readily observable by a prospective purchaser or lessee.

 

14. Willfully failing, when acting as a listing agent, to present or cause to be presented to the owner of the property any written offer to purchase received prior to the closing of a sale, unless expressly instructed by the owner not to present such an offer, or unless the offer is patently frivolous.

 

15. When acting as the listing agent, presenting competing written offers to purchase real property to the owner in such a manner as to induce the owner to accept the offer which will provide the greatest compensation to the listing broker without regard to the benefits, advantages and/or disadvantages to the owner.

 

16. Failing to explain to the parties or prospective parties to a real estate transaction for whom the licensee is acting as an agent the meaning and probable significance of a contingency in an offer or contract that the licensee knows or reasonably believes may affect the closing date of the transaction, or the timing of the vacating of the property by the seller or its occupancy by the buyer.

 

17. Failing to disclose to the seller of real property in a transaction in which the licensee is an agent for the seller the nature and extent of any direct or indirect interest that the licensee expects to acquire as a result of the sale. (the licensee should disclose to the seller: prospective purchase of the property by a person related to the licensee by blood or marriage; purchase by an entity in which the licensee has an ownership interest; or purchase by any other person with whom the licensee occupies a special relationship where there is a reasonable probability that the licensee could be indirectly acquiring an interest in the property.)

 

18. Failing to disclose to the buyer of real property in a transaction in which the licensee is an agent for the buyer the nature and extent of a licensee's direct or indirect ownership interest in such real property: e.g., the direct or indirect ownership interest in the property by a person related to the licensee by blood or marriage; by an entity in which the licensee has an ownership interest; or by any other person with whom the licensee occupies a special relationship.

 

19. Failing to disclose to a principal for whom the licensee is acting as an agent any significant interest the licensee has in a particular entity when the licensee recommends the use of the services or products of such entity.

 

Examples of Unlawful Conduct - Loan Transactions

 

Conduct such as the following when soliciting, negotiating or arranging a loan secured by real property or the sale of a promissory note secured by real property may result in license discipline:

 

1. Knowingly misrepresenting to a prospective borrower of a loan to be secured by real property or to an assignor/endorser of a promissory note secured by real property that there is an existing lender willing to make the loan or that there is a purchaser for the note, for the purpose of inducing the borrower or assignor/endorser to utilize the services of the licensee.

 

2. Knowingly making a false or misleading representation to a prospective lender or purchaser of a loan secured directly or collaterally by real property about a borrower's ability to repay the loan in accordance with its terms and conditions.

 

3. Failing to disclose to a prospective lender or note purchaser information about the prospective borrower's identity, occupation, employment, income and credit data as represented to the broker by the prospective borrower.

 

4. Failing to disclose information known to the broker relative to the ability of the borrower to meet his or her potential or existing contractual obligations under the note or contract including information known about the borrower's payment history on an existing note, whether the note is in default or the borrower in bankruptcy.

 

5. Knowingly underestimating the probable closing costs in a communication to a prospective borrower or lender of a loan to be secured by a lien on teal property for the purpose of inducing the borrower or lender to enter into the loan transaction.

 

6. When soliciting a prospective lender to make a loan to be secured by real property, falsely representing or representing without a reasonable basis to believe its truth, the priority of the security, as a lien against the real property securing the loan, i.e., a first, second or third deed of trust.

 

7. Knowingly misrepresenting in any transaction that a specific service is free when the licensee knows or has a reasonable basis to know that it is covered by a fee to be charged as part of the transaction.

 

8. Knowingly making a false or misleading representation to a lender or assignee/endorsee of a lender of a loan secured directly or collaterally by a lien on real property about the amount and treatment of loan payments, including loan payoffs, and the failure to account to the lender or assignee/endorsee of a lender as to the disposition of such payments.

 

9. When acting as a licensee in a transaction for the purpose of obtaining a loan, and in receipt of an advance fee from the borrower for this purpose, failure to account to the borrower for the disposition of the advance fee.

 

10. Knowingly making a false or misleading representation about the terms and conditions of a loan to be secured by a lien on real property when soliciting a borrower or negotiating the loan.

 

11. Knowingly making a false or misleading representation or representing, without a reasonable basis for believing its truth, when soliciting a lender or negotiating a loan to be secured by a lien on real property, about tile market value of the securing real property, the nature and/or condition of the interior or exterior features of the securing real property, its size or the square footage of any improvements on the securing real property.

 

Regulations

 

The Commissioner has the authority to adopt regulations to aid in the administration and enforcement of the Real Estate Law and the Subdivided Lands Law. The Regulations of the Real Estate Commissioner have the force and effect of the law itself. Licensees and prospective licensees should have a thorough knowledge of the regulations.

END OF CalBRE REFERENCE BOOK QUOTATION

 

The State Legislature has invested full power in the CalBRE Commissioner to undertake disciplinary action against violators. The B&PC Section 10481 reads:

 

Nothing in this chapter limits the authority of the commissioner to take disciplinary action against any licensee for a violation of the Real Estate Law, or of Chapter 1 (commencing with

Section 11000) of Part 2, or of the rules and regulations of the commissioner; nor shall the repayment in full of all obligations to the Recovery Account by any licensee nullify or modify the effect of any other disciplinary proceeding brought pursuant to the Real Estate Law.

 

EASTON CASE

 

The facts of the Easton case involved the sale of a house built in a landfill which was not properly engineered and compacted. The sellers did not disclose to the listing broker, the buyer's broker, or the buyer that there was landslide activity and that corrective measures were taken. The listing broker's agents were aware that the house was built on a landfill, that netting was on the slope to prevent further slides, and that the guest house floor was uneven. However, none of these "red flags" were investigated or brought to the buyer's attention. After the buyer's purchase, the land problems worsened, the buyer sued, and the jury held the seller, listing broker and selling broker liable for $197,000.

 

According to the Easton case, a property cannot be sold "as is"' without a complete disclosure.” As is" clauses and written disclaimers are unenforceable and will not eliminate the agent and seller's liabilities to the buyer.

 

As a result, an agent should take the following precautions against liability according to Easton:

 

1.   The agent should ask the seller directly if any hidden problems exist which might affect the property's value. Any defects should be thoroughly investigated .

 

2.   The agent should physically inspect the property to uncover any flaws. Agents have an obligation to be knowledgeable of the factors influencing value in order to property inspect the property.

 

3.   The seller should be notified of any problems discovered and given sufficient time to correct them. An agent should simply point out a suspected problem and recommended that the seller contact an expert.

 

4.   The agent should make a full disclosure to the potential buyer and seller of any items discovered which affect value and if any action has been taken to correct them Professional inspection reports should be presented to both parties. If neither the buyer nor seller wishes to further investigate the problems, the agent should obtain a written confirmation that they were properly notified, and are aware of the agent's recommendations, and chose to disregard them.