SHORT
INTRODUCTION TO CALIFORNIA REAL ESTATE PRINCIPLES,
© 1994 by Home Study, Inc. dba American Schools
PART II: LAND CONVEYANCE
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.
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.
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.
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.
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:
(a) Making any substantial
misrepresentation.
(b) Making any false promises of a character
likely to influence, persuade or induce.
(c) A continued and flagrant course of
misrepresentation or making of false promises through real estate agents or
salesmen.
(d) Acting for more than one party in a
transaction without the knowledge or consent of all parties thereto.
(e) Commingling with his own money or
property the money or other property of others which is received and held by
him.
(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.
(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.
(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.
(i) Any other conduct, whether of the same or
a different character than specified in this section, which constitutes fraud
or dishonest dealing.
(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:
(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.
(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.
(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.
(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.
(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.
(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.
(g) Demonstrated negligence or incompetence
in performing any act for which he or she is required to hold a license.
(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.
(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.
(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.
(k) Violated any of the terms, conditions,
restrictions, and limitations contained in any order granting a restricted
license.
(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.
(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.
(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.
(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:
(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.
(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.
(c) Has knowingly participated in the
purchase, sale, or other acquisition or disposal of a stolen mobilehome.
(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.