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Ch1-7.pdf
Chapter 1: Real estate licensing and endorsement 1
After reading this chapter, you will be able to:
• understand the function of the California Bureau of Real Estate (CalBRE) to oversee, regulate, administer and enforce the real estate law as practiced by licensees;
• identify the activities requiring a real estate license; • determine the eligibility and education requirements for broker
and agent licensing and renewal; • understand the function of the Real Estate Recovery Fund; and • comprehend when a mortgage loan originator (MLO) license
endorsement is required of licensees who originate mortgages.
Learning Objectives
Real estate licensing and endorsement
Chapter
1
Real estate law is codified to protect the public in real estate transactions when a real estate licensee or subdivision is involved.1
The California Legislature created the California Bureau of Real Estate (CalBRE) to oversee, regulate, administer and enforce the real estate law. The CalBRE is contained within the Department of Consumer Affairs.
1 Calif. Business and Professions Code §§10000 et seq.
CalBRE oversight
bulk sale
business opportunity
California Bureau of Real Estate (CalBRE)
designated officer (DO)
fictitious business name
mobilehome
mortgage loan originator (MLO)
principal
Real Estate Recovery Fund
Key Terms
2 Real Estate Principles, Second Edition
The chief officer of the CalBRE is the Real Estate Commissioner. The Real Estate Commissioner’s principal responsibility is to enforce all the real estate laws pertaining to real estate licensing and the Subdivided Lands Act.2
The Commissioner ensures that real estate licensees and members of the public dealing with licensees receive maximum protection.3
As a means of enforcing licensing and subdivision laws, the Commissioner issues regulations addressing conduct of persons falling within the real estate law activities. The regulations are part of the California Code of Regulations known as Title 10.
To engage in the business of real estate as a real estate broker or agent, a person first obtains a real estate license issued by the CalBRE.4
A real estate broker is a person who, for compensation or in expectation of compensation, engages in:
• negotiating the sale, purchase or exchange of real estate, leases or business opportunities;
• soliciting listings, buyers or sellers;
• leasing or renting, or offering to lease or rent, property on behalf of an owner or tenant;
• collecting rent from real estate or business opportunities;
• assisting in the purchase or lease of property owned by the state or federal government;
• negotiating real property sales contracts or mortgages to be secured directly or collaterally by real estate or business opportunities on behalf of lenders or borrowers; and
• negotiating the sale or purchase of a mobilehome.5
A real estate agent is an individual who, for compensation or in expectation of compensation, is employed by a licensed broker to do one or more of the acts of a licensed broker.6
Real estate agents are legally classified as agents of the agent, since they need to be employed by a real estate broker to render real estate-related services to the public. Agents render all services on behalf of the broker that employs them.
A sales agent employed by a broker is the agent of the broker, not a client. In turn, the broker is the agent of the client.
2 Bus & P C §§10050; 10051
3 Bus & P C §10050
4 Bus & P C §10130
5 Bus & P C §10131
6 Bus & P C §10132
Real Estate Commissioner
California Bureau of Real Estate (CalBRE) A government entity which oversees, regulates, administers and enforces California real estate law as practiced by licensees.
Activities requiring a real estate
license
real estate agent A person who, for compensation or in expectation of compensation, is employed by a licensed broker to do one or more of the acts of a licensed broker.
Delegated supervision, not agency
Chapter 1: Real estate licensing and endorsement 3
As an agent representing the broker, a real estate sales agent is authorized to prepare listings, sales documents, disclosure sheets, etc., on behalf of the broker. The agent does not do so on their own behalf.
The broker employing agents is required under the CalBRE’s supervisory scheme to reasonably supervise sales agents’ activities. Reasonable supervision includes establishing policies, rules, procedures and statements to review and manage:
• transactions requiring a real estate license;
• documents having a material effect upon the rights or obligations of a party to the transaction;
• the filing, storage and maintenance of documents;
• the handling of trust funds;
• advertisement of services that require a license;
• sales agents’ knowledge of anti-discrimination laws; and
• reports of the activities of the sales agents.7
To be eligible for a broker or agent license, the applicant needs to:
• be at least 18 years old;8
• be honest and truthful;
7 Calif. Bureau of Real Estate Regulation §2725
8 CalBRE Regs. §§2720; 2750
Licensing education
California Bureau of Real Estate (CalBRE) website and contact information
www.calbre.ca.gov
Sacramento 1651 Exposition Blvd., Sacramento, CA 95815 (877) 373-4542
Fresno 2550 Mariposa Mall, Room 3070, Fresno, CA 93721 (559-445-2273)
Los Angeles 320 West 4th Street, Suite 350, Los Angeles, CA 90013 (213-620- 2072)
Oakland 1515 Clay Street, Suite 702, Oakland, CA 94612 (510-622-2552)
San Diego 1350 Front Street, Suite 1063, San Diego, CA 92101 (619-525-4192)
4 Real Estate Principles, Second Edition
• make the application on the proper form prescribed by the CalBRE;
• complete the mandatory education; and
• pass the qualifying exam.
In addition, all applicants need to be fingerprinted. Fingerprints are not required if the applicant is currently licensed by the CalBRE or holds a real estate license that expired less than two years ago.
All statutory course requirements for both the agent and the broker license may be waived if the applicant is a member of the state bar.9
Every real estate broker maintains a definite place of business which serves as an office. The office is the place where the broker displays their license and where consultations with clients are held.
If more than one place of business is maintained, the broker applies for and obtains an additional license for each office branch.
An agent who has held a real estate agent license for at least two years within the last five years may apply for a broker license.
The agent is required to have worked on a full-time basis (at least 40 hours per week) as an agent during the two-year time requirement.
The CalBRE requires verification of the agent’s employment using the Employment Verification Form issued by the CalBRE. [See the CalBRE’s Employment Verification Form (CalBRE 226)]
Exceptions to the agent employment requirements will be given to an applicant who has:
• at least two years of general real estate experience; or
• graduated with a real estate-specific degree from a four-year college or university.
To qualify for the employment exemption based on experience, the broker applicant needs to file a written petition with the CalBRE setting forth the applicant’s qualifications. [See the CalBRE’s Equivalent Experience Verification Form (CalBRE 227)]
The CalBRE considers the following activities, conducted within the five- year period immediately prior to the date of application for the broker examination, as qualification in lieu of employment as a sales agent:
• experience as an escrow or title officer;
• experience as a mortgage officer directly related to the financing or conveying of property;
9 Bus & P C §§10153.2
The individual broker license
Qualifying for a broker
license
Experience qualifications
Chapter 1: Real estate licensing and endorsement 5
• experience as a subdivider, contractor or speculative builder, if the agent performed substantial duties relating to the purchase, finance, development and sale or lease of real property.
Other types of direct real estate-related experience will be considered by the CalBRE if it satisfies the intent of the law.10
All broker applicants need to complete eight statutory courses of three- semester units or the quarter equivalent, unless exempt.
Five of the eight courses need to be in:
• real estate practice;
• legal aspects of real estate;
• real estate appraisal;
• real estate finance; or
• real estate economics or accounting.11
The remaining three courses can be selected from any of the following:
• real estate principles;
• business law;
• property management;
• real estate office administration;
• escrows;
• mortgage brokering and lending;
• advanced legal aspects of real estate;
• common interest developments (CIDs);
• advanced real estate finance;
• advanced real estate appraisal; or
• computer applications in real estate.12
The three courses taken to meet the agent licensing requirements count towards the eight courses a broker needs to complete. Thus, a licensed agent only needs to take five additional courses to qualify to take the broker exam.
On completion of the course requirements, the broker applicant applies to take the state broker licensing exam. The applicant has two years from the CalBRE receipt of the examination application to meet the license qualification requirements and take the exam.
If the broker applicant fails the exam, they may apply for reexamination within two years after filing the examination application. No limit is placed on the number of times the applicant may take the exam.
10 See the CalBRE’s Instructions to License Applicants, July 2009
11 Bus & P C §10153.2(a)(1)
12 Bus & P C §10153.2(a)(2)
Pre-licensing coursework
Taking the broker exam
6 Real Estate Principles, Second Edition
The CalBRE broker and agent licensing examination consists of seven major areas of real estate practice, divided as follows:
1 — Property Ownership and Land Use Controls and Regulations Approximately 15% of the sales and broker exam.
• classes of property [See Chapter 31 and 32]; • property characteristics [See Chapter 84]; • encumbrances [See Chapter 47 and 52]; • types of ownership [See Chapter 33]; • descriptions of property [See Chapter 40]; • government rights in land [See Chapter 31]; • public controls [See Chapter 85]; • environmental hazards and regulations [See Chapter 16]; • private controls [See Chapter 37]; • water rights [See Chapter 36]; and • special categories of land.
2 — Laws of Agency Approximately 17% of the sales and broker exam.
• law, definition and nature of agency relationships, types of agencies, and agents [See Chapter 2 and 3];
• creation of agency and agency agreements [See Chapter 3]; • responsibilities of agent to seller/buyer as principal [See Chapter 2]; • disclosure of agency [See Chapter 3 and 28]; • disclosure of acting as principal or other interest [See Chapter 3]; • termination of agency [See Chapter 24]; • commission and fees [See Chapter 24 and 25]; and • responsibilities of agents to non-client third-parties [See Chapter 2].
3 — Valuation and Market Analysis Approximately 14% of the sales and broker exam.
• value [See Chapter 29]; • methods of estimating value [See Chapter 29]; and • financial analysis [See Chapter 29 and 54].
4 — Financing Approximately 9% of the sales and broker exam.
• general concepts [See Chapter 54 and 54]; • types of loans [See Chapter 54 and 57]; • sources of financing [See Chapter 54 and 57]; • government programs [See Chapter 56]; • mortgages/deeds of trust/notes [See Chapter 61 and 65]; • financing/credit laws [See Chapter 54]; • loan brokerage [See Chapter 58]; and • types of loan originators. [See Chapter 54]
5 — Transfer of Property Approximately 8% of the sales and broker exam.
• title insurance [See Chapter 51 and 52];
Sidebar
The California real estate salesperson and broker examination
Chapter 1: Real estate licensing and endorsement 7
• deeds [See Chapter 65]; • escrow [See Chapter 30]; • tax aspects [See Chapter 72]; • special processes; and • transfer through court supervision [See Chapter 49]; and • types of vesting. [See Chapter 49]
6 — Practice of Real Estate and Disclosures (Includes specialty areas) Approximately 25% of the sales and broker exam.
• trust account management [See Chapter 6]; • fair housing laws [See Chapter 7]; • truth in advertising [See Chapter 12]; • record keeping requirements [See Chapter 6]; • agent supervision [See Chapter 2]; • permitted activities of unlicensed sales assistants [See Chapter 26]; • CalBRE jurisdiction and disciplinary actions [See Chapter 1 and 8]; • licensing, continuing education requirements and procedures [See Chapter 1]; • California Real Estate Recovery Fund [See Chapter 1]; • general ethics [See Chapter 7 and 9]; • technology [See Chapter 25]; • property management [See Chapter 73 and 74]; • commercial/industrial/income properties [See Chapter 76]; • specialty areas; • transfer disclosure statement (TDS) [See Chapter 15]; • natural hazard disclosure (NHD) statements [See Chapter 17]; • disclosure of material facts affecting property value [See Chapter 13]; • need for inspection and obtaining/verifying information [See Chapter 21]; • reports [See Chapter 21 and 22]; and • servicing diverse populations. [See Chapter 7 and 8]
7 — Contracts Approximately 12% of the sales exam and 12% of the broker exam.
• general [See Chapter 24, 27 and 55];
• listing agreements [See Chapter 24 and 25];
• buyer-broker agreements [See Chapter 25];
• offers/purchase Contracts [See Chapter 27];
• agreements [See Chapter 75 and 76];
• promissory notes/securities [See Chapter 61];
• purchase/lease options [See Chapter 24 and 67]; and
• advanced fees. [See Chapter 6]
Sidebar
The California real estate salesperson and broker examination
Cont’d
8 Real Estate Principles, Second Edition
Once the applicant has been notified by the CalBRE of their passing, the applicant may apply for a broker license and pay the appropriate licensing fee within one year.
An agent is an individual employed by a real estate broker to directly participate in brokerage activities on the broker’s behalf.
To qualify to take the real estate agent license CalBRE exam, an applicant completes a three-semester unit course, or the quarter equivalent, in:
• real estate principles;
• real estate practice; and
• one elective course in the following subjects:
• legal aspects of real estate;
• real estate finance;
• property management;
• real estate appraisal;
• real estate economics or accounting;
• business law;
• real estate office administration;
• escrows;
• mortgage brokering and lending;
• common interest developments (CIDs); or
• computer applications in real estate.13
The applicant has two years from the date the exam application is filed with the CalBRE to take the exam.14
An applicant who fails to take the exam and pass within two years from the date of filing the application will have to file a new application to take the exam.
An applicant who fails the agent exam may apply for reexamination. No restriction exists on the number of times the applicant may take the test within the two-year period following the application.15
Once the CalBRE notifies the applicant of passing, the applicant may apply for an agent license. The application for the license and the fee are to be submitted to the CalBRE within one year of the examination date.
The following are major categories of persons and activities which are exempt from real estate licensing requirements:
• a person dealing with their own property, called a principal;
13 Bus & P C §10153.4
14 Bus & P C §10153.8
15 Bus & P C §10153.8
Agent license
Exemptions from license
requirements
principal A person, an individual or an entity, acting as a buyer or seller, represented by a broker and their agents.
Chapter 1: Real estate licensing and endorsement 9
• an officer of a corporation, or a general partner of a partnership or a manager of a limited liability company (LLC), collectively called entities, with respect to property owned or leased by the entity. To be exempt, the acts may not be performed in expectation of a fee;
• an individual with power-of-attorney authority;
• an attorney rendering legal services for a client;
• a receiver, trustee in bankruptcy or any person acting under order of a court;
• a trustee of a trust deed lien who is acting under a power-of-sale provision in the trust deed;16 or
• a resident manager of an apartment complex, hotel, motel or trailer park.17
Also exempt are individuals acting on behalf of others, such as unlicensed employees of real estate brokers, who arrange, accept reservations or money for transient occupancy in:
• vacation rentals such as hotels, motels or residence clubs;
• common interest developments (CIDs), such as condominium projects, planned urban developments (PUDs), community apartment projects and stock cooperatives; or
• an apartment unit or single family residence (SFR).18
An individual acting without a real estate license, either as a broker or agent, is guilty of a public offense punishable by a maximum fine of $20,000 for an individual or $60,000 for a corporation, six months in jail, or both a fine and imprisonment.19
A real estate broker and real estate agent license is valid for four years from the date of issuance noted on the license certificate.20
All real estate brokers and sales agents need to complete at least 45 hours of continuing education (CE) to renew a license issued by the CalBRE.21
The CE requirements for license renewal were legislated to help maintain and improve the level of competence of real estate brokers and agents.
A CalBRE sales agent renewing for the first time needs to complete 45 hours of CE, consisting of:
• 18 hours of Consumer Protection courses;
• 15 hours comprised of five separate three-hour courses in:
º Agency;
º Fair Housing;
16 Bus & P C §10133
17 Bus & P C §10131.01
18 Bus & P C §10131.01
19 Bus & P C §10139
20 Bus & P C §§10153.6; 10153.7
21 Bus & P C §10170.5
Continuing education requirements
10 Real Estate Principles, Second Edition
º Trust Funds;
º Ethics; and
º Risk Management; and
• the remaining 12 hours composed of either Consumer Protection or Consumer Service courses, including Office Management and Supervision course if they choose to take it.
While brokers and sales agents beyond their first renewal are required to include the Office Management and Supervision course in their 45 CE hours, the CalBRE allows them the option of choosing how to study it.
A licensee may study the Office Management and Supervision material separately or aggregated into an eight-hour “survey” course with the five mandated courses.
Here, the 45 CE hours will consist of:
• 18 hours of Consumer Protection courses;
• mandated topical courses, structured as either:
º 18 hours comprised of six separate three-hour courses in:
• Agency;
• Fair Housing;
• Trust Funds;
• Ethics;
• Risk Management; and
• Office Management and Supervision; OR
º eight hours in a survey course covering all six subjects; and
• the remaining hours composed of Consumer Protection or Consumer Service.
Courses covering the following real estate-based topics are considered consumer protection courses:
• real estate financing;
• land use regulation and control;
• consumer disclosures;
• agency relationships;
• capital formation for real estate development;
• fair practices in real estate;
• appraisal and property valuation technique;
• property management;
• energy conservation;
• environmental regulation;
• probate;
Consumer protection
Chapter 1: Real estate licensing and endorsement 11
• mineral, oil and gas conveyancing;
• government programs such as redevelopment;
• business opportunities; and
• taxation of real estate transactions.22
Consumer service courses cover topics designed to help licensees achieve a higher level of competence in sales, organizational and management skills. Examples of consumer service courses include:
• how to market property;
• how to hold an open house;
• how to motivate sellers; and
• how to obtain a listing.
A licensee is exempt from CE requirements if, on the actual renewal date of the real estate license, the licensee:
• is at least 70 years of age; and
• has been a real estate licensee in California for at least 30 consecutive years.23
Acts for which a real estate license is required may be performed in the name of a corporation if a licensed officer of the corporation qualifies the corporation for a license issued by the CalBRE.24
22 Bus & P C §10170.5(a)(6)
23 Bus & P C §10170.8
24 BRE Reg §2740
The corporate license
Examinations and Exam/License Applications
Broker Agent Examination fee $95 Examination fee $60 Broker 1st reschedule $20 Agent 1st reschedule $15 Broker subsequent reschedule $30 Agent subsequent reschedule $30
Original Exam/License Applications and Corporation License Applications
Original Broker/Corporation License $300
Original Agent License $245
Renewal License Applications
Broker/Corporation renewing on-time $300
Broker/Corporation renewing late $450
Agent renewing on-time $245
Agent renewing late $367
Sidebar
CalBRE licensing and renewal fees
12 Real Estate Principles, Second Edition
Violation of a real estate law by a broker or his sales agent may result in the suspension or revocation of the license by the Real Estate Commissioner. The following are grounds for suspension or revocation of a CalBRE license.
Business and Professions Code §10176
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 person engaged in the business or acting in the capacity of a real estate licensee within this state, and he or she 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 salespersons.
d. Acting for more than one party in a transaction without the knowledge or consent of all parties thereto.
e. Commingling with his or her own money or property the money or other property of others which is received and held by him or her.
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 the 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 the licensee the full amount of the licensee’s compensation, commission or profit under any agreement authorizing or employing the 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 the 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 the licensee to sell, buy, or exchange real estate or a business opportunity for compensation or commission, except when the licensee prior to or coincident with election to exercise the 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 the 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 the prospective purchaser shall either transact the purchasing, leasing, renting or exchanging of a business opportunity property through the broker obtaining the signature, or pay a compensation to the broker if the property is purchased, leased, rented
Violations of real estate law
Chapter 1: Real estate licensing and endorsement 13
or exchanged without the broker first having obtained the written authorization of the owner of the property concerned to offer the property for sale, lease, exchange or rent.
k. Failing to disburse funds in accordance with a commitment to make a mortgage loan that is accepted by the applicant when the real estate broker represents to the applicant that the broker is either of the following:
1. The lender.
2. Authorized to issue the commitment on behalf of the lender or lenders in the mortgage loan transaction.
l. Intentionally delaying the closing of a mortgage loan for the sole purpose of increasing interest, costs, fees, or charges payable by the borrower.
m. Generating an inaccurate opinion of the value of residential real property, requested in connection with a debt forgiveness sale, in order to do either or both of the following:
1. Manipulate the lienholder to reject the proposed debt forgiveness sale.
2. Acquire a financial or business advantage, including a listing agreement, that directly results from the inaccurate opinion of value, with regard to the subject property.
Violations of real estate law
Cont’d
The officer qualifying the corporation for a corporate broker license is called the designated officer (DO). The corporation holds its brokerage license through the DO.
The DO is responsible for the supervision and control of the activities of officers and employees of the corporation. This includes supervision of the activities of agents and brokers employed to act as agents for the corporate broker. Failure of the DO to supervise may result in the suspension or revocation of the DO’s real estate license.
The individual broker, when acting as the DO, acts on behalf of the corporation in the capacity of a corporate officer only. The individual who is the DO may also become an employee of the corporation and act as an agent of the corporation rendering services to the corporation’s clients.
The DO is liable to the corporation for any failure to supervise agents. However, the DO is not liable to corporate clients for breaching their duty to supervise agents – this supervision is a duty owed to their employer, the corporation and the CalBRE who entrusted them as a designated officer.
A licensee may use a fictitious business name in any activity for which a real estate license is required, if the license is issued under the fictitious name.25
25 CalBRE Reg. §2731(a)
designated officer (DO) The individual who is the licensed officer qualifying a corporation for a corporate broker license.
Fictitious business name
fictitious business name The name under which a business or operation is conducted, also known as a d.b.a. (“doing business as...”).
14 Real Estate Principles, Second Edition
A fictitious business name license will only be granted to a broker who has complied with the filing requirements for a fictitious business name, also known as a d.b.a. (“doing business as...”).26
The CalBRE will refuse to issue a license under a fictitious business name when:
• the name is misleading or would constitute false advertisement;
• implies a partnership or corporation exists when one does not;
• includes the name of a real estate agent;
• violates California’s Business and Professions Code on fictitious business name requirements; or
• is the name formerly used by a licensee whose license has been revoked.27
A real estate broker and agent may solicit and negotiate for the purchase, lease or exchange of mineral, oil and gas property. The licensee may also arrange or negotiate and service loans on mineral, oil and gas property.28
Finally, the licensee may rent mineral, oil and gas property and collect the rents or royalties from the mineral, oil and gas property.29
The CalBRE cannot issue or renew a real estate license if the applicant is on a list of persons not in compliance with child support orders provided by the State Department of Social Services.30
However, the CalBRE may issue a 150-day temporary license to an otherwise qualified applicant who is on the list of persons neglecting child support. Only one 150-day license will be issued, and a four-year license cannot be issued until a release is obtained from the district attorney’s office.31
The State Department of Social Services also provides the CalBRE with a supplemental list of real estate licensees who are delinquent in child support payments for more than four months. If the licensee does not renew their license with the CalBRE within six months of the CalBRE’s receipt of the supplemental list, the license will be subject to suspension.
The CalBRE has the authority to suspend the license of any licensee placed on the supplemental four-month delinquency list. However, before a license can be suspended, the CalBRE gives the licensee notice that the license will be suspended 150 days after the notice is served, unless the licensee receives a release from the district attorney.
26 CalBRE Reg. §2731(b)
27 CalBRE Reg. §2731(c)
28 Bus & P C §10500
29 Bus & P C §10500
30 Calif. Family Code §17520
31 Fam C §17520
Mineral, oil and gas
Child support obligations
Chapter 1: Real estate licensing and endorsement 15
Also, any real estate licensee whose name appears on the certified list or supplemental list provided by the State Department of Social Services for noncompliance with an order for child support is liable to the CalBRE for a special handling fee of $95 for each time their name is on the list.32
The CalBRE commissioner will not issue a license or reinstate a suspended license until the $95 fee is paid.33
A business opportunity is the sale or lease of the operations and goodwill of an existing business enterprise or opportunity.
Common types of business opportunities include:
• liquor stores;
• gas stations; and
• restaurants.
The arranging of a sale or purchase of a business opportunity is governed by the CalBRE. To receive a fee for the sale of a business opportunity, it is necessary to hold a real estate license, unless the person receiving the fee is licensed as a securities broker or dealer by California or the United States.
The sale of a business opportunity consists of two transactions:
• the sale of the business, including inventory, trade fixtures and goodwill; and
• the sale of the real property itself, whether a fee or leasehold interest, including the building and land.
The documents used in the sale of a business include a:
• bill of sale;
• Uniform Commercial Code (UCC)-1 Financing Statement for the personal property [See RPI Form 436-1]; and
• a deed (or assignment of the leasehold and a trust deed) for the transfer of the real property. [See RPI Form 404]
On the sale of a business opportunity, the inventory of the business is transferred to the buyer by a bill of sale. The transfer of more than one-half the inventory of a business’ materials or goods to a person other than the business’ customers is called a bulk sale. A bulk sale needs to comply with the UCC since it is the transfer of personal property.34
The buyer of the inventory gives public notice of the transfer 12 days before the transfer takes place to perfect their interest in the acquisition of the inventory on closing.35
32 Fam C §17520; CalBRE Reg. §2716.5
33 CalBRE Reg. §2716.5
34 Calif. Commercial Code §6102
35 Com C §6105
Business opportunities
business opportunity The assets for a business enterprise including its goodwill. The term includes the sale or lease of the business and goodwill of an existing business enterprise or opportunity.
Bulk sales
bulk sale The transfer of more than one-half the inventory of a business’ materials or goods to a person other than the business’ customers.
16 Real Estate Principles, Second Edition
Mobilehomes have a unique legal status, being either real estate or personal property.
A mobilehome, also called a manufactured home, is a structure:
• at least eight feet in width, 40 feet in length or more than 320 square feet when transported in one or more sections;
• built on a permanent chassis;
• designed to be used as a dwelling with or without a permanent foundation.36
A mobilehome that meets the requirements and is attached to a permanent foundation is no longer considered personal property but real estate, since it is a permanent fixture or an improvement to real estate.37
The broker handling the sale of a mobilehome that is considered real estate conducts themselves as though they are handling the sale of real estate.
The rules for buying, selling, registering and encumbering mobilehomes that are not considered real property differ from the rules for real estate sales.
The government agency responsible for the registration of mobilehomes is the California Department of Housing and Community Development (HCD). Mobilehomes are registered with the HCD, unless the mobilehome is considered real estate.38
When a new mobilehome is first purchased it is registered on a form provided by the HCD, referred to as the original registration of the mobilehome.
At the time of the original registration of the mobilehome, the HCD creates a permanent title record for the mobilehome.
The Real Estate Recovery Fund, also known as the Consumer Recovery Account, is available to individuals who have obtained a final-court judgment against a real estate licensee for losses caused while acting as an agent and are unable to recover the judgment from the licensee.
The judgment needs to be based on:
• fraud, misrepresentation or deceit;
• conversion of trust funds; or
• criminal restitution.39
For causes of action which occurred on or after January 1, 2009, the threshold is $50,000 for one transaction and $250,000 for any one licensee.40
36 Calif. Health and Safety Code §18007
37 Health & S C §§18039.1; 18551
38 Health & S C §§18206; 18000 et seq.
39 Bus & P C §10471
40 Bus & P C §10474
Mobilehome sales
mobilehome Property designed to be used as a dwelling, classified as either personal or real property depending on the method of attachment to a parcel of real estate. Also known as a manufactured home.
Real Estate Recovery
Fund
Real Estate Recovery Fund Funds available to individuals who have obtained a final-court judgment against a licensee and are unable to recover the judgment from the licensee. Also known as the Consumer Recovery Account.
Chapter 1: Real estate licensing and endorsement 17
A licensee’s license will be suspended and will not be reinstated until the licensee repays any amounts paid from the Real Estate Recovery Fund to satisfy a judgment against them.41
Licensees who make or arrange residential mortgages are required to obtain a CalBRE mortgage loan originator (MLO) license endorsement.
A residential mortgage is any loan primarily for personal, family or household use, known as a consumer purpose mortgage, secured by a deed of trust on a dwelling. Dwellings include:
• one-to-four unit residential properties;
• mobile homes; and
• trailers or houseboats, if they are used as residences.42
In order for a transaction to trigger the CalBRE MLO license endorsement requirement, it needs to meet both the prongs of the residential mortgage definition:
• a consumer purpose; and
• security in the form of a dwelling.
Thus, whether or not a CalBRE MLO license endorsement is required depends on the purpose of the mortgage, not just the property securing it. Mortgages for personal and household purposes when secured by a dwelling are consumer purpose mortgages, and trigger the endorsement requirement. On the other hand, loans made for business, investment or agricultural purposes whether or not secured by a dwelling are not made for a consumer purpose, and do not trigger the endorsement requirement.
To become CalBRE-endorsed as an MLO, a licensee needs to:
• complete the national and state California-specific mortgage brokerage examination;
• submit a MLO licensee endorsement application through the Nationwide Mortgage Licensing System and Registry (NMLS);
• complete and supply a criminal background check, including fingerprinting, to the NMLS;
• complete 20 hours of pre-license education; and
• provide authorization for the NMLS to obtain a credit report on the licensee.
The NMLS is an offshoot of the larger regulatory scheme known as the Secure and Fair Enforcement (SAFE) Mortgage Licensing Act.
41 Bus & P C §10475
42 Bus & P C §10166.01; 12 Code of Federal Regulations §108.103
Mortgage loan brokerage
mortgage loan originator (MLO) A California Bureau of Real Estate (CalBRE) licensee who receives fees to arrange a consumer mortgage other than a carryback.
MLO endorsement
18 Real Estate Principles, Second Edition
To keep their CalBRE endorsement, MLOs need to meet minimum licensing/ endorsement standards, pay the yearly renewal fee and complete a minimum of eight hours of continuing education annually, including:
• three hours of federal law and regulations;
• two hours of ethics (including instruction on fraud, consumer protection and fair lending issues); and
• two hours on lending standards for nontraditional mortgages.
The California Legislature created the Bureau of Real Estate (CalBRE) to oversee and regulate the real estate law. The chief officer of the CalBRE is the Real Estate Commissioner, who enforces all the real estate laws pertaining to real estate licensing and the Subdivided Lands Act.
To engage in the business of real estate as a real estate broker or agent, a person first obtains a real estate license issued by the CalBRE.
A real estate broker is a person who, for compensation or in expectation of compensation, engages in real estate activities, such as:
• negotiating the sale, purchase or exchange of real estate;
• soliciting listings, buyers or sellers; or
• leasing or renting on behalf of an owner or tenant.
A real estate agent is a person who, for compensation or in expectation of compensation, is employed by a licensed broker to do one or more of the acts of a licensed broker.
To qualify to take the CalBRE real estate agent license exam, an applicant completes three statutory courses of three-semester units or the quarter equivalent, unless exempt, and pass the CalBRE agent licensing exam.
An agent who has held a real estate agent license for at least two years within the last five years may apply for a broker license. All broker applicants are to complete eight statutory courses of three-semester units or the quarter equivalent, unless exempt, and pass the CalBRE broker licensing exam.
A real estate broker and agent license is valid for four years from the date of issuance. To renew their CalBRE license, real estate brokers and sales agents are to complete at least 45 hours of continuing education (CE) every four years.
The Real Estate Recovery Fund is available to individuals who have obtained a final-court judgment against a real estate licensee and are unable to recover the judgment from them. The threshold for recovery is $50,000 for one transaction and $250,000 for any one licensee
Chapter 1 Summary
Chapter 1: Real estate licensing and endorsement 19
Licensees who make or arrange residential mortgages are required to obtain a CalBRE mortgage loan originator (MLO) license endorsement. A residential mortgage is any mortgage primarily for personal, family or household use secured by a deed of trust on a dwelling.
To become CalBRE-endorsed as an MLO, a licensee first completes the national and state mortgage brokerage examination, and completes 20 hours of pre-license education. To keep their endorsement, MLOs complete a minimum of eight hours of continuing education annually.
bulk sale .......................................................................................... pg. 15 business opportunity .................................................................. pg. 15 California Bureau of Real Estate (CalBRE) ............................... pg. 2 designated officer (DO) ................................................................ pg. 13 fictitious business name ............................................................. pg. 13 mobilehome ................................................................................... pg. 16 mortgage loan originator (MLO) ............................................... pg. 17 principal ............................................................................................ pg. 8 Real Estate Recovery Fund ........................................................ pg. 16
Chapter 1 Key Terms
Quiz 1 Covering Chapters 1-3 is located on page 606.
Notes:
Chapter 2: Agency: authority to represent others 21
After reading this chapter, you will be able to:
• understand the variations of the agency relationship; • determine how agency relationships are created and the primary
duties owed; and • discuss why real estate licensing is necessary to protect the
licensees and their clients.
Learning Objectives
Agency: authority to represent others
Chapter
2
An agent is described as “One who is authorized to act for or in place of another; a representative...” 1
An agency relationship exists between principal and agent, employer and employee.
The California Bureau of Real Estate (CalBRE) was created to oversee licensing and police a minimum level of professional competency for individuals desiring to represent others as real estate agents. This mandate is pursued through the education of individuals seeking an original broker or salesperson license. It is also pursued on the renewal of an existing license, known as continuing education. The education is offered in the private and public sectors under government certification.
1 Black’s Law Dictionary, Ninth Edition (2009)
Introduction to agency
agent One who is authorized to represent another, such as a broker and client or sales agent and their broker.
agent
California Bureau of Real Estate (CalBRE)
principal Key Terms
For a further discussion of this topic, see Agency Chapter 1 of Agency, Fair Housing, Trust Funds, Ethics and Risk Management.
22 Real Estate Principles, Second Edition
Agency in real estate related transactions includes relationships between:
• brokers and members of the public (clients or third parties);
• licensed sales agents and their brokers; and
• finders and their brokers or principals.
The extent of representation owed to a client by the broker and their agents depends on the scope of authority the client gives the broker. Authority is given orally, in writing or through the client’s conduct with the broker.
Agency and representation are synonymous in real estate transactions. A broker, by accepting an exclusive employment from a client, undertakes the task of aggressively using due diligence to represent the client and attain their objectives. Alternatively, an open listing only imposes a best efforts standard of representation until a match is located and negotiations begin which imposes the due diligence standard for the duration of negotiations.
An agent is an individual or corporation who represents another, called the principal, in dealings with third persons. Thus, a principal can never be their own agent. A principal acts for their own account, not on behalf of another.
The representation of others undertaken by a real estate broker is called an agency. Three parties are referred to in agency law: a principal, an agent and third persons.2
In real estate transactions:
• the agent is the real estate broker retained to represent a client for the purposes hired;
• the principal is the client, such as a seller, buyer, landlord, tenant, lender or borrower, who has retained a broker to sell or lease property, locate a buyer or tenant, or arrange a real estate loan with other persons; and
• third persons are individuals, or associations (corporations, limited partnerships and limited liability companies) other than the broker’s client, with whom the broker has contact as an agent acting on behalf of their client.
Real estate jargon used by brokers and agents tends to create confusion among the public. When the jargon is used in legislative schemes, it adds statutory chaos, academic discussion and consternation among brokers and agents over the duties of the real estate licensee.
For example, the words real estate agent, as used in the brokerage industry, mean a real estate salesperson employed by and representing a real estate broker. Interestingly, real estate salespersons rarely refer to themselves as sales agents; a broker never does. Instead, they frequently call themselves
2 Calif. Civil Code §2295
What is an agent?
principal A person, an individual or an entity, acting as a buyer or seller, represented by a broker and their agents.
Real estate jargon
California Bureau of Real Estate (BRE) A government agency which oversees, regulates, administers and enforces California real estate law as practiced by licensees.
Chapter 2: Agency: authority to represent others 23
“broker associates,” or “realtors,” especially if they are affiliated with a local trade union. The public calls licensees “realtors,” the generic term for the trade, much like the term “Kleenex.”
Legally, a client’s real estate agent is defined as a real estate broker who undertakes representation of a client in a real estate transaction. Thus, a salesperson is legally an agent of the agent.
The word “subagency” suffers from even greater contrasts. Subagency serves both as:
• jargon for fee-splitting agreements between Multiple Listing Service (MLS) member brokers in some areas of the state; and
• a legal principle for the authorization given to the third broker by the seller’s broker or buyer’s agent to also act as an agent on behalf of the client, sometimes called a broker-to-broker arrangement.
Fundamental to a real estate agency are the primary duties a broker and their agents owe the principal. These duties are distinct from the general duties owed by brokers and agents to all other parties involved in a transaction.
Primary duties owed to a client in a real estate transaction include:
• a due diligence investigation into the subject property;
• evaluating the financial impact of the proposed transaction;
• advising on the legal consequences of documents which affect the client;
• considering the tax aspects of the transfer; and
• reviewing the suitability of the client’s exposure to a risk of loss.
To care for and protect both their clients and themselves, all real estate licensees are to:
• know the scope of authority given to them by the employment agreement;
• document the agency tasks undertaken; and
• possess sufficient knowledge, ability and determination to perform the agency tasks undertaken.
A licensee need to conduct themselves at or above the minimum acceptable levels of competency to avoid liability to the client or disciplinary action by the CalBRE.
An agency relationship is created in a real estate transaction when a principal employs a broker to act on their behalf.3
3 CC §2307
Primary duties
Creation of the agency relationship
24 Real Estate Principles, Second Edition
A broker’s representation of a client, such as a buyer or seller, is properly undertaken on a written employment agreement signed by both the client and the broker. A written employment agreement is necessary for the broker to have an enforceable fee agreement. This employment contract is loosely referred to in the real estate industry as a “listing agreement.”4 [See RPI Form 102 and 103]
The broker’s agency can also be created by an oral agreement or conduct of the client with the broker or other individuals. However, fee arrangements are unenforceable if no written agreement exists.
4 Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247
An agent is an individual who represents another in dealings with third persons. The representation of others undertaken by a real estate broker or agent is called agency. Agency in real estate related transactions includes relationships between brokers and members of the public, licensed sales agents and their brokers, and finders and their brokers or principals.
The primary duties a broker owes his client includes evaluating the financial impact, legal consequences, tax aspects and exposure to risk of loss inherent in all transactions.
The agency relationship is created when a client employs a broker to act on his behalf. This relationship is best undertaken with a signed written employment agreement containing a fee provision.
The California Bureau of Real Estate (CalBRE) was created to oversee licensing and establish a minimum level of professional competency in real estate transactions.
Chapter 2 Summary
Quiz 1 Covering Chapters 1-3 is located on page 606.
agent ............................................................................................... pg. 21 California Bureau of Real Estate (CalBRE) ............................ pg. 22 principal ......................................................................................... pg. 22
Chapter 2 Key Terms
Chapter 3: The agency law disclosure 25
The agency law disclosure
After reading this chapter, you will be able to:
• understand the origin and necessity of the statutorily-mandated Agency Law Disclosure;
• know the roles and obligations of all participants involved in a real estate transaction; and
• identify when the agency law disclosure is required. • • • • •
For a further discussion of this topic, see Agency Chapter 2 of Agency, Fair Housing, Trust Funds, Ethics and Risk Management.
Learning Objectives
As a result of licensee misconceptions about the duties they owe to members of the public and the public’s lack of awareness, the California legislature enacted the agency disclosure law. The goal is to better inform the public (and licensees) in an effort to eliminate some of these deficiencies.
The real estate agency disclosure law addresses two separate sets of agency- related matters on real estate transactions:
• an Agency Law Disclosure, also known as the Disclosure Regarding Real Estate Agency Relationships, setting out the “rules of agency” which control the conduct of real estate licensees when dealing with the public in an agency capacity [See Form 305 accompanying this chapter]; and
Agency Law Disclosure Restatement of agency codes and cases which establish the conduct of real estate licensees. It is delivered to all parties in targeted sales and leasing transactions. [See RPI Form 305]
Agency Chapter
3
agency confirmation provision
Agency Law Disclosure
buyer’s agent
exclusive agent
fiduciary duty
seller’s agent
Key Terms
Legislated order
26 Real Estate Principles, Second Edition
• an agency confirmation provision, contained in documents signed by principals used to negotiate the purchase of real estate or the leasing of real estate and lease agreements with a term exceeding one year, declaring the agency relationships undertaken by each of the brokers with the participants in the transaction. [See RPI Form 150]
In creating an agency scheme, the California legislature established uniform real estate terminology and brokerage conduct covering targeted transactions, as specified later in this chapter.
The real estate agency disclosure law previously applied only to one-to-four unit residential sales and leases for greater than one year. It has since been expanded to include commercial real estate sales and lease transactions effective January 1, 2015.
Thus, the Agency Law Disclosure needs to be presented to all parties when listing, selling, buying or leasing for a term greater than one year:
• property containing one-to-four residential units;
• mobilehomes; or
• commercial property.1
At its core, the Agency Law Disclosure form is a restatement of pre-existing agency codes and case law on agency relationships in all real estate transactions. [See Form 305]
Editor’s note — Multi-family apartment sales remain outside the agency disclosure law but not so for residential leases over one year.
The Agency Law Disclosure was created for use by brokers and their agents to educate and familiarize principals with:
• a uniform jargon for real estate transactions; and
• the various agency roles licensees undertake on behalf of their principals and other parties in a real estate transaction.
This information is presented in a two-page form. The exact wording of its content is dictated by statute.2 [See Form 305]
The Agency Law Disclosure defines and explains the words and phrases commonly used in the real estate industry.
These industry terms are used to express:
• the agency relationships of brokers to the parties in the transaction;
• broker-to-broker relationships; and
• the employment relationship between brokers and their agents.
A buyer’s agent and seller’s agent are mentioned but not defined. Legally, an agent is a licensed real estate broker. Thus, the word “agent,” when used
1 Calif. Civil Code §§2079.13(j), 2079.14
2 CC §2079.16
agency confirmation A provision in all purchase agreements and counteroffers disclosing the agency of each broker in the transaction.
Uniform jargon and agency law
buyer’s agent An agent representing the buyer. Also known as a selling agent. [See RPI Form 103]
seller’s agent An agent representing the seller. Also known as a listing agent. [See RPI Form 102]
Chapter 3: The agency law disclosure 27
in the disclosure, is not a reference to the broker’s agents. Ironically, a broker rarely refers to themselves as an agent, which in law, they always are when using their license to earn a fee.
Two sections on the face of the Agency Law Disclosure, entitled “seller’s agent” and “buyer’s agent,” address the duties owed to the seller and buyer in a real estate transaction by these otherwise undefined brokers.
The seller’s broker is correctly noted as being an agent for the seller, and is also known within the trade as a listing broker or listing office. The buyer’s broker is known as a buyer’s agent. However, peculiar to real estate brokerage, the buyer’s broker is also known as the selling agent.
The Agency Law Disclosure does not mention, much less define, the broker’s role as an exclusive agent for either the buyer or seller. Yet the separate agency confirmation provision included in all targeted transactions calls for the broker to make this distinction known to all the parties involved. The mandated provision requires the broker to characterize their conduct with the parties as the agent of the “seller exclusively” or the “buyer exclusively.”
These exclusive characterizations of agency conduct have no relationship to employment under exclusive listings to sell or buy property. The seller’s agent with an exclusive right-to-sell listing understands the prospective buyer may turn out to be one of their buyer clients. This representation of opposing parties makes the broker a “non-exclusive” dual agent. [See Chapter 5]
Editor’s note — This chapter is discussed primarily in the context of an agent representing a buyer or seller. However, the same rules of conduct apply for an agent of a tenant or landlord.
The Agency Law Disclosure states the generally accepted principles of law governing the conduct of brokers who are acting as agents solely for a seller or a buyer (or tenant or landlord).
Two categories of broker obligations arise in a transaction, including:
• the special or primary agency duties of an agent which are owed by a broker and their agents to their principal, known as fiduciary duties; and
• the general duties owed by each broker to all parties in the transaction, requiring them to be honest and avoid deceitful conduct, known as general duties.
In addition to the use requirements for the Agency Law Disclosure form, a separate, long-mandated agency confirmation is also required on all targeted transactions. [See RPI Form 150]
The agency confirmation provision declares the agency relationships each broker may have with the principals in the specific transaction underway.
exclusive agent An agent who is acting exclusively on behalf of only one party in a transaction.
The parties, their brokers and duties owed
fiduciary duty That duty owed by an agent to act in the highest good faith toward the principal and not to obtain any advantage over their principal by the slightest misrepresentation, concealment, duress or undue influence.
Agencies confirmed
28 Real Estate Principles, Second Edition
With the agency confirmation included in written negotiations to purchase or lease and lease agreements, this relationship is consented to by all parties when they sign the documents.
The agency confirmation provision discloses each broker’s actual agency relationship presently existing with the participants. Further, it memorializes the relationship established by the broker’s and their agents’ conduct with the principals in a transaction. The agency relationship confirmed is the broker’s legal determination of the actual agency created by their prior and present conduct with the parties.
Form 305
Agency Law Disclosure
Page 1 of 2
Chapter 3: The agency law disclosure 29
Other agency related conflicts may exist for the broker or agent with other parties or service providers in a transaction, such as a dual agency relationship or conflict of interest. These are set out and disclosed in other forms. [See RPI Form 117 and 527]
The Agency Law Disclosure form contains the wording for the agency confirmation provision to be included in targeted transactions. However, the
Form 305
Agency Law Disclosure
Page 2 of 2
30 Real Estate Principles, Second Edition
confirmation provision in the Agency Law Disclosure form is not filled out or used in lieu of the agency confirmation provision contained in a document, such as a purchase agreement or lease.
The agencies to be confirmed by each broker in the purchase agreement or lease provisions are not known at the time of the initial employment when the Agency Law Disclosure is first presented to the principal. For example, the agency in a potential future sales transaction cannot be determined, much less confirmed at the time the broker firsts presents their seller with the Agency Law Disclosure form.3
When two brokers are involved in a targeted transaction, each broker needs to disclose whether they are acting as the agent for the buyer or the seller (or the tenant or landlord). Alternatively, when only one broker is involved, they need to confirm whether they and their agents are acting as the exclusive agent for one party or as a dual agent for both the buyer and seller.
Written disclosures tend to eliminate later disputes over agency duties. Agency conflicts discovered when in escrow often become the basis for cancelling a transaction, the payment of a brokerage fee, or both.4
The Agency Law Disclosure needs to be presented to all parties in targeted transactions. However, not all transactions are targeted. For example, arranging the secured interests of lenders and borrowers under trust deeds or collateral mortgages, are not targeted transactions.
The sale, exchange or creation of interests in transactions targeted by the agency disclosure law include transfers of:
• fee simple estates in real estate or registered ownerships for mobilehomes;
• life estates;
• existing leaseholds with more than one year remaining, such as ground leases; and
• leases created for more than one year.5
The Agency Law Disclosure needs to be attached to the following documents and signed by all parties in targeted transactions:
• a seller’s listing [See RPI Form 102];
• a buyer’s listing [See RPI Form 103];
• a landlord’s authorization to a broker to lease property on their behalf for a lease term of more than one year [See RPI Form 110];
• an exclusive authorization to locate space for a tenant seeking to lease real estate for a term greater than one year [See RPI Form 111];
• a purchase agreement [See RPI Form 150 and 159]; 3 CC §2079.17(d)
4 L. Byron Culver & Associates v. Jaoudi Industrial & Trading Corporation (1991) 1 CA4th 300
5 CC §2079.13(l)
Use of the Agency Law Disclosure
What is targeted?
Chapter 3: The agency law disclosure 31
• an option to purchase [See RPI Form 161 and 161-1]
• an exchange agreement [See RPI Form 171];
• a counteroffer, by attachment or by reference, to a purchase agreement containing the disclosure as an attachment [See RPI Form 180];
• any letter of intent (LOI) prepared and submitted on behalf of a buyer or tenant (or landlord) [See RPI Form 185];
• a residential or commercial lease agreement for a term exceeding one year [See RPI Form 550 and 552 –552-8];6 and
• an offer to lease. [See RPI Form 556]
However, there are exceptions. The Agency Law Disclosure is not required on negotiations and agreements concerning:
• property management, unless entry into leases for periods exceeding one year are authorized;
• financing arrangements;
• leases for one year or less;
• month-to-month rental agreements; and
• the purchase of residential property containing five-or-more units.
Failure of the seller’s agent to provide the seller with the Agency Law Disclosure prior to entering into the listing agreement is a violation of disclosure laws. As a consequence of this up front failure, the broker will lose the fee on a sale if challenged by the seller. The loss of the fee is not avoided by a later disclosure made as an addendum to a purchase agreement or escrow instructions.7
The Agency Law Disclosure is also required when listing and submitting offers on leasehold estates. These transactions occur when a long-term ground lease is being conveyed to a buyer and will be security for any purchase- assist financing.8
The seller’s signature acknowledges receipt of the Agency Law Disclosure at both:
• the listing stage, as an addendum to the listing; and
• on presentation of a buyer’s offer, as an addendum to the purchase agreement.9
Thus, the Agency Law Disclosure is treated by the seller’s agent as a preliminary and compulsory listing event, if the listing broker expects to enforce collection of a brokerage fee on a later sale of the property. The Agency Law Disclosure is signed by the seller and handed back to the broker or their agent before settling down to finalize the listing to which it will be attached.
6 CC §2079.14
7 Huijers v. DeMarrais (1992) 11 CA4th 676
8 CC §§2079.13(j), 2079.13(l), 2079.14
9 CC §2079.14
Agency rules for a seller’s listing
32 Real Estate Principles, Second Edition
Further, when the broker or their sales agent fails to hand the seller the Agency Law Disclosure at the listing stage, the listing, and thus the agency, can be cancelled by the seller at any time. When the Agency Law Disclosure is not delivered up front with the listing, the seller may cancel payment of the fee due their broker after the transaction is in escrow and the brokerage fee has been further agreed to.
Similarly, the buyer’s agent provides the Agency Law Disclosure form to the buyer prior to their signing any writing that initiates negotiations contemplating a sale or lease transaction for a term greater than one year.10
Editor’s note — Agency disclosure law requires a buyer’s/tenant’s agent provide the Agency Law Disclosure form as soon as practicable prior to execution of an offer to purchase or lease. Thus, as a matter of good practice, the disclosure form is best provided and signed by the buyer/tenant when entering into a buyer’s listing agreement or an exclusive authorization to locate space, as this is the moment affirmative agency duties commence. [See RPI Form 103 and 111]
For the buyer’s broker to protect themselves against loss of the fee due to the seller’s broker’s failure to timely disclose, the buyer’s broker needs to perfect their right to collect their portion of any brokerage fee to be paid by the seller. Here, the buyer’s broker’s share of the fee to be paid by the seller needs to be agreed to be paid directly to the buyer’s broker under the terms of the purchase agreement and escrow instructions.
Also, the Agency Law Disclosure form needs to be attached as a signed addendum to the buyer’s purchase agreement offer submitted to the seller.
However, the buyer’s broker might erroneously agree to let the seller’s broker receive the entire fee from the seller. Under this risky arrangement, the seller’s broker pays the buyer’s broker a share of the fee under their separate fee-sharing agreement. [See Chapter 5]
However, when the seller’s broker fails to obtain a signed Agency Law Disclosure as an addendum to the listing, the seller may legally avoid paying their broker their fee. Thus, when the seller has not agreed to directly pay the buyer’s broker, a risk for the buyer’s broker is created. If the seller refuses to pay their broker the entire fee for lack of disclosure, the buyer’s broker is left without a fee as agreed from the seller’s broker.
For the buyer’s broker to protect their fee, the seller needs to agree in the body of the purchase agreement that the seller will pay both brokers themselves.
10 CC §2079.13
Agency rules for a buyer’s
agent
The buyer’s agent
perfects their fee
Chapter 3: The agency law disclosure 33
A seller may accept a purchase agreement offer or enter into a counteroffer but refuse to sign an Agency Law Disclosure. If the seller refuses to return a signed copy of the Agency Law Disclosure, the broker or their agent needs to document the refusal to preserve their right to receive a fee from the seller.11
If a party claims they were never handed the Agency Law Disclosure, the broker’s written documentation, created at the time of the refusal, dispels such a claim. The written documentation would also preserve the fee.
11 CC §2079.15
Documenting a refusal to sign
The Agency Law Disclosure was created by the California legislature to familiarize brokers, agents and their principals with the uniform industry jargon. It also reveals the duties owed by licensees in the sale or lease for more than one year of real estate in targeted transactions involving:
• one-to-four unit residential properties;
• commercial real estate; or
• mobilehomes.
The disclosure describes the various agency roles licensees undertake on behalf of their principals and other participants in a real estate related transaction. The Agency Law Disclosure needs to be presented to all participants when listing, selling, buying or leasing for more than one year of property in targeted transactions.
A separate agency confirmation provision is included in purchase agreements and counteroffers. It advises the buyer and seller of any agency relationships each broker has with the participants in the transaction.
agency confirmation provision ............................................... pg. 26 Agency Law Disclosure .............................................................. pg. 25 buyer’s agent ................................................................................. pg. 26 exclusive agent ............................................................................. pg. 27 fiduciary duty ............................................................................... pg. 27 seller’s agent .................................................................................. pg. 26
Chapter 3 Summary
Chapter 3 Key Terms
Quiz 1 Covering Chapters 1-3 is located on page 606.
Notes:
Chapter 4: Conflict of interest 35
After reading this chapter, you will be able to:
• recognize the types of arrangements, situations, and relationships that can give rise to conflicts of interest in real estate transactions;
• disclose the kinds of relationships and interests presenting a potential conflict of interest; and
• mitigate potential conflicts resulting from familial and investment relationships.
Learning Objectives
Conflict of interest
Chapter
4
A conflict of interest arises when a broker or their agent, acting on behalf of a client, has a competing professional or personal bias which hinders their ability to fulfill the fiduciary duties they have undertaken on behalf of their client.
In a professional relationship, a broker’s financial objective of compensation for services rendered is not a conflict of interest.
However, fees and benefits derived from conflicting sources are required to be disclosed to the client. This includes compensation in the form of:
• professional courtesies;
• familial favors; and
Professional relationships compromised
conflict of interest When a broker or agent has a positive or negative bias toward a party in a transaction which is incompatible with the duties owed to their client. [See RPI Form 527]
Key Termsaffiliated business arrangement (ABA)
conflict of interest
dual agency
For a further discussion of this topic, see Ethics Chapter 1 of Agency, Fair Housing, Trust Funds, Ethics and Risk Management.
36 Real Estate Principles, Second Edition
• preferential treatment by others toward the broker or their agents. [See RPI Form 119]
Similarly, the referral of a client to a financially controlled business, owned or co-owned by the broker, needs to be disclosed by use of an affiliated business arrangement (ABA) disclosure. [See RPI Form 519]
A conflict of interest addresses the broker’s personal relationships potentially at odds with the agency duty of care and protection owed the client.
Thus, a conflict of interest creates a fundamental agency dilemma for brokers; it is not a compensation or business referral issue.
affiliated business arrangement (ABA) Referral of a client to a financially controlled business whose earnings are shared with the broker which requires a written disclosure. [See RPI Form 205 and 519]
Form 527
Conflict of Interest
Page 1 of 2
Chapter 4: Conflict of interest 37
Unless disclosed and the client consents, the conflict is a breach of the broker’s fiduciary duty of good faith, fair dealing, and trust owed to the client when the broker continue to act on the client’s behalf.
A conflict of interest, whether patent or potential, is disclosed by the broker at the time it occurs or as soon as possible after the conflict arises. Typically, the conflict arises prior to providing a buyer with property information or taking a listing from a seller.
The disclosure creates transparency in the transaction. It reveals to the client the bias held by the broker which, when disclosed, allows the client to take the bias into consideration in negotiations. The disclosure and consent does not neutralize the inherent bias itself. However, it does neutralize the element of deceit which would breach the broker’s fiduciary duty if left undisclosed.
A conflict of interest arises and is disclosed to the client when the broker:
• has a pre-existing relationship with another person due to kinship, employment, partnership, common membership, religious affiliation, civic ties, or any other socio-economic context; and
• that relationship might hinder their ability to fully represent the needs of their client.
A seller’s broker is to disclose their acquisition of any direct or indirect interest in the seller’s property. The broker also discloses whether a family member, a business owned by the broker, or any other person holding a special relationship with the broker will acquire an interest in the seller’s property. [See Form 527 §3.6 accompanying this chapter]
A broker cannot act for more than one participant in a transaction, including themselves, without disclosing their dual agency and obtaining the client’s consent at the time the conflict arises.1 [See Chapter 5; see Form 527]
1 Bus & P C §10176(d)
Situations involving a conflict
Relative’s participation in a transaction
dual agency The agency relationship that results when a broker represents both the buyer and the seller in a real estate transaction. [See RPI Form 117]
Form 527
Conflict of Interest
Page 2 of 2
38 Real Estate Principles, Second Edition
Also, a seller’s broker has an affirmative duty to disclose to the seller their agency or other conflicting relationship they might have with the buyer. The duty to disclose exists even if the seller fails to inquire into whether the broker has a relationship with the buyer.
Further, failure to disclose a broker’s personal interest as a buyer in a transaction when they are also acting as a broker on behalf of the seller constitutes grounds for discipline by the Real Estate Commissioner.2
A buyer’s broker is to disclose to the buyer the nature and extent of any direct or indirect interest the broker or the broker’s agents hold in any property presented to the buyer.
For example, a buyer’s broker shows the buyer several properties, one of which is owned by the broker and others, vested in the name of an LLC. The broker does not inform the buyer of their indirect ownership interest in the property.
The buyer later decides to purchase the property owned by the LLC. An offer is prepared on a purchase agreement with an agency confirmation provision stating the broker is the agent for both the buyer and seller. The offer is submitted to the LLC. [See RPI Form 159]
The broker, aware the buyer will pay a higher price for the property than the initial price offered by the buyer, presents the buyer with a counteroffer from the LLC at a higher selling price. The buyer accepts the counteroffer.
Here, the broker has a duty to promptly disclose their ownership interest in the property to the buyer the moment the conflict arises. The conflict of interest in the broker’s ownership is a material fact requiring disclosure since the buyer’s decisions concerning acquisition of the property might be affected.
As a result of the nondisclosure, the buyer can recover the fee received by the broker and the increase in price under the counteroffer.
Had the buyer known the broker held an ownership interest in the property when it was first presented, the buyer might have negotiated differently when setting the price and terms for payment. Alternatively, the buyer may have retained a different broker who was not compromised by a conflict of interest.
A broker acting solely as a principal in the sale of their own property is not restricted in their conduct by compliance with agency obligations. The broker selling or buying property for their own account acts solely as the seller or buyer. The licensee has no conflict due to the existence of their license since they are not holding themselves out as a broker or agent acting on behalf of another person in the transaction.3
2 Whitehead v. Gordon (1970) 2 CA3d 659
3 Robinson v. Murphy (1979) 96 CA3d 763
A relative owns the
property sold
Acting as principal
Chapter 4: Conflict of interest 39
However, when a broker-seller receives a brokerage fee on the sale of their own property, or on the purchase of their own property, the broker subjects themselves to real estate agency requirements.
A broker’s positive or negative bias toward the opposing participant, or an indirectly involved third party in a transaction, needs to be disclosed and consented to by the client. This bias is known as a conflict of interest.
A conflict of interest is disclosed at the time the conflict arises. Timely disclosure allows the client to take the bias held by the broker into consideration during negotiations.
A licensee acting solely as a principal on their own behalf when buying or selling property need not disclose the existence of their real estate license.
affiliated business arrangement .............................................. pg. 36 conflict of interest ........................................................................ pg. 35 dual agency .................................................................................... pg. 37
Chapter 4 Summary
Chapter 4 Key Terms
Quiz 2 Covering Chapters 4-7 is located on page 607.
Notes:
Chapter 5: Dual agency and subagency 41
Dual agency and subagency
After reading this chapter, you will be able to:
• differentiate between agency and fee sharing; and • identify situations in which a dual agency or subagency is
established and managed.
Learning Objectives
Chapter
5
The agency relationship of the buyer’s broker is determined by the conduct of the brokers and their agents, not by the seller’s payment of a broker fee to the broker. Nor is it determined by splitting the fee received by the seller’s broker.
Thus, neither a subagency duty owed the seller, nor a dual agency relationship with the buyer and seller, is imposed on the buyer’s broker simply because the seller pays the buyer’s broker a fee. This fee-agency rule applies whether the seller pays the fee directly to the buyer’s broker, or indirectly when the seller’s broker initially receives the entire fee.1
Brokers and agents working for buyers to locate suitable property are not considered agents of the seller simply because they show their buyers properties listed with other brokers. Buyer’s brokers do not typically conduct themselves as subagents of the seller or as dual agents representing both seller and buyer.
1 Calif. Civil Code §2079.19
Agency and fee sharing concepts
subagent An individual who has been delegated agency duties by the primary agent of the client, not the client themselves.
dual agent
multiple listing service (MLS)
subagent
For a further discussion of this topic, see Agency Chapter 4 of Agency, Fair Housing, Trust Funds, Ethics and Risk Management.
42 Real Estate Principles, Second Edition
A seller’s listing agreement authorizes the listing broker to cooperate with other brokers. Thus, the seller’s broker may share property information with other brokers and share any brokerage fee due from the seller. [See RPI Form 102 §4.2]
Listing agreements do not authorize the seller’s broker to delegate to other brokers the authority to also act on behalf of the seller to locate buyers and obtain offers to purchase as the seller’s agent.
When another broker acts on behalf of a seller at the request of the seller’s broker, a subagency with the seller has been established by the brokers. Further, the broker acting as the subagent is not employed by the seller’s brokers as an associate broker.
However, a provision in a listing agreement may authorize the seller’s broker to create a subagency between their seller and another broker. With authority, the seller’s broker, acting on behalf of the seller, may employ another brokerage office as a subagent to also act on behalf of the seller to market the property.
The membership of a buyer’s broker in a multiple listing service (MLS) is not conduct that creates a dual agency or subagency relationship with any seller whose property is listed for sale with another broker who is a member of the MLS.
Agency, whatever the type, is created either by contract or by the conduct of a broker when interacting with a buyer or seller. Agency is not established by entering into trade memberships or by receipt of a fee paid by the seller.2
Subagency duties differ greatly from those misleading subagency concepts often generated at the MLS level. The claimed “MLS subagency” arose out of erroneous notions held about the nature of cooperation between brokers in fee-sharing arrangements.
The focus within the MLS for determining agency relationships in the past was improperly placed on the relationship between the MLS brokers. The analysis overlooked the relationship each broker had with their client in a sales transaction.
For a broker to become a subagent appointed by the seller’s broker, the broker is in contact with the buyer but conducts themselves solely as the seller’s representative throughout all negotiations with the buyer.
A dual agent is a broker who simultaneously represents the best interest of opposing parties in a transaction, e.g., both the buyer and the seller.3
2 CC §2307
3 CC §2079.13(d)]
Subagent vs. fee-sharing
buyer’s broker
Subagency: MLS
membership myth
multiple listing service (MLS) An association of real estate agents pooling and publishing the availability of their listing properties.
Dual agency as an
authorized practice
Chapter 5: Dual agency and subagency 43
Dual agency has always been proper brokerage practice. It is a situation that arises naturally in the course of representing buyers and sellers. However, the existence of a dual agency is to be promptly disclosed to each client.4
A broker who fails to promptly disclose their dual agency at the moment it arises is subject to:
• the loss of their brokerage fee;
• liability for their principals’ money losses; and
• disciplinary action by the California Bureau of Real Estate (CalBRE).5
When a dual agency is established in a one-to-four unit residential sales transaction, and both parties are represented by the same broker, the broker may not pass on confidential pricing information to the opposing parties. For example, when the broker is a dual agent, the broker and their agents may not tell the seller the price the buyer is willing to pay, or tell the buyer the price the seller is willing to accept.
Confidential pricing information is to remain the undisclosed knowledge of the dual agent, unless authorized to release the information in a writing signed by the principal in question.6
The decision by the broker not to release pricing information needs to be made and maintained from the moment the dual agency arises, the same moment the dual agency is disclosed.
The dual agency conflict typically arises when the buyer is an existing client who has received property information from the broker and is now exposed to or expresses an interest in property listed by the broker. This conflict of dual agency occurs before the purchase agreement is prepared, including its agency confirmation provision.
A broker owes their client the duty to pursue the best business advantage legally and ethically obtainable. However, by nature, the dual agent is prevented from actively achieving this advantage for either client. The dual agent cannot take sides with one or the other during negotiations. A natural inability exists to negotiate the highest and best price for the seller, and at the same time, negotiate the lowest and best price for the buyer.
Generally, clients of a dual agent do not receive the full range of benefits available from an exclusive agent. This holds true even if different agents employed by the same broker each work with different parties to the same transaction.
The legal agent for a buyer or seller in a transaction is the broker who employs the agents involved handling negotiations. It is not the broker’s agents who
4 CC §2079.17
5 Calif. Business and Professions Code §10176(d)
6 CC §2079.21
dual agent A broker who represents both parties in a real estate transaction. [See RPI Form 117]
Undisclosed knowledge
Dual agency and diminished benefits
44 Real Estate Principles, Second Edition
A provision in a listing agreement may authorize the seller’s broker to create a subagency between their seller and another broker. Under the subagency provision, the seller’s broker may act on behalf of the seller to employ another brokerage office to also act on behalf of the seller to market the property.
A dual agent is a broker who is simultaneously representing the best interests of each of the opposing parties in a transaction. Dual agency is to be disclosed to the parties involved at the time the conflict arises. Failure to disclose a dual agency relationship can result in the loss of the brokerage fee, liability for money losses incurred by the clients, and disciplinary action by the California Bureau of Real Estate (CalBRE) on a complaint.
Confidential pricing information needs to remain the undisclosed knowledge of the dual agent, unless they are authorized to release the information to the other party.
The conflicts that exist in a broker’s dual representation rule out aggressive negotiations to obtain the best business advantage for either party. Thus, the principals of a dual agent do not receive the full range of benefits they would have obtained from an exclusive agent.
dual agent ...................................................................................... pg. 43 multiple listing service (MLS) .................................................. pg. 42 subagent ......................................................................................... pg. 41
Chapter 5 Summary
are in contact with the clients. In-house transactions which involve the broker as a dual agent make it particularly difficult for the broker to oversee and supervise dual agency negotiations.
Typically, one agent employed by the broker enters into an exclusive sales listing with a property owner. At the same time, another agent in the broker’s employment works separately with a buyer to locate qualifying properties, providing information on properties listed with other brokers.
The broker becomes a dual agent the moment this buyer is exposed to a property that is the subject of an in-house listing.
However, an improper tendency in transactions involving only one broker and two of their agents is to automatically designate the broker as a dual agent. However, the buyer may be a party to whom only general duties regarding property disclosures are owed by the broker and their agents. Thus, no specific agency duties are owed the buyer and a dual agency does not arise.
Chapter 5 Key Terms
Quiz 2 Covering Chapters 4-7 is located on page 607.
Chapter 6: Trust funds overview 45
After reading this chapter, you will be able to:
• identify the general laws and regulations governing broker-held trust funds;
• manage, receive, deposit, hold, and disburse trust funds; and • understand trust fund recordkeeping and accounting procedures.
Learning Objectives
Trust funds overview
Real estate licensees often handle other people’s items which have or evidence monetary value, called funds. Funds belonging to others which a broker and their agents handle when acting as agents in a transaction are called trust funds.
Trust funds generally include:
• rents and security deposits collected under a property management agreement [See RPI Form 550];
• good faith deposits tendered by a buyer with an offer to purchase;
• fees and costs handed to the broker in advance of their performance of agreed-to services;
• loan payments and funds on contract collection and loan brokerage; and
• any other personal property of value.
Introduction to trust funds
trust funds Items which have or evidence monetary value held by a broker for a client when acting in a real estate transaction.
Chapter
6
conversion
general account
owner’s statement
subaccount ledger
trust funds
For a further discussion of this topic, see Trust Funds Chapter 1 of Agency, Fair Housing, Trust Funds, Ethics and Risk Management.
Key Terms
46 Real Estate Principles, Second Edition
Trusts funds are held by brokers for safekeeping and may not be treated casually. Recordkeeping and accounting requirements are imposed on brokers when they receive, transfer or disburse trust funds.
This chapter familiarizes brokers and their agents with the requirements and procedures for the handling of trust funds.
Brokers, while acting on behalf of others in their capacity as agents in real estate transactions, receive funds which are not theirs and are held in trust for the owner of the funds. These trust funds include:
• deposits on offers to purchase and applications to rent or borrow;
• fees advanced for any brokerage services to be provided in the future, called advance fees;
• funds advanced for future costs;
• funds from sellers, borrowers and landlords as reserves to cover future costs;
• rental income and tenant security deposits;
• funding for a loan or the purchase of real estate; and
• proceeds from a sale or financing.
Trust funds are received by a broker, or by an employee acting on behalf of the broker.
Trust funds include any item or evidence of value handed to the broker or the broker’s employee while acting as an agent in a real estate transaction.
Trust funds come in many forms, including:
• checks;
• precious metals/stones;
• stocks/bonds;
• collectibles;
• promissory notes; and
• any other item or evidence of value.1
Consider a broker who enters into a property management agreement with an owner of income-producing real estate. Management services to be performed by the broker under their license include locating tenants, collecting rent and deposits, and disbursing funds for payment of operating expenses and installments on a trust deed loan encumbering the real estate.
The broker is further authorized to withdraw their fee and send any funds remaining to the owner.
1 Calif. Business and Professions Code §10145
Identification of trust funds
Evidence of value
Managing the trust funds
Chapter 6: Trust funds overview 47
The broker takes possession of the property under the property management agreement. The broker locates several new tenants and collects monthly rent and deposits.
The broker deposits the rent and security deposits they receive into their general account. They then enter the amount of each transaction as trust funds on the client’s subaccount ledger.
Although sufficient funds are held in the client’s subaccount to meet operating expenses and make the loan payment, the broker first withdraws their fee before making the loan payment authorized by the owner. The disbursement of the brokerage fee reduces the balance on the client’s ledger below the amount needed to make the loan payment.
The broker then issues a check to the lender for the loan payment. The check bounces due to insufficient funds remaining in the broker’s general account. The owner is notified by the lender and contacts the broker who provides funds to cover the loan payment.
In this instance, the broker illegally commingled the owner’s funds with their funds when the rent and security deposits were deposited into the broker’s general account rather than a trust account. Even though a subaccount ledger for the client’s trust funds was maintained, the funds were improperly commingled with funds belonging to the broker.
Further, the broker breached their agency duty owed the client by withdrawing the brokerage fee before paying all other obligations the broker agreed to disburse on behalf of the owner, including payment on the loan, known as a conversion. The brokerage/management fee is to be paid last, after agreed-to services have been performed, including all authorized disbursements.
Lastly, by writing a check for the loan payment when the broker knew insufficient funds existed in the account to cover the check, the broker misrepresented the availability of immediate funds. This is considered fraud and is grounds for the revocation or suspension of the broker’s license.2
Alternatively, consider a broker who maintains a brokerage trust account. The trust account contains loan payments received by the broker while servicing loans on behalf of trust deed investors.
The broker pledges the trust account to secure a personal loan from the same bank which holds the trust account.
The broker defaults on the loan, and the bank seizes the trust account funds.
An investor seeks to recover their trust account funds from the bank, claiming the bank’s seizure of the funds is a conversion since trust funds cannot be taken to satisfy the broker’s personal debt.
2 Apollo Estates, Inc. v. Department of Real Estate (1985) 174 CA3d 625
general account A broker or agent’s personal or business account, not to be commingled with trust funds.
subaccount ledger An accounting document or file identifying the owner of trust funds and the amount held for the owner.
conversion The unlawful appropriation of another’s property, as in the conversion of trust funds.
Conversion trust of funds
48 Real Estate Principles, Second Edition
The bank claims the seizure of the trust account is not a conversion since it exercised its right to an offset under the security agreement.
Is the investor entitled to recover their portion of the trust funds?
Yes! The trust funds belong to the investor and need to be returned. The bank’s right to an offset for the broker’s personal debt to the bank does not extend to seizure of funds held for others in the broker’s trust account.3
Funds received in the form of cash or checks made payable to the broker while acting as an agent are to be:
• deposited into the broker’s trust account;
• held undeposited as instructed; or
• endorsed and handed to others entitled to the funds.
Further, the broker has a duty to secure trust funds that are not in the form of cash or checks, such as gems, coins, notes or other personal property, from loss or damage after they are received. These nonnegotiable types of trust funds cannot be deposited in a bank account. Thus, the broker is to place the nonnegotiable items in a safe or safe-deposit box for safekeeping until they are delivered to others.
Trust funds received in the form of checks or cash may only be used for expenditures authorized and incurred for the benefit of the owner of the funds.
Further, the broker is required to regularly account to the owner on the status, expenditure and location of the negotiable trust funds, called an owner’s statement.
Prior to the end of the third business day following the day the broker receives negotiable trust funds, the broker needs to deposit the funds:
• with the person or escrow depository entitled to the funds (as payee or by endorsement); or
• in a trust account maintained by the broker at a bank or other state- recognized depository.4
Also, when an agent of the broker accepts trust funds on behalf of the broker, the agent is to immediately deliver the funds to the broker, unless directed by the broker to:
• deliver the trust funds to the person or the escrow entitled to the funds; or
• deposit the trust funds into the broker’s trust account.5
3 Chazen v. Centennial Bank (1998) 61 CA4th 532
4 Bus & P C §10145; Department of Real Estate Regulation §2832(a)
5 Bus & P C §10145(c)
Handling cash and
checks
owner’s statement An accounting on the status, expenditure and location of negotiable trust funds provided to the owner of those funds.
Agent delivery to the broker
Chapter 6: Trust funds overview 49
For example, when a broker negotiates the purchase or lease of real estate, they usually receive a check as a good faith deposit.
The broker may hold the check undeposited until an event occurs, such as the offer is accepted or escrow is opened, if:
• the check is made payable to someone other than the broker; or
• the check is made payable to the broker with written instructions, typically from the buyer or tenant, to hold the check undeposited until acceptance of the offer or escrow is opened; and
• the person to whom the offer is submitted, usually the seller or landlord, is informed the check for the good faith deposit is being held by the broker when the offer is submitted.6
The instructions to hold the check undeposited until acceptance are included in the terms for receipt of the deposit contained in the offer to purchase or lease. [See RPI Form 150 §1]
After a buyer’s offer is accepted, the broker may continue to hold the buyer’s check for the good faith money undeposited if the seller has given the broker written instructions to continue to hold the check undeposited.
However, without instructions to further retain the check undeposited, the broker is to deposit or deliver the funds no later than three business days after acceptance:
• to the payee entitled to the funds, such as a title company or escrow;
• into the broker’s trust account at a bank or other state-recognized depository, such as a thrift; or
• to an escrow depository on the broker’s endorsement, if the broker is the payee and does not want to deposit and disburse the funds from their trust account to escrow.7
A broker needs to know who owns and controls the funds held in their trust account at all times. Trust funds can only be disbursed on the authorization of the owner of the funds. Subaccount ledgers are set up to identify the owner of funds and the amount held for the owner.
However, persons other than the owner of the trust funds may have an interest in the funds. If so, their authorization is also required to withdraw the funds.
6 CalBRE Reg. §2832(c)
7 CalBRE Reg. §2832
Identifying the owner
50 Real Estate Principles, Second Edition
Funds belonging to others which a broker and their agents handle are called trust funds. Trust funds include rents, security deposits, good faith deposits, advance fees, loan payments, and any other personal property of value.
The safekeeping of trust funds is ensured by the imposition of recordkeeping and accounting requirements on brokers when they receive, transfer or disburse trust funds.
Trust funds come in many forms, including checks, precious metals/ stones, stocks/bonds, collectibles, promissory notes and any other item or evidence of value handed to the broker or the broker’s employee while acting as an agent in a real estate transaction.
Trust funds are illegally commingled when a broker deposits the funds into an account other than a dedicated trust fund account. A broker’s use of trust funds for any reason other than those expressly authorized by the owner of the funds constitutes a conversion of the client’s funds to the broker’s own use.
Cash and checks held as trust funds are to be deposited into the broker’s trust account, held undeposited as instructed, or endorsed and handed to others entitled to the funds.
A broker needs to regularly account to the owner on the status, expenditure and location of the negotiable trust funds held by the broker. Similarly, a broker needs to know who owns and controls the funds held in their trust account, identified through the use of subaccount ledgers.
conversion ................................................................................. pg. 47 general account........................................................................ pg. 47 owner’s statement ................................................................... pg. 48 subaccount ledger ................................................................... pg. 47 trust funds.................................................................................. pg. 45
Chapter 6 Summary
Chapter 6 Key Terms
Quiz 2 Covering Chapters 4-7 is located on page 607.
Chapter 7: Civil rights and fair housing laws 51
Civil rights and fair housing laws
After reading this chapter, you’ll be able to:
• understand federal and California anti-discrimination laws; and • know how the laws affect the management of residential and
nonresidential rental property.
Learning Objectives
Key Terms
Chapter
7
Regardless of race, all citizens of the United States have the right to rent real estate under the federal Civil Rights Act.1
Further, all individuals within the United States are given the same rights to make and enforce contracts (rental and lease agreements), sue, be sued, enjoy the full benefits of the law and be subject to the same punishments, penalties, taxes and licenses, regardless of race or legal status.2
The federal Civil Rights Act applies to race discrimination on the rental of all types of real estate, both residential and commercial. Racially motivated activities in any real estate leasing transaction are prohibited.
1 42 United States Code §1982
2 42 USC §1981
Property rights cannot be based on status
Civil Rights Act A federal law which provides broad protections to numerous classes of individuals in the United States against discriminatory activities.
blockbusting
Civil Rights Act
disabled person
dwelling
familial status
Federal Fair Housing Act
steering
Unruh Civil Rights Act
For a further discussion of this topic, see Chapter 36 of Landlords, Tenants and Property Management.
52 Real Estate Principles, Second Edition
Federal protection against racial discrimination given under the Civil Rights Act is a broad protection which applies to types of discrimination prohibited in all activities between individuals present in the country.
While the federal Civil Rights Act provides general protection against all prohibited discriminatory activity, the Federal Fair Housing Act (FFHA) protections specifically limited to dwellings, including rental housing.3
A dwelling includes any building or structure that is occupied, or designed to be occupied, as a residence by one or more families. A dwelling also includes vacant land offered for lease for residential dwelling purposes, such as a lot or space made available to hold a mobilehome unit.4
The FFHA bars the use of any discriminatory actions a landlord or property manager might take against a prospective tenant when handling a residential rental based on an individual’s:
• race or color;
• national origin;
• religion;
• sex;
• familial status; or
• handicap.5
Familial status refers to whether a household includes individuals under the age of 18 in the legal custody of a parent or legally designated guardian.6
Handicapped persons are individuals who have:
• a physical or mental impairment which substantially limits the individual’s life activities; or
• a record of, or are regarded as having, a physical or mental impairment.7
The term “handicap” excludes individuals who illegally use a controlled substance. However, alcoholics and individuals who are considered “recovering or recovered addicts” are protected as handicapped individuals.8
The FFHA prohibits a landlord or property manager from unlawfully discriminating against individuals during solicitations and negotiations for the rental of a dwelling.9
Thus, a landlord or property manager may not:
• refuse to rent a dwelling or to negotiate the rental of a dwelling for prohibited discriminatory reasons;
3 42 USC §§3601 et seq.
4 42 USC §3602(b)
5 42 USC §3602
6 42 USC §3602(k)
7 42 USC §3602(h)
8 United States v. Southern Management Corporation (4th Cir. 1992) 955 F2d 914
9 42 USC §3604(a)
Anti- discrimination in residential
property
Federal Fair Housing Act (FFHA) A collection of policies designed to prevent discrimination in the access to housing based on an occupant’s inclusion in a protected class.
dwelling A building occupied or designed to be occupied as a residence by one or more families.
familial status A status which indicates a household includes individuals under the age of 18.
Qualifying and
processing tenants
Chapter 7: Civil rights and fair housing laws 53
• impose different rental charges on a dwelling for prohibited discriminatory reasons;
• use discriminatory qualification criteria or different procedures for processing applications in the rental of a dwelling; or
• evict tenants or tenants’ guests for prohibited discriminatory reasons.10
For example, a broker is hired by a residential apartment landlord to perform property management activities. One of the broker’s duties as a property manager is to locate tenants to fill vacancies.
A tenant from a religious minority group contacts the broker about the availability of an apartment.
The broker (or their agent) informs the prospective tenant of the monthly rent. However, the rate the broker communicates to the prospective tenant is higher than the rent nonminority tenants are asked to pay for similar apartments.
When the prospective minority tenant asks the broker for an application, the broker informs the tenant a nonrefundable screening fee is charged to process the application. The creditworthy minority tenant fills out the application, pays the fee and is told the processing will take several days.
In the meantime, a nonminority tenant inquires about the rental of the same or similar apartment. The monthly rent rate the broker quotes the nonminority is lower than the rent rate the minority tenant was quoted, even though the nonminority tenant is not as creditworthy as the minority tenant. Further, the nonminority tenant is not charged a screening fee with their application. The apartment is immediately rented to the nonminority tenant.
Here, the broker’s actions were racially or religiously motivated, a violation of the FFHA. The broker misrepresented the availability of the apartment based on the tenant’s religion by using different procedures and qualification standards in accepting and processing the tenant’s application.11
Selective reduction of tenant privileges, conditions, services and facilities offered to protected individuals is prohibited. Selective reduction can take the form of:
• providing for different terms in a lease, such as the rental charge, security deposit and the term of the lease, than offered by other individuals;
• delaying or failing to perform maintenance;
• limiting use of privileges, services or facilities to different classes of individuals; or
10 24 Code of Federal Regulations §100.60(b)
11 United States v. Balistrieri (7th Cir. 1992) 981 F2d 916
Different terms, different privileges
Selective reduction
54 Real Estate Principles, Second Edition
• refusing or failing to provide services or facilities due to an individual’s refusal to provide sexual favors.12
Further, the landlord or property manager may not discriminate based on an individual’s status by representing that a dwelling is not available for rent in order to direct the individual to a particular Section 8 project or neighborhood, when the dwelling is available. This practice is called steering.
Steering involves the restriction of an individual seeking to rent a dwelling in a community, neighborhood or development, when the guidance perpetuates segregated housing patterns.13
A broker or their agent making a notice, statement or advertisement when handling the rental of a dwelling unit is barred from using any wording that indicates a discriminatory preference or limitation against individuals of protected classes of people.14
The prohibition against prohibited discriminatory advertisements applies to all oral and written statements.
Notices and statements include any applications, flyers, brochures, deeds, signs, banners, posters and billboards used to advertise the availability of a dwelling for rent.
A residential landlord or property manager may not induce or attempt to induce an individual to offer, or abstain from offering a dwelling to prevent the entry of certain classes of people into the neighborhood. This prohibited practice is known as blockbusting.15
Further, a landlord’s or agent’s actual financial gain is not necessary to establish blockbusting conduct. The mere profit motivation is sufficient to establish blockbusting activity.16
Examples of blockbusting activities by a landlord or property manager include:
• encouraging an owner-occupant to offer their home for rent by insinuating that a neighborhood is undergoing or is about to undergo a change in the race, color, religion, sex, handicap, familial status or national origin of its residents; or
• discouraging an owner-occupant from offering their home for rent by claiming the entry of individuals of a particular race, color, religion, sex, familial status, handicap or national origin will result in undesirable consequences for the neighborhood or community, such as an increase in criminal activity or a decline in schools and other facilities.17
12 24 CFR §100.65(b)
13 42 USC §3604(d); 24 CFR §100.70
14 42 USC §3604(c)
15 42 USC §3604(e)
16 24 CFR §100.85(b)
17 24 CFR §100.85(c)
steering An unlawful housing practice that includes words or actions by a real estate sales licensee intended to influence the choice of a prospective buyer or tenant.
Discrimination in
advertisement
Blockbusting for
exploitation
blockbusting The prohibited practice of a real estate licensee inducing a property owner to list their property for sale in response to a change taking place in the neighborhood demographics.
Chapter 7: Civil rights and fair housing laws 55
There are exemptions to the FFHA prohibitions. A landlord who rents out a single family residence is exempt from FFHA discrimination prohibitions if they:
• own three or fewer single-family residences;
• do not use a real estate licensee to negotiate or handle the tenancy; and
• do not use a publication, posting or mailing for any discriminatory advertisement.18
Thus, the FFHA prohibitions apply to all notices, statements and advertisements promoting rentals by anyone in the business of renting dwellings.19
A person is in the business of renting dwellings if the person:
• has participated within the past 12 months as a principal in three or more transactions involving the rental of any dwelling or interest in a dwelling;
• has participated within the past 12 months as an agent, negotiating two or more transactions involving the rental of any dwelling or interest in a dwelling, excluding the agent’s personal residence; or
• is the owner of a dwelling structure intended to be occupied by five or more families.20
If a broker is the agent for either the landlord or the tenant in a residential rental transaction, the FFHA anti- discrimination rules apply.
However, attorneys, escrow agents, title companies and professionals other than brokers who are employed by a landlord to complete a transaction do not bring the transaction under the FFHA, unless they participate in negotiations with the tenant.21
The landlord of a one-to-four unit residential rental property is exempt from discrimination prohibition rules if the landlord occupies one of the units.22
Religious organizations who limit the rental or occupancy of dwellings to individuals of the same religion are also exempt, provided the dwelling is owned for noncommercial reasons. No religious exemption exists if the religion is restricted to individuals of a particular race, color or national origin.23
Private clubs which provide their members with residential dwelling space for noncommercial purposes may limit rental or occupancy of the dwellings to members.
18 42 USC §3603(b)(1)
19 42 USC §3603
20 42 USC §3603(c)
21 42 USC §3603(b)(1)(B)
22 42 USC §3603(b)(2)
23 42 USC §3607(a)
Exemptions from prohibited discrimination
Limited exemptions
56 Real Estate Principles, Second Edition
Finally, housing qualified for older citizens which excludes children is not considered prohibited discrimination against tenants with children based on familial status. However, for housing to exclude children it needs to first qualify as housing for the elderly.24
A provision in a written instrument which refers to qualified senior citizen housing is enforceable as allowable age discrimination.
A senior citizen housing project is housing:
• intended for and solely occupied by persons 62 years of age or older; or
• intended and operated for occupancy by persons of 55 years of age or older.25
Any individual who claims they have been injured by a prohibited discriminatory housing practice under the FFHA or believes they will be injured by such a practice is considered an aggrieved individual.26
An aggrieved individual may file a complaint with the Secretary of Housing and Urban Development (HUD), within one year of the alleged discriminatory housing practice.27
HUD then attempts to resolve the dispute by having the parties enter into informal negotiations, called mediation.28
If mediation is not successful, a judicial action may be initiated by HUD as a complaint to resolve the issue of discrimination. The dispute will then be resolved by an administrative law judge.
Any party to the complaint may elect to have the claims decided in a civil action before a court of law in lieu of using an administrative law judge.29
When a real estate broker subjected to a judicial action is found guilty of discriminatory housing practices, HUD is to notify the CalBRE and recommend disciplinary action.30
When a court determines discriminatory housing practices have taken place, actual and punitive amounts of money awards may be granted. Also, an order may be issued preventing the landlord or broker from engaging in any future discriminatory housing practice.31
California’s Unruh Civil Rights Act, another anti-discrimination law, prohibits discrimination by a business establishment based on numerous status classifications, including: an individual’s sex, race, color, religion, ancestry, national origin, disability or medical condition.32
24 42 USC §3607(b)
25 42 United States Code §3607(b)
26 42 USC §3602(i)
27 42 USC §3610(a)
28 42 USC §3610(b)
29 42 USC §3612(a)
30 42 USC §3612(g)(5)
31 42 USC §3613(c)(1)
32 Calif. Civil Code §§51; 51.2; 51.3
Housing for older persons
Failure to comply with
the FFHA
California’s Unruh Civil Rights Act
Unruh Civil Rights Act A California law which prohibits discrimination by a business establishment based on sex, race, color, religion, ancestry, national origin, disability or medical condition. A real estate practice is a business establishment.
Chapter 7: Civil rights and fair housing laws 57
However, age restriction is a legitimate discrimination as long as the restriction is in a project that qualifies as a senior citizen housing development.
The Unruh Civil Rights Act applies to anyone in the business of providing housing. Brokers, developers, apartment owners, condominium owners and single-family residential owners renting or selling are considered to be in the business of providing housing.
As business establishments, landlords may not boycott, blacklist, refuse to lease or rent because of the race, creed, religion, color, national origin, sex, disability or medical condition of an individual’s, or that individual’s business partners, members, stockholders, directors, officers, managers, agents, employees, business associates or customers.33
Consider a blind prospective tenant who has a guide dog and seeks to rent an available unit in a multi-unit residential dwelling structure.
The landlord refuses to rent a unit to the blind tenant, claiming the guide dog violates the building’s pet restriction in the covenants, conditions and restrictions (CC&Rs).
The blind tenant claims the landlord is discriminating against them due to their disability since the landlord denied them housing on account of the guide dog.
Here, a landlord may not refuse to rent residential property to a blind tenant because of inclusion of the tenant’s guide dog. Landlords are also prohibited from discriminating against tenants with dogs specially trained to assist deaf and other disabled individuals.34
Disabled individuals are protected from discrimination when renting or leasing California residential real estate. A disabled individual is anyone who:
• has a physical or mental impairment which significantly limits major life activities;
• has a record of a disability; or
• is regarded as being disabled.35
People with disabilities are entitled to full and equal access to housing accommodations offered for rent.36
The only exception is the rental of no more than one room in a single-family residence.37
33 CC §51.5
34 CC §54.1(b)(6)
35 CC §54(b)
36 CC §54.1(b)(1)
37 CC §54.1(b)(2)
Full and equal access guaranteed
Fair housing for disabled individuals
disabled person Anyone who has a physical or mental impairment which significantly limits major life activities, has a record of disability, or is regarded as being disabled.
58 Real Estate Principles, Second Edition
The examples of the blind tenant and their seeing-eye dog illustrate how a landlord might attempt to avoid anti-discrimination laws. While the landlord claims to justify their behavior based on their equal application of a single pet restriction rule to pet owners (an unprotected class of people), the refusal to rent to a disabled tenant based on their reliance on a trained dog is a prohibited discrimination.
A landlord is not required to structurally modify existing residential rental property to meet the special needs of disabled tenants.38
Although not required to modify the structure for a disabled tenant, the landlord is to allow the tenant to make reasonable modifications themselves or pay the landlord to do so. The landlord may require the disabled tenant who modifies the structure to restore the property to its original condition when the tenancy is terminated.39
Anti-discrimination laws require new residential properties consisting of four or more units per building to be built to allow access by disabled individuals. Required improvements include kitchens and bathrooms designed to allow access to disabled tenants in addition to wheelchair ramps.
Failure to provide the disabled with access to a newly constructed residential property with four or more units is prohibited discrimination.40
California prohibits discrimination in the sale or rental of housing accommodations based on an individual’s: race, color, religion, sex, sexual orientation, gender identity, genetic information, marital status, national origin, ancestry, familial status, source of income or disability. This list of protected individuals is more extensive than all others.41
Discriminatory activities and conduct include:
• making a written or oral inquiry into the race, sex, disability, etc. of any individual seeking to rent housing;
• ads or notices for rental of housing which state or infer preferences or limitations based on any of the prohibited discrimination factors;
• a broker refusing to represent an individual in a real estate transaction based on any prohibited factor; and
• any other practice that denies housing to a member of a protected class.42
The denial of housing based on the landlord or broker’s perception that a prospective tenant, or any associates of the prospective tenant, has any of the protected characteristics is absolutely prohibited. An individual who has been the victim of discriminatory housing practices may recover their money losses.43 [See Case in point, “Prohibited discrimination”]
38 CC §54.1(b)(4)
39 Calif. Government Code §12927
40 Gov C §12955.1
41 Gov C §12955
42 Gov C §12955
43 Gov C §12955(m)
Accommodating the disabled
California prohibitions
against discrimination
in housing
Chapter 7: Civil rights and fair housing laws 59
Standards of conduct applied equally by a broker to all individuals are not classified as prohibited discrimination against a protected group of individuals as they are considered reasonable and thus permitted.
For example, to qualify a tenant for occupancy based on their creditworthiness (which is not a prohibited discrimination), a landlord or property manager may establish income ratios or standards to determine a tenant’s ability to pay the rent. The higher the ratio of income to rent established by a landlord, the less the risk of loss of rent borne by the landlord. The lower the ratio established by the landlord, the greater the risk of their loss of rent. Once set, the ratio is to be applied to all prospective tenants equally.
However, two or more individuals who desire to live in the same unit might apply to rent a unit. Whether related or unrelated, married or not, the income of all tenants is to be treated as the total income used by the landlord to determine their collective eligibility to qualify to pay the rent amount sought for the unit.
Separately, each prospective tenant may be unable to qualify by meeting the income standard for the total rent sought by the landlord. However, if aggregating the income of all who intend to occupy the unit and enter into the rental or lease agreement results in total income sufficient under the ratio applied to qualify a tenant or tenants for occupancy, the tenants qualify.44
Also, under rent subsidy programs, such as Section 8 housing arrangements, the landlord or property manager will evaluate the tenant’s income when determining whether the tenant qualifies to pay based on only the portion of the rent that is not subsidized.45
Recall that familial status in anti-discrimination laws refers to whether children under the age of 18 will be living with a parent or guardian on the premises.46
Rental policies excluding children under the age of 18 are classified as prohibited discrimination under state, as well as federal laws, unless the property qualifies as senior citizen housing.47
Consider a landlord who refuses to rent an apartment to an unmarried couple based on the landlord’s religious beliefs about such conduct.
The couple files a complaint with California’s Fair Employment and Housing commission, claiming the landlord violated fair housing laws that prohibit discrimination based on marital status.
The landlord claims they are exempt since renting to an unmarried couple violates the landlord’s religious beliefs regarding the cohabitation of unmarried couples. 44 Gov C §12955(n)
45 Gov C §12955(o)
46 Gov C §12955.2
47 Gov C §12955.9
Income standards for tenants
Familial status
Marital status of co- applicants for housing
60 Real Estate Principles, Second Edition
However, the landlord’s refusal to rent to unmarried couples violates the fair housing laws. The landlord’s religious beliefs do not also require them to participate in the business of renting dwelling units.
Thus, fair housing laws prohibiting discrimination based on marital beliefs do not interfere with the practice of the landlord’s religion. The faithful landlord can go into a business that does not violate their religious convictions.48
The CalBRE has regulations prohibiting discriminatory practices by real estate brokers acting on behalf of a client. A broker or their agent engaging in discriminatory business practices may be disciplined by the CalBRE.49
Prohibited practices include any situation in which a broker, while acting as an agent, discriminates against anyone based on race, color, sex, religion, ancestry, disability, marital status or national origin. Examples of discriminatory practices include:
• refusing to negotiate for the rental of real estate;
• refusing to show property or provide information, or steering clients away from specific properties;
• refusing to accept a rental listing;
• publishing or distributing advertisements that indicate a discriminatory preference;
• any discrimination in the course of providing property management services;
• agreeing with a client to discriminate when leasing the client’s property, such as agreeing not to show the property to members of particular minority groups;
• attempting to discourage the rental of real estate based on representations of the race, sex, disability, etc. of other inhabitants in an area; and
• encouraging or permitting employees to engage in discriminatory practices.
Consider a broker is who aware a licensed care facility for disabled people is located in a single family residence near a residence the prospective tenant is interested in renting.
The presence of the facility might influence the tenant’s decision to rent the property. However, for the broker or their agents to inform the tenant of the facility would be unlawful discrimination. The broker may not attempt to influence the tenant’s decision based on representations of the disability of other inhabitants in the area.50
48 Smith v. Fair Employment and Housing Commission (1996) 12 C4th 1143
49 Department of Real Estate Regulations §2780
50 73 Ops. Cal. Atty. Gen. 58 (1990)
Guidelines for broker
conduct
Disclosure of disability
of other inhabitants
Chapter 7: Civil rights and fair housing laws 61
However, on a direct inquiry from a tenant, the broker or agent need to respond based on their knowledge of the existence of a care facility.
No duty exists to disclose the prior tenant’s affliction with the HIV virus or AIDS.51
Further, California public policy prohibits a broker from responding to a tenant’s inquiry for disclosure of a prior occupant’s affliction with AIDS.52
Individuals afflicted with the HIV virus are considered handicapped and are protected by the FFHA.53
A broker has a duty to advise their agents and employees of anti- discrimination rules, including CalBRE regulations, the Unruh Civil Rights Act, the California Fair Employment and Housing Act, and the FFHA.54
The broker, in addition to being responsible for their own conduct, owes the public a duty to ensure their employees follow anti-discrimination regulations when acting as agents on the broker’s behalf.
A landlord or property manager will voluntarily disclose to prospective tenants before leasing a dwelling the death of a prior occupant on the premises offered to rent which occurred more than three years earlier when they have reason to believe the death might affect the tenant’s decision to lease.
51 CC §1710.2(a)
52 CC §1710.2(d)
53 24 CFR §100.201
54 BRE Reg. §2725(f)
Broker’s duty to manage employees
Disclosing a death
An ethnic or religious minority tenant seeks to rent an apartment. The landlord informs the prospective tenant they cannot rent the apartment until they complete a credit check. The landlord also declines to accept a deposit from the tenant.
Later the same day, a nonminority tenant seeks to rent the same apartment. The landlord agrees to rent the apartment to the nonminority tenant without first requiring a credit check, and immediately accepts the tenant’s check for a deposit on the apartment. The minority tenant is informed the apartment has been rented to another individual.
The minority tenant files a complaint against the landlord, claiming the landlord discriminated against them based on their ethnicity or religion by refusing to rent them an apartment. The landlord claims no discrimination occurred since they were entitled to require a credit check of prospective tenants.
However, requiring a credit check of minority tenants, but not nonminority tenants, is a prohibited discriminatory practice which allows the minority tenant to recover their money losses. [Stearns v. Fair Employment Practice Commission (1971) 6 C3d 205]
Case in point
Prohibited discrimination
62 Real Estate Principles, Second Edition
Further, the landlord or property manager will disclose their knowledge of any deaths which took place on the property in response to a direct inquiry by a prospective tenant.
Consider a tenant who asks the property manager if any AIDS-related deaths occurred on the property.55
If the property manager is aware an AIDS-related death occurred on the property, they have a duty on direct inquiry from the tenant to disclose:
• the prior occupant’s death; and
• the death was AIDS-related.
If the property manager has no knowledge of any AIDS-related deaths occurring on the property, they will disclose:
• their lack of knowledge; and
• whether or not they intend to undertake an investigation to determine if an AIDS-related death occurred on the property.
Consider a property manager who is aware a death, from any cause, occurred on the property within three years of the commencement of a tenant’s lease agreement. The tenant has not inquired if any deaths have occurred on the property.
Here, the property manager will need to determine if the death on the property is a material fact which might affect the tenant’s decision to lease and occupy the property.
The property manager as good practice discloses any death occurring on the property within three years when they have reason to believe the fact might affect the tenant’s decision to lease. However, on inquiry from the tenant, the property manager discloses their knowledge of any death, including AIDS- related deaths, which occurred on the property within the last three years.
55 CC §1710.2(d)
Death as a material fact
Chapter 7: Civil rights and fair housing laws 63
A broker has a duty to inform their agents and employees of anti- discrimination rules, including Bureau of Real Estate regulations, the Unruh Civil Rights Act, the California Fair Employment and Housing Act, and the Federal Fair Housing Act.
California law prohibits discrimination in the sale or rental of housing accommodations based on race, color, religion, sex, sexual orientation, gender identity, genetic information, marital status, national origin, ancestry, familial status, source of income or disability.
The federal Civil Rights Act applies to race discrimination on the rental of all types of real estate, both residential and nonresidential. Racially motivated activities in any real estate leasing transaction are prohibited.
The Federal Fair Housing Act (FFHA) prohibits any discriminatory actions a landlord or property manager may take in the handling of a residential rental based on an individual’s race or color, national origin, religion, sex, familial status or handicap.
Disabled individuals are protected from discrimination when renting or leasing California residential real estate. However, a landlord is not required to structurally modify existing residential rental property to meet the special needs of disabled tenants.
Rental policies excluding children under the age of 18 are classified as prohibited discrimination, unless the property qualifies as senior citizen housing.
blockbusting .................................................................................... pg.54 Civil Rights Act ...............................................................................pg. 51 disabled person ...............................................................................pg. 57 dwelling ............................................................................................pg. 52 familial status ..................................................................................pg. 52 Federal Fair Housing Act .............................................................pg. 52 steering ..............................................................................................pg. 54 Unruh Civil Rights Act .................................................................pg. 56
Chapter 7 Summary
Chapter 7 Key Terms
Quiz 2 Covering Chapters 4-7 is located on page 607.
Notes:
