AGENCY PDF For online swc

[Pages:26]AGENCY

INTRODUCTION

In 1987 a California Civil Code was implemented concerning Real Estate Licensees and their Agency Relationships. One of the provisions of the Regulation was that you must complete a three-hour class in Agency Law every time you renew your license. That is why you are reading this material and why I am writing it.

You must pass a 20-question, multiple-choice exam with a grade of 70% or more. There are 40 true/false practice questions for assessment with answers included for remediation.

CHAPTER ONE

AGENCY DISCLOSURE

Until 1988, 99.999+% of the real estate sales in California were completed under a SubAgency Relationship. In short, all Real Estate licensees represented the sellers. If ColdwellBanker had a listing and Century 21 had the buyer, both companies represented the seller.

The Federal Trade Commission had many complaints from both buyers and sellers. Buyers were amazed that they were not being represented. Sellers were angry that licensees worked as if the buyer was their client, and they would file "Undisclosed Dual Agency" lawsuits.

The Real Estate industry led by the National Association of REALTORS? liked this arrangement. Several Boards of REALTORS? on the Peninsula of California and others were protesting this method so the Federal Trade Commission sent a survey to many buyers across the United States. The major question was, "When you bought your last property, whom did your agent represent?" Over 70% of the respondents said that their agent represented them.

The Trade Commission relayed this information to the National Association of REALTORS?. The FTC's conclusion was that buyers were not being represented in the most important purchase of their lives, and more importantly, they did not know that they were not being represented. The Trade Commission also believed that they could get a jury of the public (i.e. buyers) to rule that buyers should be represented. There was a possibility that a jury could rule that if a licensee in one company listed a property, that company could not sell the property. This would drastically change real estate operations.

In 1987 the California Association of REALTORS? realized something had to be done. A law concerning Agency Relationships was proposed and passed. This Agency Disclosure regulation was placed in the Civil Code and was effective January 1, 1988. A disclosure form

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was introduced and the Agency Education Requirement that you are completing was mandated as of July 1, 1987.

To purchase copies of the Agency Disclosure, call any Real Estate Board or Association in your area. Be sure to get the latest edition as they change constantly. The best method to learn these regulations is to work with the form itself. Sentences in the disclosure will be highlighted, examined and discussed. Knowing this material might eliminate a lawsuit in your future.

Our company specializes in DRE continuing education and broker courses, Notary education, Mortgage Loan Originator education and other real estate related topics such as foreclosures, short sales, tax, and so on. Every year we have more satisfied students than any other company or Association. The materials you will read have been thoroughly audited by experienced brokers, attorneys, other licensees, and agency experts.

DISCLOSURE REGARDING REAL ESTATE AGENCY RELATIONSHIPS

The official form used is called a "Disclosure." In my classes it is given a different name. "Disclosure" is a word that might scare a client. We call the form a "Handout to Educate the Public about Agency Law." When a purchase contract is signed by a buyer or seller, they must acknowledge the Agency Confirmation that illustrates who is representing whom in the transaction. The disclosure form is designed to give them some general information about the three agency relationships so they can make a decision and approve the relationships listed on a Purchase Contract.

AS REQUIRED BY THE CIVIL CODE

The official name of this Regulation is "Agency Relationships in Residential Real Property Transactions" and is found in the Civil Code. Residential Real Property in California is one to four units of residential properties and mobile homes, and doesn't include commercial, industrial, or apartments over four units. The duties and responsibilities listed on this form apply to all real estate transactions. However, this disclosure form must be given only as provided in the law.

Chapter One: Incremental Assessments (Practice Questions)

True or False?

1. Before the Agency Disclosure Regulation was passed almost all sales were completed under a sub-agency relationship.

2. The Agency Disclosure regulation was effective January 1, 1954.

3. The Agency Regulations concerning residential real property transactions are found in the Civil Code.

4. The requirement for taking an agency class is only for responsible brokers.

Answers to the incremental assessments are provided online after or at the end of this course.

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CHAPTER TWO

CALIFORNIA ASSOCIATION OF REALTORS? (C.A.R.) STANDARD FORM

The Disclosure Form is copyrighted by the California Association of REALTORS?.

? There is a statement, "This form is available for use by the entire real estate industry. The use of this form is not intended to identify the user as a REALTOR?." So any licensee can purchase and use them.

? The required information on the form is established in the Civil Code. ? There is a statement, "A Real Estate Broker is the person qualified to advise in real

estate transactions. If you desire legal or tax advice, consult an appropriate professional." If you are designing your own form, it is recommended that you put a blank line next to this phrase so that all clients can sign that they have read and understood it.

"When you enter into a discussion with a real estate agent regarding a real estate transaction, you should understand from the outset what type of agency relationship or representation you wish to have with the agent in the transaction."

This is the first sentence on the form. Who is "you?" It is obviously the clients. The clients involved are the sellers and buyers of 1-4 unit dwelling residential, any commercial real property and any leases on these properties that exceed one year plus mobile homes. Commercial properties were added to this list by a law change to Civil Code 2079.13 effective January 1, 2015.

In one of our classes, we were honored to have as a student, Mr. Sam Freshman, Esquire. He took our live classes in Agency and Ethics and Home-Study Classes in Foreclosure and Management. Sam is an outstanding attorney. His Syndication book was the best ever written.

Today, Mr. Freshman has many properties in Ohio. The Department of Real Estate in Ohio watched this law for a few years and then passed an Agency Law. They made one change on who must be given this form. They did not limit the Disclosure to 1-4 units and required that the Disclosure Form be given to all Real Estate clients.

This is a much better rule. Currently, residential properties five units or more are not covered by this regulation (2079.13(d)). If giving a disclosure to the required clients is beneficial, why not just give the disclosure to all real estate transactions so that everyone understands the Agency Relationships better. It could avoid a lawsuit.

"Outset" When is "outset?" It is when you have to give the form. "Outset" can mean different things to different people. There is one other phrase in the Code. You must give the form when you have more than a "casual relationship." Define that one.

The Code is very specific in that the disclosure form can't be given to a seller after a listing agreement is signed or to a buyer after a purchase contract is signed. The disclosure is an educational handout and should be treated as such. One good rule to remember: It is possible to give it out too late and it is impossible to give it out too early.

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The Confirmation step of the transaction is different than the Disclosure step. The Confirmation (who is representing whom?) should be done on the Purchase Contract. Don't confuse the two. If you look at the signature line on the Disclosure, you will see that the client is simply signing that they received a copy of the form.

Huijers vs. De Marsis This is a Santa Barbara County case where Huijers was doing a Section 1031 Tax Deferred Exchange with DeMarsis. The licensee was working with Huijers as a Buyer and listed DeMarsis' property. DeMarsis signed a contract and wanted to rescind the transaction. His contention was that the agent misrepresented the value and didn't give him the disclosure in a timely fashion.

Huijers sued for damages, and the Superior Court agreed with him and DeMarsis appealed. His property was a landscape nursery but it had a house on it. He was given the disclosure with the offer. First, the appellate court had to decide whether a "mixed use" property qualified for this treatment. They appear to have decided "yes."

Mrs. Larson, the agent, gave the form to the listing client after the listing agreement was signed, so it was too late. The court then stated the penalty for this (since no penalty is mentioned in the Code) was that the agent receives no commission. The important question of whether a client can rescind a transaction when the disclosure is not received was sent back to Superior Court for another trial.

Legal fees and penalties in the first Superior Court trial were over $150,000. We are now talking big money. There has been a Superior Court trial, Appellate, Superior again, Appellate again and probably State Supreme Court. Whoever loses will probably want to sue his/her agent, who in both instances is (Mrs. Larson) a dual agent. If errors and omissions insurance won't cover the loss, there could be more trials.

Mrs. Larson has been involved in these lengthy lawsuits and could lose a lot of money. Her crime: Giving a Disclosure Form out too late in a 1031 Exchange. It is highly recommended that you give the form out early. Someone says, "Hi" at the shopping center. Give them a form.

"To: the Seller: A Fiduciary duty of utmost care, integrity, honesty and loyalty in dealings with the Seller." This is the first sentence under the Seller's Agent Section of the Disclosure Form. This section codifies the listing agent's duties to their client. An important word during every real estate transaction is "fiduciary" and CAR capitalized it on this form. Agents should understand it. It is sometimes called the F-word of Real Estate and can get you into lots of trouble. The best word for us to use is "Trustee." You are a Trustee, which is the highest form of any business relationship.

There are four other terms used: "utmost care," "integrity," "honesty" and "loyalty." Perhaps, the law writers could have used words better understood by clients, such as trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful, thrifty, brave, clean and reverent.

Noel Seaman was an outstanding expert in Agency Relationship. He was the Lead Counsel on the California Association of REALTORS? Hot Line for many years. He also taught classes on a contract basis for Duane Gomer Seminars, and his ratings and reviews were excellent. It is so tragic that he passed away so young. In one class, he discussed the duties of an agent to a client. Noel reduced this sentence to one word, "Represents."

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When you have a listing, you "represent" the seller. You have to be honest and fair, etc. with others, but you represent only your client. It is a good word to describe your duties.

"To: the Buyer and the Seller

(a) Diligent exercise of reasonable skill and care in performance of the agent's duties.

(b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the

value or desirability of property that are not known to, or within the diligent attention and observation of, the parties."

Some old-time brokers used to operate under the theory of "Caveat Emptor." If we represented the seller, the buyer "better beware." That theory was reversed forever with the famous "Easton versus Strassburger" case in the early 1980's. In this case, the listing agent did not mention a minor earth slide three years before the purchase plus existing red flags indicating soil problems. The Court held that the Listing Agent had several duties to other parties. This case led to more disclosures by everyone. Now, there is a "Seller's Disclosure Statement" required in residential sales of four or fewer units. This is a change that is good for all licensees. The SDS is called the "Easton Disclosure," in most companies.

There is one word that is interesting in sentence "a." A listing agent owes utmost care to a seller and this sentence states that the listing agent must give "reasonable care" to a buyer. The people who wrote this law must know how to distinguish between reasonable care and utmost care. There must be a line drawn in care that separate the two (utmost and reasonable) but I don't know where it is.

If you ever have to appear in front of a jury concerning a Real Estate transaction, the jury will probably insist on lots of care. It is recommended that you follow the old TV show, "Hill Street Blues." In that show, Michael Conrad would end his briefing of the police officers at the beginning of the show with, "Now, you be careful out there." When any sales meeting ends, the reminder should be made, "Now, you be of utmost care out there."

That Are Not Known to The last part of sentence C includes the phrase "that are not know to." This points out that all parties must protect their own interests and look around. So many clients do not inspect, check, observe or notice many important items. Inform buyers and sellers of all facts so that they are responsible for diligent attention and observation.

Materially Affecting This phrase emphasizes the duty of disclosing all material facts. Many attorneys were called and guidelines of explaining the criteria of a material fact were requested. All of them answered the same. "It depends."

A California Association of REALTORS? report on Disclosure of AIDS and Death had this statement about material facts. The report states:

Many California cases have held agents and sellers liable for "fraudulent concealment" or "negative fraud" for failure to reveal known material facts affecting the value or desirability of the property. Whether information is "material" depends on all the facts of the particular case. In general, a fact would be considered material if it would affect the decision of a reasonable

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buyer to buy, or the price and terms on which he or she would be willing to buy, the subject property. For example, Easton vs. Strassburger held that a minor earth slide three years before the purchase, plus existing red flags, indicated soil problems were material facts.

Some other California decisions about the duty to disclose material facts concerned a house constructed on filled land, improvements added without a building permit in violation of zoning regulations, failure to disclose the true lien amount on a property to be acquired, and failure to disclose dual termite reports of considerable variance. In contrast, the California Attorney General has issued opinions that the race of a prospective buyer is not a material fact to be disclosed to the seller, and that a licensed real estate agent is not required to disclose to prospective home buyers that a licensed residential care facility serving six or fewer people is located in the neighborhood.

Value or Desirability This is a most important phrase. You must disclose any material fact concerning value or desirability. Value is easier to understand. Desirability is difficult to establish. People have widely varied desirability standards. Some buyers will not consider any houses when: 1. The front door faces North. 2. The front door is in a line with the back door. 3. The front door is in a line with a staircase. 4. Any staircase has a number of steps divisible by 3. 5. A street ends in front of it, (cul-del-sac). 6. A cemetery is next door. 7. Many, many more.

It is impossible to know what is in the mind of a buyer or seller. However, there are some counter-balancing laws concerning what you can disclose to a client. Fair Housing laws limit the answers to some questions. If a seller asks, "Is the buyer of a certain race, creed, religion, handicapped, or similar personal questions?" you can't answer. Confidential information that is not a material fact does not have to be disclosed.

Some California Civil Codes outline limits on Disclosures. An example is a Code Section on Death and AIDS. Same as Value Above.

What does California Civil Code ? 1710.2 provide? This statute provides in pertinent part that "No cause of action arises against an owner of real property or his or her agent, or any agent of a transferee of real property, for the failure to disclose to the transferee the occurrence of an occupant's death upon the real property or the manner of death where the death has occurred more than three years prior to the date the transferee offers to purchase, lease, or rent the real property, or that an occupant of that property was afflicted with or died from .... (AIDS)."

What types of property are covered under Civil Code ? 1710.2? Civil Code ? 1710.2 covers real property, which includes (1) land, (2) that which is affixed to land, and (3) that which is incidental or appurtenant to land. Thus, it appears that real property of every type is covered, including lots, farms, commercial and industrial property, as well as residential property.

Does Civil Code ? 1710.2 provide total protection concerning disclosures to an owner or agent?

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No. An owner or owner's agent is not protected from intentional misrepresentation in response to a direct question from a transferee or prospective transferee of real property concerning a death on the property.

For example, if a prospective purchaser directly asks an agent if an occupant died on the property and the agent knows that an occupant actually died on the property, the agent cannot answer "no" because that would be an intentional misrepresentation. This is true regardless of whether the death was AIDS-related or not. However, if the agent does not have actual knowledge of a death on the property, then the agent can answer "I don't know" when directly asked about a death. In addition, an owner or agent is not relieved from any obligation to disclose the physical condition of the premises, or any other physical or mental condition or disease (other than AIDS) that may exist and be found to be a material fact.

Must a death or other manner of death, other than AIDS, be disclosed. It depends. The statute is clear that no cause of action arises for failure to disclose an occupant's death upon the real property or manner of death where the death has occurred more than three years before the transferee's offer on that property. Here, the statute

precludes liability if death precedes the offer by more than three years. The owner's and agent's non-responsibility for disclosing the "manner of death," violent, accidental or natural, is also clear if it occurred more than three years before the offer is made. However, if a death occurred three years or less before the offer to purchase, lease, or rent the real property, the answer depends on whether the occupant's death or manner of death (excluding death by AIDS) is a material fact. If it is a material fact, then it must be disclosed.

Must the affliction with, or death by AIDS, of an occupant of real property be disclosed? No. The California Legislature specifically declared its intention to regulate disclosures related to AIDS in situations affecting the transfer of real property. Civil Code ? 1710.2 provides immunity from liability for failure to disclose that an occupant of a property was "afflicted with or died from" AIDS.

For protection under this statute, must death by AIDS be upon the property? Probably not, as the statute appears to provide protection without regard to whether a death by AIDS occurred upon or off-site of the subject property.

Does the three-year rule regarding liability for death disclosures apply to AIDS related deaths? No. AIDS related deaths and/or affliction with AIDS disclosures are protected regardless of when the occupant was afflicted with or died of AIDS. Therefore, an owner and/or agent need not disclose that an occupant was afflicted with or died of AIDS even if it occurred three years or less before the date of the offer.

Must a death, other than by AIDS, which occurs off-site of the subject property be disclosed? It depends. The disclosure of a death occurring off the property is an unresolved question. The answer would depend on whether the combination of events constituted a material fact.

An agent is not obligated to reveal to either party any confidential information obtained from the other party, which does not involve the affirmative duties set forth above. There are some facts that a buyer or seller might want to know that would be confidential.

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One example would be a seller's reason for selling. A buyer might ask, "What is the seller's reason for selling?" It is a normal question. The answer to the question would be confidential if your seller didn't want it revealed. You would not have to answer.

In another circumstance, a seller might want a buyer to know that they are motivated and are making two house payments. A good policy would be to ask your clients their reason for selling. The next question would be, "Do you want me to tell buyers this reason?"

Financial troubles, pending divorce, and medical problems, are examples of confidential information. A Notice of Default, Short Sale Proposal, and a Bankruptcy are different in my opinion. A Notice of Default can affect the wording of a Purchase Contract because of Civil Code Regulations about foreclosures. A Short Sale Purchase Contract must be made subject to lender approval. A sale for a client in Bankruptcy would probably have to be made subject to the Court's approval. All of these areas have many different aspects; therefore, any of your actions should be discussed with your responsible broker. Discuss and then take proper action. More lawsuits come from not disclosing material facts than almost any other causes.

Chapter Two: Incremental Assessments (Practice Questions)

True or False?

1. The disclosure form can be given to a seller after a listing agreement is signed.

2. The Agency Disclosure Regulations apply to all real estate transactions.

3. An Agency Disclosure Statement is required in residential sales of up to 16 units.

4. A fiduciary duty means utmost care is given to clients.

5. A real estate broker who is the agent of a principal owes a duty of fair and honest dealings to other parties.

6. The race of the buyer is a material fact and should be disclosed.

7. Easton vs. Strassburger held that a minor earth slides three years before the purchase was a material fact.

8. If a client asks is the seller Catholic, you must answer.

9. Civil Code 1710.2 covers death on a property.

10. An agent is obligated to reveal any confidential information obtained.

Answers to the incremental assessments are provided online after or at the end of this course.

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