CONTINUING EDUCATION Understanding Risk Management

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CONTINUING EDUCATION

3 Hours

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UnderstandingRisk

Management

i • Table of Contents

TABLE OF CONTENTS

Chapter 1: Risk Management Basics 1Terms and Definitions 1Activities Likely to Contribute to Risk 2

Chapter 1: Test Your Knowledge 7Chapter 1: Solutions and Suggested Responses 8

Chapter 2: Risk Reduction 9Broker Supervision and Responsibility 9Fiduciary Duties 11Disclosures 12Visual Inspection 25Avoiding Real Estate Settlement Procedures Act (RESPA) Violations 26Unlawful Practice of Law 27


Chapter 3: Consequences of Illegal and Unethical Behavior 30Penal Code 30Business and Professions Code 31Civil Code 31Corporations Code 32License Discipline by DRE 32The Consumer Complaint Process 33New DRE Enforcement Program 34


End of Study Materials 39

ii • Introduction

UNDERSTANDING RISK MANAGEMENT

COURSE DESCRIPTION

Risk management is the identification, assessment, and prioritization of risks, followed by coordinated application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events. Risks can come from uncertainty in the market, failures, legal liabilities, accidents, natural causes and disasters as well as deliberate attacks from an adversary, or events of uncertain or unpredictable root-cause.

In the real estate arena, these types of risks are usually in the form of fraud, a breach of contract, or a violation of an agent’s fiduciary duty or code of ethics. The strategies to manage risk typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk.

Credit Hours: 3 Hours Category: Risk Management

This course is sold with the understanding that the publisher is not engaged in rendering legal or tax advice and assumes no liability in connection with its use. Since laws are constantly changing and vary by state and county, we urge you to do additional research and consult appropriate experts before relying on the information contained in this course to render professional advice. The advice and strategies in this course may not be suitable for your situation.

© Empire Learning, 2019

1 • Chapter 1: Risk Management Basics

CHAPTER 1: RISK MANAGEMENT BASICS

TERMS AND DEFINITIONSReal estate professional will encounter a variety of terms in the area of risk management. Some of the most important terms include:

» Breach: The breaking of a law, or failure of duty, either by omission or commission.

» Caveat Emptor: Let the buyer beware. The buyer must examine the goods or property and buy at his or her own risk, absent misrepresentation.

» Code of Ethics: A set of rules and principles expressing a standard of accepted conduct for a professional group and governing the relationship of members to each other and to the organization.

» Commingling: The illegal mixing of personal funds with money held in trust on behalf of a client.

» Common Law: The body of law that grew from customs and practices developed and used in England since “the beginning of time”.

» Contract: An agreement to do or not to do a certain thing. It must have four essential elements — parties capable of contracting, consent of the parties, a lawful object, and consideration. A contract for sale of real property must also be in writing and signed by the party or parties to be charged with performance.

• Bilateral Contract: A contract in which each party promises to do something.

• Executed Contract: 1) A contract in which both parties have completely performed their contractual obligations. 2) A signed contract.

• Executory Contract: A contract in which one or both parties have not yet completed performance of their obligations.

• Express Contract: A contract that has been put into words, either spoken or written.

• Implied Contract: An agreement that has not been put into words, but is implied by the actions of the parties.

• Unilateral Contract: When one party promises to do something if the other party performs a certain act, but the other party does not promise to perform it; the contract is formed only if the other party does perform the requested act.

» Conversion: The unlawful appropriation of another person’s property, as in the conversion of


trust funds.

» 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 the latter by the slightest misrepresentation, concealment, duress or pressure.

» Fraud: The intentional and successful employment of any cunning, deception, collusion, or artifice, used to circumvent, cheat or deceive another person whereby that person acts upon it to the loss of property and to legal injury.

• Actual Fraud: A deliberate misrepresentation or representation made in reckless disregard of its truth or its falsity, the suppression of truth, a promise made without the intention to perform it, or any other act intended to deceive.

• Constructive Fraud: A breach of duty, as by a person in a fiduciary capacity, without an actual fraudulent intent, which gains an advantage to the person at fault by misleading another to the other’s prejudice. Any act of omission declared by law to be fraudulent, without respect to actual fraud.

» Statute of Frauds: A state law, based on an old English statute, requiring certain contracts to be in writing and signed before they will be enforceable at law, e.g. contracts for the sale of real property, contracts not to be performed within one year.

» Tort: Any wrongful act (not involving a breach of contract) for which a civil section will protect the person wronged.

ACTIVITIES LIKELY TO CONTRIBUTE TO RISKIn the real estate profession, there are many common areas that can open a licensee up to potential risk:

Broker Supervision

A licensed real estate broker must supervise the real estate salespersons who are employed under the broker. This is true for corporate brokers and for “sole proprietor” brokers alike. There are no exceptions to this law. Moreover, it is never acceptable for an unlicensed individual to supervise a licensed real estate salesperson, or to conduct licensed acts. Specifically, B&P §10159.2 sets forth the primary broker supervision requirement in which the designated licensed broker is responsible for exercising sufficient supervision and control over his or her employees necessary to achieve full compliance with the Real Estate Law. Broker supervision is key to achieving maximum protection for the public who engage in real estate transactions.


Fiduciary Duty

Under California law, certain “special” relationships involving a high degree of trust, fidelity, integrity and confidence, and the exercise of professional expertise or special knowledge and discretion or power, rise to the stature of a fiduciary relationship. They include a trustee and a beneficiary, a lawyer and his or her clients, a member of a board of directors and his or her corporation, and a real estate agent and his or her principals/clients. The latter includes a mortgage loan broker licensed by the Department of Real Estate and his or her borrowers.

In the real estate transactions context, by reason of the fiduciary relationship, the brokerage, acting through its designated broker officer and the responsible real estate broker associate(s) and/or salesperson(s), owes, and its agents owe, certain special fiduciary duties to its client(s). Fiduciary duties impose the highest standard of care, and real estate licensees must be committed to scrupulously fulfilling those obligations.

Contract Preparation

A licensee has a responsibility to be completely familiar with all contracts they are a party to. Implied contracts are especially risky. In an effort to minimize risk, all real estate contracts need be written, fully executed, and thoroughly explained to all parties.

Disclosure

Failure to research, investigate and disclose material facts is filled with potential risk. A licensee needs to be diligent about disclosing all known information regarding property condition, property ownership, agency relationships, conflicts of interest and any other information relevant to the transaction. Misrepresentation of value or property conditions or the concealment of material facts is a violation of the code of ethics and standard of care practices.

Visual Inspection

Listing and selling brokers/agents must each conduct a reasonably competent and diligent visual inspection of real property, which consists of 1 to 4 dwelling units, that is sold through said brokers/agents. The same obligation applies to manufactured homes (as defined in Health and Safety Code Section 18007) when the foregoing property is being transferred through brokers/agents. The purpose of the visual inspection is to disclose to the prospective buyer all material facts affecting the property’s value, desirability, and intended use.


Advertising

Pursuant to Section 10140.6 of the California Business and Professions Code, a real estate licensee must indicate in real estate advertising that he or she is performing acts for which a license is required. Appropriate designations, such as agent, broker, REALTOR®, and loan correspondent (or abbreviations such as bro., agt.) satisfy the requirement. Failure to properly identify themselves or to mislead or misrepresent information in advertising is a clear violation. Licensee should always avoid providing false or misleading advertising or statements for which there is no basis in fact.

Trust Fund Handling

A real estate licensee who handles trust funds needs to be extra vigilant! DRE audits of brokers find that the most violations are in the areas of property management, broker escrow, and private money mortgage loan activities. The primary cause of shortages can be attributed to commingling or conversion, meaning that trust funds were used by the licensee for personal/business use. In many cases, the use of trust funds was blatant and intentional, but in some cases the broker in charge simply did not supervise operations, creating an environment where payment and deposit errors could take place. Blatant misuse of trust funds can involve altered bank statements designed to hide large trust fund shortages from auditors, use of trust funds to pay company business expenses, and withdrawal of trust funds as cash. Lack of supervision of trust funds occurred when brokers fully relied on others to maintain trust accounts which resulted in the loss of accounting control, substandard record keeping, errors and misuse of funds by others. A broker who is not active, competent, or proficient in accounting oversight should avoid trust fund handling.

RESPA

Licensees must be careful when entering into arrangements with settlement providers or their affiliates that result in compensation back to the licensee. This type of practice could be a violation of the Federal Real Estate Settlement Procedures Act. Great care is needed when engaging in transactions with settlement service providers that result in payments for orders placed with those providers. If a real estate licensee is offered some type of benefit or payment to steer business to a settlement provider, a licensee should not take the word of the entity or person who makes the offer that the activity is RESPA compliant. Every licensee must do his or her own research to ensure any offer from a settlement service provider is RESPA-compliant.

Short Sales

In the most recent crisis, short sales became a standard in many California real estate markets. A short sale is a pre-foreclosure residential real estate transaction where the owner of the mortgage loan, the lender or lien holder, agrees to (i) allow the home owner to sell his or her property for less than -- or “short” of -- the outstanding amount owed on the mortgage loan, and to (ii) release the property


from the mortgage. Homeowners who are “underwater” or “upside down” with respect to their mortgage loans, seek to sell their homes “short” to avoid the threat of foreclosure action and to lessen the credit damage that would accompany a foreclosure. Because of the “shortage”, the transaction may involve “debt forgiveness” by the lender. These types of transactions can be riddled with potential risk for the real estate licensee. Problem areas can include (but are not limited to) unlicensed short sale negotiators, payment of unauthorized advanced fees, property flipping, and hidden surcharges.

California real estate licensees would be well-advised to be completely transparent and to fully disclose, and document the disclosure of, all material information, side-deals, and concurrent and related transactions to all parties to short sale transactions, including, without limitation, all involved third party participants and payments. Licensees would also be wise to advise their clients to contact and consult with a qualified attorney or tax professional regarding the potential tax consequences of a short sale transaction. Further, if you are considering engaging in short sale transactions, you should fully educate yourself about the mechanics of the process and the related legal and ethical issues, and work only with legitimate professionals.

Cash for Keys

When a lender is forced to take back a home, it becomes responsible for that property. If the lender can make a deal with a tenant to pay for the tenant’s security and utility deposits, moving expenses, and maybe even temporary living expenses, and perhaps a bonus for a quick moving date, it would be in the lender’s interest to do so to avoid the inevitable minimum 3 to 6 month delay associated with formal legal eviction proceedings. So a “cash for keys” deal has now become a situation in many tenant occupied foreclosure sales. The amount offered to tenants by the owner/lender varies, but it is generally between $500 and $5,000.

California real estate brokers or salespersons who engage in “cash for keys” negotiations with tenants must be aware of the federal, state and local laws relating to foreclosed properties, and the tenants’ rights with respect to their tenancies or leasehold interests. The old saying “ignorance of the law is no excuse” really does apply in this context. DRE licensees who solicit a resident owner or tenant to accept a “cash for keys” proposal must act fairly and honestly with respect to the transaction. Dishonest behavior, misrepresentations, harassment, failures to disclose material information to a resident owner or tenant, including failing to advise the resident owner or tenant of his or her rights with respect to eviction (that the licensee has knowledge of) as a result of foreclosure, or negligence, could possibly lead to license disciplinary action. A licensee who hires unlicensed persons to solicit “cash for keys” deals can also be liable for the dishonesty, misrepresentations, harassment and/or negligence of his or her unlicensed agent.


Miscellaneous

There are countless other areas that can provide opportunity for licensees to open themselves to potential risk. Real estate professionals need to be diligent in their workings with privacy issues, lending, fair housing, anti-trust, and the like. Never give negligent advice, always stick to the facts, remain knowledgeable, and work with honest, reputable people.

7 • Chapter 1: Review Questions

CHAPTER 1: TEST YOUR KNOWLEDGE

The following questions are included as an additional tool to enhance your learning experience and do not need to be submitted in order to receive credit.

We recommend that you answer each question and then compare your response to the suggested solutions on the following page(s) before taking the final exam.

1. Which of the following designations can be used in advertising material to properly identify yourself as a real estate licensee:

A. agent

B. broker

C. REALTOR®, if the licensee is a member of the National Association of REALTORS®

D. all of the above


CHAPTER 1: SOLUTIONS AND SUGGESTED RESPONSES

Below are the solutions and suggested responses for the questions on the previous page(s). If you chose an incorrect answer, you can review the page(s) as indicated for more information.

1. D. all of the above

See page 4

9 • Chapter 2: Risk Reduction

CHAPTER 2: RISK REDUCTION

BROKER SUPERVISION AND RESPONSIBILITYAll too often, the disciplinary cases the Department of Real Estate investigates and prosecutes stem from complaints about real estate transactions in which the designated broker-officer responsible for supervising the sales force was an absentee or pro forma “rent-a-broker.” A “rent-a-broker” refers to a broker who is the broker of record on the Department’s records, but who abdicates all actual responsibility to another individual, usually the true owner of the company, who may or may not be licensed or qualified to manage a real estate business. While there are legitimate ways to delegate some legal responsibility for supervision to other licensees, California’s Real Estate Law requires that the designated broker-officer of a real estate corporation, and the employing broker of salespersons in a sole proprietorship, supervise the sales force.

Under the Real Estate Law, broker supervision is key to achieving maximum protection for the public who engage in real estate transactions. In hiring and managing the sales force, reviewing and disseminating advertisements, protecting and accounting for trust funds, and handling escrows, brokers ensure that strict standards are adhered to, and that only trustworthy, competent individuals will be privy to the sensitive financial information and matters involved in buying, selling, leasing and mortgaging of real property. The Real Estate Law is set forth primarily in Business and Professions (B&P) Code Section (§) 10000 et seq. and in the related rules set forth in the Regulations of the Real Estate Commissioner, Title 10, Chapter 6 of the California Code of Regulations (Regulations). The following is a discussion of some sections of the B&P and Regulations relating to the supervision requirement.

Broker’s Obligation to Supervise

A licensed real estate broker must supervise the real estate salespeople who are employed under the broker. This is true for corporate brokers and for “sole proprietor” brokers alike. There are no exceptions to this law. Moreover, it is never acceptable for an unlicensed individual to supervise a licensed real estate salesperson, or to conduct licensed acts.

Specifically, B&P §10159.2 sets forth the primary broker supervision requirement in which the designated licensed broker is responsible for exercising sufficient supervision and control over his or her employees necessary to achieve full compliance with the Real Estate Law. Where there are other corporate officers who hold broker licenses and wish to act in a supervisory capacity, they may do so providing that the corporation enacts a corresponding corporate resolution, and the resolution is promptly filed with the DRE.

Regulation 2743 provides the very limited and specific criteria that must be followed for the delegation of supervisory responsibility to other broker-officers of a corporation. The corporate resolution assigning


supervisory responsibility over salespersons licensed to a corporate broker must make reference to a specified business address or addresses of the corporate broker, rather than by the listing of the names of salespersons subject to the supervision. In this way, a broker may use the services of brokers and salespersons to assist in supervising salespersons so long as the broker does not relinquish overall responsibility for supervision of the acts of salespersons licensed to the broker. Ultimately, it remains the designated broker’s responsibility to ensure that only qualified personnel are allowed to supervise the sales force and to ensure that the brokerage operates in compliance with the Real Estate law. What happens, for example, if a real estate salesperson who is being supervised by an officer other than the designated officer does something wrong which is within the scope of his or her employment. Depending on the facts and circumstances and the nature of the violation, the designated broker-officer may still be responsible along with the officer to whom supervision was delegated.

The supervision requirement in B&P §10159.2 is supported by B&P §10177(h). Enacted in 1955, this subsection authorizes two causes for disciplinary action:

1. for any broker who fails to exercise “reasonable supervision” over the salespersons practicing under his or her license, and

2. for any designated corporate broker licensee who fails to exercise reasonable supervision and control of the activities of the corporation for which a real estate license is required.

Hence, a broker’s failure to provide adequate supervision can lead to disastrous consequences not only for the affected consumers, but also for the broker’s future as a real estate licensee.

In exercising reasonable supervision over the activities of their salespersons, Regulation 2725 requires that brokers establish policies, rules, procedures and systems to review, oversee, inspect and manage:

a. Transactions requiring a real estate license.

b. Documents which may have a material effect upon the rights or obligations of a party to the transaction.

c. Filing, storage and maintenance of such documents.

d. Handling of trust funds.

e. Advertising of any service for which a license is required.

f. Familiarizing salesperson with the requirements of federal and state laws relating to the prohibitions against discrimination.

g. Regular and consistent reports of licensed activities of salespersons.

The form and extent of such policies, rules, procedures and systems must take into consideration the number of salespersons employed and the number and location of branch offices. In other words, a designated broker should keep track of who is working for the company, what the license status is of employees, and out of which office they are working. A broker also must have a system in place to monitor the overall policies, rules, procedures and systems. Brokers may use the services of other


brokers and salespersons to assist in administering these supervisory policies and procedures, so long as the broker does not relinquish overall responsibility for supervision of the acts of salespersons licensed to the broker.

Ensuring that all employees act with the utmost honesty and integrity and adhere to their duties as fiduciaries is an inherent part of the supervising broker’s responsibility. The decision to serve as a supervising broker, either of a sole proprietorship or of a corporate brokerage, should not be taken lightly. If any violations occur in the name of the corporation, the designated broker may suffer the consequences. The buck stops with that individual.

FIDUCIARY DUTIESIn addition to those duties of undivided loyalty, good faith, and full disclosure, California law imposes the following fiduciary duties on real estate licensees:

• To diligently exercise reasonable care, diligence and skill in representing a client and in the performance of the responsibilities of the agency relationship.

• To fully account in a timely manner for all funds and property received in which the client has or may have an interest.

• To not disclose confidential information of or about the client, including the client’s business, financial or business affairs, unless authorized to do so.

• To exercise the utmost honesty, absolute candor, integrity and unselfishness toward the client.

• To obediently, efficiently and promptly follow the lawful instruction of his or her client.

When a client feels wronged by his or her real estate brokerage and agent, the client oft-times files a lawsuit seeking damages and other remedies on theories ranging from breach of contract, intentional misrepresentation, negligent misrepresentation, and various others. It is the nature of the breach, the wrong and the loss (or the harm suffered) that will determine the scope and the applicability of remedies. In an action for an alleged breach of fiduciary duty(ies), a presumption of unfairness and undue influence arises when a fiduciary self-deals or gains an advantage in a transaction.

Depending on the facts of a particular case, a client suing for breach(es) of fiduciary duties can recover a full range of damages, including actual as well as punitive and exemplary damages. Moreover, when a client is defrauded by a fiduciary, the client is entitled to the benefit of his or her bargain and is awarded compensation for all of the detriment proximately caused by the breach, whether it could be anticipated or not (Section §§§1709, 3333 and 3343 of the California Civil Code). Also, a real estate agent who breaches his or her fiduciary obligations may forfeit and be deprived of his or her commission. Sierra Pacific Industries v. Carter 104Cal.App.3d579(1980), at page 583.

California real estate agents, as fiduciaries, owe special duties to their clients. Agents must be continually


aware of their important fiduciary duties and must perform them responsibly, diligently and completely. If they fail to do so, they risk significant civil liability and remedies, in addition to administrative discipline where their misconduct also violated the statutes and/or regulations enforced by the Department of Real Estate.

DISCLOSURESThis section deals with the major disclosures required by the California Civil Code (commencing at Section 1102). Subject to the exemptions listed below, these requirements apply when real property of 1 to 4 dwelling units is transferred by sale, exchange, installment land sale contract, ground lease coupled with improvements, lease with an option to purchase, or any other option to purchase.

In this discussion, the term “seller” means the transferor, the term “buyer” or “purchaser” means the transferee, and the term “transaction” includes the sale or transfer of the property.

These requirements also pertain to the resale of a manufactured home (as defined in Section 18007 of the Health and Safety Code) or a mobilehome (as defined in Section 18008 of the Health and Safety Code) even if classified as personal property, provided that the manufactured or mobilehome is located on real property and is intended for use as a residence.

The following transfers are exempt from these disclosure requirements:

• The sale of new homes as part of a subdivision project where a public report must be delivered to the purchaser or a public report is not required. However, when such new homes are sold through a real estate broker, the broker owes the buyer a duty to disclose any material facts which affect the value, desirability and intended use of the property;

• Foreclosure sales;

• Court ordered transfers;

• Transfers by a fiduciary in the administration of a decedent’s estate, a guardianship, conservatorship, or trust except where the trustee is a former owner of the property;

• Transfers to a spouse or to a person or persons in the lineal line of consanguinity;

• Transfers resulting from a judgment of dissolution of marriage, or of legal separation, or from a property settlement agreement incidental to such a judgment;

• Transfers from one co-owner to another;

• Transfers by the State Controller for unclaimed property;

• Transfers resulting from failure to pay taxes; and

• Transfers to or from any governmental entity.

(CAL. CIV. §§ 1102, 1102.2, 1102.3)


Termination Right

Should delivery of any of these disclosures or an amended disclosure occur after execution of an offer or of a purchase agreement, the buyer has three days after delivery of the disclosure in person or five days after delivery by deposit in the United States mail to terminate the offer or the agreement by delivering a written notice of termination to the seller or the seller’s agent.

(CAL. CIV. §1102.3)

Agency Relationship Disclosures

To provide an explanation of agency relationships and duties, the law requires that a real estate broker disclose in writing the general duties which arise from certain agency relationships. Additionally, the broker’s status as agent of the seller, agent of the buyer, or agent of both the seller and buyer (dual agent) is to be disclosed to the principals of the transaction who must consent to the agency relationship(s) disclosed. This requirement applies to the sale, exchange, or lease (for more than one year) of real property improved with 1 to 4 dwelling units, or the sale of a manufactured home (as defined in Health and Safety Code Section 18007).

Disclosure of the Negotiability of Real Estate Commissions

An agreement (such as a listing or sales agreement) which establishes or increases the amount or rate of a real estate broker’s/agent’s compensation for the sale of residential real property of not more than four units or a mobilehome must contain the following disclosure in not less than 10-point boldface type:

Notice: The amount or rate of real estate commissions is not fixed by law. They are set by each broker individually and may be negotiable between the seller and broker.

This notice must be physically placed before the provision in the agreement for compensation of the broker(s)/agent(s), and the amount or rate of compensation cannot be preprinted. Further, any compensation to be received by the broker from the transaction must be fully disclosed.

(CAL. BUS. & PROF. §§ 10147.5, 10176(g))

Real Estate Transfer Disclosure Statement

The Real Estate Transfer Disclosure Statement (TDS) describes the condition of a property and, in the case of a sale, must be given to a prospective buyer as soon as practicable and before transfer of title. In the case of a transfer by a real property sales contract (as defined in Civil Code Section 2985) by a lease coupled with an option to purchase, or by a ground lease coupled with improvements, the TDS is to be delivered before the execution of any of the foregoing.

The seller and any broker(s)/agent(s) involved are to participate in the disclosures. If more than


one broker/agent is involved, the broker/agent obtaining the offer is to deliver the disclosures to the prospective buyer unless the seller instructs otherwise.

Delivery to the prospective buyer of a report or opinion prepared by a licensed engineer, land surveyor, geologist, structural pest control operator, contractor, or other expert (dealing with matters within the scope of the professional’s license or expertise) may limit the liability of the seller and the real estate broker(s)/agent(s) when making required disclosures. The overall intention is to provide meaningful disclosures about the condition of the property being sold or transferred.

(CAL. CIV. § 1102.4)

Natural Hazards Disclosure

Unless the transfer of the property is subject to an exemption from this disclosure, the seller or the seller’s agent for this purpose must make appropriate disclosures if the property is in one or more of the following zones or areas:

» Zone A or Zone V (special flood hazard area) as designated by the Federal Emergency Management Agency. The seller’s agent, or the seller, if acting without an agent, must make this disclosure if:

• The seller, or the seller’s agent has actual knowledge that the property is in a special flood hazard area; or

• The local jurisdiction has compiled a list of parcels that are in a special flood hazard area and has posted at the offices of the county recorder, county assessor, and county planning agency a notice that identifies the location of the parcel list.

(CAL. GOV’T § 8589.3)

» An area of potential flooding shown on a map as an area which will be inundated if a dam fails. The seller’s agent, or the seller if acting without an agent, must make this disclosure if:

• The seller, or the seller’s agent, has actual knowledge that the property is within a delineated inundation area; or

• The local jurisdiction has compiled a list of parcels that are in the inundation area and has posted at the offices of the county recorder, county assessor, and county planning agency a notice that identifies the location of the list.

(CAL. GOV’T § 8589.4)

» A designated very high fire hazard severity zone. The seller and the seller’s agent must make this disclosure if:

• The seller, or the seller’s agent, has actual knowledge that the property is in a designated very high fire hazard severity zone; or


• The local agency has received a map of such properties which includes the seller’s property and has posted at the offices of the county recorder, county assessor, and county planning agency a notice that identifies the location of the map and any changes to it.*

(CAL. GOV’T § 51183.5)

» A designated wildland area (“state responsibility area”) that may contain substantial forest fire risks and hazards. The seller and the seller’s agent must make this disclosure if:

• the seller or the seller’s agent has actual knowledge that the property is in a designated wildland fire zone; or

• the city or county has received a map of such properties which includes the seller’s property and has posted at the offices of the county recorder, county assessor, and county planning agency a notice that identifies the location of the map and any changes to it.*

(CAL. PUB. RES. § 4136)

» An earthquake fault zone. These zones are over earthquake faults and are usually about one quarter mile in width. The seller’s agent, or the seller if acting without an agent, must disclose that the property is in one of these zones if:

• the seller, or the seller’s agent, has actual knowledge that the property is within a delineated earthquake fault zone; or


(CAL. PUB. RES. § 2621.9)

» A seismic hazard zone. In an earthquake, properties in one of these zones may be subject to strong ground shaking, soil liquefaction, or landslide. The seller’s agent, or the seller if acting without an agent, must disclose that the property is in one of these zones if:

• the seller, or the seller’s agent, has actual knowledge that the property is within a delineated seismic hazard zone; or


(CAL. PUB. RES. § 2694)


If, when looking at the map, a reasonable person cannot tell with certainty whether the property is in the zone, the seller or seller’s agent must mark “YES” on the disclosure form, unless there can be attached to the form an expert’s report, prepared pursuant to Civil Code Section 1102.4(c), indicating that the property is not located in the zone.

These disclosures must be made on the Natural Hazard Disclosure Statement (NHDS) or on the Local Option Real Estate Transfer Disclosure Statement (Local Option Disclosure), if the local jurisdiction has mandated use of a Local Option Disclosure for the same disclosure purposes and the information and warnings are substantially the same as on the NHDS.

The seller or his or her agent may elect to use the services of a third party consultant to complete the NHDS in lieu of completing the NHDS themselves. The use of a third party consultant does not relieve the seller or his/her agent from the obligation to deliver NHDS to the buyer.

(CAL CIV. §§ 1103, 1103.1, 1103.2, 1103.3, 1103.4)

Earthquake Guides

The California Seismic Safety Commission has developed a Homeowner’s Guide to Earthquake Safety. The guide includes information on geologic and seismic hazards, explanations of related structural and nonstructural hazards, recommendations for mitigating earthquake damage, and a statement that safety cannot be guaranteed with respect to a major earthquake and that only precautions such as retrofitting can be undertaken to reduce the risk of various types of damage. The Seismic Safety Commission has also developed a Commercial Property Owner’s Guide to Earthquake Safety. These guides are available at https://ssc.ca.gov/forms_pubs/hog.html or by calling (916) 263-5506.

If a buyer receives a copy of the Homeowner’s Guide (or, if applicable, the Commercial Property Owner’s Guide), neither the seller nor the broker(s)/agent(s) are required to provide additional information regarding geologic and seismic hazards, except that sellers and brokers/agent(s) must disclose what they actually know, including whether a property is in an earthquake fault zone.

Delivery of a booklet is required in the following transactions:

• Transfer of any real property improved with a residential dwelling built prior to January 1, 1960 and consisting of 1 to 4 units any of which are of conventional light-frame construction (Homeowner’s Guide); and

• Transfer of any unreinforced masonry building with wood-frame floors or roofs built before January 1, 1975 (Commercial Property Owner’s Guide).

Structural Deficiency Disclosures

In a transfer of residential dwellings consisting of 1 to 4 units, the following structural deficiencies and any corrective measures taken, which are within the seller’s actual knowledge, are to be disclosed to

https://ssc.ca.gov/forms_pubs/hog.html

https://www.disclosuresource.com/downloads/earthquake_com.pdf

https://ssc.ca.gov/forms_pubs/hog.html


prospective buyers:

• Absence of foundation anchor bolts;

• Unbraced or inappropriately braced perimeter cripple walls;

• Unbraced or inappropriately braced first-story walls;

• Unreinforced masonry perimeter foundation;

• Unreinforced masonry dwelling walls;

• Habitable room or rooms above a garage; or

• Water heater not anchored, strapped, or braced.

Certain exemptions apply to the obligation to deliver the booklet when transferring either a dwelling of 1 to 4 units or a reinforced masonry building. These exemptions are essentially the same as those that apply to delivery of the Real Estate Transfer Disclosure Statement. (See Part I, Section I, Subsection A, Item 2 – Real Estate Transfer Disclosure Statement.)

(CAL. PUB. RES. §§2621 et. seq., 2690 et. seq.; CAL. BUS. & PROF. §§ 10147, 10149; CAL. CIV. §§2079.8, 2079.9; CAL. GOV’T §§ 8875 et. seq., 8893.2, §8897 et. seq.)

Smoke Detector Statement of Compliance

Whenever a sale (or exchange) of a single family dwelling occurs, the seller must provide the buyer with a written statement representing that the property is in compliance with California law regarding smoke detectors. Some local ordinances impose more stringent smoke detector requirements than state law. Therefore, local city or county building or public safety departments should be consulted regarding smoke detector requirements.

The State Building Code mandates that all existing dwelling units have a smoke detector installed in a central location outside each sleeping area. In a two-story home with bedrooms on both floors, at least two smoke detectors would be required.

New construction, or any additions, alterations or repairs exceeding $1,000 and for which a permit is required, must include a smoke detector installed in each bedroom and also at a point centrally located in a corridor or area outside of the bedroom(s). This standard applies for the addition of one or more bedrooms, no matter what the cost.

In new home construction, the smoke detector must be hard-wired, with a battery backup. In existing dwellings, the detector may be battery operated.

(CAL. HEALTH & SAFETY § 13113.8; CAL. BUILDING CODE § 1210; STATE FIRE MARSHALL REGULATIONS 740 et. seq.)


Disclosure Regarding Lead-Based Paint Hazards

Many housing units in California still contain lead-based paint. This paint was banned for residential use in 1978. Lead-based paint can peel, chip, and deteriorate into contaminated dust, thus becoming a hazard. A child’s ingestion of the lead-laced chips or dust may result in learning disabilities, delayed development or behavior disorders.

The federal Real Estate Disclosure and Notification Rule (the Rule) requires that owners of “residential dwellings” built before 1978 to disclose to their agents and to prospective buyers or lessees/renters the known presence of or any information and any reports about lead-based paint and/or lead-based paint hazards (e.g., location and condition of the painted surfaces, etc.). The Rule defines a residential dwelling as a single-family dwelling or a single-family dwelling unit in a structure that contains more than one separate residential dwelling unit, and in which each such unit is used or occupied or intended to be used or occupied, in whole or in part, as the residence of one or more persons.

Properties affected by the Rule are termed “target housing.” Target housing does not include pre-1978 housing which is:

• Sold at a foreclosure sale (but a subsequent sale of such a property is covered);

• A “0-bedroom dwelling” (e.g., a loft, efficiency unit or studio);

• A dwelling unit leased for 100 or fewer days (e.g., a vacation home or short-term rental), provided the lease cannot be renewed or extended;

• Housing designated for the elderly or handicapped, unless children reside or are expected to reside there;

• Leased housing for which the requirements of the Rule have been satisfied, no pertinent new information is available, and the lease is renewed or renegotiated; or

• Rental housing that has been inspected by a certified inspector and found to be free of lead-based paint.

Sellers and lessors of units in pre-1978 multifamily structures must provide buyers or lessees with any available records or reports pertaining to lead-based paint and/or lead-based paint hazards in areas used by all the residents (e.g., stairwells, lobbies, recreation rooms, laundry rooms, etc.). If there has been an evaluation or reduction of lead-based paint and/or lead-based paint hazards in the entire structure, the disclosure requirement extends to any available records or reports regarding the other dwelling units.

The Rule requires that a seller of target housing offer a prospective buyer 10 days to inspect for lead-based paint and lead-based paint hazards. The 10 days to inspect can be increased, decreased, or waived by written agreement between buyer and seller. The Rule does not require a seller to pay for an inspection or to remove any lead-based paint/hazards, but gives a buyer the opportunity to have the property inspected. A list of certified lead inspectors and contractors is available by calling the California Department of Health Services at 1-800-597-LEAD.


The federal Environmental Protection Agency (EPA) publishes a pamphlet entitled, Protect Your Family From Lead In Your Home. This pamphlet describes ways to recognize and reduce lead hazards. The Rule requires that a seller or lessor/landlord of target housing deliver this pamphlet to a prospective buyer or lessee/tenant before a purchase, lease or rental agreement is formed.

The Rule further requires that the seller’s or lessor’s/landlord’s Lead-Based Paint or Lead-Based Paint Hazards Disclosures; the Lead Warning Statement; and the prospective buyer’s or lessee’s/tenant’s acknowledgment of receipt of that information; the offer of inspection period (or waiver of same); and the EPA pamphlet each be included in an attachment to the transaction documentation. The Seller or lessor/landlord, the prospective buyer or lessee/tenant, and the agent(s) must each sign and date the attachments. The retention period for sellers or lessors/landlords and agent(s) of this document is three years from completion of the sale or transfer, or from commencement of the lease/rental.

A real estate agent must ensure that:

• His or her principal (seller/lessor/landlord) is aware of the disclosure requirements;

• The transaction documentation includes the required notifications and disclosures;

• The buyer or lessee/renter receives the EPA pamphlet; and

• In the case of a sale or transfer, the buyer is offered an opportunity to have the property inspected for lead-based paint and lead-based paint hazards.

Violation of the Rule may result in civil and/or criminal penalties. For the purposes of these requirements, real estate “agent” does not include one who represents only the buyer and receives compensation only from the buyer.

To obtain the essential compliance information, a person may call the EPA at 1-800-424-LEAD.

(42 U.S.C. § 4852d; 24 C.F.R.. PART 35; CAL. HEALTH & SAFETY §§ 124125 to 124165)

California’s Environmental Hazards Pamphlet

As previously discussed in this section, a California seller of residential real property consisting of 1 to 4 dwelling units (with a few exceptions) must give the buyer a Real Estate Transfer Disclosure Statement (TDS). The statement must specify environmental hazards of which the seller is aware (e.g., asbestos, radon gas, lead-based paint, formaldehyde, fuel or chemical storage tanks, contaminated soil or water, etc.). The seller or the seller’s agent(s) may give the buyer of real property subject to Section 1102 of the Civil Code or of any other real property, including manufactured housing as defined in Section 18007 of the Health and Safety Code, a pamphlet entitled, Environmental Hazards: A Guide for Homeowners, Buyers, Landlords, and Tenants. If the buyer receives the pamphlet, neither the seller nor any agent in the transaction is required to furnish more information concerning such hazards, unless the seller or the agent(s) has/have actual knowledge of the existence of an environmental hazard on or affecting the property.

https://www.epa.gov/sites/production/files/2014-02/documents/lead_in_your_home_brochure_land_b_w_508_easy_print_0.pdf

https://www.epa.gov/sites/production/files/2014-02/documents/lead_in_your_home_brochure_land_b_w_508_easy_print_0.pdf

https://www.cdph.ca.gov/Programs/CCDPHP/DEODC/CLPPB/CDPH%20Document%20Library/ResEnviroHaz2011.pdf

https://www.cdph.ca.gov/Programs/CCDPHP/DEODC/CLPPB/CDPH%20Document%20Library/ResEnviroHaz2011.pdf


(CAL. CIV. § 2079.7)

Note

The environmental hazards pamphlet has been maintained and updated by the California Association of REALTORS® for several years and is available for purchase.

Delivery of Structural Pest Control Inspection and Certification Reports

The law does not require that a structural pest control inspection be performed prior to transfer of a real property. However, if required by the purchase contract or by the lender, the seller or the seller’s agent(s) must deliver to the buyer a copy of the report and written certification, prepared by a registered structural pest control company, regarding the presence or absence of wood-destroying organisms. Delivery must occur before transfer of title.

If more than one real estate broker is acting as the seller’s agent, the broker who obtained the offer is responsible for delivery of the report in person or by mail, unless the seller directs otherwise in writing. The real estate broker responsible for delivery must retain for 3 years a record of the actions taken to effect delivery.

(CAL. BUS. & PROF. §§ 8519 et. seq., 10148; CAL. CIV. § 1099; COMMISSIONER’S REGULATION 2905)

Energy Conservation Retrofit and Thermal Insulation Disclosures

State law prescribes minimum energy conservation standards for all new construction. Some local governments also have ordinances that impose additional energy conservation measures on new and/or existing homes. These local ordinances may impose energy retrofitting as a condition of the sale of an existing home. The seller and/or the seller’s agent(s) are to disclose to a prospective buyer the requirements of the various ordinances, as well as who is responsible for compliance.

Federal law requires that a “new home” seller (including a subdivider) disclose in every sales contract the type, thickness, and R-value of the insulation which has been or will be installed. However, if the buyer signs a sales contract before it is known what type of insulation will be installed, or if there is a change in the contract regarding insulation, the seller shall give the buyer the required information as soon as it is available.

(16 C.F.R. PART 460 et. seq.; CAL. PUB. RES. § 25402 et. seq.)


Foreign Investment in Real Property Tax Act

Federal law requires that a buyer of real property must withhold and send to the Internal Revenue Service (IRS) l5% of the gross sales price if the seller of the real property is a “foreign person” (10% for dispositions before February 17, 2016). The primary grounds for exemption from this requirement are: the seller’s non-foreign affidavit and U.S. taxpayer I.D. number; a qualifying statement obtained through the IRS attesting to other arrangements resulting in collection of or exemption from the tax; or the sales price does not exceed $300,000 and the buyer intends to reside in the property.

Because of the number of exemptions and other requirements relating to this law, principals and agents should consult the IRS or a qualified tax advisor for more information.

(26 U.S.C. § 1445)

Notice and Disclosure to Buyer of State Withholding on Disposition of California Real Property.

In certain California real estate sale transactions, buyers must withhold 3 1/3% of the total sales prices as state income tax and deliver the sums withheld to the State Franchise Tax Board. In applicable transactions, the escrow holder is required by law to notify the buyer of this responsibility.

A buyer’s failure to withhold and deliver the required sum may result in the buyer being subject to penalties. If the escrow holder fails to notify the buyer, penalties may be levied against the escrow holder.

Transactions are exempt from withholding if:

• The total sales price is less than $100,000.

• The property qualifies as the seller’s or decedent’s principal residence under Internal Revenue Service Code Section 121. Generally, a home will qualify as a principal residence if, during the five-year period ending on the date of sale, the seller or the decedent owned and lived in the property as their main home for at least two years. Notwithstanding the two-year requirement, the last use of the property must be that of the seller’s or decedent’s principal residence.

• The transaction must result in either a net loss or a net gain that is not required to be recognized for California income or franchise tax purposes. The seller must complete Form 593-L, “Real Estate Withholding-Computation of Estimated Gain or Loss.”

• The property is subject to an involuntary conversion and, therefore, the transaction will qualify for non-recognition of gain for California income tax purposes under Internal Revenue Service Code Section 1033.

• The property is being transferred by certain corporations, partnerships, or other entities which have no permanent place of business in California and/or otherwise qualify for an exemption.


• The property is being transferred by a trustee under a deed of trust or a mortgage with a power of sale, or pursuant to a decree of foreclosure, or by a deed in lieu of foreclosure.

There may be other restrictions, limitations, or exceptions for special circumstances. For more information, obtain IRS Publication 523, Selling Your Home, or contact the IRS toll free at 1-800-829-3676. In addition, withholding may be reduced or deferred when:

• The sale qualifies as an IRS Code Section 1031 exchange. However, withholding will be required on any cash the seller receives.

• The sale is an installment sale and the buyer agrees in writing to withhold on each principal payment including the down payment and on any balloon payment. The buyer must complete Form 593-I, Real Estate Withholding Installment Sale Agreement.

For further information, contact the Franchise Tax Board and/or a qualified tax advisor.

(CAL. REV. & TAX. § 18662)

Furnishing Controlling Documents and Financial Statements Concerning Common Interest Developments (CID’s)

The owner (other than a subdivider) of a separate interest in a common interest development (community apartment project, condominium project, planned development, or stock cooperative) must provide a prospective buyer with the following:

• A copy of the governing documents of the development, including any operating rules and a copy of the association’s articles of incorporation, or if not incorporated, a written statement from an authorized representative that the association is not incorporated;

• If there is an age restriction not consistent with Civil Code Section 51.3, a statement that the age restriction is only enforceable to the extent permitted by law and specifying the applicable provisions of law;

• A copy of the financial documents of the association including financial statement, the operating budget, the most recent reserve study and the assessment and reserve funding disclosure summary form (see Civil Code 1365 and 1365.5);

• A written statement from an authorized representative of the association specifying the amount of the current regular and special assessments, the current fees, as well as any unpaid assessments, late charges, interest, and costs of collection which are or may become a lien against the separate interest and any fines or penalties levied upon the owner and which remain unpaid.

• A copy or summary of any notice previously sent to the owner that sets forth any alleged violation of the governing documents that remains unresolved.

https://www.irs.gov/pub/irs-pdf/p523.pdf

https://www.ftb.ca.gov/forms/2019/19_593i.pdf


• A copy of any preliminary list of any construction defects and a statement that a final determination of the defects has yet to occur, including whether the list of defects is accurate and complete.

• A disclosure of any settlement agreement or other instrument between the association and the developer regarding construction defects, and the following information in connection therewith:

• A general description of the defects that the association reasonably believes, as of the date of the disclosure, will be corrected or replaced.

• A good faith estimate, as of the date of the disclosure, of when the association believes that the defects identified in (1) will be corrected or replaced. The association may state that the estimate may be modified.

• The status of the claims for defects in the design or construction of the common interest development that were not identified in paragraph (1) whether expressed in a preliminary list of defects sent to each member of the association or otherwise claimed and disclosed to the members of the association.”

• Information regarding any approved change in the assessments or fees which are not yet due and payable as of the disclosure date.

(CAL. CIV. §§ 1368, 1375 , 1375.1(a)(1),(2),(3))

Note

Upon written request, the association is to provide within 10 days the above information to or as directed by the owner. In addition, some transactional documents require that the owner secure for the prospective buyer copies of minutes of proceedings, which may be obtained from the association by the owner in accordance with Civil Code Section 1365.2.

Notice Regarding the Advisability of Title Insurance

In an escrow for a sale (or exchange) of real property where no title insurance is to be issued, the buyer (or both parties to an exchange) must receive and sign/acknowledge the following notice as a separate document in the escrow:

“IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE

ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF


ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS AND ENCUMBRANCES

WHICH AFFECT YOUR INTEREST IN THE PROPERTY BEING ACQUIRED. A NEW

POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN ORDER TO INSURE

YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING.”

(CAL. CIV. § 1057.6)

Note

While the statute does not expressly assign the duty, it is reasonable to assume that delivery of the notice is an obligation of the escrow holder. A real estate broker conducting an escrow pursuant to the exemption set forth in Financial Code Section 17006(a)(4) would, therefore, be responsible for delivery of the notice.

Certification Regarding Water Heater’s Security Against Earthquake

The seller of any real property containing a water heater must certify in writing to a prospective buyer that the water heater has been braced, anchored or strapped to resist falling or horizontal movement due to earthquake motion. The minimum standard for this security is set forth in the California Plumbing Code, which may be more restrictively amended by local or municipal code or ordinance. The certification can be included with the Homeowner’s Guide to Earthquake Safety, in the Real Estate Purchase Contract or Receipt for Deposit, or with the Real Estate Transfer Disclosure Statement.

(CAL. HEALTH & SAFETY § 19211)

Database – Locations of Registered Sex Offenders

Written leases or rental agreements for residential real property and contracts (including real property sales contracts as defined in Civil Code Section 2985) for the sale of residential real property of 1 to 4 dwelling units must contain, in not less than eight-point type, a notice as specified below:

Notice: Pursuant to Section 290.46 of the Penal Code, information about specified registered sex offenders is made available to the public via an Internet Web site maintained by the Department of Justice at www.meganslaw.ca.gov. Depending on an offender’s criminal history, this information will include either the address at which the offender resides or the community of residence and ZIP Code in which he or she resides.


Contracts entered into by the parties on or after July 1, 1999, and before September 1, 2005, contained the following notice:

Notice: The California Department of Justice, sheriff’s departments, police departments serving jurisdictions of 200,000 or more, and many other local law enforcement authorities maintain for public access a database of the locations of persons required to register pursuant to paragraph (1) of subdivision (a) of Section 290.4 of the Penal Code. The database is updated on a quarterly basis and is a source of information about the presence of these individuals in any neighborhood. The Department of Justice also maintains a Sex Offender Identification Line through which inquiries about individuals may be made. This is a “900” telephone service. Callers must have specific information about individuals they are checking. Information regarding neighborhoods is not available through the “900” telephone service.

A contract entered into by the parties between September 1, 2005, and April 1, 2006, was given the option of either notice printed above.

(CAL. CIV. § 2079.10a)

No Disclosure Required for Manner/Occurrence of Death; Affliction of Occupant with AIDS

No cause of action arises against an owner or the owner’s broker/agent (or any cooperating broker/agent) when selling, leasing, or renting real property for failing to disclose to the buyer, lessee, or renter the following:

• the manner or occurrence of an occupant’s death upon the real property if the death occurred more than 3 years prior to the transferee’s offer to purchase, lease, or rent the property; or

• that an occupant of the property was afflicted with, or died from, Acquired Immune Deficiency Syndrome (AIDS).

This controlling statute does not change the law relating to disclosure of any other physical or mental condition or disease of an occupant or the physical condition of the property. If the buyer asks a direct question concerning deaths occurring on the real property, this statute will not protect the owner or broker(s)/agent(s) from misrepresentations.

(CAL. CIV. § 1710.2)

VISUAL INSPECTIONReal estate agents must disclose all material facts affecting the value, desirability, and intended use about which they have or should have notice or knowledge that may not be discernible from the required visual inspection. An agent’s inspection certification is contained in the Real Estate Transfer Disclosure Statement. The inspection/disclosure requirement applies to property of 1 to 4 dwelling units, but does


not apply to the sale of new homes as part of a subdivision project when the sale is either subject to or exempted from the issuance of a Public Report.

Agents remain obligated to disclose material facts about which they have notice or knowledge whether such facts are included in a Subdivision Public Report or in disclosures made by the developer when no Public Report is required.

For the limited purpose of making disclosures as a result of the aforesaid visual inspections, the agents do not have to inspect:

• Areas not reasonably accessible;

• Areas off the site of the property;

• Public records or permits concerning the title or use of the property; or

• The common area if the property is in a common interest development if the seller and the seller’s broker(s)/agent(s) comply with Civil Code Section 1368. (See Part I, Section I, Subsection J – Furnishing Controlling Documents and Financial Statements Concerning CIDs.)

Nothing in the law relieves a buyer of the duty to exercise reasonable care to protect himself/herself by considering facts which are known to or within the reasonably diligent attention and observation of the buyer.

AVOIDING REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) VIOLATIONSEvery licensee must do his or her own research to ensure any offer from a settlement service provider is RESPA-compliant. A simple start is to ask the service provider if a legal analysis that their activity is RESPA-compliant has been done and, if so, get a copy of the analysis. Every licensee should also follow up with his or her own counsel and HUD before entering into any agreement with a settlement service provider that will provide any type of benefit to the licensee.

If a real estate licensee is found by HUD to have violated RESPA, the finding of a violation may be used by the Department of Real Estate as a basis for disciplinary action. Education and diligence are the keys to avoiding violations. The following excerpts are an excellent starting point to avoid violations:

RESPA Section 8(a) (12 U.S.C. Section 2607(a)) provides that:

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement to or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.


RESPA Section 8(b) (12 U.S.C. Section 2607 (b)) provides that:

No person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

UNLAWFUL PRACTICE OF LAWSections 6125 and 6126 of the California Business and Professions Code prohibit the practice of law by persons who are not active members of the State Bar.

In 1943, in People v. Sipper (61 CA 2d Supp. 844), the Appellate Department of the Los Angeles County Superior Court stated that the practice of law is the doing and performing of services in a court of justice in any matter pending therein throughout its various stages and in conformity with the adopted rules of procedure. The court recited the larger traditional definition that includes legal advice and counsel and the preparation of legal instruments and contracts by which legal rights are secured, although such matters may not be pending in a court.

In the Sipper case, a married couple had asked the real estate broker “to make out a paper to protect Mrs. Hetman for the money” which they had borrowed from her in order to pay off the indebtedness on their real property. The defendant broker proceeded to prepare a trust deed, and later a mortgage. He charged $15 for his services, later reducing the charge to $10.

The appellate court held that the trial jury was justified in concluding that the defendant broker undertook to, and did, advise his clients as to the kind of legal document that they should execute in order to secure the loan. He made a charge which clearly indicated “…that he considered he was called upon to do something more than the mere clerical work of typing in certain furnished information on a blank form.” This was practicing law.

Significantly, the court stated that if the defendant “…had only been called upon to perform and had only undertaken to perform the clerical service of filling in the blanks on a particular form in accordance with information furnished by the parties, or had merely acted as a scrivener to record the stated agreement of the parties to the transaction, he would not have been guilty of practicing law without a license.”





1. When is it appropriate for an unlicensed individual to supervise a licensed real estate salesperson:

A. it is never acceptable

B. when the salesperson is employed by a property manager

C. when the salesperson is in the process of obtaining their license

D. when the company is temporarily without a licensed broker, as long as it is for less than a 90 day period

2. Which of the following items need to be disclosed if it is within the seller’s actual knowledge:

A. the absence of foundation anchor bolts

B. unbraced or inappropriately braced first-story walls

C. unreinforced masonry dwelling walls

D. all of the above




1. A. it is never acceptable

See page 9

2. D. all of the above

See page 17

30 • Chapter 3: Consequences of Illegal and Unethical Behavior

CHAPTER 3: CONSEQUENCES OF ILLEGAL AND UNETHICAL BEHAVIOR

PENAL CODEViolations of the Penal Code (PC) are of interest to real estate licensees because such offenses may be committed by clients or by others with whom licensees come into contact. If there is doubt as to whether a transaction involves a crime, a licensee should obtain legal advice.

For the most part, grand (as opposed to petty) theft is committed when the value of the money, labor, or real or personal property taken exceeds nine hundred fifty dollars ($950).

Theft of certain farm crops, farm animals and real property severed from land is defined as grand theft at values below $950. (PC 484, 487, 487a through 487g, 488)

Some examples of real estate related crimes are:

1. Diversion of construction funds from the intended purpose; use of a false voucher to obtain construction loan funds. (PC 484b, 484c)

2. Copying without permission, and with intent to use, documents owned by a title company. (PC 496c)

3. Removal of a structure from mortgaged real property, or after a foreclosure sale, with intent to defraud or to injure the mortgagee or purchaser. (PC 502.5)

4. Fraudulent appropriation of or secreting of trust funds by a broker or other fiduciary. (PC 506)

5. Failure by debtor, upon sale of property covered by a security agreement, to pay to the secured party the amount due under the security agreement (or the sale proceeds, whichever is less). (PC 504b)

6. Obtaining property from another by extortion, i.e., by force or by a threat of injury to person or property, including injury to reputation. (PC 518, 519)

7. Making or recording a deed, knowing the maker has no title; being a party to a fraudulent conveyance of land. (PC 531a)

8. Making or procuring a false financial statement to benefit oneself or another person in obtaining credit. (PC 532a)

9. Offering or giving parcels of real property by means of winning numbers at any drawing or with admission tickets, and collecting fees in connection with the land transfer. (PC 532c)

10. Giving a kickback of construction funds. (PC 532e)


11. Selling the same land twice to different persons. (PC 533)

12. Willful concealment by a married person of the necessity for concurrence of a spouse in the sale or mortgaging of land. (PC 534)

13. A broker or agent who “holds out” on a principal, or renders a principal a false accounting, commits a misdemeanor. (PC 536, 536a)

14. Except for posting legal notices, placing advertising signs on public or private property without permission. (PC 556, 556.1, 556.2)

15. Bribing a lender to obtain credit; accepting the bribe. (PC 639, 639a)

16. Accepting compensation or consideration from a title or escrow company given as an inducement for the referral of title business. (PC 641.4)

17. Signing the name of another person, or of a fictitious person, without authority to do so; falsely making, altering, forging or counterfeiting documents such as leases, deeds or checks; passing such documents as true and genuine, with intent to defraud. (PC 470, 473)

BUSINESS AND PROFESSIONS CODEThe Department of Real Estate publishes the Real Estate Law, a book which includes the many Business and Professions Code Sections which regulate real estate licensees. It would be prudent for all agents to familiarize themselves with these sections of the code and always adhere to them.

CIVIL CODEThe Civil Code (CC) proscribes various acts relative to real property sales contracts. A real property sales contract (sometimes called a contract of sale or a land installment contract) is defined (with certain exceptions) as an agreement to convey title to land upon satisfaction of specified conditions set forth in the contract and which does not require conveyance within one year of formation of the contract. (CC 2985)

Some examples of violations involving contracts of sale are:

1. Without the buyer’s consent, the seller under an unrecorded contract of sale encumbers the land in an amount exceeding the present contract balance. (CC 2985.2)

2. When there is a payment due on an obligation secured by the land, a seller under a contract of sale appropriates a payment received from the buyer to any purpose except payment on that obligation. (CC 2985.3)

3. Failure by the seller under a contract of sale to hold in trust and properly apply pro rata tax

http://www.dre.ca.gov/Publications/RealEstateLaw.html


and insurance payments received from the buyer. (CC 2985.4)

(The Department of Real Estate’s Real Estate Law book includes these and other Civil Code sections which are of interest to real estate licensees.)

CORPORATIONS CODESome of the activities which constitute crimes under the Corporations Code relate to the sale of securities. A conspiracy to violate the California Corporate Securities Act is a crime. (PC 182; Corporations Code Section 25540)

The sale of fractionalized interests in promissory notes secured by deeds of trust may result in the sale of corporate securities subject to qualification or exemption with the

California Department of Corporations. Without such qualification or exemption, the sales are illegal and the broker or offeror could be convicted of a crime.

LICENSE DISCIPLINE BY DRECreated in 1917, DRE’s purpose has always been to require that brokers and salespeople be honest and trustworthy, as they generally act in a confidential and fiduciary capacity with the public. The Department achieves this goal not only through licensing but also through disciplinary actions against licensed brokers and salespersons. Conduct that violates the Real Estate Law will result in formal disciplinary action against a licensed real estate broker—whether the broker was acting on behalf of others or as a principal, and whether or not the conduct occurred in the context of a real estate transaction.

In addition to revocation of a real estate license, the types of discipline imposed by DRE include; revocation of the plenary license and issuance of a restricted license; suspension of the license with or without a monetary penalty (up to $10,000); restitution to the victim; educational course completion and ethics testing; trust fund reporting requirements; chargeable audits; criminal arrest reporting requirements; desist and refrain orders; and, in extreme cases, an order of debarment.

An order of debarment, issued by the Real Estate Commissioner, suspends or bars an individual for up to three years from any position of employment, management, or control of any business activity involving real estate. Persons subject to such an order are also barred from conducting any real estate-related business activity on the premises where a real estate broker or salesperson is conducting business. In addition, the order bars an individual from participating in any real estate-related business activity of a finance lender, residential mortgage lender, bank, credit union, escrow company, title company, or underwritten title company.

Since violators of the Real Estate Law may be subject to criminal penalties, DRE coordinates its investigative efforts with other law enforcement agencies. If another administrative agency has prosecuted


a broker or salesperson before the Department commences its action, DRE’s ultimate disciplinary action may include, or be based on, the other agency’s findings and results. A licensed real estate broker will be subject to discipline if his or her conduct demonstrates a lack of honesty and integrity—whether that determination has been made by DRE alone, by some other agency, or by the court.

DRE will file formal disciplinary proceedings against any licensee who has been found guilty of, or been convicted of, a felony or a crime “substantially related” to the qualifications, functions, or duties of a real estate licensee.

It is not necessary that the crimes committed by the licensee involve real estate. DRE will examine the conduct at issue to determine whether it is substantially related to the standard of conduct for a real estate licensee.

THE CONSUMER COMPLAINT PROCESSDRE’s Enforcement Section conducts investigations based upon complaints. To initiate an investigation, the Department must determine two things:

1. That the individuals or companies involved are under the jurisdiction of the Department. The Department has jurisdiction over real estate licensees, subdividers, and unlicensed persons who have performed acts for which a real estate license is required.

2. That the complaint relates to possible violations of the Real Estate Law or Subdivided Lands Law.

What DRE Can Do

If an investigation into the matter substantiates that there has been a violation of the laws enforced by the Department:

• A formal disciplinary action may be filed which could result in the suspension or revocation of a license or the issuance of a restricted license.

• An Order to Desist and Refrain may be filed to stop further unlawful activities.

What DRE Cannot Do

DRE cannot act as a court of law. Therefore, it cannot order that monies be refunded, contracts be canceled or damages be awarded. Although it cannot order restitution, it may be able to obtain a voluntary resolution to a dispute through an advocacy program (described below).

If a complainant’s primary interest is to gain restitution, he/she should consider:

• Filing a small claims court action if the amount in dispute is $10,000 or less. The maximum


amount is changed periodically.

• Contacting an attorney to determine what legal remedies are available.

The Complaint Process

The easiest way to file a complaint is to utilize the Enforcement Online Complaint System. To evaluate and process a complaint without using the online system, the Department will need:

• A completed Licensee/Subdivider Complaint Form (RE 519)

• A written explanation of the exact nature of the complaint;

• The names, addresses and telephone numbers of any witnesses to the events described in the complaint; and

• Photocopies of all documents involved in and related to the transaction.

NEW DRE ENFORCEMENT PROGRAMDRE has initiated the Enforcement Advocacy Program which attempts to resolve simple disputes or minor issues between consumers and licensees or subdividers as a potential alternative to setting up formal investigations into such matters. The program includes advocates from the Enforcement, Subdivisions, and Mortgage Loan Activities sections.

The mission of the Advocacy Program is to respond quickly and informally to concerns of consumers and members of the real estate industry by serving as an informal mediator or facilitator to resolve conflicts and/or to mitigate or prevent Real Estate Law violations.

Lately, the program has proven effective in resolving disputes, and in reducing workloads by addressing issues up front as opposed to at the conclusion of a lengthy investigative process.

Many of the issues that advocates work to resolve involve a breakdown in communication between licensees and their principals. It is important to note that, in many of these instances, advocates endeavor to reestablish and facilitate communication, thus solving the issue. The types of cases that have been handled through the Advocacy Program have included small monetary disputes where there did not appear to be a violation of the Real Estate Law. Examples of issues that have been handled through the Advocacy Program are as follows:

• Consumers who needed copies of their documents and had been unable to secure a response.

• Consumers who needed assistance in contacting their agent or broker on a current transaction.

• Consumers who needed information that they had not been able to obtain from their agent for

https://eocs.dre.ca.gov

http://www.dre.ca.gov/files/pdf/forms/re519.pdf


escrow, lenders, or inspectors.

• Consumers questioning commission demands by agents (inside and outside of escrow).

• Consumers trying to cancel transactions or loans.

• Consumers who wanted to know where their earnest money was.

• Consumers who were asked to sign documents or do something they did not understand or did not feel was appropriate.

• Consumers having difficulty with a subdivider.

• Consumers having homeowner association issues while DRE still has jurisdiction over a subdivider.

• Consumers having trouble with timeshare operators.

• Tenants who were being evicted following foreclosure without being provided the appropriate 90-day notice period.

• Short sale transaction disputes where one of the agents involved were demanding terms or provisions that were questionable or potentially unlawful. While DRE cannot interfere with an ongoing transaction, we can place a call to the licensee to discuss possible consequences of a proceeding.

• Licensees questioning whether offers have been presented to sellers, or to lenders in REO transactions.

• Consumers requesting return of illegally-collected advance fee payments.

The telephone numbers for the Advocacy Program are as follows:

State-wide Facilitation:

(213) 576-6885

Mortgage Loan Activities Unit:

(916) 263-8941

Subdivisions:

Subdivisions Northern Region

(916) 263-8879


Subdivisions Southern Region:

(213) 576-6927

It is important to note that DRE may not have the remedies and ability to compel cooperation. All the same, it has experienced a great amount of cooperation from licensees when working to resolve simple disputes.





1. Copying documents owned by a title company (and intending to use them) is a crime punishable under the Penal code.

A. true

B. false

2. If a complainant feels he has been wronged by a licensed real estate professional and his primary interest is to gain restitution of an amount to exceed $10,000, what is the best course of action:

A. contact an attorney

B. file a complaint with DRE

C. file a small claims court action

D. all of the above




1. A. true

See page 30

2. A. contact an attorney

See pages 31-32

39 • End of Study Materials

END OF STUDY MATERIALS

Exam Information

The exam for this course can be accessed by logging in to your account at www.EmpireLearning.com.

» Number of Questions: 15 » Time Limit: 15 minutes » Passing Score: 70%

DRE Regulations Regarding Exam Availability

The California Department of Real Estate strictly regulates the timing of when exams can be taken for continuing education courses. Exams will only be available when the following two conditions are met:

1. The corresponding number of study hours have been accumulated.a. 8 hours of study time is granted automatically every 24 hours starting at the

time of purchase.b. This course is worth 3 hours of CE credit and therefore requires 3 hours of

unused study time credit.c. Your currently available study hours are listed on the My Account page.

2. Taking this exam will not put the licensee over the DRE limit of 15 credits of final exams in any 24-hour period.

a. This course is worth 3 CE Credits, so no more than 12 CE Credits of exams can be taken in the 24 hours before taking this exam.

b. The number of credits of exams you have taken in the last 24 hours is listed on the My Account page, as well as the time each of those exams was completed.

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