(247588053) Risk Management, 2nd Edition, Book

3 D.R.E.
Approved Credit Hours

Copyright

2013

45HoursOnline holds the copyright to this book, Risk Management, 2
nd
Edition. As its copyright
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Events and laws may change after publication. Although this publication has been carefully
researched, 45HoursOnline can not guarantee the accuracy of the information contained herein.
Before any suggestion presented in this book is acted upon, legal or other professional assistance
may be advisable.
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PREFACE:
This is the textbook for our course, Risk Management, 2
nd
Edition. It is one
of the five, three-hour courses required by the California Department of
Real Estate (DRE) for licensees renewing their license for the first time:

1. Ethics: Describes the real estate license law enforced by the DRE
and the Code of Ethics and Professional Conduct as practiced by
members of the National Association of REALTORS
.

2. Agency: Explains the common law of agency as applied to
California real estate brokerage.

3. Trust Funds: Details the fiduciary responsibilities of brokers when
acting as escrows for their clients real estate transactions.

4. Fair Housing: Describes the federal and California fair housing
and lending laws.

5. Risk Management: Instructs licensees on how to avoid disputes
with their clients arising from professional errors and omissions.

The DRE requires each licensee to take the five mandatory courses before
renewing their licenses for the first time. Any licensee renewing after the
first time, may take these same five mandatory courses again for full credit
(15 hours) towards their 45-hour CE requirement.

To save space and make the text more readable, we use the following
abbreviations and terms:
BPC The Business and Professional Code of California
CAR
California Association of REALTOR
s
CC The Civil Code of California
DRE Department of Real Estate (as of July 2013, the Bureau
of Real Estate)
HOA Home Owners Association
MLS Multiple Listing Service
NAR
National Association of REALTORS

This is a margin note used for
definitions and footnotes.
You can find the California codes at www.leginfo.ca.gov/calaw.html.
Unless otherwise stated, all cases cited herein are California cases. In
citing cases, we specify only the names of the litigants and the year of the
decision (the text of all decisions are available online).
The forms cited in this course are from CAR
.

In addition to the above terms and abbreviations, we also follow a few
typographic conventions.

We use margin notes to display pictures, provide definitions, and for short
notes.

Side bars like this one are used for long notes. Content in the margin
notes, side bars, and in the appendices is not tested in the final exam.
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TABLE OF CONTENTS
1 Introduction 1
1.1 Terms 1
1.2 Client Satisfaction 2
1.3 What is Risk? 2
1.4 Preview 2
2 Fiduciary Duties 3
2.1 Whos Who 3
2.2 Law of Agency 4
2.3 Agency Disclosure 4
2.4 Vicarious Liability 7
2.5 Scope of Agency 8
2.6 Standard of Care 9
2.7 The Duties 10
2.7.1 Duties to Third Parties 11
2.7.1.1 Listing Brokers Duty to Perform a Visual Inspection 11
2.7.2 Duties to Client 12
2.7.3 Duties Imposed by Statute 13
2.7.3.1 Mandatory Disclosures 13
2.7.3.2 Transfer Disclosure Statement (TDS) 14
2.7.3.3 MLS 16
2.7.3.4 NHD 16
2.7.3.5 Visual Inspections 16
2.8 Seller Misrepresentation 17
2.8.1 Listing Contract 18
2.9 Civil Actions 19
2.9.1 Breach of Fiduciary Duty 19
2.9.2 Misrepresentation 19
2.9.3 Negligence 19
2.9.4 Negligent Advice/Referrals 20
2.10 Dispute Resolution 20
2.10.1 Provisions in CAR

Contracts 21
2.10.2 Mediation 21
2.10.3 Small Claims Court 21
2.10.4 Arbitration 22
2.10.5 Litigation 22
2.10.6 DREs Enforcement Tools 23
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3 Areas of Risk 25
3.1 Negligent Misrepresentation 25
3.2 Dual Agency 27
3.2.1 Legal Issues 28
3.3 Minor Areas 30
3.3.1 Contract Preparation 30
3.3.1.1 Unauthorized Practice of Law 30
3.3.1.2 Listing Agreement 31
3.3.1.3 Contract Familiarity 32
3.3.1.4 Document Review 32
3.3.2 Trust Fund Handling 33
3.3.3 Broker Supervision 33
3.3.3.1 Risk Management Policies 34
3.3.4 Kickbacks 34
3.3.5 Fair Housing 35
3.3.6 Advertising 36
3.3.6.1 Blind Ads 36
3.3.6.2 Broken Promise to Advertise 36
3.3.6.3 Discriminatory Advertising 36
3.3.6.4 Negligent Advertising 37
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1 INTRODUCTION

We recommend you take this
course after you have completed
our other three-hour courses
(Ethics, Agency, Trust Funds, and
Fair Housing). This course builds
on topics described in these four
other courses.
This three-hour course will help you, a California residential real estate
agent, reduce the likelihood and intensity of disputes with your clients.
Specifically, this course is concerned with disputes in which your clients
claim damages resulting from your professional errors and omissions. This
course is not concerned with disputes that arise from intentional wrongdoing
such as fraud, theft, and illegal discrimination.

This course explains but does not focus on your legal responsibilities
towards your clients. In the event of a dispute, your ability to prove your
actions were legal is a defense a good defense but our focus is on how
to avoid the dispute in the first place.

The topics covered in this course are mandated by the DRE (see these
guidelines for details). Most of DREs 50 mandated topics are also covered
in our other four three-hour courses: (1) Ethics, (2) Agency, (3)Trust
Funds, and (4) Fair Housing).
A challenge in writing this course was to arrange the 50 topics into a logical
sequence while keeping the course content to the minimum length allowed
by the DRE thirty pages.
The first of the two sections in our 30-hour Consumer Protection Reader
course, Defensive Real Estate, is an extension of this course.
This course was last updated June, 2013.

1.1 TERMS

Before beginning, we need to define a few terms.

By dispute we refer to any disagreement in which your client claims you
owe him restitution for damages suffered as a result of your professional
errors and omissions.

Disputes may be resolved directly by the parties involved via negotiation or
through neutral third-parties via mediation, arbitration, or civil litigation.

Injunction: A court order
prohibiting a party from a specific
course of action.
Declaratory Relief: A judges
determination of the parties rights
under a contract or statute.
By clients, we refer to buyers and sellers to whom brokers owe fiduciary
duties based in statute, contract, or common law.

By damages we refer to any compensation awarded to the injured party
including money judgments (dollars), injunctions , orders for specific
performance, and declaratory relief .
By brokers, we refer to residential real estate broker and corporate
licensees and their employees and agents.

Corporate Licenses: The DRE licenses corporations to act as brokers.
Corporations appoint a licensee as its designated officer who must be a
licensed broker when initially appointed.
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1.2 CLIENT SATISFACTION

Our basic premise:

An unhappy client in a litigious
mood.
If your client becomes unhappy with his purchase, you are at
risk of being sued.
Your client may be unhappy with the condition of his home, his interest rate,
his new neighbors, or his new neighborhood. The reasons for his
unhappiness may be logical or not; or reasonable or not. It doesnt really
matter: when your client is unhappy you are at risk of being sued.

1.3 WHAT IS RISK?

By risk we refer to the probability your client will become unhappy with his
transaction. Examples of risky circumstances are your ...

z buyer discovers his new home has far less square footage than he
was led to believe.

z seller discovers his house sold for considerably less than its market
value.

z buyer hears roosters crowing from his neighbors yard.

z seller who carries a second learns his mortgagee is unemployed.

When your client becomes unhappy, he will do what is our human nature,
he will blame you for his misfortune and demand restitution.

1.4 PREVIEW

In Section 2 we describe your responsibilities to your client and third parties
and your clients right to be compensated for injuries caused by your errors
and omissions. We also describe dispute resolution methods and DREs
enforcement tools.

In Section 3 we describe two major areas of risk: (1) the risk of negligent
misrepresentation and (2) the risk of dual agency. We also describe
several other areas of relatively smaller risk.
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2 FIDUCIARY DUTIES

This Law is the subject of our
three-hour course: Agency, 2
nd
Edition.

Most of our States agency laws
are in CC 2295-2369.
The Law of Agency describes your responsibilities to your client and
third parties (your clients counterparty and other stakeholders in the
transaction).

There is no single book which describes the Law of Agency. Much of the
Law is written into the California Codes but most of it is common law.
Common law, sometimes called judge-made law, refers to all prevailing
decisions by State appellate courts which clarifies existing law (both statute
and common law).

Common law is sometimes clarified and enacted into statute by the State
legislature. A well-known example is the Easton v. Strassburger (1984)
decision. In that case the California Appellate Court ruled that listing
brokers have a duty to visually inspect their properties for defects and
disclose those defects to prospective purchasers.

You can find this code and all
other California codes here.
The Easton decision created a new but ambiguous duty for lisiting brokers:
the duty to investigate and disclose. Following the decision, brokers
wondered if they could be held liable for latent defects, title defects,
neighborhood nuisances, or defects concealed by the seller. To resolve
these ambiguities, the California legislature clarified Easton by passing AB
1034 in 1986. That law was then encoded into the Civil Code at 2079 .

The direction in which the common law of real estate agency is evolving is
to hold brokers to increasingly higher standards of professionalism. While
the broker of twenty years ago may have been merely a facilitator between
buyer and seller, today he is almost a guarantor of the transaction.
To understand your common law duties, you must understand (1) when an
agency is created, (2) the scope of your agency, (3) the standard of care
you must render, and (4) your duties as a fiduciary.

2.1 WHOS WHO

Terms of Cooperation: The
commission split between the
listing agent and the selling agent
and other conditions required by
the seller or agent concerning the
sale.
The listing agent (aka, sellers agent) is the agent who signs a listing
agreement with the seller. Ordinarily the listing agent offers to cooperate
with any agent who procures a buyer. His terms of cooperation are
published in his realty boards MLS.

The selling agent (not to be confused with the sellers agent) is the agent
who procures the buyer. If he represents only the buyer, we call him the
buyers agent. If the selling agent does not represent the buyer but instead
is a subagent of the selling agent, we call him the cooperating agent.

It is often the case that the buyer is unsure who his selling agent
represents; that is, to whom his selling agent owes the fiduciary duties of
utmost care, integrity, and loyalty. The most common possibilities are that
the selling agent: (1) represents the buyer only, (2) the seller only, or (3)
both buyer and seller. Less common possibilities are that the selling agent
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represents (4) himself, or (5) a third party (e.g., a bank, a lender, an
investor, an estate, an HOA).

To make the agency relationships clear to all involved parties, CC 2079
requires the use of the agency disclosure form (discussed later).
In this course we use the terms agent and broker interchangeably.
We use the term principal to refer to the buyer, the seller, or to both
buyer and seller. We use the term counterparty to refer to the buyer in
relation to the seller, or to the seller in relation to the buyer.

2.2 LAW OF AGENCY

Most of the Code is quoted and
discussed in our Ethics course.
Originally, the California law of real estate agency was based on the
traditional agency model. That model recognized agency only for the
seller and left the buyer unrepresented.

In the traditional agency model, the agency relationship is established
between the listing broker and the seller via a listing agreement. In that
agreement, the seller authorizes the broker to market his property to other
brokers via the MLS and to extend agency to cooperating brokers for a
share of the sales commission. In this model, the cooperating broker is
called the selling broker and is the agent of the seller. The cooperating
broker therefore has fiduciary duties to the seller and not to the buyer.

The traditional agency model was the norm in the early 1900s when NAR

first published its Code of Ethics . Although the model worked well for
REALTORS

it created problems for buyers and sellers because

1. buyers were left unrepresented,

2. sellers were vicariously liable for the negligent actions of both their
listing broker and all cooperating brokers, and

3. courts imposed unintended dual agency status on both the listing
and cooperating brokers after the fact.

To mitigate these problems, NAR

modified its Code and the California
legislature enacted laws to give agency protection to buyers.

2.3 AGENCY DISCLOSURE

We refer only to CAR

forms even
though other firms publish similar
forms. Other form suppliers

Before rendering any service, the law (CC 2079.14) requires you to make a
formal declaration of your intended agency relationship with your client
include Peninsula Regional Data

using the Agency Disclosure Form (CAR Form AD ). The forms wording
Service (used in San Francisco
and the Silicon Valley) and First
Tuesday.
is exactly specified in CC 2079.16. CAR

publishes the form under the title
Disclosure Regarding Agency Relationships and provides two slightly
different versions; one subtitled Listing Firm to Seller; the other Selling
Firm to Buyer.
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The Disclosure has three purposes: (1) to formally declare your agency
relationship with respect to your principal, (2) to inform your principal of
your agency duties, and (3) for the selling agent to clarify his agency
relationship with the seller.

The AD must be completed in these three situations.
Click here for a Youtube video
explaining how to fill out the AD
form.

Case #1: Before signing a listing agreement ...
Execute the AD with your seller prior to signing your listing agreement.

Case #2: Before representing the buyer ...
Present the AD to your buyer when he seeks your services in more than a
casual, transitory, or preliminary manner (CC 2079.14 (d)).

Case #3: Before presenting an offer ...
Present an AD to the seller.

Case #4: When you change from a single agent to a dual agent ...
When your relationship with a client changes, execute a revised AD with
your client. If the change in your representation status is from single to
dual agency, you will have to first obtain your clients consent to this
change and then have him sign a revised AD acknowledging your change
from a single to a dual agent (this may be accomplished using CAR
s
purchase agreement form).

There are many ways in which your representation status with a buyer or
seller may change. Here are some examples:

1. As a buyers agent, your buyer wishes to make an offer to a seller
you happen to already represent.

2. As a listing agent, a licensee from your brokerage presents you an
offer from his buyer.

3. As a buyers agent, your buyer wishes to make an offer to an owner
whom you subsequently induce to sell with you acting as his agent.

4. Your buyer decides not to buy a home but to list his home with you.

5. As a listing agent, you decide to make an offer to purchase your
sellers home.

6. You start your relationship with the seller as his single agent, switch
to dual agency when you find him a buyer, and switch back to single
agency when your buyer decides not to purchase your sellers
property.

The first page of the Disclosure explains the duties you owe to your clients
counterparty (i.e., diligence, care, honesty, good faith, and disclosure) and
the the higher fiduciary duties you him (utmost care, integrity, and
loyalty.). The wording for the second page of the Disclosure (taken directly
from CC 2079.14) describes in very small print how to handle exceptional
situations as when the buyers agent doesnt deal face-to-face with the
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seller, when a party
refuses to sign the
form, or when the
buyers agent
doesnt write the
offer.
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One contingency not covered by the form is the situation in which the
selling broker represents neither the seller or buyer as would occur if two
unrepresented parties (perhaps a FiSBO and his next door neighbor) hired
a licensee for the narrow purpose of completing the paperwork needed for
the transaction. CC 2079.20 permits exceptions:

Nothing in this article prevents an agent from selecting, as a
condition of the agents employment, a specific form of agency
relationship not specifically prohibited by this article if the
requirements of 2079.14 and 2079.17 are complied with.

DREs license discipline includes
suspension, restriction, or
revocation of your license. The
DRE also may impose fines.
The cleanest way to establish buyers agency is to use a buyer agreement
such as CAR
s Buyer Broker Representation Agreement (Form BR) .

This form: (1) makes clear to your buyer the duties you owe him, (2)
defines your agency as exclusive or non-exclusive, and (3) limits the
duration of your agreement.

Dual agency requires the consent of both the buyer and seller; however, in
signing CAR
s residential listing agreement (Form RLA ), the seller pre-

authorizes his listing abent r to act as a dual agent should his agent procure
the buyer.

The listing agent must keep the Disclosures for three years. This is
required for all documents signed by the agent or obtained by the agent
in connection with any real estate transaction (BPC 10148).
As a fiduciary, you are required to perform your duties as you would expect
your client to perform those same duties had he your knowledge,
experience, and resources. As an agent, you must be selfless in your
devotion to your clients interests. Should you fail to meet this standard,
you risk being sued for breach of fiduciary duty.

If sued for breaching your fiduciary duties, your client would certainly use
your signed agency disclosure form to support his claim that you owed him
the fiduciary duties of utmost care, integrity, and loyalty. If you were unable
to produce the form, the court would most likely assume that you were in
fact the plaintiffs agent.

If the DRE investigates a complaint from your principal, the DRE would
demand to see your agency disclosure. If you were unable to produce it,
the DRE would likely subject you to license discipline .

Take care not to declare yourself your principals agent if you do not intend
or if he does not expect to receive fiduciary duties from you. To do
otherwise is to needlessly risk being sued for breach of fiduciary duty
should your principal subsequently become unhappy with his transaction.

Suppose, for example, you hold an open house. At your open house
investor appears who wishes you to immediately submit an all-cash offer to
your seller. As the law requires, you first complete an Agency Disclosure
Form in which you inadvertently elect dual agency.

When you execute the AD, you have no idea why the investor wants to
purchase your sellers home nor do you ask because you do not consider
him your client only a third-party who wants to make an all cash offer at
list for your sellers home.
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Two months after the sale, you are served with a lawsuit from the investor in
which he claims that he lost a considerable amount of money owing to your
failure to inform him that your sellers home was subject to a zoning
restriction which precluded second story homes. His cause of action is that
you breached your fiduciary duties by failing to inform him of the zoning
restriction. His complaint cites the AD you signed in which you elected dual
agency. He argues that it was your responsibility as his agent to know his
reasons for purchasing the home and that as real estate professional
familiar with the local market, you would have known (or should have
known) that he would not be permitted to add a second story.

2.4 VICARIOUS LIABILITY

Negligent acts are acts which
result from a failure to use
reasonable care. Lies, frauds,
and thefts are not negligent acts.
With the traditional agency model the seller is legally responsible for not
only the negligent acts of his listing agent but also those made by
cooperating brokers. This legal responsibility for the acts of another is
known as vicarious liability. It arises out of the common law doctrine of
respondeat superior the responsibility of the superior for the acts of
subordinates.

If Alice from Brokerage A cooperates with Bob from Brokerage B to sell
Chucks house and if Alice innocently misrepresents Chucks house as
4000 sq. ft. when it is truly 3000 sq. ft., then Chuck (the seller) would be
vicariously liable to the buyer for Alices misrepresentation. So even
though Chuck may have never met Alice (the cooperating broker), he is
liable for her misrepresentation.

Vicarious liability applies only to the negligent acts performed by
subordinates made in good faith and within the scope of the superiors
agency.

Suppose Alice had lied when she claimed Chucks home had 4000 sq. ft.;
then she alone, not Chuck, would be liable for he fraud (assuming, of
course, that Chuck had no knowledge of Alices deception).

In California, money judgments
may be collected from any liable
defendant regardless of that
defendants degree of liability.
The legal principal which allows
this practice is named joint and
several liability.
Similarly, a brokerage is vicariously liable for the professional errors made
by its agents.

Suppose George works under Sams brokers license and both are sued by
Georges seller for negligence. If the court awarded the seller $100K and
found George (agent) 99% liable and Sam (broker) only 1% liable, the seller
could demand that Sam (broker) pay the entire $100K judgment even
though George was judged to be 99 times more liable than Sam .

It is a common practice for attorneys to sue any party with money or
insurance no matter how small a role that party may have had in causing
his client's injuries. Under joint and several liability, (aka, "Deep Pocket
Doctrine") plaintiffs are legally entitled to collect their entire money
judgment from any single defendant regardless of that defendants degree
of liability (source).
If a brokerage is found vicariously liable for an error made by one of its
employees, and if the brokerage is a sole proprietorship, vicarious liability
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attaches to the broker/owner; if the brokerage is a corporation, vicarious
liability attaches to the corporation.

Put another way, if a plaintiff is awarded a money judgment against a sole
proprietorship, the proprietor must pay the judgment from his personal
assets (assuming the proprietor does not carry insurance). If instead, a
plaintiff is awarded a money judgment against a corporation, the
corporation must pay the judgment from its assets. Thus, the personal
assets of a broker operating under his own corporation are shielded from
damage claims arising out of negligence lawsuits against his corporation.

For example, if Sally is the designated officer for her own corporation,
Sallys Real Estate Inc., and if SRE is found 1% liable for a professional
error made by one of SREs employees, call him Dave Deadbeat, then the
plaintiff could collect his entire one million dollar judgment from either SRE
or Dave Deadbeat.

Note: There are many ways the
plaintiffs attorney might pierce
Sallys corporate veil to find his
way into Sallys deep pocket.
If Sallys personal net worth is 25 million dollars, SREs is 25 cents, and
Dave Deadbeats is minus 25 thousand dollars, both SREI and Dave
Deadbeat are essentially judgment proof. The plaintiff could place a one
million dollar lien against SREs future income (and/or Dave Deadbeats
future income) but Sally could easily thwart this by bankrupting SRE or
starting a new corporate brokerage .

2.5 SCOPE OF AGENCY

When you exceed the scope of the authority granted by your principal, you
assume sole liability for the consequences. Moreover, damages caused by
actions you take outside the scope of your authority are not covered by
professional liability insurance.

The listing brokers authority is normally described in his listing agreement
with his seller. For example, CAR
s listing agreement (Form RLA) gives the

broker the authority to:

z sell a home at a particular price within a specified time period;

z exercise reasonable effort and due diligence to achieve the sale;

z order reports and disclosures, advertise, and market the home;

z list the home on the MLS and Internet; and

z use a key safe/lockbox.

Before taking any action which might be outside the scope of your
authority, you should obtain your clients written authorization to take that
action; otherwise, you risk assuming sole liability for any damages which
might result from that action.
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Promotional Elephant
Suppose that without your sellers consent you decided to
promote your sellers home by renting an elephant to be tethered
to a tree in your sellers front yard . Now suppose the elephant
got loose and trampled a neighbors yard to smithereens. If the
neighbor sued both you and your seller, it is likely the judge
would grant your sellers motion to dismiss him from the suit on
the grounds that the rental of the elephant was taken without his
consent and was outside the scope of the authority he granted
you.

If, then, you were subsequently found 100% liable for the damage caused
by the elephant, your E&O carrier would not pay any money judgment
awarded to the neighbor. Your insurer would argue that the elephants
rental was outside the normal scope of a brokers authority and hence not
covered by your policy.

2.6 STANDARD OF CARE

For your client to prevail in any negligence lawsuit brought against you, he
must show you owed him a duty which you failed to provide. Examples of
duties a listing broker owes his seller are: (1) obtain fair market value, (2)
exercise care during showings, and (3) provide competent advice in
evaluating offers.

The sum total of all duties a broker owes his client is called the Standard of
Care.

The legal definition (CC 2079.2) of Standard of Care

is the degree of care that a reasonably prudent real estate
licensee would exercise and is measured by the degree of
knowledge through education, experience, and examination,
required to obtain a license

For an annotated copy of the
Code, see our Ethics course.
Although you may not be an appraiser, real estate attorney, structural
engineer, geologist, or home inspector; as a broker you are expected to
know much more about their disciplines than your clients. For example, to
obtain a brokers license the DRE requires you to have at least two years
experience and to pass eight college-level real estate courses including
real estate practice, real estate law, appraisal, real estate finance, and real
estate economics. Consequently, a real estate broker is expected to know
the fundamentals of these disciplines and to use that knowledge to protect
his clients.

NAR
s Code of Ethics is often cited as a Standard of Care in civil actions

against brokers (see Barbara Nichols article, Commit to the Code in
REALTOR
Magazine Online). Some of the most relevant sections of the

Code are discussed below.

Article 1: When representing a buyer, seller, landlord, tenant, or other
client as an agent, REALTORS

pledge themselves to protect and promote
the interests of their client.

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Possible violations:
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z A buyers broker refers his client to a home inspector without
making any effort to check the inspectors credentials.

z The listing broker fails to disclose that many homes in the sellers
subdivision have foundation problems.

z A selling broker encourages his buyer to make a full-price offer but
fails to provide comps to support the price.

z A buyers broker fails to read the preliminary title report which
describes easements which interfere with the buyers intended use
of the property.

Article 2: REALTORS

shall avoid exaggeration, misrepresentation, or
concealment of pertinent facts relating to the property or transaction.


z The listing broker makes the unfounded claim that the sellers
neighborhood hasnt suffered any burglaries in ten years.

z The broker fails to inform his buyer that the seller is an investor
notorious among local agents for shoddy remodeling and repairs.

Article 9: REALTORS
, for the protection of all parties, shall ensure

whenever possible that agreements shall be in writing and shall be in clear
and understandable language expressing the specific terms, conditions,
obligations, and commitments of the parties.


z A broker fails to document changes to the purchase agreement
(e.g., time extensions).

z A buyers broker fails to include a loan contingency in the purchase
agreement.

Article 11: The services which REALTORS

provide to their clients and
customers shall conform to the standards of practice and competence
which are reasonably expected in the specific real estate disciplines in
which they engage


z The listing broker fails to advise his seller to run a credit check on
the buyer before carrying back a second.

z In a sellers market, a listing broker advises his client to accept his
first offer even though it is 10% below market value.

2.7 THE DUTIES

The section describes your common law duties to your clients and to third
parties.
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2.7.1 DUTIES TO THIRD PARTIES

A third party is the party opposite your client (aka, a non-fiduciary or
counterparty). Under CC 2079.16 you owe third parties the following
duties even if your performance of these duties might have negative
consequences for your client. (Quotes are from CC 2079.16.)

z Diligence: The diligent exercise of reasonable skill and care in the
performance of the agents duties.

z Honesty: A duty of honesty, fair dealing, and good faith.

z Disclosure: A duty to disclose all facts materially affecting the
value or desirability of the property that are not known to, or within
the diligent attention and observation of the parties.

Do not perform these duties to any degree greater than necessary if by so
doing you would disadvantage your client. For example, if your sellers
prospective buyer asks you if the local elementary school is good and you
dont know; answer I dont know. and not Ill find out.

Ill find out. would be the wrong answer because if in researching the
school you learned that it had a terrible reputation, you would have a legal
and ethical responsibility to disclose its terrible reputation to the buyer with
obvious negative consequences for you and your buyer. Let the
prospective buyers agent answer the question.

Because your loyalty rests with your client, you have an obligation to learn
whatever information you can about the situation of your clients
counterparty that could inform him in his price negotiations. For example, if
you learned that a seller needed to sell his home quickly to flee the country
to avoid aggressive bill collectors seeking payment for a large gambling
debt, then you should so inform your buyer and use this fact in negotiating
terms.

Remember, you must do everything that is legal and ethical to help your
client get the best possible deal.

2.7.1.1 LISTING BROKERS DUTY TO PERFORM A VISUAL INSPECTION

CC 2079.1 mandates that you as a listing broker conduct a visual
inspection of your sellers property and disclose to all prospective buyers
all facts materially affecting the value or desirability of the property that an
investigation would reveal

Water stains.
The listing broker is liable for disclosing the material facts not so much for
the investigation he actually conducts but rather for what a competent and
conscientious investigation would reveal. Thus, if a listing broker doesnt
notice the water marks on the wood paneling in his sellers basement
because he was wearing sun glasses at the time of his inspection, then he
might be liable for not having disclosed this defect to the homes buyer
(especially if his seller was blind).

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As previously
mentioned, CC 2079
was enacted to place
limitations on the
inspection duty
required by the Easton
v. Strassburger
(1984):
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The inspection to be performed pursuant to this article does not
include or involve an inspection of areas that are reasonably and
normally inaccessible to such an inspection, nor an affirmative
inspection of areas off the site of the subject property or public
records or permits concerning the title or use of the property

In Field v. Century 21 Klowden-Forness (1998), the court held that the
inspection duty applies only to the listing broker not the selling broker.
Moreover, the court ruled that CC 2079 made no changes regarding an
agents liability to his principal for injuries resulting from the agents breach
of fiduciary duty.

In Field, the buyers agent (Century 21) had claimed that she was not liable
for having failed to have read her buyers preliminary title report because
2079 states that the inspection [duty] does not include or involve an
affirmative inspection of public records or permits concerning the title or
use of the property. The Field court ruled that this limitation on her
inspection duties did not apply to the Century 21 agent because she was
the buyers broker and the 2079 inspection duty applies only to the listing
broker.

Under Code of Civil Procedure
338, a defrauded person has
three yearsafter the occurrence
of the fraud to file a civil action
against the defrauding party
(source)
Century 21 also argued that the buyers suit should have been dismissed
because it had been brought after 2079s two-year statute of limitations.
The court rejected this argument on the same grounds; that is, 2079
applied only to the listing broker with respect to a third-party buyer (i.e., not
represented by the listing broker). The court remarked that the applicable
statute of limitation is derived from the Delayed Discovery rule which
states that the statute of limitations for a negligence suit is three years from
when the breach is discovered (not two years after the sale).

2.7.2 DUTIES TO CLIENT

As a fiduciary, the duties you owe your client are ambiguously defined in
CC 2079.16 as the duties of utmost care, integrity, honesty, and loyalty.

An excellent and more detailed expression of these duties was given by the
California Supreme Court in Field v. Century 21 Klowden-Forness Realty
(1998):

The broker as a fiduciary has a duty to learn the material facts that
may affect the principals decision. He is hired for his professional
knowledge and skill; he is expected to perform the necessary
research and investigation in order to know those important matters
that will affect the principals decision, and he has a duty to counsel
and advise the principal regarding the propriety and ramifications of
the decision. The agents duty to disclose material information to
the principal includes the duty to disclose reasonably obtainable
material information.

The facts that a broker must learn, and the advice and counsel
required of the broker, depend on the facts of each transaction, the
knowledge and the experience of the principal, the questions asked
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by the principal, and the nature of the property and the terms of
sale. The broker must place himself in the position of the principal
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and ask himself the type of information required for the principal to
make a well-informed decision. This obligation requires
investigation of facts not known to the agent and disclosure of all
material facts that might reasonably be discovered.

If you represented a buyer for whom it was very important to send his
school-aged children to an outstanding public elementary school, then it
would be your fiduciary duty to use the sources available to you to find your
buyer a home in a neighborhood services by a good public school. These
sources might include school rating services (such as
www.GreatSchools.org), former clients living in the neighborhood, local
newspapers, and recommendations from other agents familiar with the
quality of the schools in local neighborhoods.

2.7.3 DUTIES IMPOSED BY STATUTE

Federal laws, state statutes, and municipal ordinances impose additional
duties upon licensees. Some statutes set minimum standards for an
agents performance; others impose duties to third parties and the public,
and still others mandate disclosures. These statutes are briefly described
in this section.

2.7.3.1 MANDATORY DISCLOSURES

All disclosure requirements
enacted during the last four years
(2009-2013) are described in our
course, Consumer Protection
Reader.
There are dozens of mandatory disclosures for residential properties
required by federal and state law. Among these are the Special Taxes
Levies Notice (Mello-Roos and the 1915 Bond Act); geologic, earthquake,
and seismic hazards; special flood hazards; and state fire responsibility
areas. There is also a plethora of mandatory disclosures for potential
environmental hazards including disclosures for mold, release of controlled
substances, lead-based paint; military ordnance, and industrial use zones.

According to a CAR

paper, Summary Disclosure Chart , as of January
2013 there are about 40 mandatory disclosures . Many disclosures are
only necessary in narrow situations such as when a home is near an airport
or close to a military ordnance location.

CAR
s disclosure chart provides a summary of each disclosure, describes

a disclosure trigger, and cross references each disclosure with a CAR

form and supporting legal citation. CAR
s Residential Real Estate

Transaction Guide describes when and how each of these disclosures
should be made.

You should be prepared to describe the significance of any disclosure if
asked to do so by your principal. Where any particular disclosure is
especially material, you should explain it both orally and in writing. By
taking this precaution, you will be better able to defend yourself should your
client later claim that you failed to make the disclosure or, if your client
admits he signed the disclosure, that he only did so at your insistence and
complied to your request out of trust.

Examples of disclosures that should be explained verbally and in writing
are: (1) your buyer pays cash but declines to purchase title insurance, (2)
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your sellers TDS discloses mold or structural damage, and (3) your buyer
declines to get a home inspection.

2.7.3.2 TRANSFER DISCLOSURE STATEMENT (TDS)
The TDS is required by Article 1.5
of the Civil Code commencing at
1102. Its format is exactly
specified at 1102.6.

The 1994 case of Jue v. Smiser
established that buyers presented
with disclosures late in escrow
can acknowledge the disclosure,
complete the sale, and then sue
for damages (see our Ethics
course for details about this
case).

The buyers agent has the duty to
evaluate the preliminary title
report and advise his client if it
describes title restrictions adverse
to his clients interests.
Without a doubt, the most important disclosure is the Transfer Disclosure
Statement or TDS (CAR

form TDS).

Important points to keep in mind about the TDS are the following:

z As a listing broker, you must disclose all material defects not
already disclosed by your seller. If from your visual inspection you
discover a material defect your seller regards as insignificant, you
must nonetheless disclose even over your sellers objections.

z You must provide the TDS to the buyer before he makes his
purchase offer. If you amend the TDS with a material addition after
the offer has been accepted, the buyer has three days after personal
delivery of the amendment to terminate the purchase agreement. If
the amendment is mailed, the buyer has five days from the mailing
date to terminate the purchase agreement.

The law defines material addition as any change to the TDS after
the purchase agreement which, had it been known to the buyer
beforehand, would have informed him to offer less or not make an
offer at all. Since materiality is often in the eye of the buyer, it
behooves listing brokers to get the TDS right the first time.

z The law (CC 2079) requires the listing broker to inspect all accessible
areas of the home and to disclose all material defects he finds.

z The law (CC 2079) does not impose upon the listing broker the duty to
inspect public records such as building permits or property records.

z The TDS provides space for both the listing and selling brokers to
state their respective disclosures.

z CC 2079 states that any lawsuit from the buyer alleging a breach
of the listing brokers duty to perform a competent visual inspection
must be filed by the buyer within two years from the earliest of the
following dates: (1) date of occupancy, (2) date of the deeds
recordation, or (3) the date escrow closes.

For negligent misrepresentations by brokers (and other licensed
professionals), the time period during which the client may file a
claim begins when the misrepresentation is discovered or should
have been discovered and not at the time of sale. This is called the
delayed discovery rule and it is generally applied to the work
performed by skilled craftsmen and licensed professionals (Gryczman v.
4550 Pico Partners, Ltd. (2003)). This rule also applies to home inspectors
and overrides any contractual specifications to the contrary (Moreno v.
Sanchez (2003)).

z A special form of the disclosure is required for manufactured homes
(see CAR
Form MHTDS ).
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Warranty:
Click here for detailed
information about the Natural
Hazards Disclosure.
z The TDS is not required for new homes which are part of a
subdivision. (Disclosures for new homes in a subdivision are made
using a special document known as a public report.)

z Legally enforced transfers such as foreclosures, probates, and court
orders do not require a TDS. However, in such transfers listing
brokers are not exempted from their duty to conduct a reasonably
competent and diligent visual inspection of accessible areas (CC
2079).

z The TDS and the Natural Hazards Disclosure are not warranties
, nor are they a part of any contract. Do not attach them as
supplements to the contract or the counter-offer.

The buyer needs to realize that the sellers disclosures are
completed to the best of his knowledge and are not to be construed
as guarantees that the TDS is complete or even entirely accurate.

z If two or more real estate licensees are acting as brokers in a
transaction, the selling broker must deliver the statement to the
buyer unless the seller has given other written instructions for
delivery. If only one licensee is involved, that licensee must deliver
the statement to the buyer.

z If the contract requires the seller to provide a TDS and the seller
refuses or for any reason omits it, the buyer may void his purchase
agreement.

As your clients fiduciary, your inspection duties depend on the facts of
each transaction, the knowledge and the experience of the principal, the
questions asked by the principal, the nature of the property, and the terms
of sale (Field v. Century 21 Klowden-Forness Realty (1998)).

Suppose, for example, your buyer in no uncertain terms states that his
next home must have a backyard large enough to build an Olympic-sized
swimming pool.

California Live Oak
You then find your buyer a suitable home with an enormous backyard in a
neighborhood densely populated with California live oaks . Given your
knowledge of the local market and the certainty that many of the ancient
oaks would have to be felled to make room for your buyers enormous
swimming pool; it would be your duty as your buyers fiduciary to check the
local ordinances to see if the oaks are protected or, at the very least, to
insist that your buyer take the initiative to check the local tree ordinances.
Should you fail in this duty and your buyer subsequently purchase the home
and later be denied a permit to build his pool, he might have an actionable
claim against you for your failure to inform him of the restriction.

With respect to the NHD or any other document prepared by a third party
expert or public agency and delivered to the buyer, CC 1102.4 provides
that neither the seller nor his agent is liable for any errors that might be
contained within the document. For example, you can not be held liable for
the errors and omission a home inspector makes in his inspection report.
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2.7.3.3 MLS

CC 1088 requires that you obtain your sellers permission before placing
his listing into the Multiple Listing Service (paragraph six in CAR
s
Residential Listing Agreement (RLA) ). That same statute also makes the
agent responsible for the truth of all representations and statements made
by the agent of which that agent had knowledge or reasonably should
have had knowledge to anyone injured by their falseness or inaccuracy.
Therefore, it is crucial the information you post to the MLS be accurate.

To prevent inaccuracies, you should obtain a printed copy of the MLS
listing as soon as it is posted and have it reviewed and acknowledged by
your seller.

Representations about lot size or square footage often lead to problems
because measuring methods are not standardized. For this reason we
recommend you qualify your square foot citations using phrases such as
approximate, seller states that, or according to the Assessors records.
The size of a property is often a material consideration and
misrepresentations of size have been the source of many lawsuits.

2.7.3.4 NHD
Natural Hazard Disclosure
prepares the NHD disclosures for
$49.00 (as of 05-2013).
The Natural Hazard Disclosure (CAR

Form NHD) may be used to make the six
mandatory natural hazard disclosures (Earthquake Fault Zone, Seismic
Hazard Zones, State Fire Responsibility Areas, Very High Fire Severity
Zones, Flood Zone A, and Inundation Zones) for any residential property.

2.7.3.5 VISUAL INSPECTIONS

The Lingsch Duty.
California Supreme Courts decision in Easton v. Strassburger (1984) jolted
the residential brokerage profession. Before Easton, the disclosure duty
was the responsibility of the seller. The listing brokers disclosure duty was
the Lingsch Duty (after Lingsch v. Savage (1963)) which stated that the
listing brokers disclosure duty was limited to his actual knowledge.

Before Easton, if the broker hadnt seen the mold festooning the second
floor ceiling of his sellers home because he hadnt bothered to climb the
stairs; then, by the Lingsh Duty , the buyer could not hold the broker liable
for having failed to disclose it.
After Easton, the Court imposed a should-have-known standard. The
Court reasoned that a broker had a duty to conduct at least a visual
inspection of his sellers home and disclose whatever a reasonably
competent real estate investigation should have revealed.

Although Easton made it clear that the listing broker had a duty to inspect
his sellers home, the Court gave no details as to how thorough such an
investigation should be. To clarify the brokers inspection duty, the
California legislature passed a bill subsequently written into the Civil Code
as 2079 et seq. That statute requires a licensee to

conduct a reasonably competent and diligent visual inspection of
the property offered for sale and to disclose to that prospective
purchaser all facts materially affecting the value or desirability of the
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property that an investigation would reveal. the inspection
does not include or involve an inspection of areas that are
reasonably and normally inaccessible nor an affirmative
inspection of areas off the site of the subject property or public
records or permits concerning the title or use of the property.

With regard to your client, your 2079 duty to investigate, inspect, and
disclose is a minimum standard. Your actual duty depends on your
knowledge of your clients special needs, wishes, and requirements.
On CAR
s Real Estate Transfer Disclosure Statement (TDS) , sections I

and II are completed by the seller. The listing and selling brokers fill out
sections III and IV respectively based on the results of the careful visual
inspections they have conducted. All parties and brokers sign Section V.

2.8 SELLER MISREPRESENTATION

Red flag: Security bars and pit
pull.
Suppose a seller tells his listing broker a bald-faced lie: that his home had
never been burgled that it was only because his overly anxious wife had
insisted that they adopted a pit bull and installed window security bars .

Relying on his sellers lie, the listing broker assures all buyers that his
sellers neighborhood is safe.

The Smiths purchase his sellers home and immediately remove the ugly
security bars. One night, two months later, the Smiths are robbed at
gunpoint in their very own master bedroom. When the police arrive, they
inform the Smiths their home had been burgled on five other recent
occasions.

Is the listing broker liable to the Smiths for having repeated his sellers lie?

No, the broker is not liable for any fraud perpetrated by his seller and
republished to prospective buyers providing the broker was not complicit
in the fraud and that it was not reasonable for the broker to have had
knowledge or suspicions to the contrary.

However, should the Smiths sue their seller for fraudulent
misrepresentation, the broker should not be surprised if he is named co-
defendant.

To reduce the risk of being sued for false claims made by others, listing
brokers should take care to qualify the source of their claims (preferably in
writing):

z My seller told me this neighborhood is very safe and that his home
has never been burgled.

z My seller told me his home was designed by Julia Morgan, the
architect of Hearsts Castle.
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One final caveat It is always a good idea to have the law on your side
Gorbachev: Trust but verify.

Cock-a-Doodle-Dooo!

z My seller told me his neighbor only raises hens since he has never
heard a rooster crow.

It is the fiduciary responsibility of the buyers broker (be he a single or dual
agent) to verify any claim considered material to his buyer (or delegate this
responsibility to his buyer or to a professional). For example, if a dual agent
had repeated his sellers claim that his neighbor did not raise roosters, it
would be his duty to verify the claim (assuming of course that uninterrupted
sleep was important to his buyer).

2.8.1 LISTING CONTRACT

My neighbors are wonderful!

Lis pendens: A public notice
securing a claim on a property
pending resolution of a legal
dispute.
CAR
s Residential Listing Agreement (Form RLA) contains two

paragraphs which limit your liability should your seller misrepresent his
property without your knowledge.

The first is the Seller Representations provision by which the seller
warrants that he has disclosed to you all known encumbrances including
notices of default, bankruptcy proceedings, lis pendens notifications, and
liens; and promises to notify you should he learn of any new encumbrances
during the listing period.

The second is the Brokers and Sellers Duties provision which reads:

Seller further agrees to indemnify, defend, and hold Broker
harmless from all claims, disputes, litigation, judgments and attorney
fees arising from any incorrect information supplied by Seller, or
from any material facts that Seller knows but fails to disclose.

In other words, by signing your listing agreement your seller agrees to pay
for the cost of your defense should his buyer sue you for his
misrepresentations.

This provision does not exempt you from liability for your sellers
misrepresentations if (a) you should have known his representations were
false, or (b) as a dual agent knew his representations were important to
your buyer but failed to verify them or to advise your buyer to do so.
Remember also, that you have a statutory duty (CC 2079) to third parties to
exercise reasonable skill and care in the performance of your duties and to
disclose all material facts within your diligent attention.

but it can be an unreliable ally in a civil suit. Even with the sellers warranty
provisions in the listing agreement and even though the common law
exempts you from liability for republishing your sellers untruths, these
protections can be of little value when your adversary is an attorney skilled
in exploiting the ambiguities in the law. Therefore, with respect to what your
seller tells you, remember President Reagans immortal words to Mikhail
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2.9 CIVIL ACTIONS

Cause of Action: A specific legal
claim with legal elements which
must be proved to substantiate
the claim.
Should your client sue you, he is likely to claim one or more of these three
causes of action : Breach of Fiduciary Duty, Negligent
Misrepresentation, and Negligent Advice.

2.9.1 BREACH OF FIDUCIARY DUTY

To justify a claim for damages for a breach of fiduciary duty, the plaintiff
must prove (1) you owed him a fiduciary duty; (2) you failed to provide that
duty; and (3) his injuries were the result of your breach.

Here are some examples of breach of fiduciary duty claims:

z A seller sues his agent for having revealed to the buyers broker the
lowest offer he was willing to accept (violation of the fiduciary duty of
loyalty).

z A buyer sues his agent for having failed to read his propertys
preliminary title report which had described an easement permitting
his neighbor to drive cattle through the homes backyard (violation of
the fiduciary duty of utmost care).

z A buyer sues his dual agent for having falsely denied that the seller
had an ongoing boundary dispute with his neighbor (violation of the
fiduciary duty of honesty).

2.9.2 MISREPRESENTATION

Rescission: Cancellation of the
sale or return of commission.
Misrepresentation is a false statement made by a seller or his broker to
induce a prospect to buy. When the false statement is made by a broker
about a real estate matter, most courts hold a statement of opinion by the
broker as a statement of fact. A finding of misrepresentation allows for the
remedies of rescission and damages.

The law distinguishes three forms of misrepresentation: (1) an intentional
misrepresentation is a lie or any statement made with a reckless disregard
for the truth, (2) a negligent misrepresentation is a statement the agent
should have known was false; and (3) an innocent misrepresentation is a
false statement made in good faith, based on reasonable grounds.

Claims alleging negligent misrepresentation and innocent
misrepresentation represent the majority of claims made by sellers and
buyers against their brokers. These have been called, didnt know didnt
verify misrepresentations.

2.9.3 NEGLIGENCE

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To prevail in a suit alleging negligent nondisclosure, the plaintiff must show
that his broker had a duty to disclose a material fact or condition but
negligently failed to do so.
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The duty may arise out of statute, such as the duty to disclose window
security bars (CC 1102.16); or the duty may arise out of common law, such as
duty for the buyers broker to learn the material facts that may affect the
principal's decision (Field v. Century 21 Klowden-Forness Realty (1998)).

2.9.4 NEGLIGENT ADVICE/REFERRALS

Negligent advice imposes liability for giving faulty professional advice or
referrals when the broker should have known the advice was wrong or
should have known the person whom he referred to perform a service was
not qualified or competent to do so.

Referring a home inspector or some other service provider to your client
without performing due diligence to ensure the person you recommended is
qualified may result in you being named as a defendant in a civil action
should that service providers incompetence cost your client money.
Remember that under joint-and-several liability, a plaintiff may demand you
pay his entire money judgment even if you are found as little as one
percent liable for his injuries.

To avoid being found liable for a negligent referral, we recommend you

z do not recommend any friend, relative, or any one who provides
you a referral benefit other than a satisfied client.

z give your client good reasons for your recommendation.

z refer licensed contractors whenever possible, particularly those who
belong to trade associations.

z get a release if any client chooses someone you have reason to
distrust (e.g., the buyers dead-beat brother-in-law).

z only recommend that your clients hire contractors and service
providers who are insured. Licensed, bonded and insured means
that if your plaintiff wins a money judgment from both you and your
referral, his attorney will most likely seek to collect his money
judgment from your referrals insurance company and not from you.

z only add a service provider to your list if he has good references.

By taking proactive steps such as these and documenting them in your
transaction file, you will be less likely to be sued for the incompetency or
negligence of someone you recommend.

2.10 DISPUTE RESOLUTION

These methods are described in
greater detail in our course, The
Consumer Protection Reader.
In this section we briefly describe four methods of third-party-assisted dispute
resolution. These methods are (in ascending order of expense): (1)
mediation, (2) small claims, (3) arbitration, and (4) litigation.
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2.10.1 PROVISIONS IN CAR

CONTRACTS

CAR
s Residential Listing Agreement (Form RLA) states that should

either of you fail to first try mediation before resorting to arbitration or
litigation, then the moving party forfeits his right to recover attorney fees in
any subsequent action. An exception is made for using Small Claims Court
in lieu of mediation.

By initialing the Agreements Arbitration of Disputes provision , both you
and your seller agree that should mediation fail, binding arbitration should
be the recourse rather than litigation.

CAR

contracts permit the use of
the Small Claims Court to resolve
any dispute in lieu of mediation,
arbitration, or litigation.
Arbitration of Disputes provision as it appears in the Agreement.

CAR
s Purchase Agreement (Form RPA-CA) is an agreement between

the buyer and seller; brokers are not party to the Agreement. It (like CAR
s
listing agreement) requires the parties to first try mediation to resolve their
dispute; otherwise, the party initiating arbitration or court action without
having first attempted to mediate the dispute forfeits his right to recover
attorney fees in any subsequent legal action. The Agreement states that
should the buyer and seller agree to its Arbitration of Disputes provision
(similar to that which is shown above), both must submit their dispute to
binding arbitration .

2.10.2 MEDIATION

Mediation is an informal and alternate form of dispute resolution directed by
a third party. The first step after the parties agree to mediate their dispute
is for the parties to agree upon a mediator.

Click here to see a real estate
attorneys web page advertising
his firms mediation services.
The mediator can be anyone a bartender, a rabbi, a mail man no
special credentials or training is required. However, it is usually a good idea
to select a trained mediator who knows the Real Estate Law . CAR

agreements require the parties to split the cost of the mediator and other
mediation expenses. Again, either party may choose to take his
counterparty to Small Claims Court to force a quick settlement (see
following section).

2.10.3 SMALL CLAIMS COURT
Equitable Relief: Court remedies
that require parties to perform
certain acts or specifically perform
a contract.
Small Claims Court can only be used by plaintiffs seeking monetary
damages of less than $10,000. Small Claims Court cannot be used to
obtain equitable relief ; that is, any form of restitution other than a money
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award (not, for example, to enforce a contractor to perform).

The key advantages of resolving your dispute using Small Claims Court are
speed, economy, and finality. Neither party may be represented by an
attorney, even if the defendant is a corporation. Only defendants may
appeal their case to Superior Court but, should the appellant court find that
the defendants appeal is without merit, it can award the original plaintiff up
to $2,000 for attorneys fees, transportation, and lodging.

2.10.4 ARBITRATION
Civil Court: A court that handles
non-criminal legal matters in
which private individuals or
entities sue one another for either
money or some other type of
relief.
Arbitration is free market justice justice you pay for. But because
arbitration is usually faster and less formal than civil litigation and because
decisions by arbitration panels are almost always final; arbitration is usually
less expensive than public justice via a civil court (exception: Small
Claims Court).

Unlike public justice where all documents and proceedings are open to the
public, arbitration is 100% private. No one other than the involved parties
need ever know the outcome of a dispute settled by arbitration; not your
clientele, not homeowners in your farm, not other licensees in your
community, not the press, and certainly not the DRE. (If you fail to pay a
money judgment awarded by a civil court or by an arbitration panel, the
judgment creditor may apply for restitution to DREs Recovery Fund for
DREs explanation of this fund, click here.)

Arbitration decisions are supposed to be based on the applicable law; that
is, based on the law as applied in civil courts; but since arbitration decisions
cannot be appealed, legal mistakes (for example, the admission of hearsay
evidence) can not be remedied.
CAR

agreements include an Arbitration Provision which is enforceable
only when the parties have initialed the provision.

2.10.5 LITIGATION

Other than trial by combat, civil litigation is the worst way to resolve a
dispute. It is expensive, time consuming, lengthy, and painful. Because
litigation is complex, most litigants must hire an attorney to serve as their
champion at a cost of hundreds of dollars per hour.

Litigation starts with a lawsuit (aka, a complaint). The person initiating the
lawsuit is the plaintiff; the person sued, the defendant. The plaintiff
typically sues anyone he believes responsible for his losses and who has
the wherewithal to pay his damage claims.

Defendants with deep pockets especially those with E&O are
especially prized. Under California law, the plaintiff may collect his entire
money judgment from the defendant with the deepest pocket even if that
defendant was found only one percent liable for the plaintiffs injuries (see
Wikis article on Joint and Several Liability).

The plaintiff initiates a lawsuit by filing a complaint at the county
courthouse. The complaint states the causes for the action, the factual
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justification, and prays the court to grant him relief (i.e., money or some
other court-ordered form of restitution).

A typical complaint is written to intimidate the defendants into quickly
paying a settlement to avoid incurring ruinous litigation costs. If the
defendant fails to file an answer (a rebuttal), the plaintiff is entitled to a
default judgment in the full amount of his claim. Often, the defendant
returns his answer accompanied by his own complaint (cross complaint)
in pursuit of the strategy that the best defense is a good offense.

After the defendant files his answer, the parties engage in discovery to
compel one another to reveal the facts each needs to prevail at trial.
Discovery may consist of written questions requiring written answers
(interrogatories), witnesses questioned before a court stenographer
(depositions), and compulsory exchanges of documents (subpoenas).
During the discovery process, the parties are free to amend their
complaints with new causes of action and claims for additional damages.

Every step in civil litigation can be delayed by legal challenges argued
before a judge (motions). Often these challenges are initiated by the
stronger party in a deliberate effort to exhaust the resources of the weaker
for the purpose of forcing the weaker party to quit his suit or settle for a
pittance.

Only a tiny percentage of suits are ever resolved by judge or jury. To
prevail in a civil trial, the plaintiff need only convince 3/4
th
s of the jury
(typically composed of postal employees and retired people) that his
defendant was probably responsible for his injuries (source). The
standard of proof in civil cases is preponderance of evidence meaning
the plaintiff need only convince the judge or jury that his case against the
defendant is more likely true than not true.

Even after a judgment is rendered, litigation may continue. Any party may
appeal the decision if he believes he was found liable because the judge
made a significant legal error. If the appeal is rejected, the appellant may
appeal to a higher court and if that appeal is unsuccessful appeal to an
even higher court until ultimately reaching the end of the road: the
California Supreme Court for decisions appealed from State courts, or the
United States Supreme Court for decisions appealed from Federal courts.

If the plaintiff prevails and is awarded a money judgment, then he has the
frequently difficult and sometimes impossible task of collecting it neither
the court nor the sheriff will assist him. If the plaintiff (now called the
judgment creditor) is lucky, the defendant (called the judgment debtor)
will pay without complaint. But often the judgment creditor is unlucky. His
efforts to collect can by thwarted in innumerable ways; first and foremost:
the big BK bankruptcy the end of the road for the plaintiff where the
plaintiff more often than not collects a great Big Zero for all his expense,
troubles, and efforts.

2.10.6 DRES ENFORCEMENT TOOLS

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The DREs primary responsibility is to protect the public from unethical,
deceptive, unprofessional, and unlawful conduct by its licensees. Notice of
wrongful conduct comes to the attention of DREs Enforcement Department
in several ways. Principal among these is receipt of a written complaint
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The DRE had access to DMVs
records up until 2001 when the
DMV changed its policy to permit
only sworn peace officers to
access their database. SB 53
returned DREs access to the
DMV database.
(using DRE form 519A). The DRE receives from eight to ten thousand
such complaints a year.

Besides warnings and public rebukes, prior to 2012 the only disciplinary
actions which could be taken by the DRE were to revoke, suspend, or
restrict a wrongdoers license. But beginning in 2012, SB 53 granted the
DRE new enforcement tools:

z It may levy fines not to exceed $2,500 on both licensees and
unlicensed persons found to have violated the Real Estate Law.

z It may go directly to Superior Court to enforce an administrative
subpoena (prior to 2012, the DRE had to work through the State
Attorney General as its proxy).

z It may publicize its investigations into alleged licensee wrongdoing.

z It may access Department of Motor Vehicles database to find a
licensee .

If the DRE finds evidence of criminal wrongdoing it can refer a case to the
State Attorney General for possible prosecution. The DRE can not settle
commission disputes, collect money judgments, or resolve disputes
between licensees and their clients.
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3 AREAS OF RISK

This section describes several areas of risk. Two of the most important are
given prominence: (1) negligent misrepresentation and (2) dual agency.
Several relatively minor areas of risk are also described: (a) contract
preparation, (b) trust fund violations, (c) RESPA violations, (d) fair housing
violations, and (e) the failure of a broker to adequately supervise his
affiliated licensees.

3.1 NEGLIGENT MISREPRESENTATION

Consider what Matt Farmer, associate real estate council for the Oregon
Association of REALTOR
s, has to say about the risk of negligent

misrepresentation.
Risk Hotline for Real Estate is the
only source we cite not available
online. It is written by Robert L.
Read and published by JRAdams
Publishing in 2005.
About 90% of risk problems in real estate stem from disappointed
buyers discovering defects after closing. When the problem stands
to cost the buyer money, they will either blame the listing agent,
saying, You didnt tell me such-and-such. They will also often turn
to their own buyers agent and say You werent diligent in
protecting me. Pg. 140 of Risk Hotline for Real Estate

If you fail to disclose a material defect, you risk being sued for
misrepresentation. Technically, the law may exempt you from liability if
your misrepresentation was due to the connivance of your seller, the
incompetency of the home inspector, the sloth of the pest inspector, or the
navet of the buyer. BUT the reality is that buyers are likely to hold you
responsible at least to some degree for any misrepresentation which
costs them money and attorneys are skilled at exploiting the ambiguities of
the law.

Negligent Misrepresentation
If you dont know something, you cant be expected to disclose it. This
sounds right but it isnt. Negligent misrepresentation is when you dont
disclose something because you dont know it but you should have known
it. These failures to disclose are sometimes called didnt know, didnt
verify misrepresentations.

As a real estate agent, the public expects a minimum level of expertise,
knowledge, and level of care to be evident in your work regardless of
whether youre dealing with a customer or client.

Suppose you had sold a home to an out-of-town buyer six months ago.
The buyer now knows what everyone else in his neighborhood knew when
he bought his home and which you, calling yourself a neighborhood
expert, should have known; namely, that a new highway was then under
construction which when completed would bring a constant flow of truck
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traffic careening
down the sellers
street. Now that the
highway has been
completed, the buyer
sues you for
negligent
misrepresentation
claiming
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damages for the loss of his homes market value, the expense he incurred
to sound-proof his home, his loss of quiet enjoyment, and for the attorney
fees he needed to pay to settle his dispute with you.

Innocent Misrepresentation
Innocent misrepresentation occurs when in good faith you make a material
statement of fact which your client relies on but which isnt true. Here are
some examples of misstatements that could result in a law suit alleging
innocent misrepresentation:

z Teens from this neighborhood attend Taft High School it ranked
10 out of 10 in last years Academic Performance Index.

z This property has 4200 square feet.

z There hasnt been a robbery in this neighborhood in over twenty
years.

z Listen! All you can hear is clucks because Mr. Jones raises only
hens no roosters!

z This property is zoned for horses.

The first section of our course,
Consumer Protection Reader,
provides a fuller discussion of
red flags. and other ways to
reduce the risk of
misrepresentation.

There are 533 incorporated cities
and counties in California. State
law requires each adopt a comprehensive, long-term
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To avoid being sued
for negligence, be
proactive and
suspicious. Be
proactive by
aggressively ferreting
out all material
defects from the
sellers property. Be
suspicious by
verifying your sellers
TDS and by
corroborating the
findings of inspectors.

Here are ten actions
you can take to
reduce your chances
of being sued for
misrepresentation:

1. Learn to spot
red flags
indicative of
defective
roofs, water
damage, pest
infestation,
structural
damage, and
other
expensive
defects .

2. Accompany
home
inspectors
on their
rounds to
learn the
basics of
home
inspection.
(Ditto for
pest
inspectors.)

3. Hire the most
capable home
inspectors you can find.

4. Learn about
the
neighborhood from neighbors at open houses or from neighborhood
social networking sites such as NextDoor.com or Patch.com.

5. Google the sellers name and neighborhood. (You should also
search Googles news archive.

6. Review important documents for title restrictions in the homes
preliminary title report and deed. For homes subject to controls
from home owner associations, review its CC&Rs, bylaws,
governing documents, financial reports, and the minutes of board
meetings over the last twelve months (more info).

7. Carefully review the homes appraisal, home inspection, and pest
inspection reports.

8. Go online and read the community plan for the sellers
neighborhood.
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general plan for [its] physical

development. (Source) 9. Thoroughly understand your principals needs.

10. Verify all material claims made by the seller.
3.2 DUAL AGENCY

Second only to the risk of inadvertently selling a home with undisclosed
defects are the risks of breaching or failing to render your fiduciary duties
when selling a home as a dual agent.

As a dual agent you risk being sued should you fail to please both your
buyer and seller even though they have conflicting interests:

z Your seller wants his price to be high while your buyer wants it to be
low.

z Your seller wants to sell his home quickly while your buyer wants to
take his time.

z Your seller wants your buyer to make an offer without contingencies
while your buyer can not afford to risk making an offer unless there
are contingencies.

z Your seller wants a large earnest money deposit without strings
while your buyer wants to offer a small amount of earnest money
and then only with strings attached.

z Your seller wants to sell his home as is while your buyer wants it
delivered in perfect condition.

z Your seller wants your buyer to pay for all the inspections while your
buyer wants your seller to pay for them.

One agent put it this way: Dual
Agency twice the
compensation, three times the
work, four times the responsibility,
and five times the liability
(source).
Recall the premise of this course: A transaction becomes risky when your
client becomes unhappy with his transaction. With each conflicting interest
it is difficult to make one party happy without making the other unhappy.

Dual agency has been described as a time bomb which detonates when
either party becomes unhappy for whatever reason, even months after
closing. Says Matt Farmer, a real estate attorney for the Oregon
Association of REALTORS
:

when somebody becomes angry over events, then the risk to the
person who is the dual agent is tremendous. If you represent
both parties in a transaction and they sue each other, no matter
which one of them wins, youre going to lose! (Risk Hotline for Real
Estate, Pg. 239)
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3.2.1 LEGAL ISSUES

Suppose you are holding an open house when in walks a young couple who
instantly falls in love with your sellers home. Before you know it, the couple
wants you to write an offer at list price a price you suspect is 20% above
market; and the couple plans to pay with cash recently won in the State
lottery. What should you do? Here are some options:

Write the offer while retaining exclusive agency for the seller:
You do not have to represent the couple to write their offer. CC 2079.23
states:

Nothing in this article precludes a listing agent from also being a
selling agent, and the combination of these functions in one agent
does not, of itself, make that agent a dual agent.

Nave Young Couple
This is the most lucrative option for you and your seller but it is also the
riskiest for you. If you pursue this option, it is your legal and ethical
responsibility to make sure the couple understands that in your future
dealings with them, while you will be treating them honestly and fairly, you
will be working for your seller. You must impress upon them that you will be
applying all your knowledge, resources, and experience towards the
objective of getting your seller the very best deal that you can possibly get.

It the couple is nave (or stupid) they may disingenuously say they
understand the risks of proceeding without representation. The couple may
even sign an affidavit which states in writing that they understand the risks
of not being represented. If asked later why they signed it, they might
remember that you had asked them to sign the release and they complied
out of trust believing you to be their agent.

If the couple comprehends how likely they are to be exploited by your
single-minded devotion to your sellers interests, the couple is likely to take
one of two actions: (1) return with an agent willing to represent them, or (2)
take leave to consider their options and probably not return.

If the couple understands that you represent only your seller and you are
convinced that they truly understand the risks of not being represented,
then you should proceed as follows:

1. Before writing the offer, present the couple with the Agency
Disclosure Form (CAR

Form AD). On that disclosure declare
yourself the exclusive agent of your seller. This step is required by
CC 2079.16.
2. Explain, verbally and in writing, your agency duties to the seller. This
is not legally required but you should do it for your own protection.

3. Write the offer. If you take this option, take care to document that
every choice made in the purchase offer is the informed choice of the
couple and that you had no part in advising the couple concerning any
of the terms of the purchase agreement.
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This option is legal and good for both your seller and your bank account but
it is almost certainly bad for the young couple and very risky for you.
Should the couple wise up after close of escrow or should a friend or
relative come to their aid to rescind the sale or recover damages from what
they believe was your cynical exploitation of the couples navet, the judge
and jurys sympathies are likely to be with the couple and not you the
fast-talking, greedy real estate agent.

All kidding aside, this could be the best option in some situations. Suppose
one of the couple was a Stanford Business School graduate, an
experienced real estate agent, or an investor who had purchased many
homes? Or suppose you were wrong about your sellers home being
overpriced? Or suppose the couple were both experienced investors and
in exchange for proceeding without representation you promised a 2%
discount to be paid from your full commission? There could be any number
of situations in which it would be safe, legal, and ethical to write their offer
even though they were unrepresented.

Write the offer as a dual agent.
This option is far less risky than the former. Its principal advantage is that
you can provide protection for the nave couple and reduce your liability. Its
principal disadvantage is that you risk alienating your seller and losing the
couple as prospective buyers.

As a dual agent, you are legally prohibited from telling the couple that your
sellers home has been overpriced. CC 2079.13 reads:

In representing both Seller and Buyer, the agent may not, without
the express permission of the respective party, disclose to the other
party that the Seller will accept a price less than the listing price or
that the Buyer will pay a price greater than the price offered.

To fulfill your fiduciary duty to protect the buyer, you should provide the
couple good comps and encourage them to carefully consider the comps
before finalizing their offer.

As the couples agent, you must also protect their interests by insisting they
get a home inspection. If the inspection reveals major defects, the couple
may withdraw their offer.

Proceed with this option as follows:

1. Before writing the offer, fill out the Agency Disclosure Form
declaring dual agency (legally required). Provide the same
document to your seller.
CAR
s Residential Listing Agreement (Form RLA) permits

agents to unilaterally enter into a dual agency (see Paragraph 10,
Agency Relationships) but it still requires immediate notification to
the seller.

If your listing agreement does not authorize you to elect dual agency,
you must get your sellers permission. If you fail to do so, you will be
liable for undisclosed dual agency for which the minimum remedy,
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even if there is no injury to your seller, is rescission of your
commission.
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2. Explain the significance of dual agency to the couple and document
your explanation with a letter or email.

3. Write the offer as agent for the couple taking care to protect their
interests with your utmost diligence.

Advise the couple to find their own agent.
The buyers representative might be another broker, an attorney, or a
discount brokerage.

The obvious risk with this option is that you may lose the buyer. Any
reputable single agent retained by the couple would feel it his duty to
provide the couple with other choices which the couple might well find
preferable to your sellers home.

This option carries the least liability but the greatest probability you will lose
the couple as buyers.

3.3 MINOR AREAS

This subsection describes risks of a lesser degree than negligent
misrepresentation and dual agency.

3.3.1 CONTRACT PREPARATION

3.3.1.1 UNAUTHORIZED PRACTICE OF LAW

Article 13 of NAR
s Code of Ethics reads:

REALTORS

shall not engage in activities that constitute the
unauthorized practice of law and shall recommend that legal
counsel be obtained when the interest of any party to the
transaction requires it.

BPC 6125 and 6126 make it illegal for anyone to practice law who is not
a member of the State Bar (that is, not a state-licensed attorney).

The use of standard forms carefully composed by attorneys is not an
unauthorized practice of law. The authoritative encyclopedia of California
Law, California Jurisprudence, states

an established business custom sanctions the activities of real
estate agents in drawing certain agreements in business
transactions in which they take part in their respective professional
capacities.

Filling out standard forms and adding common amendments and
contingencies is not construed as the unauthorized practice of law
providing you do so for your own transactions and you dont bill separately
for preparing the forms.
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Just how far you can go in rewriting paragraphs, deleting clauses, or adding
additional provisions without crossing the line into the unauthorized
practice of law is a judgment you will have to make based on

z the consequences of being wrong,

z whether the changes you wish to make are normally drafted by
licensees, and

z the degree to which the changes require knowledge of the law.

If you are a CAR

member and you are in doubt about any legal matter,
you may call CAR
s Legal Hotline to consult with a CAR

staff attorney.
Calls are received Monday to Friday from 9:00 AM until 6:00 PM. There is
no charge to the REALTOR

or his office for this service; it is a member
benefit (source).

3.3.1.2 LISTING AGREEMENT

To avoid subsequent misunderstandings with your seller, encourage him to
carefully read your listing contract. If you are using CAR
s Residential
Listing Agreement (Form RPA-CA) , be prepared to justify and explain its
provisions. Of all the paragraphs in the Agreement, we believe these are
the ones most likely to interest your seller:
If you have the authority to delete
provisions from a standard
contract, just line it out and have
both parties initial and date the
change.

z Paragraph 10c gives you your sellers prior consent to act as a dual
agent should you or an associate from your brokerage find a buyer
for his home. (If you strike this paragraph, you may still elect dual
agency subject to your sellers approval (BPC 10176(d)).)

z Paragraph 14a states that if you or your seller should fail to first try
mediation to resolve any dispute arising from the agreement then
the party that moves directly to arbitration or litigation forfeits his
right to recover attorney fees in any subsequent action.

Your seller may be concerned about the objectivity of the mediator
and his obligation to pay half the mediation fees.

z If you and your seller initial the bottom of Paragraph 14b, then the
two of you agree to settle any commission dispute using binding
arbitration. (If the amount in question is $10,000 or less, this
provision permits you to resolve your dispute in Small Claims Court
rather than binding arbitration.)

z Paragraph 17 states that your listing is owned by your brokerage. If
you work for your brokerage and you quit, your listing stays with
your brokerage. This may concern your seller if wants you and not
just anyone from your brokerage.

z Paragraph 20 states that all prior discussions, negotiations, and
agreements between the parties concerning the subject matter of
this agreement are superseded by this agreement. In other words,
any promises you may have made which are not specifically
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mentioned in
the contract
(Ill feed your
cat while you
are house
hunting in
Puerto
Vallarta) are
not binding.
Your seller
may wish to
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amend the agreement with an addendum which incorporates your
promises.

You should make it clear to your seller that it is your legal duty to disclose
any defect you believe material even if your seller disagrees.
It is also a good idea to walk your seller through CAR
s Sellers Advisory
(Form SA) and have him initial it. This document explains his disclosure
duties and the advantages of obtaining a home inspection before
completing his TDS (pre-inspection).

3.3.1.3 CONTRACT FAMILIARITY

There is a good 45 minute
explanation of the CAR

Residential Real Estate Purchase
Agreement on Youtube here.
You should thoroughly know three standard contracts: (1) the listing
contract (CAR

Form RLA), (2) the buyer broker representation agreement (CAR

Form BR); and (3) the purchase agreement (CAR

Form RPA-CA).
The most commonly used purchase agreement is CAR
s Residential
Purchase Agreement and Joint Escrow Instructions . Thirty years ago
this form was but a single page; but today it is eight pages of fine print. The
Agreement is supplemented by 45 possible addenda for special
circumstances such as when the seller provides the buyer with financing.

An excellent way to gain a complete understanding of CAR
s purchase
agreement is to read the CAR

publication, Your Guide to the California
Residential Purchase Agreement . This 60-page document explains
the agreement clause by clause.

Older versions of the Guide may be found on various online sites but the
current Guide appears to be only available for purchase from CAR

on
their site and on iTunes for $19.99.

3.3.1.4 DOCUMENT REVIEW

According to the DREs Broker Compliance Evaluation Manual :

A licensed broker must retain for three years copies of all listings,
deposit receipts, canceled checks, trust account records, and other
documents executed by him or her or obtained by him or her in
connection with any transaction for which a brokers license is
required. The retention period shall run from the date of the closing
of the transaction or from the date of the listing if the transaction is
not consummated. After reasonable notice, the books, accounts
and records shall be made available for audit, examination,
inspection and copying by a Department representative during
regular business hours.
Latent Defect: A fault in the
property that could not have been
discovered by a reasonably
thorough inspection before the
sale.
Although DRE regulations require you to maintain your transaction files for
three years, we recommend ten years instead. We recommend this longer
period because the statute of limitations for latent defects in real property
is ten years.

Barbara Nichols, a Los Angeles risk management expert offers this advice
about retaining records
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ask yourself, If Im sued and an attorney subpoenas this
[transaction] file, does it contain everything I need to prove I did
everything right? (Source)

3.3.2 TRUST FUND HANDLING

The number one source of DRE administrative actions is trust fund
violations. According to the DRE (source ), seven of the ten most
common violations found in DRE audits are trust fund violations. Here is
the top ten list with the trust fund violations in red:

1. B & P Code Section 10148 - Retention of Records
2. Regulation 2731 - Use of False or Fictitious Name
3. Regulation 2831 - Trust Fund Records To Be Maintained
4. Regulation 2831.1 - Separate Record for Each Beneficiary
5. Regulation 2831.2 - Trust Account Reconciliation
6. Regulation 2832.1 - Trust Fund Handling for Multiple Beneficiaries
7. B & P Code Section 10145/ Regulation 2832 - Trust Fund Handling
8. Regulation 2834 - Trust Account Withdrawals
9. B & P Code Section 10145/ Regulation 2835 - Commingling
10. B & P Code Section 10240 - Written Disclosure Statement

(If any violation is found, the DRE may charge you for the cost of its audit.)
As a fiduciary, you are required to handle the monies entrusted to you with
no less care than if they were your own. These monies include earnest
money deposits, rents, and advance fees. The DRE has formulated
detailed accounting regulations for handling trust funds and these are
detailed in our three-hour course, Trust Funds.

3.3.3 BROKER SUPERVISION
The DRE regards licensees
working under a brokers license
as employees while the IRS,
under a special provision of the
tax code, regards these same
licensees as statutory
independent contractors.
Brokers are vicariously liable for the negligent actions of employees when
performed within the scope of their employment or agency. To minimize
their liability, brokers should take care to document their standards and
establish procedures to ensure they are followed. This responsibility is not
only prudent it is also required by the Commissioner:

A broker shall exercise reasonable supervision which includes, as
appropriate, the establishment of 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) the handling of trust funds, (e) advertising of any service for
which a license is required, (f) familiarizing salespersons with the
requirements of federal and state laws relating to the prohibition of
discrimination, (g) regular and consistent reports of licensed
activities of salespersons. (Commissioners Regulation 2725)

Because the broker is strictly liable for the negligent actions and
omissions of each licensee conducting business under his/its name, in the
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eyes of the law and the DRE, the broker is the employer and each
licensee who hangs his license with the brokerage is its employee.

Strictly liable in this context means that the employer is liable for any
action taken by any employee regardless of whether the employee is at
fault.
For example, suppose Bobs broker is ABC Realty, Inc. (ABCR) and
ABCRs designated broker is Sally (the boss). After reading his sellers
appraisal report, Bob tells his buyer that his sellers home has 4300 square
feet. After purchasing the sellers home, the buyer learns his home has
only 3300 square feet. The buyer sues and prevails against Bob and
ABCR. In this case, ABCR (not Sally) is strictly liable for Bobs error.

3.3.3.1 RISK MANAGEMENT POLICIES
About.com provides a "detailed
collection of sample real estate
brokerage office polity manual
documents" here.
For the sake of consistency and clarity, brokers should state their policies,
standards, and reporting requirements in a written policy manual .
Sample topics are

z procedures for real estate transactions,

z checklist for transaction files,

z activities requiring management approval,

z use of personal assistants,

z requirements for E&O insurance,

z your probationary policy.

In composing the policy manual, you should be mindful that, if sued, the
plaintiffs attorney will subpoena the manual; or if investigated by the DRE,
the DRE will demand to see it. The plaintiffs attorney or the DRE
investigator will want to examine the manual to determine if you failed to
provide a duty to your client as required by your own policies and
procedures. To avoid this trap, standards should be realistic and enforced.

3.3.4 KICKBACKS

NOTE: RESPA does not make all
kickbacks illegal, only kickbacks
for settlement services and then
only for federally-related
mortgages. Federally-related
includes any FHA loan and any
loan guaranteed by the GSEs.
As a fiduciary, the common law of agency and specific statutes bars you
from accepting any form of undisclosed compensation from any third party
without your clients consent.

8(a) of RESPA (Real Estate Settlement Procedures Act) prescribes
criminal and civil penalties for a fiduciary or non-fiduciary who accepts any
form of kickback, disclosed or undisclosed, for referrals of settlement
service business involving a federally-related mortgage loan. Kickbacks
include anything of value such as a one-hundred dollar bill, tickets to a
baseball game, or free continuing education.

Criminal sanctions for violating RESPAs anti-kickback provision include
one year in jail and fines not in excess of $10,000. Civil sanctions permit
the plaintiff to recover up to three times the cost of his settlement services.
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An undisclosed kickback for referring ones client to a gardening service
would not be illegal under RESPA but could be under BPC 10176(g) the
statute which forbids compensation for a real estate transaction not
approved by the licensees client (sometimes called a secret profit). If the
licensee recommended the gardener to his client before close of escrow
with the expectation of receiving a kickback from the gardener and without
having disclosed it to his client, then it probably would be unethical under
Article 6 of NAR
s Code of Ethics.

3.3.5 FAIR HOUSING
The fair housing and lending laws
are covered in detail in our three-
hour Fair Housing course.
Both Federal and State laws prohibit discrimination in the sale, rental, and
financing of real estate. But not all discrimination is illegal, only
discrimination based on 12 attributes called protected classes.

Federal law recognizes seven protected classes; State law, twelve:

z Federal Protected Classes: (1) race, (2) color, (3) religion, (4) sex,
(5) national origin, (6) familial status, and (7) disability.

z State Protected Classes: State law adds to the seven federal
protected classes five additional classes: (8) sexual orientation
(includes sexual identity and sexual expression), (9) marital status,
(10) ancestry, (11) source of income, and (12) age.

These exceptions are covered in
detail in our three-hour Fair
Housing course.

Non-profit watch dogs called fair
housing councils (funded by
HUD) are empowered to file
discrimination suits on behalf of
the public.
Put simply, in your interactions with prospects and clients the fair housing
laws require you to act as if you are blind to all 12 attributes. The law
permits only two exceptions :

(1) you are permitted to see and ask about the disability of any person
requesting a reasonable accommodation providing the persons
need for the accommodation is not obvious, and

(2) you may see the age of a person but only if he wishes to purchase
a property within a legally-sanctioned seniors-only community.

Barring these two exceptions, if you make any decision in whole or in part
based on any of these 12 attributes, then you are in violation of the fair
housing laws.

The penalties for violating the fair housing laws can be severe. You may be
investigated, sued, or fined by the California Department of Fair
Employment and Housing. You may be sued by a fair housing group
(subsidized and licensed by HUD). You may be sued for compensatory and
punitive damages by the party who suffers injury from your discrimination.
The DRE Commissioner may suspend or revoke your license. Be aware
that E&O policies do not recognize claims for fair housing violations.

Overt racial discrimination is rare and becoming rarer still; but violations of
the fair housing laws are nevertheless commonplace. Most violations are
for discrimination against groups who have been recently given legal
protection. These include groups defined by sexual orientation; familial
status (e.g., families with children); and disability (e.g., alcoholics).
Risk Management, 2
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Many licensees discriminate innocently as when, for example, on their own
initiative they direct their gay clientele to gay neighborhoods, when they ask
their clients if they have children, or when they include discriminatory
phrases in advertising (e.g., perfect for empty nesters).

3.3.6 ADVERTISING

There are four types of illegal advertising: (1) blind ads, (2) breaches of the
contractual duty to advertise, (3) discriminatory advertising, and (4)
negligent advertising.

3.3.6.1 BLIND ADS

As of July 1, 2009, AB 1461
requires licensees to put their
license number on all solicitation
materials intended to be the first
contact with customers. Such
materials include business cards,
stationary, and web sites.
A blind ad is an ad for a property which does not identify the broker who
placed it. Blind ads convey the false impression that the property is offered
for sale by its owner.

Blind ads are forbidden by BPC 10140.6. The Commissioners
implementing regulation (CR 2770.1) permits the following terms to reference
the broker: broker, agent, REALTOR
, loan correspondent, or the

abbreviations bro., agt., or other similar terms or abbreviations.

3.3.6.2 BROKEN PROMISE TO ADVERTISE

By the Statute of Frauds (CC 1624), a listing contract must be in writing if it is
to be legally binding (CC 1624(a)(4)). Therefore, any promise understood to be
part of the contract must also be in writing and this includes promises to
advertise. This requirement is reinforced by the Entire Agreement clause
of CAR
s Residential Listing Agreement (Form RLA) :

All prior discussions, negotiations and agreements between the
parties concerning the subject matter of Agreement are superseded
by this Agreement, which constitutes the entire contract and a
complete and exclusive expression of their agreement, and may not
be contradicted by evidence of any prior agreement or
contemporaneous oral agreement.

Since the listing agreement specifies that it is the brokers responsibility to
exercise reasonable effort and due diligence (see the forms Brokers and Sellers
Duties provision) to sell the property, any specific promises to market the sellers
property must be in writing if these promises are to be legally binding.

3.3.6.3 DISCRIMINATORY ADVERTISING

The Federal Fair Housing Act (FHA) states:

It shall be unlawful to make, print, or publish, or cause to be made,
printed, or published any notice, statement, or advertisement, with
respect to the sale or rental of a dwelling that indicates any
preference, limitation, or discrimination based on race, color,
religion, sex, handicap, familial status, or national origin, or an
intention to make any such preference, limitation, or discrimination
(42 USC 3604).
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These very words in Craigslist got
Daniel Bader of Orange County
into serious trouble. Read about
his battle with Department of Fair
Housing and the Fair Housing
Council of Orange County here.
California state law extends protection to five additional groups: sexual
orientation, marital status, ancestry, source of income, and age.

When advertising, take care when drafting ad copy to not state or infer any
preference for or against any of the 12 protected groups. Statements such
as the following would be considered discriminatory:

z Perfect for anyone who must walk to Valley Beth Shalom on
Shabbat. Shows a preference for Orthodox Jews; a group based
on religion or ethnicity.

z Est muy cerca a Mercado de Vallarta! (if it appears in a non-
Spanish-language publication and does not provide an English
translation) Shows a preference for Hispanics; a group based on
race, color, and national origin.

z Well suited for professional adults Shows a preference for
adults without children; a group based on familial status.

See the section Avoiding Discriminatory Advertising in our Fair Housing
course for a more detailed discussion of discriminatory advertising.

3.3.6.4 NEGLIGENT ADVERTISING

Negligent advertising refers to material claims made in brochures, MLS
listings, and other forms of promotions on which the buyer relies and which
are later found to be false.

Here are some examples:

z An MLS listing overstates a propertys lot size because it
erroneously includes a neighboring owners vacant lot.

z A brochure states the property has access to public sewers when
the home actually empties its sewage into a private septic tank.

z A brochure states that the home was once owned by Greta Garbo,
the 1930s film star, when it was actually owned by Greta Gumbo, an
unknown beekeeper .
You should verify all material claims made in your advertising especially
your MLS listings.

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3 D.R.E.

Approved Credit Hours

California Association of REALTOR

National Association of REALTORS

include Peninsula Regional Data

s Buyer Broker Representation Agreement (Form BR) .

s residential listing agreement (Form RLA ), the seller pre-

s listing agreement (Form RLA) gives the

s Code of Ethics is often cited as a Standard of Care in civil actions

Magazine Online). Some of the most relevant sections of the

, for the protection of all parties, shall ensure

s disclosure chart provides a summary of each disclosure, describes

s Residential Real Estate

s Real Estate Transfer Disclosure Statement (TDS) , sections I

s Residential Listing Agreement (Form RLA) contains two

s Residential Listing Agreement (Form RLA) states that should

s Purchase Agreement (Form RPA-CA) is an agreement between

s, has to say about the risk of negligent

s Residential Listing Agreement (Form RLA) permits

s Code of Ethics reads:

s Legal Hotline to consult with a CAR

, loan correspondent, or the

s Residential Listing Agreement (Form RLA) :

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