PART 1: BROKERS. Sources of Relevant Law. Selected Statutes and Regulatory Materials Concerning Brokers

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1 PART 1: BROKERS Intro The broker puts a seller and buyer together and serves as an intermediary during negotiations. o They have the authority to show, advertise and market the property The sales agent acts under the broker s supervision The real estate recovery fund is a special fund set up so that if the broker violates her ethical duties, an aggrieved party can make a claim and recover from the fund o Note that broker generally has her own insurance, and the real estate recovery fund is a fund of last resort. Sources of Relevant Law Selected Statutes and Regulatory Materials Concerning Brokers Functions Performed by Brokers Again, they put the seller and buyer together, and serve as an intermediary during negotiations. They have the authority to show, advertise and market the property. They have: o The duty to expend reasonable effort, in good faith, to procure an offer meeting the vendor s terms. o They owe a fiduciary duty of utmost care to their client. Contract Between Broker and Client The contract between a broker and her client is called a listing agreement o It is a contract between a seller and a broker for the marketing of the property for sale.! It is NOT a contract for the sale of the property.! It is NOT an offer, it is merely an invitation for buyers to make offers.! BUT, if the buyer offers the terms in the listing, then the broker has earned his commission. Requirements for the listing agreement o Listing Price o Termination Date o Location of the property for sale Types of Listing Agreements o The Right to Sell Agreement! In this type of agreement, the broker does not need to be the procuring cause of the deal. If the conditions for earning commission are met during the time allotted, the commission is earned. This means that if the property is sold at the listing price and before termination date, even if it is not by the broker, the broker earns his commission.! The seller can sell the home himself, and the broker still gets commission! Another broker other than the listing agent can sell the home, and the listing agent broker still gets the commission.

2 ! The terms must be reasonably fulfilled. For instance, the listing agent cannot say I got your price! but it is 95% seller financed. The time value of money is more important than getting the price.! The sale must occur during the specified time period. o Excusive Agency Listing Agreement! This agreement is like an exclusive right to sell agreement, except the seller can sell the property himself without paying the agent a commission. The listing agent still gets commission if the property sells through another broker. o Open Listing! In this type of listing, the listing agent must be the procuring cause He must find a purchaser who is ready, willing and able to buy the property at the terms stated and obtain a valid contract obligating the purchaser on those terms! The broker gets commission only if he finds the buyer! There is no sale necessary, if the sale falls through (just like the other listing types) the broker still gets his commission.! Here, there is no requirement that the broker use his best efforts to sell your property, and he reserves the right to find the buyer himself or use other brokers to procure buyers. o Illicit Listing Agreements! Net listing A broker agrees to accept as his commission any portion of the purchase price over an agreed upon figure o Ex. Seller: I want $600K for my house, you get whatever is left A fiduciary duty issue arises here o Creates a conflict of interest between the broker and the selling party. The broker is less willing to discuss the fair market value of the property with his seller. He will likely say it is worth less than it really is in order to sell it far over the stipulated price and receive a larger commission.! Option listing A broker has a right as a principle to buy the property at the asking price as a last resort. o This type of listing undermines the authenticity of the appraisal, because it creates an incentive to under-price. o Conflict of interest because the broker will want to under-price and then acquire the property himself? When Has Broker Earned Her Commission?! RULE: A brokerage agreement must be in writing, and it must be subscribed (signed) by the party to be charged Phillipe v. Shapell o Policy! The desire to secure consumers with the certainty of written contracts! Ensures that brokers know what they are doing. They should have knowledge of the laws governing their trade, so they should get their agreements in writing or they don t get paid.! Evidentiary purpose: prevents fraud! The brokerage agreement must cover the actual property at issue

3 ! The broker must have a valid real estate license o Sales agents do not have the same authority as brokers! The specific conditions of the broker s contract with the seller (principal) must have been met! Depending on the type of listing: o Majority rule:! The broker produces a buyer who is ready, willing, and able under the terms of the listing, even if the sale is not completed or! He produces a buyer offering different conditions and the seller accepts The buyer s acceptability is conclusively presumed because a seller is estopped from disputing the qualifications of a purchaser with whom he is willing to contract! The evidentiary burden of showing the buyer is ready, willing and able is on the broker o Minority Rule (Dobbs)! Commission is not earned until performance of the contract (usually close of escrow) But where seller wrongfully prevents closing, the courts following this rule still grant specific performance and make seller pay commission (Drake case) o What realistically happens:! Commissions are paid from funds in escrow! If the deal does not close, it usually shows that the buyer was not ready, willing and able! Thus, broker usually doesn t get commission absent closing. This helps facilitate more closings, because the broker really wants his commission. The Withdrawal from Sale Clause! A contract provision that allows the seller to take the property off the market before the listing expires. o But you must pay the broker a previously specified amount even though he didn t sell your house o But if the withdrawal from sale penalty is the same as the commission, it is an illegal penalty! If the withdrawal from sale amount is less than the commission from the actual sale, it is an acceptable liquidated damages provision.! To avoid paying this at all: o A seller could theoretically argue that it is a penalty provision that operates to compel performance of an act (the sale of your house) and becomes effective only in the event of default in that performance, upon which forfeiture is compelled without regard to the damages that actually flow from the failure to perform.! For instance, it is possible that even if the seller kept the house on the market, the broker may have never sold it and not earned his commission. So why give anything to him? Broker Duties of Investigation and Disclosure STATUTES: California Civil Code Sections 1102 and 2079! 1. Scope of inspection required by the broker o The broker s duty to inspect is limited to a reasonable, diligent visual inspection of accessible areas. (i.e. no dirty knees )! 2. Disclosure o The broker must disclose to the buyer all material facts/defects affecting the value or desirability of the property that are known or should have been discovered through a reasonably competent and diligent inspection of the property. (Cal. Civ. Code Section 2709, which codifies this rule as pronounced in the Easton case)

4 o The broker has a duty to exercise reasonable care in his inspection! Usually, an expert is used to prove this.! Broker is not required to use special equipment to observe anything, just ordinary senses! In court, arguments are often made about whether or not an area was accessible. o Structural defects not discernable by visual inspection need not be disclosed if unknown. o In order to prove negligence! You must show constructive knowledge, i.e. that the broker should have known! Rationale: " If the broker only had the duty to disclose known defects and not those that were reasonably discoverable to him, it would reward his ignorance " We don t want to reward an unskilled broker for incompetence " We don t want to reward an unscrupulous broker with the ability to protect himself at the unwary s expense " The seller s broker is best situated to obtain and provide the most reliable info o In order to prove fraud! You must show known but undisclosed material facts that were not known or within reach/attention/observation of buyer.! 3. These rules apply to residential property only o 1-4 units o Rationale: commercial buyers are more experienced! 4. Mandatory o Parties may not waive inspection and disclosure requirements.! Buyer s Duties o Buyer must exercise reasonable care to protect himself o He has a duty to investigate and act on those facts that are known to him or within his diligent attention and observation.! As-Is Clauses and Disclaimers o Even when the sale is as-is, the seller must still complete the form disclosing known material defects.! As-is language does not shield a seller/broker from affirmative or negative fraud. o The broker s duty to inspect and disclose persists! An as-is clause never relieves the broker s duty to inspect and disclose all defects found in a reasonably diligent visual inspection (but again, no duty to inspect inaccessible areas). o Essentially, the as-is clause can relieve defendants of liability except! Fraudulent non-disclosure " intentional concealment of material defects that would normally be observable by plaintiffs! Affirmative fraud " Seller misrepresents the condition of the property during disclosures! Negative fraud " Seller fails to disclose (omits) true facts of property s condition that are not within the buyer s reach and affect the value or desirability of the property.! Some other types of fraud o Negligent Misrepresentation! A species of fraud that cannot be contracted away without violating public policy

5 ! It specifically requires a positive assertion. An omission is not enough. An implied assertion or representation is not enough. (See Cal. Civ. Code Section 1572)! You need to make a false statement to someone, honestly believing it is true, but without reasonable ground for that belief. o Constructive Fraud! An act, omission, or concealment involving a breach of legal or equitable duty, trust, or confidence that results in damage to another even though the conduct is not otherwise fraudulent. o A broker may be liable for negligent misrepresentation or constructive fraud if he passes on misstatements without personally investigating them. Agency, Dual Agency, and Agency Disclosure STATUTES: California Civil Code Section 2079 (1) Agent defined (Section 2079(13)) o One who represents another, called the principal, in dealing with a third party. (2) Broker o A broker is automatically considered an agent o Finder: has a limited role, therefore no agency o Escrow agent: Limited agency duties to both parties (limited to their role in the transaction) (3) The existence of agency is a question of fact o Court looks at the conduct of the parties, specifically degree of principal s control over agent and agent s discretion. (4) Creation of agency o No writing is required! An agency relationship may be created or implied without a contract o Agency is as agency does! Relationship that looks like agency may imply one o Material factors! Principal s control over the alleged agent! Exercise of discretion by the alleged agent! Payment of compensation is not determinative of the agency! A broker has agency with seller, but does he have one with the buyer? Merely carrying an offer back to a seller does not create agency But if the broker does things for a seller that he wasn t already obligated to do, the more likely there is an agency relationship. (5) Imputation of knowledge/actions o For liability purposes, an agent s acts and knowledge are imputed to his principal (6) Subagency o Someone employed to assist an agent in his performance of services to the principal! Listing broker is liable for the wrongful acts of a cooperating broker toward 3 rd parties! A listing-cooperating broker relationship is usually created by an MLS listing (7) Termination of Agency (See Cal. Civ. Code Section ) o Expiration of its term under contract o Agent s renunciation of agency or o Revocation of agency by principal