BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
SB 1171 (Hueso)
As Introduced
Hearing Date: May 6, 2014
Fiscal: No
Urgency: No
TMW
SUBJECT
Real Property Transactions: Agents: Obligations
DESCRIPTION
Existing law requires residential real estate listing and
selling agents to provide the seller and buyer with a real
estate agency relationship disclosure form, and requires the
listing or selling agent to disclose to the buyer and seller
whether he or she is acting as the buyer's agent exclusively,
the seller's agent exclusively, or as a dual agent representing
both the buyer and seller. This bill would expand those
disclosure requirements to include commercial real estate
listing and selling agents.
BACKGROUND
Prior to 1984, existing law required a real estate broker to
disclose to a buyer material defects known to the broker but
unknown to and unobservable by the buyer. In 1984, case law
provided that the broker also owed a duty to disclose defects
which the broker should have discovered through reasonable
diligence. In Easton v. Strassburger (1984) 152 Cal.App.3d 90,
the court held that real estate licensees owed certain duties of
care to the property buyers, including while representing the
sellers in a residential home transaction. That court refrained
from extending these duties to commercial property transactions,
stating in dictum: "[u]nlike the residential home buyer who is
often unrepresented by a broker, or is effectively unrepresented
because of the problems of dual agency . . . a purchaser of
commercial real estate is likely to be more experienced and
sophisticated in his dealings in real estate and is usually
(more)
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represented by an agent who represents only the buyer's
interests . . . ." (Id. at p. 102, fn. 8.)
After the Easton decision, there was extensive discussion in the
real estate industry on how those duties were to be interpreted.
SB 453 (Robbins, Ch. 223, Stats. 1985) clarified the duties of
real estate brokers and buyers in real property transactions.
However, the law was still unclear as to whether real estate
brokers had disclosure duties to buyers. In Smith v. Rickard
(1988) 205 Cal.App.3d 1354, 1360, the court, after examining
statutory construction and the Easton case dictum, held that
real property brokers had a duty to inspect the property and to
disclose to the plaintiff any material defects affecting the
value or desirability of the property.
In 1995, the Easton decision was further clarified and codified
in SB 467 (Leonard, Ch. 428, Stats. 1995) to require real estate
listing and selling agents of residential property to provide
specified disclosures to buyers and sellers. Those disclosures
require the real estate listing and selling agents to disclose
whether the agent represents the buyer, the seller, or both the
buyer and seller (known as dual agency). This bill would extend
the existing real estate disclosure requirements to commercial
property transactions.
CHANGES TO EXISTING LAW
Existing law requires specified disclosures by listing and
selling agents to be provided to a buyer and seller of
residential real property and defines the duties owed by the
agents to the buyer and seller. (Civ. Code Sec. 2079.12 et
seq.)
Existing law requires those listing and selling agents to
provide the seller and buyer with a copy of a specified
disclosure form and to obtain a signed acknowledgment of receipt
from that seller or buyer as follows:
the listing agent, if any, shall provide the disclosure form
to the seller prior to entering into the listing agreement;
the selling agent shall provide the disclosure form to the
seller as soon as practicable prior to presenting the seller
with an offer to purchase, unless the selling agent previously
provided the seller with a copy of the disclosure form;
where the selling agent does not deal on a face-to-face basis
with the seller, the disclosure form prepared by the selling
agent may be furnished to the seller by the listing agent, or
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the selling agent may deliver the disclosure form by certified
mail addressed to the seller at his or her last known address,
in which case no signed acknowledgment of receipt is required;
and
the selling agent shall provide the disclosure form to the
buyer as soon as practicable prior to execution of the buyer's
offer to purchase, except that if the offer to purchase is not
prepared by the selling agent, the selling agent shall present
the disclosure form to the buyer not later than the next
business day after the selling agent receives the offer to
purchase from the buyer. (Civ. Code Sec. 2079.14.)
Existing law provides that in any circumstance in which the
seller or buyer refuses to sign an acknowledgment of receipt of
the disclosure form, the agent, or an associate licensee acting
for an agent, shall set forth, sign, and date a written
declaration of the facts of the refusal. (Civ. Code Sec.
2079.15.)
Existing law provides a specified form detailing the fiduciary
duties of care owed by the listing or selling agent and the
agent's conflict of interest disclosures that the agent is
required to give to the seller or buyer. (Civ. Code Sec.
2079.16.)
Existing law requires the listing or selling agent to disclose
to the buyer and seller whether the selling agent is acting in
the real property transaction exclusively as the buyer's agent,
exclusively as the seller's agent, or as a dual agent
representing both the buyer and the seller. This relationship
is required to be confirmed, as specified, in the contract to
purchase and sell real property or in a separate writing
executed or acknowledged by the seller, the buyer, and the
selling agent prior to or coincident with execution of that
contract by the buyer and the seller, respectively. (Civ. Code
Sec. 2079.17.)
Existing law prohibits a selling agent in a real property
transaction from acting as an agent for the buyer only, when the
selling agent is also acting as the listing agent in the
transaction. (Civ. Code Sec. 2079.18.)
Existing law provides that the payment of compensation or the
obligation to pay compensation to an agent by the seller or
buyer is not necessarily determinative of a particular agency
relationship between an agent and the seller or buyer. A
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listing agent and a selling agent may agree to share any
compensation or commission paid, or any right to any
compensation or commission for which an obligation arises as the
result of a real estate transaction, and the terms of any such
agreement shall not necessarily be determinative of a particular
relationship. (Civ. Code Sec. 2079.19.)
Existing law prohibits a dual agent from disclosing to the buyer
that the seller is willing to sell the property at a price less
than the listing price, without the express written consent of
the seller. Existing law also prohibits the dual agent from
disclosing to the seller that the buyer is willing to pay a
price greater than the offering price, without the express
written consent of the buyer. (Civ. Code Sec. 2079.21.)
Existing law provides that a listing agent is not prohibited
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. (Civ. Code Sec. 2079.22.)
Existing law defines real estate listing and selling agent,
buyer, seller, and specifies that "real property" means any
estate in property which constitutes or is improved with one to
four dwelling units, any leasehold in this type of property
exceeding one year's duration, and mobilehomes, when offered for
sale or sole through an agent. (Civ. Code Sec. 2079.13.)
This bill would add "commercial property" to that definition of
"real property," thus applying all of the above disclosure
requirements to commercial property sale and leasehold
transactions.
COMMENT
1. Stated need for the bill
The author writes:
As written, the protections outlined in Civil Code Sections
2079.14 to 2079.24 cover only residential real estate
transactions and do not extend to commercial real estate
transactions.
There is a common misconception that parties involved in
commercial real estate transactions are 1) sophisticated; 2)
of equal bargaining power; or 3) equally knowledgeable and
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experienced in real estate as the other party or the brokers
involved. This is not always the case. For example, a small
business owner whose only real estate transaction over the
next five years will be his or her office lease is not going
to be as sophisticated as a landlord whose primary business is
real estate and who is negotiating multiple leases a year with
the help of a team of sophisticated professionals. That
business owner is at a severe disadvantage at the bargaining
table and should be educated on the duties or limited duties
the licensed real estate professionals involved in the
transaction owe to all parties.
The objective of SB 1171 is clear and simple: to educate the
parties to all real estate transactions as to the duties and
responsibility of a listing agent, selling agent, landlord
agent, tenant agent or dual agent.
2. Providing transparency of conflicts of interest in commercial
real estate transactions
Existing law requires residential real estate listing and
selling agents to provide to the seller and buyer a real estate
agency relationship disclosure form, and requires the listing or
selling agent to disclose to the buyer and seller whether he or
she is acting as the buyer's agent exclusively, the seller's
agent exclusively, or as a dual agent representing both the
buyer and seller. (Civ. Code Sec. 2079 et seq.) This bill
would expand those disclosure requirements to apply to
commercial property sale and leasehold transactions.
The author argues that this bill would increase real estate
transaction transparency by making the buyer and seller of
commercial property aware of potential conflicts of interest of
the real estate listing or selling agent. The National
Federation of Independent Business, in support, states that
"[s]mall business owners, the majority of which rent or lease
property in California, believe in making real estate
transactions and other information more open and transparent,
but in many cases[,] this 'sunlight' is simply not taking place.
. . . Several large commercial brokerage firms have already
adopted dual agency disclosure policies, but unfortunately, the
majority have not. Therefore, a simple change in statute, as
directed by SB 1171, is needed to ensure tenants are aware of
the potential conflict of interest. This is simply [a] fair and
reasonable policy that will increase protections for buyers and
renters in real estate transactions, and will bring conformity
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into existing law."
Case law demonstrates a problem with statutory disclosure
requirements in property transactions that contain both
residential and commercial property (mixed-use property). In
Richman v. Hartley (2014) 224 Cal.App.4th 1182, the plaintiff
buyer declined to close escrow on the sale of a property that
was a mixed-use single parcel improved with both a commercial
building and a residential duplex. The buyer claimed that the
defendant seller breached the contract because he failed to make
all applicable disclosures required by law, which was a term of
the contract. (Id. at 1186.) The defendant seller did not
provide the statutory transfer disclosure statement (TDS) to the
buyer claiming that the disclosures required under the Transfer
Dislosure Law (TDL) only applied to residential property, not
mixed-use property. (Id.) The court held that the Transfer
Disclosure Law does not enumerate mixed-use property in the list
of property excluded from the TDL, nor does it refer only to
"residential real property." (Id. at pp. 1188-1189.) Rather,
the TDL applies to any transfer of real property improved with
or consisting of not less than one nor more than four dwelling
units. (Id. at 1189.) Accordingly, the court held that even
though the property was mixed-use and included a commercial
property along with a duplex, the seller was not relieved of the
duty to provide the TDS. (Id.)
Although this bill does not alter seller disclosure requirements
as discussed in Richman, but instead would expand existing real
estate listing and selling agent disclosures to apply to
commercial real property transactions, the Richman case
demonstrates how a real estate listing or selling agent could
attempt to avoid conflict of interest disclosures in mixed use
property transactions. Further, the TDL was enacted to provide
inexperienced home buyers, who at that time, often were either
not represented by a real estate broker or effectively
unrepresented because of the problems of dual agency, with
information about the residential property they are interested
in purchasing. (Smith v. Rickard (1988) 205 Cal.App.3d 1354,
1359; citing Easton v. Strassburger (1984) 152 Cal.App.3d 90,
102, fn. 8.) While historically, the TDL did not require
sellers of commercial real property to provide those disclosures
because commercial buyers were assumed to be knowledgeable about
such transactions, the author notes that assumption is not
necessarily correct. From a policy standpoint, both residential
and commercial real property sellers and buyers, who may be
operating small businesses and otherwise inexperienced in
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commercial property transactions, arguably, would benefit from
conflict of interest disclosures from the real estate listing
and selling agents. This bill, by adding commercial real estate
listing and selling agents to the existing residential conflict
of interest disclosure requirements, would provide better
transparency of those listing and selling agents' financial
interests in those transactions.
Support : Anametrix, Inc.; Atessa Benefits, Inc.; BIS2; Breeze
IT, Inc.; Browning Hocker; California Asian Pacific Chamber of
Commerce; California Grocers Association; California Retailers
Association; Coast Appraisal Services; E3 Advisors; Hughes
Marino; Huntington Capital; Law Offices of Timothy E. Fields;
McAteer & McAteer; MPC; National Federation of Independent
Business; Trovagene; Walk San Diego/Move San Diego; Yunker &
Schneider
Opposition : California Association of Realtors
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation :
SB 467 (Leonard, Ch. 428, Stats. 1995) See Background.
SB 453 (Robbins, Ch. 223, Stats. 1985) See Background.
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