BILL ANALYSIS Ó SB 1171 Page 1 Date of Hearing: June 17, 2014 ASSEMBLY COMMITTEE ON JUDICIARY Bob Wieckowski, Chair SB 1171 (Hueso) - As Amended: June 10, 2014 As Proposed to be Amended SENATE VOTE : 29-1 SUBJECT : Real Property Transactions: Dual Agency KEY ISSUE : SHOULD THE EXISTING REQUIREMENT THAT A REAL ESTATE AGENT DISCLOSE TO THE SELLER AND BUYER IN A REAL ESTATE TRANSACTION WHETHER THE AGENT IS ACTING AS THE BUYER'S AGENT EXCLUSIVELY, AS THE SELLER'S AGENT EXCLUSIVELY, OR AS A DUAL AGENT REPRESENTING BOTH THE BUYER AND SELLER ALSO BE MADE TO EXPRESSLY APPLY TO TRANSACTIONS INVOLVING COMMERCIAL REAL PROPERTY? SYNOPSIS Existing law requires a real estate agent to provide the seller and buyer in a real estate transaction with a statutorily prescribed disclosure as to whether the agent is acting as the buyer's agent exclusively, as the seller's agent exclusively, or as a dual agent representing both the buyer and seller. The required disclosure form must also generally explain the duties of different agency relationships and must contain relevant provisions of the Civil Code relating to these relationships on the back of the form. While there may be certain circumstances in which it is appropriate for the same agent to represent both buyer and seller, dual agency creates a potential conflict of interest, about which, both buyer and seller should be cognizant. Statutory language, legislative history, and case law all seem to reinforce the view that the existing statutory disclosure requirement applies only to residential property transactions, not commercial property transactions. This bill would extend the existing statutory disclosure requirements to transactions involving "commercial real property," as defined. The bill is premised on the assumption that buyers and sellers of commercial property and commercial property interests should, like those involved in a residential property transaction, be aware of the potential conflicts of interest created by dual agency. The author rejects the assumptions of the bill's SB 1171 Page 2 opponents who maintain that parties to a commercial transaction are generally more "sophisticated" than typical home buyers and negotiate at arm's length, and therefore do not need the same protections. The author will take amendments in this Committee to clarify the definition of "commercial real property." The analysis and bill summary reflect that amendment. The California Association of Realtors opposes this bill as unnecessary, claiming that parties to a commercial transaction are generally more sophisticated and, at any rate, are already required to disclose dual agency - even if they are not required to do it through a statutorily prescribed form. The bill is supported by several small business and retail groups who often buy commercial property or enter into long-term leases for commercial space. SUMMARY : Extends disclosure requirements that currently only apply to residential property transactions to commercial property transactions. Specifically, this bill : 1)Redefines "real property," for purposes of a statute that requires a real estate agent to make certain disclosures about the nature of the agent's representation, to include commercial real property. 2)Defines "commercial real property" to mean all real property in this state except single-family residential real property, dwelling units made subject to Chapter 2 (commencing with Section 1940) of Title 5 of Part 4 of Division 3 of the Civil Code, mobilehomes as defined in Section 798.3 of the Civil Code, or recreational vehicles as defined in Section 799.24 of the Civil Code. EXISTING LAW : 1)Requires listing agents and selling agents to provide the seller and buyer in a real property transaction with a copy of a prescribed disclosure form and to obtain a signed acknowledgement of receipt from that seller or buyer, except as specified. Specifies the information that must appear on the front of the form and requires that the back of the form contain specified provisions of the Civil Code that set forth the duties of the real estate agent, including, most notably, those relating to dual agency. (Civil Code Sections 2079.14-2079.17.) SB 1171 Page 3 2)Defines "real property," for purposes of the above only, to include real 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 mobile homes, when offered for sale or sold through a real estate agent, as specified. (Civil Code Section 2079.13 (j).) 3)Requires, subject to certain exceptions, the transferor of any real property that is improved with or consisting of not less than one or more than four dwelling units to deliver to the prospective transferee a prescribed "Real Estate Transfer Disclosure Statement" that sets forth general safety, structural, and material conditions of the property. (Civil Code Sections 1102 and 1102.6.) 4)Provides that the Real Estate Commissioner may, upon his or her own motion, and shall, upon the verified complaint in writing of any person, investigate the actions of any person engaged in the business or acting in the capacity of a real estate licensee within this state, and he or she may temporarily suspend or permanently revoke a real estate license at any time where, among other things, the licensee acts for more than one party in a transaction without the knowledge or consent of all parties thereto. (Business & Professions Code Section 10176(d).) FISCAL EFFECT : As currently in print this bill is keyed non-fiscal. COMMENTS : Existing law requires a real estate agent to provide the seller and buyer with a statutorily prescribed disclosure form that tells both buyer and seller whether the agent is acting as the buyer's agent exclusively, as the seller's agent exclusively, or as a dual agent representing both the buyer and seller. The required disclosure form must also generally explain the duties of different agent relationships, and it must contain relevant provisions of the Civil Code relating to these relationships on the back of the form. The rationale for this provision is straightforward: while there may be certain circumstances in which it is appropriate for the same agent to represent both buyer and seller, dual agency creates a potential conflict of interest, as the agent attempts to serve the best interest of both buyer and seller simultaneously. This bill would extend the existing statutory disclosure requirements that now apply in transactions involving the sale of a residential SB 1171 Page 4 property with four or fewer dwelling units, to transactions involving "commercial real property," as defined. The bill is premised on the assumption that buyers and sellers of commercial property should also be aware of potential conflicts of interest inherent in dual agency. The author rejects the assumptions of some of the opponents - and possibly the Legislature that enacted the original legislation - that parties to a commercial transaction are somehow more "sophisticated" than the average home buyer and negotiate from more or less equal bargaining positions. But not all parties to a commercial property transaction, the author maintains, are equally sophisticated or equally situated. At any rate, parties to a commercial property transaction should know if the agent is representing both parties to the transaction. It is important to note that the Civil Code section that this bill would amend defines "seller" and "buyer" to include a "lessor" and "lessee," respectively, and it defines a "sale" to include a leasehold exceeding one year's duration. In other words, this bill would apply to real estate agents that arrange long-term commercial leases as well as agents that arrange commercial property sales. Indeed, the supporters of this bill are primarily associations representing small businesses, such as single-store grocers, who are more likely to lease commercial property than they are to purchase it. As proposed to be amended, however, the bill will specify that the disclosure requirement, both under this bill and existing law, does not apply to residential leases (though it will apply, as in existing law, to the sale of residential property.) Existing Disclosure Requirements in Commercial Property Transactions : Statutory language, legislative history, and case law all seem to reinforce the view that the existing provisions in the Civil Code requiring real estate agents to disclosure the exact nature of the agency relationship to buyers and sellers applies only to residential property transactions, and not commercial property transactions. For example, in Smith v. Rickard (1988) 205 Cal. App. 3d 1134, the court held that "section 2079 et seq.is one of those statutory schemes where the Legislature distinguishes between residential and commercial properties in order to protect unsophisticated buyers and owners of residential properties from those with greater knowledge and bargaining power." [Richman v. Hartley (2014) 224 Cal. App. 4th 1182 (quoting, explaining, and affirming Smith v Rickard); see also Easton v. Strassburger (1984) 152 Cal. App. 3d 90 SB 1171 Page 5 (observing that unlike a "residential home buyer . . . a purchaser of commercial real estate is likely to be more experienced and sophisticated in his [or her] dealings in real estate.")] However, just because Civil Code Section 2079 et seq. does not apply to commercial property transactions, it does not mean that agents selling commercial real property are not required, as part of a general duty and professional standard of care, to disclose dual agency relationship to buyers and sellers. For example, Business & Professions (B&P) Code Section 10176(d) presumes this duty, even if it does not create it. Specifically, that section empowers the Commissioner of the Department of Real Estate (DRE) to investigate and, if necessary, suspend or revoke a real estate license if the licensee has, among other things, acted "for more than one party in a transaction without the knowledge or consent of all parties thereto." However, unlike Section 2079 et seq., B&P Section 10176(d) is reactive; that is, it does not impose an affirmative statutory duty on the real estate agent. Rather, the agent is presumed to have a preexisting duty; B&P Section 10176(d) only requires the DRE, upon its own motion or upon the filing of a complaint against the licensee, to take action. If a relatively unsophisticated buyer of commercial real property did not already know about the disclosure requirement, he or she would have no reason to file a complaint with the DRE. As noted below, the California Association of Realtors (CAR) cites B&P Section 10176(d) to argue that this bill is unnecessary because agents selling commercial property are already required to make such disclosures. While this appears to be the case, existing statutory law is relatively silent on just how this disclosure is to be presented to the buyer and seller. For the sake of clarity and uniformity, this bill would require a real estate agent involved in a commercial property transaction to provide the same statement (as spelled out in Section 2079.16) that he or she would provide in a residential property transaction. In short, CAR's opposition appears to be based not so much on whether the agent in a commercial real estate transaction must make a disclosure, but whether or not that agent must make a written disclosure that includes the language set forth in the statute. CAR contends not only that the statutory form requirement is unnecessary, but that the form prescribed by Section 2079.16 is "the wrong form . . . and is not appropriately worded to address SB 1171 Page 6 commercial leasing or even commercial sales." However, there is no language within Section 2079.16 that restricts its application to residential properties. To be sure, the Article within which Section 2079.16 appears is titled "Duty to Prospective Purchaser of Residential Property," but this bill would delete the word "Residential" from that title. The word "residential" does not appear anywhere in the prescribed language. The signature line on the form refers to "sellers" and "buyers," and therefore might appear to exclude a lease agreement; but as noted above, the legislation defines "seller" to include a "lessor" and the buyer is defined to include a "lessee." Proposed Amendment Seeks to Address Apartment Owner Concerns : Although the California Apartment Association (CAA) does not formally oppose this bill, it did raise concerns to both the author and the Committee about potential unintended consequences for apartment owners. Because existing law, for purposes of disclosure duties, defines a "seller" to include a "lessor" and a "sale" to include a leasehold exceeding one year's duration (Civil Code Section 2079.13), CAA feared that the definition of "commercial" in an earlier version of this bill might unintentionally require disclosures in all apartment units within an apartment building, since a lease conveys an interest in real property. (CAR raises a similar point in its letter opposition.) Requiring disclosure in residential leases was not, however, the author's intent. However it is not at all clear that this bill, even without the proposed amendment, would have applied to apartment rentals. To begin with, the disclosure requirement extended by this bill only applies to a lease in excess of one year's duration that is offered by an agent, which is not typical of apartment leases. Moreover, the disclosure requirement required by existing law (and this bill) only applies to a licensed "agent" involved in the selling or long-term leasing of real property that may contain one or more residential buildings; neither existing law nor this bill impose any duty on landlords renting units within a residential building upon that property. The author has indicated to the Committee that he only intends to extend the requirement to the sale and long-term leasing of commercial properties, not to rental units within an apartment building. As proposed to amended, therefore, the bill will define "commercial real property" to exclude the renting of residential property units by expressly exempting dwelling units SB 1171 Page 7 subject to the landlord and tenant provisions in the Civil Code. (See proposed author amendment below.) It is not entirely clear if exempting the leasing of apartment units will entirely address CAA's concerns, if CAA prefers - as it appears it might - to exempt transactions involving the sale of entire apartment buildings as well. Such an exemption, it seems, is not consistent with the author's intent. If the purpose of this bill is to extend the disclosure requirement to commercial properties, and existing law already requires disclosure for the sale of a building with four or fewer residential units, it is not clear why the sale of an apartment building - alone among all forms of real property - should not also be subject to the disclosure. Whether an apartment building is more like a four-unit residential building, or more like a commercial property, does not matter, for both those types of property will be subject to the disclosure requirement under this bill. It is not clear why the sale of an apartment building should be treated any differently. ARGUMENTS IN SUPPORT : According to the author the dual agency protections outlined in existing law only cover residential real estate transactions, even though the logic justifying those protections should apply with equal force to commercial real estate transactions. Presumably, the exclusion of commercial property transactions from existing law was based on the assumption that commercial buyers and sellers are more "sophisticated" than the average home buyer and will have the knowledge and wherewithal to require such disclosures contractually. The typical buyer of a family home, on the other hand, was presumed to have less experience in business matters and needed more protection. The author and supporters of this bill, however, reject those assumptions. The author writes: "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 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 SB 1171 Page 8 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." The California Grocers Association (CGA) contends that under existing law "a real estate broker is permitted to represent both the landlord and the tenant in a leasing transaction, without providing written disclosure to both parties." CGA contends that this is not a problem for its larger members, since both sides in those transactions generally have representation. However, independent, single-store operators "must depend upon their leasing agent to act in their best interest." CGA believes that "SB 1171 simply aligns the [disclosure] rules already in statute with those already prevalent in residential real estate transactions." ARGUMENTS IN OPPOSITION : The California Association of Realtors (CAR) opposes this bill for three reasons. First, CAR claims that this bill is not needed because B&P Code Section 10176(d) already prohibits undisclosed dual agency. Second, "the agency disclosure form that is required under this bill is one tailored to the re-sale of 1-4 properties [i.e. residential properties with four or fewer units], and is not appropriately worded to address commercial leasing or even commercial sales." Third, CAR contends that the definition of "commercial" in the bill is so broad that it will "require every apartment lease and every residential hotel lease to contain the listing agents' disclosure form for a single family home." [NOTE: As proposed to be amended, the bill appears to address CAR's third objection by amending the definition of "commercial real property" to exclude apartment leases, or any other lease for a residential unit. Moreover, even without such a change, this bill would not change lease requirements; rather, it only imposes the duty of disclosure on licensed real estate agents, not on landlords or hotel owners who offer apartments for lease.] PROPOSED AUTHOR AMENDMENTS : In order to clarify the meaning of "commercial real property," the author will take the following amendments in this Committee: - On page 3 line 19 delete "specified in subdivision (a) SB 1171 Page 9 or (b) of section 1101.3" - On page 2 after line 35 insert: (d) "Commercial real property" as used in this section, means all real property in this state except single-family residential real property, dwelling units made subject to Chapter 2 (commencing with Section 1940) of Title 5 of Part 4 of Division 3 of the Civil Code, mobilehomes as defined in Section 798.3 of the Civil Code, or recreational vehicles as defined in Section 799.24 of the Civil Code. - On page 2 line 36 change (d) to (e), and change remaining subdivision letters accordingly. REGISTERED SUPPORT / OPPOSITION : Support Anametrix, Inc. Atessa Benefits, Inc. BIS2 Breeze IT, Inc. Browning Hocker California Asian Pacific Chamber of Commerce California Grocers Association California Hispanic Chambers of Commerce California Retailers Association Coast Appraisal Services E3 Advisors Hispanic Chamber of Commerce 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 SB 1171 Page 10 Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334