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
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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.)
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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
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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
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(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
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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
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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
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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)
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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
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Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334