BILL ANALYSIS Ó SB 1171 Page 1 SENATE THIRD READING SB 1171 (Hueso) As Amended June 24, 2014 Majority vote SENATE VOTE :29-1 JUDICIARY 9-0 ----------------------------------------------------------------- |Ayes:|Wieckowski, Alejo, Chau, | | | | |Dickinson, Garcia, | | | | |Gorell, Maienschein, | | | | |Muratsuchi, Stone | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- 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 Civil Code Section 798.3, or recreational vehicles as defined in Civil Code Section 799.24. 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 relating to an agent's duties. 2)Defines "real property," for purposes of the above only, to SB 1171 Page 2 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. 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. 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. FISCAL EFFECT : None 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 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 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. It is important to note that the Civil Code section that this bill would amend defines "seller" and "buyer" to include a "lessor" and SB 1171 Page 3 "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. 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.) 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 disclose the 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 "[Civil Code] 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.) However, that Civil Code Section 2079 et seq. does not apply to commercial property transactions does not mean that agents selling commercial real property do not have a legal and professional duty to disclose dual agency relationship to buyers and sellers. 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 acted "for more than one party in a transaction without the knowledge or consent of all parties thereto." However, unlike Section Civil Code Section 2079 et seq., B&P Section 10176(d) does not impose an affirmative 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 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. SB 1171 Page 4 Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334 FN: 0004072