Salespersons Need to Avoid Tortious Interference with Contracts

In the recent case of Jenni Rivera Enterprises v. Univision Communications, the California Court of Appeal clarified the elements of the tort for tortious interference with contractual relations.

Because listing agreements, buyer representation agreements, and purchase agreements are contracts that can be part of any standard sales transaction, prudent salespersons need to be aware of their obligation to avoid interfering with such contracts.

The appeal in Jennie Rivera Enterprises resulted from a dispute concerning a television production based on the life of the Mexican-American celebrity Jenni Rivera, who died in a plane crash in December 2012. The entity that controlled most of Rivera’s assets, Jenni Rivera Enterprises, LLC (JRE), entered into a nondisclosure agreement ("NDA") with Rivera’s former manager, Pete Salgado ("Salgado"), that restricted his disclosure and use of certain personal information about Rivera and her family.

Alleging Salgado breached that agreement by disclosing information to the producers and the broadcaster of a television series based on Rivera’s life, JRE sued Salgado and the program’s producers for breach of contract, interference with contract, and inducing breach of contract. JRE also sued the program’s broadcaster for interference with contract and inducing breach of contract.

The Appellate Court concluded that JRE satisfied its burden to demonstrate a prima facie case, with reasonable inferences from admissible evidence, that the producers had knowledge of the NDA before taking actions substantially certain to induce Salgado to breach the agreement.

The elements of a cause of action for intentional interference with contractual relations are:

(1) the existence of a valid contract between the plaintiff and a third party;

(2) the defendant’s knowledge of that contract;

(3) the defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship;

(4) actual breach or disruption of the contractual relationship; and

(5) resulting damage.

The defendant’s conduct need not be wrongful apart from the interference with the contract.  Furthermore, a plaintiff need not establish that the primary purpose of the defendant’s actions was to disrupt the contract. The tort is shown even where the actor does not act for the purpose of interfering with the contract or desire it, but knows that the interference is certain or substantially certain to occur as a result of his or her action.

The tort of inducing breach of contract requires proof of a breach, whereas the tort of interference with contractual relations requires only proof of interference.

1.         Valid Contract

JRE alleged the NDA between JRE and Salgado precluded Salgado from disclosing or using certain confidential information about Rivera. The trial court found JRE made a prima facie showing the agreement was valid and enforceable.

2.         Knowledge of the Nondisclosure Agreement

To recover damages for inducing a breach of contract, the plaintiff need not establish that the defendant had full knowledge of the contract’s terms, but the defendant must have knowledge of the contract with which the defendant is interfering, and of the fact that the defendant is interfering with the performance of the contract. 

Knowledge of a contractual relationship is sufficient to show knowledge for the tort of inducing breach of contract.

JRE provided evidence the Producers knew of the NDA when JRE sent a cease and desist letter attaching the agreement. In addition, JRE submitted evidence the Producers knew of the NDA and its likely authenticity before or very soon after production of the Series.

The NDA imposed a continuing obligation on Salgado not to disclose or use confidential information about Rivera without JRE’s consent. The Appellate Court ruled that JRE could state a cause of action based on Salgado’s continuing obligations under the agreement and his breaches of discrete obligations at different times.

4.         Actual Breach or Disruption of the Contract

The trial court recognized the Producers appeared to concede that, if they knew of the NDA when they signed the Co-producers Agreement, they could potentially face liability for the cause of action of intentional interference of the NDA.

The trial court found that Salgado undoubtedly made additional disclosures of the same information to others during the production of the Series, and Salgado undoubtedly “used” protected information without JRE’s authorization.

Given the breadth of the NDA’s restrictions on Salgado’s use and disclosure of protected information, it was a reasonable inference of the trial court from the admissible evidence that Salgado breached the agreement after the Producers had knowledge of it.

5.         Resulting Damage - Causation

Determining whether a defendant’s misconduct was the cause in fact of a plaintiff’s injury involves essentially the same inquiry in both contract and tort cases.

The test for causation in a breach of contract action is whether the breach was a substantial factor in causing the damages.

Similarly, in tort cases, California has definitively adopted the substantial factor test for cause-in-fact determinations.  Under that standard, a cause in fact is something that is a substantial factor in bringing about the injury.

The term ‘substantial factor’ has not been judicially defined with specificity, and indeed it has been observed that it is neither possible nor desirable to reduce it to any lower terms.  A force which plays only an ‘infinitesimal’ or ‘theoretical’ part in bringing about injury, damage, or loss is not a substantial factor. Undue emphasis should not be placed on the term ‘substantial. Further, a substantial factor need not be the only factor contributing to the plaintiff’s alleged harm.  

Causation is ordinarily a question of fact that may be decided as a question of law where the undisputed facts permit only one reasonable conclusion.

The evidence in the record suggested the Producers agreed to many of the “enticements” to Salgado before they knew about the NDA. But once they knew of the agreement, the Producers’ continued payments to Salgado were a substantial factor in bringing about Salgado’s continued breaches.

6.         Damages

JRE alleged the Producers’ interference with the NDA negatively affected the value of the information protected by the agreement and the ability of JRE to use the information for its purposes. JRE further alleged the Producers’ interference limited JRE’s economic opportunities to publish a book or produce or sell a television show or series about Rivera containing the information.   This was sufficient to state a cause of action.

LESSONS:

1.         Interfering with the contractual relations between other parties (e.g., a listing agreement between seller and a salesperson) can expose the offending salesperson to a lawsuit for intentional interference with contractual relations.

2.         Salespersons should always be alert to the contractual relations between other parties, and should be very careful before interacting with one of the parties in a manner that may cause that party to breach a contract.

Importance of Being a BFP

The critical importance of being a bona fide purchaser (BFP) was demonstrated in the recent case of Vasquez v. LBS Financial Credit Union wherein the Second District Court of Appeal (with jurisdiction of Los Angeles County) affirmed a judgment entered after a court trial for Carlos and Libby Vasquez and mortgagee Brighten Lending (collectively, plaintiffs) in their action for quiet title and declaratory and injunctive relief regarding property the Vasquezes purchased in 2015 from Guillermo Guerrero and his wife.

Seven years before the purchase, Defendant LBS Financial Credit Union (LBS) obtained two money judgments against Guerrero and recorded abstracts of judgment (LBS abstracts) against Wilbert G. Guerrero, a name which does not appear in the chain of title for the property.

On appeal, LBS contended the trial court erred in finding the Vasquezes were bona fide purchasers, asserting the Vasquezes had constructive notice of the LBS abstracts based on Guerrero’s use of different variations of his name on multiple title and sale documents, including one handwritten reference in the 10-page purchase agreement to the name Wilbert Guillermo Guerrero. The Court of Appeal disagreed.

In 2015, Carlos and Libby Vasquez purchased real property located on Domo Street in Whittier (Domo property) from Guillermo Guerrero and his wife, Laura Guerrero. The Vasquezes made a down payment and borrowed the remainder from Brighten Lending. Brighten Lending recorded a deed of trust against the Domo property, securing a promissory note.

In 2016, attorneys representing LBS contacted the Vasquezes, Brighten Lending, and their title insurance company, Old Republic Title Company, and advised them LBS held two judgment liens against the Domo property based on money judgments it obtained in 2008 against Guerrero, for which it recorded abstracts of judgment against “Wilbert G. Guerrero” with the Los Angeles County Registrar-Recorder. LBS demanded plaintiffs pay the full amount of Guerrero’s judgment debt, $72,166.25, to avoid foreclosure proceedings.

In 2017, plaintiffs filed a complaint for quiet title and declaratory and injunctive relief, seeking a determination the Vasquezes owned the Domo property free and clear of LBS’s judgment liens.

Old Republic Title had provided a preliminary title report that stated the Guerreros’ interest in the property was vested in “Guillermo Wilbert Guerrero and Laura Olivia Guerrero, husband and wife as joint tenants.” The preliminary title report did not identify the LBS abstracts.

Plaintiffs testified they had no knowledge of LBS’s liens prior to receiving the 2016 demand letter.

Plaintiffs' expert, Kenneth Dzien, testified that in compliance with the Government Code, the Registrar-Recorder indexes property records based on the names of the grantor and grantee. If a prospective purchaser wants to search for encumbrances on a property, he or she must visit the Registrar-Recorder’s office in Norwalk and run a search of the grantor and grantee names in the computerized index maintained at the office. To perform an index search, Dzien would first look in the grantee index to confirm the seller of the property had obtained title to the property. He then would look in the grantor index to see what grants have been made and what liens have been placed on the property.

Dzien followed this procedure for the Domo property.  Although Dzien located dozens of indexed records under Guerrero’s names, he did not locate the LBS abstracts. Dzien testified the LBS abstracts did not attach as a lien onto the property through the grantor/grantee system because the name Wilbert G. Guerrero was not reflected in the monuments of title.

Therefore, the recorded LBS abstracts could not be located by a proper search of the grantor/grantee index. Dzien opined because LBS recorded its abstracts of judgment against Wilbert G. Guerrero, which is not a variation of a name in the chain of title, the Vasquezes did not have constructive notice of the LBS abstracts.

Dzien acknowledged the statement of information Guerrero provided to the escrow company, International City, included Guerrero’s driver’s license and Social Security numbers. However, the Registrar-Recorder’s grantor/grantee index cannot be searched by a driver’s license or Social Security number. Rather, the purpose of a statement of information is to help title insurance companies examine documents that come up during a title search for common names to eliminate names that do not relate to the people and transaction at issue.

Dzien recognized that, in preparing a preliminary title report, the title company does not use the official grantor/grantee index because they can’t wait in line at the recorder’s office. The title companies maintain a computer system called the general index, and that general index is not something that has anything to do with constructive notice. It is a proprietary system that they maintain to search names.

LBS' expert witness admitted the LBS abstracts were outside the chain of title for the Domo property. He also admitted there was no evidence that the Vasquezes had actual knowledge of the LBS abstracts.

Following the close of testimony, the trial court filed a final statement of decision finding in favor of plaintiffs. The court found plaintiffs carried their burden of proving that the abstracts of judgment recorded in 2008 by LBS were improperly indexed and not locatable by a proper search. The testimony of Dzien that said recorded abstracts of judgment were essentially ‘outside the chain of title’ of the subject property were supportive of the credible showing that the plaintiffs and each of them had no actual or constructive notice of the abstracts of judgment.

The court concluded the Vasquez plaintiffs acquired the subject property as bona fide purchasers for value without notice of the LBS abstracts of judgment.

It is "black-letter law" that a bona fide purchaser for value who acquires his or her interest in real property without knowledge or notice of another’s prior rights or interest in the property takes the property free of such unknown interests.

The elements of bona fide purchase are payment of value, in good faith, and without actual or constructive notice of another’s rights.

Conversely, it is an equally well-established principle of law that any purchaser of real property acquires the property subject to prior interests of which he or she has actual or constructive notice.

“Actual notice" is defined as express information of a fact, while constructive notice is that which is imputed by law. 

A bona fide purchaser without notice may seek a legal determination through a quiet title action that the title it obtained remains free and clear of any adverse interest in the property. The general rule places the burden of proof upon a person claiming bona fide purchaser status to present evidence that he or she acquired interest in the property without notice of the prior interest.

Constructive notice of a lien or other interest in property arises from the proper recording of that interest.

Every duly recorded conveyance of real property, or recorded judgment affecting title to or possession of real property, is constructive notice of the contents thereof to subsequent purchasers and mortgagees from the time of recordation.

The law conclusively presumes that a party acquiring property has notice of the contents of a properly recorded document affecting such property. Civil Code § 1213 provides that recorded conveyance of real property provides constructive notice to subsequent purchasers. However, a bona fide purchaser of real property has constructive notice of only those matters that could be located by a diligent title search.

California courts have consistently reasoned that the conclusive imputation of notice of recorded documents depends upon proper indexing because a subsequent purchaser should be charged only with notice of those documents which are locatable by a search of the proper indexes.

A purchaser may also have constructive notice of a fact affecting his or her property rights where the purchaser has knowledge of circumstances which, upon reasonable inquiry, would lead to that particular fact. Every person who has actual notice of circumstances sufficient to put a prudent person upon inquiry as to a particular fact has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he or she might have learned that fact.

If the purchaser neglects to prosecute such inquiry diligently he may not be awarded the standing of a bona fide purchaser.  This type of constructive notice is often described as inquiry notice.

In addition, notice of an adverse interest may be imputed to a purchaser from knowledge acquired by her or his agent acting within the course and scope of the agent’s authority. An escrow agent’s knowledge of discrepancy regarding debtor’s name on judgment lien is imputed to purchaser and is sufficient to give constructive notice of the lien. An escrow agent’s knowledge of information obtained in escrow may be imputed to purchaser under an agency theory.

The determination whether a party is a good faith purchaser ordinarily is a question of fact.

On appeal, LBS did not challenge the trial court’s finding the Vasquezes lacked actual knowledge of the liens.

Rather, LBS contended the Vasquezes had constructive notice of the LBS abstracts because they were on inquiry notice Guerrero used the name Wilbert G. Guerrero. The Court of Appeal found that substantial evidence supports the trial court’s finding to the contrary.

Although a purchaser may rely on the recorded chain of title, the purchaser may not ignore information that comes to him from outside the recorded chain of title, to the extent such information puts him on notice of information that reasonably brings into question the state of title reflected in the recorded chain of title. Though defrauded buyers will not be deemed to have constructive notice of public records, this does not insulate them from evidence of their actual knowledge of the contents of documents presented to them or from being charged with inquiry notice based on those documents. 

LBS argued the Vasquezes were on inquiry notice of Guerrero’s use of the first name Wilbert because the purchase agreement contained the handwritten name Wilbert Guillermo Guerrero. However, Guerrero signed the purchase agreement and the counteroffer as Guillermo Guerrero or Guillermo Guerrero W, and the typed name Guillermo Guerrero is listed three times on the counteroffer.

Further, some form of Guillermo Guerrero appeared repeatedly on the documents in the chain of title and those relating to the sale of the Domo property to the Vasquezes, without any other reference to Wilbert as a first name. The name Guillermo Guerrero appeared on the grant deeds recorded in 1999 and 2015, and the name Guilleromo Wilbert Guerrero was on the grant deed recorded in 2004.

The preliminary title report stated title to the Domo property is to be vested in “Guillermo Wilbert Guerrero and Laura Olivia Guerrero.” The preliminary title report also listed three tax liens against Guerrero Guillermo and an abstract of judgment recorded against “Guerrero Construction and Development, Inc. et al. and Guillermo Guerrero.”

In addition, the Vasquezes were not sophisticated in property transactions, and they relied on their realtor and the escrow to prepare the documents. Libby had no recollection of the realtor pointing out the use of the name Wilbert on the purchase agreement. The realtor likewise did not discuss variations in Guerrero’s name with Carlos.

LBS relied on a decision that held an undisputedly valid judgment lien recorded against a judgment debtor under one name imparts constructive notice of the lien to a subsequent purchaser to whom the same judgment debtor sells real property under a different name, where while acting within the course and scope of his or her agency, the purchaser’s escrow agent gains actual knowledge of both of the names used by the seller.

However, in this case, there was no evidence the Vasquezes’ realtor or escrow had any knowledge beyond what is shown on the face of the documents. There was no testimony at trial as to who prepared the purchase agreement.

The question was not whether the Vasquezes were bound by the purchase agreement, but whether information on the purchase agreement, in light of other contrary information, provided the Vasquezes constructive notice Guerrero used the first name Wilbert.

Finally, LBS contended Guerrero’s statement of information, which included his driver’s license and Social Security numbers, placed Old Republic Title, International City, and the Vasquezes on constructive notice Guerrero’s legal name was Wilbert Guillermo Guerrero because they could have performed a search of recorded documents using the numbers.

But the statement of information on its face listed Guerrero’s name as Guillermo Guerrero, with no mention of the name Wilbert other than the initial “W” at the end of Guerrero’s signature.

Further, as both experts testified, the purpose of the statement of information is to help the title company eliminate documents that do not belong to a seller with a common name, not to expand the universe of documents to be searched.

Moreover, the Registrar-Recorder’s grantor/grantee database cannot be searched by driver’s license or Social Security number. Although title companies have proprietary computer systems that can search for information by driver’s license and Social Security numbers, there is no authority for charging a purchaser with knowledge of what the proprietary search would reveal.

Further, it is a well-settled rule that a title insurance company is not the agent of its insured, and the insurer’s knowledge is not imputed to its insured.

Whatever knowledge the title company had about Cloney’s identity and the state of his title as a matter of actual or constructive notice, or which it arguably should have had as a matter of its duties as a title insurer, was essentially irrelevant to the case.

LBS contended Guerrero’s use of different names on the sales documents and the “additional names and variations of Mr. Guerrero’s name” in the chain of title placed the Vasquezes on constructive notice of the LBS abstracts.

The Court of Appeal held they did not. Contrary to LBS’s argument, the variations in Guerrero’s name were consistent with his use of the first name Guillermo (or Guilleromo) and the last name Guerrero. The names appearing in the title history are Guillermo Guerrero in 1999; Guilleromo Wilbert Guerrero in 2004; and Guillermo Guerrero in 2015. The purchase agreement, counteroffer, statement of information, additional escrow instructions, and preliminary title report all reflected the name Guillermo Guerrero or Guillermo Wilbert Guerrero, except for the single handwritten name Wilbert Guillermo Guerrero on a page of the purchase agreement.

LESSONS:

1.         The status of being a bona fide purchaser is critically important in determining if real property is subject to a creditor lien against the seller.

2.         Brokers/agents for buyers should be careful to recognize the names of the parties on the various documents, and should question any discrepancies in the names, as the buyer may be denied BFP status depending upon the details in the case.

3.         Creditors should be careful to use all names of a debtor in preparing and recording an abstract of judgment to ensure the judgment lien attaches to any real property owned by the debtor.

Is a Designated Broker/Officer Liable to Third Parties?

In the decision in Sandler v. Sanchez, the California Court of Appeal held that a designated broker/officer could not be held vicariously liable for material misrepresentations made by his employees based on an implied delegation of his statutory duty to supervise under § 10159.2.

Business and Professions Code section 10159.2  makes a licensed individual real estate broker who is the designated officer of a corporate broker “responsible for the supervision and control” of the corporate broker's employees.

Can a designated officer's failure to supervise a corporate employee, without more, subject the officer to direct personal liability to third parties for harm caused by his or her failure to supervise?

Apart from the officer's direct liability, can the designated officer be held vicariously liable under traditional agency principles for the tortious conduct of the corporate employees he or she is responsible for supervising? 

The designated officer's duty to supervise codified in section 10159.2 is owed to the corporation, not to third parties.

Accordingly, breach of that statute is grounds for administrative discipline against the designated officer by the licensing entity and perhaps an action by the corporation for indemnification, but not an action by third parties.

Moreover, whether or not a designated officer may be, under traditional agency principles, vicariously liable for the tortious conduct of the employees he or she supervises in an appropriate circumstance, those circumstances were not alleged in the Sadler case.

Accordingly, the trial court's dismissal of the action against the designated officer of a real estate brokerage corporation after the trial court sustained without leave to amend his demurrer to the complaint was affirmed.

Bernard Sandler and Linda Marie Sandler, as trustees of the Bernard Sandler and Linda Marie Sandler Revocable Intervivos Family Trust dated September 13, 1991, their adult daughter, Stacy Sandler, and Steven K. Ridgeway (collectively the Sandler parties), sued 765 South Windsor, LLC (South Windsor), Gold Coast Financial (Gold Coast), a real estate brokerage corporation, and Carlos Sanchez, Gold Coast's designated officer/broker.

According to the third amended complaint, Keith Desser, a real estate salesman, president and sole shareholder of Gold Coast and a principal of South Windsor, solicited the Sandler parties to loan $600,000 to South Windsor to finance improvements to an eight-unit apartment building for the purpose of converting the units to condominiums.

Desser represented that, once the improvements were made and the condominium conversion completed, the property would be worth in excess of $5.5 million, more than enough, even with a first deed of trust of $2.75 million held by another lender, to secure the Sandler parties' loan.

Desser, however, did not reveal $600,000 was woefully insufficient to finance the necessary repairs for the condominium conversion; the property did not have sufficient equity to provide collateral for a second trust deed securing the note; and the primary lender had refused to extend the first note, which was imminently due, resulting in foreclosure by the holder of the first trust deed and leaving the Sandler parties' note unsecured.

In addition, Desser used $300,000 of the loan proceeds, which he obtained by amending the escrow instructions, for his personal expenses. 

The complaint asserted a cause of action for breach of fiduciary duty against Sanchez. Although the complaint does not allege Sanchez played any role in the transaction, or even knew of it, the Sandler parties allege he, as Gold Coast's designated officer, owed them a duty in accordance with section 10159.2 to supervise Gold Coast's employees, including Desser.

Had Sanchez fulfilled his duty to supervise, he would have learned about Desser's material misrepresentations and either disclosed them to the Sandler parties or cancelled the loan transaction. Finally, the complaint alleges Desser was Sanchez's agent and Sanchez, as Desser's principal, is liable for Desser's tortious acts committed within the scope of that agency. 

The complaint also asserted causes of action for breach of contract and fraud against Gold Coast and South Windsor. Desser, who was not named as a defendant in the complaint, died in 2009. His estate was insolvent, as was Gold Coast and South Windsor. The Sandler parties obtained default judgments against both Gold Coast and South Windsor. Sanchez is the only party to this appeal.

Sanchez demurred to the third amended complaint, arguing he owed no duty, as a fiduciary or otherwise, to the Sandler parties. 

While a claim for breach of fiduciary duty would lie against Gold Coast and Desser, he asserted, there can be no liability against him as a matter of law absent allegations he authorized or personally participated in the wrongful conduct.

He also argued he was not Desser's principal and, therefore, could not be held vicariously liable for Desser's misconduct.

The trial court agreed and sustained Sanchez's demurrer to the third amended complaint without leave to amend. The court thereafter signed an order dismissing the action against Sanchez.

California defines a real estate broker as a person who, for a compensation or in expectation of a compensation, assists people in certain statutorily defined licensed activity, including soliciting borrowers or lenders or performing services for borrowers or lenders in connection with loans secured by real property. (§ 10131, subds.(a), (d).)

A licensed broker can be an individual or a corporation. To operate as a corporate broker, however, the corporation must designate a licensed individual broker as the entity's designated officer. (§ 10211.)

No acts for which a real estate license is required may be performed for or in the name of, a corporation when there is no officer of the corporation licensed under § 10211.

Section 10159.2, subdivision (a), makes the officer designated by a corporate broker licensee pursuant to section 10211 responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees as necessary to secure full compliance with the provisions of this division, including the supervision of salespersons licensed to the corporation in the performance of acts for which a real estate license is required.

Failure to exercise reasonable supervision as required by section 10159.2 is grounds for the Real Estate Commissioner to suspend or revoke the designated officer's real estate license. (§ 10177, subd. (h).) 

The Sandler parties and Sanchez agreed section 10159.2 imposes a duty on the designated officer to supervise the corporate broker's employees. The question in this case is to whom is that duty owed?

Absent special circumstances, officers of a corporation are not responsible to third persons for negligence amounting merely to nonfeasance, to a breach of duty owing to the corporation alone; the act must also constitute a breach of a duty owed to the third person.

Here, although section 10159.2 imposes a duty of supervision on the designated officer of the corporate broker, it does not, on its face, expressly state to whom that duty is owed.

In 1979, the Department of Real Estate sponsored legislation to add section 10159.2 to the Business and Professions Code, making the designated officer of a corporate broker statutorily responsible for supervising the corporate broker's employees.

The same legislation also amended section 10177, subdivision (h), to subject the designated officer's real estate license to discipline if that duty of supervision was breached.

Corporate employers may be held vicariously liable for the tortious acts of their agents committed within the scope of the agency or employment.

However, absent special circumstances, it is the corporation, not its owner or officer, that is the principal or employer and thus subject to vicarious liability for torts committed by its employees or agents.

LESSONS:

1.         Each cause of action in a complaint must be carefully considered to determine if it attempts to impose liability on persons who are not subject to the basis of the cause of action.

2.         Supervision of salespersons is essential because the failure to exercise reasonable supervision is grounds for the Real Estate Commissioner to suspend or revoke the designated officer's real estate license.

3.         A designated officer may be, under traditional agency principles, vicariously liable for the tortious conduct of the employees he or she supervises in an appropriate circumstance.   

What Duty Does Buyer's Broker Owe to Seller of California Vacant Land?

In the recent decision in Greif v. Sanin, the California court of appeal described it as a case of seller’s remorse.

Appellant Earl Greif (Greif) sold 10 acres of raw vacant land (Property) in Rancho Mirage to Yardley Protective Limited Partnership (Yardley). A few days after Greif signed the purchase agreement (Purchase Agreement), he concluded he had sold the Property for less than its fair market value (FMV) and attempted to back out of the sale.

The buyer Yardley sued to enforce the Purchase Agreement. Greif filed a cross-complaint, and later added as cross-defendants Yardley's real estate brokers (collectively Sanin). Greif was not represented by a broker.

After a lengthy court trial, the trial court entered judgment in favor of Yardley and against Greif.

Greif filed three separate appeals. Greif’s first appeal challenged the trial court’s dismissal of the Cross-complaint. The second appeal challenged the trial judgment in favor of Yardley, ordering specific performance of the Purchase Agreement and damages. The third appeal objected to the trial court’s post-judgment order awarding Yardley attorney fees.

The three appeals were consolidated, and rejected, and the judgment in favor of Yardley was affirmed.

Greif filed a cross-complaint against cross-defendants Yardley and Sanin that asserted the cross-claims for: (1) rescission of the Purchase Agreement and damages based on mistake; (2) rescission and damages based on undue influence; (3) negligence; and (4) financial elder abuse.

Greif alleged in his cross-complaint that Greif  was born on May 3, 1925, and before and or at the time of the events alleged in the cross- complaint, Greif suffered from a variety of illnesses and disorders, including suffering a heart attack in 2004 and one or more strokes after that, and before December 2012.

Greif alleged these illnesses and disorders severely impacted his ability to walk, see, hear, and speak, and impaired his cognitive abilities, which should have been readily apparent to others.

In 2006, Greif  purchased 5.04 acres of raw vacant land for $1,850,000 (Parcel 1). In 2011, he purchased 5.04 acres of raw vacant land adjacent to Parcel 1 for the sum of $480,000 (Parcel 2). Parcel 1 and Parcel 2 are collectively referred to as the Property.

The current FMV of the Property was in excess of $4 million based on recent sales of comparable property in the vicinity of the Property. The FMV of the Property when Yardley and Greif executed the Purchase Agreement was near this amount.

The parties met at the Property and negotiated the purchase price for the Property, which ranged from $3,399,000 to $3,380,000 to $3,350,000.

Ultimately, the parties agreed on the purchase price of $3,330,000.

Later, the parties met at Greif’s home in Rancho Mirage, to execute the Purchase Agreement for the Property.

The Property Purchase Agreement stated a purchase price of $330,000.

When presenting the Purchase Agreement to Greif, the purchase price, which was conspicuously stated on the first page of the Purchase Agreement, was pointed out to Greif.

Greif was directed to initial and sign the Purchase Agreement in a cursory fashion, without reviewing and explaining to Greif the key terms of the Purchase Agreement, and without otherwise ensuring that Greif actually understood the terms, including the stated purchase price.

Greif alleged that the circumstances of the parties’ execution of the Purchase Agreement and his health and cognitive issues impaired his ability to read and understand the Purchase Agreement.

Yardley allegedly took advantage of Greif's obvious health conditions and cognitive impairment by having him execute the Purchase Agreement without affording him an adequate opportunity to review the Purchase Agreement or an opportunity to consult his advisors and legal counsel.

Shortly after Greif signed the Purchase Agreement, Greif reviewed the Purchase Agreement, and realized that the purchase price stated in the Purchase Agreement was $330,000, whereas he had understood the agreed purchase price would be $3,300,000 or $3,330,000.

Later, Greif, with the assistance of legal counsel, rescinded the Purchase Agreement by executing escrow cancellation instructions and offered to compensate Yardley by paying interest on the amount Yardley had deposited in escrow. Yardley refused to execute the proposed escrow cancellation instructions.

In the cross-claim for negligence, Greif alleged that Sanin owed Greif a duty to be honest and truthful during the Property transaction under Business & Professions Code sections 10152, and 10176, subdivisions (a)-(c), and (i).

Greif further alleged Sanin breached a duty owed to Greif by Sanin having presumed knowledge of the fair market value of the subject Property at the time of preparing and presenting the Purchase Agreement to Greif, and Sanin’s failure to raise the gross discrepancy between the true value of the Property and the purchase price stated in the Purchase Agreement.

Greif alleged Sanin’s acts constituted a breach of duty owed to Greif and dishonest dealing. As a direct and proximate result, Greif allegedly was damaged in a sum in excess of $250,000, which damages include those sustained due to Greif’s inability to develop the Property or sell it for its true FMV. Yardley allegedly was jointly and severally liable for Sanin’s acts and omissions.

 
After the bench trial on Yardley’s Complaint against Greif to enforce the Purchase Agreement, Greif contended that even though Sanin did not represent him during the sale of the Property, Sanin owed Greif a duty of fairness and good faith, which Sanin breached.

The trial court’s judgment and dismissal of the cross-complaint against Sanin were based on Greif’s failure to allege simple negligence against Sanin.

The elements of a simple negligence cause of action include a duty to use due care, breach of this duty, and the breach proximately causing injury. The trial court granted judgment on the pleadings on the ground Sanin did not owe Greif any duty alleged in the negligence cross-claim.

Real estate brokers are subject to two sets of duties: those imposed by regulatory statutes, and those arising from the general law of agency.

Greif contended that, even though Sanin represented the buyer and not Greif during the real property transaction, Sanin owed Greif a duty of fairness and good faith dealing, which included (1) informing Greif that the sales price stated in the purchase agreement was excessively low, (2) drafting the Purchase Agreement to state Greif's intended purchase price, rather than the stated purchase price of $330,000, (3) obtaining Greif’s informed consent to the 5 percent commission included in the Purchase Agreement, and (4) disclosing to Greif that he had the right to review the Purchase Agreement with an independent advisor.

Greif argued that if Sanin had taken any of these precautionary measures, Greif would have discovered the purchase price was incorrect and would not have signed the Purchase Agreement.

At the time Greif signed the Purchase Agreement in December 2012, there was no statutory duty of disclosure owed by a buyer’s broker to a seller of vacant land.

Civil Code section 2079.16, which required agency disclosure, only applied to residential real property transactions.

It was not until after the Legislature amended section 2079.16, effective on January 1, 2015, that the agency disclosure provision applied to all real property transactions, including transactions involving vacant land.

As a consequence, section 2079.16 did not apply to the sale of the Property to Yardley in 2012.

The parties and their brokers were thus only subject to the common law duties existing at the time of the sale.

In a footnote in Greif’s reply brief, Greif acknowledged that section 2079.16 did not apply, but asserted that the statutory scheme recognizes real estate brokers owe duties to buyers and sellers, and in this respect, does not differ from what caselaw has consistently held.

It is undisputed by the parties that real estate agents, regardless of whether they represent the buyer or seller, owe a duty of care to third parties in a real property transaction.

Section 2079.16 did not assist the court in determining the scope of that duty because the agency disclosure statute did not apply at that time. It therefore had to look to common law in determining the extent of Sanin’s duty owed to Greif.

Under common law, generally any person who performs professional services owes a duty of care to all persons within the area of foreseeable risk.

The standard of care imposed on a real estate broker thus is higher than that applicable to a layperson. The broker is subject to a duty of skill, care, and diligence commensurate with the professional standards that the real estate industry has held out to the public and that the public reasonably can expect.

The real estate broker is brought by his calling into a relation of trust and confidence. Constant are the opportunities by concealment and collusion to extract illicit gains.  The broker is accredited by his calling in the minds of the inexperienced with a knowledge greater than their own.

The standard of care of a real estate broker can be measured by the Code of Ethics of the National Association of Realtors when the broker is a “realtor” (a member of the National Association or local Board of Realtors).

The Code of Ethics of the National Association of Realtors provides that it imposes obligations that may be higher than those mandated by law, and in any instance where the Code of Ethics and the law conflict, the obligations of the law must take precedence; while the obligation of absolute fidelity to the client’s interests is primary, this does not relieve the Realtor of an obligation to treat fairly all persons to the transaction. (Article 7)

The extent of the broker’s duty of care is determined under common law by examining whether a reasonable person would have foreseen an unreasonable risk of harm to a third party and whether, in view of such risk, the broker exercised ordinary care under the circumstances.

Whether a real estate broker has a duty of care to a third party is a question of law that is determined by weighing the following factors: (1) the extent that the transaction was intended to affect the third party; (2) the foreseeability of harm; (3) the degree of certainty that the third party suffered injury; (4) the closeness of the connection between the broker’s conduct and the injury suffered; (5) the moral blame attached to the broker’s conduct; and (6) the policy of preventing future harm.

Under the common law, there is little question that a real estate broker owes a duty of care to third persons in the transaction, where the broker does not have privity with, or fiduciary duties to, such third person.

Despite the absence of privity of contract, a real estate agent is clearly under a duty to exercise reasonable care to protect those persons whom the agent is attempting to induce into entering a real estate transaction for the purpose of earning a commission.

The parties agree a buyer’s broker owes a duty of care to the seller, even when the broker is the exclusive broker of the buyer. There is thus no question that Sanin owed a duty of care to the seller, Greif, not to impose a foreseeable risk on the seller unreasonably.

The issue is whether Sanin owed Earl a duty to tell him the purchase price was less than the FMV. The appellate court concluded that at the time of execution of the Purchase Agreement there was no such duty.

The cases cited by Greif involved the duty of a seller’s exclusive agent or a dual agent representing the seller and buyer. They do not address the issue of whether a buyer’s broker owes a duty to tell the seller that a purchase price is a gross discrepancy between the true value of the Property and the purchase price stated in the Purchase Agreement.

Neither the Legislature nor the courts recognized such a duty exists where there have been arm’s-length negotiations.

Greif argued on appeal that Sanin owed various additional duties that were breached, such as the duty to (1) draft the Purchase Agreement to state Greif's intended purchase price, rather than the stated purchase price of $330,000, (2) obtain Greif’s informed consent to the 5 percent commission payable to Sanin, and (3) disclose to Greif that he had the right to review the Purchase Agreement and commission with an independent advisor.

But Greif did not allege in his negligence cause of action that Sanin owed Greif these duties or cite any supporting legal authority. Greif argued two legal principles: (1) a real estate broker owes a duty of care under negligence principles to other parties in a real property transaction, regardless of whether the broker has a fiduciary, agency, or privity relationship; and (2) a broker, who represents the buyer may owe a duty of care to the seller, where circumstances warrant.

While the appellate court agreed these principles are well established, it did not agree that in the instant case the buyer’s broker owed the seller a duty to disclose that the purchase price was below FMV.

In the instant case: (1) it was conspicuously stated on the first page of the Purchase Agreement that Sanin was acting as the buyer’s exclusive agent, (2) there was no allegation Sanin prepared the Purchase Agreement knowing it was unacceptable to Greif, (3) the real property transaction did not involve an unconsummated purchase agreement subject to an unfulfilled condition precedent; and (4) there was no allegation Sanin knew the Purchase Agreement was unenforceable yet falsely represented it had been accepted, when he had not.

The purchase price information that Greif alleged Sanin negligently failed to disclose to Greif was known or should have been known by Greif, as seller, such that Sanin did not owe him a duty to disclose it.

The law generally assumes one will have some knowledge of the value of that which he owns.

Greif did not allege in his negligence cause of action that Sanin was dishonest or failed to disclose facts which were known or accessible only to Sanin, and which Sanin knew were not known to, or within the reach of the diligent attention and observation of Greif.

Sanin thus did not have a duty to tell Greif he was selling his property for less than the FMV, when Greif knew or should have known the value of his own property before selling it.

Sanin also owed no duty to Greif to explain the significance of facts that were readily accessible or observable by Greif.  Sanin did not owe a duty to tell Greif the purchase price stated in the Purchase Agreement was below FMV.

Under the circumstances in this case, there was no policy justification for placing the burden on the buyer’s exclusive broker to inform the seller that the purchase price is below FMV.

The purpose of a seller and buyer having the option of being represented by separate real estate agents is to protect the buyer and seller’s unique and antagonistic interests; that of the buyer seeking to purchase the property for as low a price as possible, and the seller attempting to sell the property for as high a price as possible.

For this reason, each party benefits from retaining his/her own agent.

Even under the facts alleged in this case, where the seller is elderly and physically infirm, public policy does not favor holding the buyer’s agent responsible for informing the seller that the agreed upon purchase price is below FMV.

That is the responsibility of the seller’s broker and, if the seller chooses not to retain a real estate agent or advisor, the seller is responsible for investigating the value of the Property and determining the sales price.

As a matter of law, Greif did not alleged facts establishing that Sanin owed a duty to advise Greif that the purchase price was less than the FMV or any other alleged breached duty. Therefore, the trial court did not err in granting judgment on the pleadings on Greif’s negligence cause of action against Sanin.

After conducting a court trial lasting over a month, the trial court entered judgment in favor of Yardley and against Greif that enforced the Purchase Agreement, thereby requiring Greif to sell the Property to Yardley and transfer title to Yardley in accordance with the Purchase Agreement, in return for payment by Yardley of $330,000 to Greif.

The judgment further awarded Yardley $43,040.80 in conversion damages, consisting of the interest that accrued during retention of Yardley’s money by the escrow company during Greif’s delay in signing the escrow cancellation instructions.

In addition, the trial court awarded Yardley, as prevailing party, its costs and attorney fees, to be determined at a later date.

Greif contended he met its burden of proving the unilateral mistake defense and, therefore, the trial court erred in ordering the Purchase Agreement enforced, instead of rescinded.

A party may rescind a contract if his or her consent was given by mistake. (Civ. Code, § 1689, subd. (b)(1).)

A factual mistake by one party to a contract, or unilateral mistake, affords a ground for rescission in some circumstances.

Civil Code section 1577 defines “mistake of fact” as “a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in: 1. An unconscious ignorance or forgetfulness of a fact past or present, material to the contract; or, 2. Belief in the present existence of a thing material to the contract, which does not exist, or in the past existence of such a thing, which has not existed.

The trial court found Greif had not met this burden of establishing clear, convincing, and satisfactory evidence of the unilateral mistake defense.

The trial court concluded that (1) there was insufficient evidence of a mistake by Greif; (2) there was insufficient evidence that buyer knew of any mistake; (3) there was insufficient evidence buyer did anything to encourage or foster any mistake; and (4) any mistake was caused by the neglect of Greif and his representatives.

Greif argued that the evidence established that (1) Greif made a mistake when signing the Purchase Agreement, agreed to the $330,000 purchase price, (2) the mistake had a material effect on him signing the Purchase Agreement, resulting in Greif selling the Property for less than its FMV, (3) Greif did not bear the risk of the mistake, and (4) enforcement of the Purchase Agreement would be unconscionable because Greif was elderly, had physical and mental disabilities, was rushed into signing the Purchase Agreement, and sold the Property for less than the FMV.

The appellate court concluded there was substantial evidence to support the trial court’s finding that Greif did not make a material mistake of fact when he signed the Purchase Agreement.

There was evidence that, at the time of the sale, Greif was mentally and physically capable of comprehending, reading, hearing, and negotiating the sale of the Property, and was competent when executing the Purchase Agreement.

In addition, there was compelling evidence that Greif competently negotiated the purchase price and knowingly agreed to sell the Property for $330,000 when he signed the Purchase Agreement.

It was not until a few days later, after a friend told him the price was too low, that he attempted to back out of the Purchase Agreement by claiming he thought the purchase price was in the $3 million range.

There was substantial evidence supporting the trial court’s findings that Greif did not make a mistake of fact as to the agreed upon purchase price of $330,000 when he signed the Purchase Agreement; there was no miscommunication or confusion by Greif during the Property transaction negotiations or signing of the Purchase Agreement; there was no misunderstanding of the terms of the Property sale by Greif due to any physical or mental issues; Greif did not misread or miscomprehend the purchase price stated in the Purchase Agreement; and there was no error in drafting the Purchase Agreement to reflect the terms orally agreed upon.

Greif was not entitled to relief under the unilateral mistake of fact defense where the evidence showed that any error on Greif’s part was due to his error in judgment in selling the Property for what he later believed was too low a sales price.

Such ignorance or erroneous belief as to the mere value of property does not amount to mistake of fact as defined in Civil Code section 1577.

Therefore, Greif could not rely on a mere mistake by Greif as to value of the Property but instead had the burden of showing by ‘clear, convincing and satisfactory’ evidence that Greif made the mistake of believing he had actually contracted to sell the Property for $3.3 million. The trial court reasonably found there was insufficient evidence to support such a finding.

Furthermore, any mistake Greif made in setting the purchase price too low does not amount to the type of mistake of fact that qualifies for rescission under the unilateral mistake of fact defense.

Merely making a mistake as to the Property’s value is not a valid basis for rescinding the Purchase Agreement based on the unilateral mistake defense.

Greif bore the risk of any mistake in setting the purchase price too low because he was responsible for investigating, evaluating, and determining the purchase price for the Property. As a consequence, enforcing the Purchase Agreement was not unconscionable.

Greif contended that even if the Purchase Agreement is an enforceable contract, specific performance was not an available remedy because there was inadequate consideration.

Specific performance cannot be enforced against a party to a contract if he has not received an adequate consideration for the contract, as measured at the time the contract was made.

The remedy of specific performance is a discretionary, equitable remedy.

Greif argued Yardley did not provide adequate consideration for the Purchase Agreement because the purchase price of $330,000 was a fraction of the FMV of the Property.

The parties introduced expert opinion testimony to assist the court in assessing the adequacy of the consideration, and the value of the property at the time of the Purchase Agreement is a question of fact.

The trial court, in assessing the Property’s value, took into consideration expert opinion testimony regarding the value of the property provided by both parties’ experts.

Greif’s expert appraised the Property at $1.25 million. Yardley’s expert appraised the Property at $705,000. Based on additional evidence affecting the value of the Property, the trial court found that the Property value was in the $500,000 range, and the $330,000 purchase price was substantially fair and just under all of the circumstances of the case.

It is the universal rule that the market value of property is measured by the highest price estimated in terms of money which the land would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all the uses and purposes to which it was adapted and for which it was capable.

Thus, in determining whether consideration was fair and adequate, all circumstances surrounding the transfer of the property as they existed at that time, must be considered.

A consideration, to be adequate, need not amount to the full value of the property. The test is not whether the seller received the highest price obtainable for his property, but whether the price he received is fair and reasonable under the circumstances.

Evidence Code section 813 provides in relevant part: (a) The value of property may be shown only by the opinions of any of the following: 1) Witnesses qualified to express such opinions. (2) The owner of the property or property interest being valued. (b) Nothing in this section prohibits a view of the property being valued or the admission of any other admissible evidence (including but not limited to evidence as to the nature and condition of the property) for the limited purpose of enabling the court to understand and weigh the testimony given under subdivision (a); and such evidence is subject to impeachment and rebuttal.

Evidence Code section 813 does not preclude the court from assessing the value of real property differently than the value stated by an expert based on other relevant evidence.

Subdivision (b) of Evidence Code section 813 clarifies that the trial court can consider other relevant evidence when considering and weighing expert testimony. A court is thus not bound by the property value assessments provided by the experts, where other evidence supports rejection of the expert’s property value assessment.

The trial court found the Yardley's expert appraisal of the Property was more credible than Greif's expert appraisal, and the Property’s actual value was lower because of consideration of the significant issues bringing water to the Property. Such a factor would have a material impact on the appraised value of the Property.

Based on evidence there were no water services for the Property and obtaining them would be a massive, expensive undertaking, the trial court reasonably rejected the expert witness appraisals and concluded the Property’s value was closer to $500,000.

The trial court reasonably found that, although the purchase price was $330,000, it was substantially fair and just under the totality of the circumstances.

Although the price may be less than the FMV at that time, it was not an unreasonable price based on evidence the Property could not be developed without a massive, expensive undertaking to obtain water services.

As the trial court noted, “adequate consideration” need not be the full value of the property. It need only be fair and reasonable under all of the circumstances of the case.

The trial court found that Greif committed conversion of Yardley’s funds by delaying for almost two years signing escrow cancellation instructions required to release Yardley’s funds deposited in escrow.

Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages.

Conversion is a strict liability tort.

The foundation of the action rests neither in the knowledge nor the intent of the defendant. Instead, the tort consists in the breach of an absolute duty; the act of conversion itself is tortious. Therefore, questions of the defendant’s good faith, lack of knowledge, and motive are ordinarily immaterial.

Conversion damages are calculated based on the detriment caused to the plaintiff. Such detriment caused by wrongful conversion of personal property is presumed to be the value of the property at the time of the conversion, with the interest from that time, or, an amount sufficient to indemnify the party injured for the loss which is the natural, reasonable and proximate result of the wrongful act complained of and which a proper degree of prudence on his part would not have averted.

Money may be the subject of conversion if the claim involves a specific, identifiable sum.

Even though the escrow company, not Greif, had possession of Yardley’s funds for almost two years, Greif acted wrongfully in delaying the release of the escrow funds to Yardley.

A conversion claim does not require that a specific lump sum of money be entrusted to defendant; the plaintiff must merely prove a specific, identifiable sum of money that was taken from it.

Substantial evidence supported such a finding where there is evidence Greif unjustifiably delayed signing escrow cancellation instructions, which resulted in tying up Yardley’s money for almost two years.

LESSONS:

1.         Parties to a sales transaction should obtain qualified advice from a broker or other professional such as an attorney in order to understand and knowingly agreed to all of the terms, including the sale price.

2.         Real estate agents, regardless of whether they represent the buyer or seller, owe a duty of care to third parties in a real property transaction.

3.         The standard of care imposed on a real estate broker is higher than that applicable to a layperson, and the broker is subject to a duty of skill, care, and diligence commensurate with the professional standards that the real estate industry has held out to the public and that the public reasonably can expect.

4.         Whether a real estate broker has a duty of care to a third party is a question of law that is determined by weighing the following factors: (1) the extent that the transaction was intended to affect the third party; (2) the foreseeability of harm; (3) the degree of certainty that the third party suffered injury; (4) the closeness of the connection between the broker’s conduct and the injury suffered; (5) the moral blame attached to the broker’s conduct; and (6) the policy of preventing future harm.

5.         Under the common law, there is little question that a real estate broker owes a duty of care to third persons in the transaction, where the broker does not have privity with, or fiduciary duties to, such third person.

Do Dual Agents Owe The Same Fiduciary Duty as Broker to Both Seller and Buyer?

In the California Supreme Court case of Horiike v. Coldwell Banker Residential Brokerage Company, the court acknowledged the "relatively recent development" of dual agency, and clarified that where a broker lists real property and the broker's associate licensee (i.e., agent) represents the seller, and a different agent of the same broker represents the buyer, both agents owe the same fiduciary duty as the broker to both the seller and the buyer. 

This duty requires both agents to learn and disclose all information materially affecting the value or desirability of the property to both the seller and buyer, but not information regarding what a seller would accept, or what a buyer would pay.

In Horiike, the seller's agent listed the property at approximately 15,000 sq. ft., and he provided the buyer Horiike with public record information from the tax assessor's office that stated the living area was 9,434 sq. ft.

He also provided the buyer with a copy of the building permit that described the single-family residence as 9,224 sq. ft., a guest house of 746 sq. ft., a garage of 1,080 sq. ft., and a basement of unspecified area.

The seller's agent also gave the buyer a small-print advisement that stated "Broker/Agent does not guarantee the accuracy of the square footage." 

Horiike signed the two standard agency disclosure forms required by California law, and a third disclosure form entitled "Disclosure and Consent for Representation of More Than One Buyer or Seller." 

The seller's agent did not provide Horiike a written notice that he should hire a qualified specialist to verify the square footage of the house, as he had provided to an earlier buyer who cancelled, but he did provide Horiike a form advisory stating "only an appraiser . . . can reliably confirm square footage . . . Representations . . .".

The trial court ruled that the seller's agent exclusively represented the seller, and therefore did not owe a fiduciary duty to Horiike, and the jury returned a verdict in favor of Coldwell Banker. 

The Court of Appeal reversed the judgment on the breach of fiduciary duty claim against the seller's broker and agent concluding that the agent, as a salesperson working under the broker's license, owed a duty to the buyer Horiike "equivalent" to the duty owed to him by the broker.

The Supreme Court  affirmed the judgment of the Court of Appeal and remanded the case for a new trial, finding that the seller's agent had a duty to the buyer to disclose the discrepancy between his representations regarding the square feet and the publicly recorded documents, and alert Horiike that the agent's representations were unverified. 

In other words, in a dual agency, the seller's agent has the same fiduciary duty to the buyer as the broker, and it is an issue for the court or jury to decide if the seller's agent breached that duty.

This case confirms the best practice in a dual agency is to clarify any information and discrepancies regarding the value or desirability of a property, and the both agents should disclose to the buyer all known facts materially affecting the value or desirability that are not known to or reasonably discoverable by the buyer. 

LESSONS:

1.         Where a broker lists real property and the broker's associate licensee (i.e., agent) represents the seller, and a different agent of the same broker represents the buyer, both agents owe the same fiduciary duty as the broker to both the seller and the buyer.

2.         This duty requires both agents to learn and disclose all information materially affecting the value or desirability of the property to both the seller and buyer, but not information regarding what a seller would accept, or what a buyer would pay.

3.         A seller's agent has a duty to the buyer to disclose the discrepancy between his representations regarding the square feet and the publicly recorded documents, and alert the buyer that the agent's representations were unverified. 

Can California Borrowers Demand a Payoff and a Beneficiary Statement?

California Civil Code § 2943 requires that a beneficiary of a deed of trust (normally the lender), after receiving a written demand from an "entitled person" (the borrower a.k.a. trustor or mortgagor), prepare and deliver a "payoff demand statement" to the person requesting it within 21 days of the receipt of the demand. 

The foreclosure process may excuse compliance depending upon when the written demand is presented.   

Delivery means by mail, or transmitted by facsimile machine.

"Payoff demand statement" means a written statement setting forth the amounts required as of the date of its preparation necessary to fully satisfy all obligations secured by the loan that is the subject of the payoff demand statement. 

The written statement must include information reasonably necessary to calculate the payoff amount on a per diem basis for the period of time, not to exceed 30 days, during which the per diem amount is not changed by the terms of the note.

An entitled person may also make a written demand for a "beneficiary statement" that the beneficiary must satisfy by preparing and delivering to the person demanding it a true, correct, and complete copy of the note or other evidence of indebtedness with any modifications thereto, and a beneficiary statement. 

The "beneficiary statement" is a written statement showing:

            a.         the amount of the unpaid balance of the obligation secured by the mortgage or deed of trust, and the interest rate, together with the total amounts, if any, of all overdue installments of either principal or interest, or both;

            b.         the amounts of periodic payments, if any;

            c.         the date on which the obligation is due in whole or in part;

            d.         the date to which real estate taxes and special assessments have been paid to the extent the information is known to the beneficiary;

            e.         the amount of hazard insurance in effect, and the term and premium of that insurance to the extent the information is known to the beneficiary;

            f.          the amount in an account, if any, maintained for the accumulation of funds with which to pay taxes and insurance premiums;

            g.         the nature and, if know, the amount of any additional charges, costs, or expenses paid or incurred by the beneficiary that have become a lien on the real property involved; and

            h.         whether the obligation secured by the mortgage or deed of trust can or may be transferred to a new borrower, such as by an assignment.

A beneficiary must provide a "short-pay demand statement" (for a short sale attempt) within 21 days of a request. 

If a beneficiary elects not to proceed with the transaction that is the subject of the short-pay request, it may refuse to provide a short-pay demand statement, but it must provide written notice of that decision within 21 days of the receipt of the short-pay request.

The entitled person may rely on the beneficiary statement, payoff demand statement, or short-pay demand statement, and any amendment thereof. 

If a statement is demanded that does not specify one of the three options, the beneficiary must treat the request as a request for a payoff demand statement. 

The beneficiary may charge up to $30 for furnishing each required statement, except for mortgages or deeds of trust insured by the FHA or guaranteed by the Administrator of Veterans Affairs.

If a beneficiary for a period of 21 days after receipt of the written demand willfully fails to prepare and deliver the statement, the beneficiary is liable to the entitled person for all damages that the entitled person sustains by reason of the refusal, and even if actual damages are not sustained, the beneficiary shall forfeit to the entitled person the sum of $300. 

Each failure to provide and deliver that statement constitutes a separate cause of action.  The term "willfully" means an intentional failure to comply with the requirements of statute without just cause or excuse.

            LESSONS: 

1.         If a beneficiary does not comply with the statute, the entitled person should consider filing a civil lawsuit for violation of Civil Code § 2943, and include causes of action for breach of the promissory note and deed of trust based upon the beneficiary's breach of the implied covenant of good faith and fair dealing in both documents. 

2.         A breach of contract cause of action may enable the recovery of attorney's fees in addition to costs, depending upon the terms of the note and deed of trust. 

3.         The legal action may also support a request for an injunction against a foreclosure based upon the beneficiary's failure to comply with the statute.

What is the Test to Determine if a Real Estate Salesperson is an “Employee” or an “Independent Contractor”?

During 2023, it is imperative that California real estate brokers understand and apply the applicable test or governing standard for determining whether a real estate salesperson is an “employee” or an “independent contractor” for purposes of California Labor Code’s wage and hour provisions.

In the recent decision in Whitlach v. Premier Valley, Inc., Plaintiff James Whitlach pursued a claim under the Labor Code Private Attorney General Act of 2004 (Labor Code, § 2698 et seq.) against Defendants Premier Valley, Inc. (doing business as Century 21 MM) and Century 21 Real Estate LLC, to enforce civil penalties for violations of the Labor Code.

The trial court sustained defendants’ demurrer to the operative complaint without leave to amend. Whitlach appealed.

The appeal involved issues of statutory interpretation with regard to the following question: What is the applicable test or governing standard for determining whether a real estate salesperson is an “employee” or an “independent contractor” for purposes of the Labor Code’s wage and hour provisions.

Resolution of this question turns on interpreting recently enacted Labor Code section 2778, subdivision (c)(1), and other provisions incorporated therein.

The appellate court concluded the applicable test is the test set forth in Unemployment Insurance Code sections 650 and 13004.1, as incorporated in Business and Professions Code section 10032, subdivision (b), which is itself incorporated in Labor Code section 2778, subdivision (c)(1).

The trial court reached the same conclusion and applied the correct test in ruling on defendants’ demurrer, and the appellate court affirmed the judgment.

Plaintiff James Whitlach is a former real estate agent who was affiliated with defendant Premier Valley, Inc., doing business as Century 21 MM (Premier Valley), a real estate brokerage firm located in Oakdale. Premier Valley is a franchisee of co- defendant Century 21 Real Estate LLC (Century 21), a Delaware Corporation with its principal place of business in Parsippany, New Jersey.

On December 20, 2018, Whitlach filed a class action complaint alleging multiple violations of the Labor Code, among other claims. The complaint alleged he was bringing the class action on behalf of similarly situated real estate agents who were misclassified as independent contractors when they should have been considered employees, and as a result were not properly paid all wages due and owing, were subjected to unlawful deductions, and were not reimbursed for reasonable and necessary business expenses.

Whitlach filed a first amended complaint (FAC) that added a representative claim under the Labor Code Private Attorney General Act of 2004 (PAGA), which allows an aggrieved employee to recover civil penalties for Labor Code violations committed by an employer. (Labor Code, §§ 2698, 2699, subd. (a).)

The FAC alleged Whitlach was an “aggrieved employee” for purposes of his PAGA claim. The FAC further alleged that Whitlach’s PAGA claim was brought on behalf of himself and other current and former real estate agents affiliated with Premier Valley, to seek civil penalties for Labor Code violations committed by Premier Valley and Century 21.

Whitlach’s class claims were dismissed upon the trial court’s adoption of a stipulated order to this effect, leaving at issue only the PAGA claim.

Premier Valley and Century 21 demurred to the FAC on the ground that Whitlach was precluded from asserting a PAGA claim (or any derivative Labor Code claim) because he was an independent contractor, not an employee.

The trial court heard the demurrer and concluded the applicable test for determining Whitlach’s employee or independent contractor status for purposes of his PAGA cause of action and derivative Labor Code claims was the Unemployment Insurance Code section 650 test.

Applying the Unemployment Insurance Code section 650 test, the trial court ruled that Whitlach was an independent contractor as a matter of law and dismissed the FAC with leave to amend.

Whitlach filed a second amended complaint (SAC), which is the operative complaint in this case. The SAC again asserted a single PAGA cause of action, premised on alleged misclassification of real estate agents as independent contractors rather than employees, and attendant Labor Code violations, by Premier Valley.

In addition, the SAC contained multiple new allegations directed to the trial court’s rationale for dismissing the FAC (i.e., that Whitlach was an independent contractor as a matter of law).

The test applied by the trial court in determining that Whitlach was an independent contractor as a matter of law turned, in part, on the existence of a written contract or independent contractor agreement between Whitlach and Premier Valley.

In the SAC, Whitlach alleged the independent contractor agreement he had signed was unconscionable and, therefore, unenforceable.

Whitlach alleged, alternatively, that should he be determined to be an independent contractor and not an employee, then Labor Code section 2778(c)(1) violated equal protection and was unconstitutional under the California Constitution.

Finally, Whitlach alleged he was an employee for purposes of PAGA and his derivative Labor Code claims because he had entered into a separate contract or management employment agreement with Premier Valley, in his capacity as a sales manager for the firm.

Premier Valley and Century 21 demurred to the SAC. Premier Valley and Century 21 again argued that Whitlach was an independent contractor as a matter of law; they further argued that Labor Code section 2778(c)(1) was not unconstitutional, the independent contractor agreement between Whitlach and Premier Valley was not unconscionable, and the separate contract Whitlach had with Premier Valley for his work as a sales manager was irrelevant for purposes of his representative claims.

The trial court sustained defendants’ demurrer and dismissed the SAC without leave to amend.

Whitlach appealed the trial court’s ruling sustaining the demurrer to the SAC and the subsequent judgment of dismissal.

The parties agreed that in order for Whitlach to proceed on his PAGA claim, he was required to be an employee of Premier Valley, because PAGA, as well as the Labor Code statutes Whitlach seeks to enforce through PAGA, apply only to employees, and not to independent contractors.

A PAGA action must be brought by an aggrieved employee on behalf of himself or herself and other current or former employees.

California’s labor laws protect only employees, not independent contractors.

The principal question on appeal is therefore whether Whitlach was an employee or independent contractor for purposes of his PAGA cause of action and/or derivative Labor Code claims.

“Real estate licensee” is one of the occupational classifications that was specifically exempted from the purview of Labor Code section 2775(b)(1), and in turn from the application of the Dynamex opinion and the ABC test for purposes of the Labor Code, Unemployment Insurance Code, and wage orders.

Labor Code section 2778(c) and (c)(1), collectively remove real estate licensees from the purview of Labor Code section 2775(b)(1) and application of Dynamex’s ABC test, as follows: “(c) Section 2775 and the holding in Dynamex do not apply to the following, which are subject to the Business and Professions Code: A real estate licensee licensed by the State of California pursuant to the Business and Professions Code, for whom the determination of employee or independent contractor status shall be governed by subdivision (b) of Section 10032 of the Business and Professions Code. If that section is not applicable, then this determination shall be governed as follows: For purposes of unemployment insurance by Section 650 of the Unemployment Insurance Code. For purposes of workers’ compensation by Section 3200 et seq. of the Labor Code.

Business and Professions Code section 10032 provides as follows: “(b) A real estate broker and a real estate salesperson licensed under that broker may contract between themselves as independent contractors or as employer and employee, for purposes of their legal relationship with and obligations to each other. Characterization of a relationship as either ‘employer and employee’ or ‘independent contractor’ for statutory purposes, including, but not limited to, withholding taxes on wages and for purposes of unemployment compensation, shall be governed by Section 650 and Sections 13000 to 13054, inclusive, of the Unemployment Insurance Code.

Defendants Premier Valley and Century 21 contended the Legislature added Business and Professions Code section 10032 in 1991, to, inter alia, identify the proper test for determination of employee or independent contractor status for real estate agents/salespersons, for purposes of the Labor Code, among other statutory schemes.

The appellate court concluded that defendants Premier Valley and Century 21 have the better argument, in that the Unemployment Insurance Code section 650 test, as incorporated in Business and Professions Code section 10032(b), has long provided, and continues to provide, the controlling test for resolving the employee or independent contractor question for real estate salespersons, for purposes of the wage and hour provisions of the Labor Code.

As noted, Business and Professions Code section 10032(b) incorporates the test for determining the employee or independent contractor status set forth in Unemployment Insurance Code sections 650 and 13004.1, respectively.

Unemployment Insurance Code section 650 provides: “ ‘Employment’ does not include services performed as a real estate ... broker or as a real estate ... salesperson, by an individual if all of the following conditions are met: The individual is licensed under the provisions of ... Part 1 (commencing with Section 10000) of Division 4 of, the Business and Professions Code.... Substantially all of the remuneration (whether or not paid in cash) for the services performed by that individual is directly related to sales or other output (including the performance of services) rather than to the number of hours worked by that individual [i.e., the remuneration is in the form of a commission].

The services performed by the individual are performed pursuant to a written contract between that individual and the person for whom the services are performed and the contract provides that the individual will not be treated as an employee with respect to those services for state tax purposes.” Section 13004.1 of the Unemployment Insurance Code perfectly mirrors section 650 of that code.

The unique relationship between real estate brokers and agents is both commonly recognized and has long been reflected in California law.

A web of statutes and regulations require brokers to exercise significant control over agents and to direct work performed by agents under their supervision.

Such a legal regime would normally complicate determining real estate agents’ employment status because a principal’s right to control his agent is usually the most important factor suggesting the agent is an employee rather than an independent contractor.

Yet the Legislature has signaled, at the same time, that real estate agents were free to structure independent contractor arrangements, and that, in many contexts, traditional or common law-based tests did not make sense for resolving the employee or independent contractor question for real estate agents.

There were no statutory tests to resolve the employee or independent contractor question for real estate agents in other contexts. California courts were thus left to evaluate whether real estate agents were employees or independent contractors by recourse to the general control-based test and/or the provisions of the Real Estate Law, and to tackle the question under what circumstances, if at all, real estate agents could enter into independent contractor relationships with brokers.

Business and Professions Code section 10032(b), creates an express exception for a subpart of the Labor Code, that is, workers compensation, in that it provides that determination of the employee or independent contractor status of real estate agents for purposes of workers compensation is to be made pursuant to the Borello test.

This carve out for workers compensation indicates that the Unemployment Insurance Code sections 650/13004.1 test is applicable to other parts of Labor Code, and specifically, as relevant here, the wage and hour provisions of the Labor Code.

The appellate court agreed with the trial court that the isolated reference to a management employment contract in the SAC does not support a separate PAGA claim. The sole allegation in the SAC relating to the management employment agreement was that, in light of the agreement, Whitlach and other managers did not meet the criteria set forth in Unemployment Ins. Code § 650.

In other words, the SAC alleged that the existence of the management employment agreement made Whitlach an employee for all purposes, not that his rights were violated in his work as a manager.

Nor did the SAC allege that the management employment agreement was a novation or modification of his independent contractor agreement.

Accordingly, the trial court properly sustained the demurrer to the SAC.

LESSONS:

1.         Brokers should have the appropriate written agreements or independent contractor agreement with each salesperson operating under the broker's license.

2.         A PAGA action must be brought by an aggrieved employee on behalf of himself or herself and other current or former employees.

3.         California’s labor laws protect only employees, not independent contractors.

4.         A web of statutes and regulations require brokers to exercise significant control over agents and to direct work performed by agents under their supervision.

What is the Duty of Disclosure in California Real Estate Transactions?

The common law recognized in California imposes duties on sellers of real estate, particularly residential real estate such as homes, to disclose to the buyer any material facts known to the seller affecting the value or desirability of the real estate being sold. 

In California, the seller of a residence has both a common law and statutory duty of disclosure to the buyer, and even full compliance with the statutory duty does not excuse the common law duty. 

In order to establish a common law claim for nondisclosure of material facts, plaintiff must prove: 

(1) that plaintiff purchased real property from defendant; 

(2) that defendant knew that information that was not disclosed; 

(3) that defendant did not disclose this information to plaintiff; 

(4) that plaintiff did not know, and could not reasonably have discovered, this information; 

(5) that defendant knew that plaintiff did not know, and could not reasonably have discovered, this information; 

(6) that this information significantly affected the value or desirability of the property; 

(7) that plaintiff was harmed; and 

(8) that defendant’s failure to disclose the information was a substantial factor in causing plaintiff’s harm. 

In the context of a real estate transaction, it is now settled in California that where the seller knows of facts materially affecting the value or desirability of the property and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. 

Undisclosed facts are material if they would have a significant and measurable effect on market value. 

Where a seller fails to disclose a material fact, he may be subject to liability for mere nondisclosure since his conduct in the transaction amounts to a representation of the nonexistence of the facts which he has failed to disclose.

The sale of real property “as is” does not waive potential claims of common-law misrepresentation.

The specification of “as is” serves only to give notice of patent defects (essentially visible defects) and means that the buyer accepts the property in the condition in which it is reasonably observable by him or her. 

However, if the Purchase and Sale Agreement is augmented by language indicating that the buyer is relying on his or her own inspection of the property, it may also relieve the seller of the duty to inspect for defects or to disclose matters that the seller should know, but does not. 

Where the seller actively misrepresents the then condition of the property or fails to disclose the true facts of its condition not within the buyer's reach and affecting the value or desirability of the property, an “as is” provision is ineffective to relieve the seller of liability arising from the concealed condition. 

Sellers owe a common law duty to disclose information materially affecting the value or the desirability of the property. 

Generally, whether the undisclosed matter was of sufficient materiality to have affected the value or desirability of the property is a question of fact. 

With respect to a seller's statutory obligations, the Legislature enacted article 1.5 of the Civil Code which specifies the information a residential property seller must disclose when transferring the property.  In enacting this article, the Legislature made clear it did not intend to alter a seller's common law duty of disclosure.  The purpose of the enactment was instead to make the required disclosures specific and clear.  

In its statement of legislative intent the Legislature declared it did not intend to affect the existing obligations of the parties to a real estate contract, or their agents, to disclose any fact materially affecting the value and desirability of the property, including, but not limited to, the physical conditions of the property and previously received reports of physical inspections noted on the disclosure form set forth in Section 1102.6 or 1102.6a, and that nothing in this article shall be construed to change the duty of a real estate broker or salesperson pursuant to Section 2079. 

The Legislature specified the precise disclosure form which must be used.  

Among the items which must be disclosed, the legislatively mandated form requires a seller to answer whether he or she is aware of any "Room additions, structural modifications, or other alterations that may affect your interest in the subject property", Room additions, structural modifications, or other alterations or repairs not in compliance with building codes", Any . . . violations of 'setback' requirements", and "Any notices of abatement or citations against the property". 

In addition to mandating the use of the disclosure form, the Legislature also required the seller to make each disclosure in “good faith,” defined as “honesty in fact in the conduct of the transaction.” 

Moreover, a partial disclosure is insufficient.

Where one does speak he must speak the whole truth to the end that he does not conceal any facts which materially qualify those stated.

A duty to disclose may also arise in the so-called ‘half-truth’ context – that is, when a speaker makes a representation which, though not false, he knows will be misleading absent full disclosure of additional facts known to him which qualify the initial representation.

Where one undertakes to speak to a matter, he must not only state the truth, he also must not suppress or conceal facts within his knowledge that materially affect those stated. 

In other words, when one speaks at all, he must make a full disclosure on the subject. 

Thus, a duty to fully disclose may arise from a partial disclosure that is likely to mislead, if other material facts are not also disclosed. 

Subjective intent is also insufficient. When conduct falls sufficiently below the acceptable norm to become grossly deficient, the Courts characterize it as imbued with a bad intent which is called willful misconduct. A malicious state of mind may be implied to the actor irrespective of any actual specific intent.

A complaint for breach of contract must include the following: (1) the existence of a contract, (2) plaintiff’s performance or excuse for non-performance, (3) defendant’s breach, and (4) damages to plaintiff therefrom. 

There is no dispute that the Residential Purchase Agreement constitutes a contract between buyers and sellers. 

Providing a truthful transfer disclosure statement is a statutory requirement that was expressly incorporated into the parties' agreement, and Civil Code § 1102.6 provides that prospective buyers may rely on this information in deciding whether and on what terms to purchase the subject property. 

A disclosure statement is a nonwaivable condition precedent to the buyer's performance.

Generally, where one party to a transaction has sole knowledge or access to material facts and knows that such facts are not known or reasonably discoverable by the other party, then a duty to disclose exists.

An "as is" clause in a purchase and sale agreement does not insulate the seller from the common law duty to disclose defects or the requirements of Civil Code §§ 1102, et seq.

"As is" language serves to give notice of patent defects and means that the buyer accepts the property in the condition in which it is reasonably observable by him or her. If augmented by language indicating that the buyer is relying on his or her own inspection of the property, it may also relieve the seller of the duty to inspect for defects or to disclose matters that the seller should know but does not. 

However, the benefits of Civil Code §§ 1102 et seq. are not waived merely by the buyer’s acceptance of "as is" language in the purchase agreement, and the seller remains liable for any failure, whether negligent or intentional, to reveal known concealed defects not apparent from an inspection of the property. Similarly, "as is" language in a real property sale agreement does not shield a seller from liability for fraud. 

To state a cause of action for fraud, the plaintiff must prove a false representation, actual or implied, or concealment of a matter of fact material to the transaction which defendant had a duty to disclose, defendant's knowledge of the falsity, defendant's intent to deceive, plaintiff's justifiable reliance thereon, and resulting damage to plaintiff. 

Section 1710 of the Civil Code in relevant part provides: "A deceit, within the meaning of the last section, is either: 1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true; 2. The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true; 3. The suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact.

Nondisclosure is tantamount to a misrepresentation. 

Failure of the seller to fulfill the duty of disclosure constitutes actual fraud.

Civil Code § 1102.13 provides: “No transfer subject to this article shall be invalidated solely because of the failure of any person to comply with any provision of this article. However, any person who willfully or negligently violates or fails to perform any duty prescribed by any provision of this article shall be liable in the amount of actual damages suffered by a transferee.”

The wrongful failure to perform a contract or a material promise in a contract, where the nonperformance is not excused or justified, is a breach. The failure to perform any contract obligation subjects the defaulting party to liability for damages, regardless of the extent of the breach and whether or not it also excuses performance of the non-breaching party. 

If fraud is involved in the purchase, sale, or exchange of real property, Civil Code § 3343 may govern the measure of damages, and the out-of-pocket measure is expanded to compensate for out-of-pocket losses and additional damage arising from the transaction where there is fraud in the acquisition or disposition of property. 

Similarly, where the defrauded party has been induced by reason of the fraud to purchase or otherwise acquire the property, that purchaser is entitled to an amount that will compensate him or her for any loss of profits or other gains that might have been earned from the use or sale of the property had it possessed the characteristics fraudulently attributed to it. 

However, this recovery is only allowed where all of the following apply: (1) the defrauded purchaser acquired the property to resell it for a profit; (2) the defrauded purchaser reasonably relied on the fraud in entering into the transaction and in anticipating profits from the subsequent sale; and (3) the lost profits for which damages are sought were proximately caused by the fraud and the defrauded purchaser’s reliance on it. 

LESSONS:

1.         Where the seller knows of facts materially affecting the value or desirability of the property and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. 

2.         Undisclosed facts are material if they would have a significant and measurable effect on market value. 

3.         The sale of real property “as is” does not waive potential claims of common-law misrepresentation. The specification of “as is” serves only to give notice of patent defects (essentially visible defects) and means that the buyer accepts the property in the condition in which it is reasonably observable by him or her. 

4.         Moreover, a partial disclosure is insufficient.  Where one does speak he must speak the whole truth to the end that he does not conceal any facts which materially qualify those stated.

5.         Failure of the seller to fulfill the duty of disclosure constitutes actual fraud.

California Department of Real Estate Advisory

Past Practice

Prior to the nationwide settlement, the seller and their listing agent typically would set the commission for both the seller’s agent and the buyer’s agent without involving the buyer or the buyer’s agent when the listing agreement was signed. They would discuss what percentage of the sales price should be set aside to compensate the agents for the buyer and seller and how much of that percentage should be allocated to compensate the buyer’s agent.

Post Settlement Outcomes

Following the nationwide settlement, the sellers and their listing agents no longer will determine compensation for the buyers’ agent. The settlement places the buyer at the heart of the discussions. Buyers’ agents will need to negotiate their compensation directly with their buyer clients. 

The settlement terms are extensive, but for this Licensee Advisory, pertinent terms include: 

• the requirement that a buyer’s agent obtain a signed representation agreement with their buyer client. 

• The agent must obtain the signed representation agreement prior to touring a property and the agreement must address compensation for the buyer’s agent.

• Whatever compensation the buyer’s agent and buyer agree upon shall serve as the maximum amount that the agent may receive for brokerage services from any source with respect to that representation. 

The settlement covers the majority of the residential real estate license population but does not cover persons who are not members of associations and who do not use a multiple listing service to make an offer for their buyer client.

Coming January 2025

In addition to the nationwide settlement, the California Legislature recently passed Assembly Bill (AB) 2992, which was signed by the Governor on September 24, 2024. Effective January 1, 2025, all buyers’ agents in California will be required to sign a buyer-broker representation agreement with their buyer clients as soon as practicable, but no later than the execution of the buyer’s offer to purchase real property. 

[Note that the timing in this legal requirement is different from the trade association practice, which requires a buyer-broker representation agreement before an agent tours a home with a buyer.] AB 2992 also will require the agreement to include the buyer’s agent’s compensation, the services to be rendered, when compensation is due, and the date when the agreement shall expire, provided that the expiration date shall not exceed three months from the date it was executed.

Once the buyer and buyer’s agent agree to compensation terms and sign the buyer-broker representation agreement, the buyer’s agent will know what services to provide and the buyer will know how much they need to pay for those services. Proceeding under a signed agreement, , the buyer has several options available to them. 

• The buyer may compensate their agent out-of-pocket. 

• The buyer also may request the seller to pay some or all of the compensation owed to the buyer’s agent as a seller’s concession of the purchase price, which the seller may accept or reject. 

• If the seller accepts, then the buyer may be relieved of some or all of their financial obligation to the extent covered by the seller’s concession. 

• If the seller rejects, then the buyer remains financially responsible for paying their agent if they proceed with the acquisition. 

• If the out-of-pocket costs to pay their agent remain too great and the seller and buyer have not yet reached an agreement on the sales price and/or terms, the buyer may walk away from the subject property and work with their agent to purchase another property (presumably with a seller who is willing to cover some or all of the buyer’s agent’s compensation as a concession). The buyer also may proceed with the purchase of the subject property without representation or approach the seller’s agent about possible dual agency representation provided the buyer-broker representation agreement permits the buyer to do either of these activities without being financially obligated to pay their agent. In other words, the buyer will remain financially responsible for compensating their agent unless the signed buyer-broker representation agreement contains an “exit” clause or the buyer’s broker relieves the buyer of their obligation to pay.

While DRE is not charged with enforcing the terms of the class action lawsuit settlement, DRE will enforce compliance with the requirements added by AB 2992 and the Real Estate Law related to conduct, such as performance of fiduciary duties and appropriate representations.

Practices Licensees Should Avoid

Given the new landscape in buyer representation and compensation, licensees should avoid the following practices in their representation of buyers and sellers: 

• Failing to Provide a Written Agreement: Licensees must ensure that any agreements regarding compensation are in writing. Any modifications to the compensation agreement must be in writing and agreed upon by both parties. Licensees must avoid making verbal changes or allowing terms to be altered informally through emails or texts. 

• Not Clarifying Compensation Expectations: If the buyer’s agent fails to clearly explain how they will be compensated, this could lead to misunderstandings or legal disputes. Clear communication is critical. Licensees should clarify that buyers are now more likely responsible for negotiating and paying their agent’s commission directly, unless other terms are negotiated by the seller and buyer. 

• Misrepresenting Commission Terms: Licensees should not claim that there is a “standard” rate. Commissions are fully negotiable under California law, and it is the licensee’s duty to clearly explain this to the buyer, ensuring transparency in negotiations. 

• Not Disclosing Dual Agency: If licensees are representing both the seller and buyer, they must disclose this relationship to both parties in writing. A licensee has a fiduciary duty to their clients, meaning they are legally obligated to act in their client’s best interest. 

• Pressuring the Buyer: Licensees should avoid pressuring buyers into signing contracts or agreements without explaining the practice application of the documents and giving them adequate time to review and understand the terms. 

• Requesting Advance Fees: If a licensee chooses to piecemeal real estate services (i.e., driving and showing a property, writing an offer, ordering inspections, reviewing disclosures, etc.) and charge for those services individually, these fees may be acceptable if the fee is collected after the service has been rendered. However, if the licensee’s affiliated broker wishes to collect advance fees for services, the broker will need to submit an advance fee agreement to DRE for review and receive a letter of “no objection” before demanding or receiving any advance fees. For more information about advance fee agreements, see following link: adv fees essential elements (ca.gov). 

Licensees are encouraged to thoroughly vet new practices with their affiliated brokers and legal counsel for compliance with applicable laws.

California Department of Real Estate 12-13-2024