duties to clients and customers ch.7

honest and fair dealing and good faith

A real estate agent owes third parties the duty of honest and fair dealing and good faith. Making inaccurate statements or misrepresentations breaches this duty and may constitute fraud. Real estate fraud cases typically involve misrepresentations by the seller (or the seller's agent) about the property. Although these fraud cases are usually based on false statements, a fraud claim can also be based on misleading conduct

fiduciary duties

An agency relationship is a fiduciary relationship. A fiduciary is a person who occupies a place of special trust and confidence in relation to another person—and because of this, is held to a very high standard of conduct. As a fiduciary, an agent must place the principal's interests above anyone else's, including the agent's own. The duties that an agent owes his principal are called fiduciary duties. To avoid lawsuits and disciplinary action, real estate agents need to understand and fulfill their fiduciary duties to their clients.

agency disclosure form

An agent must give each party in a transaction a copy of the agency disclosure form. The form describes the different types of agency relationships. The agent must also have each party sign a copy to acknowledge that they received the form. One side of the form explains the duties of a seller's agent, a buyer's agent, and a dual agent, in language specified by Civil Code § 2079.16. The other side of the form contains the statutory provisions concerning real estate agency relationships found in Civil Code §§ 2079.13 - 2079.24.

relationship between agent and third party

An agent must inform the principal if a party to the transaction is a friend, family member, or business associate of the agent, or if the agent has an interest in a company involved in the transaction. This must be done before the principal makes or accepts an offer.

reasonable skill and care

A real estate agent owes every party he works with the duty to use reasonable skill and care. This is true even if he doesn't have an agency relationship with that party

avoid any idles sales talk to avoid issues

Note that in California, there is a growing tendency to treat misleading opinions and predictions as actionable misrepresentations, since unsophisticated buyers sometimes do rely on them. Courts generally allow a jury to decide if a statement made by a real estate licensee was merely an opinion or amounted to a fraudulent misrepresentation. Real estate agents should avoid any idle sales talk that could be construed as a statement of fact.

duty to inspect

ca law requires to impose a duty of inspection on real estate in transactions involving residential property with 4 units

duties to principal under civil code 2079.16:

utmost car, integrity, honesty and loyalty agent must give principal the highest degree of diligence possible

does latent defects and material fact apply to all real estate?

yes Remember that although the duty to inspect applies only to residential property with up to four units and to manufactured homes, the duty to disclose known latent defects and other known material facts applies to any real estate transaction—no matter what kind of property is involved

what's required?

A real estate agent owes a prospective buyer an affirmative duty to conduct a "reasonably competent and diligent visual inspection of the property." If the inspection reveals any material facts affecting the value or desirability of the property, the agent must disclose them to the buyer. (See § 2079(a).)

Agency disclosure requirements

1. real estate agency disclosure law 2. fiduciary duties to clients 3.duties to all parties

principal may be held liable if agent commits fraud

A buyer who enters into a contract as a result of fraud has the right to rescind the contract and may be entitled to compensatory damages from the seller or agent who committed the fraud. With actual fraud, punitive damages may also be possible (Civil Code § 3294). And remember that if an agent commits fraud, her principal can be held liable under the doctrine of vicarious liability.

fiduciary

A fiduciary is someone in a position of special trust and confidence and is held to a very high standard of conduct.An agent is a fiduciary in relation to the principal.

what's not required?

Agents do not have to inspect any of the following: areas that are not reasonably or normally accessible; areas off the site of the subject property; public records or permits concerning the title or use of the property; or in condominiums or cooperatives, areas outside the individual unit for sale.

disclose conflict of interest

As we've said, an agent must put the interests of the principal above her own or those of any third party. Therefore, an agent must keep an eye out for situations involving a conflict of interest (such as a customer who is related to the agent). Even if the agent believes that she can remain loyal to the principal, she must disclose the conflict of interest to the principal. An undisclosed conflict is a breach of fiduciary duty. Once a conflict of interest has been disclosed, the principal may decide to terminate the transaction. Alternatively, the principal might decide to continue with the transaction but terminate the agency. Conflicts of interest may arise in many different situations. We'll look first at situations in which the agent has some kind of relationship with a third party, and then at the problems of self-dealing and secret profits.

what does the CA Agency disclosure law requires?

California's real estate agency disclosure law requires real estate agents to disclose to both the buyer and the seller who they are representing in the transaction. These requirements generally apply to any California real property transaction an agent is involved in—be it commercial or residential. The disclosure rules also apply to leases over a year. The agency disclosure process requires the agent to: give the parties an agency disclosure form explaining the types of agency, disclose one's own agency and obtain an agency confirmation statement, and act in accordance with the agency disclosure.

death on the property

Civil Code § 1710.2(a) states that there is no duty to disclose the occurrence of a death on the property if the death occurred more than three years ago. The sellers and agents, however, can't provide misinformation if asked directly about a death on the property. A real estate agent is showing a home. She knows that the previous owner's son was murdered in the home seven years ago, but since it's been more than three years, she's not obligated to disclose the homicide. At the end of the tour, however, one of the prospective buyers asks about the incident. Now the agent must disclose the information.

actual fraud and deceit

Civil Code §§ 1572 and 1710 contain definitions of actual fraud and deceit. Under these provisions, any of the following intentional actions are actual fraud or deceit: Suggesting or asserting that something is a fact when you don't believe it to be true. Positively asserting that something is a fact when you have no reasonable grounds for believing it's true, or when the assertion isn't warranted by the information you have. Suppressing information that you know or believe to be true when you're legally required to disclose it, or when other information that you have provided is misleading without the information you've suppressed. Making a promise without any intention of performing it. Performing "any other act fitted to deceive."

dual agency

Confidentiality must be maintained even when the agent is representing both parties. A dual agent can't reveal one client's confidences to the other client. Civil Code § 2079.21 states that confidential information a dual agent can't reveal includes facts relating to either party's financial position, motivations, bargaining position, or personal information—unless the disclosure has been authorized in writing. The effort to keep information confidential and to avoid using it to either party's disadvantage requires a dual agent to walk a fine line.

example of constructive fraud

For example, a real estate agent misreads the city zoning map and gives incorrect information to a buyer. The buyer takes this mistaken description of the zoning into account when deciding to purchase the property. The agent may be held to have committed constructive fraud.

Do sellers' agents owe buyers a duty to inspect a property for defects?

In 1976, Easton bought a home from the Strassburgers. Soon afterwards, a large landslide occurred on the property; subsequent slides destroyed part of the driveway. Expert testimony later revealed that the slides had occurred because part of the property was built on fill that had not been properly compacted. The slides damaged the home's foundation, walls, and doorways so severely that the property's value was reduced from $170,000 to about $20,000. Cost estimates for repairing the damage and preventing further slides totaled more than $200,000. The Strassburgers had experienced two slides on the property, but hadn't informed their agents or the buyer, Easton. The sellers' agents had inspected the property and noticed several "red flags"—such as cracks in the walls—that raised the possibility of soil problems, but hadn't requested soil tests or informed Easton of the potential problems. The court found that the duty of reasonable care included the duty to perform a reasonably competent and diligent inspection of the listed property in order to discover defects for the buyer's benefit. To hold otherwise would encourage real estate agents to shield themselves with ignorance and disregard red flags (signs of possible problems).Real estate agents are liable for failing to disclose defects they would've known about had they performed a reasonably competent inspection. Easton v. Strassburger (1984) 152 Cal.App.3d 90.

integrity

Integrity is sometimes defined as "moral or ethical strength." The duty of integrity requires an agent to act ethically, to follow the rules, and to accept responsibility. It means doing what you told your client you would do, when you said you would do it.

self-dealing and secret profits

It is a breach of fiduciary duty for an agent to engage in self-dealing or to collect a secret profit in a transaction. Self-dealing occurs when a real estate agent purchases her principal's property on her own behalf, while concealing the fact that she's the buyer. For instance, an agent might have a friend pretend to purchase the property for herself, then immediately deed it to the agent after closing.

loyalty

Loyalty is the essence of a fiduciary relationship. The agent owes the principal his allegiance. In advising the principal and in negotiations with third parties, the agent should never forget that he must put the principal's interests first.

acting in according with agency disclosures

Merely making the required agency disclosures isn't enough. The agent must also act in accordance with the disclosures. For example, when an agent is representing a seller, her conduct must reflect the fact that the seller—not the buyer—is her client. She must treat the buyer as a customer, not as a client. If she fails to do this, there is a danger of inadvertent dual agency. An agent who fails to act in accordance with his agency disclosure is subject to sanctions by the Department of Real Estate. Penalties include suspension or revocation of one's real estate license and a fine of up to $10,000.

puffing, opinions, and predications are not consider to be actionable

Not every inaccurate statement is grounds for a lawsuit. A misrepresentation is actionable (a basis for legal action) only if someone relied on the statement and was injured as a result. Also, the injured party's reliance on the statement must have been reasonable.

latent defects

Problems that aren't easily observed during an ordinary inspection of the property are called latent defects. If a real estate agent knows about a latent defect, she must point it out to prospective buyers. The defect is a material fact. The same requirement applies to property sellers: sellers are required by law to disclose known latent defects to buyers. Buyers in a residential transaction must receive a transfer disclosure statement and any known latent defects should be reported on this form.

puffing

Puffing is making exaggerated statements about a property, such as, "This is the most beautiful house in the neighborhood!"Puffing isn't usually a basis for fraud, as a reasonable person would know not to rely on such information.

Did Lomanto need to disclose the assignment fee and the price agreed to by the buyer?

Roberts owned a shopping center and retained Lomanto as his agent to sell the property. Lomanto offered to buy the shopping center for $11 million, acting as trustee for her family's trust. Lomanto told Roberts that the property wasn't worth more than that, and Roberts relied on her expertise and trusted her as his agent. While still Roberts' agent, Lomanto assigned the contract to purchase to a third-party buyer. Roberts consented to the assignment, but Lomanto refused to disclose either her assignment fee or what price the buyer had agreed to pay. Lomanto still asserted, however, that the property was worth only $11 million. After the deal closed and he'd paid Lomanto the agreed-upon 1% commission ($110,000), Roberts learned that Lomanto had received $1.2 million as an assignment fee and that the buyer had paid $12.2 million for the property. The court found that Lomanto had concealed the true value of the property from Roberts and that the $1.2 million assignment fee was an undisclosed profit. Lomanto had breached her fiduciary duties. Roberts v. Lomanto (2003) 112 Cal.App.4th 1553. Note that an ordinary buyer—an unlicensed person not acting as the seller's agent—is under no obligation to tell the seller that she plans to resell the property at a profit.

self-dealing/ secret profit

Self-dealing occurs when an agent buys his principal's property without disclosing that he is the buyer.Self-dealing is a breach of fiduciary duty. A secret profit is any undisclosed profit an agent makes from a transaction.A secret profit is a breach of fiduciary duty.

what are the required information booklets

Sellers and real estate agents must provide buyers with a number of government-published consumer information booklets. For residential transactions, there are booklets on common environmental hazards including radon, asbestos, and lead-based paint (for homes built before 1978). These buyers must also receive booklets on home energy ratings and water conservation. *Note under Civil Code § 2079, giving a buyer these booklets doesn't relieve an agent or seller of the duty to disclose known problems affecting the property being sold.

Did the broker violate his fiduciary duty by not disclosing his relationship to the buyers?

Sierra Pacific purchased several pieces of property for a lump sum. Sierra enlisted a real estate broker named Carter to sell one ten-acre parcel known as the Willow Creek property. Based on Carter's recommendation, Sierra listed the property for $85,000. Carter's commission was to be $5,000. Carter eventually arranged the sale of the property to his daughter and son-in-law and pocketed the $5,000 commission, without informing Sierra of his relationship to the buyers. The court found that the failure to disclose breached Carter's fiduciary duties to Sierra. Carter therefore forfeited his commission. Sierra Pacific Industries v. Carter (1980) 104 Cal.App.3d 579.

statutory duty to inspect

The California legislature responded to the Easton ruling by codifying it in Civil Code § 2079, which defines the agent's duty to inspect.

confidentiality

The agency relationship is based on trust and confidence. An agent can't disclose the principal's confidential information to third parties, or use confidential information to the principal's detriment. Any information the agent learns during the course of the agency must be kept confidential unless the principal authorizes the disclosure or the information is a material fact. Here's an example. In negotiations with a prospective buyer, a seller's agent says, "My client's in a big hurry to sell." Unless the seller has authorized this disclosure, the agent has breached her fiduciary duties. Note that the confidentiality requirement continues even after the formal agency relationship has ended. An agent can't use confidential information learned from a former client to his own advantage later on.

buyers resposibility

The agent's duty to inspect the property on the buyer's behalf doesn't mean that a buyer has no responsibility to examine the property for herself. Section 2079.5 states, "Nothing in this article relieves a buyer...of the duty to exercise reasonable care to protect himself or herself..." An agent should not be held liable for failure to disclose "facts which are known to or within the observation and diligent attention of the buyer."

duty to inspect: Easton Case

The development of California's duty to inspect began with a 1984 case called Easton v. Strassburger.

utmost care

The duty of utmost care requires an agent to use foresight, caution, and attention to detail in her work for the principal. She must make sure that she has all of the skills necessary to fulfill the terms of her agency, and she needs to let the principal know when it's advisable to consult an expert about some aspect of the property or the transaction.

when the duty to inspect applies

The duty to inspect applies to transactions involving residential property with one to four dwelling units or a manufactured home. (There's an exemption for new homes in subdivisions offered for sale for the first time.) It applies not only to listings and sales transactions, but also to leases with options to purchase, ground leases, and land contracts. (See § 2079(a), § 2079.1, and § 2079.6.)

fulfilling fiduciary duties: Obedience

The obedience requirement stems from the duties of utmost care and loyalty. An agent must always make a good faith effort to obey and carry out the principal's instructions. In addition, the agent's acts must conform to the purpose and intent of the agency. An agent can be held liable to the principal for losses caused by the agent's failure to comply with the principal's instructions. However, the agent can't simply ignore an illegal request. Instead, the agent must explain to the client that he can't comply because it would be illegal to do so.

when do buyer and seller receive the agency disclosure form?

The time limits for providing the agency disclosure form are stated in Civil Code § 2079.14. The seller's agent must give a copy to the seller before the seller signs the listing agreement. The buyer's agent must give a copy to the buyer as soon as practicable; in any case, before the buyer signs an offer to purchase. An agent must disclose whether she and her firm are representing only the seller, only the buyer, or both the seller and the buyer in the transaction.

actual fraud (intentional/omission of material fact) vs. constructive fraud (unintentional resulting from negligence, or carelessness)

There are two types of fraud: actual and constructive. Actual fraud (also called deceit) involves intentional misrepresentation or deception, as in the previous example. Constructive fraud, on the other hand, is a misrepresentation resulting from negligence or carelessness, without a fraudulent intent. A false statement or a misleading action is involved, but it isn't a deliberate falsehoodconstructive fraud as: "[A]ny breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault...by misleading another to his prejudice."

statute of limitations

There is a two-year statute of limitations on legal actions based on a breach of duty under § 2079. The statute of limitations begins to run from the date the buyer takes possession of the property, defined as the date of close of escrow, the date of recordation, or the date of occupancy, whichever comes first. The results of an agent's visual inspections of the property should be reported to the buyer on the transfer disclosure statement, which contains sections specifically intended for these disclosures. The listing agent's and the selling agent's (the buyer's agent) sections of the form are specifically intended for disclosures based on the agents' inspections.

who it applies to?

This is a duty owed to prospective buyers by real estate brokers and their affiliated sales agents who have a contract with the seller (listing agents) or who act in cooperation with the listing broker and obtain a buyer's offer (selling agents). (See § 2079(a).)

agency confirmation statement

Under Civil Code § 2079.17, each agent's disclosures must be confirmed in writing by having the parties sign an agency confirmation statement before or at the same time that they enter into a purchase agreement. An agency confirmation statement may be a separate document, but usually it's just part of the purchase agreement form.

duties owed to all parties

diligent exercise of reasonable skill and care, honest and fair dealing and good faith, and disclosure of material facts. These duties are listed on the agency disclosure form required by Civil Code § 2079.16.

disclosure of material facts

known by agent by not the parties cannot be observed by diligent attention affect value or desirability

Real estate agent harm a third party issues

real estate harms third party through carelessness or incompetence, the agent (broker) may be liable. questions to ask yourself: would a competent agent have foreseen the risk of harm? did the agent use reasonable skill or care?

California courts have indicated that the following factors will be considered: the extent the transaction was intended to affect the third party, the foreseeability of harm, the degree of certainty of the injury suffered, the moral blame attached to the agent's conduct, and the policy of preventing future harm. As with their clients, real estate agents should encourage customers to seek expert advice whenever it's appropriate. Advising customers (as opposed to clients) isn't really part of the agent's role—and it can give rise to an inadvertent dual agency.

reasonable skill and care

Should Estrin have disclosed he was Nicholson's employer when purchasing a property from Nicholson's client?

strin was a real estate broker doing business as Rem Realty Company. His salesperson, Nicholson, took a listing for property owned by Mrs. Collins. Estrin bought the property, describing himself only as "a real estate broker," not as the seller's own broker and Nicholson's employer. Mrs. Collins didn't realize Estrin was Nicholson's boss, nor that Estrin owned Rem Realty Company and had collected a commission on the sale. Estrin's license was suspended. Estrin sued to lift the suspension, claiming that Nicholson should have disclosed Estrin's role as the buyer to Mrs. Collins. Nicholson, however, testified that Estrin had not asked him to make such a disclosure. Whether or not Nicholson should have given Mrs. Collins more information, Estrin himself had a duty to disclose to her that he was the buyer, and he breached that duty. The court called Estrin's undisclosed commission a "reprehensible" violation of his fiduciary duties. Estrin v. Watson (1957) 150 Cal.App.2d 107. If an agent profits in some way from a principal's transaction without disclosing that to the principal, this is a secret profit. Yet it isn't improper for an agent to buy the principal's property and then resell it for a profit, as long as she has the principal's knowledge and consent. The principal must also be told the property's true value.

"as is " clauses

the clause wont protect the seller or agent from libilities for fraudalent misrepresentation hether or not there's an "as is" clause in the contract, whether you're showing property to a customer or advising a client—whatever the situation—remember the DRE's dictum: when in doubt, disclose, and do it in writing. And make sure you provide accurate information in a straightforward manner, without shading the truth. That's the only way to stay out of trouble in your real estate career.

standard of care, civil code 2079.2

the degree of care that a reasonably prudent real estate licensee would exercise 'measured' by degree of knowledge through education, experience and examination

material fact

thus, a material fact that must be disclosed is any fact that a reasonable person would want to consider when evaluating the value or desirability of real property—unless it's something that buyers could observe for themselves through "diligent attention."