Attached is the latest Courtside Newsletter, featuring the article “February 2013: CFPB TO ISSUE FINAL ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE”
Attached is the latest Courtside Newsletter, featuring the article “January 2013: HOMEOWNER BILL OF RIGHTS: PART 2” from John Giardinelli’s office.
Attached is the latest Courtside Newsletter, featuring the article “NEW 2013 LAWS MAY AFFECT BROKERS” from John Giardinelli’s office.
BY: KELLY A. NEAVEL, ATTORNEY
CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.
Once again, forms were a hot topic at the California Association of REALTORS® (C.A.R.) Fall Business Meetings in Anaheim. This year there are 43 new and revised forms set to be released on November 26, 2012. While C.A.R.’s website has a list and brief overview of these forms, below is a more comprehensive review of the new and some of the revised forms that may be of importance or interest.
In response to the ever-changing climate of real estate transaction, C.A.R. created the following 15 new forms for release in November:
The two (2) new agent broker forms:
Additional Agent Acknowledgment and Additional Broker Acknowledgement: These two forms are addendums to the California Residential Purchase Agreement (RPA). They acknowledge that both the buyer and seller understand there are two agents from the same company or two brokerages working on the transaction and when one licensee/broker is named in a document, the other licensee/broker is also deemed to be named.
The next five (5) forms were derived from the Purchase Agreement Addendum:
Assumed Financing Addendum: This form is used if the Buyer will be taking over the Seller’s existing loan. This addendum to the RPA gives both the buyer and seller specific deadlines by which to have documents to the other person or to the lender. It also acknowledges that the assumed financing is a contingency of the RPA.
Back-Up Offer Addendum: This addendum to the RPA or Counter Offer indicates what position the potential Buyer’s back-up offer is in, as well as the terms of that back-up offer, including time periods.
Court Confirmation Addendum: In certain instances, such as bankruptcy, probate, guardianship, or receivership, the purchase of real property may require ratification by the Court. In such cases, this form has been drafted to provide deadlines and recommendations to the buyer.
Seller in Possession Addendum: This form was created to define the terms of a seller remaining in the property after it is purchased by the buyer. It is intended for short-term occupancy only (e.g. less than 30 days), otherwise, the Residential Lease After Sale form needs to be used. The SIP does not create a landlord-tenant relationship between the buyer and seller, though. The seller is responsible for the maintenance of the property and continued payment of the utilities (except those specified), in addition to paying an agreed-upon sum for his or her continued possession.
Tenant in Possession: If a property is sold to a buyer with a tenant already in the property, the buyer can agree to take the property subject to the rights of the existing tenants. This form defines the terms of that agreement.
There are three (3) new general forms:
Landlord in Default Addendum: Enacted in September 2012, Senate Bill 1191 amends California Civil Code Section 2924.85. Beginning January 1, 2013 until January 1, 2018, landlords who offer for rent a single-family or multi-family dwelling not exceeding four units who have received a notice of default on the property that has not been rescinded, must disclose the default to potential tenants prior to executing a lease agreement for the property. If the landlord violates these provisions, the tenant is entitled to void the lease. If the tenant chooses to void the lease and vacate the property, he or she is entitled to recover from the landlord either one month’s rent or twice the amount of actual damages, (whichever is greater), as well as any prepaid rent. However, the tenant may also elect to stay in the property and honor the lease, in which case he or she is entitled to deduct a total amount equal to one month’s rent from future rent obligations.
The written notice to the tenant must state as follows:
The foreclosure process has begun on this property, and this property may be sold at foreclosure. If you rent this property, and a foreclosure sale occurs, the sale may affect your right to continue to live in this property in the future. Your tenancy may continue after the sale. The new owner must honor the lease unless the new owner will occupy
the property as a primary residence, or in other limited circumstances. Also, in some
cases and in some cities with a “just cause for eviction” law, you may not have to
move at all. In order for the new owner to evict you, the new owner must provide you
with at least 90 days’ written eviction notice in most cases.
Lastly, a property manager is exempt from l ability for failing to provide the written
disclosure notice unless the landlord notified the property manager of the notice of default and directed him or her in writing to deliver the written disclosure to the tenant.
In compliance with the new regulations imposed by Senate Bill 1191 and Civil Code Section 2924.85, the California Association of REALTORS® created the Landlord in Default Addendum to be provided to potential tenant prior to signing the lease.
Parking & Storage Disclosure: For a property located in a multi-unit building, this form serves as a sort of disclaimer and acknowledgement. The form states that the governing documents for the Property must contain a description and drawing of all assigned parking and storage spaces. However, these drawings may not be accurate and there may be differences between the drawing and physical locations of the parking spaces and storage areas. By signing the form, the Buyer acknowledges that he or she has personally inspected the parking spaces and storage areas and, if any discrepancies or issues exist, they are not material to the purchase. This form is also made in connection with the RPA.
FHA/VA Amendatory Clause: This form is to be used as an addendum to the RPA in accordance with HUD/FHA or VA requirements. Essentially, the form states that the Buyer will not incur any penalty through loss of his or her deposit nor will he or she have to complete the purchase should the property not appraise for the amount listed on the form. This is important when the Buyer is making use of a FHA or VA loan since HUD will only insure up to the appraised amount. Pursuant to the form, it is up to the buyer to satisfy him- or herself that the price and condition of the property are acceptable.
There are two (2) new listing forms:
Trust Listing Agreement/Vacant Land Listing Agreement: The Trust Listing Agreement is similar to the standard Listing Agreement with the exception that the “seller” is the trustee of the trust that is listed. The signature line also reflects that the property is being sold by the trust. The Vacant Land Listing Agreement has been separated from the Commercial, Residential, and Vacant Land Listing Agreement and made into its own form.
There are three (3) new signature forms:
Power of Attorney Signature Addendum: This addendum to the RPA identifies a person who has the ability to sign a contract for the sale or purchase of real property as that individual’s Power of Attorney. However, it is important to note that the Power of Attorney must already have been prepared and executed prior to the use of the Addendum.
Probate Signature Addendum: Much like the Power of Attorney Signature Addendum, this form identifies who can sign a contract for the sale of real property on behalf of an estate pursuant to the Probate Code.
Trust Signature Addendum: The last signature form is the Trust Signature Addendum which is used to identify the person who can sign a real estate contract under the authority of a Trust.
In addition to the 15 new forms, there are also 28 forms that C.A.R. has revised for November release, including the Residential Listing Agreement, Transfer Disclosure Statement, and Buyer Representation Agreement. Below is a short description of three (3) forms worth noting:
Commission Agreement: This form has been revised to include a date by which the Principal must accept an offer in order to be compensated.
Contingency for Sale or Purchase of Other Property: This form mainly affects Residential Purchase Agreements or Counter Offers where the purchase of the seller’s property is contingent on the sale of the buyer’s property or the seller’s purchase of a replacement property. The form has been revised from the 2008 version to clarify a buyer’s and seller’s rights should the property at issue fall out of escrow.
Short Sale Information Advisory: In July 2012, Senate Bill 1069 was enacted, effectually
expanding California’s Anti-Deficiency Protections. In California, many mortgages are non-recourse loans, meaning if a borrower’s real property is underwater and he or she defaults, the lender cannot pursue the borrower for any deficiency that results. However, if the borrower were to refinance, the resulting loan may not be non-recourse and the lender may be able to pursue the borrower should he or she default and the lender not receive the full amount of the loan. SB 1069 amends Code of Civil Procedure Section 580b to state that no deficiency judgment shall lie on any loan, refinance, or other credit transaction which is used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, except under certain, specified circumstances. These provisions would apply to credit transactions executed on or after January 1, 2013.
In compliance with the revisions to Code of Civil Procedure Section 580b, C.A.R. also
revised Section 4 on the Short Sale Information Advisory, which advises not only regarding the short sale process but also alternatives to short sales. As a real estate practitioner, it is important to remember that you cannot and should not give advice regarding short sales. If a buyer or seller you are representing has questions about the process, be sure to refer him or her to competent legal counsel for advice. As with any of the forms used in a real estate transaction, do not risk your license simply because you “think” you know the answer.
As mentioned above, C.A.R. provides a quick summary chart of all of the revised forms being released in November.
NEW APPELLATE COURT DECISION: CALIFORNIA CORPORATE BROKERS NOT LIABLE TO THIRD PARTIES
BY: TAMAR GABRIEL,ATTORNEY AT LAW
A recent case decided by the California Court of Appeal will have an effect on how the scope of a California Corporate Broker’s liability is defined. In Sandler v. Sanchez, the appellate court’s ruling limited liability of a designated officer (sometimes referred to as “corporate brokers” or “brokers of record”) to the corporation, not to third parties.
In this case, the Sandlers, along with another party, sued 765 South Windsor, LLC, Gold Coast Financial, a real estate brokerage corporation, and Carlos Sanchez, Gold Coast’s designated officer/broker. According to the allegations in the operative third amended complaint, Keith Desser, a real estate salesman, president, and sole shareholder of Gold Coast and a principal of South Windsor, solicited the Sandlers 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, however, failed to reveal $600,000 was not enough money to do the improvements and that there was not enough equity in the property to secure their loan, which was a junior loan. When the primary lender refused to extend the first note, which was imminently due, the property was foreclosed by the holder of the first trust deed, which left the Sandler’s note unsecured. In addition, Desser used the $300,000 of the loan proceeds, which he obtained by amending the escrow instructions, for his personal expenses.
The Sandler’s third amended complaint asserted a cause of action for breach of fiduciary duty against Sanchez. Although the complaint did not allege Sanchez played any role in the transaction, or even knew of it, the Sandlers alleged that Sanchez, as Gold Coast’s designated officer, owed them a duty to supervise Gold Coast’s employees, including Desser, in accordance with California Business and Professions Code Section 10159.2. The Sandlers alleged that had Sanchez fulfilled his duty to supervise, he would have learned about Desser’s material misrepresentations and either disclosed them to the parties or cancelled the loan transaction. The Sandler’s complaint also alleged Desser was Sanchez’s agent and Sanchez, as Desser’s principal, is liable for Desser’s tortuous acts committed within the scope of that agency.
Sanchez demurred to the third amended complaint, arguing he owed no duty, as a fiduciary or otherwise, to the Sandler parties. Sanchez argued that while a claim for breach of fiduciary duty would lie against Gold Coast and Desser, 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 with Sanchez and sustained his demurrer to the third amended complaint without leave to amend. The court thereafter signed an Order dismissing the action against Sanchez. On appeal from an order dismissing an action after the sustaining of the demurrer, the appellate court independently reviewed the case and ultimately agreed with the trial court’s decision.
Gold Coast Financial is a corporation. In California, a corporation can be a licensed real estate broker. In order to form such an entity, the corporation must designate a licensed individual broker as the entity’s designated officer. Sanchez was the designated officer of Gold Coast Financial. As such, pursuant to California Business and Professions Code Section 10159.2, he was “responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees…including the supervision of salespersons licensed to the corporation…” Therefore, Sanchez was responsible for supervising Desser (even though salesperson Desser also happened to be the sole shareholder of Gold Coast). The court reviewed the governing law. It noted that Section 10159.2 imposes a duty on the designated officer to supervise the corporate broker’s employees. However, the main issue in this case was to whom is that duty owed? 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 tat duty is owed. After reviewing other cases as well as legislative history that brought this sction into being, the court concluded that smilar to a section governing contractors, the rlevant code section was “regulatory and disciplinary in nature. It did not create a duty to tird parties and therefore could not be a basis fr the broker’s personal liability.”
On the question of whether Sanchez was vicariously liable, as a corporate employer, for te tortious acts of the agents committed within te scope of the agency or employment, the court ruled that absent special circumstances, it i the corporation, not its owner or officer, that is te principal or employer and thus subject to vicarious liability for torts committed by its employees or agents. Accordingly, the Court held that under traditional agency principles, it is Gold Coast, as Desser’s employer, not Sanchez, who may be held liable for Desser’s torts committed within the scope of his employment. The Court ruled that the right to control is insufficient by itself, under traditional agency principles, to establish a principal/agent or employer/employee relationship. For an agency relationship to exist there must be an affirmative manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act. Mere inaction or malfeasance would not create such a relationship between two employees.
The significance of this appellate decision for real estate agents and brokers is that the failure to supervise could lead to discipline from the Department of Real Estate, and could even be grounds for action by the corporation against the designated officer. However, unless the broker had participated in the bad behavior there can be no liability imposed by an injured third party.
BY: TAMAR GABRIEL,ATTORNEY AT LAW
CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.
California Business and Professions Code Section 10137 governs the circumstances under which a licensed real estate broker can compensate a person from the commissions obtained in a real estate transaction.
Stay ahead of the curve by keeping up on emerging issues in real estate. The Giardinelli Law Group, APC offers numerous classes for your office and agents. Call Linda Conaway today!
REAL ESTATE CONCERNS: TO WHOM CAN COMMISSIONS BE PAID?
Specifically, this Code Section states that “it is unlawful for any licensed real estate broker to employ or compensate, directly or indirectly, any person for performing any of the acts within the scope of this chapter who is not licensed under the broker employing…” It further states that “no real estate broker shall be employed by or accept compensation from any person other than the broker under whom he or she is at the time licensed.” Unfortunately, the Code still seems to allow for some confusion as to the payment of third parties, former employees, and other aspects of commission payments that brokers are often faced with.
Pursuant to an interpretation by the California Department of Real Estate, the commission earned in a real estate transaction belongs solely to the employing broker. The employing broker must be involved in the distribution of commissions under his or her license. Any violations are subject to temporary suspension or revocation of his or her license. In light of this, a salesperson can instruct the employing broker to pay his or her commission to a third party, but that payment can only be made if the third party did not perform acts for which a real estate license is required. Business and Professions Code Section 10137 correlates with the Real Estate Law (Business and Professions Code Section 10000, et seq.) and is intended to prevent payment for unlicensed acts.
Commission sharing or splitting is not prohibited by Business and Professions Code Section 10000, et seq. However, prior to entering into an agreement for commission splitting or sharing, it is important to check with an attorney to make sure the agreement does not violate other laws pertaining to real estate, such as the Federal Real Estate Settlement Procedures Act (RESPA). In a situation where commissions are legally split or shared, the commissions still belong to the employing broker. Agents may work together and decide to share or split the commission only if the entity that they are sharing or splitting with has not performed any acts for which a real estate license is required. If the entity that the agent is sharing or splitting a fee with does have to perform the acts of a licensed real estate person, then he or she must also be licensed. Even then, it is only legal to share or split fees if the licensee was acting within the course and scope of his or her license.
Commissions earned by former employees also present a problem for brokers. Compliance with the Code requires brokers to issue checks for commissions to the former employee’s new employing broker. If such a person does not exist for whatever reason, it is the Department’s policy that an earned commission can be paid directly to a former employee. This remains consistent with an Attorney General Opinion dealing with the payment of earned commissions to suspended licensees.
Lastly, confusion often arises with regards to dual employment. This is most likely due to the fact that it may seem that brokers are allowed to work for two companies while agents are not. In reality, however, Business and Professions Code Section 10137 allows real estate brokers to act as salespeople or broker-associates for another broker. Real estate agents, however, are only allowed to work for one broker and may only accept compensation from their employing broker. This is to ensure that one employing broker is directing and controlling the licensed activity of an employed salesperson.
The bottom line when it comes to real estate commissions is that they are under the control of the employing broker. Commissions can be paid to someone else—it is one of the major perks of being a real estate agent! This includes third parties and suspended former employees, but Business and Professions Code Section 10137 was enacted to provide guidelines for the payment of compensation and to ensure that consumers are protected from unscrupulous people who attempt to perform the actions of a real estate broker or real estate agent without a license.
BY: JOHN V. GIARDINELLI, ATTORNEY AT LAW
CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.
Although some economists believe that we have reached the bottom of the housing recession, that prospect has not prevented the California legislature from enacting laws to protect borrowers in the future. On July 11th, Governor Brown signed the “Homeowner Bill of Rights” into law. A combination of five bills, including Assembly Bill 278 and Senate Bill 900, the “Bill of Rights” aims to keep California homeowners in their homes by avoiding foreclosure wherever possible. According to California Attorney General, Kamala D. Harris, who backed these laws, “[t]hese common-sense reforms will require banks to treat California homeowners more fairly and bring more transparency and accountability to their practices in our state.”
The key elements of the Homeowner Bill of Rights are that it will (1) prohibit lenders from engaging in dual tracking (defined below); (2) require lenders to provide a single point of contact for borrowers seeking foreclosure prevention alternatives; (3) provide borrowers with certain safeguards during the foreclosure process; and (4) provide borrowers with the right to sue lenders for material violations of this law.
The law will generally come into effect on January 1, 2013. As it stands now, it pertains only to first trust deeds secured by owner-occupied properties with one-to-four residential units. A “borrower” is defined as a natural person who is potentially eligible for a foreclosure prevention alternative program. This person cannot have filed bankruptcy, surrendered the secured property, or be working with an organization that is advising him or her on how to avoid their contractual obligations by extending the foreclosure process.
Prohibition of Dual Tracking
“Dual tracking” is when a lender continues to pursue foreclosure even though the borrower is applying for a loan modification, a short sale, or other foreclosure alternative. In the recent past, it has been a common complaint from borrowers and their REALTORS® that they have been in the process of a loan modification or short sale and their house was sold at a Trustee’s Sale. The new law prohibits a mortgage servicer from recording a Notice of Default, Notice of Sale, or conducting a Trustee’s Sale for foreclosure if a short sale has been approved or if a borrower’s complete application for a loan modification is pending. Even still, if the loan modification is denied, the lender cannot proceed with the foreclosure process until 31 days after giving the borrower a written denial of the modification (or longer if the denial is appealed). If a short sale has been approved after the notice of default has been filed, the lender must rescind or cancel any pending Trustee’s Sale. This provision of the law sunsets, or expires, on January 1, 2018.
Single Point of Contact
Another issue that borrowers have faced is the fact that they cannot make contact with a single person at the lender’s company. Phone call after phone call would be made to different people at the company or to an automated, non-responsive answering service. No one would know anything about the borrower’s situation, the status of the modification, or any other foreclosure alternatives available to the borrower.
Pursuant to the new law, upon a borrower’s request, the lender must establish a “single point of contact” for the borrower to contact about foreclosure alternatives. The single point of contact can be an individual or a team, but he, she or they must have knowledge of the borrower’s status and the foreclosure alternatives available to the borrower. The contact will assist in coordinating the application for the foreclosure prevention alternative and giving status reports when requested. The contact will also have access to those with the ability and authority to stop the foreclosure process, should one have already been commenced.
Safeguards for Borrowers
Additional safeguards have been added for borrowers. Until January 1, 2018, a loan servicer must provide written acknowledgement of a borrower’s submission of a loan modification application within five (5) days of receipt of the application. In the confirmation, the lender must provide a description of the loan modification process and include an estimated timeframe for the lender’s servicer to reach a decision. The confirmation must also address any deficiencies in the borrower’s application. If the loan modification is denied, the servicer must send a written notice to the borrower specifying why it was denied. However, smaller banks do not need to comply with these requirements until January 1, 2018.
Another safeguard that is included in the Bill is that any written approval for a foreclosure prevention alternative must be honored by a subsequent mortgage servicer if the loan is transferred or sold. Again, smaller banks do not have to comply with this requirement. Further, it will expire on January 1, 2018.
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Legal Remedies for Borrowers
Per Attorney General Harris, “[h]omeowners will also have a clearly-defined right to access the courts to protect themselves from violations of these protections.” While some have argued that this aspect of the Bill will merely delay the foreclosure process and encourage litigation, others argue that homeowners whose rights have been violated should have the opportunity to remain in their homes and seek damages. Under
the new law, homeowners who feel that they have been treated unfairly or were not given due process are presented with two options. If the lender’s misconduct occurs during the foreclosure process, borrowers may seek injunctive relief, which is a court-ordered act or prohibition of an act (such as stopping the foreclosure sale). However, if the misconduct occurs after the foreclosure sale has already taken place and it is not possible for a borrower to get his or her home back, they may seek monetary damages. Essentially, borrowers will have the right to sue banks for “significant, material” violations of the new laws.
While the Homeowner Bill of Rights has been surrounded by controversy and the arguments both for and against it have been well-presented, the Bill nonetheless addresses several major concerns that have plagued California homeowners and REALTORS® for the past several years. It has been touted as some of the “most stringent legal protections in the nation against predatory, aggressive bank lending practices.” It will be interesting to see how, once enacted, it affects both borrowers and banks alike.
In May’s Courtside Newsletter, I discussed two recent cases decided by the California Courts of Appeal that will impact practices in the real estate field. This month will be a continuance of that theme.
The first case is Glen Oaks Estates Homeowners Association v. Re/Max Premier Properties, Inc., et al., which clarifies who has the ability to bring a lawsuit against REALTORS®. In 2005, Glen Oak Estates, located in Pasadena, experienced a landslide along its common slope area and common driveway. As a result of the landslide, in 2007 a lawsuit was filed against the HOA for negligence (DePaul v. Glenoaks Estates Homeowners Association). The HOA counter-sued the developers for indemnity and contribution. During this lawsuit, documents were produced by the developers, which lead to the instant action, Glen Oaks Estates HOA v. Re/Max. In the transactions with Glen Oaks Estates, the REALTORS® were acting as dual agents, both for the sellers/developers, and for the buyers/HOA members who purchased the parcels at Glen Oaks Estates. According to the HOA, the documents that were produced in the DePaul case indicated that the REALTORS® and agents were not acting in the best interests of both the sellers and the buyers. The HOA sued Re/Max Premier Properties, Inc., Dilbeck Realtors GMAC Real Estate, and the agents involved in the Glen Oaks Estates transactions for unfair business practices, breach of fiduciary duty, and intentional misrepresentation.
Based on the documents produced in the DePaul case, the HOA’s complaint alleges that the REALTORS® engaged in unfair business practices by violating the Subdivided Lands Act. The complaint alleged (1) that the REALTORS® failed to provide buyers with a public report regarding the property or other transactional documents prior to the execution of the sales contract; (2) that the REALTORS® engaged in false advertising by failing to disclose, through flyers or other publications, that Glen Oaks Estates was a common interest development subject to the requirements of the Subdivided Lands Act and the regulations of the DRE; and, (3) that Re/Max engaged in unfair business practices by falsely advising developers that the DRE did not require a homeowners association for the Estates and by collaborating with the developers to low-ball the budget.
The HOA further alleged that “the Realtors breached their fiduciary duties to the members of the HOA by failing to provide a final public report, a DRE-approved budget, and other required disclosures and transactional documents pursuant to the Subdivided Lands Act,” failed to investigate the legitimacy of soil reports provided by Pioneer Soils Engineering, Inc., and failed to warn HOA members that the soil reports might not be valid.
Based on these allegations, the HOA claimed that “the HOA members would not have purchased their homes in Glen Oaks Estates had the Realtors acted as proper fiduciaries, not concealed information relating to the budget, warned them about the alleged invalid soil reports and/or complied with the laws required of them to provide a final report and other transactional documents.” However, the reality was that the homes were purchased, a landslide occurred, allegedly due to the misrepresentations and illegitimate soil reports, and the HOA found itself embroiled in third party litigation with damages in excess of 3 million dollars.
When faced with this lawsuit, the REALTORS® demurred to the HOA’s complaint, stating that the HOA did not have grounds to bring the lawsuit since the claims belong to the individual homeowners who purchased the homes in Glen Oaks Estates. The trial court agreed with Defendants, stating that the HOA could not sue the REALTORS®. The HOA appealed, pointing out that under the Davis-Stirling Common Interest Development Act, Section 1368.3 allows for “[a]n association established to manage a common interest development…to institute, defend, settle, and intervene in litigation…in its own name.” The HOA was not alleging that the REALTORS® owed it any specific duties. Instead, the HOA had standing to bring a suit based on alleged breaches of duties that were owed to the Buyers. Since the area damaged by the landslide was “common area” under the Common Interest Development Act Section 1368.3 and the HOA incurred damages as a result thereof, the Court of Appeal found that the HOA did, in fact, have standing to bring a lawsuit against the REALTORS®.
Prior to this ruling, it was thought that homeowners associations could not bring a suit against REALTORS® or real estate agents. However, the court’s interpretation of Civil Code Section 1368.3 (the Davis-Stirling Common Interest Development Act), in this case, redefines the protection afforded to REALTORS® and agents and now enables HOAs to bring suit under certain conditions.
The next case is Lyon & Assoc. v. Superior Court, in which the court “illustrates the perils that real estate brokers and their agents assume when acting as a dual listing agent with duties to both the buyers and sellers of the same house.” The original proceeding arose out of the sale of a home in Rocklin, California. Robert and Denise Costa were the sellers, Ted and Patti Henley were the buyers, and Lyon & Associates (“Lyon”) represented both parties in the transaction. The Costas listed the home in early 2006 with an agent at Lyon. However, the agent became aware of defects and problems with the stucco and paint on the home. Instead of continuing with that agent, the Costas decided to use a different agent at Lyon, Gidal, who continued to list the property. Gidal was present when listing photographs were taken of the property that showed defects in the paint and stucco.
On May 2, 2006, the Henleys signed a buyer-broker agreement giving Lyon the exclusive right to represent them in the transaction. The Agreement affirmed that “a dual agent is obligated to disclose known facts materially affecting the value or desirability of the property to both parties.” Escrow closed on May 9, 2006 and, subsequently, the Henleys began to notice the defects in the property. Allegedly, the defects included water intrusion and efflorescence that extended from the decks to the exterior of the house, causing bubbling, blistering and cracking of the stucco and paint. When the Henleys filed their first amended complaint against the Costas and Lyon in May 2009, they alleged that the Costas knew about these defects but did not disclose them in the sale. Instead, they painted the house a dark brown prior to the Henleys’ inspection so the problems would go unnoticed. Gidel also knew about these problems and failed to disclose.
The buyer-broker agreement signed by the Henleys limits the time to bring an action for breach of the Agreement to two years. Since the Henleys’ action was filed almost three years after the close of escrow, Lyon claimed that they were barred from filing their suit for breach of contract, negligence, fraud, breach of fiduciary duty, and negligent misrepresentation. Lyon relied on California Civil Code Section 2079.4, which imposes the two-year statute of limitations written into the Agreement. However, the Court of Appeal found that section 2079.4 “specifies a statutory duty imposed on seller’s brokers to buyers of residential property.” The Henleys were the buyers of the property; therefore their complaint does not assert claims under section 2079. Further, the Henleys believed that the statute of limitations should be extended by the discovery rule, which begins tolling when the breach was discovered or should have been discovered. According to the complaint, the Henleys began to notice paint blisters at the end of 2006, but only started suspecting the Costas and Lyon in mid-2007. The court agreed with the Henleys, stating that the claim was filed in a timely manner as to all causes of action. “In sum, the buyer-broker agreement’s limitation period is subject to the discovery rule for a breach of contract action alleging active concealment of the breach by the broker.”
As a result of this decision, the California Association of REALTORS® has amended the Buyer Representation Agreements (Exclusive, Non-Exclusive, and Non-Exclusive/Not for Compensation). These forms have been slated for release this month, amongst others.
As a real estate practitioner, it is important to be aware of the duties that are owed and to whom they are owed. Otherwise, one could end up in a situation such as the brokers above. As the court pointed out in Lyon, it is especially harrowing to be a dual agent, thus extra precautions should be taken. As a buyer or seller, it is also important to be aware of your rights and the duties owed to you by your agent or broker. However, whether you are an agent, broker, buyer, or seller, always review the contracts you sign. If you have any questions, seek the advice of qualified legal counsel.
BY: KELLY A. NEAVEL, ATTORNEY CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.
There have been four recent cases decided by the California Courts of Appeal that will have an effect on how real estate brokers and agents conduct business. This article will will discuss two of those cases.
In RealPro, Inc. v. Smith, the court took a closer look at the standard Listing Agreement used in the sale of real property. In September 2005, Sellers/Defendants Smith Residual Company, LLC and J&A Gonzales, LLC retained real estate broker MGR Services, Inc. to act as their agent for the sale of real property in Riverside County. A “Standard Owner-Agency Agreement for Sale or Lease of Real Property” was executed, setting forth the sale price and terms of “$17,000,000 cash or such other price and terms agreeable to [Sellers]…” In November 2005, RealPro, Inc., broker for the buyer, submitted a written offer to MGR for the full asking price of $17,000,000 cash. In December, MGR countered that offer, stating that the listing price was being increased to $19,500,000. Both MGR and the Sellers (Defendants) confirmed a brokerage fee of 4% split equally between MGR and RealPro. However, the Counteroffer was rejected by RealPro.
In March 2006, RealPro demanded its 2% brokerage fee for producing a ready, willing, and able buyer. When Sellers refused to pay the brokerage fee, RealPro filed the instant action, wherein the trial “court found that RealPro had ‘failed to allege facts giving rise to the existence of an enforceable written contract for the payment of a real estate commission.’” RealPro appealed the trial court’s decision. The Court of Appeal ultimately agreed with the trial court. According to the Court of Appeal, the confusion centers on the word “or” at Paragraph 1.4(a) of the Listing Agreement. Plaintiff RealPro interpreted the “or” to act as a means of separating the $17,000,000 cash offer from the phrase “such other price and terms acceptable to [Sellers].” Defendants interpreted the “or” to include the phrase “such other price.” With this interpretation, the emphasis is on the “and,” not the “or”: “$17,000,000 cash or such other price and terms agreeable to [Sellers].” The court agreed with Defendants’ interpretation, stating that the presentation of a $17 million cash offer did not obligate the Sellers to enter into a purchase and sales agreement. Further language in the Listing Agreement indicates that Sellers are allowed “to specify price and terms, even outside of the four corners of [the Agreement].” The Court of Appeal concluded that the $17 million was merely an invitation to submit offers. It is an asking price to “guide negotiations.”
RealPro argued that the Listing Agreement contains “language that allows for payment of any commissions simply upon receipt of a full price offer.” The Court disagreed. Sellers pointed out that such language would create a conflict that is not to the mutual benefit of the parties who entered into the Listing Agreement to begin with. “Mutual benefit” is the purpose of a contract. Having to pay a commission for any full price offer that is submitted would create a myriad of problems for the Seller, including: (1) preventing a Seller from accepting any higher offers without still owing a commission to the first broker, (2) creating an obligation for the Seller to pay multiple commissions on multiple offers, and, (3) prospective buyer’s brokers would have no incentive to obtain purchase prices below the listing price because it would jeopardize their commission.
This case reminds real estate agents and brokers to look carefully at the documents they are signing and the contracts they are entering into. From the start of representation, real estate contracts are laced with subtle nuances that often escape many agents’ notice. As a result of this case, the California Association of REALTORS® is considering changing the language of the Listing Agreement in order to make it less ambiguous.
Bank of America, N.A. v. Mitchell addresses California’s antideficiency statutes as a matter of law and how they are affected by the structure of certain loans. In this case, in 2006 GreenPoint Mortgage loaned Defendant Michael Mitchell $315,000 to purchase real property located in Lancaster. The loan was secured by two notes with a first deed of trust and a second deed of trust, both held by GreenPoint. In 2008, Mitchell defaulted on both notes. In 2009, GreenPoint foreclosed on the first deed of trust. Thereafter, GreenPoint assigned the second deed of trust to Bank of America. Bank of America attempted to collect the debt owed under the second deed of trust. However, Mitchell refused to pay, arguing that the second loan was “wiped out” at the foreclosure sale of the first loan. Bank of America initiated this lawsuit for breach of contract based on the second promissory note. The trial court agreed with Mitchell and stated, “the Bank’s…claims seek recovery of the balance owed on the obligation secured by the second deed of trust and, thus, are barred by the antideficiency statutes…” Bank of America appealed, yet the Court of Appeal affirmed the decision of the trial court.
In California, Code of Civil Procedure §580d is part of the antideficiency statutes. It prohibits a creditor from seeking a judgment for a deficiency on all notes “secured by a deed of trust or mortgage upon real property…in any case in which the real property…has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.” This means that the beneficiary of a deed of trust cannot go after the debtor for the deficiency (unless he uses judicial foreclosure).
In its discussion in the Mitchell case, the Court of Appeal analyzed decisions reached in two separate, similar cases, both interpreting Code of Civil Procedure §580d. The Court of Appeal reasoned that GreenPoint would not have been a “sold-out junior lienor” after the foreclosure sale of the first deed of trust because it held both the first and the second deeds of trust at the time of the foreclosure sale. Therefore, it was not entitled to obtain a deficiency judgment. The fact that the junior note was thereafter transferred to Bank of America does not change the fact that a deficiency judgment cannot be obtained. The Bank merely “‘stands in the shoes’ of the assignor, assuming the assignor’s rights and remedies.” Essentially, because GreenPoint was precluded from obtaining the deficiency judgment, Bank of America was also precluded.
What can be taken away from this case is that the structure of the loans at the time of the foreclosure sale will determine whether a second lien holder can pursue a deficiency judgment.
Many homeowners who have been foreclosed upon may find themselves in similar situations where California’s antideficiency statutes can be interpreted in a different way than what they may believe to be true. Here at The Giardinelli Law Group, APC, we find that many people come in, both before and after a foreclosure sale, with knowledge that they have either heard through the rumor mill or read on the internet, which may not be completely correct. If you or someone you know are going through a foreclosure, this case demonstrates the fact that not every situation is cut and dry and each foreclosure or short sale deserves special attention and, potentially, legal expertise.
Look for Part Two of this series in next month’s Courtside Newsletter!
BY: JOHN V. GIARDINELLI, ATTORNEY,
CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.
The California Association of REALTORS® has finalized the forms currently set for release on April 30, 2012, as well as those that will be released in late May.
Carbon Monoxide Detector Notice (New)
The Carbon Monoxide Detector Notice is a new disclosure form reflecting California Law that requires that all existing single-family homes have carbon monoxide detectors installed by July 1, 2011. All other dwellings intended for occupancy are to have carbon monoxide detectors installed by January 1, 2013. The latter deadline is intended for duplexes, lodging homes, dormitories, hotels, condos, time-shares, and apartments, among others. The purpose of the new form is to provide the buyer and seller with notice of the new requirements, exceptions to the requirements, and the penalties of non-compliance. It does not disclose if the requirements have been met by the sellers. The form states that sellers of residential 1-4 properties who are required to complete a Transfer Disclosure Statement (TDS), or a Manufactured Home and Mobile home TDS must use section II A of the forms to disclose whether the dwelling has a carbon monoxide detector. Failure to disclose or comply can result in a fine of up to $200. The form should be used as a rick management protection, although it is not mandatory.
Short Sale Addendum (Revised)
The Short Sale Addendum form has been revised to include language regarding cancellation of the California Residential Purchase Agreement, Counter Offer, or other agreement to sell a property via short sale. Pursuant to the existing form, the Short Sale Addendum is contingent upon the Seller’s receipt of and delivery to the Buyer of a Short Sale Lenders’ Consent no later than a the “Short Sale Contingency Date.” The revisions to this section of the form (1A) state that any cancellation of the Agreement prior to the Short Sale Contingency Date “must be pursuant to a right to cancel by the party in the Agreement notwithstanding that time periods in the Agreement have not commenced.” The rest of the form remains the same.
Homeowner Association Information Request:
The Homeowner Association Information Request has been revised from the November 2011 form to now include additional lines for the delivery of CC&Rs and notices of owner violations. The purpose of the Homeowner Association Information Request is to allow the parties to obtain documents from the HOA, (if available), pursuant to California Civil Code Section 1368. After the request is submitted, the HOA, usually through escrow, must provide an estimate of the fees that will be assessed for providing the documents and, within 10 calendar days, provide the requesting party with the items or information requested. The revision to the form now allows the parties to obtain information of CC&Rs and notices of owner violations, in addition to information regarding rentals, insurance, and defects, to name a few. Some of the information is mandated by statute. The form is an excellent and useful worksheet for the members working with properties in HOAs and Planned Unit Developments.
Commercial, Residential Income and Vacant Land Listing Agreement (Revised)
A new Section 6 has been added to the Commercial, Residential Income and Vacant Land Listing Agreement. This section applies specifically to properties listed in the Multiple Listing Service and states that all terms of the transaction will be provided to the MLS for “publication, dissemination and use by persons and entities on terms approved by the MLS.” However, there are also subsections that allow the seller to opt out of internet display of the property or the property address. Should the seller want to display the property on the internet, he or she also has the option to opt out of linking with other MLS Participant and Subscriber websites. What this means is that while the property will show up with on those sites, people searching the internet will not be able to link back to where the property is originally listed and will not be able to see comments or reviews. It is important to note, however, that the seller must opt out using a separate form (C.A.R. form Seller Instruction to Exclude Listing from the Multiple Listing Service or Internet).
Seller Instruction to Exclude Listing from the Multiple Listing Service or Internet (Revised)
The Seller Instruction to Exclude Listing from the Multiple Listing Service or Internet has also been modified. The amount of time to submit an exclusive right to sell and exclusive agency listing for real property or a vacant lot is not longer listed in hours, but has been changed to two (2) days. For those members who are in CRMLS, these are two (2) business days. Under most rule sets weekends and holidays are generally excluded. While the section dealing with the exclusion of a property from the MLS not been changed, it is important to take note that this form has a secondary purpose and can be used by sellers to make sure their property either does not appear on the internet or is not hyperlinked to reviews and comments.
Seller’s Affidavit of Nonforeign Status and/or California Withholding Exemption (Revised)
The November 2006 revision of the Seller’s Affidavit of Nonforeign Status and/or California Withholding Exemption clarifies that a tax identification number (TIN) is necessary, as well as a California Corporation number for those corporations qualified to do business in California. The remainder of the form is the same.
Septic Inspection, Well Inspection, Property Monument and Allocation of Costs Addendum (Revised)
The Septic Inspection, Well Inspection, Property Monument and Allocation of Costs Addendum has been modified to more accurately reflect whether the buyer or the seller will be paying for the costs related inspection and/or repairs to septic tanks, wells, and property monuments. It is anticipated that these revisions will provide for more accuracy as to who is doing what and will hopefully prevent any confusion or future issues.
The last revised form to be released on April 30, 2012 will be the Addendum. C.A.R. has simply removed the broker signature line. If the broker wishes to sign, he or she may use the prior form or insert his or her signature.
The following revised forms will be issued in late May 2012. However, at the time this article was published, C.A.R. has not released a specific date.
Office Management Agreement (New)
The Office Management Agreement is a new form that reflects changes to California Business and Professions Section 10164 that become effective on July 1, 2012. Pursuant to the changes to the Code, (also discussed in our October Courtside Newsletter, “New Laws That May Affect Your Real Estate Business,” which can be found on our website), a broker who appoints a branch manager must do so pursuant to a written contract defining the responsibilities of that manager. There are further requirements, of course, as well as anticipated DRE regulation, but the purpose of C.A.R.’s new form is to provide a basic written contract according to the law. The Agreement contains language defining what offices the manager will oversee, his or her responsibilities, his or her salary, and other topics directly related to employment. It is to be used in conjunction with exhibits relating to internal office policies.
Broker/Associate-Licensee/Assistants Three-Party Agreement (Revised)
Section 5 of the Broker/Associate-Licensee/Assistants Three-Party Agreement has been revised to reflect recent changes in employment classifications. Now entitled “Employee Classification Advisory,” this section addresses the misclassification of independent contractors, stating “the classification of persons as employees or independent contractors is one the areas of the law that is complicated and risky.” The new law on this issue was addressed in our December Courtside Newsletter, “Warning to Employers: New 2012 Employment Laws,” which can be found on our website, www.glawgroupapc.com. The revisions to the Broker/Associate-Licensee/Assistants Three-Party Agreement serve as a warning to signees, letting them know that “independent contractor” has different definitions for different entities and the severe penalties of willful or unintended misclassification. The form also mentions the need to carry workers’ compensation insurance for an assistant.
Personal Assistant Contract (Revised)
The Personal Assistant Contract contains the same language with as the Broker/Associate-Licensee/Assistants Three-Party Agreement with regards to an “Employee Classification Advisory.”
It is important to seek the advice of competent legal counsel if any of the new forms are confusing or you have any questions whatsoever. It is always better to be safe than sorry.