11.1: Part I- Real Estate Law
- Page ID
- 36049
\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)
\( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)
\( \newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\)
( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\)
\( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\)
\( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\)
\( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\)
\( \newcommand{\Span}{\mathrm{span}}\)
\( \newcommand{\id}{\mathrm{id}}\)
\( \newcommand{\Span}{\mathrm{span}}\)
\( \newcommand{\kernel}{\mathrm{null}\,}\)
\( \newcommand{\range}{\mathrm{range}\,}\)
\( \newcommand{\RealPart}{\mathrm{Re}}\)
\( \newcommand{\ImaginaryPart}{\mathrm{Im}}\)
\( \newcommand{\Argument}{\mathrm{Arg}}\)
\( \newcommand{\norm}[1]{\| #1 \|}\)
\( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\)
\( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\AA}{\unicode[.8,0]{x212B}}\)
\( \newcommand{\vectorA}[1]{\vec{#1}} % arrow\)
\( \newcommand{\vectorAt}[1]{\vec{\text{#1}}} % arrow\)
\( \newcommand{\vectorB}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)
\( \newcommand{\vectorC}[1]{\textbf{#1}} \)
\( \newcommand{\vectorD}[1]{\overrightarrow{#1}} \)
\( \newcommand{\vectorDt}[1]{\overrightarrow{\text{#1}}} \)
\( \newcommand{\vectE}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash{\mathbf {#1}}}} \)
\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)
\( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)
\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)Real Estate Law: Fiduciary Duty
Real estate agents hold important obligations to their clients, the most important of which is called a fiduciary duty. A fiduciary duty is the highest legal standard of care that a person or company can owe to another. The person who owes the duty must exercise utmost fidelity and must do everything reasonably necessary to protect the interests of those they serve. In real estate, the agent typically owes the fiduciary duty to her broker as well as to her clients.
Fiduciary duties include, among others, loyalty; confidentiality; the exercise of utmost care (and in certain fact situations, reasonable care); full and complete disclosure of all material facts; the obligation to account to the principal; the obligation to act fairly and honestly and without fraud or deceit; and the duty to "explain" and "counsel" about that which has been disclosed or should have been disclosed thereby permitting the principal to make an informed and considered decision to buy, sell, lease, exchange, borrow or lend.
The concept of agency and fiduciary duty is quite old. According to Civil Code § 2295 (which was enacted in 1872), "An agent is one who represents another, called the principal, in dealings with third persons. Such representation is called agency." In an agency relationship, the principal delegates to the agent the right to act on his or her behalf, and to exercise some degree of discretion while so acting. The agency relationship between a real estate broker and his or her principal results in a special agency typically limiting the broker to soliciting and negotiating on behalf of the principal to the real property or real property secured transaction. (Business and Professions Code § 10131 et seq.; Civil Code § 2297). Generally, real estate brokers are neither entitled to act in the place and instead of nor are they entitled to bind their principals.
An agency relationship creates a fiduciary duty owed by the agent to the principal within the course and scope of the agency and the authority granted by the principal. The fiduciary duty owed by real estate brokers to their principals has been compared by the courts to the duty owed to the beneficiaries by a trustee under a trust. (Civil Code § 2322, Probate Code §§ 16000-16105.) Reference Book, A Real Estate Guide. California Department of Real Estate, Chapter 10. https://www.dre.ca.gov/publications/...rencebook.html
According to California Civil Code p2322, Probate Code pp16000-16105, and California Civil Instructions 4100, an agent owes a fiduciary duty to her clients and to her broker. This fiduciary duty is a matter of law, although its components also look like ethical principles. The fiduciary duty says that the agent must act with the utmost good faith and in the best interests of the client or other person to whom the duty is required.
As shown above, from the California Department of Real Estate, fiduciary duty is a complex set of obligations. They include loyalty, confidentiality, utmost care, complete disclosure of all material facts, accountability to principals, acting fairly and honestly without fraud or deceit, and the duty to explain and counsel principals about disclosures.
The duty of loyalty requires that the agent or broker always act in the best interests of the client, even if it isn't in the agent or broker's own interest. If, for example, an agent wishing only to earn a higher commission persists in showing higher priced properties to a client even when a lower priced property will meet the client's needs would not be acting in accordance with his fiduciary duty.
The duty of confidentiality requires that the agent or broker protect the principal's confidential information. For example, a listing agent who tells a buyer that the seller will take a lower price is working against the best interests of his client (the seller) as well as disclosing confidential information.
The duty of utmost care requires that the agent use the highest possible care and attention to serve her principal honestly and accurately. The agent must not be neglectful or careless.
Disclosure of all material facts related to the property, the transaction, or the agent/client relationship is an essential element of fiduciary duty. For example, a listing agent (the seller's agent) must present all offers (except frivolous ones) to the seller. Similarly, a selling agent (the buyer's agent) must disclose anything related to the value of the property. Agents must also explain and counsel principals about disclosures in the way that they are most likely to understand the implications of the information. Also, an agent who represents both the seller and the buyer, that is, a dual agent, must disclose this dual agency to both principals.
The fiduciary duty of accountability requires agents to account for everything of value, including the principal's money, property, and documents, that has been given into their care. This means they are responsible for knowing the whereabouts of these things.
Practice Zone
.jpg?revision=1) |
|
Real Estate Law: Other Regulations
In the previous module, you learned about federal and state laws regarding fair housing. California also has other regulations for real estate that have the force of law. For the most part, they address issues of fraud. This section will discuss four of the violations of real estate law that are both serious and, unfortunately, rather common, and that are important for you to know. These include:
- illegal advertising
- commingling
- kickbacks
- conversion
Advertising
Several laws relate to real estate advertising. For example, a newspaper or magazine ad placed by an agent must state that an agent is placing the ad and must give the name and DRE number of the broker. Without the name of the broker, the ad is "blind advertising" and is illegal.
Advertising cannot be deceptive. An ad that says a house is "turnkey" (ready to move in) when it really needs structural or other significant repair, for example, is deceptive – and illegal. Similarly, posting pictures that have been edited to remove telephone poles or other unsightly items is misrepresenting the property and is illegal. A misleading map or drawing would also be a violation.
Commingling
The mixing together, or commingling, of funds of a client with those of an agent is a violation of the Business and Professions Code. Commingling happens when an agent deposits a client's money into her own personal or business account rather than a trust account. Another way of commingling funds is to place a client's money in the broker's safe. This practice not only creates a risk of financial loss for the client but also undermines trust in the real estate industry. Agents are entrusted with safeguarding client funds, and commingling demonstrates a lack of professionalism and ethical conduct. Penalties for commingling can be severe, including license suspension or revocation, fines, and even criminal charges.
Kickbacks
Maybe you've already heard of "kickbacks." In real estate, for an escrow, title, pest control, or home warranty, or other real estate services company to give money or other thing of value to an agent in return for her sending it some business is illegal. This practice violates the Real Estate Settlement Procedures Act (RESPA) and undermines fair competition in the industry. Agents are required to present their clients with a variety of qualified service providers, allowing them to choose the one that best meets their needs and budget. Sometimes this practice is called a "referral fee." Some people think of it as a bribe. Whatever you call it, it's illegal.
Source: Section 8(a) (12 U.S.C. § 2607(a))
Conversion
"Conversion" is stealing. It can also be characterized as misappropriation of funds, fraud, or embezzlement. An agent converting a client's money into her own money for personal use is not just a violation of trust, it is a criminal act. Client funds entrusted to an agent must be held securely in a separate account and used only for designated purposes as agreed upon. An agent taking a client's deposit or down payment and keeping it instead of using it for the intended purpose, is an example of conversion. Misusing client funds is a serious breach of trust and can result in legal repercussions, loss of licensure, and damage to the agent's reputation.
Practice Zone
|
The examples given above of illegal activities in real estate are punishable by the district attorney. Are they also unethical? What do you think? Why? |