The Agency Law Disclosure and agency confirmation is now expanded to include nonresidential transactions. Read on for a discussion of the expanded role this pivotal disclosure will play in the commercial real estate practice of tomorrow, the agency law’s proper application and the consequences of avoidance.
Agency law broadens its application
The real estate agency disclosure law previously applied only to one-to-four unit residential sales and leases. It has since been expanded to include nonresidential real estate sales and lease transactions effective January 1, 2015. Thus, commercial brokers and agents will now disclose, in a written statement and at the earliest possible opportunity, their agency relationship with the different participants in all their commercial sales transactions and leases with a term exceeding one year.
Thus, in practice, commercial brokers and agents will now hand their clients an Agency Law Disclosure form and have it signed and acknowledged by the client as an attachment to:
- a listing agreement employing the broker to locate a buyer or tenant; and
- any writing that initiates negotiations contemplating a sale or lease transaction. [Calif. Civil Code §2079.13; see first tuesday Form 305]
For example, the Agency Law Disclosure form will now be attached when an agent prepares a letter of intent (LOI) to be signed by a prospective buyer or tenant for a purchase or a lease with a term exceeding one year. As is well understood, an LOI commences negotiations in a transaction between prospective buyers/tenants (users) and the owner (as does a purchase agreement submission). [CC §2079.14]
The agency disclosure law’s two applications
The real estate agency disclosure law addresses two separate sets of agency-related matters on real estate transactions:
- an Agency Law Disclosure form, also known as the Disclosure Regarding Real Estate Agency Relationships, setting out the “rules of agency” which control the conduct of real estate licensees when dealing with the public in an agency capacity [See first tuesday Form 305]; and
- an agency confirmation provision, contained in documents signed by a prospective buyer or tenant and used to negotiate the acquisition of real estate or the leasing of real estate and lease agreements with a term exceeding one year, declaring the agency relationships undertaken by each of the brokers with the participants in the transaction. [See first tuesday Form 150]
At its core, the Agency Law Disclosure form is a restatement of pre-existing agency codes and case law on agency relationships in all real estate transactions. [See first tuesday Form 305]
Until now, the Agency Law Disclosure form and agency confirmation provision have been limited in practice to use in one-to-four unit residential property transactions following enactment of the agency disclosure statutes of 1988. In the years since, a reverse assumption came to exist that agency rules are not of concern to commercial real estate agents since agency issues and disclosures were limited by statute to use in one-to-four unit residential property transactions.
As of January 1st, the residential-only assumption is no longer arguable. Agency disclosures and confirmations are now required of real estate brokers to all participants in:
- all commercial real estate purchases; and
- commercial lease transactions with lease terms longer than one year. [CC §2079.13]
Editor’s note — As before, multi-family apartment sales remain outside the agency disclosure law but not so for residential leases over one year.
Commercial real estate transactions now require the Agency Law Disclosure form to be attached and signed by all owners and users involved, on or before a participant enters into any of the following documents:
- a seller’s listing [See first tuesday Form 102];
- a purchase agreement [See first tuesday Form 159];
- an exchange agreement [See first tuesday Form 171];
- a landlord’s listing of property for lease authorizing a lease term for more than one year [See first tuesday Form 110];
- any LOI prepared and submitted on behalf of a buyer or tenant (or owner); [See first tuesday Form 185]
- an offer to lease [See first tuesday Form 556];
- a residential or commercial lease agreement for a term exceeding one year [See first tuesday Form 550 and 552 – 552-8], and
- an option to purchase. [CC §2079.14; see first tuesday Form 161 and 161-1]
Editor’s note — All affected first tuesday forms will be updated and available online prior to the effective date.
With the 2015 legislative update, commercial brokers and agents now need to provide the same level of transparency that their residential brethren have been providing for over 25 years. As has evolved in single family residence (SFR) representations since enactment of the 1988 law, commercial transactions going forward will come to include two sets of brokers and agents in each set of negotiations; one for the owner, one for the user. As a result, dual agency, with its risks of inherent client discomfort and litigation, will tend to disappear.
Multiple acknowledgements required
Both the seller’s/owner’s agent and the buyer’s/user’s agent are required to provide the participants in a transaction involving a sale or lease for more than one year with a copy of the Agency Law Disclosure form at the earliest possible opportunity –– ASAP.
The owner’s agent provides the disclosure form to the owner of the property prior to entering into any listing agreement to:
- sell [See first tuesday Form 102]; or
- lease a property for a term of more than one year. [CC §2079.14(a); see first tuesday Form 110]
The buyer’s/user’s agent provides the disclosure form to the buyer/user prior to their signing any:
- LOI or other purchase offer [See first tuesday Form 159 and 185]; or
- LOI or other offer to lease for a term of more than one year. [CC §2079.14(d); see first tuesday Form 556]
Upon receipt of the proposal from the buyer’s/user’s agent, the owner’s agent then reviews the disclosure form with the owner for their acknowledgement prior to their consideration of the proposal submitted by the buyer/user. [CC §2079.14(b); see first tuesday Form 185 and 556]
Editor’s note – Agency disclosure law requires a buyer’s/user’s agent provide the Agency Law Disclosure form to the client as soon as practicable prior to execution of an offer to purchase or lease. Thus, as a matter of good practice, the disclosure form is best provided and signed by the buyer/user when entering into a buyer’s listing agreement or an exclusive authorization to locate space, as this is the moment affirmative agency duties commence.
The expansion of agency law disclosures and agency confirmation to include commercial transactions adds a new layer of protection for businesses and investors who lease or purchase commercial space. It shifts control of the now one-sided, asymmetrical negotiations to a more level playing field for buyers and tenants. Non-disclosed dual agency will quickly become a thing of the past, except for situations of intentional deceit.
Many users in the past believed they were represented by an agent whose fiduciary duty was exclusive to the property owner, only owing the buyer a general duty to honestly disclose any material defects in the property to be purchased or leased. Now, users will know whether the individual agent handling a transaction is a dual agent, their agent exclusively, or more likely the owner’s exclusive agent with no duty to advise or act on the user’s behalf.
Agency confirmation: the broker’s obligation
Two categories of broker obligations owed to owners and users arise in a real estate sale or leasing transaction:
- the general duties owed by each broker and their agents to all owners and users in the transaction, requiring them to be honest and avoid deceitful and misleading conduct with those who are not their clients; and
- the special or primary agency duties owed by a broker and their agents to their client, known as fiduciary duties.
In addition to the use requirements for the Agency Law Disclosure form, a separate, long-mandated agency confirmation is also required on all commercial transactions excluding lease negotiations seeking a term of one year or less.
The agency confirmation provision declares the agency relationships each broker may have with the owner and user in the specific transaction underway. With the agency confirmation included in written negotiations to purchase or lease and lease agreements, this relationship is consented to by both the owner and user when they sign the documents.
The agency confirmation provision discloses each broker’s actual agency relationship presently existing with the participants. It memorializes the relationship established by the broker’s and their agents’ conduct with the owner and user in a transaction. The agency relationship confirmed is the broker’s legal determination of the actual agency created by their prior and present conduct with the owner and user.
Other agency related conflicts may exist for the broker or agent with other parties or providers in a transaction, such as a dual agency relationship or conflict of interest. These are set out and disclosed in other forms. [See first tuesday Form 117 and 527]
When only one broker is involved in negotiating a transaction, they need to confirm whether they and their agents are acting as the exclusive agent for either the owner or user, or as a dual agent for both.
Avoidance and failure has consequences
Failure of the owner’s agent to provide the owner with the Agency Law Disclosure form prior to entering into the listing agreement for the sale or lease of a property is a violation of real estate law. As a consequence of this up-front failure at the time of the owner’s listing, the broker stands to lose their fee on a sale or lease if challenged by the owner prior to closing. The loss of the fee by the owner’s agent is not avoided by a later disclosure made as an addendum to an LOI, purchase agreement, lease agreement or escrow instructions. [Huijers v. DeMarrais (1992) 11 CA4th 676]
The Agency Law Disclosure form is treated by the owner’s agent as a preliminary and compulsory listing associated event. If not made part of the listing agreement by attachment, the broker cannot reasonably expect to enforce collection of their brokerage fee when the property is sold or leased — even after the transaction is in escrow and the brokerage fee has been further agreed to. This includes extensions, renewals and later sales of the property to the tenant in which fees will otherwise be due, but for the failure at the initial listing stage –– the moment of employment –– to attach the Agency Law Disclosure form.
Further, when the broker or their agent fails to hand the owner an Agency Law Disclosure form at the listing stage, the listing, and thus the agency, may be cancelled by the owner at any time. For the user’s broker to protect themselves against loss of the fee due to the failure of the owner’s broker to timely provide the Agency Law Disclosure form, the user’s broker needs to perfect their right to collect their portion of any brokerage fee to be paid by the owner.
Here, the share of fees earned by the user’s broker to be paid by the owner needs to be agreed to be paid directly to the user’s broker as stated in a provision in each the LOI, purchase agreement, agreements to lease, lease agreement and escrow instructions.
However, payment of a fee earned by the user’s broker is not enforceable without a properly and timely executed Agency Law Disclosure form attached to the initial written negotiations prepared by the user’s broker and signed by the user.