Why this article is important: Real estate brokerages are often formed as corporations, qualified and led by at least one designated officer (DO). This article explains how a corporation changes its DO with the DRE to avoid cancellation of licenses attached to the corporate license as a broker.
A new designated officer
When a designated officer (DO) retires, seeks employment elsewhere or simply wants to leave their position — and the other members of the corporation wish to continue operating under the same corporation — the corporation needs to license and register a new DO with the Department of Real Estate (DRE).
To name another officer of the corporation as the new DO, a Corporation Change Application is submitted to the DRE and signed by both the outgoing DO as well as the incoming DO. [See RE Form 204A]
When the incoming DO is not yet an officer with the corporation, the board make a corporate resolution appointing the new officer and assigning them DO responsibilities. The incoming DO also needs to submit a new Corporation License Application in addition to the Corporation Change Application. [See RE Form 201]
To keep the corporation continuously licensed with the DRE, both of the following must be received in the same package:
- the Corporation License Application or Corporation Change Application; and
- the resignation of the former designated officer.
When all documents are completed and received together, the effective date of the new DO is the date the DRE receives the application.
However, when the documents are not received together, the DRE will cancel the licenses of the corporation, any branch offices and DBAs. The salespersons and broker-associates employed by the corporation will become inactive.
Circumstances prevent signing by prior DO
When the outgoing DO is unable or unavailable to sign the application, the incoming DO may instead submit:
- a personally signed resignation letter from the outgoing DO; or
- a copy of the Resolution of the Board, signed by all officers, naming the change and including the corporation’s seal.
Further, on the application’s signature line for the outgoing DO, the incoming DO indicates the reason the outgoing DO is unable to sign.
Death of a DO
However, when a corporation’s DO dies or is incapacitated (such as due to an illness or disability), statutory guidelines are followed.
The incoming DO for the corporation submits to the DRE a completed Corporation Change Application. On the signature line for the outgoing DO’s signature, the incoming DO enters a statement with the date of death of the former DO. Alternatively, the incoming DO may reference and attach a death certificate to the Corporation Change Application. [See RE Form 204A]
The application for a new designated officer is postmarked or filed with the DRE before midnight of the 10th business day after the death or incapacitation occurs. [Calif. Bus & P C §10158; See RE 201]
A corporation may operate as a licensee without interruption under its existing license when these steps to replace a deceased DO are completed within the 10-business-day timeline.
An example of DO replacement after death
Consider a DO for a DRE-licensed corporation who is acting as the sole corporate officer, say, president. Other board members or employees assist in the operations of the corporation, but none are registered as additional officers with the DRE.
The DO dies without prior corporate planning for a successor DO. At the time of the DO’s death, the agents and broker-associates employed by the corporation are involved in several fee generating transactions. All of the employees want to continue their employment with the corporation, representing clients under the same corporate license and client representation agreements.
One of the broker-associates steps forward and lets the board members know they are willing to become the new DO for the corporation.
Here, the broker-associate seeking to become the new DO submits to the DRE within 10 business days of the former DO’s death:
- a Corporate License Application; [See RE 201]
- a Corporate Change Application; [See RE 204A] and
- a statement providing the date of death of the former DO on the signature line for both applications (since the death certificate is not available at the time of submission).
The broker-associate submits all DRE documents together to ensure the corporate license is not cancelled.
The DRE makes the substitution, and the broker-associate becomes the new DO for the corporation. The corporation is not required to pay a fee until the licensing period which began under the former DO is renewed at time of expiration.
Editor’s note — Always, the DO’s officer license expiration date is the same as the expiration date for the corporate license.
Replacing a bad DO
Consider a DO who fails to perform their duties for the corporation and the DRE, including proper employee supervision, trust fund management or timely filing reports.
The employees of the corporation seek to have the DO replaced by another officer of the corporation. They discuss the replacement with the corporation’s board and it is agreed: the dilatory DO must go.
A resolution of the corporation board fires the DO, naming a different officer who holds a broker license as the replacement.
The other officer — new DO — files a Corporate Change Application with the DRE. In place of the outgoing DO’s signature, the new DO includes the Resolution of the Board in the same package as the application. [See RE 204A]
Disciplinary actions
Disciplinary actions the DRE takes against corporate licensees typically are due to violations identified during audits.
The DRE performs two types of audits:
- investigative audits; and
- routine audits.
Investigative audits are initiated based on complaints from the public or tips indicating probable violations by a licensed broker, sales agent or broker-associate.
The DRE performs routine audits on randomly selected brokerages, especially those engaged in real estate activities where the risk of financial loss to the public is high, such as:
- mortgage loan brokers;
- property managers; and
- broker-owned escrows.
A brokerage selected for an audit receives a letter from the DRE giving notice of the audit. In addition to reviewing trust fund records, the auditor investigates any number of the brokerage’s procedures and documents, including:
- licensing compliance;
- transaction files; and
- recordkeeping.
Common violations identified during DRE audits involve:
- record retention;
- fictitious business name use;
- mortgage loan disclosures; and
- trust funds, specifically:
- maintaining trust fund records;
- reconciliation of trust accounts;
- trust fund shortages;
- trust fund handling;
- trust account withdrawals; and
- commingling of funds.
As a result of the violations found, the DRE may impose disciplinary action on the corporation, as well as the broker-officer, brokers and/or sales agents. Depending on the violation, the DRE’s course of action can involve:
- a Corrective Action Letter requesting the licensee provide assurances the violation has been corrected (usually issued for minor infractions);
- a monetary penalty;
- issuance of a desist and refrain order to stop licensees from participating in unlawful activities;
- the denial of an application for original license or renewal;
- barring individuals from participating in activities subject to regulation under the real estate law; and/or
- suspension or revocation of the individual’s or corporation’s license.
When a corporation’s license is revoked, all licensees employed under the license need to find a new employing broker before they may continue to practice real estate activities for which a license is required.
Often, when the DRE initiates disciplinary action against a corporate license, the same or similar action is taken against the DO’s individual license. However, the DRE’s actions are made on a case-by-case basis.
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Cancelling the corporate license
To cancel a corporate license, the DO submits a letter to the DRE signed by each of the corporation’s broker-officers. The letter needs to state the corporation is no longer conducting business for which a real estate license is required.
When the DRE receives the letter, all license numbers associated with the DO are cancelled. This includes:
- all branch offices licensed under the corporation; and
- all DBAs associated with the corporation.
Further, the licenses of all sales agent and broker-associates employed by the corporation will become inactive.
Renewing and reactivating a corporate license
The DO renews the corporate license at the same time as their officer license every four years. To renew both licenses, the DO uses the same Officer Renewal Application. [See RE Form 207]
A DO who misses their renewal deadline automatically receives a two-year grace period during which they may renew their officer and corporate licenses. During this grace period, the license is inactive and therefore no transactions may be completed under the corporate license.
A DO who renews their corporate license during the grace period pays a late penalty fee of $675. In contrast, the DO pays a fee of $450 for an on-time renewal.
Once the grace period has lapsed, the DO seeking to reactivate their corporate license will need to:
- submit a Corporate Change Application when the DO is reactivated by the existing DO; [See RE Form 204A] or
- submit a Corporate License Application as well as a Corporate Change Application when the corporation is reactivated by a new DO. [See RE Form 201]
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