This article examines the unlawful conduct and unprofessional behavior of real estate licensees when acting as an agent or as a principal in real estate related transactions.
Defining unlawful conduct
The Real Estate Commissioner is empowered by the state legislature to adopt regulations for the administration and enforcement of the Real Estate Law and Subdivided Lands Act. [
Both the Real Estate Law (Business and Professions Code §§10000 et seq.) and the Department of Real Estate Regulations act to protect consumers of services rendered by real estate licensees. Thus, the public is assured real estate licensees will be honest, truthful and of good reputation, in a word, ethical.
Webster’s Dictionary defines ethics as a “system or code of morals of a particular…group, profession, etc.” [Webster’s New World Dictionary, Third College Edition (1988)]
Black’s Law Dictionary describes ethical conduct as “…professionally right or befitting; conforming to professional standards.” [Black’s Law Dictionary, Fifth Edition (1979)]
Thus, ethics and professionalism are synonymous. The real estate profession should demand nothing less than completely ethical behavior from fellow licensees, whether dealing between themselves or with members of the public as principals or as agents. Peer pressure imposed by fellow licensees generally produces corrected conduct by the offending licensee at an early stage, before continuing and evolving bad conduct causes the Department of Real Estate (DRE) to become involved.
Whenever a real estate broker or sales agent acts unprofessionally, he subjects himself to:
- liability to offended principals for money damages caused by his conduct (the loss of a commission, or worse); and
- disciplinary action by the DRE resulting in possible license suspension or revocation.
For real estate licensees to conduct themselves properly, they must be thoroughly familiar with the Real Estate Commissioner’s regulations and apply lawful principles in the conduct of their practice.
The guidelines comprising a study of proper conduct for individuals who are licensed by the DRE include:
Unlawful conduct, also called unethical conduct, improper conduct and unprofessional conduct, is generally defined as engaging in fraud or dishonest dealing or conduct which would have warranted denial of an application for a real estate license. [B & P C §§10176, 10177]
The following is a review of improper conduct that a broker or sales agent must avoid.
Misrepresenting real estate values
for brokerage or personal gain
Brokers and sales agents must not misrepresent to an owner the likely market value of an owner’s property to:
- obtain a listing;
- acquire an interest in the property for their own account; or
- induce a prospective buyer to make an offer to purchase the property.
For example, a seller lists his property for sale with a broker based on the broker’s representations that he will be able to obtain a specific price for the property.
The broker locates a potential buyer willing to purchase the property at the listed price.
The broker does not disclose the existence of the buyer or the offer to the seller. Instead, the broker tells the seller he is unable to locate a buyer at the seller’s asking price. The broker tells the seller he should consider lowering the price.
Relying on his broker’s advice, the seller lowers his asking price.
Later, the broker again represents to the seller he cannot find a buyer. The broker then offers to purchase the property himself. The seller agrees and the broker opens escrow as a principal — the buyer — and takes title to the property on closing.
Immediately after escrow closes, the broker resells the property at the seller’s original asking price.
Here, the broker intentionally misrepresented the market value of the property and the presence of buyers to induce the seller to reduce the asking price to an amount below the property’s fair market value.
Having caused the listing price to be reduced while acting as an agent, the broker proceeds to purchase the property for his own account and resell it at a profit in excess of the percentage fee discussed with the seller.
However, a broker may not put his own interests for personal gain before those of his client. A broker must fully disclose the status of existing buyers, the price they will pay and his total earnings on the transaction proposed to the client. [Rattray v. Scudder (1946) 28 C2d 214]
If a broker intends to profit as a principal in a transaction, he must either avoid acting as an agent at any time or fully disclose his knowledge of activities if he does act as an agent.
Now consider the responsibilities owed to a seller by a buyer who also happens to be a licensed broker. Representations made to the seller by the broker concerning the price obtainable for a property must be accurate — even though the broker is acting as a principal and buying the property for his own account rather than acting in the capacity of the seller’s listing broker. [Smith v. Zak (1971) 20 CA3d 785]
A licensee cannot, either by partial suppression, concealment or deliberate misrepresentation, make untruthful and misleading statements about the market value of a property, whether acting as an agent or a principal. [B & P C §§10176(a), 10177(f);
Now consider a broker who is employed by a seller under a listing agreement to locate buyers for real estate. The listing agreement includes a purchase option in favor of the broker, exercisable during the listing period, called an option listing.
The option listing gives the broker an option to buy the property at a predetermined price if the property does not sell during the listing period.
Thus, the broker becomes both principal (holding the option) and agent (employed to locate buyers). The potential for misrepresentation increases when these highly conflicting relationships coexist.
For example, a seller’s broker has a listing coupled with a purchase option. The broker might locate a buyer who will pay a price in excess of the option price, and then exercise his option to buy the property at the lesser option price and resell the property to the buyer without informing the seller about the buyer.
Also, a seller’s broker may legitimately decide to purchase the listed property with the intention of later reselling it at a profit. Later, when the property resells at a higher price, the seller will likely seek to recover the broker’s profit, claiming the broker failed to diligently market the property under the listing agreement.
Likewise, the broker exercising a purchase option may overlook his need to inform the seller of all the inquiries he received on the listing.
However, a broker cannot exercise his option to buy property listed under an option listing unless he first fulfills his agency obligation to the seller. The broker must first make a full disclosure of the property’s fair market value and of all offers he receives on the property before exercising a purchase option he holds. [Rattray, supra]
Investigate property conditions
before representing them as fact
Now consider a broker who advertises a home as having been designed by a famous architect. Relying on the broker’s representation, a buyer enters into a purchase agreement. A further-approval contingency that allows the buyer to either confirm the broker’s representations or cancel the transaction is not included in the purchase agreement. The broker’s representation is considered a fact.
Before closing escrow, the buyer learns that no evidence exists to prove the home was designed by the famous architect. The broker recommends the buyer cancel escrow, which the buyer refuses to do.
After escrow closes, the buyer seeks to recover money from the broker for the diminished value of the home due to the misrepresentation concerning the design of the home.
The broker claims the buyer is not entitled to recover any money since the buyer proceeded to close escrow with the knowledge that no proof existed that the architect designed the home.
However, the broker is liable for the diminished value of the home due to the architectural misrepresentation. The buyer relied on the broker’s representation at the time the purchase price was set and the purchase agreement was entered into with the seller, not later as would have occurred under a contingency provision.
A buyer who relies on a broker’s unconditional representations — no contingency to confirm or cancel — to enter into a real estate purchase agreement and discovers the representations are incorrect prior to closing, may close escrow and later recover his losses suffered as a result of the misrepresentation. [Jue v. Smiser (1994) 23 CA4th 312]
To instruct brokers and sales agents, the Jue court observed:
“Our decision should encourage sellers and their representatives to investigate and learn the true facts pertaining to real property before it is offered for sale.” [Jue, supra, 23 CA4th at p. 246]
On the other hand, the broker who fails to first confirm a representation he makes about the property can avoid liability by including a further-approval contingency that allows the buyer to cancel if the representation cannot be confirmed.
When listing, represent the existence
of an offer only if one exists
A broker and his agents may not represent the existence of a buyer for a property to induce a seller to list property when no buyer is known to exist.
For example, a broker tells an owner, whose property is in foreclosure, he has a buyer for the property. However, a buyer does not exist.
The broker’s representation about the existence of a buyer induces the seller to sign an exclusive right-to-sell listing agreement employing the broker to locate a buyer.
The seller relies on the broker to produce a buyer and close a sale of the property before he loses it in foreclosure.
However, the broker makes no effort to market the property other than the publication and dissemination of information on the property through a Multiple Listing Service (MLS).
Ultimately, the broker does not produce a buyer and the seller loses the property in a foreclosure sale.
As a result, the broker is liable to the seller for the loss of the seller’s equity.
Also, the broker’s license may be suspended or permanently revoked. [B & P C §§10176(a),(b), 10177(c), 10177(g), 10177(j)]
If the broker has a buyer, he should:
1.
Enter into a listing agreement with the buyer. [See first tuesday Form 103]
2.
Prepare a written offer which is signed by the buyer and presented to the seller;
and
3.
Provide for the brokerage fee in the body of the written offer signed by the buyer. [See first tuesday Form 150, §14]
If a broker has initially undertaken the task of locating property for a buyer, he is well advised to formalize the agency relationship and his expectation of a brokerage fee by using a buyer’s listing agreement, rather than seeking a listing from the seller and creating a dual agency. [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]
Fees are determined by
each broker individually
A broker and his agents must not state or imply they are prevented by a law, a regulation, or rules of a trade organization from negotiating the amount of the brokerage fee.
For example, an association of real estate licensees openly encourages uniform fee rates based on the need to maintain a minimum level of income necessary to support a professional lifestyle for its members.
The association publishes literature using examples of a 6% brokerage fee on residential sales and an equal split of fees between listing and selling brokers.
Further, the association requires its MLS members to include both sides of the brokerage fee in each publication of the listed property.
An MLS broker decides to compete with the fixed rates set by the association by offering to provide the same brokerage services for a lower fee, referred to as a discount broker. Also, he offers to share 40% of his fee with any selling broker who produces a buyer at the listed price and on the listed terms.
The association then adopts a policy stating the fee split published in the MLS by other listing brokers can be altered as against any one selling broker, if advance notice of the altered fee split is given to the other broker.
A listing broker sends the competing broker a letter that states the brokerage fee the competing broker will receive should he sell one of the broker’s listings will be less than the share published in the MLS.
Another listing broker advises the competing broker that when he complies with the current brokerage fees as published in the association’s literature, the listing broker will split the brokerage fee equally as he does with all other selling brokers who conform.
The association members also inform homeowners listed with the competing broker that their property will not be shown to prospective buyers while it remains listed with the competing “discount” broker.
The competing broker, acting as a selling agent, submits an offer to purchase property listed in the MLS. The MLS listing provides for the brokerage fee to be split equally between the two brokers.
However, the listing broker insists on retaining a greater percentage of the fee since the competing broker does not follow the “accepted” brokerage fee guidelines.
The competing broker files an arbitration complaint with the association as required for resolution of disputes among its members. The complaint is arbitrated and the arbitration board holds the listing broker is to receive the higher percentage of the fee on the property sold by the competing broker. Further, the competing broker is assessed the costs of arbitration.
Eventually, economic pressure by association members successfully forces the competing broker to raise the brokerage fee he charges the public and to split the fee equally with selling brokers in the local MLS.
A complaint is filed against the association for its actions by the State of California. The association and its members are charged with having engaged in the illegal practice of price fixing by adopting and enforcing policies to discriminate against competing brokers.
As a result, the association is held to have violated unlawful competition statutes and restraints on trade through the practice of illegal price fixing. The association is ordered to pay statutory penalties for its conduct. [People v. National Association of Realtors (1981) 120 CA3d 459]
Misrepresenting a licensee’s
employment with a broker
A sales agent may not misrepresent his employment relationship with a broker or a broker’s responsibility for his conduct.
For example, a sales agent, while employed by a broker, negotiates two real estate loans for an investor.
Later, the sales agent is terminated as an employee of the broker. The sales agent then contacts the same investor and arranges for the origination of another real estate loan.
The investor is not aware that the sales agent is not presently employed by a broker.
The annual interest rate yield on the real estate loan arranged by the sales agent exceeds the 11th District Federal Reserve Bank rate by more than 5%.
After the loan is originated, the borrower claims the excessive interest rate makes the loan usurious and limits the investor’s recovery to the principal investment in the loan.
However, a loan secured by real estate is not usurious if the sales agent arranging the loan is an agent of a licensed broker who is acting on behalf of either the borrower or the lender when the loan is made. [Calif. Constitution Article XV]
Thus, the loan arranged by the unemployed sales agent is usurious as no broker made or arranged the loan. Accordingly, the sales agent is liable to the investor for the loss of interest on the loan since he failed to disclose to the investor that he was not employed by a licensed broker when the loan was made, a misrepresentation called an omission. [Dierenfield v. Stabile (1988) 198 CA3d 126]
Disclose agent’s or relative’s
interest in the property sold
A seller’s broker must disclose to his seller- client the extent of any direct or indirect interest the broker expects to acquire in the property, or whether a family member, a business owned by the broker, or any other person holding a special relationship with the broker will acquire any interest in the seller’s property.
For example, a broker’s brother-in-law offers to buy property from an estate through a probate proceeding under a purchase agreement stating the broker is to receive a fee.
The broker does not disclose to any representative of the estate or to the probate court that the buyer is his brother-in-law.
The probate court confirms the sale, including the brokerage fee.
The broker opens two escrows. The first escrow facilitates the sale from the estate to the broker’s brother-in-law.
The second escrow transfers title of the property from the brother- in-law to a company in which the broker holds a majority share of stock. The probate sale closes and the broker receives his fee.
Here, the broker is not entitled to retain the brokerage fee he received from the estate. The estate is also entitled to either recover any reduction in price or set the sale aside due to the misrepresentation of the broker’s agency.
A broker cannot act for more than one party in a transaction, including himself, without disclosing his dual role. [B & P C §10176(d)]
Also, a broker has an affirmative duty to disclose to a seller his agencies and any conflicting relationship with the buyer, even if the seller fails to inquire about the true nature of the broker’s relationship with the buyer.
Further, failure to disclose a broker’s personal interest as a buyer in a transaction when he is also acting as an agent of the seller constitutes grounds for discipline by the Real Estate Commissioner. [Whitehead v. Gordon (1970) 2 CA3d 659]
In another example, a seller, acting on a broker’s advice as to the estimated value of his real estate, retains the broker to find a buyer for the property.
The broker and seller enter into a net listing agreement.
Under the net listing, the seller agrees to take a fixed sum of money as the net proceeds for his equity should the property sell. Also, the net listing provides for the broker to receive all further sums paid on the price as his brokerage fee.
The broker arranges a sale of the property to his daughter and son- in-law. On close of the transaction, the broker receives his brokerage fee.
The seller is not informed of the broker’s relationship with the buyer. On discovery of the relationship, the seller demands a return of the brokerage fee. The broker claims the seller cannot recover the brokerage fee since the seller only bargained for a fixed amount for his property under the net listing agreement.
However, a broker employed under any type of listing has an obligation to voluntarily disclose to his seller any special relationship he may have with the buyer. The seller, unaware of the family relationship between his broker and the buyer, can recover the brokerage fee he paid to the broker. [Sierra Pacific Industries v. Carter (1980) 104 CA3d 579]
Disclose agent’s or relative’s
ownership interest in property sold
A broker acting as an agent on behalf of a buyer must disclose to the buyer the nature and extent of any direct or indirect interest he holds in the property sold.
Conversely, a broker acting solely as a principal for his own behalf need not disclose the existence of his brokerage license when buying (or selling) property. The broker has no conflict since he is not also acting as an agent in the transaction.
For example, a broker acting as an agent of a buyer shows the buyer several properties, one of which is owned by the broker, along with others vested in the name of a limited liability company (LLC). The broker does not inform the buyer of his indirect ownership interest in the property.
The buyer later decides to purchase the property in which the broker has an interest.
Since the broker is the buyer’s agent, the broker learns the buyer will pay a higher price for the property than the price specified in the buyer’s original offer. Thus, the broker presents the buyer with a counteroffer from the LLC which provides for a higher selling price. The buyer accepts the counteroffer.
Thus, the broker profits both from the amount paid by the buyer to buy the property and the amount received as his brokerage fee — the result of a conflict of interest.
Had the buyer known the broker held an ownership interest in the property, he might have retained a different broker to represent his interests.
Here, the broker has a duty to timely disclose his ownership interest in the property to his client. The information is a material fact since the broker’s conflict of interest might affect the client’s decisions concerning acquisition of the property.
However, a broker acting solely as a principal in the sale of his own property is not restricted by agency requirements. The broker should represent himself as being a seller exclusively, rather than a seller who is paying himself a (taxable) fee for also acting as a broker in the transaction. [Robinson v. Murphy (1979) 96 CA3d 763]
When the broker-seller receives a brokerage fee on the sale of his own property or property he purchases for his own account, he is subject to real estate agency requirements.
For example, a broker owns a residence which violates safety requirements for occupation due to defects in the foundation.
The broker does not tell the buyer about the foundation defects.
In addition to the price received for the property, the broker- seller pays himself a brokerage fee on the transaction.
The buyer later discovers he must demolish the residence and rebuild with an adequate foundation. The buyer obtains a money judgment against the broker for breach of his agency duty to disclose a known defect that caused the buyer to take a loss.
The broker is unable to pay the money judgment. The buyer seeks payment from the DRE Recovery Fund.
Recovery is received from the DRE Recovery Fund since the seller also acted as a broker in the transaction. The broker’s license is also suspended. Before the broker can reactivate his license, he must reimburse the DRE fund. [Prichard v. Reitz (1986) 170 CA3d 465]
Disclose to the client any interest the licensee holds in a business referral
A broker must voluntarily inform a client of any significant interest he or his agents hold in a business that is recommended to the client by the broker’s office for the performance of services or the sale of products.
For example, a broker arranges a loan for a borrower. The lender making the loan is the broker’s sister.
The broker, however, funds the loan himself by depositing his personal funds into his sister’s account.
In essence, the broker is the lender.
The borrower is not aware of the relationship between the broker and the lender or of the true source of the loan funds.
Here, the broker fails in his duty to disclose his dual representation in acting as both a broker and as the maker of the loan. The broker’s actions constitute grounds for discipline by the Real Estate Commissioner. [Tushner v. Savage (1963) 219 CA2d 71]
A licensee cannot act for more than one party in a transaction without the prior knowledge or consent of all parties. [B & P C §10176(d)]
