This article is part of an ongoing series covering violations of real estate law. Here, the Department of Real Estate (DRE) revoked the California real estate license of a broker who failed to comply with advance fee requirements while conducting prepaid rental listing service (PRLS) activities.

In November 2021, the California Department of Real Estate (DRE) decided by default decision to revoke the license of Carlos Martinez, a broker since 2008 operating out of Rosemead, California. The decision became effective December 2021.

As part of his brokerage practice, Martinez engaged in prepaid rental listing service (PRLS) activities and collected advance fees. In this role, he supplied prospective tenants with listings of residential rental properties in exchange for a tenant’s advance fee paid before the service was expected to be performed.

Before a broker may solicit, advertise for and agree to receive an advance fee, the paperwork material needs to be submitted to the Commissioner of the DRE for approval at least 10 calendar days prior to use. [DRE Regulations §2970]

When the Commissioner, within 10 calendar days of receipt, determines the material might mislead clients, the Commissioner may order the broker to refrain from using the material. [Calif. Business and Professions Code §10085]

To be approved by the Commissioner, the advance fee agreement, and any materials to be used with the agreement, will:

  • contain the total amount of the advance fee and the date or event in which the fees will become due and payable;
  • list a specific and complete description of the services to be rendered to earn the advance fee;
  • give a definite date for full performance of the services described in the advance fee agreement; and
  • contain no false, misleading or deceptive representations. [DRE Regs. §2970(b)]

Further, the advance fee agreement may not contain:

  • a provision relieving the broker from an obligation to perform verbal agreements made by their employees or agents; or
  • a guarantee the transaction involved will be completed. [DRE Regs. §§2970(b)(4), 2970(b)(5)]

Related Video: Advance Fees are Trust Funds

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In March 2016, Martinez filed the advance fee contract proposed to be used for his PRLS activities with the DRE. As required by the controlling PRLS laws, the form included a clause setting forth the right for the tenant to receive a full or partial refund of their prepaid fee when the broker’s obligation to find suitable rental properties procures less than three available listings. [Bus & P C §10167.10]

However, the written PRLS agreement Martinez actually used in his practice lacked a significant, unauthorized detail from the one he presented to the DRE for approval. Martinez’s PRLS agreement omitted the clause entitling the client to a refund of their prepaid fee.

The amended, unauthorized PRLS agreement Martinez used to conduct his PRLS activities constituted a noncompliance with PRLS contract requirements. [Bus & P C §10167.9]

Still, even without the written acknowledgement of their right to a refund, several clients requested a return of their fees between May 2018 and December 2019.

On the first request of a refund during this period, the prospective tenant who employed Martinez discovered one of the listings provided by Martinez was unavailable to rent. The prospective tenant demanded a full refund, as permitted to the tenant under PRLS law. [Bus & P C §10167.10(c)]

Instead, Martinez issued a partial refund to the prospective tenant in the amount of $150 out of $200, when they were entitled to a full refund.

In addition, Martinez failed to provide any refunds to numerous other prospective tenants who requested them when they discovered one or more of their choice of listings presented were unavailable. In one instance, Martinez falsely claimed he had already mailed the check to the tenant, though they never received it.

Martinez made false, misleading and deceptive representations to prospective tenants who employed him. He misrepresented their ability to obtain a refund from him when the choice of listings he gathered were unavailable to rent or lease, and therefore inadequate. He also misrepresented the availability of the property for tenancy by not doing his due diligence to confirm its availability.

Related Video: Word-of-the-Week: Due diligence

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Employed to perform due diligence

Due diligence is the concerted and continuing efforts of an agent employed to meet the objectives of their client. It’s the agent’s promise given in exchange for the client’s promise to pay a fee — a promise for a promise.

Due diligence is much like a form of art on the part of the broker and their agents. Diligence sufficient to meet employment objectives include applying an agent’s talent and efforts, through a basket of activities they need to orchestrate, to achieve the end result the client requests in relation to their real estate needs — buying, selling, leasing and the like.

A diligent effort is requisite for a broker and their agents to fulfill their fiduciary agency duties owed — due — the principal in a transaction.

This obligation is fulfilled by making a concerted and continuing effort to locate a buyer or a suitable property for sale or lease, depending upon the specific transaction agreed to by both participants.

These due diligence obligations require a broker and agent to perform at a level reasonably expected by the client. [See RPI e-book Real Estate Practice Chapter 10]

Related article:

Brokerage Reminder: The seller’s broker’s due diligence

As demonstrated in the case with Carlos Martinez, fulfilling a client’s objectives is part and parcel with receiving a fee. In exchange for that fee, the client expects the licensee to perform the necessary services required for obtaining or selling real estate.

Here, Martinez did not properly use due diligence.

He used faulty contracts with his clients that were not approved by the DRE prior to use. He misrepresented the availability of the properties selected for clients. After all this, when aggrieved clients requested a refund, as they are entitled to under controlling laws, Martinez refused, and thus did not comply with refund requirements set by statute. [Bus & P C §10167.9(c); Bus & P C §10167.11; Bus & P C §10167.10]

A licensee who misrepresents or performs similar deceitful practices behaves in a manner that is diametrically opposed to performing due diligence. The moment a contract is entered into, these due diligence obligations are expected and entrusted to be owed to the client.

Related article:

Brokerage Reminder: A general duty owed the buyer

Want to learn more about the exclusive employment obligations owed to clients in particular transactions? Click the image below to download the RPI book cited in this article.