This article confronts the Bureau of Real Estate (BRE)’s erroneous interpretation of California real estate law in stating that a real estate licensee who acts solely as a principal in a real estate sales transaction must disclose the existence of their license.
A real estate licensee who acts solely as a principal buying or selling property need not disclose the existence of their Bureau of Real Estate (BRE) license. The disclosure of a sales agent or broker license is only required when the licensee:
- is a principal in the transaction; and
- holds themselves out as an agent in the transaction with the expectation of a fee. [Calif. Business and Professions Code §10177(o)]
However, the BRE erroneously misstates that a BRE licensee who acts as a principal to a real estate transaction must disclose their licensed status to the other principal to the transaction. The BRE’s interpretation leaves out the critical fact that such disclosure only needs to be made when the licensee is acting in the capacity of both a principal and an agent in the transaction. More specifically, when acting as a licensee – an agent for someone else in the transaction – a licensee must disclose any direct or indirect principal participation in the transaction. [BRE Real Estate Reference Book – A Real Estate Guide, Chapter 10 Agency, page 180]
Real estate law focuses strictly on defining agency duties, and the rights and limitations pertaining to the use of a real estate license. In other words, real estate law only controls when one acts in the capacity of an agent. Individuals acting as principals in real estate transactions are not subject to the rules governing licensees, unless they are also acting as an agent for a fee in the transaction.
A first tuesday reporter spoke with a representative from the California Department of Consumer Affairs (DCA) regarding this discrepancy. The DCA representative confirmed that California law did not require a licensee to disclose their license status when acting solely as a principal. We trust they will correct the misstatement in the BRE Real Estate Reference Book, and in any other “official” material on the topic.
However, and without explanation, the BRE advised the DCA they did encourage the disclosure. Such unwritten encouragement places the disclosing licensee at unnecessary risk and liability when acting solely as a principal in a transaction. Better that BRE reinstate the regulation requiring employing brokers to police the principal transactions of their employed agents and brokers.
No agency duty owed
All the confusion about whether or when to disclose one’s licensed status originates from controlled agency activities, not principal activities.
Specifically, the misunderstandings stem from conflict of interest disclosures a licensee must make when acting as both a principal and an agent in the same transaction. Holding a license is one thing; using that license to act as an agent is quite another. It is the agency activity that mandates the disclosure, not the principal participation.
Also, conflicts to be disclosed are situations in which a principal or provider in a transaction is the acting agent’s relative, employee or any person for whom the agent may have a bias.
Consider also the conflict that arises when a real estate licensee sells their own property and includes a broker fee provision in the purchase agreement calling for the payment of a fee to them on the sale. When a licensee receives a brokerage fee on the sale of their own property or on the purchase of property for their own account, they subject themselves to real estate agency requirements. Once a licensee holds themselves out as a licensee acting as an agent in a transaction to collect a fee, they are responsible for fulfilling general agency duties to the other party, be they buyer or seller. Thus, they must then conduct themselves as both an agent and a principal. [Prichard v. Reitz (1986) 178 CA3rd 465]
Another common conflict of interest situation arises when a licensee acting as an agent for a buyer or a seller has a bias towards a person (individual or entity) who is a principal, agent or provider in the transaction. Also, a broker employed to act on behalf of a principal in a transaction must disclose the nature and extent of any direct or indirect interest they or their agents hold or are acquiring in the property. [Robinson v.Murphy (1979) 96 CA3d 763]
Increased risk for liability
In addition to the BRE’s erroneous interpretation of agency disclosure laws and nuances in statutory conflict of interest disclosures, the most likely cause of this misconception arises from the rhetoric espoused by the California Association of Realtors (CAR) trade union and its members.
CAR’s code of ethics outlines several restrictions requiring the inculcated faithful to disclose their status as “real estate professionals,” “licensees” and most of all as “REALTORS” when acting as principals in a real estate transaction. According to common CAR trade union lore, it is a showing of good faith to disclose one’s status as a REALTOR in order to inform the opposing parties in a real estate transaction of one’s expertise, honesty and above-average knowledge of real estate sales transactions. (Actually, this disclosure only serves to further CAR’s own trade union legacy.)
This logic quickly degenerates into pure absurdity on one level and in fact instigates (not mitigates) risk on another. Should medical doctors disclose their licensing status at every checkup they receive? Must every CPA disclose they are an accountant if they have another CPA prepare their tax return? What about the licensed attorney buying property who, like all other trained individuals, will marshal all their expertise for business advantage? And what of those individuals who let their licenses lapse, but still have all the skills of the trade? Should a broker who dropped their license 20 years ago confess to a potential buyer of their property that they know a great deal about real estate?
Aside from the absurdity of disclosing all your licenses when acting as a principal, the disclosure substantially increases one’s risk for liability. A licensee may unintentionally activate statutory responsibilities by disclosing their licensed status if the other principals believe they are getting some protection or care from its existence. Why else would the disclosure be made? Thus, by virtue of the disclosure, one’s status may be perceived to change from that of a mere principal to one who is holding themselves out as an agent in the deal. Disclosures have consequences.
When agents hold themselves out to be specially qualified and informed in certain subject matter expressed in their opinion regarding a real estate transaction, their opinion becomes a positive statement of truth on which a buyer or seller of lesser knowledge can rely. Thus, it is considered ill-advised for a licensee acting solely as a principal to disclose the existence of their license. [Cohen v. S & S Construction Co. (1983) 151 CA3d 941]
If a member of CAR chooses to blindly follow its code of ethics, they must be aware that it exposes them to greater risk when they are not acting in an agency capacity. Codes of ethics are fine, but they do not function as law, ever, and as excuses, never.
The bottom line: if you are not using your license, you have no duty to disclose it.