Real estate law requires real estate transactions to be executed under a broker’s license. Real estate agents can perform business; however, contracts will be identified under the broker’s name. A salesperson works as an employee of the broker, with agents paid via the designation of commissions or salaries.
Real Estate Transactions
Real Estate Law allows real estate licensees (brokers, salespersons) to represent clients in the following categories:
Soliciting to Sell
Offering to Buy
Buying or selling property with oil, gas
Helping clients with government and state land purchases or offerings
People Who are Not Required to be a Licensed Real Estate Agent:
Property Management Employees
Real Estate Assistants
Financing (Mortgages, Loans)
A real estate broker can also solicit and sell loan products. A broker who solicits and sells loan products works for or owns a mortgage loan brokerage. Mortgage loan brokerages have the legal protection to do the following:
Solicit Borrowers for Loan Products
Sell Loan Products
Negotiate Loans with Lenders
Service loans (Collect payment, manage property); provide service for lender or investor
New laws require mortgage originators from a loan brokerage to register with the state as a loan originator.
A real estate brokerage can buy, sell, or represent clients in the following activities:
Offer to Sell
Offer to Purchase
Lease or rental
Purchase Government Land
Other Broker Sales
Real Estate Law permits brokers to represent buyers or sellers in business opportunity sales. They can also represent buyers or sellers in franchise agreements between a company and an individual. A business opportunity sale can be the transferring of business assets, products, and branding rights.
Business opportunity sales or purchases may involve the transferring of stock and/or dividends that are a part of the company’s portfolio. A real estate broker, although not a licensed securities professional (stock broker), can help with the transferring of stock, but not the selling of stock.
Commercial and industrial real estate are huge sectors within the real estate industry. Retail space, restaurants, manufacturing and factories can all be handled by real estate brokers. Many brokers specialize in business real estate transactions, as such transactions offer brokers an incredibly sizeable percentage of gross real estate deals.
Some brokers specialize in franchise sales. Franchise sales have become an increasingly larger percentage of the overall transactions agents and brokers represent. Brokers may even specialize in the sales of specific companies, industries, or types of businesses. A broker or agent who engages in the sale of franchises must be well- versed in business documents, including profit and losses reports, company reports, expense reports, and must demonstrate a solid understanding of the nature of franchise sales.
A franchise sale involves an agreement between the business and buyer for the right to use the franchises name and engage in the business of the franchise. Buying a franchise opportunity includes the right to use the franchise marketing plan, its process, and offer its products and services.
A real estate broker can charge a fee for providing prospective tenants a list of properties. This is called a prepaid rental listing service (PRLS). Real estate brokers must have a written tenant/client contract that is approved by the DRE to execute such transactions. Both a broker and salesperson can deal with prepaid rental listing services.
Individuals and Corporations can sell prepaid rental listing services, however they must attain a separate PRLS license.
To do this individuals and corporations must:
Fill out application form
Complete a fingerprint card
$10,000 bond or deposit for each location of business
The $10,000 bond or deposit amounts are not required for tax exempt organizations or agencies associated with the government. Additionally, each location must meet the application requirements, which includes all the steps found above.
For more information on PRLS licensing, send requests for PRLS licensing to the Department of Real Estate, or by calling them directly at 877-373-4542.
Real Estate Broker Requirements
To apply for a real estate broker license, an individual must be at least 18 years old. The following requirements must be met in order to obtain a real estate license:
Prospective broker should be active in real estate for two of the last five years on a full-time basis, either as a salesperson or in another capacity within the real estate space. If the applicant has a four-year degree, he or she is exempt from this requirement. An applicant with an AA degree must have one year of experience in real estate to qualify for a license.
Prospective broker must pass a total of eight, three semester unit courses at an accredited higher learning or vocational school.
The following courses must be successfully completed:
Real Estate Practice
Legal Aspects of Real Estate
Real Estate Finance
Real Estate Appraisal
Real Estate Economics or Accounting
Additionally, applicants must choose three of the following courses below:
Real Estate Principles
Mortgage Loan Brokering and Lending
Advanced Legal Aspects of Real Estate
Advanced Real Estate Finance
Advanced Real Estate Appraisal
Computer Applications in Real Estate
Common Interests Development
Attorneys are exempt from educational and experience requirements.
Salespersons and brokers whose licenses are expired are barred from practicing real estate until the license is renewed. Even if code or law violations are nonexistent, licensees must have all license renewals before beginning or completing a transaction.
Applicants can use the eLicensing portal on dre.ca.gov to renew applications 90 days prior to the license’s expiration.
A broker whose license is expired cannot continue any form of business, which is detrimental to all agents and employees who work under that brokerage.
Agents who work under an expired broker are placed in nonworking status. A real estate license is considered a renewal if it is completed within a two-year period of expiration.
Licensee holders must take a new test if said license is not renewed within a two-year period of the license’s expiration.
Failure to execute the specific task successfully (i.e. buying or selling real property) results in no commission or payment for the broker.
Function of Broker
Because brokers are not paid for work that does not lead to the execution of a transaction, brokers are not considered employees.
Employees, by the true definition of the word, are individuals who receive payment for their time rather than a specific end result, which is the opposite of agents and brokers, who get paid nothing if their work yields no results.
Brokers are authorized to act on behalf of the principal by soliciting or negotiating a transaction for the principal.
A broker is typically not an employee, unless he or she is a wage earner or is the recipient of a salary disbursed by another broker.
Brokers, at a basic terminological level, are special agents of the principal and are hired to perform a specific task. Execution of that task results in a commission.
The relationship between a broker, and agent who works under him or her, is that of a principal and an agent and employee (Business and Professions Code Section 2079.13(b)).
Brokers are held liable for the acts of their employees and agents. More details on this point will be offered later in this chapter.
Broker Liability and Duty to Supervise
Brokers and principals can be held liable for the actions of their employees or agents even if they did not personally perform the unlawful act. Liability includes handling damages resulting from an agent’s negligence. It is advised that brokers purchase general liability, and errors and omissions insurance, to cover the actions of their salespersons, broker associates, and other related parties of the broker. Regardless of the contractual agreement between a broker and their associates, a broker can be held liable, even if the associate is not considered an employee.
All transactions require broker supervision. Even if salespersons or associate brokers are deemed the party conducting the transaction, it is the responsibility of the broker to oversee the implementation of the transaction. Because brokers are expected to supervise the transaction of a salesperson, they can be held liable since salespersons and broker associates are agents of the broker.Although salespersons and broker associates may be considered independent contractors for tax purposes, such a classification does not diminish a broker’s liability or alter the agency and employee dynamic.
As previously indicated in the chapter, a real estate salesperson is not authorized to act independently of the employing broker. The salesperson represents the interests of the broker, who is technically considered an agent of the principal. Should an employer require a task that results in an agent losing money or incurring an expense, the broker is required to indemnify the employee for expenses or losses resulting from the directions or tasks of the broker.
Employers are principals and cannot be held liable for intentional torts or criminal misconducts of an agent or employee, unless said employers possess certain knowledge regarding the nefarious behaviors (Alhino v. Starr (1980) 112 Cal. App. 3d 158). Consider the example of a broker as being held liable should he or she be aware of instances of fraud while neglecting to intervene or prevent the misconduct.
A mortgage broker is a mortgage professional who acts as an intermediary between a borrower and lender. Mortgage brokers assist borrowers in qualifying for mortgages and in finding the most compatible lenders and loan programs available.
The California Business and Professions Code defines a mortgage broker as one who “engages as a principal in the business of making loans or buying from, selling to, or exchanging with the public, real property sales contracts or promissory notes secured directly or collaterally by liens on real property, or who makes arrangements with the public for the collection of payments or for performance of services in connection with real property sales contracts or promissory notes secured directly or collaterally by liens on real property.”
A mortgage broker has a duty to provide all vital loan information to a prospective borrower, including commissions and fees. A mortgage broker is also responsible for delivering copies of a deed to all involved parties, including the lender, borrower, and investor, if applicable.
Any individual who solicits mortgage business is subject to the regulations set forth by the Real Estate Commissioner. Any individual, property owner, or other party involved in more than eight trust deed transactions or promissory notes in a year must be a licensed broker.
In return for assisting the client find a loan, the mortgage broker is compensated by the client and/or lender, typically through points or fees. The maximum commission a lender/broker can earn in commission for a first position loan is 5% of the principal loan amount for a program of three years or less, and 10% for programs that are three or more years.
California’s Business and Professions Code has further regulations relating to mortgage brokers and mortgages:
Real estate licensees are prohibited from advertising or offering prospective lenders or clients a gift, or any other item of value, with the intent of inducing the lender to make a loan, or purchase a promissory note. (10236.1)
A real estate broker who benefits directly or indirectly from obtaining the use of funds other than the commission and fees must disclose this to the Department of Real Estate and the lender providing the loan. (10231.2)
It is unlawful for mortgage brokers to accept funds from lenders, unless the borrower has been approved, or a loan has been arranged for the broker’s client. (10231)
A mortgage broker who services a promissory note/mortgage that is secured by real property must have written authorization from all parties including the borrower, lender, or owner of the note. A broker who acts as the servicer for the lender is responsible for all accounting related items that affect the lender. Accounting includes keeping track of the unpaid principal balance, disbursements, payments, collections, the status of a notice of default, and other accounting items. (10233)
If a real estate broker who services a loan receives payment other than the scheduled payment, the broker must inform the note holder within 10 days of acceptance of such payment. In addition to disclosing acceptance of payment, the broker must inform the source of payment, who the payment was directed to, and the reason for making the payment. (10233.1)
It is the duty of every real estate licensee who negotiates the approval of a loan to have the loan recorded with the local county recorder’s office. Prior to the release of funds, the broker must verify the loan’s recording, unless otherwise indicated by the lender in writing. (10234)
In an attempt to equip consumers with as much necessary information about their loan as possible the Real Estate Commissioner’s office requires the borrower’s mortgage broker to provide their clients with a copy of the deed of trust within a reasonable amount of time of the loan’s recording. The rule also requires the copy of the deed to be given to any other parties who hold an interest in the loan including the investor and lender. (10234.5)
It is unlawful for real estate licensees to knowingly mislead consumers in advertising, including print, internet, published, televised advertising, and other advertising mediums. (10235)
Real Estate Commissioner as it Relates to Brokers
The chief executive of CalBRE is the Real Estate Commissioner. The Real Estate Commissioner is appointed by the governor. He or she must have been an active real estate broker for the last five of ten years. The Commissioner is responsible for regulating the California real estate market using statutory and administrative law.
The Real Estate Commissioner’s job includes:
protecting the financial interests of buyers, sellers, tenants, and professionals in the real estate market
creating or revoking administrative real estate policy and real estate laws
employing necessary personnel for the Department of Real Estate
overseeing the licensing process, including the issuing and revocation of real estate licenses
assisting in fraud prevention
establishing trust funds for victims of real estate licensee abuse
choosing the members of the Real Estate Advisory Commission
The Real Estate Advisory Commission is a panel of ten members appointed by the Commissioner whose purpose is to make recommendations on matters relating to real estate.
Although the Real Estate Commissioner is the authority over real estate law and real estate activities in the state, their power is not limitless. Residents have the ability to appeal certain regulations or statutes set forth by the Commissioner, if they are deemed unnecessary or overly burdensome.
The Commissioner also does not have the right to settle legal disputes; like other legal cases, only the court can determine a legal verdict. However, he or she does have the right to bring legal suit against a violator of real estate law on behalf of the people of California.
Brokers as They Relate to Legal Outcomes
Case Review: City of Turlock v. Paul M. Zagaris, Inc. (1989)
The case, Paul M. Zagaris Inc. v. City of Turlock (1989) 209 Cal.3d 189., involved a broker who sued the city for a dispute over eminent domain.
A broker (Zagaris) introduced a buyer and a seller. They entered into a sales contract for the seller’s property, a transaction on which Zagaris would earn a 6 percent commission. However, while in escrow, they were made aware of the City of Turlock’s intention to acquire the property through eminent domain. Zagaris brought legal suit against the City of Turlock for the loss of his commission.
Zagaris claimed that the government’s actions deprived him of the benefit of his bargain. The court disagreed and ruled in favor of the City. California law does not protect a broker’s right to compensation; a broker’s commission is dependent entirely upon his or her performance within a contract. As no transaction closed in this case, Zagaris was not able to retain the commission.
Case Review: In re Estate of De Harte (1961)
In the case, In re Estate of De Harte (1961) 196 Cal.2nd 452., an estate administrator filed suit against a broker for a breach of good faith duties.
An estate administrator hired a broker to sell an estate. Shortly after the estate was listed, the broker introduced the estate administrator to a buyer. The estate administrator approved the buyer’s offer and sold the estate for $9,600. However, only 17 days after the close of the sale, the estate buyer listed the property for sale at $11,900. The estate administrator discovered that the buyer was the broker’s mother. He filed suit against the broker for failing to act in good faith.
The Superior Court ruled in favor of the estate administrator. Ultimately, the sale was rescinded and the broker was required to return his commission.
Case Review: Coldwell Banker & Co. v. Pepper Tree Office Center Associates (1980)
The case, Coldwell Banker & Co. v. Pepper Tree Office Center Associates (1980) 106 Cal.3d 272., involved an action by a broker against his client.
An office building owner (Pepper Tree Office Center Associates) entered into an exclusive listing agreement with a broker (Coldwell Banker). Pepper Tree Office Center advertised for the lease of its units, including the submission of a one-page brochure and the forwarding of floor plans to the brokers of a prospective tenant. These actions ultimately led to the lease of three units. Coldwell Banker claimed it was due commission. However, Pepper Tree Office Center claimed that Coldwell Banker’s actions were not a procuring cause for the units being leased. Therefore, the broker was not due a commission. Coldwell Banker sued.
The Superior Court held that Coldwell Banker’s direct actions did not lead to the procurement of the tenants in the building. It ruled in favor of Pepper Tree Office Center.
Case Review: R.J. Kuhl Corp. v. Sullivan (1993)
In the case, R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.4th 1589., a broker sued a buyer over a breach of contract dispute.
A broker (R.J. Kuhl Corp.) found a property for a buyer (Sullivan). He set up a deal, but ultimately, the property was sold to a third party. That third party later approached Sullivan and gave him the option to purchase half of the property’s interest. Sullivan agreed and entered into an agreement with the third party. When R.J. Kuhl Corp. was made aware of this, he sued Sullivan and the third party for breach of contract, interference with a contract, and conspiracy to alter an existing contract.
R.J. Kuhl Corp. claimed that he was entitled to his broker’s commissions for the sale of the property. Sullivan opposed this, saying that his original agreement with R.J. Kuhl Corp. did not lead to the direct purchase of the property. The Superior Court ruled in favor of the broker. It held that as a result of going around R.J. Kuhl Corp. and not paying the commission, Sullivan had gained an unfair profit from the broker’s services. Sullivan appealed, but the appellate court affirmed the lower court’s ruling. Sullivan was held liable for R.J. Kuhl Corp.’s fees.
Case Review: Estate of Lopez (1992)
The case Estate of Lopez (1992) 8 Cal. 317., involved a real estate broker bidding on a real property in a probate sale without a proper license.
A real estate broker (Tong) made a successful bid in a probate sale in order to purchase real property on behalf of his client. At the time of the bidding, Tong’s license was expired; however, he had renewed his license by the time the sale was completed.
The probate court ruled that Tong was not entitled to a commission because he had made a bid without a license. The Court of Appeals reversed the lower court’s ruling on the grounds that Tong had a valid license on the day of the sale’s close. The court cited Business & Professions Code Section 10136, which requires the party claiming commission be licensed at the time of the sale’s execution. The court also noted that according to Probate Code Section 10160, an estate is liable for commission at the time the actual sale is made. Therefore, Tong was entitled to a commission.
Case Review: Direnfield v. Stabile (1988)
The case, Direnfield v. Stabile (1988) 198 Cal.3d 126., involved a real estate agent who arranged a loan transaction with a high interest rate without being employed by a broker.
A real estate agent (Stabile) arranged for two borrower loans with a private lender (Direnfield). Shortly after, Stabile ended his employment with his broker, but failed to acquire a new broker. Without disclosing this to Direnfield, Stabile approved a third borrower loan for Direnfield at an interest rate of 30%.
When the borrower discovered that Stabile was not working with a licensed broker, he sued Direnfield for charging a usurious — or illegally high — interest rate. (In California, a private lender cannot charge more than 7% interest unless the transaction is under a licensed broker.) The case ultimately resulted in a settlement. Direnfield subsequently initiated a lawsuit against Stabile to recoup its losses.
The Superior Court contended that Stabile was guilty of concealing his unlawful employment status. It ruled in favor of Direnfield. Stabile could not pay back the funds, so Direnfield applied to the Department of Real Estate. The court ordered the Real Estate Recovery Fund to make payments to Direnfield for the money he lost.
Case Review: Salazar v. Interland (2007)
The case, Salazar v. Interland (2007) 152 Cal.4th 1031., involved a dispute over whether a business opportunity broker had to be licensed.
A business (AT&T) was looking to sell its existing small- and medium-sized customer contracts. It hired a business opportunity broker (Salazar) to find a suitable buyer. Salazar did not have a broker’s license, but still introduced AT&T to a potential buyer (Interland) and arranged meetings between the two companies. Interland ultimately agreed to purchase AT&T’s customer contracts.
Upon the close of the sale, Interland refused to pay Salazar over his failure to have a license. Salazar sued, alleging that he was owed commission for the sale, and for every new client gained by Interland as a result. He sought $20 million in damages.
The Superior Court argued that the transaction constituted a business opportunity sale, and therefore, Salazar was required to be a licensed real estate broker. The court indicated that the purpose of “licensing requirements is to protect public from incompetent or untrustworthy practitioners”. It ruled in favor of Interland. Salazar appealed. He argued that the transaction was not a business opportunity sale, as it was not the sale of the entire company, only a portion of it. The Court of Appeals reasoned that any business transaction, regardless of size or percentage of the company, must be arranged by a licensed real estate broker. The lower court’s ruling is affirmed.