CONTRACTS IN GENERAL - assess CONTRACTS IN GENERAL ... 2 CE DIGEST PARTIES CAPABLE OF ......
Transcript of CONTRACTS IN GENERAL - assess CONTRACTS IN GENERAL ... 2 CE DIGEST PARTIES CAPABLE OF ......
CE DIGEST 1
Chapter Index Chapter 2 Chapter 3 Chapter 4 Chapter 5
CHAPTER 1
CONTRACTS IN GENERAL
The single most important application of law to the field of real estate is in the area
of contracts. Virtually every real estate transaction involves a contract. These contracts are
very important to the parties involved in the transaction. A well drafted contract protects
both sellers and buyers of real estate. Well designed agreements also protect a broker's right
to a commission.
Contracts must be interpreted and understood by others involved in the real estate
transaction. The written agreements reached between the sellers and buyers of real estate
provide the foundation for the instructions that guide the escrow holder. Should a legal
dispute arise, the contracts drafted in the transaction will be read and translated by the courts
and the attorneys of the parties who are involved in the transaction.
Lenders, title insurers, and real estate licensees could all be affected by the interpreta-
tion of these drafted real estate contracts. For this reason, all real estate licensees should
strive to know the rules governing the creation and operation of contracts. More specifi-
cally, real estate licensees need to know how to apply the law of contracts to real estate
transactions.
CONTRACTS DEFINED
A contract is an agreement to do or not to do a certain thing. It may be written or
oral. In order to create a contract that is legally valid, the agreement must contain certain
essential elements. The four essential elements that must be present to create a valid
contract are:
Parties who are capable of contracting
Mutual consent
A lawful object
Consideration
Contracts that contain these elements are binding and enforceable. This means that if
the contract is breached, the injured party can seek the help of the courts to enforce the
contract or award money damages for nonperformance.
2 CE DIGEST
PARTIES CAPABLE OF CONTRACTING
To create a valid contract, there must be two or more persons who have the legal
capacity to enter into a binding contract. Most people are considered to be legally capable.
There are, of course, exceptions.
In California, parties who are considered to lack the capacity to enter into contracts
would include:
Minors
Incompetents
Aliens
Convicts
Both parties to a contract must have the legal capacity to contract. If one of the
parties lacks capacity, the contract is voidable by the person who lacks the capacity. Or, the
contract may be void from its inception.
Corporations are considered to be legally competent parties. The individual who
enters into the contract for the corporation must have been given the authority to do so by
the Board of Directors of the corporation. This authority is usually given in the form of a
corporate resolution.
MINORS
One of the conditions required to qualify a person as having legal capacity is that of
age. A person who is 18 years of age or older is considered to be an adult. An adult person
can enter into a legally binding contract. A person who is under the age of 18 is considered
to be a minor. A minor cannot enter into a legally binding contract.
A minor cannot give a delegation of power or make a contract relating to real prop-
erty. Any contract that a minor would enter into may be disavowed and made void by the
minor. A minor is incapable of appointing an agent. Any such delegation of power such as
giving another person a power of attorney to buy or sell real property for the minor is void.
For this reason, a broker could not act as an agent for the minor to buy or sell real property.
A contract entered into by an adult and a minor may only be disaffirmed and made
void by the minor. Therefore, an adult who enters into a contract with a minor does so at his
own risk. Although a minor has the legal right to disaffirm a contract with an adult, the
minor is liable under the contract until steps are taken to void the contract. Any
consideration received by the minor must be returned to the other party.
CE DIGEST 3
RATIFICATION
Ratify means “to give formal sanction to; approve and so make valid.” A person,
who approves a voidable contract that he or she has a right to disaffirm, “ratifies” the con-
tract. Ratification applies to a voidable contract. Take the case of a minor who enters into a
contract with an adult. Later, after the minor has reached the legal age of eighteen, the
person’s conduct continues to indicate that he or she approves of and is satisfied with the
contract. The party’s acts and conduct would “ratify” the contract and eliminate the right to
disaffirm.
EMANCIPATED MINORS
The Emancipation of Minors Act is contained in the Civil Code. Based on this act,
an emancipated minor is a person under 18 years of age who:
Is married;
Has been married even though the marriage has been dissolved;
Is on active duty with the armed forces of the United States;
Has received a declaration of emancipation by petitioning the Superior Court in the
county where he or she resides.
Persons, who fall into one of these categories, are considered as being over the age of
majority and do have certain powers to deal with real property. Emancipated minors may
enter into legally binding contracts to: 1) Sell 2) Buy 3) Lease 4) Encumber 5)
Exchange or, 6) Transfer any interest in real or personal property.
INCOMPETENTS
Under California law, a person, who has been judged in a court of law to have an
unsound mind, would be classified as being mentally incompetent. Should this happen, the
incompetent person would not have the legal capacity to enter into a contract until such time
as the person’s capacity is restored.
Similarly, a person who is entirely without understanding has no power to contract.
This is true even if the person has not been judicially determined to be incompetent. The
best procedure is for the incompetent person to be represented by a court appointed guardian
or conservator. Any acts of the guardian or conservator on matters concerning real property
would be subject to court approval.
If someone makes a contract while drugged or intoxicated, the contract is voidable by
that person. A mentally incompetent person cannot legally contract. Any such contract
would be void. Minors or incompetents may convey, mortgage, lease or acquire real
4 CE DIGEST
property through the acts of their guardians or conservators subject to court approval. Both
minors and incompetents may acquire title to real property through a gift or an inheritance.
ALIENS
In California, resident or nonresident aliens have essentially the same property rights
as citizens. Section 671 of the Civil Code provides that “any person whether citizen or alien
may take, hold, and dispose of property, real or personal, within this state.” Under federal
law, however, there are certain restrictions upon the property rights of aliens.
CONVICTS
Persons sentenced to imprisonment in state prisons are deprived of their civil rights
as may be necessary for the security of the institution in which they are confined and for the
reasonable protection of the public. Convicts do not, however, forfeit their property. They
may acquire property by gift, inheritance, or by will under certain conditions. They may
also convey their property or acquire property through a conveyance.
MUTUAL CONSENT
The second element of a valid contract is that the parties, who have the legal capacity
to contract, must mutually consent to be bound by the contract. To have mutual consent, we
need:
A definite offer made by one of the parties to the contract, and
A genuine acceptance made of the offer by the other party to the contract.
These two components of offer and acceptance form the essential element of “mutual
consent” needed to form a valid contract. To satisfy the requirement of mutual consent,
there must be a “meeting of the minds” by the parties as to the terms and conditions of the
agreement. The assent of both parties must be genuine and freely made. The party who
makes the offer is known as the offeror; and, the party who accepts the offer is the
offeree.
A DEFINITE OFFER
Advertisements placed in newspapers, magazines, or other mass media do not consti-
tute definite offers. These kinds of advertising can be characterized as an invitation to enter
into preliminary negotiations to make an offer. These mass media serve to announce that
certain items or properties are for sale. Similarly, other communication forms such as
proposals, preliminary negotiations, and, listings are not definite offers.
An agreement to agree is not a contract. It is an illusory contract. The term
“illusory” is used to describe “that which has a false appearance.” An offer from an offeror
CE DIGEST 5
who promises to “buy your property if I can find acceptable financing” is an example of an
illusory offer. The offeror is not making a real promise since there is no standard on which
to base a determination of what is acceptable financing. It is left to the offeror to determine
what is “acceptable financing” and does not effectively bind the offeror to the contract.
A true offer must:
Demonstrate a present intent on the part of the offeror to enter into a contract with
the offeree in exchange for the offeree’s promise to: a) Perform some act; or, b)
Refrain from doing something.
Be definite and certain as to its terms and the acts that are to be performed. The
preciseness of the wording in a contract becomes very important if the contract has to
be interpreted later in a court of law. The contract must set forth the conditions of
performance with enough certainty so that the court can determine the validity of the
contract, whether or not it has been breached, and the rights of the parties to the
agreement.
Be communicated to the person who can accept the offer. To be effective, the offer
may only be communicated voluntarily by the offeror or through his or her duly
authorized agent.
*************************************************************
CASE HISTORY
GOODYEAR v. MUNOZ (1985) 170 C.A. 3d 919
Goodyear Rubber Corp. held a lease with an option to purchase certain real property
for “fair market value” from Munoz. When Goodyear attempted to exercise their option,
Munoz refused their tender offer of $80,000. Munoz claimed the term “fair market value”
was too uncertain to support performance of the contract and that the option was therefore
unenforceable. Goodyear filed a complaint for specific performance. The trial court
entered a summary judgment in favor of Munoz.
The Court of Appeal reversed this decision. The court held that the term “fair market
value” was a generally accepted and well-established means of property valuation requiring
neither greater specificity nor future agreement of the parties to be specifically enforceable.
********************************************************************
ACCEPTANCE OF OFFER
When an offeree accepts and communicates his or her acceptance of a definite and
certain offer from an offeror, a binding contract is formed. An offer must be accepted in the
manner specified in the contract. However, if an exact method of accepting the contract is
not stated, any reasonable manner is deemed to be legally sufficient.
The acceptance of an offer must be absolute and unqualified. If the terms of the offer
are modified in any kind of a material way by the offeree, it becomes a counteroffer. The
6 CE DIGEST
acceptance of the offer must be within the time limit specified in the contract. If no time is
specified, then acceptance must be within a reasonable time. Once accepted, the death or
insanity of either party will not terminate the contract.
An offeree, who receives an offer that he would like to accept after making certain
changes to its terms or conditions, is making a counteroffer. The original offer is legally
rejected. The offeree now becomes the offeror of the counteroffer; the original offeror
becomes the offeree.
Each change made in an offer or counteroffer should be dated and initialed by all
parties to the transaction. Additionally, if it is a real estate contract, the broker must give
copies of the contract or changes to the parties signing or initialing at the time the contract is
signed or the changes are made.
A contract is made when the acceptance is mailed or put in the course of transmission
by any prescribed or reasonable mode such as deposit of a telegram for transmission. This
is so even though the letter of acceptance is lost and never reaches the party making the
offer since the acceptance has been placed in the course of transmission by the offeree.
TERMINATION OF AN OFFER
The hope of a person who makes an offer is that the other party will accept the offer
and that a contract will be formed. However, the offeror usually does not want to wait
indefinitely to find out if the offer is accepted. An offer may be terminated in a number of
ways.
Lapse of Time - An offer is revoked if the offeree fails to accept the offer within the
time period specified in the contract. The offeror generally specifies that the
offeree’s acceptance must be communicated to the offeror by a certain date. If the
offeree’s acceptance is not received by that date, the offer is considered to have been
revoked.
Revocation of Offer - An offer may be withdrawn at any time before the offeror
receives communication of the offeree’s acceptance in writing. This is true even if
the offeror said the offer would be kept open for a stated period of time which has not
yet elapsed. If the offeree pays to keep the offer open for a prescribed period of time,
it becomes an option contract and the offeror must abide by its terms.
Failure of Offeree to Fulfill a Condition - If the offeree fails to fulfill a condition
prescribed by the offeror or to accept the offer in a prescribed manner, the offer may
be terminated. If the offeree makes a qualified acceptance such as by changing the
price, the offer becomes a counteroffer and the original offer is dead. It cannot later
be accepted unless revived by the offeror making the same offer over again.
CE DIGEST 7
Rejection by the Offeree - An unequivocal rejection ends the offer. However,
requests for clarification or preliminary bargaining do not have the same effect if
they involve no more than inquiries or suggestions for different terms.
Death or Insanity of the Offeror or Offeree - Revokes the offer. However, should
one or both of the parties to the contract die or become incapacitated after accep-
tance of the offer, the contract becomes binding upon the heirs or guardians.
An Illegal Purpose - If the conditions or the purpose of the contract are illegal, then
the contract is terminated.
*****************************************************8
CASE HISTORY
GIBBS v. AMERICAN SAVINGS & LOAN 217 C.A. 3rd 1372
James and Barbara Gibbs submitted an offer for $180,000 to American Savings and
Loan to purchase a house in Woodland Hills that American had taken back in foreclosure.
A short while later the Gibbs received a counteroffer from American Savings. The counter-
offer contained several additional terms and conditions but made no mention of the purchase
price.
Mrs. Gibbs received the counteroffer on June 6, 1985 at approximately 8:45 a.m.
She then drove to her husband's worksite to get his signature on the counteroffer, signed it
herself, and drove to her office where she prepared an envelope and certified mail receipt
and gave the ready-to-mail envelope to the mail clerk at her office to mail at approximately
10:00 a.m on the morning of June 6, 1985.
At approximately 11:00 a.m. on the same morning (June 6th), Barbara Gibbs had a
telephone conversation with an employee from American Savings during which the thrift's
employee informed Mrs. Gibbs that the counteroffer contained an error since American
Savings had intended to increase the purchase price to $198,000 and that because of this
error the counteroffer was revoked.
American Savings then took the position that no contract had been formed since they
had withdrawn their counteroffer prior to receipt of the Gibbs's offer. The Gibbs insisted
that they had accepted the counteroffer before it was revoked by placing it in the hands of
the mail clerk for mailing prior to being informed that American Savings was withdrawing
their counteroffer. The trial court found for American Savings and Loan. The Gibbs
appealed the decision.
It is a basic principle of contract law that an offeror may withdraw an offer to enter
into a contract at any time prior to receiving the offeree's acceptance of the offer. In the trial
court's proceedings, evidence had been presented that indicated that giving their acceptance
to the mail clerk on June 6th did not meet the standard of putting their acceptance "in the
course of transmission" to the other party. This was based on the fact that although the
8 CE DIGEST
Gibbs' acceptance of the counteroffer had been given to the mail clerk on June 6th, their
acceptance was not postmarked until the following day June 7, 1985. Therefore, American
Saving's revocation occurred prior to the Gibbs' acceptance.
Civil Code Section 1583 provides "consent is deemed to be fully communicated
between the parties as soon as the party accepting an offer has put his or her acceptance in
the course of transmission to the offeror. This means that the acceptance must be placed
out of control of the accepting party in order to be considered "in the course of
transmission." In California, an acceptance is deemed to be communicated upon deposit in
the mail. In this case, however, the acceptance was given to the mail clerk on June 6th. The
postmark of June 7 on the envelope was clearly after the June 6th withdrawal of the
American Savings' counteroffer and prior to the Gibbs' acceptance. Based on these facts,
the trial court's verdict was upheld by the appeals court.
****************************************
GENUINE ASSENT
The element of mutual consent is “clouded” if it is induced by:
Fraud
Mistake
Duress
Menace
Undue influence
If any one of these obstacles is present, the contract is voidable at the option of the
injured party. The injured party may seek to have the contract rescinded in which case both
parties would be restored to their original positions. Or, the party, who has the option to
make the contract void, may sue for dollar damages.
FRAUD
Fraud exists when a person misrepresents a material fact. A “material fact” means an
important fact which significantly affects the party’s decision to enter into the contract.
Fraud is either actual or constructive.
Actual Fraud: Exists when a person intentionally misrepresents a material fact
knowing that it is not true in order to induce the other party to enter into a contract.
The Civil Code lists five acts which could be construed as actual fraud.
1. The suggestion, as a fact, of that which is not true, by one who does not
believe it to be true;
2. The positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true though the person believes it to
be true;
CE DIGEST 9
3. The suppression of that which is true, by one having knowledge or belief of
the fact;
4. A promise made without any promise of performing it; or,
5. Any other fact designed to deceive.
MISTAKES
Another possible obstacle to genuine assent between parties occurs when either one
or both of the parties is mistaken as to the subject matter of the contract. A contract in
which a “mistake” is made is void or voidable. Where both parties are mistaken as to the
subject matter of the contract, there is no contract. Where the subject matter of the contract
has ceased to exist and this fact is not known to either party, there is no contract.
DURESS, MENACE, & UNDUE INFLUENCE
Sometimes a contract may be rendered voidable because it was entered into under the
pressure of duress, menace, or undue influence. All three could cause a person to enter a
contract against his or her will. The law allows the person on whom the unlawful pressure
has been applied to void the contract at a later date.
LAWFUL OBJECT
A contract must be legal in its formation and operation. Both its consideration and its
object must be lawful. The object refers to what the contract requires the parties to do or not
to do. If a contract has a single object and that object is unlawful or is impossible to per-
form, the contract is void. If there are several distinct objects, the contract is normally valid
as to those parts that are lawful.
An object is not lawful that is contrary to an express provision of the law or to good
morals. In general, the law does not lend its support to either party involved in an unlawful
contract.
SUFFICIENT CONSIDERATION
Every contract requires a sufficient consideration. Consideration is anything of value
which induces a person to enter into a contract. Consideration may be: 1) A promise 2)
An act, or 3) Money.
All consideration is considered to be “valuable” consideration which means it is
something that the parties consider to be of value. The exception to this statement is “love
and affection” which is termed “good consideration.”
10 CE DIGEST
In summary, contracts require certain essential elements to be classified as valid and
binding contracts. These elements are: 1) Capable parties; 2) Mutual consent; 3) A law-
ful object; and, 4) Consideration. Real estate contracts, however, usually require a fifth
essential. Real estate contracts generally must be in writing in order to be enforceable.
INTERPRETATION OF CONTRACTS
The majority of all contracts are properly performed and discharged or executed
without legal complications. If contractual disputes occur, the parties themselves, or with
the aid of legal counsel, will typically work out an amicable settlement. But the courts
remain available for the resolution of conflicts between contracting parties that cannot be
settled by the parties. It is helpful, therefore, to understand the rules which guide the courts
in their interpretation of contracts.
In general, contracts are interpreted to give effect to the mutual intent of the parties at
the time the contract was formed. A contract may be explained by reference to the circum-
stances under which it was made and the subject matter of the contract. However, if the
language of the contract is clear and explicit, the language of the contract will govern its
interpretation.
Under the Statute of Frauds, virtually all real estate contracts must be in writing to be
enforceable. Real estate licensees can perform the ultimate in consumer protection service
by seeing to it that what is written in a sales contract clearly sets forth the intentions of all
parties to the contract. However, when a written contract fails to express the real intention
of the parties because of fraud, mistake, or accident the courts will seek to regard such real
intention and disregard the written parts of the contract that are in error.
A written contract will take precedence over all negotiation either oral or written that
took place prior to the forming of the contract. When a contract is partly written and partly
printed, written parts control the printed parts. In addition, the parts which are purely
original control those which were copies from a form. The modification or alteration of a
contract creates a change in the terms and conditions of the contract and requires the mutual
assent of the parties to the contract.
PAROL EVIDENCE RULE
Courts are often asked to interpret the meaning of a contract. This gives rise to the
question of whether the courts can consider other evidence that is not set forth in the written
contract. The general rule is that oral statements or representations made prior to the form-
ing of a contract which modify the subject matter of a written contract are inadmissible in a
court of law.
CE DIGEST 11
This is known as the parol evidence rule. This rule prevents the introduction of prior
oral or written agreements which would modify or contradict the written contract drawn up
between the parties. Parol evidence may be used, however, to show a later verbal modifica-
tion of a written contract or to clarify an ambiguity.
****************************************************
CASE HISTORY
WILSON v. GENTILE (1992) 8 C.A. 4th 759
In this case, a dispute arose as to the proper exercise of a lease option to purchase.
The lessor brought an unlawful detainer action and the lessee, in turn, filed an action for
declaratory relief and specific performance. The “lease option” agreement provided that the
lessee must exercise the option right personally in writing “within thirty (30) days prior to
the expiration of this option.” The trial court granted summary judgment for the lessee,
determining that the lessee properly exercised his option to purchase the leased property
seven days before the option period expired.
The lessor appealed. However, the Court of Appeals upheld the trial court’s decision
determining that the lessee exercised the option within the period allowed by the agreement.
The court held that in the context of an “option to buy,” as opposed to an option to renew a
lease, the language “within 30 days prior to” is properly interpreted to allow exercise of the
option during the 30-day period immediately preceding the expiration of the option.
**********************************************
CLASSIFICATION OF CONTRACTS
There are certain terms that are used to classify contracts. A listing of these terms
would include:
MANNER OF CREATION
There are two terms generally used to describe the manner in which a contract is
created. A contract may be an express contract. Or, a contract is an implied contract. An
express contract is created “in words.” These words may be placed into writing which sets
forth the terms of the agreement between the parties. Or, they may be conveyed in an oral
agreement.
An implied agreement is one created by the acts and conduct of the parties rather
than in words.
EXAMPLE: You have a credit account at the local drugstore. You go into the
drugstore and select an article that you wish to purchase from the shelf. The
12 CE DIGEST
clerk is talking to another customer but you catch her eye and show her the
article that you wish to buy. She nods affirmatively. You turn around and exit
the store. Was a contract created? Yes! It would be an implied contract even
though not one word passed between you and the clerk.
CONTENT OF THE CONTRACT
The content of the agreement may be bilateral or unilateral. A bilateral contract is
one in which the promise of one of the parties is given in exchange for the promise of the
other party.
EXAMPLE: Able tells Baker, “I’ll pay you $7,000 if you will promise to
remodel both my bathrooms.” Baker responds, “I promise that I will remodel
both your bathrooms for the $7,000 you will pay.”
In a bilateral contract, both parties promise to do something or refrain from doing
something.
A unilateral contract, on the other hand, is an agreement between the parties whereby
one party promises to do something in exchange for the act of the other party.
EXAMPLE: Able’s pet dog is lost. Able puts up reward posters saying, “I
promise to pay a $200 reward to anyone who finds my lost dog.” At this point,
nobody has actually promised to find the dog and no agreement exists between
the parties. However, if someone finds and returns the dog to Abel, has a
contract been made? Yes! It is based on the exchange of a promise by one of the
parties to do something in exchange for the performance of some act by the other
party. It is a unilateral contract.
PERFORMANCE
In reference to the extent of the performance of a contract, you will find the use of
the terms “executory” and “executed” to describe a contract. In an executory contract,
certain terms and conditions contained in the contract have yet to be performed. In a
contract described as “executed,” all the terms and conditions have been met by both of the
parties to the contract.
LEGAL EFFECT
Contracts may be classified in four ways in terms of the legal effect of the contract:
Valid
Void
Voidable
Unenforceable
CE DIGEST 13
A valid contract is one that contains all the legal essentials required to create a
legally binding contract. It is a good contract and is binding on both parties to the agree-
ment. It is enforceable by both parties to the agreement. If the conditions required to create
a valid contract have been met, any party to the contract may seek help in a court of law
should there be a breach in the contract. The injured party may ask the courts to help
enforce the contract as created or award money damages as compensation for the breach of
the contract.
A void contract is a contract that is lacking in one or more of the legal essentials
required. A void contract has no legal effect. It is not binding on or enforceable by any of
the parties to the contract.
A voidable contract is a contract that is valid and enforceable on its face but may be
made void by one or all of the parties because of some defect. A contract induced by fraud
would be voidable by the injured party. It is however, valid until made void.
An unenforceable contract is one in which one or both of the parties cannot be com-
pelled to perform under the terms of the contract. An example would be the lapse of the
time limitation required under the Statute of Limitations. Another example would be an oral
contract that under the Statute of Frauds is required to be in writing. All void contracts are
unenforceable.
STATUTE OF FRAUDS
The Statute of Frauds is a law that requires certain contracts to be in writing to be
enforceable in a court of law. The parties to a contract, which under the Statute of Frauds is
required to be in writing, are barred from enforcing their rights if the contract is not in writ-
ing. The injured parties may not seek the help of the courts in finding a legal remedy.
The Statute of Frauds was first adopted in England in 1677 and became part of the
English common law. Subsequently, it was introduced into this country and has been codi-
fied in California. The purpose of this law is to prevent perjury, forgery, and dishonest con-
duct on the part of unscrupulous people in proving the existence and terms of certain
important types of contracts.
WRITING REQUIRED
The statute provides that certain contracts are invalid unless they are in writing and
signed by the parties or their agents. Under Section 1624 of the California Civil Code, the
contracts that are required to be in writing that pertain to real estate are:
An agreement that by its terms is not to be performed within a year of its
creation.
14 CE DIGEST
An agreement for the leasing for a longer period than one year, or for the sale of
real property, or of an interest in real property.
An agreement authorizing or employing an agent, broker, or any other person, to
purchase or sell real estate, or to lease real estate for a longer period than one
year. Or, to procure, introduce, or find a purchaser or seller of real estate or a
lessee or lessor of real estate where such lease is for a longer period than one
year for compensation or a commission.
An agreement which by its terms is not to be performed during the lifetime of
the promisor or an agreement to devise or bequeath any property, or to make any
provisions for any reason by will.
An agreement by a purchaser of real property to pay an indebtedness secured by
a mortgage or deed of trust upon the property purchased, unless assumption of
the indebtedness by the purchaser is specifically provided for in the conveyance
of such property.
REMEDIES
The Stature of Frauds relates to the remedy only and not to the validity of the con-
tract. A contract, which is required by this statute to be in writing but is not, is not void. It
is merely unenforceable. It is an effective contract for all purposes except in the case where
the contract is breached. The injured party cannot pursue the help of the courts in seeking a
legal remedy.
When a contract has been fully performed, the Statute of Frauds no longer applies
and may not be called upon by the parties for any reason. The writing required by the law
may be in any form. Its main purpose is to provide evidence that a contract exists and that
the parties have entered into an agreement. The writing must contain, however, all the
material terms of the contract so that a court can determine what the parties agreed. It must
provide evidence that the party being charged signed the agreement.
REAL ESTATE APPLICATIONS
Several of the sections contained in the Statute of Frauds have an important impact
on persons dealing in real estate. Practically all contracts of sale or purchase giving any
right, title, or interest in real property must be in writing. The words “transfer of real estate
or of an interest therein” include such transactions as:
Assignment of a percentage of the proceeds of oil produced from designated
lands
All instruments creating liens such as trust deeds
CE DIGEST 15
Leases for periods of time of more than one year
Rights to rights-of-way through property and any and all encumbrances incurred
or suffered by the owners
To sum up, the easiest way to remember which real estate contracts fall under the
Statute of Frauds is to take the approach that all real estate contracts must be in writing in
order to be enforceable. The exception is, of course, a lease for 1 year or less which may be
oral and still be enforceable.
STATUTE OF LIMITATIONS
The Statute of Limitations is a law which establishes certain time limitations in
which to bring a legal action for breach of contract. The injured party must start legal pro-
ceedings within a certain period of time or the courts will not help the party.
This California law sets forth a number of important time frames for real estate.
Some of the time periods that real estate licensees should be familiar with are:
An oral contract or title insurance claim - 2 years
An action for trespass upon real estate - 3 years
All rights arising out of a real estate contract - 4 years
An action to recover real property such as a quiet title action, adverse
possession, or tax sale - 5 years
Recovery under a judgment lien - 10 years after it has been recorded
PERFORMANCE AND DISCHARGE OF CONTRACTS
In the majority of contracts, the contracting parties perform properly according to the
terms and conditions of the agreement without legal complications. However, sometimes a
transaction can break down despite the best efforts of the principals and their agents. If
difficulties do arise, the parties, sometimes with the aid of legal counsel, will attempt to
work out an amicable settlement. However, if this fails, the courts are available to resolve
the differences between the parties.
There are three ways, generally, that a contract may be discharged. They are:
Performance
Agreement
By law
16 CE DIGEST
PERFORMANCE
Most contracts are discharged by the full performance of the parties. However, a
person may wish to withdraw from a contract without terminating it. Under the proper con-
ditions, this may be accomplished through either an assignment or a novation.
ASSIGNMENT
An assignment is the transfer of a person’s rights under a contract to another person.
The new party literally “steps into the shoes” of the original contracting party and assumes
that person’s rights and responsibilities contained in the provisions of the contract. The
effect is that the person making the assignment (assignor) drops out of the contract. The
person receiving the assignment (assignee) continues on in meeting the terms and conditions
of the agreement.
A contract may be assignable depending upon the nature of the terms of the con-
tract. Most unilateral and bilateral contracts are assignable unless the terms of the contract
expressly prohibit an assignment. The assignee becomes primarily liable under the contract.
The assignor still retains a secondary liability.
The following types of contracts may not be assigned:
An option in which the consideration is an unsecured promissory note
A contract that expressly prohibits an assignment. If this type of contract is
assigned, it is voidable by the injured party
Personal service contracts such as a listing may not be assigned
A deed cannot be assigned
NOVATION
A party may withdraw from a contract through a novation. A novation is the
substitution by agreement of a new obligation for an existing one with the intent of extin-
guishing the existing contract. The substitution may be a new contract between the same
parties or a new party may be involved. A novation requires the intent to discharge the old
contract. The new contract must have all the legal essentials required to create a contract
including a sufficient consideration.
DISCHARGE BY AGREEMENT
In the event there is a breach of contract, the injured party may look to the courts for
help. The court’s remedies include court actions for specific performance, money damages,
or liquidated damages.
CE DIGEST 17
However, as a practical matter, the time and cost of pursuing a remedy in a court of
law may exceed the benefits to be gained. In addition, the possibility exists that the judge
may not agree with the person initiating the lawsuit. In this event, the party suing could end
up losing the case in court. For this reason, the injured party may find it more practical and
prudent to agree with the other party and simply mutually rescind the contract.
When both parties agree to mutually rescind the contract, it has the effect of releasing
each other from the contract and restoring each party to their original positions. For the
protection of everyone, the agreement to cancel should be in writing and signed by the
parties to the original contract.
DISCHARGE BY LAW
If one of the parties to the contract fails or refuses to perform his or her obligations
without legal justification, the contract is breached. A breach of contract by one of the
parties gives the other party or parties several potential “causes of action.” The injured
party may make a legal claim in court for one of three possible legal solutions. They are:
UNILATERAL RESCISSION - If a breach occurs, the wronged party may
seek to unilaterally rescind the contract. However, the suing party must use
reasonable diligence to rescind promptly upon discovering the facts that would
entitle the party to rescind. In addition, the party seeking to rescind must restore
to the other party everything of value received from the other party under the
contract. Or, offer to restore same if the other party will do the same.
SUE FOR DAMAGES - The victim of a breach of contract has, obviously,
been wronged. The courts take the approach that the aggrieved party may be
awarded compensation in the form of money for being wronged. This type of
compensation is known as damages.
SPECIFIC PERFORMANCE - If dollar damages would not provide an
adequate remedy, the courts may order the performance of the original contract
on its terms and conditions. This type of action may be sought by either party
when the non-breaching party still wishes to proceed with the sale or purchase.
Specific performance is especially important in the real estate business in connection
with contracts for the transfer of interests in land. Since every piece of land is unique, the
law presumes that the breach of an agreement to transfer real property cannot be
compensated adequately by the payment of money damages. For specific performance to be
available as a remedy, however, certain other requirements must be met before the court will
order a person to perform a contract. These requirements are:
The consideration in the contract must be adequate.
The contract must be just and reasonable as to the party against whom it is being
enforced.
18 CE DIGEST
The contract must be sufficiently certain or definite.
The “legal” remedy must be inadequate
The performance ordered by the court must be substantially the same as that
called for in the contract.
FORFEITURES
Contracts often contain a provision "liquidating" or setting the damages a non-
breaching party will receive in the event of a contract breach by the other party. The
purpose of these provisions is to provide a fixed or, at least, easily determined amount of
damages if a default occurs. In this day of expensive and time-consuming litigation, this is
important because it presets the amount of damages to be awarded in the case of a forfeiture.
The provision in the contract that achieves this objective is known as a "Liquidated
Damages" clause.
If the contract is for the purchase and sale of residential real property, of not more
than four units and the buyer/owner intends to occupy one of the units, the following rules
apply:
These special rules apply only to amounts actually prepaid, in the form of
deposit, down payment or otherwise.
If the amount paid in accordance to the liquidated damages clause does not
exceed three (3) percent of the purchase price, the clause is valid unless the
buyer proves that the amount paid is unreasonable.
If the amount actually paid in accordance with the liquidated damages clause
exceeds three (3) percent of the purchase price, the clause is invalid unless the
party seeking to enforce it proves that the amount paid is reasonable.
The provision must be separately signed or initialed by each party to the
contract, and if it is a printed contract, the provision must be set off in ten (10)
point bold-type or contrasting red print in eight (8) point type.
REAL ESTATE CONTRACTS
CONTRACT PREPARATION
Real estate contracts provide the foundation for the agreements reached by the parties
in a real estate transaction. The two major contracts that all licensees need to be thoroughly
familiar with are the listing agreement and the purchase agreement. It is imperative in
reducing the risks involved in a typical real estate transaction that real estate licensees fully
understand these forms and be well trained in their usage.
CE DIGEST 19
Real estate contracts adhere to the same essentials as contract law in general. They
follow the same requirements for contract formation, enforceability, and rules applicable to
contract interpretation. These essentials include: 1) Parties capable of contracting 2)
Mutual consent 3) A lawful object and 4) Sufficient consideration. In the case of real
estate contracts, however, a fifth requirement is that they be in writing in order to be
enforceable in a court of law.
A real estate agent should make it a practice to use the approved preprinted standard
listing contracts and purchase agreements fill-in forms offered through state boards and
associations. The use of this type of form acts as a risk reducer to avoid the possibility of a
misunderstanding by one or both of the parties in the transaction. The preprinted forms
have been prepared by legal experts and state the items that need to be in a contract to fully
"legally package" the transaction.
****************************************************
CASE HISTORY
FRANKLIN v. HANSEN 1963 59 C. 2d 570
Hansen owned residential property in Newport Beach. Franklin had acted as an
agent for Hansen in the rental of Hansen’s property and had informed Hansen that he would
like to represent Hansen as his agent in the sale of Hansen’s property.
A sale price of $115,000 was agreed upon. Over the period of the next few months,
several offers were received. However, all the offers were for less than $115,000. Hansen
eventually agreed that he would accept an offer of $100,000. At this point, no written
agreement existed between Hansen and Franklin on the sale of the property. Hansen had
assured Franklin that a signed listing was unnecessary as his word was good.
A short while later Franklin received an offer for $100,000. Franklin telephoned the
seller and requested Hansen to send him a telegram authorizing him to sell the property.
Hansen complied and sent a telegram confirming he would sell the property for $100,000.
Franklin proceeded with the sale and then called Hansen again to tell him that the property
had been sold and that he had accepted a check for $5,000 as a down payment. Hansen
stated he was pleasantly surprised and consented to the suggested escrow agent.
However, when a standard form deposit receipt providing for payment of a 5%
commission to Franklin was presented, Hansen refused to sign it and indicated he wished
“to get out of the deal.” At a meeting between Franklin, Hansen, and the buyers of the
property, the buyers refused to waive their rights under the agreement. Hansen admitted he
was “stuck” with the deal and that Franklin would receive his commission. Subsequently,
however, Hansen refused to sign any of the documents necessary to complete the sale of the
property and also refused to pay the agreed upon commission.
Franklin sued for his $5,000 commission citing Hansen’s promise to abide by the
verbal listing of the property and the telegram in “confirmation thereof.” Hansen relied on
the statute of frauds as his main defense. However, the trial court, after taking into account
all the transactions between the parties, awarded a judgment to Franklin.
20 CE DIGEST
Hansen appealed contending that neither the telegram nor any other writing consti-
tuted a sufficient memorandum or ratification of a contract of employment to satisfy the
statute of frauds. The appeals court ruled in favor of the appellant, Hansen, and reversed the
trial court’s decision.
The appeals court based its decision on its finding that a written agreement must
specify that it is a contract of employment. Hansen’s telegram to Franklin confirming that
he would sell the property contained no reference to the fact that Hansen was employing
Franklin or to any representation that he would pay a commission. If Hansen’s telegram had
stated that Hansen was employing Franklin to sell the property, a payment of a commission
would have been inferred. The court held that a listing agreement must unequivocally show
the fact of employment of the broker seeking to recover a real estate commission. The
appeals court concluded that in Franklin v. Hansen, the telegram failed to use any words in
recognition of a contractual obligation and, therefore, was insufficient under the statute of
frauds to support Franklin’s claim for a commission.
**********************************************************
INSURING MARKETABLE TITLE
It is especially important in the transfer of real property that a marketable title is con-
veyed. Lenders and buyers would be very reluctant to commit their funds to real estate
transaction unless they have assurances that the title to the subject property was merchant-
able. Buyers want to know that there are no hidden interests in the real property they are
proposing to buy. A title is merchantable if there are reasonable assurances as to the rights
of the parties involved in the transaction.
A grant deed conveys two implicit promises with the transfer of title. When the word
"grant" is used in a deed, the seller is warranting that: (1) He or she has not already con-
veyed the title to somebody else, and (2) That the title is free and clear of any encum-
brances such as taxes, assessments, and any other liens other than the ones that are being
disclosed to the buyer. These warranties usually do not appear on the face of the deed. The
word "grant" carries with it these two implied warranties.
COMMON AREAS OF RISK IN REAL ESTATE CONTRACTS
The preponderance of lawsuits filed in real estate transactions stem from misrepre-
sentations, negligence, and non-disclosures. The best proactive risk control steps that
can be taken to reduce the potential for this type of lawsuit is to do the right thing, in the
right way, and at the right time. The best way to accomplish this feat is to make sure you
fully document your activities, conversations, and recommendations and disclose what you
know or discover about a property that your client is interested in buying or selling. Simply
said, this means "When in doubt, disclose it - and put it in writing"!
CE DIGEST 21
SCOPE OF AGENT'S DUTIES AND LIABILITIES
The listing contract is generally the written agreement between the seller and real
estate broker that creates an agency relationship. It is an express agency. The agent holding
the listing is bound by the rules of law applying to the agency relationship and owes certain
obligations to the principal. A real estate licensee, who is performing his or her services
under a written listing contract, has two sets of responsibilities. There are the responsibili-
ties and legal obligations set forth in the terms and provisions of the listing contract. And,
there are the fiduciary responsibilities created by the agency relationship established as a
result of the written listing agreement. If the listing contract is unenforceable, the broker
cannot be held liable for failing to fulfill the broker’s contractual obligations. However,
even if the contract is unenforceable, the broker may be held liable for a failure to meet his
or her fiduciary duties imposed by the agency relationship.
The listing agreement clearly spells out the scope and the limits of the agent's duties
and responsibilities in the handling of the transaction. A sure way to reduce the risks in any
transaction is to make sure that all licensees are thoroughly familiar with what is written on
the listing agreement. And, that they clearly understand what duties they are required to do
as well as what is beyond the scope of their agency and, therefore, that they are not legally
required to do.
No liability is incurred by the principal for acts of an agent that are beyond the scope
of the agent’s actual or ostensible authority. A third party, who deals with an agent and
knows of the agency, is under a duty to determine its scope. If the agent acts beyond the
agent’s actual authority and the conduct of the principal has not been such as to give the
agent ostensible authority to do the act, the third party cannot hold the principal liable.
It is a good idea to remember that the listing agreement must be in writing if the
agent expects to receive a commission. An oral agreement to buy or sell real estate can be
valid, but it is not enforceable in a court of law. All licensee's should be aware of California
Civil Code Section 1624 (a) (4).
SECTION 1624
(a) The following contracts are invalid, unless they, or some sort of memorandum
thereof, are in writing and subscribed by the party to be charged or by the party's agent.
(4) An agreement authorizing or employing an agent, broker, or any other person to
purchase or sell real estate or to lease real estate for a longer period than one year, or to
procure, introduce, or find a purchaser or seller of real estate or a lessee or lessor of real
estate where the lease is for a longer period than one year, for compensation or
commission.
Most real estate licensees operate as "special agents" in pursuing their real estate
activities. A special agent is one who has been employed to do a specific thing such as
finding a buyer for a particular property that a seller is interested in selling. Therefore, his
22 CE DIGEST
or her authority is limited to this single transaction. All licensees should strive to be aware
of the limits of the authority given to them and not to exceed the scope of this authority.
*****************************************************************
CASE HISTORY CARLETON V. TORTOSA
(1993) 14 Cal. App. 4th 745
In this case, an experienced real estate investor, Carleton, employed Mary Tortosa, a
real estate broker, in the sale of two residential rental properties and the purchase of two
residential rental properties. Carleton executed listing agreements, real estate disclosure
statements, and real estate purchase contracts in completing the transactions. These docu-
ments advised him that Tortosa's responsibilities as a broker did not include giving advice
on the tax consequences of the transactions.
After the transactions were completed, Carleton was informed by his accountant that
he had incurred a tax liability of approximately $34,000 because these transactions were not
structured to qualify as tax-deferred exchanges under the Internal Revenue Code. Carleton
then brought a professional negligence action, alleging in substance that Tortosa had "failed
to exercise reasonable care and skill in undertaking her duties as a broker by neglecting to
warn plaintiff his transactions could have adverse tax consequences and by failing to struc-
ture the transactions as tax-deferred exchanges."
In completing the transactions, Carleton had signed two listing agreements with
Tortosa, one for each of the properties he was selling. Both listings advised in writing that
"A real estate broker is the person qualified to advise on real estate. If you desire legal or
tax advice, consult an appropriate professional." On all four of the transactions, Tortosa
furnished plaintiff a written "Disclosure Regarding Real Estate Agency Relationship" form
which advised the plaintiff: "The above duties of the agent in a real estate transaction do not
relieve a Seller or a Buyer from the responsibility to protect their own interests. You should
carefully read all agreements to assure that they adequately express your understanding of
the transaction. A real estate agent is a person qualified to advise about real estate. If legal
or tax advice is desired, consult a competent professional."
The trial court ruled in favor of Tortusa. Carleton appealed but the appellate court
affirmed the trial court's decision.
***************************************************************
Real estate licensees should also remember that giving legal advice or input into
another person's legal decisions in a real estate transaction represents the unauthorized
practice of law. This type of advice is a criminal offense that could lead to a fine or jail.
Real estate brokers and agents should, as a matter of course, make it a practice to suggest
that clients seek expert advice in areas such as law, appraisal, tax matters, or other special-
ized fields, where the client has a significant problem and is asking for advice.
CE DIGEST 23
Some real estate licensees may have a good deal of knowledge and expertise on
matters such as real estate law and tax matters. However, it is not their duty to give expert
advice about structural defects, tax questions, soil stability, and environmental hazards. All
licensees do have a duty, however, to advise their clients about selecting appropriate experts
to conduct tests, inspections, and prepare reports. It is always a good idea to provide your
clients with a list of experts in a given specialized field and let them make their own deci-
sion as to who they may wish to select.
CONTRACT PROVISIONS
In the usual real estate sales transaction, the prospective buyer states the terms and
conditions under which the buyer is willing to purchase the property. These terms and con-
ditions constitute the offer. If the owner of the property agrees to all of the terms and
conditions of the offer, it constitutes the seller’s acceptance. This offer and genuine accep-
tance creates a contract.
It makes no difference whether the offer comes from the seller or buyer. If the
negotiation finally leads to a definite offer on the one side and an unconditional acceptance
on the other side, a contract of sale has been effected. All that is legally required to com-
plete the contract for the sale of real property is to reduce the terms and conditions to
writing, and to have the parties sign the contract.
Forms such as listing agreements, purchase agreements, exchange agreement, and
other real estate contracts should, at a bare minimum, contain the following provisions:
The date of the agreement
The names and addresses of the parties to the contract
A description of the property
The consideration
Reference to creation of new trust deed, if any, and the terms thereof - Also, the
terms and conditions of existing trust deeds
Any other provisions which may be required by either of the parties
The date and place of closing the contract
The contract should contain a description of the property so that it may be referred to
with certainty. A contract of sale normally calls for the preparation of a deed to convey the
property. It is executory in that when the deed is properly signed and delivered to the pur-
chaser, the contract is executed.
The reality of modern day real estate practice is that the purchase agreement used
today contains many provisions to insure the legal protection of all the parties to the trans-
action. Professionally drafted real estate real estate forms such as a listing agreement or
purchase agreement are designed to incorporate the conditions, disclosures, and addendums
that are frequently required in the real estate transaction of today.
24 CE DIGEST
DEPOSITS
Earnest money deposits by a prospective purchaser of real property are known as
trust funds. The deposit must be handled by the broker as prescribed in the Business and
Professions Code.
Section 10145 of the Real Estate Law provides that the broker, who receives trust
funds, must place the funds into one of three places. The broker may place the monies into
a trust fund account in a bank or other recognized depository. The broker may also deposit
the funds into a neutral escrow. Or, the broker may place the funds into the hands of the
principal. These are the only three things that a broker can do with funds given to him or her
in trust. Whichever of these acts is done, the law requires that it be done not later than three
business days following receipt of the funds by the broker or broker's salesperson.
The Regulations of the Real Estate Commissioner set forth the procedures to be fol-
lowed by the broker who elects to place the earnest money deposit into the broker’s trust
fund account. The regulations require that the earnest money deposit shall be maintained in
the trust fund account for the benefit of the party making the offer until there has been an
acceptance of the offer.
EFFECT OF SELLER’S DEATH ON REAL ESTATE CONTRACT
A real estate contract, properly drawn, usually contains a provision which states that
all the terms of the contract are to be binding upon the heirs, executors, administrators, and
the assigns of the respective parties.
In the event this wording is used, the buyer’s rights are the same against the execu-
tors, administrators, or assigns of the seller as the buyer had against the seller. Under these
circumstances, the buyer may compel the seller’s heirs, administrators, executors, or assigns
specifically to perform the contract.
UNIFORM VENDOR AND PURCHASER RISK ACT
Although it happens infrequently, it is possible that after a contract has been entered
into for the purchase of real property that the property could be seriously damaged or
destroyed. If this happens, the question will come up as to who is liable for the loss.
Under the California Uniform Vendor and Purchaser Risk Act, this is decided by
considering when the legal title and the possession of the property are transferred. If neither
the legal title nor the possession of the property has been transferred and the property is
damaged, the seller cannot enforce the contract. This assumes that the property’s damage
was through no fault of the buyer. And, the buyer is entitled to recover any portion of the
price paid. If, however, either the legal title or the possession has been transferred, the
CE DIGEST 25
buyer is not entitled to recover any portion of monies paid. This position assumes that the
destruction to the property was through no fault of the seller.
CONTINGENCIES
Contingencies are conditions or provisions which have been inserted into contracts.
A condition is an act or event that limits or qualifies the duty of the parties to a contract to
perform. These conditions or provisions generally require the completion of a certain act or
the happening of a certain event before the contract becomes binding upon the parties.
Contingencies give either one or both of the parties the opportunity to cancel the transaction
should:
The act upon which the condition is based not be performed
The event upon which the condition is based not occur
Contingencies limit or qualify the duty of the parties to a contract to perform until the
unmet conditions in the contract are resolved. If a contingency provision is not met, the
party who benefits by the provision may cancel the contract by written notification of the
cancellation to the other party. The party canceling is then relieved of his or her duty to
perform under the terms of the contract. On the other hand, once the contingency provisions
in a contract have been satisfied or removed, then both parties have a duty to perform under
the terms and conditions of the contract.
The placing of a contingency provision into a contract can often serve a useful pur-
pose. It allows a buyer or seller to enter into a real estate sales agreement and give evidence
of their good faith contractual intent. While, at the same time, limiting their liability under
the contract until the contingency provision or conditions placed into the contract can be met
or resolved. Typical examples of contingency clauses found in contracts would include:
Lender approval of buyer’s loan
Approval of soil conditions report
Buyers sale of current home before contract becomes binding
Receiving an appraisal on property of a certain amount
Receipt of termite and roofing reports
Property inspection report from a qualified home inspector
Care should be taken that a contingency or condition placed into a contract be
certain, definite, and clearly understandable so that a reasonable person would know
precisely what is intended. It is of the utmost importance, that all parties to the contract
know exactly what their obligations are as stated in a contingency clause to avoid later mis-
understandings. Contingency provisions may benefit the buyer, the seller, or both of the
parties to the transaction.
26 CE DIGEST
TYPES OF CONTINGENCIES
The California Civil Code defines a contractual obligation as being conditional when
the rights or duties of any party to the contract depend upon the occurrence of an uncertain
event. The Civil Code describes and governs conditions and contingency clauses which are
found in contracts, deeds, and other real estate related documents.
There are three ways to describe contingency clauses or conditions found in real
estate sales agreements based on their relationship to the date that escrow closes.
Conditions Precedent - An act that must be performed or an event that must occur before
the agreement becomes binding and enforceable between the parties (C.C. Sec. 1436).
Conditions precedent are typically acts that are to be performed or events that are to occur
during the escrow period before the closing date of escrow.
EXAMPLE: Sharon Ferguson enters into a sales agreement with Mr. Brown to
buy his home contingent upon her ability to qualify for and obtain a 30 year loan
from a savings and loan for $150,000 at an interest rate of 8.25% per year. Should
the bank approve her loan request at the terms specified or at terms that are more
attractive, Sharon is bound to the contract and has a duty to perform by meeting the
other terms and conditions in the contract and paying the required purchase price.
If, on the other hand, Sharon is denied her loan or it is approved under less favor-
able terms that set forth in the contingency clause, she is excused from performance
under the terms of the contract and may cancel the agreement.
Conditions Concurrent - Conditions which are mutually dependent and are to be
performed at the same time by the parties to the contract (C.C. Sec. 1437). Conditions
concurrent are acts or events that have been set forth in the sales agreement which each
party is to perform separately prior to the closing date of escrow. By the terms and condi-
tions of a real estate contract, the seller generally has a duty to deliver a marketable title,
deliver a termite report, and furnish title insurance. The buyer has a duty to obtain financing
and provide for the delivery of funds in the amount of the purchase price of the property to
escrow. Should either party fail to perform the conditions concurrent stated in the contract,
the other party may terminate the contract based on the failure of the other party to perform.
Condition Subsequent - A condition subsequent is rare, and refers to a future event, which
if it occurs, releases one or both of the parties to the contract.
Section 1439 of the Civil Code further states that before any party to an obligation
can require another party to perform any act under it, he must fulfill all conditions precedent
thereto imposed upon himself, and must be able and offer to fulfill all conditions concurrent
so imposed upon him on the like fulfillment by the other party.
CE DIGEST 27
****************************************************************
CASE EXAMPLE
In the case of Fogarty v. Saathoff (1982) 128 CA 3d 780, the parties entered into a
contract for the purchase and sale of a condominium. The contract provided for a 21 day
escrow period and that time was of the essence. The escrow instructions expressly gave
either party the right to cancel the escrow if the escrow was not in a position to close at the
end of the specified period. The instructions called for a deposit of a small down payment
and deposit of the balance of the purchase price before the close of escrow.
It further provided that closing of escrow was contingent on the buyer obtaining a
conventional loan and that notification by the lender of loan approval would terminate the
contingency. The buyers did not deposit the balance or provide loan approval within the
escrow period. A week after the expiration of the escrow period, the seller gave written
notice of cancellation to the escrow holder.
The trial court found that when the seller purported to cancel the escrow, she had not
deposited into escrow either a termite report or a policy of title insurance as was called for
in the purchase contract and the escrow instructions. And, that her attempt to cancel the
escrow constituted an anticipatory breach of the contract. The trial court concluded that the
buyers' performance was not a condition precedent to the seller’s performance, and
therefore the performance of each party was concurrently conditional on performance by
the other. At this point, the trial court gave judgment for specific performance in favor of
the buyers and against the sellers.
The Court of Appeals reversed the trial court’s decision. They concluded that the
trial court erred in concluding that the seller’s obligations to provide a termite clearance and
a policy of title insurance were conditions concurrent with the buyers’ obligations to give
notice of the bank’s approval of its loan and to deposit the balance of the purchase price.
The court further reasoned that a policy insuring the buyers’ title could not be deliv-
ered until title to the property was transferred. The termite clearance provision referred to
the "lender’s requirements" and requiring the seller to furnish a termite report and clearance
before the buyers had solidified the deal by obtaining loan approval was not commercially
reasonable.
The appeals court decided that in the absence of an express provision to the contrary,
it would be unreasonable to expect or require a seller to incur the expense of a termite
inspection and report while the transaction was still contingent upon the buyer’s obtaining a
loan commitment for the great bulk of the purchase. They concluded that the removal of the
contingency by depositing into escrow a notice of the lender’s approval of the loan applica-
tion was a condition precedent to the seller’s obligation to obtain a termite inspection and
report.
**************************************************
28 CE DIGEST
In this case the escrow instructions expressly gave either party the right to cancel the
escrow if the escrow was not in a position to close at the end of the 21 day escrow period.
The appeals court ruled in favor of the sellers since, in their view, the failure to remove the
loan approval contingency was a condition precedent that had not been met and, in actuality,
there was no impediment to the seller closing the escrow as had occurred.
CONTINGENCY REMOVAL
If the act or event called for in a contingency clause occurs, the contingency is said to
be “satisfied.” It is eliminated from the contract. The other terms and conditions of the
contract then become binding and enforceable on both parties and the transaction can
proceed.
If the act or event does not transpire, the person, who benefits from the contingency,
may:
Exercise his or her right to avoid performance of the contract and cancel it
Disapprove of the conditions or reports (such as a contract that is contingent on
buyer’s approval of a property inspection report made by a qualified home
inspector)
Give up the right to waive the contingency and proceed on with the contract.
A waiver is defined as “to voluntary give up a claim or right.” The party who
benefits from the contingency may deliberately relinquish his or her right to cancel and pro-
ceed onward toward the completion of the contract. A contingency may be waived in
writing, orally, or by the conduct of the party who benefits by the contingency. The surest
way, however, to avoid later disputes, misunderstandings, or possible arbitration is to pre-
sent a written notice of waiver to the other party.
******************************************************
CASE EXAMPLE
The case of Sabo v. Fasano (1984) 154 C.A. 3d 502 illustrates the waiver of a condi-
tion through words and deeds. In this case, the sellers listed an apartment building that they
owned for sale. They later received an offer by a prospective buyer that was conditioned on
the seller’s acceptance within a five day period. The sellers did not accept the offer until
one day after the expiration date stated in the offer.
The buyer went forward with the purchase of the property, opening escrow, deposit-
ing money in escrow and arranging financing for the sale. The buyer also communicated to
the sellers his intent to go forward with the transaction.
The trial court held that the sellers’ signature on the deposit receipt (the offer) could
not constitute an acceptance because the offer had already expired. The trial court also
found that, assuming the buyer waived the seller’s late acceptance, there was no communi-
cation of that waiver to the sellers, and therefore no mutual consent to the contract.
CE DIGEST 29
The Court of Appeal reversed. The court held the buyer had waived the sellers’ late
acceptance and that the trial court’s finding that the buyer’s waiver was not communicated
to the sellers was not supported by the evidence. The court held the evidence demonstrated
an unequivocal desire of the buyer to go ahead with the purchase of the property. And that
this desire was communicated to the sellers through the buyer’s words and deeds.
************************************************************
PASSIVE REMOVAL OF CONTINGENCIES
In the passive method, the buyer has a set number of days to complete all inspections,
investigations, and review applicable items. If the buyer does not give the seller written
notice of any items disapproved or of cancellation within the time period indicated, it will be
assumed that the buyer has completed all inspections and is ready to proceed on with the
transaction.
If the buyer does give the seller written notice of any items disapproved within the
time limits set, the seller will then be given a set number of days to respond to the buyer. If
the seller is unwilling or unable to repair or correct any items disapproved or does not
respond within the time periods specified, the buyer may cancel the contract. If the buyer
does not give a notice of cancellation within the time period indicated on the contract, the
buyer shall conclusively be deemed to have elected to proceed with the transaction without
repair or correction of any items which seller has not agreed in writing to repair or correct.
ACTIVE REMOVAL OF CONTINGENCIES
Some professionally prepared real estate contracts give the parties to the contract an
active method for removing the contingencies from the contract. This method requires the
buyer to give a written statement to the seller that the contingencies are acceptable to the
buyer and are removed from the contract. This notice must be delivered to the seller within
the time frames specified in the contract. If the seller is not informed in writing within the
time specified, the seller has the option of canceling the contract by providing written notice
to the buyer.
The buyer also has the right in the active method to deliver to the seller a written
disapproval of any of the contingency items or a written cancellation based on any contrac-
tual cancellation right the buyer may have. Both of these acts must be completed within the
time periods the parties have agreed to in the sales agreement.
If the seller does not respond to a written disapproval from the buyer of any of the
contingency items, the buyer has the right to cancel the contract or to elect to proceed with
the contract. Either notice must be delivered to the seller in writing within the time frames
agreed to by the parties. If a buyer disapproves a contingency and, then, later elects to pro-
ceed with the contract upon being informed that the seller will not correct the defect, the
buyer assumes the financial expense needed to correct the defect.
30 CE DIGEST
RESOLVING DISPUTES IN REAL ESTATE CONTRACTS
In the last twenty years, the real estate industry in California has enjoyed several real
estate “boom” periods. These periods of rapid growth produced a near frenzy of interest in
a rush to acquire real estate for the purposes of home ownership and speculation. As a result
of these conditions, the real estate industry became more competitive, more highly regu-
lated, and much more complicated.
During this period of time, there has also been a dramatic increase in the use of law-
suits to resolve contractual disputes involving the buying and selling of real property.
Buyers and sellers of real estate have become increasingly sensitive to the potential to
become the target of a potential lawsuit in their transactions involving real estate. Resolving
disputes through judicial litigation can be costly, time consuming, disruptive, and extremely
traumatic. For these reasons, alternative methods of resolving disputes have grown in use in
an attempt to find a better way to seek resolution of conflicts and disputes in real estate
transactions.
Mediation and arbitration are both processes that have gained widespread use and
popularity as alternatives to litigation in real estate matters. These processes are known as
“Alternative Dispute Resolution (ADR)” methods. In 1988, the California Association of
Realtors began to advocate the use of arbitration in dispute resolution. Nowadays, most
preprinted, standard form Real Estate Purchase Agreements and Deposit Receipts also
contain an “arbitration clause.” As a natural evolution, most contracts added a “mediation
clause” to their contract in the event the parties to the contract chose not to use arbitration as
the method to be used to handle conflicts between the parties..
Mediation and arbitration are two different and distinctive processes. Real estate
licensees have a real need to become more knowledgeable on the mechanics, benefits, and
limitations of both of these ADR processes. Real estate licensees must be in a position to
discuss these methods with their clients and advise them of the key points and differences
that exist between the two methods. In addition, if conflicts arise that cannot be resolved
through negotiation between the parties to a contract, real estate agents may well find them-
selves involved in a mediation or arbitration proceeding. For these reasons, licensees should
become familiar with ADR methods and their use in the real estate field.
MEDIATION
In this process, an impartial third party (mediator) assists the parties who are in
conflict in resolving their dispute. Negotiation is a central theme in the mediation process.
The negotiator can meet with the parties, who are in conflict, together as well as individu-
ally. The negotiator is not empowered to reach a final decision that will then bind the
parties and be enforceable in a court of law. The negotiator’s role is to assist and guide the
parties to reach a mutually acceptable compromise or solution between themselves.
CE DIGEST 31
Mediation services are available through the American Arbitration Association
(AAA) or Judicial Arbitration and Mediation Services, Inc. (JAMS). There are other local
services provided by legal associations. The mediators that staff these providers are often
retired judges, lawyers, or attorneys who are currently practicing in the real estate field.
One of the important benefits of mediation in dispute resolution is that it is a volun-
tary process. The parties elect to use this method because they do not want to get involved
in the more time consuming and costly processes of arbitration or litigation.
BENEFITS OF MEDIATION
Here is a partial list of the benefits of mediation as compared to arbitration or litiga-
tion.
Generally, this process is low cost when compared to other alternatives.
The parties do not lose control of the outcome. Each party is actively involved in
reaching a mutually agreeable settlement.
The process is confidential.
Saves time and money because it is faster than arbitration or litigation.
Parties still retain the right to later go to arbitration or litigation if the mediation is
not successful.
ARBITRATION
Arbitration is a nonjudicial process in which an arbitrator is chosen to settle the
dispute between the parties who are in conflict. The use of arbitration in place of litigation
to settle real estate contractual disputes is increasing in use. The arbitrator is empowered to
render a ruling to settle any disputes between the parties. The arbitrator's decision is legally
binding and enforceable in the State of California.
MECHANICS OF ARBITRATION PROCESS
The process starts when two parties, who cannot agree on a contract issue, decide
turn the matter over to a third party to help them sort it out. This act is known as “submis-
sion.” Submission can be accomplished in two ways. One method is for the parties to
proceed forward with the contract and, if a dispute arises, to agree in writing at that time to
submit the issue to arbitration for resolution. The other method would be to place a clause,
known as an arbitration clause, in the original contract. If this clause is signed or initialed
by both parties in the original contract, it would automatically form an agreement to submit
any disputes that may arise to arbitration.
Real estate purchase agreements used today usually contain arbitration agreements.
If both parties initial this arbitration clause, they are agreeing in advance to submit any
future disagreements or conflicts to arbitration for resolution. In this paragraph, the parties
agree to first use mediation to settle their disputes if any arise. This clause in most cases
32 CE DIGEST
states that if mediation doesn’t provide a satisfactory resolution that the dispute be then
submitted to arbitration for a binding resolution. It is well to keep in mind that the arbitra-
tion clause is optional. If the parties do not initial the clause or it is struck out, the arbitra-
tion clause does not apply to the contract.
The arbitration proceeding involves a hearing at which the parties and arbitrator or
arbitrators are present. Each party is allowed to present their evidence and any testimony is
heard. The arbitrator then considers the evidence presented, deliberates, and then renders a
decision. The arbitrator’s decision, known as the “award” is binding and legally enforceable
in a court of law.
The fact that the arbitrator can reach a decision that is final and binding on the parties
is one of the advantages of the arbitration process. However, it is also one of the major dis-
advantages inasmuch as an arbitrator’s decision is final. This process offers only a limited
right of review. There is no appeal of the arbitrator’s award. The courts will not review the
arbitration proceedings nor reverse any decisions.
EXCLUSIONS
The Code of Civil Procedures provides that certain types of real property transactions
in areas involving court supervision or jurisdiction are not subject to resolution of disputes
by arbitration. This would include:
Probate
Unlawful detainer actions
Eminent domain proceedings
Marital dissolution
Foreclosure liens
ADVANTAGES OF ARBITRATION
In general, the resolution of real estate disputes through the process of arbitration
offers the following list of advantages and benefits:
It is conclusive - a decision is reached and finalized
The process is usually must faster than litigation saving both time and money
It is private
Less formal than court cases
Choice of an impartial arbitrator who is usually experienced in areas involving the
particular real estate dispute being arbitrated.
CE DIGEST 33
REDUCING RISKS IN REAL ESTATE TRANSACTIONS
Due to the complexities of "doing business" in today's real estate market, real estate
brokerages need to adopt official risk management policies that address the company's risk
control procedures and rules. Risk control policies and procedures should hold a central
place in the company's policy manual.
The areas of real estate activity that lead to lawsuits are readily identifiable as
evidenced by the nature of local court cases. Some lawyers state that 90 percent of the
liability cases filed involve misrepresentation and 90% of these cases involve "negligent
misrepresentation. These are situations where a salesperson says something they believe to
be true based on what a seller says but the statement turns out to be false. These are the type
of situations that can be minimized. How is it done? By the broker, office manager, and
supervisors undertaking the responsibility to manage risk by educating, training, and super-
vising employees and associates to recognize areas of risk and how to handle these areas.
The goals of the company's risk management program and the benefits of this pro-
gram to the salespeople should be clearly stated. These goals must also be communicated to
agents and employees in a manner that will be understood. Feedback should also be
undertaken to make sure that all company policies and procedures are fully understood.
While it is management's responsibility to see that a risk control program is created,
the company's sales agents should also undertake their own program. This can be done
through self-study and attempting to stay current on all matters relating to risk control.
Also, as has been mentioned several times in this book, the sales associate's first line of
defense is to make the proper disclosures and thoroughly document all relevant conversa-
tions and actions taken by the licensee and the client. A complete, well-documented trans-
action file is a sales associate's best protection in a court of law.
TRANSFERRING RISKS TO OTHER PARTIES
In the "sue-happy" environment of modern day real estate practice, the use of inspec-
tors and other 3rd party "experts" has become a part of many real estate transactions.
Professional experts and inspectors can provide valuable information that your clients can
use to help them evaluate whether or not they want to buy or sell a property. The suggested
use of public agencies, experts, or inspectors is often specifically stated in the purchase
agreement. However, even if this is the case, it is good risk management policy to recom-
mend that a principal seek outside professional help in areas that could open up the licensee
to future legal action.
The use of home warranty plans can serve as an excellent risk-reducer. These plans
provide benefits for buyers, sellers, and brokers. The buyer gets a certain degree of security
and predictability regarding the condition of the purchased property. And, the seller/broker
34 CE DIGEST
is not faced with an inflated lawsuit resulting from a modest problem with an appliance or
system.
When making a recommendation to a client that they seek professional help on a
specific matter, do not refer them to a particular vendor or service provider. Give your
client a list of service providers and then let them make their own selection of who they
choose to use. In this way, you once again minimize legal liability.
It is an excellent business practice for the licensee to document the fact in his or her
transaction/conversation log that the recommendation was made. And, at what point in the
negotiations it was made. If a claim of negligence concerning a specific event were to arise
at a later date, written documentation that the agent had presented this option to the principal
could greatly help to reduce the possibility of legal liability.
**********************************************************
CE DIGEST 35
CHAPTER ONE -HIGHLIGHTS
ESSENTIAL ELEMENTS FOR VALID CONTRACT
1. Parties who are capable of contracting
2. Mutual consent
3. A lawful object
4. Consideration
PARTIES WHO LACK CAPACITY TO CONTRACT
1. Minors (Under 18 years of age)
2. Incompetent
3. Aliens
4. Convicts
EMANCIPATED MINORS (Under 18 but meet certain conditions)
1. Is currently married
2. Has been married but marriage has been dissolved
3. Is on active duty with the Armed Forces
4. Has received a declaration of emancipation from Superior Court
Emancipated minors may: 1) Sell 2) Buy 3) Lease 4) Encumber 5) Exchange
6) Transfer both real and personal property
MUTUAL CONSENT (Two requirements)
1. A definite offer made by one of the parties to the contract
2. A genuine acceptance made of offer by other party
TERMINATION OF OFFER 1. Lapse of time
2. Offer is revoked
3. Failure of offeree to fulfill a condition
4. Rejection by the offeree
5. Death or insanity of offeror or offeree
7. An illegal purpose
ACTUAL FRAUD 1. Exists when a person misrepresents a fact
2. A “material fact” - An important fact which affects the party’s decision to enter into a
contract
CLASSIFICATION OF CONTRACTS
1. Express contract - Created by words
2. Implied contract - Created by acts of party
3. Bilateral contract - Exchange of a promise for a promise
4. Unilateral contract - Exchange of a promise for an act
5. Executory contract - Certain terms and conditions have yet to be performed
6. Executed contract - All terms and conditions have been performed
LEGAL EFFECTS OF CONTRACTS
1. Valid - Contains all legal essentials to create a binding contract
2. Void - Lacks one or more of the legal essentials
3. Voidable - A valid contract that may be made void by one of the parties
4. Unenforceable - Cannot be enforced in a court of law.
36 CE DIGEST
CHAPTER ONE - HIGHLIGHTS
STATUTE OF FRAUDS - A law that requires certain contracts to be in writing to be enforceable in a
court of law. Virtually all real estate contracts must be in writing.
STATUTE OF LIMITATIONS - A law that establishes certain time limitations to bring a legal action
for a breach of contract.
REAL ESTATE CONTRACTS
DEPOSITS - Must be placed not later than three business days into:
1. Hands of the principal
2. An escrow account
3. The broker’s trust account
CONTINGENCIES
1. Conditions or provisions which have been inserted into a contract
2. A condition is an act or event that limits or qualifies the duty of the parties to a contract to
perform
3. If a contingency is not met, either one or both parties may terminate the agreement
TYPES OF CONTINGENCIES
1. Condition Precedent - Act that must be performed or event that must occur before the
agreement becomes binding and enforceable between the parties.
2. Condition Concurrent - Conditions which are mutually dependent and are to be performed
at the same time by the parties to the contract
3. Condition Subsequent - Refers to a future event. When and if the event happens, the
condition is no longer binding on other party
ALTERNATIVE DISPUTE RESOLUTION (ADR) - Processes, other than law suits, used to resolve
disputes arising from real estate contracts.
1. Mediation - Uses a neutral and impartial third party (mediator) to assist the parties to reach a
voluntary and mutually acceptable settlement of dispute
Advantages
Allows parties in dispute to retain in control of proceedings
Less expensive than arbitration or lawsuit
It is voluntary. Parties enter into it in an attempt to resolve dispute
2. Arbitration - Nonjudicial process in which arbitrator acts as judge. Arbitrator makes a final
decision to resolve disputes.
Advantages
It is conclusive - a decision is reached and finalized
The process is usually faster than litigation saving time and money
It is private
**************************************************
Chapter Index
CE DIGEST 37
CHAPTER ONE Review Quiz
1. Which of the following is one of the legal essentials required to create a valid contract?
a) A lawful object
b) Mutual consent
c) Consideration
d) All of the above
2. Jones, who is a minor, enters into a contract with an adult to buy real property. Under the
circumstances, which of the following is true?
a) If the contract is voided, Jones may keep any consideration received
b) Jones is liable under the contract until steps are taken to void the contract
c) The contract may only be voided or disaffirmed by Jones
d) Both (b) and (c) above
3. To satisfy the requirement of mutual consent in a contract there must be a “meeting of the
minds” by the parties as to the terms and conditions of the agreement. Which of the
following elements must be present?
a) A definite offer made by one of the parties
b) A genuine acceptance made of the offer by the other party
c) Both a) and b) above
d) Neither a) or b) above
4. A contract that is induced by fraud, menace, or duress is:
a) Voidable
b) Valid
c) Void
d) Incomplete
5. Consideration in a contract may be:
a) An act
b) Money
c) A promise
d) Any of the above
6. An agreement between two parties whereby one party promises to do something in exchange
for the act of the other party is known as:
a) A bilateral contract
b) A unilateral contract
c) An express contract
d) An executory contract
38 CE DIGEST
CHAPTER ONE Review Quiz
7. Under the Statute of Limitations, the time limitation to initiate a court action involving a real
estate contract is:
a) Two years
b) Three years
c) 4 years
d) 5 years
8. An act that must be performed or an event that must occur before a real estate agreement
becomes binding and enforceable between the parties is known as a:
a) Condition precedent
b) Condition concurrent
c) Condition subsequent
d) None of the above
9. In a real estate contract, which of the following may be used to resolve a dispute between
the parties?
a) Mediation
b) Arbitration
c) A lawsuit
d) Any of the above
10. All of the following are considered to be an advantage of using arbitration instead of judicial
litigation to settle a real estate dispute except:
a) It is private
b) It is more formal than a lawsuit
c) It is faster
d) It is less costly
Chapter Index
CE DIGEST 39
CHAPTER 2
AGENCY & THE LISTING CONTRACT
A listing contract is an employment contract in which an owner of real property is
employing a broker to procure a purchaser for the owner’s property under the terms of
authority set forth in the listing contract. It is a personal service contract between a seller
and the broker. The agreement must be in writing to be enforceable in a court of law. It
must be signed by the owner and indicate the intent of the owner to employ the broker for
the purpose of achieving a sale of the property. Since it is a personal service contract, the
death of either the seller or the broker will terminate the listing contract.
The listing contract is generally the written agreement between a seller and real estate
broker that creates the agency relationship. It is an express agency. The agent holding the
listing is bound by the rules of law applying to the agency relationship and owes certain
obligations to the principal. A broker, who is performing his or her services under a written
listing contract, has two sets of responsibilities. There are the responsibilities and legal
obligations set forth in the terms and provisions of the listing contract. And, there are the
fiduciary responsibilities created by the agency relationship established as a result of the
written listing agreement. If the listing contract is unenforceable, the broker cannot be held
liable for failing to fulfill the broker’s contractual obligations. However, even if the contract
is unenforceable, the broker may be held liable for a failure to meet his or her fiduciary
duties imposed by the agency relationship.
LOYALTY AS A FIDUCIARY
A real estate agent owes a loyalty to the agent’s principal and is prohibited from
personally profiting by virtue of the agency. The exception, of course, is the receipt of the
agreed upon compensation for the services rendered by the agent. The fiduciary obligation
of the agent to his or her client throughout their dealings is probably the most significant
aspect of their relationship. The courts have consistently equated the duty of an agent to a
principal to the duty owed by a trustee to a beneficiary.
A trustee may not obtain any type of advantage over the beneficiary by the slightest
misrepresentation, concealment, duress, or adverse pressure of any kind. The courts gener-
ally apply this same concept to the relationship of a real estate agent to his or her principal.
40 CE DIGEST
Real estate brokers and salespersons are considered by law to be fiduciaries. They
have a duty to act primarily for the principal's benefit and not their own. A fiduciary must
act with the highest degree of care and good faith in relations with the principal and on the
principal's business.
The act of an agent, within the scope of the agent’s authority, is the act of the
principal. In exercising that authority, the agent is dealing with real property that is of
considerable value to the principal. The agent has the principal’s confidence and is,
therefore, not permitted to enjoy the fruits of any advantage, which the agent might take of
this confidential relationship. As a fiduciary, the agent in relations with the principal is
bound by law to exercise the utmost good faith, loyalty, and honesty.
********************************************************************
CASE HISTORY
TIMMSEN V. FOREST E. OLSON, INC. (1970) 6 C.A. 3d 860
In this case, the sellers of real property sued the broker who handled the sale of their
property for breach of a real estate broker's fiduciary obligation to a principal. The plaintiffs
(Timmsen) owned a residence in Van Nuys, California. They were inexperienced and
unsophisticated in business dealings especially in real estate.
Timmsen listed his house for sale after discussing the property with one of the
broker’s salespeople at a branch office of the broker. The salesperson prepared a listing
agreement which included a commitment by the seller “to subordination” on the sale of the
property. Neither the seller nor the salesperson knew the meaning of the term.
Another salesperson for the broker learned of the listing and contacted a builder to
advise him of the terms of the listing “since the terms would be very favorable to someone
in the builder’s position.” The builder inspected the property and submitted an offer to buy
the property for $47,500 and that his purchase money encumbrance would be subordinated
to any construction loan placed on the property as long as it did not exceed $300,000. The
offer was also subject to the buyer getting the property rezoned and approval of a title
report. The broker’s salesperson exercised no judgment concerning the terms inserted by
the builder, thus failed to do anything on behalf of the client.
Instead of thinking about the offer from the standpoint of their client, the broker’s
sales representatives merely proceeded to attempt to get the sellers to accept the offer. The
sellers raised doubts about the subordination agreement. These doubts were brushed aside
by the broker’s salespeople who advised the seller since they had signed a listing agreement
that they had no choice but to accept the subordination clause contained in the offer. The
price of $49,500 for the property would have been fair without the subordination. However,
for a sale involving subordination, a reasonable price would have been at least $70,000.
CE DIGEST 41
An escrow was opened. Later, the sellers refused to sign the escrow instructions
since they had been advised that the subordination provisions of the agreement were unjust
and unfair. The builder sued the sellers for specific performance. The courts ruled in favor
of the buyer. The sellers made a cash settlement with the buyer for $7,500. The sellers then
sued the real estate broker and his agents for breach of fiduciary obligations owed by
brokers and agents to sellers as their principals. The trial court granted a nonsuit against the
sellers and the sellers appealed. The appeals court reversed the trial court’s decision in
favor of the sellers. The appeals court summarized the facts of the case in this light:
The sellers in this case were unsophisticated in real estate transactions.
The defendants in the case were experienced real estate salespeople and
brokers.
The defendants inserted in the listing agreement a subordination provision and
advised the plaintiffs incorrectly as to its meaning.
The defendants procured an offer that was financially unsound to plaintiffs'
interest and misrepresented to plaintiffs that they were obligated to accept it.
That when plaintiffs refused to accept the offer, defendants obtained plaintiffs'
consent to a counteroffer that was also financially unsound to their interests.
That defendants orally obtained the buyer’s approval of the counter-offer and
signed the buyer’s name on it making it unenforceable under the Statute of
Frauds.
That defendants knew that plaintiffs did not want to consummate the
transaction, knew the contract was unenforceable, and did not disclose such
facts to plaintiffs. In addition to attempting to force them to proceed ahead with
the sale by telling them they would lose at least $5,000 if they failed to com-
plete the sale.
That defendants failed to take into account the interests and obligations owing
their principals but acted solely for their own selfish interest and not the
interests of the purchaser.
That as a result of this misconduct, plaintiffs suffered damages in attempting to
avoid the sale.
The findings of the court in the Timmsen v. Forest E. Olson, Inc. case, related above,
set forth several points of key significance to all licensees:
The relationship between a broker and his principal is fiduciary in nature and
imposes upon the broker the duty of acting in the highest good faith toward his
principal. The duty of good faith precludes the broker from assuming a position
adverse to that of his principal unless the principal consents. Moreover, it
places upon the broker a legal obligation to disclose to his principal all the facts
within his or her knowledge which are material to the matter in connection with
which the agent is employed.
42 CE DIGEST
When the acts of an agent have been questioned by his principal and the
fiduciary relationship has been established, the burden is cast upon the agent to
prove that he acted with the utmost good faith toward his principal and that he
make a full disclosure prior to the transaction of all the facts relating to the
transaction under attack.
An agent who violates his duty to use reasonable care, skill and diligence is
liable for any losses which his principal may sustain as the result of his
negligence or breach of duty.
*****************************************************
DUTIES OWED TO PRINCIPAL
The basic duties owed by a real estate agent to his or her principal when entering into
the agency relationship created by the written listing agreement are:
Duty to Use Reasonable Care and Skill
Full Disclosure of All Material Facts
Loyalty and Confidentiality
Duty of Utmost Good Faith
Duty to Obey
These duties represent legal obligations imposed by the law that set the level of
performance that is expected of real estate licensees. They set the standards on which the
behavior of real estate licensees is judged in their real estate activities. A breach of these
duties may give rise to disciplinary measures brought by the Real Estate Commissioner,
lawsuits for damages by injured parties, or a real estate board’s ethical procedures if the
licensee is a member of a local board.
DUTY TO USE REASONABLE CARE AND SKILL
Real estate licensees, by virtue of the licensing and continuing education training
required by law, are regarded as professionals by the general public as well as by the courts.
They are expected to possess a higher level of knowledge and a higher degree of compe-
tence in real estate dealings than the general public. The standards of reasonable care and
skill the courts use in judging a licensee’s actions are those that should be expected when
compared to the knowledge and competence exhibited by competent licensees engaged in
the real estate business.
For example, in the Timmsen v. Forest E. Olson, Inc. case discussed previously, the
salesperson prepared a listing agreement for the sellers that included a commitment by the
sellers “to subordinate” in the sale of their property. The meaning of the term “to subordi-
nate,” within the context of a real estate transaction, was not known to the sellers.
CE DIGEST 43
Unfortunately, for the principals, the real estate agent handling their transaction was also
unaware of the meaning of the term and the consequences to the sellers in committing to do
so in the sale of their home.
The action of the sales agent in allowing his client to make this commitment repre-
sents a breach of the duty of reasonable care and skill. While this term is not generally
known or understood by the general public, a competent practitioner of real estate should
most certainly know the implications of subordination. And, most certainly is not acting in
the best interests of his or her principal by allowing them to commit to do so without
making a full disclosure of the implications of making this type of commitment.
************************************************
CASE HISTORY
SANTOS v. WING 1961 C.A. 2d 678
Santos owned 100% of the stock of the Woodland Avenue Corporation, whose sole
asset was an apartment house in Menlo Park, California. Santos gave a listing for the sale of
the apartment building to a broker named Carl Horvitz. After the listing, Santos received
several offers through Horvitz to exchange the property but no offers to buy the property.
After the property had been on the market for awhile, Horvitz and Wing, who was a
salesperson for Horvitz, made an offer to jointly purchase the property. When the sales
agreement was executed, it included an acknowledgment clause to the effect that the seller
was aware of the fact that both the prospective buyers held real estate licenses. The offer
was made as an offer for the outright purchase of the property. No mention was made of
exchanging the property. In addition, at the time of the signing of the final documents,
evidence existed that Santos had an attorney and there was also evidence that Santos had
previously been advised in tax matters by an accounting firm.
About 15 months after the sale, it was discovered that Santos had a tax liability of
$16,000. The tax liability could have been avoided if the sale had been made in the form of
the sale of all the stock in the corporation that owned the property to the buyers rather than
the corporation selling the property outright to the buyers.
Santos sued to have the sale overturned and for a reconveyance of the property back
to him. Santos charged the defendants with a failure to exercise the care and skill standard
in the locality for the kind of work the defendants were expected to perform. Santos
charged that the defendants owed him a duty to fairly investigate and give him preliminary
advice on the method by which this transaction should be carried out from a tax liability
standpoint. The trial court ruled in favor of the defendants, Horvitz and Wing, and found
that there was no violation of any fiduciary relationship on the part of the defendants.
44 CE DIGEST
Santos appealed. The appeals court found that there was ample evidence to support
the trial court’s findings and affirmed its judgment. The appeals court ruled that there was
no evidence suggesting that the broker, or his salesperson, had any knowledge of the appel-
lant’s tax situation. There was no evidence showing that the respondents tried to give
Santos any tax advice. On the contrary, the evidence supported the fact that they urged
Santos to seek expert advice. Also, that Santos did have both an attorney and an accountant
to give him advice.
************************************************
All licensees are held to a standard of reasonable skill in their real estate activities. A
licensee, however, who claims to be an expert in a specific area is held to a much higher
standard. As an example, a licensee who performs a comparative market analysis to help a
seller arrive at a realistic listing price is quite a different situation than a licensee claiming to
be an “expert appraiser” and, attempting to appraise a “special purpose property.”
CASE EXAMPLE A prospective seller tells a real estate agent that she wishes to dispose of a 40 unit
apartment complex that she owns in Torrance, California. She also states that she wishes to
enter into an exchange for a larger income producing property in order to defer as much of
the taxable gain as possible. The real estate agent has sold only a few residential properties
in her career and has no in-depth knowledge of current tax laws or of the tax ramifications
of a real estate exchange.
The agent, however, informs the seller that it should be easy to exchange the property
and that she, in fact, has experience in structuring exchanges designed to minimize the tax
due at the time of the exchange. It would be highly unethical for the agent to enter into such
a complex transaction involving both legal and tax consequences and represent herself as a
“specialist” unless, of course, the licensee has had specialized training in this area.
As a matter of course, licensees should make it a practice to suggest that clients seek
expert advise in areas such as law, appraisal, tax matters, or other specialized fields, where
the client has a significant problem in a particular area and the licensee cannot give his
client reasonably accurate or authoritative advice. A licensee most certainly can give an
opinion to his client. However, in areas that might have a significant legal or tax effect on a
transaction, a licensee would be well advised to also suggest the client seek professional
help in the specific areas being questioned.
FULL DISCLOSURE OF ALL MATERIAL FACTS
In a fiduciary relationship, it is a paramount duty of an agent to make a full disclo-
sure of all material facts relating to the agency to his or her principal. The agent must
CE DIGEST 45
disclose any information that might influence the principal's decision to sell or not to sell.
This would include such material items as:
The sale price the property could bring
The possibility of a higher sales price
The tax consequences of a sale vs. an exchange
All offers received by the agent
The form of the down payment (Cash, check, promissory note etc.)
Any relationship (family or business) that the agent may have with either the
buyer or the seller
Buyer’s financial condition
Any property defects discovered by agent’s inspection
Any profits gained by an agent as a result of the agency relationships that are not
known to the principal
**************************************************
CASE HISTORY
DE ST. GERMAIN v. WATSON (1950) 95 C.A. 2d 862
In 1948, a broker named De St. Germain, spoke to a Mr. Zimmerman about selling a
portion of Zimmerman’s property for him. Zimmerman entered into an oral agreement with
De St. Germain that the broker could look for buyers for the property. A short time later,
the seller received a call from the broker stating that he had found a buyer for the property.
De St. Germain, presented a deposit receipt signed by the buyer which stated that a
$1,000 deposit had been received with the offer. Nothing was said regarding the deposit
which, in fact, was a non-negotiable promissory note. The broker did not inform the seller
of this fact and the seller signed the contract. The seller later testified that he would not
have signed the contract had he known the deposit was a promissory note.
The buyer later backed out of the transaction. The seller, before he was made aware
of this fact, received calls from other persons about the property but turned them down on
the assumption the place was sold.
The broker’s license was suspended by the Real Estate Commissioner for a 15 day
period. An appeals court later stated that while the broker did not intend to mislead the
seller nor did he act in a fraudulent or dishonest manner, his acceptance of a promissory
note without a disclosure to the seller still violated the spirit and letter of the real estate law.
********************************************************
OBEDIENCE, LOYALTY, & CONFIDENTIALTY
A real estate agent, who is acting in the role of a fiduciary, has been entrusted with
the confidence of the principal. The agent is bound to act in good faith and with due regard
to the interests of the principal. As a fiduciary, a real estate agent is under an obligation to
46 CE DIGEST
give diligent and faithful service to his or her principal and to obey all legal instructions of
the principal. The duty of diligence requires the agent to make a reasonable effort to help
the principal reach the goals of the agency. A real estate broker must perform as promised
in the listing contract. Real estate brokers and salespersons can be held liable for any loss
caused by the failure to obey the principal’s instructions. A principal may terminate the
agency relationship if a broker, who promises to “use due diligence” and make a reasonable
effort to promote the sale of the property and find a buyer, fails to do so.
The agent must put the principal’s interest above all others including the agent’s own
interests. A principal will often disclose confidential information to his fiduciary. An agent
is duty bound to respect this confidentiality and remain, at all times, loyal to the principal.
An agent in a fiduciary relationship must not disclose confidential information to others or
take advantage of it himself. An agent of the seller, who informs a prospective buyer that
the seller would probably take less than the listed price, is in breach of his fiduciary duty
unless he has the consent of the principal to do so.
AGENT’S AUTHORITY
The Civil Code provides that every agent has the authority:
To do everything necessary, or proper, or usual in the ordinary course of
business, for effecting the purpose of the agency;
To make representations as to facts involved in the transaction in which the agent
is engaged.
The authority of an agent may be actual or ostensible. Actual authority is that
authority a principal intentionally confers upon the agent. Or, intentionally, or by want of
ordinary care, allows the agent to believe that he or she possesses. Ostensible authority is
that authority a principal intentionally, or by want of ordinary care, causes third persons to
believe that the agent possesses.
The principal is liable to persons who have sustained injury through a reasonable and
prudent reliance upon the ostensible authority of an agent. The act or declaration of the
agent can never alone establish ostensible authority. But, silence upon the part of the
principal, who knows that an agent is holding himself or herself out as vested with certain
authority, may give rise to liability of the principal.
When a principal executes and entrusts to the agent a negotiable or non-negotiable
instrument containing blanks and the agent fills them in, the principal will be bound to third
persons who rely upon the instruments even though the agent was not authorized to
complete the documents.
CE DIGEST 47
RESTRICTIONS ON AUTHORITY
An agent, who is given the power to sell and convey real property for a principal,
also has the power to convey the usual promises of warranty unless there are express
restrictions in this regard in the listing agreement with the principal. The Civil Code
expressly states that an agent can never have authority, either actual or ostensible, to do an
act which is known or suspected by the person with whom the agent is dealing to be fraud
upon the principal. An agent has no authority to act in the agent’s own name unless it is
specifically authorized and is in the usual course of business for the agent to do so.
An agency relationship created by a listing agreement does not carry with it the
authority to modify or cancel a purchase agreement after it has been made. The authority
given to an agent by the listing agreement ordinarily gives the agent the authority to find a
purchaser but does not authorize the agent to enter into a contract to convey the title on
behalf of a principal. Unless otherwise specified, the authority to sell only permits a sale for
monies and an agent is not authorized to accept goods instead of money funds.
An agent, who has authority to collect money, may endorse a negotiable instrument
received in payment only where it is necessary for the performance of the agent’s duty.
Where an agent is expressly authorized to collect money, the agent may accept a valid check
and the agent’s receipt of the check will be considered payment to the principal. An agent,
who negotiates a loan on behalf of a lender/principal, ordinarily has no authority to collect
from the borrower except in those instances where the agent has possession of the security
and the borrower has knowledge of this fact.
RATIFICATION OF UNAUTHORIZED ACTS
Occasionally, a person may act as an agent without any authority to do so; or, a true
agent may act beyond the scope of the agent’s authority. The alleged principal is not bound
by such acts. However, a principal may, under certain circumstances, ratify the acts of the
agent and become bound. For this to happen the principal must intend to ratify and the
following have to occur:
The agent must have professed to act as a representative of principal;
The agent must have been capable of authorizing the act both at the time of the
act and at the time of ratification;
The principal must have knowledge of all the material facts;
The principal must ratify the entire act of the agent and accept the burdens with
the benefits;
The principal must ratify before the third party withdraws.
48 CE DIGEST
Once ratified, the legal consequences are the same as though the act had been
originally authorized. Generally, an act may be ratified by any words or conduct showing
an intention upon the part of the principal to adopt the agent’s act as the principal’s own.
Acquiescence or acceptance of benefits by the principal must be with full knowledge of the
facts unless made with the intention to ratify whatever the facts may be.
If the principal's ignorance of the facts arises from the principal’s own failure to
investigate, and the circumstances are such as to raise a question in the mind of a reasonable
person, the principal may be held to have ratified the act in spite of lack of full knowledge.
A ratification can be made only in the manner that would have been necessary to create the
original authority for the act ratified. In transactions involving real property, the ratification
must be in writing.
DUTY TO DETERMINE SCOPE OF AGENT’S AUTHORITY
No liability is incurred by the principal for acts of an agent that are beyond the scope
of the agent’s actual or ostensible authority. A third party, who deals with an agent and
knows of the agency, is under a duty to determine its scope. If the agent acts beyond the
agent’s actual authority and the conduct of the principal has not been such as to give the
agent ostensible authority to do the act, the third party cannot hold the principal liable.
POWER OF ATTORNEY
A power of attorney is a written instrument giving authority to an agent. The agent
acting under such a grant of authority is generally called an “attorney-in-fact.” A special
power of attorney authorizes the attorney-in-fact to do certain prescribed acts on behalf of
the principal. Under a general power of attorney, the agent may transact all of the business
of the principal.
AUTHORITY TO RECEIVE DEPOSITS
Virtually all listing agreements now give express authority to the broker to accept an
earnest money deposit on behalf of the seller. The authority granted a listing broker also
applies to subagents of the seller. The authority, however, would not apply to a broker who
is acting only as an agent of the buyer.
Except for a check to be held uncashed until acceptance of the offer, a broker may
legally only do three things with deposits received by the broker. They are:
Place the funds accepted on behalf of the seller into the seller's hands
Place the funds into a neutral escrow depository, or
Place the funds into a trust fund account in the name of the broker as trustee at a
bank or other financial institution.
CE DIGEST 49
Whichever of these actions is selected, it must be performed not later than three
business days following receipt of the funds by the broker or the broker's salesperson.
In those cases where a down payment has been paid to the broker and not deposited
in escrow, title to such payment vests in the seller when the seller accepts the purchase
contract. Further, where an agreement for sale of real property provides that a deposit with
the broker is to become a part of the down payment when the seller puts a deed evidencing
good title into escrow, the deposit becomes the seller's property when the deed is put in
escrow. Similarly, money received by seller's agent under a deposit receipt with a valid
liquidated damages clause is generally not recoverable by the buyer if the buyer breaches
the contract.
The rationale behind this rule is that money received by a broker as agent or subagent
for the seller belongs to the seller when the offer has been accepted. In general, the broker
may not return the funds to the buyer without the consent of the seller.
CHECKS AND PROMISSORY NOTES
A broker who accepts a check or promissory note as an earnest money deposit must
make a full disclosure to the seller. If a buyer has given a check to the broker as an earnest
money deposit with written instruction to hold the check until acceptance of the offer, the
buyer's instructions should be followed. But the seller must be informed in writing that the
buyer's check is being held and not negotiated. This disclosure should be given to the seller
no later than the actual presentation of the offer to the seller.
During the time between receipt of the check by the broker and acceptance of the
purchase offer by the seller, the broker must record receipt of the check on broker's trust
fund records and hold the check in a safe place. Also, California law has held that a post-
dated check may be considered the equivalent of a promissory note. Therefore, a broker
should not accept a post-dated check from a buyer since this may create confusion in the
mind of the seller as to the form of earnest money deposit received without adequate
disclosure to the seller.
While checks are universally accepted as equivalent to cash in business transactions,
promissory notes are not. The maker of a check represents that sufficient funds are in the
bank account upon which the check has been drawn, and failure to have such money may be
a crime. The maker of a note does not represent that he or she has sufficient money to pay
as the note requires and failure to pay is generally not a crime.
A broker violates the Real Estate Law if he or she directly or by implication
misrepresents to his or her principal that a purchaser has given cash or a check as an earnest
money deposit when, in fact, the broker has accepted a non-negotiable promissory note.
50 CE DIGEST
*************************************************
REGULATIONS OF THE REAL ESTATE COMMISSIONER
Section 2832 - Trust Fund Handling
(a) Compliance with Section 10145 of the Real Estate Law requires that the broker place
funds accepted on behalf of another into the hands of the owner of the funds, into a neutral
escrow depository, or into a trust fund account in the name of the broker as trustee at a bank
or other financial institution not later than three business days following receipt of the
funds by the broker or by the broker's salesperson.
(b) Except as expressly provided by subdivision (d) of Section 10145 of the Code or by a
regulation in this article, the account into which the trust funds are deposited shall not be an
interest bearing account for which prior written notice can by law or regulation be required
by the financial institution as a condition to the withdrawal of funds.
(c) A check received from the offeror may be held uncashed by the broker until acceptance
of the offer if:
The check by its terms is not negotiable by the broker or if the offeror has given
written instructions that the check shall not be deposited nor cashed until
acceptance of the offer and
The offeree is informed that the check is being so held before or at the time the
offer is presented for acceptance
(d) In these circumstances, if the offeror's check was held by the broker in accordance with
subdivision (c) until acceptance of the offer, the check shall be placed into a neutral escrow
depository or the trust fund account, or into the hands of the offeree if offeror and offeree
expressly so provide in writing, not later than three business days following acceptance of
the offer unless the broker receives written authorization from the offeree to continue to
hold the check.
(e) Notwithstanding the provisions of subdivisions (a) and (d), a real estate broker who is
not licensed under the Escrow Law (Section 17000 et seq., of the Financial Code) when
acting in the capacity of an escrow holder in a real estate purchase and sale, exchange, or
loan transaction in which the broker is performing acts for which a real estate license is
required shall place all funds accepted on behalf of another into the hands of the owner of
the funds, into a neutral escrow depository or into a trust fund account in the name of the
broker as trustee at a bank or other financial institution not later than three business days
following receipt of the funds by the broker or by the broker's salesperson.
********************************************************
ESCROW
When a buyer deposits earnest money directly into a neutral escrow depository, the
delivery is conditional. A case could be made that the buyer retains title to the money until
the conditions have been performed. However, the escrow holder will generally not return
CE DIGEST 51
the earnest money deposit to the buyer without obtaining approval from the seller. If a
transaction does not close as agreed, it is the obligation of buyer and seller to insure that all
funds deposited into escrow are given to the person who is entitled to the money.
If the buyer and seller are unable to resolve a dispute regarding an earnest money
deposit, the escrow holder may file an interpleader action seeking declaratory relief from the
court. If the buyer and seller perform as agreed, the escrow holder becomes the agent of the
seller as to the purchase money and the agent of the buyer as to the deed. At closing, the
escrow holder delivers the money to the seller and the deed to the buyer.
COURT ACTION TO RECOVER DEPOSIT
A real estate broker may be named as a defendant in a lawsuit for recovery of money
the broker is holding as a trustee in a transaction. If the only relief sought against the
defendants is payment of a stated amount of money, the defendant may, after notice to the
other parties, apply to the court for an order of discharge from liability and dismissal from
the action. This is known as an interpleader action. The defendant broker must deposit the
money in dispute with the clerk of the court. The court may then dismiss the suit as to the
broker. A broker need not wait to become a defendant in a lawsuit. If there is a fund
disputed by two or more persons, the holder of the fund may file an interpleader action and
deposit the fund with the court. The pleading would allege that the holder has no interest in
the fund, and it would require the other parties to litigate their claims.
COMMINGLING
The agent who places a client’s money in the agent’s personal bank account is guilty
of commingling and creates a risk of having it attached for personal claims against the
agent. Consequently, real estate licensees are required by law to place all funds received on
behalf of principals in a special trust account unless they place the funds into an escrow or
deliver them to the principal. The broker must deposit checks for collection within three
business days following their receipt. If the broker fails to do so, the broker is liable to
disciplinary action by the commissioner. A salesperson should immediately deliver all
deposits into the hands of or into the control of the salesperson’s broker.
SALESPERSON’S DUTIES AND OBLIGATIONS
A real estate salesperson, to the same extent as the salesperson’s broker, is subject to
the obligations arising out of the fiduciary relationship between the broker and the broker’s
principal. The salesperson is the agent of the broker and is employed to carry on licensed
activities on behalf of the broker. In performing these acts for which a license is required,
the salesperson must disclose to the broker’s principal all of the information the salesperson
has which may affect the principal’s decision in a transaction involving the principal. A
failure on the part of the salesperson to fulfill this obligation could result in disciplinary
action against a salesperson’s license.
52 CE DIGEST
Moreover, the broker could be held liable for damages to the principal for acts and
omissions of the salesperson. Since the broker may be subject to administrative disciplinary
action of civil liability for the acts of the broker’s salespersons, the broker should take
particular care in instructing his or her salespeople on their duties and obligations to the
broker’s principal. The salespersons should also exercise the greatest care in carrying out
these instructions given by the broker in dealing with the broker’s clients.
A real estate salesperson is also subject to the prohibitions of the Real Estate Law
against dual agency, secret profits, and other acts and omissions, which violate an agent’s
duties to the agent’s principal. Since a broker has a statutory duty to exercise reasonable
supervision over the activities of salespeople licensed to him, it is quite possible for a broker
to be disciplined for the acts and omissions of the broker’s salespeople that are in violation
of the provisions of the Real Estate Law even if the broker was not aware that these acts had
taken place.
It should be noted that the duty of the qualifying broker, under a corporate license, to
supervise salespeople is a duty owed to the corporation. In the California Appellate Court
case of Walters v. Marler (1978) C.A. 3d 83, a salesperson, who had not been appointed as
a subagent by the qualifying broker, breached the duty to disclose to the purchaser all
material facts affecting the purchaser’s decision. The court held that when a salesperson,
who is an agent for a buyer, breaches such a duty, the qualifying broker’s duty to supervise
does not make the broker individually liable to the purchaser. The broker’s actions are
considered the actions of the corporation.
DUTIES OF AGENT TO THIRD PARTIES
WARRANTY OF AUTHORITY
If an agent acts in the name of the agent’s principal with authority given by the
principal, the principal is bound by the agent’s acts. When the agent acts without authority,
or in excess of the agent’s given authority, the agent may be held liable for resulting
damages for having breached agent’s implied warranty of authority.
While the agent warrants the agent’s own authority, the agent does not impliedly
guarantee the principal’s capacity to contract. The agent is not liable, therefore if the prin-
cipal is incapable of contracting through incompetency, such as a minor or one who has
been judged to be mentally incompetent, unless the agent has expressly warranted capacity
or fraudulently concealed the fact of incapacity. To protect himself against liability for
breach of an implied warranty of authority, the agent should clearly indicate to the third
party that he or she is not sure of the authority granted by the principals and does not
warrant it.
CE DIGEST 53
ON CONTRACTS
When a contract is negotiated and executed by an agent in the name of the principal,
the agent will not ordinarily be held liable on the contract. If however, there is lack of
authority on the part of the agent and the lack of good faith belief on the agent’s part that the
agent possesses the authority, the agent is liable on the contract as a principal.
The agent is also personally liable on the contract if the agent fails to reveal the name
of the principal or the fact that the agent is acting in an agency capacity. If the fact of
agency is disclosed in the contract, but the name of the principal is not, the rule in California
appears to be that the agent is personally liable on the contract. To avoid the possibility of
personal liability of the agent, the name of the principal for whom the agent is acting must
appear on the face of the contract.
The manner in which an agent signs a contract with a third party on behalf of the
agent’s principal may be significant in determining whether the agent has any personal
liability to the third party. Ordinarily, an agent should enter the name of the principal as the
contracting party and should then sign the instrument “by” himself or herself for that of the
principal. By signing the contract in this manner, the agent is virtually assured that he or
she will not be held liable on the contract since the fact of agency and the name of the prin-
cipal are disclosed.
ON TORTS
Torts are private wrongs committed upon the person or property of another and aris-
ing from a breach of duty created by law rather than contract. An agent is always liable to
third parties for the agent’s own torts whether the principal is liable or not, and in spite of
the fact that the agent acts in accordance with the principal’s directions. Where a person
misrepresents his or her authority to act as agent for another, such person may be liable in a
tort to the third party who relies on the representation to the third party’s detriment.
Real estate agents, by the very nature of their business, are constantly making
representations to prospects concerning the property being offered for sale. A representa-
tion may be merely an expression of opinion or "puffing" on the part of the agent. But, on
the other hand, it may be reasonably understood by both the agent and prospective purchaser
to be a representation of fact and a part of the contract if agreement is reached.
Material representations, purporting to be fact, which are false or misleading, may
result in liability of the agent. The same may be said with respect to a failure on the part of
the agent to disclose material facts about the property to the prospective purchaser. In addi-
tion to incurring liability for damages to the purchaser, an agent may also be subject
to disciplinary action against the agent’s license for overt misrepresentations or for failure to disclose material facts.
54 CE DIGEST
MISREPRESENTATIONS
A misrepresentation to the prospective buyer of the lowest price acceptable to the
owner is not usually actionable because it is not a representation of a material fact. The
owner has a right to obtain the best price available and has hired the agent to achieve this
goal.
Statements, incorporated into the contract, are often in the form of promises
comprising part of the consideration extending from the owner to the purchaser. If such a
representation is made in good faith, the fact that it is untrue will ordinarily not render the
owner or owner’s agent liable in tort. An untrue representation, which is a material
ingredient of the contract, however, could lead to a court action for rescission or damages by
the purchaser. The same holds true with respect to mutual mistakes of fact resulting from
representations made by the agent. The mutual mistake may be the basis for a rescission of
the contract, but neither the agent nor the principal would ordinarily be liable in tort to the
buyer.
FRAUD VS. NEGLIGENCE
Misrepresentation may be either fraudulent or negligent. In either case, the agent
may be liable civilly for damages incurred by the buyer on account of the misrepresenta-
tions. The agent may also be subject to disciplinary action against the agent’s license. The
owner may be vicariously liable in damages for the agent’s misrepresentations even where
the owner was not the source of the erroneous information conveyed by the agent.
Certain misrepresentations, even though made by an agent with no evil intent, are
defined by law as actual fraud if they are positive assertions of that which is not true made
in a manner not warranted by the information of the person making the representation even
if the person believes it to be true. Constructive fraud is defined as “a breach of duty, as by
a person in a fiduciary capacity, without any fraudulent intent, which gains an advantage to
the fiduciary by misleading the other person.”
There is a fine line that separates a misrepresentation as to whether it is fraud or
negligence. If a statement is found by a court to be fraudulent, punitive damages can be
awarded against the person making the misrepresentation. If a fraud judgment is against a
real estate licensee, disciplinary action may be taken against the licensee based solely on the
civil judgment. If a licensee’s misrepresentation is found to be no more than negligence, a
case against the licensee would be conducted at an administrative level where the level of
proof required is substantially less than required in a civil suit.
NONDISCLOSURES
Civil liability of a real estate licensee for misrepresentation, and the possibility of
disciplinary action against the licensee, may arise from a licensee’s failure to disclose as
well as actual misrepresentation. In a situation where a licensee has knowledge of material
CE DIGEST 55
facts, which the licensee does not convey to a prospective buyer while knowing that the
buyer does not have the same information, the liability for silence may be imposed.
Cases involving a duty of disclosure usually involve the concealment of latent defects
in the property by the seller. These cases have held that the agent of the seller, as well as the
seller, has a duty to disclose facts materially affecting the value of the property if the agent
knows that the buyer is unaware of these facts and they are not within the buyer’s diligent
attention. The courts have sometimes referred to such non-disclosures, as in the case of
Easton v. Strassburger, as negative fraud.
***************************************
CASE HISTORY
SHAPIRO v. SUTHERLAND (1998) 64 Cal. App. 4th 1534
The Sutherlands had lived in a home in Burbank, California for fifteen years. David
Sutherland worked for IBM. IBM had an established employee relocation policy to assist
employees who might be transferred to different parts of the country for a company move.
In those cases where a transferred employee was unable to effect a timely sale of his or her
current residence prior to moving, the relocation policy involved a relocation company
(Prudential) who would step in and buy the property. The purchase price of the sale was
based on a price established by three independent appraisals of the property.
In 1992, David Sutherland accepted a promotional transfer to an IBM facility in the
State of Washington. Since the Sutherlands were unable to conclude a satisfactory sale of
their home, they entered into a home purchase agreement with Prudential. Under the terms
of that agreement, Prudential paid the Sutherlands $349,000. The Sutherlands then pro-
ceeded to move to Washington. However, it was several weeks after the move before all the
relevant legal documents in this transaction were received from Prudential. The Sutherlands
executed the documents and returned them to Prudential along with a Transfer Disclosure
form.
The TDS form included a question which asked "Are you aware of any
Neighborhood noise problems or other nuisances." The Sutherlands checked the "No" box
and they both signed the form right below the printed certification that the "information
herein is true and correct to the best of (their) knowledge as of the date signed by (them).
This express representation was allegedly false and untrue. The record reflects
without dispute that the Sutherlands' next-door neighbors were, over a period of years, a
source of disturbing noises and commotion. Loud arguments and late night music has
caused the Sutherlands to call the police on a number of occasions.
Prudential, however, did not know of these matters. It had physical control of the
Sutherland home at all times after the Sutherlands had vacated it in July of 1992, but the
home remained unoccupied. Prudential attempted to resell the Sutherland home but were
unable to do so for several months. After a number of months trying to sell the home,
56 CE DIGEST
Prudential sold the home to Shapiro for $250,000 which was $99,000 less than Prudential
had paid the Sutherlands.
Shortly after moving in, Shapiro discovered the loud noises and disturbances being created
by their neighbors next door. Since he was unable to resolve these problems, Shapiro sub-
mitted a notice of rescission to the Sutherlands and Prudential. The Sutherlands either
rejected or ignored Shapiro's rescission. Shapiro then filed a court action alleging fraudu-
lent misrepresentation, fraudulent concealment, and negligent misrepresentation. The
Sutherlands responded by filing a motion for summary judgment on Shapiro claiming that
they were not the parties who had sold the property to Shapiro and they had no contractural
relationship with him. Prudential also asked for a summary judgment pointing out that they
had no knowledge of a noisy neighbor problem or the Sutherlands' alleged misrepresenta-
tion of this fact. The trial court agreed with both Sutherland and Prudential and entered a
judgment in favor of the defendants. Shapiro then appealed.
The appeals court considered the matter and reviewed the many legal aspects at issue
in this particular case. At the end of their deliberations they reversed the trial court's
summary judgments in favor of both Sutherland and Prudential and remanded the case back
to the trial court for further proceedings with the views expressed in the appeals court's
opinions.
*****************************************************
PUFFING
Even in a situation where a licensee honestly believes that representations to the pro-
spective buyer are nothing more than “sales talk” or “puffing” a problem may arise. This
could occur if the impression made upon the buyer is that the representation is one of fact.
At one point in time, if an agent made statements like "best on the street" or that the buyer
"will receive outstanding profits from the buyer's investment" were mostly considered to be
mere expressions of opinion.
In more recent years, however, there appears to be a growing tendency on the part of
the courts to treat such statements as representations of material fact. The court’s thinking is
that buyers, with very little expertise and sophistication, tend to rely upon such statements
and to purchase property as a result of this reliance. A statement by a licensee that a house
was “in perfect shape,” while obviously not literally true, has been described as a represen-
tation of a material fact by an appellate court considering the question.
GRATUITOUS AGENT
In addition to negotiating the “meeting of the minds" of seller and buyer in a real
estate transaction, brokers do a multitude of other things in order to consummate sales.
They order title reports, complete forms, process loan applications, arrange for pest control
inspections and assist in the preparation of escrow instructions. In a sense, the broker
performs many of these functions gratuitously since the broker or broker’s salesperson has
CE DIGEST 57
earned a commission when he or she has produced an offer from a person who is ready,
willing, and able to purchase.
If the broker undertakes to aid the buyer in processing a loan application and does not
charge the buyer for that service, the broker is the gratuitous agent of the buyer for the
purpose of obtaining the loan. The broker’s failure to use reasonable care while acting in
the capacity of a gratuitous agent can result in the liability of the broker if the buyer sustains
injury as a result of this negligence.
TORTS OF THE PRINCIPAL
An agent is always personally liable for the torts which the agent commits regardless
of the liability or absence of liability of the principal. However, the agent cannot be held
liable for torts committed by the principal. For example, if the principal supplies the agent
with false information concerning the property and the agent passes this information along
to a prospective buyer in reasonable reliance upon its truth, the agent is not liable to the
buyer for what amounts to republishing the misrepresentation.
LICENSE REQUIREMENTS
A person must have a real estate broker or salesperson license in order to negotiate
the purchase, sale, or exchange of real property or a business opportunity for another person
for compensation. In order to recover in any action for a real estate commission, the plain-
tiff must allege and prove that the plaintiff was licensed as an active broker or salesperson at
the time of the transaction.
UNLAWFUL PAYMENT OF COMPENSATION
It is unlawful for a licensed real estate broker to compensate another person for any
acts which require a real estate license unless the other person is a licensed broker or sales-
person licensed under the broker employing or compensating him or her. However, a broker
may pay a commission to a broker in another state.
A real estate salesperson may not be employed or accept compensation from any
person other than the broker under whom he or she is, at the time, licensed. Also, it is
unlawful for any licensed real estate salesperson to pay any compensation to any other real
estate licensee except through the broker under whom he is licensed.
The above prohibition against sharing a commission with an unlicensed person
applies only to a payment made by a licensee to a non-licensee as compensation for the
performance of acts for which a real estate license is required. Thus, a payment of a portion
of a commission by a licensee to a principal in the transaction does not constitute a violation
of Section 10137 of the Real Estate Law. However, if there is a commission rebate to the
buyer in the transaction, this fact must be disclosed by the agent to the seller.
58 CE DIGEST
COMPENSATION - PERFORMANCE REQUIRED
Generally, to be entitled to a commission, the broker must:
(1) Produce a buyer ready, willing, and able to purchase under the terms and at
the price stipulated by the seller or,
(2) Secure from the prospective buyer a binding contract upon terms and
conditions which the seller subsequently accepts.
In the first situation, the real estate broker’s right to compensation is based upon the
broker’s written employment contract (meaning the listing). The listing agreement requires
that the broker be the procuring cause of an offer by a buyer who is ready, willing, and able
to purchase on the seller’s listing terms. A ready and willing buyer denotes one who is pre-
pared to enter into a binding unconditional contract. An able buyer is one who has the
financial ability to obtain the funds necessary to consummate the transaction at the proper
time.
From the broker’s standpoint, a listing agreement is very much results oriented. The
broker’s right to a commission is in no way dependent upon the amount of work put into
finding a buyer who is ready, willing, and able to purchase and in negotiating a “meeting of
the minds” between the buyer and the seller. By the same token, if the broker expends no
time and effort on behalf of the seller and, yet, is able to produce a “ready, willing, and
able” buyer on terms acceptable to the seller, the broker has earned a commission.
PAYMENT DEPENDENT ON ANY LAWFUL CONDITION
The payment of a commission under a listing contract may be made dependent upon
any lawful condition. A seller may be relieved from the obligation to pay a commission if it
appears from the language of the contract, that the payment of a commission was contingent
upon the happening of a condition that did not occur.
The burden is upon the broker to establish that he or she has earned a commission by
fulfilling all of the conditions of the contract. If the fulfillment of a condition is prevented
by the fraud or bad faith of the seller, or through collusion between the seller and other
parties, the broker may recover compensation even if the condition has not been met.
PERFORMANCE WITHIN TIME LIMIT EARNS COMMISSION
Revocation of a broker’s authorization cannot operate to deprive the broker of the
compensation for damages if, within the time specified, the broker has produced a “ready,
willing, and able” buyer to buy under the terms of the contract. The principal will not be
relieved from liability by a refusal to consummate a sale where the principal’s voluntary act
precludes the possibility of performance on the principal’s part. It has been well established
that a principal cannot discharge an agent who is negotiating with a prospective customer
and then sell the property to the customer, without liability to the agent.
When the listing contract is for a definite period, and there is a valuable consideration
extending from the broker, the contract is binding upon the seller as soon as executed. The
CE DIGEST 59
agent cannot be prevented from earning a commission within the time period of the listing
by revocation of the broker’s authority. However, the distinction must be made between the
power to revoke and the right to revoke. If the principal no longer desires to have the agent
act for the principal, then the principal has the power to revoke the agency at any time. But,
if the principal does revoke the listing, the principal breaches the promise under the listing
contract and becomes liable to the broker for payment of a commission.
AGREEMENT BETWEEN BROKERS
An agreement between brokers who are cooperating in the sale of real property for a
commission split is not illegal nor against public policy. This type of an agreement is
construed and enforced the same as other contracts not required to be in writing. In the
case, where a cooperating broker has been the procuring cause of the sale, and the broker’s
services are completed, the broker is entitled to recover the selling broker’s share of the
commission from the listing broker.
In the case where the original broker fixed the compensation at a certain sum, the
original broker cannot deprive the assisting broker of a portion of the commission by
settling with the principal for a lesser sum. There is an implied warranty that the owner will
pay the amount of money specified in the contract. The original broker is liable to the other
broker for the other broker’s portion regardless of what the original broker settles for in the
way of compensation unless the consent of the cooperating broker is obtained. The listing
broker is liable to the cooperating broker for the payment of the commission only if the
listing broker has received a commission from the seller. If an agreement for the division of
a commission has been abandoned by the cooperating broker, the listing broker may then
sell the property without being liable to the other broker for a share of the commission.
RIGHT OF PRINCIPAL TO SECURE BUYER
In an open listing, if the owner of the property sells the property to a person who has
not been referred to the owner by the broker, it does not violate the listing agreement. Nor,
does it create a commission liability to the broker on the part of the seller. If the open listing
has no termination date, an owner may not attempt to by-pass the broker and try to sell the
property to a buyer with whom the broker has been in contact. In an exclusive agency
listing, where the agency is irrevocable for a fixed time, the owner may, however, sell the
property within the time limit to a person with whom the broker has had no prior
negotiations and not incur a commission liability.
COMMISSION RATE IS NEGOTIABLE
The amount of commission is set out in a broker’s contract of employment. In the
absence of any evidence of incapacity to read or any fraud to prevent the reading of it, its
express terms and conditions bind the party signing the written contract.
60 CE DIGEST
Ordinarily, the compensation of the broker is negotiated at a certain percentage of the
purchase price obtained by the owner. If no amount of compensation is mentioned in the
contract of employment, the law implies a promise on the part of the owner to pay the usual
or customary commission charged in the neighborhood for like services. Both the listing
agreement and the deposit receipt usually expressly provide for the payment of a
commission to the broker if the owner accepts an offer procured by the broker at a price
which is less than the price specified in the listing agreement.
LISTING AGREEMENT - NO DEPOSIT RECEIPT CONTRACT
A broker has earned a commission when, within the life of the contract, the broker
has brought the buyer and seller together and enabled them to enter into a binding contract.
As stated before, a person produced must be ready, willing, and able to purchase upon the
terms and conditions specified by the owner. The readiness and willingness of a person to
purchase real property may be shown only by an offer to purchase from that person. Unless
such person has made an offer to the seller to enter into such a contract, this person cannot
be considered as a person ready, willing, and able to buy.
The buyer and seller must be brought into communication with each other. Merely
putting a prospective purchaser on the track of property that is on the market does not entitle
the broker to a commission. The broker will not be entitled to a commission if the broker
ultimately fails to induce the prospective buyer to make an offer on the property. This is
true even though the owner may subsequently sell the property to the person originally
produced by the broker at the price and upon the terms at which it was originally offered for
sale.
The obligation assumed by the broker is to achieve a “meeting of the minds” of the
buyer and seller as to the price and other terms of the transaction. Thus, if the seller and
buyer execute a valid contract, the broker is entitled to a commission even if the sale of the
property is never actually consummated.
SELLER RESPONSIBLE WHEN NEGOTIATES CONTRACT
A seller who negotiates the terms of the contract bears the responsibility for its form
and contents. The broker does not lose a commission if, after producing a buyer who is
ready, willing, and able to purchase on the terms set forth in the listing agreement, an unen-
forceable contract is entered into through the mistake, inadvertence, or ignorance of the
seller. If the seller undertakes to complete the contract on his or her own, the broker is
discharged from any responsibility and the seller is estopped to deny the broker’s commis-
sion claim on the grounds that the contract is unenforceable.
CE DIGEST 61
BROKER AS PROCURING CAUSE IN OPEN LISTING
The broker who first produces a customer who is ready, willing, and able to buy in
accordance with the listing is the “procuring cause” of the sale and is entitled to the com-
mission. As soon as a broker has found a customer, it is the broker’s duty to notify the prin-
cipal. Where the listing is an open one, the seller may accept the first satisfactory offer
presented. There is no duty on the part of the seller to ascertain whether the agent who
presented the offer was the procuring cause unless the seller has notice that another broker
was the procuring cause.
The seller may accept an offer, which does not conform to the terms of the listing
agreement, and will ordinarily be liable to pay a commission to the broker who has
presented the offer under the terms of the contract executed. The owner is entitled to a rea-
sonable time within which to investigate the financial responsibility of the proposed
purchaser before accepting the purchaser as such.
If the offeror presented by Broker “A” decides not to enter into a contract, but is
thereafter induced by Broker “B” or another person to enter into the contract on substan-
tially the same terms that the offeror originally declined, Broker “A” is not entitled to a
commission under the theory that Broker “A” is the procuring cause of the sale. On the
other hand, Broker “A” is the procuring cause of the sale if Broker “A” has negotiated a
“meeting of the minds” of offeror and offeree notwithstanding the fact that the written
contract for the sale of the property is executed through negotiations by Broker “B.”
INTERFERENCE FROM SELLER UNDER AN OPEN LISTING
Where competing brokers are endeavoring to negotiate a contract under an open
listing, the agents must be permitted to act freely and independently of each other without
interference by the owner. Where there is freedom and independence of action on the part
of the agents, the owner is under no obligation to the agent who was unsuccessful in effect-
ing a contract for the sale of the property. The owner, on the other hand, may not avoid the
payment of a commission by personally negotiating a contract with a prospect produced by
the agent on terms and conditions substantially similar to those offered through the agent.
DEPOSIT RECEIPT CONTRACT - NO LISTING
On occasion, the only written agreement containing a promise to pay a commission
to the broker is in the contract to purchase between the buyer and seller. In order to protect
a right to a commission, the broker should attempt to obtain a separate agreement for the
payment of a commission even if it is a listing that is written up to terminate within hours
after an offer is presented.
If a seller refuses to enter into such a separate agreement, the broker will have to rely
upon the deposit receipt agreement. Where this occurs, a question may arise on the seller’s
62 CE DIGEST
obligation to pay a commission if the sale of the property is not consummated. Whether or
not there is an enforceable obligation on the part of the seller will often depend upon the
wording of the commission clause in the deposit receipt.
Business and Professions Code Section 10147.5 sets out the "Negotiability and
Notice Requirements" for commission agreements. Whichever form agreement (usually
listing) initially establishes, intends to establish or alters terms of a previously estab-
lished right to a compensation by a licensee, must contain specified information as indicated in the following section.
******************************************************
SECTION 10147.5 - REAL ESTATE LAW
NEGOTIABILITY OF REAL ESTATE COMMISSIONS -
NOTICE REQUIREMENT
(a) Any printed or form agreement which initially establishes or is intended to establish, or
alters the terms of any agreement which previously established a right to compensation to be
paid to a real estate licensee for the sale of residential real property containing not more than
four residential units, or for the sale of a mobilehome, shall contain the following statement
in not less than 10-point boldface type immediately preceding any provision of such agree-
ment relating to compensation of the licensee:
NOTICE: The amount or rate of real estate commissions is not fixed by law. They are set
by each broker individually and may be negotiable between the seller and broker.
(b) The amount or rate of compensation shall not be printed in any such agreement.
(c) Nothing in this section shall affect the validity of a transfer of title to real property.
(d) As used in this section, “alters the terms of any agreement which previously established
a right to compensation” means an increase in the rate of compensation, or the amount of
compensation if initially established as a flat fee, from the agreement which previously
established a right to compensation. ***************************************************
BROKER RECOVERY OF COMMISSION
An additional basis for the recovery of compensation by a broker is provided where
the listing is either an exclusive agency or exclusive right to sell. If the broker is prevented
from performing under an exclusive contract as a result of a sale by the owner, or through
another agent or through the withdrawal of the property from the market by the owner, the
broker will, ordinarily, be entitled to a commission under the listing agreement.
TERMINATION OF AGENCY
Ordinarily, an agency may be terminated by the acts of one or both of the parties or
by operation of law. An agency is also terminated by the expiration of its term, extinction
of its subject matter, or the death or incapacity of either principal or agent.
CE DIGEST 63
WHEN PRINCIPAL MAY REVOKE AGENCY
Because the relationship between a principal and agent is a personal one founded on
the trust and confidence which a principal places in his or her own agent, the principal has
an absolute power under the law to revoke the agency at any time. While the principal
has an absolute power to revoke, the principal does not necessarily have the right
to do so and may be liable for breach of contract by revoking the agency without good
cause. The revocation of the agency is not effective unless the revocation is in writing and
is acknowledged and recorded in the same place as the instrument creating the agency.
EFFECT OF TERMINATION
According to Civil Code, Section 2355, notice of termination of an agency relation-
ship must be given to third persons if the agency is terminated as a result of expiration of its
term, extinction of the subject matter, or the death, incapacity, or renunciation by the agent.
If the agency is, in fact, terminated in any of the ways in Section 2355, the former agent is
still an ostensible agent as to those third persons who have not received notice of
termination. If the agency is terminated through the death or incapacity of the principal or
by the principal's express act of revocation, it is effective as to third persons even though
they have no notice.
TIMING OF REVOCATION
As a rule, an agent’s authority may be revoked at any time by the principal. The
principal’s termination of the agency relationship by revocation may give a real estate agent
a right to damages for breach of contract. Withdrawal of the property from the market by
the owner prior to expiration of the listing is an example of a de facto revocation that gives
the broker a cause of action for an agreed compensation under a listing contract.
The California Supreme Court has held that a clause in an exclusive listing contract
providing for payment of the commission to the real estate agent on withdrawal of the prop-
erty from sale by the principal does not constitute an unenforceable penalty under California
law. If the listing is an open one, a sale negotiated by the owner or by a broker terminates
the listing and notice of termination need not be given to brokers other than the broker who
has presented the offer which has been accepted.
In the event an open listing specifies no fixed term of employment, the owner
normally may revoke the listing at any time, without liability, prior to production of a ready,
willing, and able buyer by the broker. If a fixed term is specified, it is possible that, despite
revocation by the owner, the commission will be earned if the broker produces such a buyer
within the specified time.
64 CE DIGEST
Exclusive listing contracts must contain a definite, specified date of final and
complete termination date. If the listing does not contain a definite termination date, the
listing is unenforceable by the agent.
*********************************************
CASE HISTORY
COLEMAN V. MORA (1968) 263 C.A. 2d 137
On August 4, Mora gave Coleman an exclusive listing to sell his property. The
listing was to expire on December 31st of the same year. On November 25th, Coleman
received a letter from Mora revoking the agency. The revocation of the agency relationship
was based on the fact that during the approximately three and one-half months of the
listing’s existence, Coleman had not produced a single prospect who had made an offer or
even looked at the property. The only visible activity initiated by Coleman was to run an
advertisement that the property was for sale along with a number of other properties.
At the end of October, Mora listed his property with another brokerage on an
exclusive basis. Then on November 25th, as stated above, Mora sent his written revocation
of his agency relationship with Coleman. And, finally, on November 30th, prior to the
expiration of the time period of his original listing with Coleman, Mora accepted an offer
received through his new broker and sold the property. Coleman then sued for his
commission on the basis that since his listing with Mora was an exclusive listing he was
entitled to his commission.
The trial court ruled that Coleman had failed in his duty to make a diligent effort to
find a buyer for the property and that Mora had good cause to revoke their agency
relationship. The court found that in this case that the sole inducing consideration given by
Coleman in the listing agreement was to promise to make a diligent performance of services
in seeking a buyer. Mora’s promise in the listing was to give Coleman an irrevocable
agency and to pay a commission for any sale whether resulting from Coleman’s efforts or
not.
The court found that Coleman did not, as contended, exercise reasonable diligence in
seeking prospects prior to the notice revoking his agency. The court ruled that the
intervening period of over three and one-half months was of sufficient duration to afford
Coleman a reasonable time to show his good faith intention to perform.
The court also stated that a person, who makes a contract with another to perform
services as an agent for him is subject to a duty to act in accordance with that promise. And,
that a principal may discharge an agent before the time fixed in the contract of employment
where the agent fails to perform a material part of the promised service. The trial court’s
findings were later upheld upon appeal.
*********************************************
CE DIGEST 65
EXCLUSIVE LISTINGS
An exclusive listing is a contract in which an owner/seller “hires” one broker on an
exclusive basis to find a buyer for his or her property. The seller agrees to pay the broker a
commission if the broker finds a buyer who is “ready, willing, and able” to buy the property
on terms that are acceptable to the seller. Most real estate listing agreements are written on
an exclusive basis. There are two types of exclusive listings:
Exclusive agency listing
Exclusive right to sell listing
Section 10176 (f) makes it a violation of the Real Estate Law to write an exclusive
listing that does not contain a definite, specified date of final and complete termination. The
failure of an agent to insert a definite termination date on an exclusive listing agreement is
grounds for the suspension or revocation of an agent’s license. If the contract set forth a
definite termination date, but the agent had added verbiage such as, “or until either party
gives a 5 day written notice," the termination date would be considered to be indefinite and
in violation of the law. *************************************************************************8
CASE HISTORY
NYSTROM v. FIRST NATIONAL BANK OF FRESNO (1978) 81 C.A. 3d 759
The facts of this case centered upon the legality of a definite termination date
contained in an exclusive listing. These facts are summarized as follows:
First National Bank initiated foreclosure proceeding on an apartment building when
the owner/borrower defaulted on the bank’s loan. First National then entered into a letter
agreement with Nystrom, a real estate broker, to act on their behalf to collect rents and
obtain renters for the property. For this service, Nystrom was to receive a 5% commission
on the rents collected that was to be paid when the property was sold through the
proceedings of a trustee’s sale or when the default was cured. The agreement further
provided that if the property was sold at the trustee’s sale, the bank would give Nystrom an
exclusive listing to sell the property for a minimum of 90 days. The agreement specified a
6% commission be paid on the sale.
Shortly after the signing of the letter agreement with the bank, Nystrom was advised
by an officer of the bank that the property was going to be “deeded back” to the bank and
that he should proceed to find a buyer for the property. Nystrom found such a buyer and
submitted an offer to the bank. The bank declined to accept the offer. The bank told
Nystrom that the party in possession of the property had refused to give them a deed. And,
that they had obtained the title to the property through a deed in lieu of foreclosure about
three weeks prior to the date the property was to be sold at the trustee’s sale. The bank then
proceeded to sell the property through another broker without notifying Nystrom there had
been any changes.
66 CE DIGEST
A lawsuit followed in which the bank contended that the agreement with Nystrom
regarding the exclusive listing never became operative inasmuch as it was conditioned on
the property being sold through a trustee’s sale that never occurred. The bank also
contended that the exclusive listing agreement was illegal and unenforceable since it did not
contain a definite termination date.
Section 10176 (f) of the Real Estate Law states that it is unlawful for a broker to fail
to include a definite, specified termination date in an exclusive listing The exclusive listing
must be clear as to its date of expiration. The trial court gave a summary judgment to the
bank. Nystrom appealed.
The appeals court reversed the trial court's decision and ruled in favor of Nystrom.
The appeals court summarized that:
The letter agreement had an uncertain beginning date but a definite termination
date and was therefore not illegal or in violation of Section 10176.
The manner of acquisition of title could not make any difference to the parties and
the rights and obligations of the parties were not dependent upon the occurrence of
the trustee’s sale.
*****************************************************
Section 10142 of the Real Estate Law requires that an agent give a copy of the listing
agreement to the owner/seller at the time that the owner’s signature is obtained. The fact
that an agent failed to have an owner/seller sign an exclusive listing does not render the
listing agreement void. It does, however, subject the agent to disciplinary action. Most
listing agreements contain an acknowledgment statement to the effect that the seller has read
and understands the listing agreement and has received a copy of the contract signed by both
the seller and the broker. This statement provides written verification of the receipt of the
listing contract and protects the broker against a later claim by the seller that he or she did
not receive a copy of the document.
EXCLUSIVE AGENCY LISTING
In this type of listing, an owner/seller employs the services of a particular broker to
find a buyer for the owner’s property. If the listing agent or any other agent procures a
buyer who is “ready, willing, and able” to purchase the property on terms that are acceptable
to the seller, the listing broker has earned his or her commission. However, the distin-
guishing feature of an exclusive agency listing is that it allows the owner to retain the right
to sell the property himself during the term of the listing. Should this occur, the owner is
not liable to pay a commission to the listing agent or any other agent.
This type of exclusive listing would generally be used should an owner have several
sales prospects with whom he may have been negotiating prior to entering into the exclusive
listing. The owner, understandably from his point of view, may wish to continue these
CE DIGEST 67
negotiations. From the listing broker’s standpoint, however, an exclusive agency listing
does not afford the broker the complete protection of knowing that should a sale occur
during the listing period for any reason, the broker has earned his or her commission.
The most practical approach to using an exclusive agency listing is to have the owner
list his prospects and then set a time limit for a sale to be consummated. If the owner, sells
to any of the prospects that have been “registered” with the broker during the time frame
established, the owner is not liable to pay a commission. However, once the time period has
expired, this condition is then removed and the listing rolls over into an exclusive right to
sell listing.
EXCLUSIVE RIGHT TO SELL LISTING
The exclusive right to sell listing is the listing form most commonly used by real
estate brokers throughout California. In this type of listing, the owner is legally obligated to
pay a commission to the broker if the property is sold during the listing period by anyone
including the owner. The broker would not have to prove that he was the “procuring cause”
of the sale.
OPEN LISTINGS
An open listing is a written memorandum signed by a seller authorizing a broker to
act as the agent for the sale of a property. It is a non-exclusive listing that may be given to
any number of brokers at the same time. Usually no termination date is given. The first
broker, who finds a buyer that meets the terms of the listing and whose offer is accepted by
the seller, earns the commission.
A sale of the property automatically cancels all open listings given to other brokers
by the seller. The seller does not have to notify other agents that the property has been sold
and is no longer on the market. Should the seller sell the property by himself, he would not
be liable to pay a commission on the sale. The broker who is the “procuring cause" and
consummates the sale is the broker who has legally earned the commission.
NET LISTINGS
In this type of listing, the amount of the commission to be paid to the broker is not set
forth in the terms of the listing. This type of listing usually contains a clause which provides
that the agent may retain as compensation, for the agent’s services, all sums received over
and above a net amount to be received by the owner. Both the exclusive listings and open
listing discussed previously in the text can be “net listings.” This means that both exclusive
and open listings retain their key features as related previously. They are also “net listings”
however, because they have the added distinguishing characteristic of a seller who agrees to
accept a set amount as the sales price of his or her property and agrees that the agent is
entitled to any amount above that set figure.
68 CE DIGEST
Net listings are legal but are rarely used by agents in California. The major reason
for their lack of use in real estate activities is that net listings can easily lead to charges of
misrepresentation and fraud from the agent’s principal. The following account of the facts,
as presented in a past disciplinary hearing before the Real Estate Commissioner, give
evidence to this possibility: The Administrative Law Judge, who presided at the hearing,
found the following facts:
The real estate agent, in this case, obtained a net listing from a seller authorizing the
sale of property. The net listing agreement provided that the seller would receive
$10,000 net from the sale, and that the agent would receive any excess over $10,000
as a commission.
After determining the value of the property, the agent set the price and advertised it
for sale at $13,950.
The agent subsequently received an offer from a buyer to purchase the property for
$12,950.
The agent refused to present the $12,950 offer to the seller by falsely representing
to the buyer that the seller had turned down other offers for that same amount.
Subsequently, the agent received another offer from the same buyer for $13,950 and
began the steps necessary to transfer title to the buyer and to pay the seller the
agreed upon amount of the sales price of $10,000. The agent did not present the
$13,950 offer directly to the seller.
In addition, the agent failed to reveal to the seller the amount of compensation that
he expected to realize from the transaction before the seller signed the documents
relinquishing the title of the property to the buyer. The seller only learned the
amount of the agent’s compensation after title had been transferred to the buyer.
The facts of the case, as determined by the administrative judge indicated a clear
violation of Section 10176 (g) of the Real Estate Law and were grounds for the revocation
or suspension of a real estate license. This provision requires an agent to disclose the
amount of the agent’s compensation in a net listing to the seller prior to or at the time the
principal binds himself or herself to the transaction. An agent must keep in mind that
legally required disclosure requirements apply to agency relationships and all listings
agreements including a net listing.
********************************************************************
SECTION 10176 (G) - REAL ESTATE LAW
(g) The claiming or taking by a licensee of any secret or undisclosed amount of
compensation, commission or profit or the failure of a licensee to reveal to the employer of
such licensee the full amount of such licensee’s compensation, commission or profit under
any agreement authorizing or employing such licensee to do any acts for which a license is
required under this chapter for compensation or commission prior to or coincident with the
signing of an agreement evidencing the meeting of the minds of the contracting parties,
CE DIGEST 69
regardless of the form of such agreement whether evidenced by documents in an escrow or
by any other or different procedure.
***************************************************
BROKER’S COMMISSION
The compensation clause in an exclusive right to sell listing will be specific and
unequivocal. If this section were left blank, an agent would not be entitled to a commission.
Authorizing an agent to find a buyer for the property does not automatically imply that the
owner will pay a fee if the agent is successful. In a well drafted compensation clause it will
state that the seller agrees to pay a commission to a broker if the broker procures a buyer
during the stated time period, or any written extension, on the terms specified or on any
other terms acceptable to the owner. The clause generally will also state that the broker is
entitled to a commission if:
The property is sold, exchanged, or otherwise transferred during the above
listing period, or any written extension, by Owner, or through any other source
The property is withdrawn from sale, or transferred, conveyed, or leased with-
out the consent of Broker, or made unmarketable by Owner’s voluntary act
during the above listing period.
An agreement to sell or exchange the property is made by Owner within ninety
(90) days after the termination of this agreement to persons with whom Broker
has had negotiations during the listing period; provided that the names of such
persons are submitted in writing to the owner prior to the owner entering into a
new listing agreement with another broker or within five (5) days after the
termination of this Agreement, whichever occurs first. Presentation of a
written offer during the term of the listing constitutes sufficient notice of
such persons.
The amount of the commission on the listing agreement is generally stated as a percentage of the purchase price or a dollar amount.
***************************************************************
CASE HISTORY
FILANTE v. KIKENDALL (1955) 134 C.A. 2d 695
A broker, Filante, entered into a two-month listing agreement with the seller of a
motel, named Kikendall. The asking price for the property was $110,000 and the down
payment was to be $35,000. The broker was to receive a commission of 5% on the first
$50,000 of the selling price and 2% on the balance of the selling price. At the bottom of the
listing agreement, the seller had the broker insert the wording “No sale after May 1, 1952.”
The reason given for the insertion of this statement was that the motel owner wanted the
property sold by May 1, and that if it was not sold by that time that he was going to keep it.
70 CE DIGEST
During the term of the listing, Filante advertised the property and it was shown to a
prospective buyer, Tenenbaum, by Smith, a broker who worked for Filante. Tenenbaum
orally stated that he would buy the property for $100,000. In leaving the property, however,
Tenenbaum noticed that freeway construction was underway nearby to the motel which
gave him some concern about the purchase of the motel. The next day, he left town for a
period of eighteen days.
On May 3rd, Kikendall’s son, who had an ownership interest in the motel, called
Smith and wanted to know what happened with Tenenbaum. He went on to tell Smith to
"Get busy on him" and “We want to close this sale and get it over with.” Smith went to see
Tenenbaum but was unable to do so since he was out of town. He left a card asking
Tenenbaum to contact him upon his return. On May 22, Tenenbaum went to Filante’s office
to discuss the motel with Smith. Smith reassured Tenenbaum that he did not think the
freeway construction would have a negative effect on the motel’s business. Tenenbaum told
Smith that he was not convinced and wanted to investigate the matter further.
At this point in time, which was now beyond the expiration date of the original
listing, Smith went to Kikendall and told him that they had worked hard on the listing, were
still working hard to close the sale with Tenenbaum, and requested the broker be given a
new listing on the property. Kikendall told him that he would have to see his son about a
new listing but told Smith “But in the meantime, you go ahead and work on it.” Thereafter,
Smith went to see Tenenbaum who told him he liked the motel and that he was going to buy
it. The buyer then proceeded to contact the sellers directly and offer to buy the motel for
$98,000. On May 23rd, the seller and buyer executed escrow instructions for the sale and
purchase of the motel for $98,000. The buyers paid $30,000 into escrow at that time. The
escrow was completed on June 9, 1952.
In a court action by the broker to recover his commission, the sellers claimed that no
purchaser was procured by the broker during the term of the original listing at the asked for
price and, therefore, the broker was not entitled to a commission. The seller also argued that
the plaintiff was not the procuring cause of the transaction since the buyer came directly to
them and prevailed upon them to accept $98,000 after the broker’s listing had expired. The
court’s finding concluded that:
A provision in a real estate listing agreement limiting the time for performance by
the agent may be waived orally by the principal; and whether or not there has been
a waiver depends upon the facts and circumstances of the particular case.
Where an owner of real estate, after the time limit in a listing contract within which
a broker was to sell the property had expired, encouraged the broker to continue his
efforts to find a purchaser, and the broker did so with the owner’s knowledge and
approval, with the result that a purchaser was produced to whom the owner sold the
property, the time limit in the contract was waived and the broker was entitled to
his commission.
****************************************************
CE DIGEST 71
BROKER’S SAFETY CLAUSE
To recover a commission under a listing contract, the broker must have produced an
offer satisfying the terms of the listing contract within the time limit of the listing. The
broker’s negotiations during the life of a listing with a prospect that ultimately purchases the
property, does not necessarily entitle the broker to a commission. Special circumstances
may, nevertheless, dictate that the agreed commission be paid to the broker.
For example, where the sale is consummated directly by the buyer and seller after the
expiration of the listing on the same terms as proposed through the broker or with only a
price reduction to the buyer, there is every reason to believe that the broker was the
procuring cause of the sale and should be entitled to the agreed compensation for his
services. The broker may also protect his or her commission by inserting a “safety clause”
in the listing agreement.
In a "safety clause," a seller agrees to pay a commission to the broker if the property
is sold within a period of so many days after expiration of the listing to a person with whom
the broker negotiated while the listing was in effect. Ordinarily, the terms of a listing
contract, which includes such a protective clause, requires that the broker furnish the owner
with a list of prospective purchasers with whom the broker has negotiated within a
prescribed number of days after the expiration of the listing.
Even though the broker may not have negotiated with anyone during the term of the
listing, the seller may waive the expiration of the contract by encouraging the broker to
continue efforts to find a buyer (Filante v. Kikendall, Page 66). If the broker continues, in
reliance upon such a waiver and does produce an offeror to whom the property is ultimately
sold, the broker may be entitled to a commission depending on the circumstances of the
situation.
Under the broker’s safety clause there is no protection of the broker’s compensation
if the owner re-lists the property with another licensed real estate broker during the period
that the “safety clause” is effective, provided the employment of another broker is by a valid
listing agreement. A collusive agreement with another broker intended to deprive the
original listing broker of the protective advantages of the “safety clause” is unlawful.
OTHER PROVISIONS
Generally speaking, most listing contracts will also contain clauses covering the
following items:
Lockbox: Authorizes the agent to place a key repository on the listed property.
Owner Obligations and Warranties: Owner agrees to perform certain
obligations and deliver certain items in the course of the transaction such as
allowing broker and cooperating brokers to show the property, not to obstruct the
broker’s performance in any way, provide a signed Transfer Disclosure Statement,
and warrants the accuracy of the property information furnished to the broker.
72 CE DIGEST
Owner’s Instructions and Authorizations: Owner sets forth in this section the
extent of the authority that the owner/seller is giving to the broker in order to assist
the broker to find a buyer for the property. These items would include the placing
of the listing into the local MLS service, place a “For Sale” sign on the property,
and install a lockbox among other things. Also, the owner agrees or disagrees in
this section to obtain a preliminary title report, obtain a structural pest control
report, and provide a home protection plan.
Transfer Disclosure Statement: The listing will require that the seller (unless
exempt) provide a Real Estate Transfer Disclosure Statement (TDS). Normally,
the selling broker will deliver the TDS to the buyer. The listing may hold the bro-
ker harmless if the seller fails to make the proper disclosures.
Equal Housing Opportunity clause: This clause sets forth the intentions of the
parties to the listing contract to act in compliance with both the federal and state
fair housing laws.
Mediation and Arbitration clauses: Most listing agreements contain provisions
that, if initialed by both the broker and the seller, constitute an agreement to refer
all disputes or claims “in law or equity” arising out of the listing or any resulting
transaction to mediation or arbitration.
BUYER’S AGENT LISTING TO LOCATE PROPERTY
Many agents choose to represent buyers only on an exclusive basis to find properties
that are suitable for purchase. Exclusive listing agreements for this type of situation exist
and contain many of the clauses that are similar to the seller/broker agreement discussed in
the preceding pages of this text. An exclusive right to represent listing must be in writing to
be enforceable under the Statute of Frauds. Oral listings are unenforceable. The terms in a
buyer’s listing are very similar to the standard seller listings given to brokers.
*******************************************************
CE DIGEST 73
CHAPTER TWO - HIGHLIGHTS
THE LISTING CONTRACT
1. It is a contract of Employment
2. Must be in writing to be enforceable in a court of law
3. Classified as a personal service contract - Death of Seller or Broker terminates the contract
4. Listing contract between seller and broker creates an agency relationship
5. Agent holding listing has TWO sets of responsibilities
a. The legal obligations set forth in the terms of the listing contract, and
b. The fiduciary responsibilities created by the agency relationship
FIDUCIARY RELATIONSHIP - Created by Listing Contract
1. Agent has a duty of loyalty to his or her principal
2. Agent is prohibited from personally profiting as a result of the agency relationship
3. The act of an agent within the scope of the agent's authority, is the act of the
principal
4. As a fiduciary, an agent is legally and morally bound to exercise the utmost good
faith, loyalty, and honesty in dealings with the principal
5 An agent has a legal obligation to disclose to his principal all the facts within his knowledge
which are material to the subject matter of the agency
6, Agent who violates his duty to use reasonable care, skill, and diligence is liable for any losses
that his or her principal may sustain as a result of agent's negligence
AGENT'S AUTHORITY
The Civil Code provides that every agent has the authority:
1. To do everything necessary, or proper, or usual in the ordinary course of business for effecting
the purpose of the agency
2. To make representations as to facts involved in the transaction in which the agent is engaged
AUTHORITY TO RECEIVE DEPOSITS
When scope of authority of licensee is limited to producing a ready, willing, and able buyer on
terms that are acceptable to the seller, a broker has no authority to accept a deposit. In this
circumstance, if agent takes a deposit, agent is acting on behalf of the buyer. Any misappropriation of
funds is buyer's loss
1. Most listing contracts give express authority to agent to accept an earnest money deposit from
buyer. Also applies to subagents
2. Broker must place all funds accepted into one of three places within three business days
following receipt of funds: a) Hands of principal b) Neutral escrow depository (c) Broker's
trust account
AGENT'S RIGHTS
1. To be entitled to a commission, a broker must:
a. Produce a buyer ready, willing, and able to purchase under terms and conditions which are
acceptable to the seller
b. Secure from the prospective buyer a binding contract upon terms and conditions which the
seller subsequently accepts
2. By law, commission rate set between seller and broker must be negotiable
3. Payment of commission may be made dependent upon any lawful condition
74 CE DIGEST
CHAPTER TWO - HIGHLIGHTS
4. Seller may be relieved of obligation to pay commission if pay was contingent on condition that
did not occur
5. Burden is upon broker to establish that he or she earned a commission by fulfilling all of the
conditions of the contract
6. If fulfillment of a condition is prevented by: a) Fraud or bad faith of seller or b) Collusion
between the seller and other parties - broker may recover compensation even if the condition has
not been met
TERMINATION OF AGENCY
1. Agency may be terminated by: a) Acts of one or both of the parties b) Operation of law
c) Expiration of its term d) Extinction of its subject matter
e) Death or incapacity of principal or agent
2. Principal may also revoke agency at any time. However, principal's revocation might give
agent a right to a cause of action for a commission under a listing contract.
TYPES OF LISTINGS
Law requires an agent to give a copy of listing agreement to owner/seller at time seller's signature is
obtained.
1. EXCLUSIVE AGENCY LISTING
a. Seller employs one broker to represent seller on an "exclusive" basis - Broker may, however,
cooperate with sub-agents in sale
b. If property sold during listing period, broker is entitled to a commission. EXCEPTION: If
owner sells on own, without any assistance from broker, seller may not be liable to pay a
commission to the broker.
2. EXCLUSIVE RIGHT TO SELL LISTING
a. Most commonly used listing form in California
b. Owner is legally obligated to pay commission to broker if property sold by anyone during
listing period including the owner
NOTE: All exclusive listing contracts must contain a definite, specified date of final and
complete termination date. If no definite termination date, contract is unenforceable and
agent is subject to disciplinary action by the Real Estate Commissioner.
3. OPEN LISTING
a. A written memorandum authorizing broker to act as agent for the sale of a property
b. A non-exclusive listing that may be given to many brokers at the same time
c. Usually no termination date is given
d. Commission earned by first broker who finds a buyer who meets terms of listing and whose
offer is accepted by seller
e. Sale of property automatically cancels all open listings given to other brokers
4. NET LISTING
a. The amount of the commission to be paid to broker is not set forth in the terms of the listing
b. Usually contains a clause which states broker may retain all monies received above and
beyond the net amount of money seller is to receive as specified by seller in listing contract
c. Legal, but rarely used in California because this type of a listing can easily lead to charges
of misrepresentation and fraud from agent's principal
*****************************************************
CE DIGEST 75
CHAPTER TWO Review Quiz
1. Which of the following is a true statement regarding a listing contract?
a) It is an employment contract
b) It is a personal service contract
c) It must be in writing to be enforceable in a court of law
d) All of the above
2. All of the following are true statements regarding an agency relationship except:
a) An agent who violates his duty to use reasonable care is not liable for losses
sustained by the principal as a result of the agent's negligence
b) An agent has a duty to act in the highest good faith toward his principal
c) An agency relationship is fiduciary in nature
d) An agent has a legal obligation to disclose all material facts relating to the subject of
the agency
3. Which of the following would be considered a material fact in a real estate transaction that
might influence a principal's decision to sell?
a) The possibility of a higher sales price
b) The form of the down payment
c) Any property defects discovered by agent's inspection
d) All of the above
4. All of the following statements are true regarding an agent's fiduciary duties of obedience,
loyalty, and confidentiality except:
a) The agent must give diligent and faithful service to his principal
b) A principal may not terminate an agency relationship under any circumstances even
if the agent fails to use due diligence in seeking to obtain the goals of the agency
c) The agent must obey all legal instructions of the principal
d) The agent must put the principal's interest above his own interests
5. Regarding the unlawful payment of commission, which of the following is true?
a) A broker may pay a commission to an unlicensed person
b) A salesperson may directly compensate another salesperson
c) A broker may pay a commission to a broker in another state
d) Both a) and b) above
6. Which of the following listings would require a definite termination date?
a) An exclusive agency listing
b) An exclusive right to sell listing
c) An open listing
d) Both a) and b) above
76 CE DIGEST
CHAPTER TWO Review Quiz
7. The Real Estate Law requires that an agent give a copy of a signed listing agreement to the
seller/owner:
a) At the time of execution
b) Within three business days of its signing
c) Within one month of signing
d) Prior to the signing of a binding sales agreement
8. Johnson gave a listing to Broker Lopez to sell her home. Prior to the expiration of the
listing, Johnson sold the property on her own to a friend with whom she had been
negotiating prior to giving the listing to Lopez. Which of the following is true?
a) If the listing was an exclusive right to sell, Lopez would have to prove that he was
the "procuring cause" to be entitled to a commission
b) If the listing was an open listing, the sale automatically cancels all open listings
given to other brokers
c) If the listing was an exclusive agency listing, Johnson may not be liable to pay a
commission to Lopez
d) Both b) and c) above
9. Regarding an open listing, which of the following is true?
a) It is a non-exclusive listing
b) It may be given to more than one broker at the same time
c) The agent who is the "procuring cause" of the sale is the agent entitled
to a commission
d) All of the above
10 All of the following statements regarding net listings are correct except:
a) Net listings are legal in California but used rarely because they can easily lead to
charges of fraud
b) There is no requirement in the Real Estate Law that requires an agent to disclose the
amount of commission received in a net listing to the seller
c) In a net listing, the broker is entitled to all of that portion of the sales price that
exceeds the set amount the seller agreed to accept in the listing agreement
d) The amount of commission received by the agent must be disclosed to the seller
prior to or at the time the principal binds himself to the contract
Chapter Index
CE DIGEST 77
CHAPTER THREE
REAL ESTATE DISCLOSURES
During recent years, the buying and selling of real estate has become more compli-
cated and expensive. The stakes are higher and the risks of significant losses have esca-
lated. Lawsuits commonly are being filed against real estate agents, buyers, and sellers of
real estate when problems arise in real property transactions. Confusion and disagreement
are far too common. Numerous laws and statutes have been enacted that have a significant
effect on real estate transactions in the area of “disclosures.”
A disclosure is an item of information which is required by law to be conveyed from
one person involved in a real estate transaction to another person. The word “information”
relates to certain facts, data, figures, or news. The definition of the word “convey” means to
transmit or communicate from one person to another. And, the phrase "required by law"
means some obligation imposed by a legal authority such as the State legislature, a court, or
the Bureau of Real Estate.
The rise in the number of disclosures, now required in real estate transactions, has
been brought about by the feeling on the part of sellers and buyers of real estate that they
were treated unfairly. This feeling has translated itself into numerous efforts to seek relief
through the courts or State legislature. Because of the pressure, these two government
bodies have responded by enacting statutory disclosure requirements in real estate transac-
tions.
LOYALTY TO FIDUCIARY
A real estate agent owes a loyalty to the agent’s client and is prohibited from person-
ally profiting by virtue of the agency except through the receipt of the agreed compensation
for services. The fiduciary obligation of the agent to a client throughout their dealings is
probably the most significant aspect of their relationship. The courts have consistently
equated the duty of an agent to a principal to the duty owed by a trustee to a beneficiary.
The Civil Code provides that in all matters connected with a trust, a trustee is bound
to act in the highest good faith toward the trustee’s beneficiary. The trustee may not obtain
any advantage over the beneficiary by the slightest misrepresentation, concealment, duress,
or adverse pressure of any kind. The courts generally apply this same concept to the
relationship of a real estate agent to his or her principal.
78 CE DIGEST
An agent may not mix his or her own personal agenda with the agent’s representation
of a client in the same transaction. The act of an agent, within the scope of the agent’s
authority, is the act of the principal. In exercising that authority, the agent is dealing with
property or other matters of grave concern to the principal. The agent has the principal’s
confidence and is, therefore, not permitted to enjoy the fruits of any advantage which the
agent might take of this confidential relationship. As a fiduciary, the agent in relations with
the principal is bound by law to exercise the utmost good faith, loyalty, and honesty.
FAIR AND HONEST DEALING
A real estate licensee, who is the agent of a seller, also owes a duty of fair and honest
dealing to the buyer. This is a duty which the courts have held to exist by reason of the
agent’s status as a real estate licensee. The duty may also be found to exist by way of the
agent’s fiduciary obligation to the seller since any misrepresentation or material
concealment on the part of the agent may afford the buyer grounds upon which to seek
rescission or damages from the seller.
An agent must not withhold from a prospective buyer material facts regarding the
property which are known to the agent and unknown to the buyer. And, these facts are
unascertainable by the buyer through diligent attention or observation. The duty of
disclosure of a real estate broker representing the seller also includes the affirmative duty to
conduct a reasonably competent and diligent inspection of the residential property listed for
sale. Also, to disclose to prospective purchasers all facts materially affecting the value or
desirability of the property that such an investigation would reveal (Easton v. Strassburger
1984 152 CA 3d 90).
EASTON V. STRASSBURGER
Before the California Court of Appeals decided the landmark case of Easton v.
Strassburger, a broker was obligated to disclose any material fact known or accessible only
to the broker or his or her principal. A material fact is one that will affect the decision of the
buyer to purchase the real property or the price at which the buyer would pay to buy the
property. By the same token, a material fact to the seller is one which affects the decision of
the seller to sell or the price at which the seller would sell.
The Easton case imposed an additional duty on brokers and sales people in California
that had, heretofore, not been required. Under the Easton decision, a real estate licensee is
responsible not only for what is known or accessible only to him or his principal, but also
for what the licensee “should have known” following a reasonably competent and diligent
inspection. The courts, by virtue of this decision, eliminated a licensee’s ability to rely on
the fact that he did not know of a defect or problem or that the problem was accessible only
to him or his principal. A real estate licensee is now required to “investigate” and to
CE DIGEST 79
ascertain whether problem conditions or defects (“red flags”) exist. A licensee, who
chooses to disregard an obvious “red flag” indicator, does so at his or her own risk.
The Easton case involved the sale of a home that had been built on earth fill and had
not been properly compacted. The owners were aware of slide activity as a result of this
engineering problem. However, they did not disclose these facts, or the corrective actions
they had taken, to either the agent or the buyers. The buyers purchased the property totally
unaware of the past history of slides and suffered severe damage as a result.
When the court considered the evidence brought forth in the subsequent court case,
they found:
At least one of the listing agents knew the property had been built on fill.
The listing agents had seen netting on a slope which had been placed there to repair
the slide that had occurred most recently prior to the sale
One of the listing agents had testified that he had observed that the floor was not
level.
Another one of the listing agents stated in court that uneven floors were indicators
of soil problems.
The courts concluded that the listing agents in the Easton case were guilty of negli-
gence because they failed to disclose what “they should have known” following a
reasonably competent and diligent inspection of the residential property listed for sale.
The “red flag” theory is the basis for the inspection requirement. Red flags are
supposed to warn of danger. In real estate, a “red flag” is an indication or observable con-
dition that would alert a competent licensee that there may be underlying defects or
problems in the property. The licensee is not charged with knowing the underlying
problem. However, the licensee must be observant enough to identify the obvious indica-
tors of a problem and make a disclosure based on these indicators.
REAL ESTATE TRANSFER DISCLOSURE STATEMENT
There are many specific facts about a particular piece of property that could
materially affect its value and desirability. These facts would include items such as:
The age and any defects or malfunctions of any structural components such as the
plumbing, electrical, and mechanical systems of the dwelling
Easements, common driveways, or fences
Room additions, structural alterations, repairs, or replacements made without
required building permits
80 CE DIGEST
Flooding, drainage, or soil problems on the building site
Zoning violations
Homeowners’ association obligations, deed restrictions, or “common area”
problems
Citations against the property or lawsuits against the owners which also affect the
property
It is well to keep in mind that the California courts have long held that a seller has a
duty to disclose material facts affecting the value or desirability of a property that are not
known or accessible to a buyer. A failure to do so could trigger a lawsuit for fraud.
Also, Section 2079 of the Civil Code states that it is unlawful for an agent to not
disclose to a prospective purchaser facts known to the licensee affecting the value or desir-
ability of a property, when the licensee has reason to believe that such facts are not known
to nor are readily observable by a prospective purchaser.
CIVIL CODE SECTION 1102
This existing law became effective in California on January 1, 1987. Its provisions
require that a Real Property Transfer Disclosure Statement (TDS) be given by a seller of
residential dwellings of 1-4 units to a prospective buyer. This requirement applies to
certain transactions which would include:
Sale transactions
Exchanges
Lease options
Ground leases with improvements
Some contracts involving residential stock cooperatives
The law does not apply to various transfers such as probate sales, foreclosure sales,
and by a trust. In addition, the following property transfers are also exempt:
Transfers requiring a public report (subdivision sales)
A transfer as a result of a failure to pay property taxes
Transfers or exchanges to or from any government entity
A transfer by the State Comptroller pursuant to the Unclaimed Property Law
Transfers between spouses
The statement of the property’s condition must be delivered to the prospective buyer
as soon as is practicable. It is well to keep in mind that if any disclosure or amended
CE DIGEST 81
disclosure is delivered in person after a binding contract has been signed and agreed to by
the buyer and seller, the buyer has the right to terminate the contract by providing written
notice to the seller or the seller’s agent within three days. The time within which to
terminate is 5 days if the buyer receives the transfer disclosure statement or any
amendments by mail.
The main purpose of the transfer disclosure form is to provide a regulated method to
allow the seller to disclose those facts about the condition of the property that might affect
its value or desirability. This would include structural or material defects, malfunctioning
systems, and any other problem areas that might adversely affect the property’s value. To
fulfill this requirement in the process of the sales transaction, the seller is legally required to
make a reasonable inspection of the property before preparing the disclosure statement.
Sellers of real property should be made aware of the fact that their disclosure obliga-
tions in the sale of real property are well documented in various California court cases,
statutes, and real estate law.
FORM OF DISCLOSURE STATEMENT
The language of the disclosure statement is prescribed by law and may not be varied
The TDS form is divided into five sections:
Section I - Allows the seller to state other disclosures that have or will be made in addition
to the information contained in the transfer disclosure form. Examples would include
geologic, earthquake and seismic hazard zone disclosures, and flood zone disclosures.
Section II - Is completed by the seller. This section provides the buyer a list of the items
contained in the subject property that are covered by the disclosure statement. It asks the
seller to reveal any significant defects or malfunctions in components and systems located in
or on the property of which the seller is aware. In addition, it provides for a disclosure of
other such items such as soil problems, zoning violations, drainage problems, structural
additions without building permits, encroachments, and easements.
The Civil Code (Section 1102.7) requires that each disclosure required and each act
which is performed in making the disclosure be made in “good faith.” This means that the
seller deals with the facts regarding the condition of the property “honestly” in the conduct
of the real property transfer.
The TDS is not a warranty of any kind by the seller as to the condition of the
property. However, in Section II of the form, it clearly states that prospective buyers may
rely on the information provided in deciding whether and on what terms to purchase the
subject property.
Section III - Contains the Agents Inspection Disclosure. The agent, who represents the
seller (generally the listing agent) has a responsibility to conduct an investigation and
inspection of the property being listed. This requirement is independent of the legal
82 CE DIGEST
requirements of the seller. For example, if the seller happens to be selling certain property
that is exempt from the transfer disclosure requirements outlined in the Civil Code, this does
not automatically relieve the agent of his or her inspection responsibilities.
The case of Easton V. Strassburger set a standard in California which licensees are
legally required to follow. As a result of this case, the California Civil Code requires that
all licensees involved in a real estate transaction conduct a reasonably competent and
diligent visual inspection of the subject property and make their own disclosure to a
prospective buyer of all material facts affecting the value or desirability of the property.
The listing agent is not responsible for the accuracy of the seller’s disclosures on the
form. However, the agent has the duty to conduct his or her own visual inspection and
disclose the facts of this inspection to the buyer. The facts of this inspection should be
stated in Section III of the TDS. The Civil Code does not require the licensee to inspect
those areas that are normally and reasonably inaccessible.
Section IV - This section is to be used to disclose the facts of an independent inspection of
the property made by the selling agent (generally the agent of the buyer) if more than one
agent is involved in the transaction. Remember, that all licensees involved are required to
make their own inspection of the property.
Section V - Provides the suggestion to the seller and buyer that they “may wish to obtain
professional advice and/or inspections of the property and to provide for appropriate
provisions in a contract between them with respect to any advice, inspections, or defects.”
The information contained in the transfer disclosure statement may be amended or modified in writing by the seller or the seller’s agent. The amended or modified report must be redelivered to the prospective buyer as soon as is
practicable and, preferably, before the execution of an offer to purchase. Should the amended disclosures be received after the execution of a sales contract, the
buyer has the right to terminate the contract.
**********************************************
CASE HISTORY
LINGSCH v. SAVAGE (1963) 213 C.A. 2d 737
In this case, an action for damages for fraud was brought against the sellers/owners
of property located in San Francisco and the broker who handled the transaction for the
sellers. The plaintiffs contended that at the time of the sale the building was in a state of
disrepair, that the units contained in the building were illegal, and that the building had been
condemned by the city. They further contended that all of these facts were known to the
sellers when the building was sold to them.
CE DIGEST 83
The suit contended that the buyers were not told of these facts and that they relied on
these non-disclosures when buying the property. It was also alleged that the property’s
actual market value was $5,000 less than it would have been in the condition represented.
The defendants in the case claimed that no evidence of fraud was present since the
buyers had signed a purchase contract in which they agreed to purchase the property “in its
present state and condition.” The contract also contained the statement that “the under-
signed purchaser hereby agrees to purchase the herein described property for the price and
according to the conditions herein specified...” The trial court dismissed the case on the
basis that sufficient facts did not exist to support a claim of fraud and give the plaintiffs the
relief they sought.
Upon appeal, the appeals court decided that the facts of the case did not support any
allegations of fraud based on intentional and affirmative misrepresentations, negligent
misrepresentations, or false promises. It did, however, rule that the mere nondisclosure of
certain facts suggested the possible existence of fraud. The plaintiffs in the original case
were allowed to amend their original complaint and file a new complaint supporting their
allegations of fraud.
Several important principles emerged from the appeal court’s decision:
Where a seller of real property knows of facts materially affecting the value or
desirability of the property that are known or accessible only to him and also
knows that such facts are not known to, or within the reach of the diligent attention
and observation of the buyer, the seller is under a duty to disclose those facts to the
buyer and his failure to fulfill such a duty constitutes actual fraud.
A seller’s agent or broker is liable for his affirmative and intentional mis-
representation to a buyer and is also liable for mere nondisclosure to the buyer of
defects known to the agent and unknown and unobservable by the buyer, since the
agent’s conduct amounts to a representation of the nonexistence of the facts that he
has failed to disclose.
*************************************************
DELIVERY OF TRANSFER DISCLOSURE STATEMENT
The Civil Code requires that the transferor (seller) deliver the disclosure statement to
the transferee (buyer) as soon as is practicable. Delivery must be made to the prospective
transferee by personal delivery or by mail. The delivery may be made by either the seller or
the seller’s agent.
In a “For Sale By Owner” transaction, the responsibility for the delivery will,
obviously, fall on the shoulders of the owner/seller of the property. If only one agent is
involved, then that agent must deliver the TDS to the buyer. If there is both a listing agent
and a selling agent, it is the responsibility of the selling agent to deliver the disclosure
84 CE DIGEST
statement to the prospective transferee. If the licensed real estate person, who is responsible
for delivering the disclosures cannot obtain the TDS and does not have written assurance
from the transferee that the disclosure has been received, the licensee should advise the
transferee in writing of his or her rights to the disclosure statement. The licensee
responsible for delivery must maintain a record of the action taken to effect compliance with
this law for a period of three years from the date of the closing of the transaction.
As has already been pointed out in this text, should the transfer disclosure statement
be delivered to the buyer after the execution of a binding purchase agreement between the
seller and the buyer, the buyer may terminate the sales contract. The buyer has three days
within which to cancel by providing written notice to the seller or the seller’s agent of the
termination.
Suppose that for some reason, the TDS was not actually delivered to the buyer until
after the transaction had closed and the title had been transferred. Could the sale be
overturned and both parties returned to their original positions? No! This would not
invalidate the sale. It could, however, make the seller, broker, or both of them liable to the
buyer for damages.
LIABILITY FOR ERRORS OR OMISSIONS
A seller or agent is not liable for any error, inaccuracy, or omission of information
that was not within their personal knowledge. Nor, are they liable if the information was
provided by a public agency or “expert” individual such as a licensed engineer or contractor.
The seller or agent, however, must exercise ordinary care in obtaining and conveying this
“third party” information.
The delivery of a report by a licensed engineer, land surveyor, geologist, structural
pest control operator, contractor, or other expert to the buyer constitutes compliance with
the transfer disclosure requirements. In many cases, this type of information is made a part
of the transfer disclosure statement. The delivery of information that is required to be
disclosed from a public agency or “expert” individual relieves the seller or seller’s agent of
any further duty to disclose information relating to that item of information.
FAILURE TO COMPLY
The failure to disclose information required in the transfer disclosure statement will
not invalidate a sale. However, anyone who willfully or negligently violates or fails to
perform any duty prescribed by any provision of the transfer disclosure laws is liable for the
actual damages suffered by the buyer as a result of the omission.
AGENT'S DUTY
An agent's duty under the transfer disclosure laws is to make a reasonably competent and
diligent visual inspection of the property being transferred. The agent is then required to disclose
CE DIGEST 85
the property's condition, and any deficiencies uncovered by this "visual inspection," in the
appropriate sections of the Transfer Disclosure Statement. The agent's inspection is limited
to those areas of the property that are "accessible" to the agent. The agent is not charged
with a duty or responsibility to investigate details that may exist beyond the boundary lines
of the property or in the public records. Of course, any material fact that is known to the
agent affecting the value of desirability of the property should be disclosed regardless of the
nature of the information.
A California court case (Robinson v. Grossman - 1997 57 C.A. 634) more clearly
defines the limits of an agent's duty in this area.
*********************************************************
CASE HISTORY
ROBINSON V. GROSSMAN (1997) 57 C.A. 4th 634
This case involved the sale of a hillside home near San Diego. The home had been
built and owned by the present owners (Helms and Grossman) for about two years before
they listed the property with a local broker for sale. The house was subsequently purchased
by the Robinsons with the assistance of their real estate agent. Helms and Grossman
completed a transfer disclosure form and both the listing and selling agents in the
transaction conducted a visual inspection of the property and made their disclosures on the
transfer document.
Prior to the closing of escrow and during her inspection of the property, the listing
agent noticed hairline stucco cracks, ceiling and wall water stains, and peeling paint in
several areas of the house. When the listing agent questioned the sellers about these
conditions, she was told that the cracks were cosmetic and that the peeling had been caused
by a leak that had since been repaired. The listing agent did not write any of these items
down on her portion of the TDS. Nor, did the sellers express any awareness of any
foundation-related defects on their portion of the document.
On the buyer's side, both the buyers and their real estate agent observed the cracks
and other conditions noted above. The selling agent noted the cracks in her portion of the
TDS and advised the Robinsons to get a geologic report. The buyers, as a result of these
conditions, had a general home inspection performed which satisfied them that the
foundation was stable and opted not to bring in their own engineer for an inspection. They
then proceeded to close escrow. A few weeks later, when the Robinsons attempted to have
a swimming pool installed on the property, the excavation collapsed requiring backfilling
and recompaction.
The Robinsons sued the sellers and listing agent and others for professional
negligence and negligent and intentional misrepresentation. The trial court dismissed the
fraud and negligence charges against the listing broker and agent. The court found that even
86 CE DIGEST
though the listing agent had made material statements that were inaccurate, she had a
reasonable basis for believing they were true.
The appellate court upheld the trial's courts findings. In the opinion of the appeals
court, an agent's duty requires that a listing broker conduct a reasonably competent and
diligent inspection of the property. It does not require that the listing agent verify the
seller's representations. Given no evidence to the contrary, it is reasonable for an agent to
accept the seller's representation as truthful and accurate. Thus, a listing agent's
representations, even though false, may not create any liability on the part of the agent to the
buyers, if the representations were made with a reasonable basis, such as a statement from
the agent's principal, that they were true. The court's statement regarding this point was:
"...under the post-Easton statutory scheme, once the sellers and their agent make the
required disclosures, it is incumbent upon the potential purchasers to investigate and make
an informed decision based thereon. In making the required disclosures, the seller's agent is
required only to act in good faith and not convey the seller's representations without a
reasonable basis for believing them to be true."
"
************************************************
AGENCY RELATIONSHIP DISCLOSURE
Due to the way in which real estate is marketed in California and across the rest of
the country, there has always been some confusion among real estate agents and the general
public as to actually “who” an agent represents in a real estate transaction. In an attempt to
clarify these relationships between buyers, sellers, and agents, the State legislature enacted
legislation which required real estate licensees to disclose their relationship to their clients
in writing.
The resulting law required that licensees acting as listing and selling agents in
residential real estate transactions make written and oral disclosures concerning the role
they would play in the real estate transaction. The resulting "Agency Disclosure Form"
clearly detailed the duties and obligations undertaken by licensees when they agreed to
represent a client in a specific transaction. Agency disclosure requirements apply to
transactions involving the sale, exchange, or lease for more than one year of residential property improved with one to four dwelling units. This requirement also includes
mobile homes and mixed-use properties.
DEFINITIONS
To understand an agent’s responsibilities under this law, you need to be familiar with
the classic definition of the term agency. An agent is one who represents another, called the
principal, in dealings with a third person(s). Such a representation is called agency. Once
CE DIGEST 87
this agency relationship is created, the licensee has a fiduciary relationship with his or her
principal. A fiduciary incurs the highest obligations under the law.
Within the context of the agency disclosure laws certain words are used in a manner
that differs from the more accepted definitions of these terms. To more fully understand
their duties and obligations, licensees should use the following agency definitions in
interpreting the legal requirements imposed on them:
Agent: The employing broker.
Listing Agent: The agent who obtains the listing.
Associate Licensee: A real estate licensee whose license has been placed with an
employing broker.
Selling Agent: The agent who finds a buyer for the real property and sells the
listing. This term could also apply to an agent who obtains the listing (listing agent)
and then finds a buyer and sells the property (selling agent). In other words, the
agent performs the functions of both the listing and selling agent in the same
transaction.
Dual Agent: An agent acting as agent for both the seller and buyer in a real
property sales transaction.
COMPLIANCE WITH AGENCY DISCLOSURE LAW
In general, to comply with this law, listing agents and selling agents must give the
seller and buyer in the transaction a copy of an agency disclosure form, and obtain a signed
acknowledgment from the seller and buyer that they have received the form. The California
Association of Realtors recommends that agents and associate licensees use a three-step
process to insure compliance with the agency relationship disclosure laws. The three steps
are to disclose, elect, and confirm.
STEP #1 - DISCLOSE
A short study of a pre-printed agency disclosure form will reveal that there are three
alternatives available to a real estate licensee regarding agency relationships in a real estate
transaction. The licensee may represent the seller. The licensee may represent the buyer.
Or, the licensee may represent both the seller and buyer as the agent of both. Each of these
choices carries with it certain duties and responsibilities that the licensee owes to the person
he or she is representing in the transaction.
PURPOSE OF DISCLOSURE STEP
The purpose of the agency disclosure law is to insure that sellers and buyers in real
estate transactions are made aware of the type of representation that they are entitled to as
early in the transaction as possible. For example, the law requires that the listing agent give
a copy of the disclosure form to the seller prior to entering into a listing agreement to
88 CE DIGEST
represent the seller in the transaction. A listing agreement is an employment contract. So,
prior to actually being employed by the seller, the listing agent is legally required to educate
the seller as to the type of representation available and what this representation entails.
A study of a standard, pre-printed "Agency Relationship Disclosure Form" will
reveal that very specific duties and obligations are spelled out. For example, the wording on
most of these forms clearly points out that a listing agent or associate licensee representing
the seller owes that seller a fiduciary duty of utmost care, integrity, honesty, and loyalty in
dealings with that seller. At the same time, the same licensee owes both the seller and
buyer:
The diligent exercise of reasonable skill and care in performance of the agent’s
duties.
A duty of honest and fair dealing and good faith.
A duty to disclose all facts known to the agent materially affecting the value or
desirability of property that are not known to, or within the diligent attention and
observation of, the parties.
THE MECHANICS OF THE DISCLOSURE STEP In addition to being delivered to the seller prior to the execution of a listing
agreement, the listing agent must have the seller sign the disclosure form acknowledging
that the seller has received it prior to the execution of a listing agreement. The listing agent
is required to give a disclosure form to the seller only. If the listing agent is the same as the
selling agent (In-House sale), then only one disclosure form is given to the seller even if
more than one associate licensee is involved.
In practice, the disclosure form may well be presented to the seller during the listing
presentation for the prospective client’s review and signature just prior to the time that the
client signs the listing agreement. A copy of the signed and acknowledged disclosure form
becomes a part of the permanent file for the transaction and should be retained by the
agent/broker for a period of three years.
The selling agent is required to give a disclosure statement to both the buyer and the
seller. The legal requirement is that the selling agent provide the seller with the disclosure
statement as soon as practicable prior to presenting the seller with an offer to purchase. This
delivery of the disclosure form by the selling agent to the seller is required even if the listing
agent has already provided the seller with the form.
If the selling agent is able to deal on a face-to-face basis with the seller, the selling
agent may deliver the form directly to the seller. If the selling agent is not able to deal
directly with the seller, the selling agent may prepare the form and present it to the listing
office for delivery. In actual practice, it will probably be given to the listing agent with a
CE DIGEST 89
request to deliver it to the seller. The listing agent will have the seller sign and acknowledge
the form and return it to the selling agent for his or her files. The delivery of the disclosure
form requirement may also be met by mailing the prepared form by certified mail to the
seller’s last known address. If this is done, no signed acknowledgment of receipt is
required.
DELIVERY TO BUYER
The selling agent is also required to make a disclosure of agency relationships to the
buyer. The delivery to the buyer is to be made as soon as practicable. This means that it
must be done sometime between the time that the selling agent determines that the
prospective buyer is serious and qualified, and prior to the time that the selling agent, or
associate licensee, helps the buyer prepare and execute an offer to purchase the property.
If a seller or buyer refuses to sign and acknowledge the disclosure form, the agent, or
an associate licensee acting for the agent, should write up the facts of the refusal. When this
declaration of facts has been prepared, signed, and dated, it should become a part of the
agent’s permanent record of the transaction.
STEP #2 - ELECT
The listing agent in a real estate transaction has two choices of agency relationships
available. The listing agent may act exclusively as the seller’s agent or as a dual agent
representing both the seller and the buyer. By virtue of the act of taking an exclusive listing
from the seller, the listing broker becomes the agent of that seller and takes on the duties and
responsibilities of that agency. Therefore, a listing agent cannot represent the buyer only
in the transaction. The provisions of the Civil Code specifically prohibit a listing agent from
acting exclusively as the buyer’s agent.
The listing agent is required to disclose to the seller as soon as practicable which of
these two options the listing agent has elected. In actual practice, the listing agent should
make his or her election of agency relationships known to the seller as soon as possible
after delivery of the legally required agency disclosure form to the seller.
The selling agent has three options in his or her selection of an agency relationship.
The selling agent may represent the: 1) Buyer exclusively; or 2) Seller exclusively; or
3) Both the buyer and seller. **********************************************
CASE HISTORY HUIJERS V. DEMARRAIS
(1993) 11 C.A. 4th 676
In this case, a listing agent failed to present an agency disclosure form to a seller
prior to entering into a listing agreement with the seller as required by Civil Code §
2079.12-2079.24. The failure to deliver the disclosure rendered the listing agreement
voidable at the seller’s option. In this case, the real estate broker who took the listing was
90 CE DIGEST
previously working with a buyer to locate property for the buyer. Once the property was
found, the broker then proceeded to take a listing from the seller. The agency disclosure
form was presented to the seller, not at the time of taking the listing but, instead, at the time
the purchase contract was signed.
The courts shed light in their ruling as to what constitutes substantial compliance
with the agency disclosure laws. In this case, they ruled that a real estate agent who signs an
exclusive right to sell listing agreement with a property owner without first providing the
seller with an agency disclosure form, which tells the property owner that a broker can act
as a dual agent, does not substantially comply with the disclosure law. This is true even
though the agent did provide the disclosure form at the time the purchase contract was
signed. The objective of a statute requiring a disclosure prior to signing the listing
agreement is to allow the seller to make a more intelligent decision about whether to sign.
The full measure of protection that the Legislature intended to provide to the seller cannot
be achieved if the listing agent fails to provide a disclosure form prior to entering into the
listing agreement. Adhering to the requirement that a “selling agent” provide a disclosure
form as soon as practicable prior to presenting the seller with an offer to purchase does not
relieve a selling agent who is also a listing agent from complying with the advance
disclosure required by the law.
The law requires that the selling agent disclose the election of the agency
representation desired as soon as is practicable. Once again, good business practice dictates
that the selling agent disclose his or her election as soon as possible after the “Step #1”
mandatory delivery of a disclosure form to both the buyer and the seller.
It was clearly the intent of the state legislature in enacting agency disclosure
legislation to clear away the confusion as to “who is representing who” in a typical real
estate transaction. The longer that either a selling agent or listing agent delays in making
their election known the greater the risk of allegations of improper representation arising as
the transaction progresses.
***************************************************************
The election may be made orally, but the relationship selected must be confirmed in
writing. The written confirmation must be made in either the:
Purchase contract and receipt for deposit agreement; or
In a separate writing
If the confirmation is made by a separate writing, it must be signed and
acknowledged by the parties in the particular agency relationship involved. The written
confirmation must be executed by all parties involved prior to execution of the purchase
contract
CE DIGEST 91
STEP #3 - CONFIRMATION
If the listing agent is representing the seller exclusively, both the listing agent and the
seller must sign the confirmation. If the listing agent is representing both the seller and the
buyer in the transaction, then all parties (seller, buyer, and listing/selling agent) should sign
the confirmation. The selling agent should provide the seller and buyer with separate
written confirmations signed by the seller, buyer, and selling agent. The confirmation may
also be made in the purchase contract and receipt for deposit.
RULES OF AGENCY DISCLOSURE REQUIREMENTS
Here are a few general provisions of the agency disclosure laws that all real estate
licensees should know:
A listing agent, who is also a selling agent, may not be the agent for a buyer only.
Payment of compensation to the agent does not determine who is the agent’s
principal.
A dual agent may not tell the seller that the buyer is willing to pay more, nor may a
dual agent tell the buyer that the seller will take less, without the express written
consent of the party.
Associate licensees, who are all employed by the same real estate brokerage firm
whether in the same office or a different branch office are considered to be one
entity. This means that one associate licensee cannot act as the listing agent and
another associate licensee as the selling agent. In the event the real estate brokerage
was acting as the listing agent, both licensees may act as the seller’s agent
exclusively or as dual agents of both the seller and the buyer.
All real estate licensees need to be thoroughly familiar with all aspects of the agency
disclosure law. The effective use of uniform written disclosures, if effectively followed and
made a part of the written record of the transaction to be maintained by the licensee, will go
a long way toward eliminating confusion in the minds of sellers and buyers as to “who is
representing who” in a transaction. In addition, this law avoids the potential for litigation or
license revocation in the case of an undisclosed dual agency.
DUAL AGENCY
An agent cannot legally act for two or more principals in negotiations with each other
without the knowledge and consent of both of the principals. Such conduct is opposed to
public policy in that it places the agent in a position where the agent may represent
conflicting interests. Therefore, regardless of the agent’s honesty or the fairness of the
contract in the particular transaction, the agent cannot collect a commission from the
principals unless the dual agency is both disclosed and consented to by the principals.
The California Supreme Court has held that an undisclosed dual agency is grounds
for rescission by any principal without any necessity of showing injury. Even when the dual
92 CE DIGEST
agency position is known and consented to by all parties, the agent owes to each party the
same duty of utmost good faith, honesty, and loyalty in the transaction. The agent also has a
duty to disclose any material fact that would affect the judgment of either party. This rule of
agency is specifically mentioned in the California Real Estate Law and its violation is cause
for revocation or suspension of a real estate license.
*********************************************
DUAL AGENCY CAN LEAD TO CONFLICTS (The following paragraphs regarding Dual Agency were excerpted from the Fall 2007 issue
of the Real Estate Bulletin which is published by the
California Department of Real Estate.)
"Dual agency is permitted in real estate transactions provided the principals are noti-
fied in advance and consent to it. Without the principals prior knowledge and consent, a
dual agent is not entitled to recover a commission, even if no one is harmed as a result of the
dual agency or the non-disclosure. Failure to disclose a dual agency may subject an agent to
discipline by the Real Estate Commissioner (Business& Professions Code § 10176 (d)).
Civil Code § 2079.21 expressly permits dual agency, but there is an inherent possible
conflict of interest because it prohibits a dual agent from disclosing either principals negoti-
ating strategy. That is, the dual agent has the same fiduciary duty to disclose all material
facts as if involved in a single agency, but he or she must refrain from disclosing to the
buyer "that the seller is willing to sell.at a price less than the listing price" without the
seller's express written consent, and he or she must refrain from disclosing to the seller "that
the buyer is willing to pay a price greater than the offering price "without the buyer's
express written consent.
PERILS OF DUAL AGENCY
Dual agency commonly arises where two salespersons associated with the same
broker undertake to represent two or more parties to a transaction, in which case the broker
is then the dual agent and each salesperson has the duties of a dual agent. Also dual agency
commonly occurs where a listing broker, who is the agent of the seller, also becomes the
agent of the buyer, either by agreement or through conduct in representing the buyer's
interests. In such cases, the dual agent owes the above-discussed fiduciary duties to both
principals in the transaction, and must comply with the statutory exception on disclosure of
negotiation strategy discussed above.
Even where a dual agent carefully complies with all of the applicable statutory
disclosure and consent requirements, pitfalls remain. One major problem is that a dual
agent's traditional fiduciary duties to both principals remain in effect throughout the term of
the agency, and are not necessarily fulfilled by the agent's proper use of required written
disclosures early in the transaction. Except for price negotiation strategy, all agents must
affirmatively notify their principals of potentially material facts they discover during the
CE DIGEST 93
transaction. But what if a dual agent learns of "confidential" information - unrelated to price
negotiation strategy - "Principal A" (A) which would clearly be material to the interest of
"Principal B" (B) in the transaction? Under the rules discussed above, the agent may be
violating his duty of disclosure to B if he remains silent, and he may be violating his duty of
confidentiality to A if he discloses the information to B. Unless the agent can obtain
express written consent from A authorizing disclosure and subsequently disclose the infor-
mation to B, the law provides no clear solution to this problem or protection for the agent
who violated his or her duties.
The best option for the dual agent may be to withdraw from the transaction once he
or she realizes there is an irresolvable conflict of interest. An agent violates his or her
fiduciary duties when his or her own interests are placed ahead of those of his principals or
favors one principal over the other. However, the Department has seen that some agents
may be unwilling to do so if it requires forfeiting their commission, or possibly inconven-
iencing one or both principals. Nevertheless, proceeding in such circumstances is risky for
the agent.
For example, in a recent unpublished appellate case, the sellers and buyers executed a
contract for the purchase and sale of residential property with a dual agent ("Smith"). Smith
knew the property was subject to tax liens and judgments in excess of the purchase price of
the property and did not disclose this fact to the buyers. The following events took place
between execution of the contract and close of escrow:
Sellers informed Smith that they were working on a compromise settlement of the
tax liens with the I.R.S. and that if a settlement could not be reached, the sellers
would not be able to transfer title to the buyers at close of escrow.
Buyers learned independently of the tax liens and inquired of Smith about them.
Smith said the sellers were "working on compromising" the tax liens, which would
be no problem.
Sellers were unable to compromise the liens and could not transfer title at time of
escrow.
In short, Smith did not perform his fiduciary duty to the buyers. There was a real risk
that the sellers would be unable to consummate the deal which was, of course, material to
the buyers' judgment about whether to proceed with the transaction. Smith also violated the
duty of good faith to the buyers by omitting the facts from the statements in effort to
comfort the buyers about the status of the I.R.S. negotiations, which amounted to an
affirmative misrepresentation on Smith's part in light of the agent's fiduciary disclosure
obligations.
Smith and the employing brokerage were exposed to civil liability based upon
(among other things) the above-discussed breaches of fiduciary duties to the buyers. In such
cases, courts may conclude the dual agent remained silent about the negative material facts
out of a desire to obtain the anticipated commission. Such inferences lend support to claims
against the agent.
94 CE DIGEST
Other problems with dual agency arise with the inherent difficulty in price negotia-
tions for the property, as well as the belief that the requisite disclosure forms absolve the
agent from further disclosures. In a 1998 appellate case, a listing agent was alleged to have
acted on behalf of both the seller and the buyer during negotiations concerning the prospec-
tive purchase of real property. Prior to presenting the purchase offer to the seller, the listing
agent assured the buyer that he thought the seller would accept an offer below the list price
of the property. The seller was then convinced to reduce the list price. However, evidence
was unclear as to whether the listing agent informed the seller that he was representing the
buyer at or before the time the listing agent relayed the purchase offer to the seller.
Although the dual agency was disclosed in the escrow instructions, which the seller had
initialed but not read, the court found that such disclosure did not absolve the listing agent
or his employing broker of liability to the seller for breach of duty. The listing agent did not
call attention to the dual agency in the manner it was disclosed, and the disclosure came too
late to allow the seller to incorporate it in his judgment of whether to proceed with the
transaction.
In conclusion, although there may be advantages to acting as a dual agent, the
potential perils of dual agency must be understood. The following question should always
be considered by a licensee who is about to act as a dual agent: Is the reward worth the risk
of a lawsuit or license discipline?"
****************************************
NATURAL HAZARDS DISCLOSURE
In California, sellers of real property or their sales agent must disclose to a potential
buyer if the property is located in one of six "natural hazard" zones. This requirement
applies to both residential and nonresidential properties. If either the seller or the seller's
agent fail to provide a buyer with a natural hazards disclosure in one form or another, they
may be liable for any actual damages suffered by the buyer. The six zones or areas that
have been designated as natural hazard zones are:
A flood hazard zone as designated by the Federal Emergency Management Agency
An area of potential flooding after a dam failure (also known as an "inundation
area" (These areas are designated by the State Office of Emergency Services)
A very high fire hazard severity zone (Designated by the California Department of
Forestry and Fire Protection
A wildland fire area (Also known as a "state responsibility fire area)
An earthquake fault zone as designated by the State Geologist, and
A seismic hazard zone - which is also designated by the State Geologist
CE DIGEST 95
The Natural Hazards Disclosure requirement specifies that a Natural Hazards
Disclosure Statement (NHDS) or local option form must be given in all transactions that
require the use of Transfer Disclosure Form (TDS). This means that this requirement
generally applies in the sale or transfer of residential properties of four units or less. If
the subject property requires the use of a Transfer Disclosure Statement and also is located
in one or more of the six designated natural hazards zones, a Natural Hazards Disclosure
Statement is required. On the other hand, if the transaction is not covered by the TDS law
or is exempt from the TDS, the NHDS does not have to be provided even if the property is
located in one or more zones. However, if the sale or transfer of property that is exempt
from the TDS occurs and the property is located in a designated natural hazard zone, this
fact should be disclosed by the seller to the buyer in one form or another.
The Natural Hazards Disclosure Statement contains statements as to whether or not a
subject property is located in one of the six designated natural hazard zones. It allows the
seller and/or the seller's agent to provide a "Yes" or "No" answer as to whether the property
is located in one or more of these areas. The form also states that these hazards could limit
the ability of the buyer to develop the property, obtain insurance, or receive assistance in the
event of a disaster.
FEDERAL LAW REQUIRES LEAD-BASED PAINT DISCLOSURE
To protect the public from exposure to lead from paint, dust, and soil, the U.S.
Congress passed the Residential Lead-Based Paint Hazard Reduction Act of 1992. This
law, which is also known as Title X, directed HUD and the EPA to require disclosure of
information on lead based paint hazards before the sale or lease of most housing built before
1978. The purpose of this law was to insure that buyers or renters of housing built before
1978 would receive the information necessary to protect themselves and their families from
lead-based paint hazards.
IMPLEMENTATION AND AFFECT OF LAW
Title X became effective on a staggered basis. For owners of more than 4 dwelling
units, the effective date was September 6, 1996. For owners of 4 or fewer units, the
effective date was December 6, 1996. This law applied to all housing defined as “target
housing.” This includes most private housing, public housing, housing receiving Federal
Assistance and Federally owned housing built before 1978.
Housing that is not affected by this rule includes:
“0-bedroom dwellings” such as lofts, efficiencies, and studios.
Leases of dwelling units of 100 days or fewer, such as vacation homes or short-term
rentals.
Designated housing for the elderly and the handicapped unless children reside or are
expected to reside there.
96 CE DIGEST
Rental housing that has been inspected by a certified inspector and is found to be free
of lead-based paint.
Sellers and lessors are also required to disclose available lead information about
common areas so that families can be informed about preventive actions. Common areas
are those areas in multifamily housing structures that are used or accessible to all occupants.
SAFETY FACTORS OF LEAD-BASED PAINT
Approximately three-quarters of the nation’s housing built before 1978 contains
some lead-based paint. This paint, if properly managed and maintained, poses little risk. If
allowed to deteriorate, lead from paint can threaten the health of occupants, especially
children under 6 years old.
If families and building owners are aware of the presence of lead-based paint and the
proper actions to take, most lead-based paint hazards can be managed. The EPA pamphlet
“Protect Your Family from Lead in You Home” provides important information for families
and home owners to help them identify when lead-based paint is likely to be a hazard and
how to get their home checked.
SELLER & LESSOR RESPONSIBILITIES
Under Title X, owners of residential real property who sell or lease their property are
required to:
Disclose all known lead-based paint and lead-based paint hazards in the home and
any available reports on lead in the housing.
Give buyers or renters a copy of the EPA pamphlet “Protect Your Family from Lead
in Your Home.” This pamphlet is available through the National Lead Information
Clearinghouse and the U.S. Government Printing Office. In California, the EPA
pamphlet is incorporated in the California “Environmental Hazards: A Guide for
Homeowners, Buyers, Landlords, and Tenants,” which has been developed and
published by the California Environmental Protection Agency in cooperation with
the California Department of Health Services. The combination of the federal and
state booklets, when presented to a prospective buyer or tenant fulfills the
environmental hazards disclosure requirement of California law as well as the lead-
based disclosure requirements mandated by the Residential Lead-Based Paint
Hazard Reduction Act of 1992.
Include certain warning language in the purchase agreement or lease as well as
signed statements from all parties verifying that all requirements were completed
Retain signed acknowledgments for 3 years as proof of compliance.
CE DIGEST 97
In the case of a purchase, the owner must also give the prospective buyer a 10-day
opportunity to have the dwelling tested for lead-based paint hazards. Owners, who are
renting their property, are not required to give a copy of the EPA pamphlet ”Protect Your
Family from Lead in Your Home,” to existing tenants. However, when the lease is
renewed, the owner is required to provide the tenant with a copy of the pamphlet.
Sellers of residential dwellings are not required to conduct or finance an inspection or
risk assessment of the property prior to sale. In addition, there is nothing in the new law that requires a building owner to remove lead-based paint or lead-based paint
hazards discovered during an inspection or risk assessment. The parties to the contract,
however, are free to negotiate hazard reduction activities as a contingency of the purchase
and sale of the housing.
INSPECTION AND CERTIFICATION PROGRAMS
An owner, who has an inspection or risk assessment made on his property to
determine if it is free of lead based paint, must have this done by a certified inspector. The
Environmental Protection Agency is developing certification requirements for individuals
and firms conducting lead-based paint inspections, risk assessments, and abatements. The
certification requirements that EPA is developing will insure that inspectors engaged in
lead-based paint activities have completed an EPA-certified training program or an EPA-
approved state program. Meanwhile, EPA and HUD recommend that people inspect the
qualifications and training of individuals and firms before hiring them to conduct risk
assessments, inspections, or abatements.
AGENT’S RESPONSIBILITIES
Real estate licensees, who are involved in a transaction involving residential real
property must insure that:
Sellers and landlords are made aware of their obligation under this rule.
Sellers and landlords disclose the proper information to lessors, buyers, and
tenants.
Sellers give purchasers the opportunity to conduct an inspection.
Lease and sales contracts contain the appropriate notification and disclosure
language and proper signatures.
An agent is responsible for informing a seller or lessor of his or her obligations under
the new law. In addition, the agent is responsible if the seller or lessor fails to comply,
however, an agent is not responsible for information withheld by the seller or lessor.
98 CE DIGEST
LIABILITIES
A failure to comply with this law can lead to some stiff civil and criminal penalties.
Under this rule, sellers, landlords, or agents who fail to provide the required notices and
information are liable for triple the amount of damages. Lenders, under this disclosure
regulation, do not have an exposure to liability. This rule, however, does not affect other
state and/or federal legal requirements regarding the obligations and responsibilities of
lenders.
STRUCTURAL PEST CONTROL REPORT
Another important disclosure requirement can be a Structural Pest Inspection Report
and written confirmation of the presence or absence of wood destroying pests. California
law does not actually require that a structural pest control inspection be performed on real
property prior to sale. However, if an inspection report and certification is made a condition
of the sale, or is required to obtain financing, it triggers delivery obligation on the part of the
seller or the seller’s agent.
If a pest control inspection is made a condition of sale, the seller or seller’s agent
must deliver to the buyer a copy of the inspection report and written confirmation as soon as
practical prior to the execution of a binding sales contract or the transfer of title. If, for any
reason, the report and confirmation were not delivered to a buyer, it could provide grounds
for the rescission of the sales contract.
NEED FOR INSPECTION REPORT
In most cases, a structural pest control inspection and written certification are made a
condition of the sale. The buyer wants to know the condition of the property prior to
purchasing, and the lender wants to know the status revealed by such a report prior to
funding a loan to be used to purchase the property. A report is mandatory in the case of an
FHA or VA loan. The inspection and written certification must be done by a company or
individual who is licensed by the Structural Pest Control Board to perform this type of work.
COVERAGE OF INSPECTION AND CERTIFICATION
When a structural pest control report is requested, the pest control company is
required by law to disclose that a separated report is available. A separated report means
that the pest control operator’s report will separately identify the recommendations for
corrective work as:
Section 1 - Infestation or infection which is evident.
Section 2 - Conditions which are present and deemed likely to lead to infestation or
infection
CE DIGEST 99
The purpose of the two sections is to make it easier to determine whether the seller or
buyer pays for the corrective work. The question of who pays for any corrective work
required is usually determined by local custom. However, it is a negotiable item. Either the
seller or buyer could agree to pay all of the cost of the corrective work. Or, they could agree
to split it. Customarily, the seller pays for all the Section 1 work. The buyer generally pays
for all of the Section 2 work.
AGENT’S RESPONSIBILITIES
Under the Civil Code, the real estate broker, who is acting as the listing agent in the
transaction, shall affect the delivery of the inspection report, certification, and notice of
work completed, if any, to the buyer. The delivery must be made as soon as practical and
before transfer of title or the execution of a real property sales contract. Under the
provisions of the Civil Code, delivery to a buyer must be in person or by mail and delivery
to the husband or wife is deemed sufficient unless the contract states otherwise.
If more than one real estate broker licensee is acting as an agent in the transaction,
the broker who has obtained the offer made by the buyer shall affect delivery of the required
documents to the transferee. Unless, the transferor, has given written directions to another
real estate broker licensee acting as the agent of the transferor in the transaction to affect
delivery. If the responsible broker cannot obtain the required documents to deliver to the
buyer, he should advise the buyer of the buyer’s rights under the Civil Code regarding the
required documentation. As always, the real estate broker or associate licensee who is
responsible to affect the delivery of the pest control documentation should keep a written
record of the actions taken to affect compliance.
With older homes, it is highly desirable to obtain a structural pest control report at the
time the property is listed. This is particularly true if, during his or her visual inspection, the
agent observes red flags such as: 1) Wood from house in contact with ground; 2) Areas
where wood is continuously exposed to moisture; 3) Evidence of existing termite damage
4) Mud tunnels inside or outside the house or other tell tale signs. Having the report
available when the offer is prepared makes it easier to overcome the hurdle of an
unfavorable report.
SMOKE DETECTORS
State law requires that dwelling units be equipped with smoke detectors approved by
the State Fire Marshal. In an existing dwelling, there must be a battery operated smoke
detector outside each sleeping area. As of August 14, 1992, new construction that exceeds
$1,000 and requires a permit or includes the addition of a sleeping room must include smoke
detectors in each bedroom and at a point centrally located outside the bedrooms. This
requirement also applies to additions, alterations, or repairs. In new construction, the smoke
detectors must be hard wired with battery back-up.
100 CE DIGEST
The seller must give the buyer written certification of smoke detector compliance as
required by the Health and Safety Code Section 13113.8. This may be done in the purchase
agreement or on the transfer disclosure form.
WATER HEATER BRACING
It is the seller's duty to see that each water heater is braced, anchored or strapped, in accordance with the California Plumbing Code, to resist falling or
horizontal displacement during an earthquake. Under the provisions of the Health and Safety Code, Section 19211, the seller must give the buyer written certification of compliance.
MELLO-ROOS BONDS AND TAXES
The Mello-Roos Community Facilities Act of 1982 authorizes the formation of community
facilities districts. Mello-Roos liens are municipal bonds that are used to finance the
construction of streets, sewers and other infrastructure needs before a housing development
is built. These liens allow developers to raise money that is used to complete these off-site
improvements before offering homes or condos for sale in a subdivision.
The sellers of one to four residential units that are located in a Mello-Roos tax
districts are legally required to disclose that the property is subject to a Mello-Roos tax levy.
Usually, the developer pays this lien until the property is sold. The buyer then becomes
responsible to pay any tax levies in the future.
A real estate broker is legally required to disclose to a buyer that a property located in
a Mello-Roos tax zone may be subject to future tax levies. This law applies to the sale or
lease (5 years or more) of one to four residential units. A buyer or tenant, who fails to
receive this disclosure prior to signing a real estate purchase agreement, has a three day right
of rescission following delivery of the disclosure.
EARTHQUAKE DISCLOSURES
The California Seismic Safety Commission has developed a "Homeowner's Guide to
Earthquake Safety." This guide includes information on geologic and seismic hazards,
explanations of related structural and nonstructural hazards. It also includes
recommendations for mitigating earthquake damage, and a statement that safety cannot be
guaranteed with respect to major earthquakes. And, that only precautions such as
retrofitting can be undertaken to reduce the risk of various types of damage.
If a buyer receives a copy of the Homeowner's Guide, neither the seller nor the
broker or sales agent are required to provide additional information regarding geologic and
seismic hazards. However, both sellers and brokers must disclose what they actually know
including whether a property is in an earthquake fault zone.
CE DIGEST 101
Delivery of a booklet is required in the following transactions:
Transfer of any real property improved with a residential dwelling built prior to
January 1, 1960 and consisting of one to four units any of which are of
conventional light-frame construction
Transfer of any unreinforced masonry building with wood-frame floors or roofs
built before January 1, 1975. Commercial buildings would receive a copy of a
Commercial Property Owner's Guide
In residential transfers of from 1-4 units, the following structural deficiencies and any
corrective measures taken, which are within the seller's actual knowledge, are to be
disclosed to prospective buyers.
Absence of foundation anchor bolts
Unbraced or inappropriately braced perimeter cripple walls
Unbraced or inappropriately braced first-story walls
Unbraced or inappropriately braced fir-story walls
Unreinforced masonry perimeter foundation
Unreinforced masonry dwelling walls
Habitable room or rooms above a garage
Water heater not anchored, strapped, or braced
ENERGY CONSERVATION RETROFIT
State law prescribes minimum energy conservation standards for all new
construction. Some local governments also have ordinances that impose additional energy
conservation measures on new and/or existing homes. These local ordinances may impose
energy retrofitting as a condition of the sale of an existing home. The seller and/or the
seller's agents are to disclose to a prospective buyer the requirements of the various
ordinances as well as who is responsible for compliance.
Federal law requires that a "new home" seller (including a subdivider) disclose in
every sales contract the type, thickness, and R-value of the insulation which has been or will
be installed. However, if the buyer signs a sales contract before it is known what type of
insulation will be installed, or if there is a change in the contract regarding insulation, the
seller shall give the buyer the required information as soon as it is available.
DISCLOSURE OF DEPOSITS
A broker, who accepts a check or promissory note as an earnest money deposit, must
make a full disclosure of this fact to the seller. If a buyer has given a check to the broker as
an earnest money deposit with written instruction to hold the check until acceptance of the
102 CE DIGEST
offer, the buyer's instructions should be followed. But the seller must be informed in
writing that the buyer's check is being held and not negotiated. This disclosure should be
given to the seller no later than at the time of the actual presentation of the offer to the seller.
During the time between receipt of the check by the broker and acceptance of the
purchase offer by the seller, the broker must record receipt of the check on the broker's trust
fund records and hold the check in a safe place.
While checks are universally accepted as equivalent to cash in business transactions,
promissory notes are not. The maker of a check represents that sufficient funds are in the
bank account upon which the check has been drawn. Failure to have sufficient funds in a
checking account to cover the amount of a check written upon that account may be a crime.
The maker of a note, on the other hand, does not represent that he or she has sufficient
money to pay as the note requires, and failure to pay is generally not a crime.
A broker violates the Real Estate Law if he or she directly or by implication
misrepresents to the broker's principal (seller) that a purchaser has given cash or a check as
an earnest money deposit when, in fact, the broker has accepted a non-negotiable
promissory note.
FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT
Federal law requires that a buyer of real property must withhold and send to the
Internal Revenue Service 10% of the gross sales price if the seller of the real property is a
"foreign person." The primary grounds for exemption from this requirement are
The seller's non-foreign affidavit and U.S. taxpayer I.D. number
A qualifying statement obtained through the IRS attesting to other arrangements
resulting in collection or exemption of the tax, or
The sale price does not exceed $300,000 and the buyer intends to reside in the
property
Because of the number of exemptions and other requirements relating to this law,
principals and agents should consult the IRS or a qualified tax advisor for more information
prior to communicating information of this type to sellers.
************************************
CE DIGEST 103
CHAPTER THREE - HIGHLIGHTS
AGENT’S DUTIES
1. A real estate agent owes a loyalty to the agent’s client and is prohibited from profiting
personally at the client’s expense
2. The Courts have consistently equated the duty of an agent to his or her principal to that of the
duty owed by a trustee to a beneficiary
3. As a fiduciary, the agent must exercise the utmost good faith, loyalty, and honesty to his or
her principal
4. An agent owes a duty of fair and honest dealing to the buyer
5. An agent must not withhold from a prospective buyer material facts regarding a property that
are known to the agent and unknown to the buyer
6. A licensee has an affirmative duty to conduct a reasonably competent and diligent inspection
of a seller’s property if the agent is representing the seller
EASTON V. STRASSBURGER
Landmark Case: Imposed duty on brokers and sales people to make them responsible for “what they
should have known” following a reasonably competent and diligent inspection of a property
1. A “red flag” on a property is a property condition or defect that could affect the value or
desirability of the property
2. A licensee is not charged with knowing the underlying problem of a “red flag” condition.
The licensee must, however, be observant enough to identify the obvious indicators of a
problem and make a disclosure based on these indications.
TRANSFER DISCLOSURE STATEMENT
1. Must be given to all buyers of residential dwellings (1-4) units by the seller or seller’s agent
2. Must be delivered to buyer as soon as practicable
3. If disclosure is delivered after the signing of a binding contract between seller and buyer,
buyer has three days within which to terminate transaction
4. The TDS is a regulated way for a seller to provide a buyer with a disclosure of property
conditions that might affect the value or desirability of the property
DELIVERY OF TRANSFER DISCLOSURE STATEMENT
1. Delivery may be made of TDS by mail or personal delivery
2. In “For Sale by Owner,” the owner/seller is responsible for delivery of TDS
3. If one agent involved, the agent is responsible to deliver to buyer
4. If both a listing agent and selling agent, the selling agent is responsible
AGENCY RELATIONSHIP DISCLOSURE
Civil Code Section 2373-2382 - Became law January 1, 1988
1. Applies to sales, exchanges, and leases for more than 1 year of 1-4 unit residential dwellings
2. Definitions: An agent is one who represents another, called the principal, in dealings with a
third person(s)
3. Listing agent must deliver an agency disclosure form to a seller prior to entering into a listing
agreement to represent the seller
4. Listing agent is legally required to deliver and obtains a signed acknowledgement from the
seller only
5. Selling agent is required to give a disclosure statement to both the buyer and seller
6. Selling agent must provide disclosure form to seller as soon as is practicable
7. Selling agent must provide disclosure form to buyer prior to buyer entering a binding sales
agreement with seller
104 CE DIGEST
CHAPTER THREE - HIGHLIGHTS
AGENCY RELATIONSHIP DISCLOSURE (CONT'D)
8. Dual Agency: To represent both the seller and the buyer, agent must have the knowledge and
consent of all parties to the transaction. An undisclosed dual agency is unlawful. Can lead to
revocation or suspension of license.
NATURAL HAZARDS DISCLOSURE
In California Sellers or seller's agents must disclose to a potential buyer if the property is located in one
of six natural hazard zones. Required in the sale of residential properties of 4 units or less. Zones are:
A flood hazard zone as designated by FEMA;
An area of potential flooding after a dam failure (Also known as an "inundation" area;
A very high fire hazard severity zone;
A wildland fire area (Also known as a "state fire responsibility);
An earthquake fault zone;
A seismic hazard zone
FEDERAL LEAD-BASED PAINT DISCLOSURE
Created when Congress passed the Residential Lead-Based Paint Hazard Reduction Act of 1992 (Also
known as Title X). This law directed HUD and the EPA to require disclosure of information on lead
based paint hazards before the sale or lease of most housing built before 1978. Approximately, three-
quarters of the nation's housing built before 1978 contains some lead based paint. Sellers must:
Disclose all known lead-based paint and lead-based paint hazards in the home
Give buyer or renter copy of EPA pamphlet "Protect Your Family from Lead in Your Home."
Include certain warning language in the purchase agreement or lease
Retain signed acknowledgement for 3 years as proof of compliance
Agents must insure that:
Sellers and landlords are made aware of their obligations under this law
Sellers and landlords disclose the proper information to lessors, buyers, and tenants
Sellers give purchasers the opportunity to conduct an inspection
Leases and sales contracts contain the appropriate notification and disclosure information
STRUCTURAL PEST CONTROL REPORT
Inspection Report is not legally required by California law prior to sale. However, if report is made a
condition of the sale (as it normally is), it triggers delivery obligation by seller or seller’s agent
Seller must deliver inspection report to buyer as soon as practical prior to execution of a
binding sales contract
If not delivered, provides grounds for rescission of sale
Report is mandatory for FHA and VA loans
Civil Code places burden for delivery of inspection report on seller’s agent
If more than one agent, buyer’s agent shall effect delivery.
MELLO-ROOS LIENS (Municipal Bonds used to finance construction of streets, sewers and other
infrastructure needs before a subdivision is built). Key Facts:
Allows developers to raise money to complete off-site improvements before sale of property
Sellers of 1-4 residential units in Mello-Roos areas must disclose liens to buyers before sale
Developer usually pays lien until property is sold
Buyer usually takes over payment upon purchase
If disclosure not made, buyer or lessor has three day right of rescission following delivery of
disclosure Chapter Index
CE DIGEST 105
CHAPTER THREE Review Quiz
`
1. The landmark case in which the court ruled that a real estate agent is responsible for what
the licensee “should have known” following a reasonably competent and diligent inspection
of a property is:
a) Easton v. Strassburger
b) Jones v. Mayer
c) Wilson v. Gentile
d) Lingsch v. Savage
2. All of the following are correct statements regarding a Real Property Transfer Disclosure
Statement (TDS) except:
a) It is legally required to be given by the seller of residential dwellings of 1-4 units to
the buyer
b) It requires the seller to disclose those facts about the condition of a property that
might affect its value or desirability
c) It is required to be given in all real estate property transfers
d) It must be delivered to the buyer as soon as is practicable
3. A real property transfer disclosure statement is required to be given by the owner of one to
four residential dwelling units in all of the following transfers except a:
a) Lease option
b) Sales transaction
c) Transfer between spouses
d) Ground lease with improvements
4. If there is both a listing agent and a selling agent involved in a real estate transaction, the
responsibility to deliver the transfer disclosure statement to the buyer rests with the:
a) Seller
b) Selling agent
c) Listing agent
d) Escrow officer
5. Which of the following is true if the transfer disclosure statement is delivered to the buyer
after the execution of a binding purchase agreement?
a) The buyer may terminate the sales contract
b) The buyer has three days within which to cancel
c) The termination must be by written notice to the seller or the seller’s agent
d) All of the above
6. An agency disclosure form must be given by licensees to sellers and buyers in real estate
transactions involving:
a) All multi-family residential dwelling units
b) Residential property improved with 1-4 dwelling units
c) All types of property
d) Mobilehomes only
106 CE DIGEST
CHAPTER THREE Review Quiz
7. A listing agent must deliver an agency disclosure statement to a seller:
a) As soon as practicable prior to presenting the seller with an offer
b) Never since it is the selling agent’s responsibility
c) Prior to entering into a listing agreement to represent the seller in the transaction
d) After the signing of a binding sales agreement between the seller and buyer but prior
to the opening of escrow
8. Which of the following is true regarding a dual agency?
a) If a dual agency is not disclosed to one of the principals in a real estate transaction,
the principal may rescind the contract
b) It is legal if it is disclosed and consented to by all principals
c) If undisclosed, it is cause for the revocation of a real estate license
d) All of the above
9. A Natural Hazards Disclosure Statement must be used by a seller of real property if his or
her property is located in:
a) A flood hazard zone
b) An earthquake fault zone
c) A wildland fire area
d) All of the above
10. Under the Residential Lead-Based Paint Hazard Residential Act of 1992, a seller must give
the buyer an opportunity to have the dwelling tested for lead-based paint hazards. By law,
the length of time is:
a) One week
b) 10 days
c) Two weeks
d) 30 days
Chapter Index
CE DIGEST 107
CHAPTER 4
ENVIRONMENTAL LAWS & CONCERNS
Since the mid-1960’s, the Federal government has enacted a significant number of
environmental laws that work together to protect our health, our environment, and our
future. In general, the objectives of these pieces of legislation have been to protect the envi-
ronment, protect the health of all of our citizens, conserve our national resources, and reduce
the proliferation of pollution and waste. All of these laws work together to make a cleaner,
safer world.
Laws set out a framework or a basic outline of what needs to be done. Then, a
government agency, such as the Environmental Protection Agency, writes rules, regulations,
and policies to fulfill what the law says should be done. Most of the major environmental
laws emanate at the federal level and apply to the entire United States. Each state also has
its own laws and its own agencies to implement the laws enacted by the state's own
governmental bodies..
IMPACT OF ENVIRONMENTAL LAWS ON REAL ESTATE
These comprehensive Federal laws, as well as the supporting state and local laws and
regulations, can have a significant impact on real estate values. The discovery that a prop-
erty is contaminated with hazardous waste can dramatically reduce a property’s value. It
could certainly affect a seller or a buyer. Either one could be held liable for potentially huge
clean-up costs of the waste materials. In turn, a lender’s collateral for the loan on the prop-
erty could be drastically reduced. Under certain circumstances, the lender might become
liable for the clean-up costs. A real estate licensee could, conceivably, be held liable for a
failure to disclose environmental problems concerning a particular property that should have
been known following a reasonably diligent and competent inspection of the property.
Due to the widespread potential liability created by federal and state environmental
laws and regulations, all members of the real estate community (licensees, lenders,
appraisers, sellers, buyers, landlords, and tenants) need to be familiar with the more
important environmental laws and regulations that affect real estate and its value.
Sellers and buyers of real estate, in particular, will look to real estate licensees, who
represent them in a real estate transaction, to provide the knowledge, advice, and guidance
needed to consummate transactions without incurring liability or losses to the principals
involved. Clients and the courts do not place the burden on licensees to become "experts" in
all types of environmental matters. However, it is expected that licensees be sufficiently
108 CE DIGEST
well informed on environmental hazards and potential environmental " red flags" to provide
the level of duty and care owed to a principal in a real estate transaction.
This knowledge of environmental concerns will help alert real estate professionals to
the possibility of potential environmental problems on a property being sold. In the case of
real estate licensees, developing a broader understanding of environmental issues provides
another consumer protection tool with which to better serve their clients. And, indeed, in
this era of heightened emphasis on "consumer protection," it is incumbent on all real licen-
sees to be in a position to correctly advise a client on environmental matters. Not only do
clients expects to be advised on their environmental concerns, they expect licensees to help
them solve any environmental problems that might arise. Clients also expect their agents to
provide them with the information and resources needed to make informed, intelligent
decisions in real estate transactions.
To begin, let's take a brief look at the federal laws that regulate the environmental
issues that pose the greatest concern for the real estate community. In the sale of developed
property, whether it is residential, industrial, or commercial, the same areas of concern are
shared. This requires an awareness of potential environmental problems in basic areas such
as:
Indoor Air Quality
Soil Contamination
Lead-Based Paint
Asbestos
Radon
Safe Drinking Water
An understanding of the laws and regulations of most concern to real estate licensees
will provide the foundation to deal with the environmental issues, problems, and concerns
they may encounter.
NATIONAL ENVIRONMENTAL POLICY ACT
The federal government enacted the National Environmental Policy Act (known as
NEPA) in 1969. This act was one of the first laws ever written that established a broad
national framework for protecting our environment. NEPA now provides the “umbrella”
which covers most of the federal laws and regulations on environmental matters and policies
enacted either prior to or after the enactment of NEPA.
NEPA's basic policy is to assure that all branches of government give proper consid-
eration to the environment before taking any major federal action that significantly affects
the environment. The NEPA process is intended to help public officials make decisions that
CE DIGEST 109
are based on an understanding of environmental consequences and take actions that protect,
restore, and enhance the environment.
The stated purposes of this act are:
To declare a national policy which will encourage productive and enjoyable
harmony between man and his environment;
To promote efforts which will prevent or eliminate damage to the environment
and stimulate the health and welfare of man;
To enrich the understanding of the ecological systems and natural resources
important to the Nation; and
To establish a Council on Environmental Quality
And, in addition to the stated objectives of establishing a broad national policy to
address environmental concerns and establish a Council on Environmental Quality, NEPA
created the Environmental Protection Agency (EPA).
GOALS OF NATIONAL ENVIRONMENTAL POLICY ACT
One of the two major goals of NEPA is to place the obligation on federal agencies to
consider every significant aspect of the environmental impact of a proposed action. A
proposed action means a project undertaken by a federal agency such as the construction of
a highway, waterway, bridge, or dam. Proposed actions would also include other projects
that require a federal permit such as construction by a private firm in a “wetlands area.”
The other major goal of NEPA is to provide a means to insure that the federal agency
proposing the action inform the public of its findings regarding the effects of the project on
the environment in its decision-making process. The legal requirements to attain these two
goals in NEPA insured that the legislation’s thrust be toward an environmental evaluation of
a proposed action prior to the start of a project rather than in finding fault after the project
was significantly completed. Also, to make sure that other parties and the public have a role
in the environmental evaluation process.
ENVIRONMENTAL IMPACT STATEMENT
NEPA mandates that an environmental impact statement (EIS) be included in every
report or proposal for legislation and other major federal actions that significantly effect the
quality of the human environment. Actually, NEPA regulations require various levels of
analysis of possible environmental effects depending on the circumstances and the likely
degree of environmental impacts.
110 CE DIGEST
The agency involved first makes a determination as to the significance of the
proposed action on the environment. If a determination is reached that the impact will not
significantly affect the environment, no EIS has to be prepared. The agency issues a
“finding of no significant impact” that may be subject to review by the public before a final
decision to bypass the EIS is reached.
If the findings reveal that the project could have a significant impact, the responsible
federal agency will prepare an EIS. This statement will include:
The environmental impact of the proposed action
Any adverse environmental effects which cannot be avoided should the
proposed action be implemented
Alternatives to the proposed action
The relationship between local short-term uses of man’s environment and
maintenance and enhancement of long term productivity, and
Any irreversible and irretrievable commitments of resources which would be
involved if the proposed action should be implemented
Proposed federal projects are subject to lawsuits by private citizens if:
No EIS is filed, or
An EIS is filed that does not address significant potential environmental damage,
or
The EIS fails to consider viable alternatives
Most court cases relate to when an EIS needs to be prepared and to the adequacy of
the EIS coverage. The Courts have the power to rule that a project be halted until an EIS or
a new EIS is prepared that sufficiently addresses all the required factors required in an Envi-
ronmental Impact Statement (EIS).
PUBLIC PARTICIPATION
Another cornerstone of the National Policy Act is that the public participate in the
decision making steps of the Environmental Impact Statement process. In fact, the public
participation aspects of the NEPA are regarded by many as the most valuable aspect of the
law. Agencies must provide public notice of NEPA-related hearings, public hearings, and
the availability of environmental documents. The purpose of this notification is to insure
that persons and agencies, who may be interested in or affected by a project, be informed of
the proposed action prior to any final decisions being reached.
CE DIGEST 111
******************** CASE STUDY
SAN BERNARDINO VALLEY AUDUBON SOCIETY, INC.
v. COUNTY OF SAN BERNARDINO (1984) 155 C.A. 738
An Audubon society brought an administrative mandamus proceeding seeking
judicial review of the adequacy of an environmental impact report (EIR). The EIR was in
connection to a proposed cemetery project and had been approved by the County Board of
Supervisors.
The California Environmental Quality Act mandates that when an EIR identifies that
a proposed project will have a significant effect on the environment, the board make
findings that changes or alternatives have been required that mitigate these significant
effects. Or, that such mitigation features are infeasible. The record showed that discussion
of feasible alternative sites took place at the hearings on the EIR. However, nowhere in the
record were there any findings by the board of any alternative sites. The court also
discovered that the record did not show substantial evidence to support the board’s
determination the proposed use was consistent with the county’s general plan.
The trial court granted the motion for administrative mandamus and ordered the
county to set aside all actions taken to approve the cemetery. The court referred the EIR
back to the board of supervisors with instructions to prepare a legally adequate EIR with a
discussion of alternative sites, and the preparation of legally adequate findings regarding the
feasibility of mitigated measures, and the preparation of adequate findings with respect to
the consistency of the cemetery with the county general plan.
The trial court awarded the Audubon society attorney fees. The Court of Appeals
later affirmed the trial court’s decision. ***************************************************
COUNCIL ON ENVIRONMENTAL QUALITY
The Council on Environmental Quality, which was created through the enactment of
NEPA, advises the President on environmental policy matters. It has three members who
are appointed by the President. As one of its functions, the council prepares an environ-
mental quality report for the President each year reviewing environmental issues and their
status. In addition, the report makes recommendations for overcoming deficiencies in areas
of environmental concern.
Other functions performed by the Council include:
Gathering and analyzing trends in environmental quality and presenting
reports on such trends to the President
Conducting surveys and analyses
112 CE DIGEST
Reviewing and appraising Federal programs and policies
Developing policy proposals to improve environmental quality and the natural
resource base
ENVIRONMENTAL PROTECTION AGENCY
The United States Environmental Protection Agency has emerged as the federal
agency whose major role is to oversee and enforce federally enacted minimum standards
dealing with environmental protection, specifically pollution control programs. This agency
is empowered with far reaching regulatory and enforcement authority and administers many
of the major pieces of federal legislation concerning the environment passed since the
1960’s.
The Environmental Protection Agency was originally created in 1970. Prior to that
time, environmental law consisted of a hodge-podge of environmental protection laws
enacted by the various states and local communities. President Richard Nixon realized that
a need existed for a federal agency that would set national guidelines for the environment,
monitor these guidelines, and enforce them.
To create this new agency, certain functions were taken from other federal agencies
such as the Department of the Interior, of Agriculture, and Health, Education, and Welfare
and transferred into to the newly formed EPA. The newly created Environmental Protection
Agency was initially charged with the responsibility to administer the Clear Air Act (1970)
that had been enacted to abate air pollution created by industry and motor vehicles. The
EPA's other major responsibilities in its early years included the Federal Environmental
Pesticide Control Act (1972) and the Clear Water Act (1972) that regulated municipal and
industrial waste water discharges. By the mid-1990's the EPA was enforcing 12 major stat-
utes, including laws designed to control such activities as ocean dumping, safe drinking
water, insecticides, and asbestos hazards.
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION
AND LIABILITY ACT (CERCLA)
One of the better known laws that is enforced by the Environmental Protection
Agency is CERCLA. CERCLA became federal law in 1980. It is also known as the Super-
fund Law. CERCLA is the environmental law most likely to affect buyers, sellers, and
lenders in real estate transactions. The liability provisions of CERCLA place the sometimes
enormous costs of cleaning-up a hazardous waste site on the shoulders of parties held
responsible for the contamination. The costs of clean-up on a property, in some cases, may
exceed the actual market value of a property.
The major purposes of CERCLA are:
To provide a method of paying for the restoration of the environment caused by
the use and disposal of hazardous materials.
CE DIGEST 113
To establish the authority in the federal government to recover the costs of
cleaning up sites that have been damaged as a result of the disposal of
hazardous materials.
It also provides the government with the authority to hold responsible parties
liable for the cost of cleaning up and restoring the property. These parties are
referred to as PRP’s (potentially responsible parties).
CERCLA LIABILITY
CERCLA authorizes the EPA and other parties to recoup the costs of identifying and
cleaning-up a hazardous waste site from the parties responsible for the contamination.
These potentially responsible parties (PRP’s) may be:
Present owners and operators of a site;
Corporations or individuals if they owned the property at the time of the
disposal of the hazardous waste;
Parties who generated the hazardous waste;
Persons who arranged for the hazardous waste to be disposed at the site; or
Any corporation or individual who transported the hazardous waste.
The liability imposed under CERCLA is strict liability. This means that a “Poten-
tially Responsible Person (PRP)” may be held liable whether or not he or she was responsi-
ble for, knew about, or was in any way negligent regarding the contamination. If there is
more than one PRP involved, the liability is joint and several. This means that the EPA can
collect the entire cost of the clean-up from a single PRP and leave that party with the
responsibility of collecting from the other contributing parties.
The only defenses that can be used by PRP’s to avoid liability under CERCLA and
avoid the costs of clean-up are to demonstrate and prove that the contamination was:
An act of God
An act of War; or
An act or omission of a third party
Obviously, an Act of God or an Act of war are rarely used. The main shields to
avoid liability for clean-up costs under CERCLA are an act or omission of a third party and
the innocent landowner defense.
THIRD PARTY DEFENSE
Under CERCLA, a defendant may only use this defense if the person, who released
the hazardous wastes, is a party unknown to the defendant. The United States Code, Section
9607 (b)(3), describes a third party as “other than one whose act or omission occurs in
114 CE DIGEST
connection with a contractual relationship, existing directly or indirectly, with the defen-
dant.” The action must have been undertaken without the knowledge or consent of the
defendant. The defendant must be able to prove that the “third party” acted independently
and was not an employee or agent of the defendant.
To preserve this defense, the defendant must be able to show that once the
contamination was discovered, the defendant took action and initiated steps to prevent
further unauthorized dumping of hazardous wastes on the property. The owner of the
property must report the contamination to the EPA and take steps to prevent further
contamination of the property.
SUPERFUND AMENDMENT AND REAUTHORIZATION ACT (SARA)
This amendment to CERCLA was enacted in 1986. For real estate buyers, the most
important provision in this legislation was the establishment of the “innocent landowner’s
defense.” This defense, which was added to the original law by this amendment, lessened
the strict liability requirement of CERCLA by providing a defense that exempts “innocent
landowners” from having to pay the clean-up costs of an environmentally contaminated
property.
To claim a defense as an “innocent landowner,” a defendant in a superfund suit must
establish that he or she:
Did not know, or had no reason to know, that the property was contaminated at
the time it was purchased;
Purchased the property after the improper disposal of the hazardous materials;
Had exercised “due diligence” by making “all appropriate inquiry” into the
previous ownership and use of the property consistent with good commercial or
customary practice.”
Acquired the contaminated property through an inheritance
The “innocent landowner’s” defense is also available to a government entity that
acquired the property through escheat or condemnation.
******************** CASE STUDY
UNITED STATES v. SHELL OIL CO.
(1985) 605 F. SUPP. 1064
The United States filed a suit against the Shell Oil Co. under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA). The
CE DIGEST 115
government sought to recover costs it had incurred and would incur in responding to
hazardous waste contamination at the Rocky Mountain Arsenal near Denver, Colorado.
The arsenal property was owned by the U.S. Department of the Army. The Army
used the property for the manufacture, testing, and disposal of various chemical agents and
munitions. The Army leased certain portions of the property to Shell Oil and its predeces-
sors for the manufacture, packaging, and other handling of pesticides, herbicides, and other
chemicals.
The Army’s wastes and all or some portion of Shell’s wastes were disposed of
through a common sanitary sewer system and common contaminated waste disposal system
built and operated by the Army. The waste disposal system failed and released into the
environment hazardous substances from the wastes generated by the Army, Shell Oil, and
other tenants. The released chemicals contaminated air, land, ground water, and lakes on the
arsenal property and threatened to contaminate the environment outside the arsenal. The
contamination also killed migratory birds, fish, and wildlife found in and around the arsenal
property.
In 1975, the State of Colorado issued an administrative order to the Army and Shell
directing them to cease and desist from the discharging of chemical wastes. The order
further directed them to clean up all sources of certain chemicals and to undertake a ground
water monitoring program. By 1983, the Army had incurred expenses of $48,000,000 in
responding to releases of hazardous chemicals at the arsenal. The Army had also developed
several comprehensive plans for the further clean-up of the arsenal ranging from costs of
$210,000,000 to $1,800,000,000. The United States suit against Shell identified the com-
pany as a “Potentially Responsible Person” and alleged that Shell was responsible for all or
a substantial portion of the response costs for further clean-up costs under CERCLA.
Shell sought dismissal from certain of the claims on the grounds that the contamina-
tion had occurred prior to the enactment of CERCLA. The court concluded that the whole
purpose of CERCLA was retrospective and remedial and that CERCLA authorized recovery
of pre-enactment response costs. The court also concluded that Shell qualified as a
“Potentially Responsible Party” under CERCLA. Shell also sought dismissal of the
$1,800,000,000 estimated remedial costs for further clean-up costs arguing that the amount
represented a “worst case” scenario and represented the most expensive clean-up option.
The court denied their motion for dismissal.
******************** DUE DILIGENCE UNDER CERCLA & SARA
The EPA, the courts, or enacted statutes, have not yet set forth specific guidelines as
to what constitutes "appropriate inquiry." However, SARA suggests that the following be
considered:
Any specialized real estate knowledge or experience of the buyer
Any difference between the selling price and the property’s value if
uncontaminated
116 CE DIGEST
Commonly available information about the property
How obvious or apparent is the hazardous waste to competent inspection
Since the introduction of CERCLA and the later amendments to it by SARA, concern
has grown within the real estate community. Buyers, sellers, and lenders have developed a
growing realization that, on certain types of real estate transactions, they could find them-
selves responsible for enormous environmental clean-up costs. They also realize that
finding themselves as a party in a transaction involving a contaminated property could
trigger extensive red tape and expensive environmental litigation.
Lenders have become increasingly reluctant to extend credit on certain properties
without obtaining environmental clearance should they have to foreclose and take over the
ownership of the property. They could become legally liable for hazardous substances
found on properties that they own as well as on properties on which they hold a security
interest and participate in the management of the property.
These facts tend to raise the “red flag” of caution concerning the lender’s policy in
the approving and making of real estate loans. Newer EPA regulations have tended to
reduce lender concerns over potential liability by stating that for the purpose of superfund
liability, a lender is not technically considered to be “the owner” if the property is disposed
of within six months of the foreclosure.
It is becoming increasingly prudent for sellers, buyers, and lenders to take actions to
protect themselves and minimize their liability in transactions that warrant it. One of the
best ways to exercise due diligence under CERCLA and SARA is to have an Environmental
Site Assessment (ESA) done on the property. This can provide the "all appropriate inquiry"
feature in SARA to qualify as an "innocent landowner." There are also insurance
companies that write Environmental Liability Insurance that can be used to provide
protection if needed.
The Federal National Mortgage Association (FNMA) and the Federal Deposit
Insurance Corporation (FDIC) publish guidelines for lending institutions when considering
loans on properties that raise environment concerns. These guidelines contain excellent
information, however, for all members of the real estate community.
RESOURCE CONSERVATION AND RECOVERY ACT (RCRA)
This environmental law, that was enacted in 1976, has evolved through a series of
amendments to give the EPA virtually “cradle to grave” authority to monitor hazardous
wastes. It empowers the EPA with far reaching authority to regulate the generators and
transporters of hazardous wastes as well as parties who treat, store, and dispose of hazardous
wastes. This law also establishes the legal authority to defray the clean-up costs of
contaminated properties.
CE DIGEST 117
The original legislation was the Solid Waste of Act of 1965, which was a narrow
piece of legislation dealing with non-hazardous solid waste. It was amended and expanded
in 1970 and then again in 1976 through the enactment of the Resource Conservation and
Recovery Act of 1976. Later, it was combined with the Hazardous and Solid Waste
amendments (HSWA) in 1984 to emerge in its present form. Amendments made in 1986 to
RCRA enabled EPA to address problems that could result from underground tanks storing
petroleum and other hazardous substances. RCRA focuses only on active and future
facilities and does not address abandoned or historical sites.
There are nearly two million Underground Storage Tanks (USTs) around the country.
USTs can harm the environment through leaks or spills. UST owners and operators must
clean up any damage their tanks may have caused. New tanks must also meet stringent
standards and be operated to minimize the chance of leaks or spills.
ADMINISTRATION
This program is administered at the federal level through the Office of Solid Waste.
The administrator of this federal office is charged with the responsibility of administering
this legislative program which includes such functions as:
The definition and identification of materials that are to be classified as “solid”
and “hazardous” wastes.
The maintenance of lists of materials that are classified as “hazardous” that would
fall under the provisions of this act.
The setting of standards and guidelines that provide a “paper trail” from the
generator of these wastes through the transporters and storers to the final disposal
of the wastes by the disposer.
The development of guidelines for state hazardous waste programs.
The issuing of permits for the treatment, storage, or disposal of hazardous wastes.
RCRA gives the Administrator and the EPA broad and far-reaching powers. It
authorizes that a suit may be brought on behalf of the United States government to
immediately restrain persons contributing to the handling, storage, treatment, transportation,
or disposal of solid or hazardous wastes upon receipt of evidence that such may present
imminent and substantial endangerment to human health or the environment.
DEFINITION OF HAZARDOUS WASTE
One of the major problems of waste generators, handlers, and transporters is to
determine if a waste material falls under the regulatory provisions of RCRA. One of the
EPA’s functions, under RCRA, is to define, update and maintain lists of both solid and
118 CE DIGEST
hazardous waste materials in an attempt to clarify the issue. The first step in attempting to
comply with this law is to determine if the EPA classifies the material as a solid waste.
This determination is complicated inasmuch as solid wastes may be liquid, semi-
liquid, or gaseous waste products. This determination, however, is vital because the provi-
sions of RCRA apply to solid wastes that the EPA also classifies as being hazardous. A
solid waste that is non-hazardous or a hazardous waste that is non-solid would fall under or
be subject to the regulatory provisions of this legislation.
The statutory definition of a hazardous waste as provided by RCRA is: "A solid
waste, or combination of solid wastes, which because of its quantity, concentration, or
physical, chemical, or infectious characteristics may cause, or significantly contribute to an
increase in mortality or an increase in serious irreversible, or incapacitating reversible,
illness, or pose a substantial present or potential hazard to human health or the environment
when improperly treated, stored, transported, or disposed of, or otherwise managed."
Under RCRA, a hazardous waste possesses the four features of “ignitability,
corrosivity, reactivity, or toxicity.” Waste material that in itself is not hazardous would
become subject to regulation if it happened to possess even a small amount of substances
that the EPA classified as being hazardous. A solid waste is considered to be hazardous if it
is a waste mixture containing one or more listed hazardous wastes or exhibits one or more
characteristics of hazardous waste (ignitability, corrosivity, reactivity, or toxicity).
A REGULATORY "PAPER TRAIL
RCRA requires generators of significant amounts of hazardous waste to initiate a
“trail of paper” that identifies each of the handlers and transporters of these substances. This
tracking system is known as the Manifest System (or cradle to grave). This establishes a
framework that allows the EPA to track the movement of these waste products and to
identify responsible parties for any violation of RCRA. Violations of this legislation can be
very expensive with fines of up to $50,000 per day.
******************** CASE STUDY
UNITED STATES v. REILLY TAR & CHEMICAL CORP.
(1982) 346 F. SUPP. 1100
In 1917, Reilly Tar & Chemical Corporation began to operate a plant in St. Louis
Park, Minnesota. At this plant, it refined coal tar in creosote oil and other products, and
treated wood products with creosote oil and other preservatives. For fifty-five years, until
the plant ceased operations in 1972, Reilly Tar generated chemical wastes that were
handled, stored, treated, and disposed of at the Reilly Tar site.
CE DIGEST 119
In 1982, the U.S Government and the State of Minnesota brought actions against
Reilly Tar under the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, and state law for alleged con-
tamination of the ground and the underlying groundwaters in and around the city of St.
Louis Park. The plaintiffs alleged that Reilly Tar spilled, leaked, and discharged chemical
wastes generated at the Reilly Tar site directly into the ground causing the wastes to seep
into the ground and into the area surrounding the plant site.
The plaintiffs further alleged that these chemicals had migrated into the groundwater
beneath and surrounding the site. The groundwater beneath the Reilly Tar site was part of
the water system supplying drinking water in the Minneapolis-St.-Paul metropolitan area.
The chemicals previously discharged at the Reilly site were carcinogens and toxic and
would continue to move into the drinking water unless preventative measures were taken.
Reilly Tar claimed they were not liable for clean-up costs and sought dismissal of all actions
based on their contentions that:
The federal and state laws invoked were jurisdictional and only applied if the
pollution crossed state lines
Statutes do not apply to prior owners of inactive sites
Complaints failed to allege sufficient facts to establish an “imminent and
substantial endangerment” to the public health, welfare, and environment.
The District Court ruled that both RCRA and CERCLA could be interpreted to apply
to intrastate pollution; that the complaints were sufficient to establish an imminent and
substantial endangerment to health and the environment and, therefore, subject to claims of
the state under the Acts; and, that the liability for clean-up costs is absolute, subject only to
defenses of acts of God, acts of war, and certain acts and omissions of third parties. The
District Court denied all motions for dismissal.
This case points up the fact that the courts give a broad and liberal interpretation in
environmental cases to preserve the intent of Congress through the enactment of RCRA and
CERCLA. This intent was to give the federal government the tools necessary for a prompt
and effective response to hazardous waste problems. And, in addition, that parties held
responsible for problems caused by the disposal of chemical poisons bear the cost and
responsibility to remedy the harmful conditions they created.
********************
THE CLEAN AIR ACT OF 1970
Outdoor air quality is affected by many human and natural activities. Manufacturing
companies, power plants, small businesses, automobiles, and forest fires are all sources of
air pollution. Any activity that releases materials into the air affects air quality.
120 CE DIGEST
The basic purpose of the Clean Air Act, when initially enacted, was to protect human
health and the environment from emissions that pollute outdoor air. This law authorized the
Environmental Protection Agency to establish National Ambient Air Quality standards
(NAAQS) to protect public health and the environment. The EPA, in implementing this
Act, has established federal standards for mobile sources of air pollution, for sources of 189
hazardous air pollutants, and for the emissions that cause acid rain. It also established a
comprehensive permit system for all major sources of air pollution. EPA's Office of Air and
Radiation (OAR) is concerned with pollution prevention, indoor and outdoor air quality,
industrial air pollution, pollution from vehicles and engines, radon, acid rain, stratospheric
ozone depletion, and radiation protection. OAR also acts as the lead office for developing
the scores of regulations required under The Clean Air Act.
Under CAA, individual states are responsible for establishing procedures to attain
and maintain the standards developed by the EPA. The Act requires that each state adopt
plans, and submit them to the EPA to insure that they are adequate to meet the legal
requirements of the law. These plans are known as State Implementation Plans (SIPs).
Amendments made to CAA in 1990, require the EPA to impose sanctions in areas that fail
to submit a SIP, fail to submit an adequate SIP, or fail to implement a SIP. The states also
share responsibility for issuing and enforcing air pollution permits. In some areas, local
governments will test vehicle emissions and monitor other air quality issues.
******************** CASE STUDY
(The following news article was released by the EPA for publication on May 17, 2001)
"EPA APPROVES NEW YORK AND NEW JERSEY PLANS
TO REDUCE SMOG-FORMING CHEMICALS"
"In an effort to make smoggy summer days a thing of the past, the U.S.
Environmental Protection Agency (EPA) has given final approval to New York and New
Jersey's plans to reduce nitrogen oxide pollution. Nitrogen oxides are a key ingredient of
smog, the murky, steamy and unhealthy air that can cause some to reach for their inhalers or
take a trip to the hospital. EPA's approvals of the New York and New Jersey plans are part
of an overall strategy to curb the transport of harmful pollutants across state borders.
Under the strategy, commonly called the NOx SIP Call, EPA is requiring 19 states in
the midwest, south, northeast, and the District of Columbia to place further controls on
nitrogen oxides, which are primarily emitted by large industrial boilers and power plants.
Each of these states and the District must meet a set "budget" that limits nitrogen oxide
emissions.
The budgets were calculated based on what would be emitted in that state if all of its
power plants and boilers were clean. These budgets will generally require large reductions
CE DIGEST 121
in nitrogen oxide emission in the midwest and south, with more modest reductions in the
northeast, where nitrogen oxide pollution is already stringently controlled. The NOx SIP
Call will help the entire eastern portion of the country meet federal health-based standards
for smog, the most persistent and serious air pollution problem in the northeast.
This plan will reduce nitrogen oxide emissions a total of about one million tons per
ozone season. For their parts, New York is reducing its seasonal nitrogen oxide emissions
by 16,000 tons and New Jersey is reducing its emissions by 9,000 tons. The plans that EPA
has approved lay out these reductions and meet the requirements of EPA's overall plan."
***********************************************
INDOOR AIR
Indoor air is often more polluted than the air outside our homes and places of
business. Indoor pollution sources that release gases or particles into the air are the primary
cause of indoor air quality problems in a home. Inadequate ventilation can increase indoor
pollutant levels by not bringing in enough outdoor air to dilute emissions from indoor
sources and by not carrying indoor air pollutants out of the home. High temperature and
humidity levels can also increase concentrations of some pollutants. There are many
sources of indoor air pollution in any home. These include:
Combustion sources such as oil, gas, kerosene, coal, wood, and tobacco
products
Building materials and furnishings as diverse as deteriorated asbestos-
containing insulation, wet or damp carpet, and cabinetry or furniture made of
certain pressed wood products
Products for household cleaning and maintenance, personal care, or hobbies
Central heating and cooling systems and humidification devices
Outdoor sources such as radon, pesticides, and outdoor air pollution
If too little outdoor air enters a home, pollutants can accumulate to levels that can
pose health and comfort problems. Unless they are built with special mechanical means of
ventilation, homes that are designed and constructed to minimize the amount of outdoor air
that can "leak" into and out of the home may have higher pollutant levels than other homes.
However, because some weather conditions can drastically reduce the amount of outdoor air
that enters a home, pollutants can build up even in homes that are normally considered
"leaky."
SAFE DRINKING WATER ACT (SDWA)
The Safe Drinking Water Act was originally passed by Congress in 1974 to protect
public health by regulating the nation's public drinking water supply. The law encompasses
many requirements that are designed to protect drinking water and its sources. The sources
122 CE DIGEST
of drinking water include waters taken from rivers, lakes, reservoirs, springs, and ground
water wells. SDWA authorizes the Environmental Protection Agency to set national health-
based standards for drinking water to protect against both naturally-occurring and man-
made contaminants that may be found in drinking water.
The Safe Drinking Water Act applies to every public water system in the United
States. There are currently more than 170,000 public water systems providing water to the
American public. The responsibility to make sure these public water systems provide safe
drinking water is divided among the EPA, the individual states, water systems, and the
public. SDWA provides a framework in which these parties work together to protect this
valuable resource.
The EPA sets national standards for drinking water based on scientific analysis to
protect against health risks, considering available technology and costs. These National
Primary Drinking Water Regulations set enforceable maximum contaminant levels for
particular contaminants in drinking water or require ways to treat water to remove
contaminants. The EPA sets primary drinking water standards through a three-step process:
First Step: The EPA identifies contaminants that may adversely affect public
health and occur in drinking water with a frequency and at levels that pose a
threat to public health.
Second Step: The EPA determines a maximum contaminant level goal for
contaminants it decides to regulate.
Third Step: The EPA specifies a maximum contaminant level which is the
maximum permissible level of a contaminant in drinking water that is delivered
to any user of a public water system.
National drinking water standards are legally enforceable. This means that both the
EPA and the states can take enforcement actions against water systems that do not meet
safety standards. The EPA and states may issue administrative orders, take legal actions, or
fine utilities. The EPA and the states also work to increase water systems understanding of,
and compliance with, the existing standards.
TOXIC SUBSTANCES CONTROL ACT (TSCA)
The Toxic Substance Control Act of 1976 was enacted by Congress to give the EPA
the ability to track the 75,000 industrial chemicals currently produced or imported into the
United States. The EPA repeatedly screens these chemicals and can require reporting or
testing of those that may potentially pose an environmental or human-health hazard.
Based on these test results and other information, the EPA may regulate the
manufacturing, distribution, and disposal of any chemical that represents an unreasonable
risk of injury to human health or the environment. Under the provisions of TSCA, a variety
CE DIGEST 123
of regulatory tools are available to the EPA. The agency's choice of remedies may range
from a total ban on the production, use, and import of a chemical to the placement of a
warning label at the point of sale.
As a result of amendments enacted over the years, the role of TSCA has been
expanded from its original mandates and now covers four title areas of responsibility:
Title I - Control of Toxic Substances - Includes provisions for testing
chemical substances and mixtures; manufacturing and processing notices;
regulating hazardous chemicals, substances, and mixtures; managing imminent
hazards; and reporting and retaining information.
Title II - Asbestos Hazard Emergency Response - These provisions gave the
EPA the authority to impose more requirements on asbestos abatement in
schools. This title now requires the inspection of schools for asbestos and
appropriate response actions and mandates periodic reinspection. It also
requires accreditation of persons who inspect for asbestos-containing material
in school, public, and commercial buildings.
Title III - Indoor Radon Abatement - The purpose of this legislation was to
assist states in responding to the threat to human health posed by exposure to
radon. The EPA is required to publish an updated citizen's guide to radon
health risk, and to perform studies of the radon levels in schools and radon
contamination in federal buildings.
Title IV - Lead Exposure Reduction - The purpose of this legislation is to
reduce environment lead contamination and prevent adverse health effects as a
result of lead exposure particularly in children. Its provision include identifying
lead-based paint hazards, defining levels of lead allowed in various products
including paint and toys, and establishing state programs for the monitoring and
abatement of lead exposure levels, including training and certification of lead
abatement workers.
Under TSCA, the EPA classifies chemical substances as either "existing" chemicals
or "new" chemicals. The EPA maintains a database of chemicals known as the TSCA
Chemical Substance Inventory which lists "existing" chemicals. The EPA has mechanisms
in place to track the thousands of new chemicals that industry develops each year with either
unknown or dangerous characteristics. EPA can then control these chemicals as necessary
to protect human health and the environment. TSCA supplements other Federal statutes
including the Clean Air Act. The TSCA program is run by the EPA and is not delegated to
any state agency.
POLLUTION PREVENTION ACT
A trend that is gaining in favor that tends to mitigate liability under federal
environmental laws, is embodied in the Pollution Prevention Act of 1990. Earlier
environmental law focused on various ways to treat wastes after they were created in order
to protect the environment. Gradually, however, real estate sellers, buyers, and lenders are
124 CE DIGEST
developing a growing realization that whenever possible, avoiding wastes altogether is a far
better and safer solution than treating and disposing of existing hazardous and household
waste.
The Pollution Prevention Act of 1990 focused industry, government, and public
attention on reducing the amount of pollution produced through cost-effective changes in
production, operation, and raw materials use. Opportunities for source reduction are often
not realized because existing regulations, and the industrial resources required for
compliance, focus on treatment and disposal. Source reduction is fundamentally different
and more desirable than waste management or pollution control.
The biggest incentive for industries to reduce waste through source reduction is that
the cost of disposing of hazardous wastes is getting more and more expensive. When
companies produce less waste, their disposal costs are lower. Companies may also profit
from selling or saving recovered materials. Industries can reduce the amount of waste they
produce in many ways such as:
Manufacturing Process Changes: Process changes involve either eliminating
a process that produces a hazardous waste or changing the process so that it
produces little or no hazardous waste.
Source Separation: Refers to preventing hazardous waste from coming into
contact with nonhazardous waste. It is the cheapest and easiest way to reduce
hazardous waste. Source separation reduces costs for disposal, handling, and
transportation and is widely used by industry.
Recycling: Also referred to as recovery and reuse, is common in industry.
Recycling removes a substance from a waste and returns it to productive use.
Industries commonly recycle solvents, acids, and metals.
Substitution of Raw Materials: Involves replacing raw materials that
generate a large amount of hazardous waste with those that generate little or no
waste. Manufacturers can substantially reduce waste volume through
substitution.
Product Substitution: Involves finding nonhazardous substitutes for materials
and products used routinely in homes and businesses.
********************
Chapter Index
CE DIGEST 125
CHAPTER 4 - HIGHLIGHTS
ENVIRONMENTAL LAWS & REGULATIONS
Early Legislation
1. Created starting in mid-1960’’s
2. PURPOSES: 1) Protect the environment 2) Protect the health of citizens 3) Conserve our
national resources 4) Reduce spread of pollution and waste
GENERAL LIABILITY
1. Environmental laws require that owners can be held liable for clean-up costs of contaminated
properties
2. If lender assumes ownership of contaminated property through foreclosure - Lender may become
liable.
NATIONAL ENVIRONMENTAL POLICY ACT (NEPA) - Enacted in 1969
NEPA created the: 1) Council on Environmental Quality 2) The Environmental Protection Agency
(EPA) 3) Framework for Environmental Impact Statement (EIS)
1. Council of Environmental Quality - Has 3 members; Appointed by President
2. Council prepares environmental quality report each year for President
3. Council reviews and appraises Federal programs and policies
GOALS OF NEPA
1. Places obligation on federal agencies to consider every significant aspect of the environmental
impact of a proposed federal action or program such as construction of a highway, dam, or bridge
2. Provide the means to insure that the federal agency proposing action inform public of its findings
regarding effect of project on environment in decision-making process.
ENVIRONMENTAL IMPACT STATEMENT (EIS)
NEPA mandates that an Environmental Impact Statement be included with every proposed federal
action or program significantly affecting the environment
1. If a determination is reached that impact will not significantly affect the environment, no EIS has
to be prepared
2. Agency issues a “finding of no significant impact” - subject to review by public before decision to
bypass EIS is reached
3. Proposed federal projects are subject to lawsuits by private citizens if: 1) No EIS is filed 2) An
EIS is filed which does not address significant potential environmental damage, or 3) The EIS
fails to consider viable alternatives
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY
ACT (CERCLA)
1. Became law in 1980. Also known as Superfund law
2. CERCLA authorizes EPA to recoup costs of clean-up from responsible parties
3. “Potentially Responsible Parties (PRP’s)” may be: 1) Present owners and operators of a site
2) Corporations or individuals who owned property at time of hazardous waste disposal
3) Parties who generated the hazardous waste 4) Persons who arranged for the hazardous waste
to be disposed of at the site 5) Any corporation or individual who transported the waste.
4. Strict Liability under CERCLA - Means a PRP may be held liable whether PRP was responsible
for, knew about, or was negligent regarding contamination
5. The only defenses that can be used by PRP to avoid liability under CERCLA are: 1) An act of
God 2) An act of War 3) An act or omission of a 3rd party
6. Third Party Defense - Defendant must be able to prove contamination was done by party unknown
to PRP and that 3rd party acted independently not as agent or employee of defendant.
126 CE DIGEST
CHAPTER 4 - HIGHLIGHTS
SUPERFUND AMENDMENT AND REAUTHORIZATION ACT (SARA)
1. 1986 amendment to CERCLA.
2. Established “innocent landowner’s defense.” Very important to real estate buyers.
3. To claim defense of “innocent landowner,” defendant must prove that 1) Buyer did not know or
had no reason to know that property was contaminated at time of purchase 2) The property was
purchased after the improper disposal of hazardous materials 3) Buyer had exercised “due
diligence” by making “all appropriate inquiry” into previous ownership and use of property
consistent with customary practice
RESOURCE CONSERVATION AND RECOVERY ACT (RCRA)
1. Administered at federal level by Office of Solid Waste
2. Functions of federal agency include 1) Definition of materials that are to be classified as “solid”
or “hazardous” wastes 2) Maintenance of lists that are classified as “hazardous” that fall under
RCRA 3) Setting of standards and guidelines for generators, transporters, storage facilities, and
disposers of hazardous wastes 4) Development of guidelines for state hazardous waste programs
5) Issuing of permits for the treatment, storage, or disposal of hazardous wastes
SAFE DRINKING WATER ACT (SDWA)
1. Passed by Congress in 1974 to protect public health by regulating the nation's public drinking
water supply.
2. Sources of Drinking Water: Includes waters taken from: 1) Rivers 2) Lakes 3) Reservoirs
4) Springs, and 5) Ground water wells.
3. SDWA authorizes the Environmental Protection Agency to set national health-based standards for
drinking water to protect against both naturally occurring and man-made contaminants.
4. There are more than 170,000 public water systems in the United States
5. National drinking water standards are legally enforceable. Both the EPA and states
can take enforcement actions against water systems that do not meet safety standards.
6. Legal actions include: 1) Issue administrative orders 2) Take legal actions, or
3) Fine utilities.
TOXIC SUBSTANCES CONTROL ACT (TSCA)
1. Enacted by Congress to give the EPA the ability to track the 75,000 industrial chemicals currently
produced or imported into the U.S.
2. EPA may regulate the manufacturing, distribution, and disposal of any chemical that represents an
unreasonable risk of injury to human health or the environment.
3. If a substance is considered hazardous, the EPA remedies may range from a total ban on the
production, use, and import of a chemical to the placement of a warning label at the point of sale.
4. Under TSCA, the EPA has the responsibility for lead exposure reduction
5. The EPA maintains a database of chemicals known as the TSCA Chemical Substance Inventory
which list "existing" chemicals.
6. The TSCA program is run by the EPA and is not delegated to any state agency.
******************************************
Chapter Index
CE DIGEST 127
CHAPTER FOUR Review Quiz
1. Which of the following persons would be concerned about the possibility that a real estate
property might be environmentally contaminated?
a) The seller of the property
b) The lender who intends to use the property as collateral for his loan
c) The buyer of the property
d) All of the above
2. All of the following were created through the enactment of the National Environmental
Policy Act except the:
a) Environmental Protection Agency (EPA)
b) Innocent landowner’s defense
c) Council on Environmental Quality
d) The requirement for Environmental Impact Statements (EIS’s)
3. Which of the following is true regarding the Council for Environmental Quality?
a) It has 3 members
b) The council reviews and appraises Federal programs and policies
c) The members of the council are elected and serve on the council for 5 years
d) Both a) and b) above
4. Under CERCLA, if there is more than one “Potentially Responsible Party (PRP) involved,
the liability is joint and several. This means the:
a) Government can hold a single person liable for the entire cost of cleaning up the
contaminated property
b) The present owner is liable for the contamination of the previous owner
c) The buyer, seller, and lender are each liable for 1/3 the cost of clean-up
d) The government can only collect from the person who caused the contamination of
the property
5. Which of the following legal defenses can a "Potentially Responsible Party" use to avoid
liability under CERCLA and avoid the costs of cleaning up a contaminated property?
a) An act of God
b) An act of War
c) An act or omission of a third party
d) Any of the above
6. All of the following are true statements regarding the Superfund Amendment and
Reauthorization Act (SARA) except:
a) This amendment added the "innocent landowner" defense to the list of defenses that
the defendant in a Superfund suit could use
b) Lessened the strict liability of CERCLA by providing a defense that exempts
"innocent landowners"
c) Barred parties who acquired the property through inheritance from using the
"innocent landowner" defense d) SARA was enacted in 1986
128 CE DIGEST
CHAPTER FOUR Review Quiz
7. Which of the following prudent actions might an individual or corporation that is involved
in a real estate transaction take to reduce to their exposure to environmental liability?
a) Have an environmental site assessment made on the property to attempt to establish
the "innocent landowner" defense
b) Buy an adequate amount of environmental liability insurance
c) Both (a) and (b) above
d) Neither (a) or (b) above
8. Under the Resource Conservation and Recovery Act (RCRA), all of the following are
classified as one of the characteristics of a “ hazardous waste” except:
(a) Radioactive
(b) Ignitable
(c) Corrosive
(d) Reactive
9. Under the Safe Drinking Water Act, both the EPA and the states have the right to enforce
national drinking water standards. Should either the EPA or an individual state discover that
a water system is not meeting these safety standards, they can:
a) Issue an Administrative Order directing the water system to take corrective action
b) Take legal action
c) Fine the water system
d) Any of the above
10. All of the following are true statements concerning the Toxic Substance Control Act
(TSCA) except:
a) The EPA delegates the authority to administer TSCA to the states
b) The EPA has the ability to track the 75,000 chemicals produced or imported into the
U.S.
c) The EPA, under TSCA, has the responsibility for lead exposure reduction
d) Under TSCA, the EPA has the responsibility to publish an updated citizen's guide to
radon health risk
Chapter Index
CE DIGEST 129
CHAPTER 5
ENVIRONMENTAL HAZARDS
In modern day real estate practice, the cardinal rule is to disclose early and disclose
often. Most active real estate practioners are well aware that the days of "caveat emptor"
have almost disappeared from the national real estate scene. Real estate licensees have a
duty to inform a principal of all material facts. A material fact is one that would likely
influence a principal in making a decision to sell property or to buy property or the price and
terms at which the seller will do so. Most certainly, any potential environmental hazard, and
resulting liability would profoundly affect a seller's or buyer's decision in a real estate
transaction.
If a licensee becomes aware of an environmental hazard or problem involving a real
estate transaction in which the agent is involved, he should make both the seller and buyer
aware of it as early as possible. This gives seller and buyers more time to consider the
degree or severity of the problem and what can be done about it. The real estate buyers of
today are well educated on health and safety issues and want to be informed of any
information that might effect them and their families.
Most state real estate associations advocate the use of some type of seller property
disclosure form in residential transactions. A seller disclosure statement in a real estate
transaction describes the condition of the property. It also lists any known defects that
might affect the value or desirability of the property. The use of this type of seller
disclosure form is one of the better ways to insure that the buyer will be satisfied that he or
she was treated honestly and fairly. This is a rather important consideration since estimates
are that almost two-thirds of all lawsuits in the United States against real estate licensees are
filed charging misrepresentation or a failure to disclose property defects.
While property disclosure statements vary from state to state, in some states it has
become mandatory that sellers provide this type of documentation to buyers. In California,
for instance, it is legally required that a seller of from one-to four residential units provide
the buyer with a Real Property Transfer Disclosure Statement (TDS). This statement of the
property's condition must be delivered to the prospective buyer as soon as is practical. The
statement would include a disclosure of any structural or material defects, malfunctioning
systems, and any other problem areas that might adversely affect the property's value. In
today's market, this definitely includes a disclosure of any existing or potential environ-
mental hazards.
130 CE DIGEST
LEAD
Lead is a heavy, comparatively soft, malleable metal found in rocks and soils. It has
long been recognized as a harmful, highly toxic, environmental pollutant. In 1991, the then
Secretary of the Department of Health and Human Services called lead the "number one
environmental threat to the health of children in the United States." There are many ways in
which humans can be exposed to lead. Lead can be found in the air that we breathe, our
drinking water, the food we eat, contaminated soil, deteriorating paint, and dust.
Airborne lead enters the human body when an individual breathes in or swallows
lead particles or lead dust. Lead can leach into drinking water from certain types of
plumbing materials such as lead pipes, copper pipes with lead solder, and brass faucets. It
can also be found on walls, woodwork, and the outside of homes and buildings in the form
of lead-based paint. Lead can also be deposited on floors, windowsills, eating and playing
surfaces, or in the dirt outside the home. Children can swallow harmful amounts of lead if
they play in the dirt or in dusty areas and then put food or other items into their mouth
before washing their hands.
Children are more vulnerable to lead exposure than adults since lead is more easily
absorbed into growing bodies. Also, the tissues of small children are more sensitive to the
damaging effects of lead. Children, who have been exposed to excessive levels of lead, run
the risk of incurring severe physical and mental health problems such as:
Brain damage
Slower physical growth
Damaged kidneys
Impaired hearing
Headaches
Appetite loss
Learning and behavioral problems
In adults, lead can increase blood pressure, cause digestive problems, kidney damage,
nerve disorders, sleep problems, muscle and joint pain, and mood changes.
SOURCES OF LEAD IN HOMES AND BUILDINGS
The four major sources of excessive lead exposure in homes and commercial
buildings are:
Lead-based paint
Lead contaminated dust
Lead contaminated soil, and
Drinking water.
CE DIGEST 131
Of these four major contributors, lead-based paint is of particular concern because of
its relationship to lead contaminated dust, and lead contaminated soil. Lead-based paint
becomes the trigger to increased overall lead exposure as a result of this relationship. As an
example, lead in paint can contribute lead to dust and soil and, in turn, lead in soil can be
carried indoors and contribute more lead exposure in the form of interior dust.
LEAD-BASED PAINT
Lead was widely used as a major ingredient in most interior and exterior oil-based
paints that were in use until the late 1970's. In 1978, because of growing concerns regarding
lead as a health hazard, the Consumer Product Safety Commission banned the use of paint
containing high levels of lead for all homes and most buildings. The Department of
Housing and Urban Development (HUD) estimates that more than 75% of the housing built
prior to 1978 contains some lead-based paint.
Lead-based paint that is intact and in good condition is usually not a hazard.
However, lead based paint that is peeling, chipping, chalking, or cracking is a hazard and
needs immediate attention. Lead-based paint may also pose a hazard on surfaces children
can chew, or in areas with heavy wear. These areas include windows and window sills,
doors and door frames, stairs, railings, banisters, porches, and fences.
DETERMINING IF LEAD IS PRESENT IN PAINT
The most reliable way to determine if the paint in a home or building contains lead is
to test the paint. There are several recommended methods that can be used to determine the
lead content of paint. They are:
Paint Scrapings - In this method, paint chips are cut as samples and these
samples are sent to a qualified laboratory for testing. The main advantage of
this method is its accuracy. A qualified laboratory will have the capabilities to
thoroughly test the samples and best determine the degree of lead content. The
main disadvantage of this method is that 30-50 paint samples may need to be
taken. This could cause considerable damage to the existing woodwork in the
home and can be fairly costly. In addition, lab processing can be slow which
could cause delays.
Chemical Spot Testing - A chemical solution is applied to the suspect paint in
a home. This causes a chemical reaction and the paint will change its color if
lead is present. This test is quick and inexpensive. It enables the tester to
determine whether or not lead is present in painted woodwork in the home.
However, this test will not determine how much lead is in the paint. It loses a
little accuracy because of this feature. It can also be destructive since the
samples must be scraped to determine the lead content on the lower levels of
the sample.
132 CE DIGEST
X-Ray Florescence - This method exposes a radioactive source to the paint
surface to determine the percentage of paint contained in the lead. It is
expensive. However, it is very accurate and the testing can be conducted on the
site. It does require that the test be performed by a trained professional.
LEAD CONTAMINATED DUST
When painted surfaces bump or rub together they generate lead dust. Likewise, dry-
scraping, sanding, or heating lead paint during repainting or remodeling also creates huge
amounts of poisonous lead dust. This lead dust can pose a definite health hazard. In
addition to indoor sources of house dust, there are neighborhood sources. Neighborhood
sources could include the demolition of a nearby building, sandblasting of a bridge, or other
activities involving structures that might contain lead-based paint. Also lead may be
brought into the home on clothing of family members employed in lead related occupations,
or as the result of some hobbies.
LEAD CONTAMINATED SOIL
Soil can become contaminated with lead from deteriorating exterior paint and from
leaded gasoline emissions. These sources have added substantially to the naturally
occurring lead found in soils. Also, industrial sources such as smelters, recycling facilities,
and mining activities can result in lead contamination in residential areas. Excessive levels
of lead in soil can be a hazard to children who play in the bare soil. It can also contaminate
the home when people bring soil into the house on their shoes.
DRINKING WATER
Lead contamination of drinking water usually occurs after water leaves the local
public water system or an individual's water well. The most likely sources of lead in
drinking water are generally found in the plumbing fixtures built into a home or commercial
building. Lead levels in a home are likely to be highest if:
A home or building has faucets or fittings made of brass which contain some
lead, or
A home or water system has lead pipes, or
A home has copper pipes with lead solder and the home is less than five years
old, or
The home or building has naturally soft water, or
Water often sits in the pipes for several hours/
Up through the early 1900's, it was common practice to use lead pipes for interior
plumbing. Also, lead piping was often used for the service connections that join residences
CE DIGEST 133
to public water systems. Eventually, copper pipes replaced lead pipes in most residential
plumbing. However, the use of lead solder with copper pipes continued to be widely used.
Experts regard this lead solder as the major cause of lead contamination of household
drinking water in U.S. homes today.
Lead pipes are generally found only in homes built before 1930. Amendments to the
Safe Drinking Water Act that went into effect in 1988, require the use of "lead-free" pipe,
solder, and flux in the installation or repair of any public water system, or any plumbing in a
residential or non-residential facility connected to a public water system. Pipes and fittings
are now considered "lead-free" when they contain not more than 8.0 percent lead.
However, new brass faucets and fittings can also leach lead even though they
are "lead free." Any plumbing device or fixture, domestically produced or imported, that
contains any amount of lead and is in contact with the water is a potential source of
contamination. Brass fittings and plumbing fixtures containing 8.0 or less lead have been
found to contribute high lead levels for a considerable period of time after their installation.
This is true even in cases where these devices are in contact with relatively non-corrosive
waters. The amount of lead that may leach into the water from a brass faucet or fixture is
not solely related to the amount of lead contained in the product. The amount of lead
leaching from a plumbing product is greatly, but not exclusively, influenced by the
manufacturing process.
Newer homes, less than 5 years old, generally have a higher risk of lead
contamination than older homes. As a home gets older, mineral deposits form a coating on
the inside of the pipes if the water is not corrosive. This coating insulates the water from the
solder. But, during the first five years before the coating forms, water is in direct contact
with the lead. It is highly likely that water in homes or buildings less than five years old
have a high level of lead contamination.
SAFE LEVELS OF LEAD IN DRINKING WATER
Federal standards initially limited the amount of lead in water to 50 parts per billion
(ppb). In light of new health and exposure data, the EPA has set an action level of 15 ppb.
If tests show that the level of lead in your household water is in the area of 15 ppb or higher,
it is a signal that steps should be taken to reduce the level of lead in the household's drinking
water. This is especially true if there are young children in the household. The EPA
estimates that more than 40 million U.S. residents use water that can contain lead in excess
of 15 ppb.
IDENTIFYING LEAD LEVELS IN DRINKING WATER
Lead that is dissolved in water cannot be seen, tasted, or smelled. The only sure way
to tell whether or not there are harmful quantities of lead in drinking water is to test it. One
"red flag" as to the presence of lead in a home's drinking water would be if the home has
134 CE DIGEST
lead pipes. Lead is a dull gray metal that is soft enough to be easily scratched with a house
key. Other "red flags" that are indicators of possible lead contamination would include:
Frequent leaks
Rust-colored water
Stained dishes or laundry
Non-plastic plumbing is less than five years old
If one is suspicious of elevated lead levels in a household's drinking water, the local
water supplier might be able to provide useful information including whether or not the
service connector used in a home or area is made of lead. Testing is especially important in
high-rise buildings where flushings might not work.
To test the drinking water, samples will have to be collected from the tap and sent to
a qualified laboratory for analysis. For information on how to proceed, a concerned
homeowner might contact the local water utility or health department for information and
assistance. In some instances, these authorities might have the resources themselves to test
the water for the homeowner. Generally speaking, a qualified testing company should be
listed in the "yellow pages" of the local telephone directory.
It is advisable to make sure that the lab used has been approved by the state or by the
EPA as being able to analyze drinking water samples for lead contamination. To find out
which labs are qualified, contact the local or state health department or environmental
office.
REDUCING LEAD LEVELS IN DRINKING WATER
There are a number of actions that can be taken to reduce lead levels in homes or
buildings. Obviously, if the problem is stemming from installed lead pipes or the use of
lead solder, then these items should be removed. Other steps that can be taken would
include:
Do not drink water that has been in contact with the home's plumbing for more
than six hours such as overnight or during the normal workday. Before using
the water for drinking or cooking, "flush" the cold water faucet being used by
letting the water run until is gets as cold as possible. Buildings built prior to
about 1930 may have service connectors made of lead. Letting the water run
for an additional 15 seconds after it cools, will also "flush" the service
connector. Flushing is important because the longer water is exposed to lead
pipes or lead solder, the greater the possible lead contamination.
CE DIGEST 135
Never cook with or consume water from the hot-water tap. Hot water dissolves
more lead more quickly than cold water. So, do not use water taken from the
hot tap for cooking or drinking. If you need hot water, draw water from the
cold tap and heat it on the stove. Use only thoroughly flushed water from the
cold tap for any consumption.
If you are served by a public water system contact your supplier and ask
whether or not the supply system contains lead piping and whether the water is
corrosive. If either answer is yes, ask what steps the supplier is taking to deal
with the problem of lead contamination. Drinking water can be treated at the
plant to make it less corrosive. Treatment to reduce corrosion will also save the
homeowner and the water supplier money by reducing damage to plumbing.
Water mains containing lead pipes can be replaced, as well as those portions of
lead service connections that are under the jurisdiction of the supplier.
RADON
Radon is a colorless, odorless, tasteless, radioactive gas that occurs naturally from the
decay of uranium in soils and rocks. As the uranium breaks down, it releases radon gas that
enters homes through dirt floors, cracks in concrete walls and floors, floor drains, and
sumps. When radon becomes trapped in buildings and concentrations build up indoors,
exposure to radon becomes a concern.
Any home may have a radon problem. This means new and old homes, well-sealed
and drafty homes, and homes with or without basements. Sometimes, radon enters the
home through well water. Radon gas is measured in PicoCuries per liter of air (pCi/L).
PicoCuries per liter (pCi/L) is a unit of measure for levels of radon gas. Sometimes test
results are expressed in Working Levels (WL) rather than PicoCuries per liter of air. A
level of 0.02 WL is usually equal to about 4 pCi/L in a typical home. Nearly one out of
every 15 homes in the United States is estimated to have an elevated radon level (4 pCi/L or
more). Since radon cannot be seen, tasted, or smelled, special instruments are necessary for
its detection.
HARMFUL EFFECTS OF RADON
The predominant health effect that can result from breathing indoor air that contains
elevated levels of radon is lung cancer. Drinking water that contains high radon levels may
also pose risks. However, these risks are believed to be much lower than those from
breathing air containing radon. The Surgeon General of the United States has warned that
radon is the second leading cause of lung cancer in the United States today. Only smoking
causes more lung cancer deaths. Individuals who smoke tobacco and live in a home with
high radon levels have an especially high risk of lung cancer.
136 CE DIGEST
TESTING FOR RADON
The U.S. EPA recommends that homeowners should attempt to reduce radon levels in
any home that has an annual average level of radon over 4 pCi/L. The mitigation method
chosen will depend on the construction of the house, extent of radon reduction required, and
cost. Since you can't see radon, the only way to determine its presence is to test for it. If
they choose to do so, radon testing can be done by homeowners on their own. There are
many kinds of low cost "do-it-yourself" radon test kits that can be purchased through the
mail and in hardware stores or other retail outlets. Persons, who are involved in real estate
transactions as either a seller or buyer, may want to hire a professional testing company to
perform the testing. The EPA recommends that persons hiring a professional testing
company should contact their state radon office to determine if the contractor is federally or
state certified.
There are several types of radon testing devices. They include:
Passive Devices - This type of radon testing device does not need power to
function. Passive devices include charcoal canisters and alpha-tract detectors
that can be purchased in hardware or drug stores. They also can be ordered by
mail or by phone. These devices are exposed to the air in the home for a
specified period of time and then sent to a laboratory for analysis. Both short-
term and long-term passive devices are generally inexpensive. Some of these
devices may have features that offer more resistance to test interference or
disturbance than other passive devices. Qualified radon testers may use any of
these devices to measure the home's radon level.
Active Devices - Active radon testing devices require power to function. These
devices include continuous radon monitors and continuous working level
monitors. They continuously measure and record the amount of radon or its
decay products in the air. Many of these devices provide a report of this
information that can reveal any unusual or abnormal swings in the radon level
during the test period. In addition, some of these devices are specifically
designed to detect test interferences. Some technically advanced active devices
offer anti-interference features. Although these tests may cost more, they may
insure a more reliable result.
The EPA recommends that testing devices be placed in the lowest level of the home
suitable for occupancy. This means testing in the lowest level (first floor, basement,) that a
buyer could use for living space without renovations. The test should be conducted in a
room that is to be used regularly such as a family room, living room, playroom, den, or
bedroom. It is suggested that testing not be done in a kitchen, bathroom, laundry room or
hallway.
CE DIGEST 137
Usually, the buyers decide where to locate the radon test based on their anticipated
use of the home. A buyer and seller should explicitly discuss and agree on the test location
to avoid any misunderstanding at a later date. Their decision should be clearly
communicated to the person performing the test.
LENGTH OF RADON TESTING
The two methods generally employed to test for radon are short-term testing and
long-term testing. Because radon levels vary with changes in climate, humidity, and other
factors, long term testing is more accurate in determining year-round average radon levels.
However, if the results of the test are needed to decide how to identify and handle a radon
problem quickly, short-term testing might be more appropriate.
Short-Term Testing - This is the quickest and easiest way to determine the
current level of radon gas in a home. An activated charcoal packet is placed on
the lowest level of a home that is currently in use as living space and is left
undisturbed for 48 hours. After this period, the packet is mailed to a qualified
laboratory for analysis. The results of the test are generally returned to the
sender with further instructions or recommendations within a two week period.
Long-Term Testing - If the objective of the test is to determine the most
accurate reading of a home's year round average radon level, a long term test is
highly recommended. Long term testing is done for a minimum time period of
90 days. The mechanics of the test procedures are similar to those used in
short-term testing. It is simply done over a longer period with more accurate
results.
If a property being tested is the subject property in an on-going real estate
transaction, or is about to be put on the market by a seller, or is being considered for
purchase by a potential buyer, the results are generally needed quickly. If this is the case,
any of the following three options for short-term testing are acceptable in determining
whether the home should be fixed. Any real estate transaction related test for radon should
include steps to prevent or detect interference with the test device.
Should the results be needed quickly, one of these three options could be used.
If Using a Passive Testing Device - Take two short-term tests at the same time
in the same location for at least 48 hours, OR
If Using a Passive Test Device - Take an initial short-term test for at least 48
hours. Immediately upon completing the first test, do a second test using an
identical device in the same locations as the first test, OR
If Using an Active Testing Device - Test home one time with a continuous
monitor for at least 48 hours.
138 CE DIGEST
In either of the options using a passive testing device, if the average radon level is 4
pCi/L or more, the house needs to be fixed. In the testing situation where an active testing
device is used, only one test is required. However, once again, if the average radon level is
4 pCi/L or more corrective action should be taken.
REDUCING RADON LEVELS
A variety of methods are used to reduce radon in a home or building. In some cases,
sealing cracks in floors and walls may help to reduce radon. In other cases, simple systems
using pipes and fans may be used to induce radon reduction. Such systems are called "sub-
slab depressurization" and do not require major changes to a home. These systems remove
radon gas from below the concrete floor and the foundation before it can enter the home.
Similar systems can also be installed in houses with crawl spaces. Lowering high radon
levels requires technical knowledge and special skills. In most cases, it is best to use a
contractor who is trained to fix radon problems. A trained mitigation contractor can study
the radon problem in a home and make knowledgeable recommendations on the proper
treatment method.
SALES ASPECTS OF RADON TESTING
More and more, home buyers and renters are asking about radon levels before they
buy or rent a home. Because real estate sales can happen quickly, there is often little time to
deal with radon and other issues. Smart sellers are opting to have their homes tested prior to
putting the home on the market. This allows the sellers to fix the problem (take steps to
reduce radon levels if elevated) and solve any potential problems before they arise. If the
test shows that radon levels are acceptable or non-existent, the seller can simply hold on to
the test results in case a potential buyer expresses an interest in the results. During home
sales:
Buyers often ask if a home has been tested and if elevated levels were reduced
Buyers frequently want tests made by someone who is not involved in the home
sale
Buyers might want to know the radon levels in areas of the home (like a
basement they plan to finish) that the seller might not otherwise test
Many of the new homes being built today are built to be radon-resistant. The EPA
has Model Standards including drawings that are available and show how radon-resistant
features can be built in at the time of construction. Homes that are built to be radon-
resistant will most likely contain these basic elements:
Gas-Permeable Layer - This layer is placed beneath the slab or flooring
system to allow the soil gas to move freely underneath the house. In many
cases, the material used is a 4-inch layer of clean gravel. This gas-permeable
layer is used only in homes with basement and slab-on-grade foundations. It is
not used in homes with crawlspace foundations.
CE DIGEST 139
Plastic Sheeting - Plastic sheeting is placed on top of the gas-permeable layer
and under the slab to help prevent the soil gas from entering the home. In crawl
spaces, the sheeting is placed directly over the crawlspace floor.
Sealing and Caulking - All below-grade openings in the foundation and walls
are sealed to reduce soil gas entry into the home.
Vent Pipe - A gas tight pipe runs from the gas-permeable layer through the
house to the roof to safely vent radon and other soil gases to the outside.
UNDERGROUND STORAGE TANKS (USTs)
An underground storage tank (UST) system is a steel or fiberglass tank, or a
combination of tanks and connected piping having at least ten percent of its volume
underground. The tank system includes the tank, underground connected piping,
underground ancillary equipment, and any containment system. Federal UST regulations
apply only to underground tanks and piping used to store either petroleum or hazardous
substances such as solvents, methanol, and anti-freeze.
As these tanks age, they can develop leaks (releases). At the present time, over
445,000 releases had been reported to the EPA. Releases can be caused by:
Improper Installation - Improper installation is a significant cause of
fiberglass-reinforced plastic (FRP) and steel UST failures (particularly piping
failures). Improper layout of piping runs, incomplete tightening of joints, and
inadequate cover pad construction can lead to the failure of the delivery piping.
According to the EPA, most leaks result from piping failure.
Corrosion - Many USTs are made of bare steel that corrodes over time and
causes leaks.
Spills and Overfills - Oil or hazardous substances can be spilled during
delivery to the UST. Or, the UST can be overfilled causing the material to flow
on and seep into the surrounding soil.
These releases can threaten human safety and health as well as the environment
because UST systems contain hazardous and toxic chemicals. When a tank leaks, the oil,
chemical, or substance enclosed escapes and percolates through the surrounding soils. Rain
water then carries the substance to a subsurface aquifer that may, in turn, transport the
contamination to a stream, lake, or wetland area. Fumes and vapors can travel beneath the
ground and collect in areas such as basements, utility vaults, and parking garages. These
substances pose a serious threat of explosion, fire, and asphyxiation or other adverse health
effects.
Since approximately one-half of the population of the United States relies on
groundwater as their source of drinking water, groundwater pollution is generally
considered to be the most serious problem created by leaking USTs. The most common
140 CE DIGEST
source of ground water pollution is gasoline that is leaking from USTs at auto service
stations. It has been estimated that one gallon of petroleum can contaminate a water supply
for 50,000 people. Many municipal and private wells have had to be shut down as the result
of contamination caused by releases from UST systems.
The specific health hazards from drinking petroleum contaminated water include
damage to the central nervous system, leukemia, kidney and liver damage, and other
problems associated with the intestinal tract.
REGULATION OF USTs
In 1984, Congress directed the U.S. EPA to develop regulations for underground
storage tank systems. Many USTs are also subject to state regulations. EPA's Office of
Underground Storage Tanks (OUST) developed the Federal Regulations which delegate
USWT regulatory authority to approved State programs. States with approved programs
operate in lieu of the Federal regulations. There are currently 28 states with approved UST
programs.
Preventing and cleaning up releases are the two primary goals of the programs that
regulate USTs. Cleaning up petroleum releases is difficult and usually very costly. It is
easier and less costly to prevent releases before they happen. The old adage of "an ounce of
prevention being worth a pound of cure" is particularly relevant to UST systems.
Replacement costs for leaking tanks are estimated at one dollar per gallon of storage
capacity. Should the site require a cleanup operation, the costs can become very high.
The following types of tanks do not have to meet federal UST regulations:
Farm and residential tanks of 1,100 gallons or less capacity holding motor fuel
used for noncommercial purposes
Tanks storing heating oil used on the premises where it is stored
Tanks on or above the floor of underground areas, such as basements or tunnels
Septic tanks and systems for collecting storm water and wastewater
Emergency spill and overfill tanks.
Flow-through process tank
NEW REGULATIONS FOR USTs
Congress addressed the problem of the rapidly increasing numbers of leaking USTs
in the United States by passing legislation that took effect in December of 1998. This
legislation established higher standards regarding the construction and installation of new
USTs and imposed higher qualifications for owners and operators of USTs. It also created
two classes of USTs.
CE DIGEST 141
Existing USTs - This description encompassed all UST systems that were installed
prior to the December 1998 legislation. By this legislation, owners and operators of
"existing USTs" were required to upgrade their older UST's to meet the higher
standards mandated by the new laws and regulations. Deadlines were established
for these owners to either upgrade their UST's to comply with these new
requirements or to close down their "substandard" units. Since all imposed
deadlines have passed, existing UST's that have not been closed down or upgraded
are considered to be out-of-compliance and the owners subject to fines of up to
$11,000 per day per violation.
New USTs - This term applies to UST's installed after December 1998. USTs
falling into this category are legally required to meet four requirements:
Spill and overfill prevention devices must be installed
Tanks and piping must include leak detection devices
Tanks and piping must be corrosion protected
Tanks and piping must be certified as meeting industry standards for proper
installation
Under current regulations, all federally regulated USTs must be registered with the
appropriate regulatory authority and meet leak detection requirements. In addition, the
owners and operators of USTs must:
Meet financial responsibility requirements
Perform a site check and take corrective action in response to leaks, spills and
overfills
Follow regulatory rules during installation of new tanks and closure of existing
tanks
Maintain records as required, and
Have periodic checks performed on corrosion protection and leak detection systems
UST RED FLAGS
Real estate licensees have a duty to disclose all material facts known to them that
might affect the value and desirability of a property. In the case of USTs, it is also desirable
to know something about the past and present use of surrounding properties. The real estate
licensee needs to be aware of the possibility that nearby properties may have or have had
USTs that leaked.
In marketing residential properties it may only be a remote possibility that USTs
could be found on other nearby properties. However, on commercial and industrial sites
there is a real possibility that USTs exist or have been present in the past. It is always a
142 CE DIGEST
possibility that USTs on nearby sites could be the source of hazardous materials that could
be carried to the subject property by groundwater and contaminated its soil. Visual
evidence of pumps, input or vent pipes coming out of the ground, or oil spots would signal a
potential "red flag" of the presence of USTs.
TESTING FOR LEAKS
The only way to determine if leaks, spills, or overfills have contaminated the soil
around a UST is to test. All tests should be conducted by an EPA or state certified
professional. The three most commonly used tests to determine if a UST is leaking are:
Soil Borings - The method usually recommended by environmental
professionals in real estate transactions. Holes are drilled in the ground to a
depth of two feet below the base of the UST. A decontaminated drill is then
lowered and collects soil samples. These samples are labeled and packaged in
dry ice and shipped to an EPA approved lab to be analyzed.
Tank Integrity Test - This method is commonly used in the testing of gasoline
tanks. However, most real professionals do not consider it accurate enough to
be used in a real estate transaction because it can produce false readings. The
results on this test method rely on multiple factors such as temperature, air
pressure, and ground water fluctuations. These factors, along with the
possibility of operator error, most generally render this test's readings as too
unreliable for the purposes of making buy or sell decisions on real estate.
Soil Vapor Analysis - This method is also used in testing soils near gasoline
stations. In this method, shallow holes are drilled around the UST and a pipe is
inserted into these holes. A probe is then used to obtain an air sample that is
analyzed for petroleum content.
ASBESTOS
Asbestos is a fibrous mineral that may be found in residential, commercial, and
industrial buildings. In most cases, the presence of asbestos in a building is not a serious
problem. The mere presence of asbestos in a home or a building is not hazardous. It can,
however, become a problem if the asbestos materials become damaged over time. Damaged
asbestos may release fibers that, when inhaled, can become a health hazard.
Asbestos fibers are very strong and heat-resistant. In past years these characteristics
lead to the use of asbestos in a wide range of products found in buildings to provide
insulation, strength, and fire protection. Intact or sealed (painted or taped over) asbestos is
not harmful unless it becomes friable. Friable means the material can be easily crushed or
pulverized to a powder by hand pressure. Friable materials have a higher potential to
release fibers. Asbestos fibers that are released into the air and inhaled can accumulate in the
lungs and pose a health risk. This risk can be divided into two general categories: 1) risk of
CE DIGEST 143
asbestosis; and 2) increased risk of cancer. Most persons diagnosed with asbestosis have
been exposed to asbestos in the work place.
WHERE ASBESTOS CAN BE FOUND
In 1989, the U.S. Environmental Protection Agency (EPA) announced a phased ban
of asbestos products to be completed by 1996. For this reason, most products made today
do not contain asbestos. The few products that remain on the market today, that contain
asbestos that could be inhaled, must be labeled. However, until the 1970's many types of
building products and insulation materials used in homes, commercial, and industrial
buildings contained asbestos. The most common items in buildings and the conditions that
could trigger the release of fibers include:
Resilient Floor Tiles (vinyl, asbestos, asphalt, and rubber) - Found on vinyl
sheet flooring and adhesives used for installing floor tiles. Sanding tiles can
release fibers. So may scraping or sanding the backing of sheet flooring during
removal.
Steam Pipes, Boilers, and Furnace Ducts - Insulated with an asbestos blanket
or asbestos paper tape. These materials may release asbestos fibers if damaged,
repaired, or removed improperly.
Cement Sheet, Millboard, and Paper - Used as insulation around furnaces
and wood burning stoves. Repairing or removing appliances may release
asbestos fibers. So may cutting, tearing, sanding, drilling, or sawing insulation.
Door Gaskets - Used in furnaces, wood stoves, and coal stoves. Worn seals
can release asbestos fibers during use.
Soundproofing or Decorative Material - Sprayed on walls and ceilings.
Loose, crumbly, or water-damaged material may release fibers. So will
sanding, drilling, or scraping the material.
Patching and Joint Compounds - For walls and ceilings, and textured paints.
Sanding, scraping, or drilling these surfaces may release asbestos
Asbestos Cement Roofing, Shingles, and Siding - These products are not
likely to release asbestos fibers unless sawed, drilled, or cut.
ASBESTOS POSES A HUMAN HEALTH HAZARD
The Environmental Protection Agency classifies asbestos as a known human
carcinogen. If asbestos fibers are inhaled, the likelihood of contracting lung cancer or
cancer of the lining of the chest or abdomen increases. As more asbestos is inhaled, the risk
of developing cancer further increases. Smokers who are exposed to high levels of asbestos
have a much greater risk of developing lung cancer than non-smokers exposed to the same
level. Symptoms of cancer may not develop until 10-40 years after the first exposure.
144 CE DIGEST
IDENTIFYING ASBESTOS CONTAINING MATERIALS
When asbestos is suspected to be present in building materials, it is important to have
the materials tested by a qualified laboratory. Visual inspection alone is not enough to
identify the presence of asbestos. However, such testing may not be warranted if the
material is in good condition. Should this be the case, it is best to leave it in place. If the
material is damaged, or will be disturbed during normal household activities or remodeling,
it should be tested.
If in doubt about the presence of asbestos in certain areas, have the building materials
or insulation sampled and analyzed by a trained and qualified professional. In most cases, it
is much better to have a qualified professional take samples for testing since he or she
knows what to look for and how to correctly take samples. If done incorrectly, sampling
can cause an increased release of airborne fibers in an area that, in turn, will increase the
risk to human health. In fact, if done incorrectly, sampling can be more hazardous than
leaving the material alone. It is generally unwise for home or building owners to attempt to
repair or remove asbestos if the damage is severe. However, small repairs on pipe or duct
insulation can be made with paint or duct tape.
MANAGING ASBESTOS PROBLEMS
If the asbestos material is in good shape and will not be disturbed, do nothing! If it is
a problem, there are two types of corrections which are 1) repair or 2) removal. Repair
usually involves either sealing or covering asbestos material. Sealing involves treating the
material with a sealant that either binds the asbestos fibers together or coats the material so
fibers are not released. Pipe, furnace, and boiler insulation can sometimes be repaired this
way. Sealing should be done only by a professional trained to handle asbestos safely.
Covering involves placing something over or around the material that contains
asbestos to prevent release of fibers. Exposed insulated piping may be covered with a
protective wrap or jacket. With any type of repair, the asbestos remains in place. Repair is
usually cheaper than removal, but it may make later removal of asbestos, if necessary, more
difficult and costly. Repairs can either be major or minor.
Removal of asbestos containing materials is usually the most expensive method of
treating asbestos problems. Unless required by state or local regulations, removal should be
the last option considered in most situations. This is because removal poses the greatest risk
of fiber release. However, removal may be required when remodeling or making major
changes to your home that will disturb asbestos material. Also, removal may be called for if
asbestos material is damaged extensively and cannot be otherwise repaired. Removal is
complex and must be done only by a certified and insured asbestos professional. Improper
removal may actually increase the health risk to homeowners and their families.
CE DIGEST 145
ASBESTOS PROFESSIONALS
Asbestos professionals are trained in handling asbestos material. The type of
professional depends on the type of product and what needs to be done to correct a problem.
You may hire a general asbestos contractor or, in some cases, a professional trained to
handle specific products containing asbestos.
Asbestos professionals can conduct home inspections, take samples of suspected
material, assess its condition, and advise about what corrections are needed and who is
qualified to make these corrections. Once again, material in good condition need not be
sampled unless it is likely to be disturbed. Professional correction or abatement contractors
repair or remove asbestos materials.
Some firms offer combinations of testing, assessment, and correction. A professional
hired to assess the need for corrective action, however, should not be connected with an
asbestos-correction firm. It is better to use two different t firms so there is no conflict of
interest. Services vary from one area to another around the country.
ASBESTOS TESTING
The method most generally used to determine if a material contains asbestos, and to
what degree, is referred to as bulk sampling. In this method, the inspector wets the material
that is to be sampled. He or she then takes a small core of, or scrapes a sample of, the
suspect material. The core or sample is then sent to a laboratory for analysis. If a suspect
material is labeled with a manufacturer's name or product number, a certified inspector can
look up the material in a product identification list to determine the amount and type of
asbestos present.
Asbestos-containing material (ACM) is defined by the EPA as any material or
product that contains more than one percent asbestos. Some states regulate smaller
percentages of asbestos containing material.
Real estate licensees should advise clients, who have a problem that requires the
services of an asbestos professional, to check the professional's credentials carefully.
Advise them to hire professionals who are trained, experienced, reputable, and accredited -
especially if accreditation is required by state or local laws. Before hiring a professional,
clients should ask for references from previous clients. Also, clients should be advised that
they should get cost estimates from several professionals since the charges may vary.
FORMALDEHYDE
Formaldehyde is an important industrial chemical used to make other chemicals,
building materials, and household products. It is one of the large family of chemical
compounds called volatile organic compounds (VOCs). The term volatile means that the
146 CE DIGEST
compounds vaporize, that is, become a gas, at normal room temperatures. Formaldehyde
serves many purposes in products. It is used as a part of:
The glue or adhesive in pressed wood products such as particleboard, hardwood
plywood, and medium density fiberboard (MDF)
Preservatives in some paints, coatings, and cosmetics
The coating that provides permanent press quality to fabrics and draperies
The finish used to coat paper products
Certain insulation materials (urea-formaldehyde) foam and fiberglass insulation
Formaldehyde is released into the air by burning wood, kerosene, or natural gas, by
automobiles, and by cigarettes. Materials, in which formaldehyde was used in the
manufacturing process, can emit formaldehyde gas. In addition, formaldehyde is also a
naturally occurring substance. Formaldehyde gas can affect the quality of both indoor and
outdoor air.
HARMFUL AFFECTS OF FORMALDEHYDE
Formaldehyde is a colorless gas with a pungent odor. It can be highly irritating to the
eyes and respiratory tract. Exposure to low to moderate levels of formaldehyde in air for
even short periods of time can cause temporary burning or itching of the eyes or nose, stuffy
nose, sore or burning throat, or headaches. Breathing high levels of formaldehyde can cause
chest tightness and coughing or wheezing. High levels may also worsen asthma symptoms.
The U.S. EPA classifies formaldehyde as a probable carcinogen. This means that
there is sufficient data from animal studies, and limited data from human studies, to
conclude that formaldehyde is likely to cause cancer in humans. Regulation of carcinogens
is based on the assumption that any exposure to a carcinogen carries with it a finite risk of
developing cancer. This assumption has not been proven scientifically, but was adopted as
conservative regulatory policy to protect the health of the general public. As a consequence,
the risk is assumed to vary directly with the amount of exposure. As the exposure
decreases, the risk decreases as well.
FORMALDEHYDE LEVELS
New products, used in home building, usually will emit the highest level of
formaldehyde gas. As these products age, the level of formaldehyde being released will
lessen. New homes tend to have higher formaldehyde levels because they often contain a
large amount of new building materials which emit formaldehyde.
Formaldehyde is normally present at low levels, usually less than 0.03 (parts per
million) in both indoor and outdoor air. The outdoor air in rural areas has lower
CE DIGEST 147
concentrations while the outdoor air in urban areas contains higher concentrations of
formaldehyde. Residences or offices that contain products that release formaldehyde into
the air can have formaldehyde levels of greater than 0.03 parts per million (ppm).
Formaldehyde levels in indoor air depend mainly on what is releasing the
formaldehyde (the source), the temperature, the humidity, and the air exchange rate (the rate
at which outside air replaces indoor air in a given space). Increasing the flow of outdoor air
to the inside of a home or office decreases the formaldehyde levels. Decreasing this flow of
outdoor air by sealing the residence or office increases the formaldehyde level in the indoor
air.
More formaldehyde gas is emitted from products when the temperature rises. And
conversely, less is emitted as the temperature decreases. Humidity also affects the release of
formaldehyde from products containing the chemical. The higher the humidity, the higher
the emission rate of formaldehyde. The formaldehyde levels in a residence change with the
season and from day-to day and day-to-night. Levels may be high on a hot and humid day
and low on a cool, dry day. It is important to understand these factors should the need arise
to measure the level of formaldehyde in a home or office.
SOURCES OF FORMALDEHYDE
The major sources of formaldehyde include:
Urea-Formaldehyde Form Insulation: During the 1970's, many home owners
installed this type of insulation to save energy. Many of these homes had high
levels of formaldehyde soon afterwards. Sale of urea-formaldehyde form
insulation has largely stopped. Formaldehyde released from this product
decreases rapidly after the first few months and reaches background levels in a
few years. Most experts agree that urea-formaldehyde foam insulation that was
installed 5 to 10 years ago is unlikely to still release formaldehyde.
Durable-Press Fabrics, Draperies, and Coated Paper Products: In the early
1960's, there were several reports of allergic reactions to formaldehyde from
durable-press fabrics and coated paper products. Such reports have declined in
recent years as industry has taken steps to reduce formaldehyde levels.
Draperies made of formaldehyde-treated durable press fabrics may add slightly
to indoor formaldehyde levels.
Cosmetics, Paints, Coatings, and some Wet-Strength Paper Products: The
amount of formaldehyde present in these products is small and is of slight
concern,. However, persons sensitive to formaldehyde may have allergic
reactions.
148 CE DIGEST
Pressed Wood Products: Pressed wood products, especially those containing
urea-formaldehyde glues, are a significant source of formaldehyde. These
products include particleboard used in flooring, shelves, cabinets, and furniture;
plywood wall panels, and medium density fiberboard used in drawers, cabinets,
and furniture. When the surfaces and edges of these products are unlaminated
or uncoated, they have the potential to release more formaldehyde.
Manufacturers have reduced formaldehyde emissions from pressed wood
products by 80-90 percent from the levels of the early 1980's
Combustion Sources: Burning materials such as wood, kerosene, cigarettes,
and natural gas, and operating internal combustion engines (such as
automobiles), produce small quantities of formaldehyde. Combustion sources
add small amounts of formaldehyde to indoor air.
Products such as Carpets or Gypsum Board: These products do not contain
significant amounts of formaldehyde when new. They may, however, trap
formaldehyde emitted from other sources and later release the formaldehyde
into the indoor air when the temperature and humidity change.
FORMALDEHYDE TESTING
Because of its pungent odor, it may be possible to detect the presence of
formaldehyde in indoor air by simply detecting its characteristic smell. However, in most
cases, identifying the presence of formaldehyde is difficult. The reason for this is that the
symptoms of reacting to formaldehyde gas can also be produced by a wide variety of other
irritants.
The best way to determine the level of formaldehyde in indoor air is to have the
suspect indoor environment tested by a qualified environmental testing firm. And, if
accuracy is important, then a trained professional is highly recommended because of the
difficulty of obtaining good data and interpreting the results. This type of firm can be easily
found in the local yellow pages or through local or state governmental sources.
Professional testing, however, can be costly. For this reason, it is wise to establish
some reasonable suspicion that formaldehyde is present and is creating a problem before
initiating formal testing. The presence of abundant formaldehyde-containing materials
would be one indication of a problem, especially if these materials have been in place in the
home for less than one year. Do-It-Yourself Testing Kits can also be obtained through
various sources that can be used to determine the possible presence of formaldehyde. If the
decision is made to use a home-monitoring kit, it is recommended that it be able to take a 24
hour sample to make sure that the testing period represents changes in temperature, heat,
and humidity over the testing period.
CE DIGEST 149
REDUCING FORMALDEHYDE LEVELS
The most effective way to reduce formaldehyde levels in a home or office setting is
to find the source of the gas emissions and remove it. However, each situation is unique and
may require the use of several methods to bring the formaldehyde level to an acceptable
point. Other methods that can be used are:
Avoid the use of pressed wood products and other formaldehyde-emitting
products. Remove your exposure as much as possible by purchasing exterior-
grade products that emit less formaldehyde.
Bring large amounts of fresh air into the home. Increase ventilation by opening
doors and windows and installing exhaust fans.
Seal the surfaces of the formaldehyde-containing products that are not already
laminated or coated. You may use a vapor barrier such as some paints,
varnishes, or a layer of vinyl or polyurethane-like materials. Be sure to seal
completely, with a material that does not itself contain formaldehyde. Many
paints and coating will emit other VOCs when curing, so be sure to ventilate the
area well during and after treatment.
MOLD
Mold contamination is a rapidly growing area of environmental concern. The real
estate community is developing an awareness of the potential for human health problems,
loss of property values, and potential lawsuits that mold contamination represents. This
realization has been spurred by the rapidly escalating number of mold-related lawsuits.
Many lawyers now find that as much as 50% of the litigation they are involved in is in
relationship to mold contamination and indoor air quality.
Molds produce tiny spores that reproduce. Mold spores are very tiny and lightweight
which allows them to float through both indoor and outdoor air. When mold spores land on
a damp spot indoors, they may begin growing and digesting whatever they are growing on
in order to survive. There are molds that can grow on wood, paper, carpet, and foods.
Exposure to high spore levels can cause allergic reactions, asthma attacks, infections, and
other respiratory health problems.
MOISTURE CONTROL
When excessive moisture or water accumulates indoors, mold growth will often
occur, particularly if the moisture problem is not taken care of promptly or remains
undiscovered. There is no practical way to eliminate all mold and mold spores in the indoor
environment. Available moisture in a home allows mold to thrive and multiply. Some of
the sources of indoor moisture that could cause problems include:
Flooding
Leaky roofs, pipes, and windows
150 CE DIGEST
Humidifiers
Damp easements and crawl spaces
Plumbing leaks
Steam from cooking
Backed-up sewers
Shower/baths steam and leaks
MOLD DETECTION
The general rule is that if you can see mold, or if there is an earthy or musty odor,
you can assume you have a mold problem. Areas, where previous water damage has
occurred, should be considered to be "red flag" areas. Visible mold growth may be visible
underneath materials where water has damaged surfaces or behind walls.
Testing a home or building for mold can be quite expensive and requires equipment
not available to the general public. Any extensive testing, which is generally considered to
be an area of 30-100 square feet, would probably require the services of a mold abatement
contractor. The remediation process necessitates physical contact with mold contamination
and airborne spores. It requires that appropriate safety measures be used.
MOLD CLEAN-UP PROCEDURES
It is important to remember in any mold abatement efforts, that unless the source of
moisture is removed and the contaminated area is cleaned and disinfected, mold growth is
likely to reoccur. The general steps to take are:
Identify and correct the moisture source
Clean, disinfect and dry the moldy areas
Bag and dispose any material that has moldy residues such as rags, paper,
leaves, or debris
The key to mold control is moisture control. It is important to dry water damaged
areas and items within 24-48 hours to prevent mold growth. If mold is a problem in a home,
the excess water or moisture should be disposed of and the mold should be cleaned up.
Leaky plumbing or other sources of water should be fixed. Any mold should be washed off
hard surfaces with detergent and water and dried completely. Absorbent materials, such as
ceiling tiles and carpets that become moldy should be replaced.
Indoor humidity should be reduced to 30-60% of the indoor air environment to
decrease mold growth. This can be done by
Venting bathrooms, dryers, and other moisture-generating sources to the
outside
Using all conditioners and de-humidifiers
Increasing ventilation, and
CE DIGEST 151
Using exhaust fans whenever cooking, dishwashing, and cleaning
MOLD REGULATION
According to the EPA, Standards or Threshold Limit Values (TLVs) for airborne
concentrations of mold, or mold spores, have not been set. Currently, there are no EPA
regulations or standards for airborne mold contamination. However, efforts are accelerating
at both federal and state levels of government to develop guidelines and standards that will
help regulate this growing environmental hazard.
The Toxic Mold Protection Act (SB 732) was passed in California in 2001. The
purpose of this legislation is to study and potentially regulate permissible exposure limits to
mold. The state legislature has mandated that the State Department of Health Services
develop the standards to measure and quantify these permissible levels. Once these
standards have been determined, the law then requires that written mold disclosures be
given by sellers and landlords of commercial and industrial properties to the buyers and
renters of these properties. Sellers and landlords will be required to disclose whether or not
"they know of the presence of mold, both visible or invisible, or hidden, that affects the unit
or building."
MINIMIZING POTENTIAL ENVIRONMENTAL LIABILITY
CERCLA and RCRA are the two major environmental laws of concern to the real
estate community. The potential for far-reaching environmental liabilities have created a
great deal of concern in recent years on the part of sellers, buyers, and institutional lenders.
Lenders are increasingly reluctant to extend credit without environmental clearances since
they may become subject to future liability if their lien position converts to ownership upon
foreclosure.
Clean-up costs can be substantial and red tape can be extensive so informed buyers,
sellers, and lenders need to know what potential risks exist in a particular real estate
transaction. These realities have helped develop a growing awareness within this group that
one of the more effective ways to minimize their exposure to environmental liability is by
thoroughly investigating a site for the potential presence of hazardous substances before
purchasing, financing, or foreclosing on the site. This realization has lead to a new, rapidly
growing industry in the field of Environmental Site Assessments (ESA's).
Sellers, buyers, and lenders today need to know if any environmental contamination
or hazards exist currently on a piece of property that might affect the use of a property or its
market value in order to protect themselves. A thorough environmental site assessment
prior to moving forward on an any real estate transaction is a necessary part of the due
diligence required to establish the "all appropriate inquiry" requirement of an innocent
landowner's defense.
152 CE DIGEST
ENVIRONMENTAL INSPECTIONS
The purpose of an environmental inspection report is to provide protection for
buyers, sellers, and lenders in a real estate transaction against the possibility of possible
environmental contamination of the subject property. In this respect, an inspection report
can be compared to a policy of title insurance. Buyers, sellers, and lenders purchase title
insurance to protect themselves in the event they acquire less than clear title to a property
they are buying or financing. In the same manner, although not insured, environmental
inspections provide as much protection as is currently possible against possible liability on
properties acquired.
Many financial institutions and federal regulators now require that inspections be
made on certain types of property such as commercial or industrial properties. The Resolu-
tion Trust Company, while in the process of liquidating the hundreds of properties they dis-
posed of in the savings and loan bailout of several years ago, required an environmental
inspection on all properties handled. Most people relate the need for environmental inspec-
tions as a requirement only to larger types of properties such as industrial or commercial
properties. On the other hand, many real estate appraisal professionals see a growing possi-
bility that a need is developing for wider use of environmental inspections for most
residential properties.
Environmental inspections are classified as Phase I, Phase II, or Phase III environ-
mental inspections. A Phase I Environmental Site Assessment is a common requirement
today for many real estate transactions. Typically, the purchaser, or the bank that is financ-
ing the purchase, will require a Phase I assessment of the property to qualify for the
CERCLA “Innocent Landowner Defense.” This action is designed to allow the owner of
contaminated property to defend against liability for hazardous substances that were put on
the property by an unrelated third party.
THE ENVIRONMENTAL ASSESSMENT ASSOCIATION
The Environmental Assessment Association (EAA) is a professional organization
dedicated to providing its members with information, education, and a professional
designation in the field of environmental inspection. EAA awards members the Certified
Environmental Inspector (CEI) and the Certified Environmental Specialist (CES)
professional designations. Its membership ranges widely from appraisers and home
inspectors to environmental engineers.
The following excerpt is reprinted from: "The Basic Guide to Performing Phase I
Environmental Site Assessments - Certificate Course" with permission from the
Environmental Assessment Association, ,Alexandria, Minnesota. The excerpted material
provides an overview of Phases I, II, and III of an Environmental Site Assessment (ESA).
CE DIGEST 153
THE TRANSACTION SCREEN PROCESS
The Transaction Screen Process is a very preliminary inspection of a commercial or
residential property. It entails completing a questionnaire and conducting limited research.
For smaller properties, it may be all that is necessary to give the parties involved the
information needed to make a decision regarding environmental concerns.
The Transaction Screen Process Questionnaire involves questioning both owners and
occupants of the commercial property, a site visit of the property, and a review of readily
available government records and standard historical sources.
In some instances, a Transaction Screen Process will satisfy the environmental
inspection requirements of a loan package. It is a preliminary inspection and usually will
indicate the need for a more in-depth, Phase I inspection.
The procedures for commercial and industrial properties will generally be more
comprehensive than those for residential or smaller commercial properties. The discretion
of the person performing the assessment is important in determining how much information
should be gathered on a specific property. Communication with the client is particularly
important at this stage so that the client is aware of any applicable laws and regulations that
may affect the decision on the depth of the assessment.
PHASE I ENVIRONMENTAL INSPECTION
Phase I environmental inspections should be conducted on sites where there is reason
to believe that an environmental problem may exist or, if the transaction is large enough, to
warrant the expense of all that would be involved in the process.
Phase I environmental inspections have three distinct categories:
Pre-site evaluation through historical record review and owner/operator
questionnaires;
Site inspection through visual observation of the property; and
Submitting a written report.
HISTORICAL RECORD REVIEW
The following steps should be taken in an historical record review:
Review the use and improvements made to the site by conducting a title search,
interviewing past and present owners, neighbors, and anyone else who may
have knowledge of the history of the property such as building inspectors,
health inspectors, and assessors.
154 CE DIGEST
Review records, permits, and licenses that give information of what has been
built or installed on the property. This includes building, zoning, planning
sewer, water, fire, environmental and other department records that would have
information on or have an interest in the property and neighboring properties.
An investigation of the subject property and neighboring properties with regard
to the EPA’s National Priority List or Comprehensive Environmental Response
Compensation and Liability Information System (CERCLIS) List and similar
state lists showing known locations of hazardous waste sites.
The following are suggested Federal and State Standard Environmental record
sources:
Federal NLP Site List (1 mile)
Federal CERCLIS List (.5 mile)
Federal RCRA TSD Facilities List (1 mile)
Federal RCRA Generators List (Property and adjoining property)
Federal ERNS List (Property only)
State Lists Hazardous Waste Sites
State Landfill and/or Solid Waste Disposal (.5 mile)
State Leaking UST List (.5 mile)
State Registered UST Lists (Property and adjoining property)
4. Analyze aerial photographs to determine the construction or destruction of
buildings and the existence of ponds and disposal areas on the property over
time.
5. A review of the Department of Health Services, Solid Waste Management
Board, Regional Water Quality Control Board, Air Quality Management
District, and other board’s or agency’s records whose actions may affect the
subject property and neighboring properties.
6. EAA members can order a comprehensive historical review of any property in
the United States through Association Headquarters. The report accesses
separate Federal and state data bases and provides radius maps of the property.
HOW TO OBTAIN INFORMATION ABOUT A PROPERTY
There are a number of ways to obtain environmental information about a property in
addition to direct observation. Some of these are:
Title Search - This will show the history of ownership of the property. The
EAA member should look for past owners who have operated a business that
could have used or produced hazardous materials or waste. Some residential
properties may have been developed on sites that were commercial, industrial, or
agricultural and may have soil problems from previous owners or operators.
CE DIGEST 155
Municipal Fire Depart or State Fire Marshal - This is a good source for
discovering if any action or response has been taken with regard to a property.
City - Building permits and sewer discharge permits can disclose the nature of a
business that was or is operated from a property. Some residential properties are
used for business purposes and have out-buildings that may been used to run the
business. Building permits may give a clue to the nature of the business.
County - Air pollution, sewer and septic records available from the county may
indicate environmental problems.
EPA - ID numbers, sites, air permits and other information may exist on a
property. Any past action or complaints about a property will be available.
State Agencies - All states have official departments to regulate air quality,
water, wastes, etc. These are good sources of information to determine if past
problems have existed.
Utility Companies - Utilities often have detailed records of any environmental
problems reported or observed.
Aerial Photographs - This is often the easiest way to look at surrounding
property. If it is possible to obtain older photos as well as recent photos, the
inspector will have a good idea of the types of previous and current activities on
or adjacent to the subject property. Look for the construction or destruction of
buildings and the existence of ponds or disposal areas on or near the site.
Environmental Consultants - This is an expensive way to find information and
should be used only at a client’s request. Generally, it is not a part of the Phase I
environmental inspection and is suited more to a Phase II environmental audit.
SITE INSPECTION - VISUAL OBSERVATION OF PROPERTY
An inspection entails the following the steps:
Observing the subject site and adjacent and surrounding properties within a 1/2
mile radius. Look for improvements made to the subject property with particular
attention to the use of hazardous materials in the structures or operating
equipment.
Identifying the presence or potential presence of Hazardous Wastes; Leaking
Underground or Above Ground Storage Tanks; Contaminated Drinking Water,
Soil, and Groundwater; Asbestos; UREA Formaldehyde Foam Insulation; Lead
Paint; Pesticides and Herbicides; PCB’s; Radon and Electronic magnetic Fields.
Make appropriate recommendations for further testing where applicable (Phase
II).
156 CE DIGEST
SUBMITTING A FINAL WRITTEN REPORT
The Final Report should include the following: 1) Documentation to support the
analysis, opinions, and conclusions found in the report 2) A description of all the evidence
of recognized environmental conditions on the property. This includes all of your opinions
as a professional 3) An in-depth statement of your findings and conclusions and 4)
Environmental Professional’s signature
The following is a recommended outline for the contents of the final report:
Summary
Introduction
Site Description
Historical Records Review
Site Inspection Information
Findings and Conclusions
Signature of Environmental Professional
Optional appendices
PHASE II TESTING
A Phase II Environmental Testing is conducted when the client suspects a hazard
exists on the property or when the Environmental Inspector suggests further testing after
conducting a Phase I Environmental Site Assessment.
Testing and sampling can range from simple to complex. A Phase II Environmental
Assessment can entail a combination of the following field tests and activities:
Testing of underground storage tanks for content and integrity.
Soil gas analysis to identify the potential for petroleum hydrocarbons and
volatile organic compounds such as industrial solvents and dry cleaning
chemicals.
Bulk soil sampling.
Groundwater sampling if groundwater may be impacted by land activities.
Limited surface water sampling if there is a pond, lagoon, or stream on the
property.
A comprehensive review of the regional and local geology to determine the
pathways that leaked chemicals would follow in the event of a spill or leak.
A list of individual groundwater wells or subsurface bodies that may be affected
by a spill or leak.
CE DIGEST 157
A comprehensive inspection of the building for asbestos containing building
materials. This should include collecting and analyzing samples of the building
material for friable asbestos. It is strongly recommended that inspections be
performed by EPA-certified inspectors and analyses be completed according to
EPA guidelines
If no listed hazardous materials or wastes are found, an appropriate verification
should be provided.
A written report summarizing the findings.
PHASE III REMEDIATION
A Phase III Environmental Remediation (Cleanup) is the final process if Phase II
Testing identifies hazards that need to be either removed, encapsulated, or enclosed. Phase
III also manages and maintains the successful, and continued, cleanup of the property.
ENVIRONMENTAL HAZARDS
Sellers, buyers, real estate agents, and lenders can all be adversely affected should
pollutants such as asbestos, radon, lead, and other toxic materials be found on a property.
These parties may be subject to civil and criminal penalties as a result of the discovery that a
property is contaminated with hazardous waste. For this reason, it is incumbent on all real
estate licensees to build their general awareness of the nature of these hazardous materials,
and what might constitute a “red flag” condition in a property inspection.
It is not expected that real estate licensees become “experts” in the field of
environmental hazards. They are expected, however, to know the federal and state laws that
regulate environmental issues so that they can intelligently discuss environmental issues
with their clients and give them knowledgeable and sound advice. Today's real estate
clients expect their agent to be able to provide them with the resources that are available to
help the clients solve their real estate problems. In addition, a study of environmental issues
and concerns will give licensees the background they personally need to recognize potential
environmental "red flags" on properties that they are inspecting and marketing.
********************
Chapter Index
158 CE DIGEST
CHAPTER 5 - HIGHLIGHTS
LEAD - A heavy, comparatively soft, malleable metal found in rocks and soils.
1. It is a harmful, highly toxic, environmental pollutant.
2. Can be found in the air, our drinking water, the food we eat, contaminated soil deteriorating paint
and dust.
3. Sources of Lead in homes: 1) Lead-based paint; 2) Lead contaminated dust 3) Lead
contaminated soil; and 4) Drinking water.
4. Most reliable way to determine the presence of lead in a home is to test the paint. Methods used
include: 1) Paint Scrapings; 2) Chemical Spot Testing; and 3) X-Ray Florescense
5. Most likely source of lead in drinking water is found in plumbing fixtures.
RADON - A colorless, odorless, tasteless, radioactive gas that emanates from soils and rocks
1. The second leading cause of lung cancer in the U.S. today.
2. Radon Testing in Home: There are many kinds of low-cost "do-it-yourself" radon test kits
available in stores. People involved in real estate transactions may want to hire a professional
testing company to perform the test.
4. Devices used to test for radon: 1) Passive Devices - Does not need power and can be purchased in
hardware or drug stores 2) Active Devices: Need power to operate.
5. EPA recommends that testing devices be placed in the lowest level of the home suitable and also
that the device be placed in a room that is used a lot.
7. Two methods generally used to test for radon are short-term testing and long-term testing.
Short-term test is quickest and easiest. Long-term test is most accurate.
8. Radon enters home through cracks and openings in concrete slabs, crawl spaces, floor drains, and
tiny pores in hollow-wall concrete blocks.
UNDERGROUND STORAGE TANKS (USTs)1.
1. A UST system is a steel or fiberglass tank, or a combination of tanks and connected piping having
at least 10% of its volume underground.
2. Sources of Leaks: 1) Improper installation; 2) Corrosion; and 3) Spills and Overfills.
3. Pollution of drinking water is considered to be most serious problem created by leaking USTs.
4. Only way to determine if leaks, spills, or overfills have contaminated the soil around a UST is to
test.
ASBESTOS: A fibrous mineral found in residential, commercial, and industrial buildings. EPA has
classified Asbestos as a known human carcinogen.
1. Damaged asbestos may release fibers that, when inhaled can become a health hazard.
2. The "friable" means a material can be easily crushed or pulverized to a powder by hand pressure.
Friable materials have a higher potential to release fibers. Asbestos that is friable can harm human
beings.
3. If asbestos is suspected to be present in building materials it is important to have the materials
tested by a qualified laboratory. Visual inspection alone is not enough to identify the presence of
asbestos. Testing would not be necessary if material is in good condition.
4. If asbestos in the home is damaged there are two things that can be done: 1) Repair it or
2) Remove it.
5. Asbestos Testing: Method most generally .used to determine if a material contains asbestos, and
to what degree, is to test it by what is referred to as "bulk sampling." Inspector wets the material
and takes a small core of the subject material that is sent to the laboratory.
CE DIGEST 159
CHAPTER 5 - HIGHLIGHTS
FORMALDEHYDE - An important industrial chemical used to make other chemicals, building
materials, and household products.
1. It is one of a large family or chemical compounds called volatile organic compounds (VOCs)
The term volatile means that the compound can vaporize and becomes a gas.
2. Formaldehyde is a colorless gas with a pungent odor. The EPA classifies it as a possible
carcinogen.
3 More formaldehyde gas is emitted from products when the temperature rises - conversely, less it
emitted when temperature decreases.
4. The higher the humidity, the higher the emission rate of formaldehyde. Increasing the flow of
outdoor air to the inside of a home decreases the formaldehyde level
MOLD - General rule: If you can see Mold, or if there is an earth or musty odor, you can assume you
have a mold problem.
1. Mold Cleanup Procedures: 1) Identify and correct the moisture source; 2) Clean, disinfect and
dry the moldy areas; and 3) Bag and dispose any material that has moldy residue such as rags.
PHASE I ENVIRONMENTAL INSPECTION
1. Should be conducted on sites when: 1) There is reason to believe that an environmental problem
may exist 2) Transaction is large enough to warrant the expense of an inspection.
2. Phase I environmental inspection has three parts: a) Pre-site evaluation through historical
record review b) Site inspection of property c) Submitting a written report
3. Historical Record Review - Steps: a) Review the use and improvements made to the site by
conducting a title search and interviewing past and present owners and neighbors; b) Review
records, permits, and licenses that give information on what has been built or installed on property;
c) Investigate subject property and neighboring properties by checking EPA’s list showing known
locations of hazardous waste sites d) Analyze aerial photographs
SITE INSPECTION
The inspection entails observing the subject site and adjacent and surrounding properties within a 1/2
mile radius. Identify presence or potential presence of: 1) Hazardous wastes 2) Leaking
underground storage tanks 3) Contaminated drinking water, soil, and groundwater 4) Asbestos
5) UREA formaldehyde foam insulation 6) Lead paint 7) Pesticides and herbicides 8) PCB’s
9) Radon 10) Electronic Magnetic Fields
PHASE II TESTING
Conducted when client suspects a hazard exists on property or when further testing is suggested after a
Phase I inspection. Testing sampling can consist of: 1) Testing of underground storage tanks for
content; 2) Soil gas analysis to identify potential for petroleum hydrocarbons; 3) Bulk soil sampling
4) Groundwater sampling 5) Comprehensive inspection of building for asbestos containing materials.
PHASE III REMEDIATION
A Phase III Environmental Remediation (Cleanup) is the final process if Phase II
Testing identifies hazards that need to be 1) Removed 2) Encapsulated or
3) Enclosed. Phase III also manages and maintains the successful, and continued cleanup of the property.
*****************************************
Chapter Index
160 CE DIGEST
CHAPTER FIVE Review Quiz
1. Which of the following is a source of lead in the home?
a) Lead-based paint
b) Outside soil
c) Lead water pipes
d) All of the above
2. All of the following methods are used to test for lead in paint except:
a) Use a spectrometer
b) Paint scrapings
c) Chemical Spot testing
d) X-Ray florescence
3. All of the following are true statements regarding radon except:
a) Radon is a colorless, odorless, tasteless, radioactive gas
b) Radon enters homes through cracks and openings in the floor and walls
c) The EPA recommends that if annual average level of radon in a home is over 10
pCi/L that it be reduced
d) Radon levels can be measured in a home using a device known as a passive radon
detector
4. Asbestos is:
a) A type of glue used in plywood
b) A small rock used widely in landscaping
c) A mineral fiber used primarily for fire resistance and insulation
d) Used as a coolant in older air conditioners
5. Which of the following is a true statement regarding asbestos?
a) The EPA classifies asbestos as a known human carcinogen
b) If asbestos containing material is suspected to be present in a dwelling, it is usually
apparent through visual inspection
c) If asbestos containing material is damaged, it should be tested
d) Both a) and c) above
6. All of the following are true statements regarding formaldehyde levels in a home except:
a) New products used in home building usually emit the highest level of formaldehyde
gas
b) As products used in home building age, their formaldehyde emission level increases
c) Increasing the flow of outdoor air to the inside of a home decreases the
formaldehyde level
d) New home tend to have higher formaldehyde levels
CE DIGEST 161
CHAPTER FIVE Review Quiz
7. An earthy, musty odor in any specific area of a home could be an indication of:
a) Mold
b) Friable asbestos
c) Formaldehyde gas
d) Both a) and b) above
8. Which of the following might an environmental inspector do when conducting a historical
record review during a Phase I Environmental Site Assessment?
a) Interview past and present owners
b) Review records, permits, and licenses that have information on what has been built
or installed on the property
c) Review the Department of Health Services records
d) All of the above
9. Which of the following sources could an inspector use to obtain environmental information
about a property during a Phase I inspection?
a) County records
b) Utility companies
c) Aerial photographs
d) Any of the above
10. In which phase of an Environmental Site Assessment (ESA) would the environmental
inspector normally conduct testing and sampling to determine the presence of hazardous
materials?
a) Phase I
b) Phase II
c) Phase III
d) Both a) and b) above
Chapter Index
If you have completed your 15 hours of study, then you may continue on to the
CE Digest practice exam. Click here to take the practice exam now. NOTE: If
you have not completed your 15 hours of study, then you will not be allowed to
take the practice exam.
162 CE DIGEST
CHAPTER INDEX
Contracts in General Page 1 Contracts in General Cont'd
Contracts Defined (1) Contingency Removal (28)
Parties Capable of Contracting (2) Resolving Contract Disputes (30)
Minors (2) Mediation (30)
Ratification (3) Arbitration (31)
Emancipated Minors (3) Reducing Risks in Transactions (33)
Incompetents (3) Transferring Risks (33)
Aliens & Convicts (4) CHAPTER 1 HIGHLIGHTS (35)
Mutual Consent (4) CHAPTER 1 REVIEW QUIZ (37)
A Definite Offer (4)
Acceptance of Offer (5) Agency & the Listing Contract (39) Termination of Offer (6)
Genuine Assent (8) Loyalty as a Fiduciary (39)
Fraud (8) Duties Owed to Principal (42)
Mistakes (9) Reasonable Care and Skill (43)
Duress, Menace & Undue Influence (9) Disclosure of Material Facts (44)
Lawful Object (9) Obedience, Loyalty & Confidentialty (45)
Sufficient Consideration (9) Agent's Authority (46)
Interpretation of Contracts (10) Restrictions on Authority (47)
Parol Evidence Rule (10) Ratification of Unauthorized Acts (47)
Classification of Contracts (11) Power of Attorney (48)
Manner of Creation (11) Authority to Receive Deposits (48)
Content of the Contract (12) Checks & Promissory Notes (49)
Performance (12) Escrow (50)
Legal Effect (12) Court Action for Deposit (51)
Statute of Frauds (13) Commingling (51)
Writing Required (13)\ Salesperson's Duties & Obligations (51)
Remedies (14) Agent's Duty on Contracts (53)
Real Estate Applications (14) Agent's Duty on Torts (53)
Statute of Limitations (15) Misrepresentation (54)
Performance/Discharge of Contracts (15) Fraud vs. Negligence (54)
Assignment (16) Nondisclosures (54)
Novation (16) Puffing (56)
Discharge By Agreement (16) Torts of the Principal (57)
Discharge by Law (17) Unlawful Payment of Compensation (57)
Forfeitures (18) Payment Based on Lawful Condition (58)
Real Estate Contracts (18) Compensation/Performance Requirement (58)
Contract Preparation (20) Agreements Between Brokers (59)
Common AreaS of Risk (20) Commission Rate is Negotiable (59)
Agent's Duties & Liabilities (21) Open Listings (61)
Contract Provisions (23) Effect of Termination (63)
Deposits (24) Exclusive Listings (65)
Effect of Sellers Death (24) Net Listings (67)
Contingencies (26) Broker's Commission (69)
Types of Contingencies (26) CHAPTER 2 HIGHLIGHTS (73)
Conditions in Contracts (26) CHAPTER 2 REVIEW QUIZ (75)
CE DIGEST 163
Real Estate Disclosures (77) Environmental Laws (Cont'd)
Loyalty to Fiduciary (77) Due Diligence Under CERCLA (115)
Fair and Honest Dealing (77) Resource Conservation Act (116)
Easton v. Strassburger (78) Administration of RCRA (117)
Transfer Disclosure Statement (79) Definition of Hazardous Waste (117)
Civil Code Section 1102 (80) A "Regulatory" Paper Trail (118)
Form of Disclosure Statement (81) Clean Air Act of 1970 (119)
Delivery of TDS (83) Indoor Air (121)
Liability for Errors/Omissions (84) Safe Drinking Water Act (121)
Agent's Duty (84) Toxic Substance Control Act (122)
Agency Relationship Disclosure (86) Pollution Prevention Act (123)
Compliance with Agency Disclosure (87) CHAPTER 4 KEY HIGHLIGHTS (125)
Mechanics of Disclosure Step (88) CHAPTER 4 REVIEW QUIZ (127)
Delivery to Buyer (89)
Agency Disclosure Rules (91) Environment Hazards (129) Dual Agency (91)
Perils of Dual Agency (92) Lead (130)
Natural Hazards Disclosure (94) Sources of Lead in Homes (130)
Lead-Based Paint Disclosure (95) Lead-Based Paint (131)
Safety Factors of Lead-Based Paint (96) Lead Contaminated Dust (132)
Seller's Responsibility (96) Lead Contaminated Soil (132)
Agent's Responsibilities (97) Drinking Water (132)
Structural Pest Control Report (98) Safe Levels of Lead in Water (133)
Pest Control Inspection Report (98) Reducing Lead Levels in Water (134)
Agent's Responsibilities (99) Radon (135)
Smoke Detectors (99) Harmful Effects of Radon (135)
Water Heater Bracing (100) Testing for Radon (136)
Mello-Roos Bonds and Taxes (100) Length of Radon Testing (137)
Earthquake Disclosures (100) Reducing Radon Levels (138)
Energy Conservation Retrofit (101) Sales Aspects of Radon Testing (138)
Disclosure of Deposits (101) Underground Storage Tanks (139)
Foreign Investment Tax Act (102) Regulation of USTs (140)
CHAPTER THREE HIGHLIGHTS (103) UST Red Flags (141)
CHAPTER THREE REVIEW QUIZ (105) Testing for Leaks (142)
Asbestos (142)
Environmental Laws (107) Where Asbestos Can Be Foun (143) Asbestos as a Health Hazard (143)
Impact of Environmental Laws (107) Identifying Asbestos in Material (144)
National Environmental Policy Act (108) Asbestos Testing (145)
Goals of Policy Act (109) Formaldehyde (145)
Environmental Impact Statement (109) Harmful affects of Formaldehyde (146)
Council on Environmental Quality (111) Sources of Formaldehyde (147)
Environmental Protection Agency (112) Formaldehyde Testing (148)
CERCLA (112) Mold (149)
CERCLA Liability (113) Environmental Inspections (152)
Third Party Defense (113) CHAPTER 5 HIGHLIGHTS (158)
Superfund Authorization Act (114) CHAPTER 5 REVIEW QUIZ (160)
All Course Materials © Copyright 2016 Premier Schools, Inc.