SHANNON B. JONES LAW GROUP
208 W. El Pintado Rd.
300 Diablo Rd. (mailing)
Danville, California 94526
925.837.2317 Telephone - 925.837.4831 Facsimile
sbj@sbj-law.com Email

In Johnson v. Seigel (2000) 00 C.D.O.S. 9204, a California Appellate Court held that the arbitration provision of the California Association of Realtors' Purchase Agreement applies to a failure to disclose dispute arising out of the transfer disclosure statement. In Johnson, plaintiffs purchased a home in Aptos, California. The parties used a standard California Association of Realtors Residential Purchase Agreement and Receipt for Deposit form. As part of that contract, the parties initialed the arbitration clause, which stated that the parties agreed to arbitrate, 'any dispute or claim in law or equity arising between them out of this Agreement or any resulting transaction, which is not settled through mediation.' On the transfer disclosure statement, defendant Seigel marked the box 'no' in response to the question of whether the property had flooding problems.

After plaintiff Johnson moved onto the property, the property immediately flooded, ruining furniture, carpets and carpet pads. The garage also flooded. As a result, plaintiff was forced to leave part of his house vacant. Plaintiff did not request a mediation or arbitration, but immediately filed suit requesting that the court rescind the agreement.

In response to the suit, defendants filed a motion for summary judgment requesting that the court dismiss the case on the ground that the dispute should have been arbitrated and not litigated in court. The court granted the motion and plaintiff appealed.

The appellate court affirmed and held that the arbitration provision was 'extremely broad.' 'The clause is clearly broad enough to encompass disputes arising from the TDS, which is a required part of the overall real estate transaction.' The court concluded that the dispute was covered by the arbitration clause in the purchase agreement. However, the court further held that plaintiff had the right to file a petition to compel arbitration and pursue his action in that forum.

Many real estate agents use marketing plans to obtain listings from their sellers. For example, at the time of taking or presenting a listing agreement to a seller, a real estate agent may present a marketing plan, which sets forth all of the actions the agent intends to take to sell the property.

Although marketing plans are excellent ideas and effective ways of obtaining listings, agents must be cautioned to ensure that they fulfill the promises made to the sellers that are set forth in the marketing plan. Liability can arise if an agent promises to market the property in a certain manner, but does not fulfill those promises. For example, if the agent promises to conduct a certain number of open houses, the agent should fulfill those promises or be subject to claims of misrepresentations.

Be cautious in preparing your marketing plan and ensure that you fulfill all of the representations set forth in that plan. If you change your marketing strategy midway through the listing agreement, notify the seller and obtain the seller's agreement to the revised marketing plan in writing.

The following are some new laws affecting real estate agents and brokers.

Private Mortgage Insurance

As of January 1, 2000, private mortgage insurers may insure home loans up to 100 percent of the property's fair market value. Previously, such insurance was limited to 97 percent of the fair market value of the property.

Homeowners' Insurance

As of July 1, 2000, lenders must notify borrowers in writing that the lenders are prohibited from requiring borrowers to provide hazard insurance coverage on real property in an amount exceeding the replacement value of the improvements to the real property as a condition of receiving or maintaining a loan secured by that real property. This new law was set forth in the bill AB1454 which amends Civil Code section 2955.5.

Pest Control Companies

As of January 1, 2000, Business and Professions Code section 8550 was amended to enlarge the activities of unlicensed individuals. Prior to this amendment, unlicensed individuals were prohibited from engaging in the practice of structural pest control, but were permitted to give price quotations if they were employees of a registered company. Under this new law, such unlicensed individuals are permitted to solicit pest control work on behalf of a registered structural pest control company, so long as these individuals do not perform any acts for which a license is required. For example, an unlicensed individual may not offer opinions or make recommendations regarding the need for a structural pest control in general or in connection with a particular structure.

Worker's Compensation

The penalties for employers who fail to provide worker's compensation have been increased to up to one year in jail and a fine of up to $10,000.

The Shannon B. Jones Law Group recently obtained a judgment in a quiet title action, which cleared a cloud on the title to a client's property. The client was defrauded into executing a grant deed, which placed another person's name on the title of the client's property. The client, not realizing that the title to the property had a cloud on it, executed a sales agreement and proceeded to sell the property. While in escrow, the client realized that he could not deliver clear title to the property.

Ms. Jones represented the client in an action to quiet title and cancel the grant deed. On October 26, 2000, Ms. Jones obtained a judgment clearing the title. Escrow on the sale is scheduled to close the week of October 30, 2000.

As most agents in the State of California are aware, the California Association of Realtors revised the Residential Purchase Agreement in April 2000. A newly revised Residential Purchase Agreement will be issued by the California Association of Realtors in October 2000. The significant changes of that revised contract will include the following. The funds deposited into escrow as the initial deposit will be considered good upon deposit with the escrow company. The paragraph pertaining to pest control will make it clear that the pest control inspection is a contingency of the contract. The contract will provide that all inspection reports prepared by the buyer will be made accessible to the seller. Finally, the broker compensation paragraph will include a reference to a transaction fee.

The California Association of Realtors will also be offering an alternative Residential Purchase Agreement, which will include certain warranties, which were included in the Residential Purchase Agreement used before the April 2000 version. It will also allow a buyer the alternative of canceling the contract if the buyer is not satisfied with the inspections. That alternative contract is expected to be released in October 2000.

The City of Concord, located in the San Francisco Bay Area, is currently considering a proposal, which would require residents to disclose that they live near an airport when selling or renting their property. That disclosure proposal could affect more than half of the residents of the City of Concord. Public hearings regarding the draft proposal are scheduled for November 2000.

In Parichehr Assilzadeh v. Cal Fed Bank (2000) 82 Cal.App.4th 399, Cal Fed Bank ('Cal Fed') obtained a condominium unit in a high-rise project in Los Angeles through a non-judicial foreclosure sale. Cal Fed executed a listing agreement with FSR Brokerage, Inc. to sell the property. Plaintiff was a tenant living in another unit in the same building and was interested in purchasing the condominium. Plaintiff and Cal Fed executed a purchase agreement, which included the following language, 'Buyer to be aware that property was acquired through foreclosure and seller is exempt from providing a property disclosure statement . . . No warranties expressed or implied are included in this sale. The subject property is being sold in its present 'AS IS' condition. Buyer will satisfy himself/herself as to the condition of said property, and their requirement regarding permitted and non-permitted areas of the subject.'

During the course of the escrow, the real estate agent with FSR, who was a dual agent, informed plaintiff of the existence of litigation instituted by the homeowners' association against the developer of the condominium complex. The agent also disclosed that the lawsuit was for construction defects and had been settled for $5.1 million. The agent provided a broker's inspection statement that notified plaintiff of the following: 'Broker strongly advises buyer to select professionals with the appropriate qualifications to conduct inspections/investigations of the conditions of all aspects of the property . . . Buyer should be aware of lawsuit brought by HOA against builder for defects. Lawsuit has been settled for $5.1 million.' Plaintiff was also told prior to the close of escrow that any improvements or alterations to the condominium unit required prior submission to and approval by the architectural control committee of the homeowners' association.

Prior to the close of escrow, plaintiff's son commented to the agent that plaintiff would like to replace the existing floor with marble. The agent replied, 'There would be no problem.' After the close of escrow, plaintiff purchased marble for the floor and requested approval from the homeowners' association to replace the floor with the marble. The homeowners' association denied the request and stated that the marble could not be installed because of structural defects affecting the load capacities of the building. Plaintiff filed suit against Cal Fed, the real estate brokerage and agent seeking rescission and restitution based on claims for fraudulent concealment, negligence and breach of fiduciary duty. The basis of the lawsuit was that the defendants failed to disclose the details of the lawsuit involving the alleged construction defects, including the terms of the settlement and failed to advise plaintiff that the defects could adversely affect the value of her unit. She further alleged that the agent misrepresented that she could install marble flooring.

Cal Fed and the agents filed motions for summary judgment. The court granted the motions and dismissed the case finding that the defendants had 'fully satisfied their duties of disclosure by informing plaintiff of the existence of the construction defect litigation and its settlement.' The court ruled that once plaintiff was informed of this suit, plaintiff had an independent duty to investigate and inquire about the suit's details. Plaintiff appealed the decision. The California Appellate Court affirmed the trial court's decision.

With respect to Cal Fed, the court held that it had fulfilled its statutory duties of disclosure by providing a statement to plaintiff that Cal Fed was exempt from Civil Code section 1102 in that Cal Fed had obtained the property through a foreclosure and it was therefore exempt from providing a transfer disclosure statement.

Plaintiff also argued that Cal Fed should have disclosed that the real estate agent had provided Cal Fed with a 'broker's price opinion' wherein the agent disclosed that the building had many problems and the disclosure regarding the lawsuit may present a problem for buyers. It also stated that if the problems relating to the lawsuit came to fruition, it would be conceivable that the values could drop as much as 70 to 80 percent. Plaintiff argued that Cal Fed had a duty to disclose this opinion because it was a fact materially affecting the value or desirability of the property. The Appellate Court disagreed and found that statements concerning the value of property are generally deemed expressions of personal opinion and not actionable representations of fact. 'We view the opinion of Sands as constituting no more than a vague and general speculation concerning the possible market value of the unit at some unspecified future time depending on factors that may never exist. The opinion does not constitute an additional fact about the construction defect litigation that required disclosure.' In conclusion, the court held that Cal Fed disclosed the fact that there had been construction defect litigation concerning the building and that the litigation was settled, which was sufficient.

With respect to the real estate agents, the court held that the agents fulfilled their obligations under Civil Code Section 2079 by disclosing the existence of the lawsuit to plaintiff. '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.'

With respect to plaintiff's breach of fiduciary duty claim against the broker and agent, the court held that those duties were fulfilled when the buyer was informed that a construction defect lawsuit had been filed and settled. The buyer should have investigated further and if necessary, should have hired an attorney for advice on the legal aspects of the lawsuit and settlement. It is not the obligation of a real estate agent to read and analyze legal documents located in a court file. The court further held with regard to plaintiff's claims regarding the installation of marble that the plaintiff could not rely on the agent's representation since it was unverified and speculative and plaintiff was advised to seek approval from the architectural committee prior to installation. Therefore, the appellate court concluded that the trial court correctly determined there were no triable issue of fact and held in favor of defendants and the agents.

If you are representing a seller in a transaction wherein the property was previously involved in litigation, you should disclose the existence of the lawsuit and provide sufficient information to allow the buyer to investigate, such as a case number, name and court where the action was pending. If you are representing a buyer in such a transaction, you should disclose the existence of the litigation, the outcome and recommend that the client seek legal counsel to fully investigate the potential consequences of purchasing property previously involved in litigation. Make this recommendation in writing. Do not evaluate the lawsuit or the implications of the suit yourself. This issue commonly arises when a homeowners' association, condominium complex or other planned unit developments has sued a builder or contractor for construction defects.

Question

I am trying to obtain information regarding a real estate agent's duty to investigate building permits. I recently purchased a home. The transfer disclosure statement stated that the sellers were unaware of any issues relating to permits and they believed that their home and all additions and modifications were built with the proper permits. The local building department recently inspected the home and is requiring that I permit all improvements. Apparently, the prior sellers built certain improvements and additions without permits, which was never disclosed to me. Is my agent liable to me for the failure to disclose the lack of permits?

Answer

Under Civil Code Section 2079, a real estate agent does not have an obligation to check records off the property site, such as permits. However, if there is a red flag or some kind of indication that there was an issue with permits, the obligation to investigate may arise. Although you may not have claims against the real estate agent, you probably have claims against the sellers, if the sellers have any reason to believe that any of the improvements were made without permits.

Jones Publishing recently reduced the price of the book, 'A Real Estate's Agent Practical Guide to Avoiding Litigation,' from $39.99 to $19.99 (plus tax of $1.65 and shipping of $4). If you would like to purchase a copy, please contact Jones Publishing at (925) 648-4890, fax order with a credit card number to (925) 648-0842 or send a check to Jones Publishing, P.O. Box 3142, Danville, California 94526.

Recently, I have had several clients contact me with issues regarding a property owner's rights to a view. I had two clients who were selling homes with views and the clients wanted to know what rights the buyers had to keep the views and force the neighboring property owners to trim their trees to maintain those views. Another client was unhappy because nearby construction was obstructing some of their view. Another client inquired whether he had an easement for his view. In California, home purchasers pay a substantial premium for view properties. Therefore, it is important to understand a property owner's rights to a view.

Generally, there is no legal right to an unobstructed view. Such rights can only be created by an express agreement between property owners, by an express grant of easement or reservation, or creation of a covenant that runs with the land. The interference with a view is not legally actionable ' a property owner cannot complain about the construction of a structure, which interferes with a view so long as it was lawfully constructed. Lawfully constructed means built with proper permits.

To protect a view, a property owner should enter a written agreement with the property owner who could obstruct the view and record the agreement with the county recorder's office. A property owner may have to pay for such right. However, such an agreement will be enforced by injunction or damages could be awarded.

Before purchasing a home with a view, a prospective buyer can determine whether such agreement exists by reviewing the preliminary title report. If there are any questions regarding a right to a view, an attorney should be consulted.

Northern California has been experiencing an extraordinarily strong seller's market during the last year or so. In some instances, the prices of homes are being driven up thousands of dollars and in at least one case, a million dollars, over asking prices. One of the concerns with this potentially inflated market is that buyers are paying too much for homes and that the homes will not be worth their sales price in the near future when the market begins to cool. As a consequence, buyers may blame and sue their real estate agents for recommending that they pay so much for their homes.

To prevent this situation, many brokerages are requesting that buyers sign disclosures, which inform the buyers that the market could be artificially inflated and that the market may not sustain the current selling prices in the near future. If you would like such a disclosure prepared, please contact us by email at sbj@sbj-law.com or call (925) 648-4890.

The Shannon B. Jones Law Group recently represented a window and door manufacturer in a large construction defect case in Northern California. Plaintiffs claimed numerous defects in their properties, including but not limited to drainage, structural, electrical, plumbing and water leakage. Plaintiffs claimed damages in excess of $2.2 million arising out of the windows and doors. Ms. Jones settled the claims on behalf of the manufacturer for $5,000.

A real estate agent filed an action in the Santa Clara Superior Court claiming that he was injured when he walked into a glass wall during an open house. He claimed that the wall constituted a dangerous condition because there were no visual cues indicating its existence. He sued the owners of the home and the real estate brokerage, which held the home open. Plaintiff claimed damages of over $1 million for a concussion and herniated disk.

Plaintiff demanded $300,000 to settle the case. Defendants offered $10,000. The jury found in favor of the defendants and awarded nothing to the plaintiff.

Nationwide Insurance recently settled one of the nation's largest housing discrimination cases by agreeing to pay a fair housing group $17.5 million and improve services to minority inner-city customers. The group filed a suit in Virginia accusing Nationwide of redlining - denying coverage to applications in black neighborhoods.

In 1998, a jury ordered Nationwide to pay the plaintiff $100 million, the largest verdict ever in a fair housing case. In January 2000, the Virginia Supreme Court dismissed the verdict on the ground that the plaintiff had no standing to sue, but agreed in March 2000, to rehear the case. The parties subsequently settled.

If a buyer of residential real property, which is one to four units, is making multiple deposits which the parties intend to be subject to a liquidated damages clause, remember that the buyer must initial a liquidated damages provision with every deposit. Otherwise, the subsequent deposits will not be subject to the liquidated damages clause.

Many purchase agreements (deposit receipts) for real property contain an arbitration clause, whereby the parties agree to have any dispute arising out of the agreement decided by arbitration. However, the parties rarely understand the true of impact of agreeing to binding arbitration and are surprised at what they have given up when a dispute arises. This article addresses the meaning of the binding arbitration clause and the pros and cons of agreeing to it. It also discusses a new case decided by a California Supreme Court which further illustrates the primary problem of agreeing to binding arbitration.

Binding arbitration arises when the parties agree to refer the matter to an arbitrator for a decision. The parties' agreement can be in the form of a contract such a deposit receipt or after a dispute arises, the parties can agree to refer the matter to arbitration. If a contract contains a binding arbitration clause and a dispute arises, that matter will be decided by arbitration. If a party refuses, a court can order the case to arbitration.

In binding arbitration, the parties agree to be bound by the decision of the arbitrator. The parties have no rights to a jury and limited rights of appeal. Therefore, if the arbitrator is wrong in his or her decision, the losing party is generally without a remedy. In Moore v. First Bank of San Luis Obispo (2000) 2000 Daily Journal D.A.R. 3867, the California Supreme Court recently upheld an arbitrator's decision even though the trial, appellate and Supreme courts acknowledged that the award contained a 'legal error.'

In Moore, plaintiffs borrowed money from defendant, which loans were secured by deeds of trust against commercial property. Subsequently, plaintiffs agreed to provide deeds of trust secured by their personal residences as additional security. When the loans became delinquent, defendant began foreclosure procedures against plaintiffs' homes. Plaintiffs filed suit. The loan agreements contained a binding arbitration clause pursuant to which the case was referred to a panel of three arbitrators for a decision. After presentation of their case, the arbitrators found in favor of plaintiffs, but refused to award plaintiffs their attorneys' fees even though there was an attorneys' fees clause in the contract with defendant. Plaintiffs appealed to the trial court to recover their attorneys' fees. The trial court denied plaintiffs' motion and plaintiffs appealed.

The appellate court stated, 'The arbitration award shows a clear error of law on this point.' However, 'We conclude that the award contains a legal error on its face which is not subject to judicial review.' Despite those findings, the court affirmed the arbitrators' decision because an error of law is not a sufficient ground to change or vacate an arbitrator's award. Plaintiffs appealed to the Supreme Court.

The Supreme Court affirmed the lower courts' decisions and held that because the attorneys' fees award issue was within the scope of the issues to be decided by arbitration, the arbitrators' decision was final, even if the decision could have been reversible error if made by a court in civil litigation. The Court concluded that an error of law on an in issue submitted to arbitration will not be corrected so long as the arbitrator acted within the arbitrator's authority.

Moore illustrates the disadvantage of agreeing to binding arbitration -- if the arbitrator is wrong, it is almost impossible to overturn an arbitrator's decision. An arbitrator's decision can be changed in very limited circumstances such as: arbitrator misconduct; corruption or fraud; or the arbitrator exceeded his or her authority. The Moore court held that committing a legal error does not mean that an arbitrator exceeded his or her authority.

The primary advantages of agreeing to binding arbitration are that it is less costly than trial before a jury and generally, a case is resolved sooner through arbitration. To bring a case to trial before a jury, it can cost well in excess of $100,000. That cost can be limited if the case is decided by an arbitrator. Also, it can sometimes take years for a case to progress to a jury trial in the court system. Some courts are very impacted and cannot handle the number of cases being filed. Binding arbitration can be scheduled easily and in accordance with the parties', attorneys' and arbitrator's schedules, once the case is ready for arbitration.

Before a party to a contract agrees to an arbitration clause, make sure that party understands the full impact and importance of the agreement. There are both advantages and disadvantages, of which parties should be aware.

In InterMountain Mortgage, Inc. v. Sam Sulimen (2000) 00 C.D.O.S. 2134, a California appellate court held a real estate broker liable for the fraud of one of his agents. In InterMountain, defendant Sulimen was a real estate broker in the business of soliciting mortgage loans. He hired a real estate agent, Baskaron, as a loan representative. Baskaron processed and submitted a loan package to InterMountain Mortgage ('InterMountain') on behalf of Estelle Brown, who never authorized the transaction. Baskaron also represented to InterMountain that the value of the property, which was to secure the loan was $800,000, when the property was actually worth approximately $480,000. Baskaron submitted the loan package to Sulimen, who rejected it. Nevertheless, Baskaron processed the loan through InterMountain.

The lender who funded the loan through InterMountain sued InterMountain, who in turn, sued defendant Sulimen and other defendants. InterMountain alleged that Sulimen was liable because Sulimen negligently supervised Baskaron. Sulimen filed a motion for summary judgment requesting that the complaint be dismissed. The Court granted the motion and InterMountain appealed.

The appellate court reversed the trial court's decision. It held that under the doctrine of respondeat superior, 'an employer is vicariously liable for the torts of its employees committed within the scope of the employment.' 'An employee's willful, malicious and even criminal torts may fall within the scope of his or her employment for purposes of respondeat superior, even though the employer has not authorized the employee to commit crimes or intentional torts.' To find liability on the part of the employer, there must also be a reasonable connection between the tort and employment.

The court found that Baskaron was acting within the scope of his employment with Sulimen when he committed the alleged fraud. Moreover, there was a connection between his tort, the fraudulent loan transaction, and his employment as a loan representative. Therefore, the Court held that there was sufficient evidence to raise an issue as to whether Sulimen was vicariously liable for Baskaron's allegedly fraudulent conduct. The court reversed the trial court's decision.

Shannon B. Jones, attorney at law, recently published an article regarding tips for avoiding legal malpractice in Lawyers Weekly. Although the article was written for attorneys, the information in the article is applicable to all professionals. If you are interested in obtaining a copy of the article, please contact Ms. Jones at sbj@sbj-law.com or (925) 648-4890, or you can view the article at www.lawyersweekly.com/reprints/landy.htm.

We are offering a new notification service. If you would like to receive an email each time this on-line newsletter is updated, please email your request to sbj@sbj-law.com.

In Taylor v. Rancho Santa Barbara (2000) Daily Journal D.A.R. 3035, the Ninth Circuit Court of Appeals held that a restriction excluding persons under age 55 from living in a mobile home park is constitutional. In Taylor, the plaintiff, age 41, purchased a mobile home that was located in a privately owned lot, which only rented spaces to mobile home owners who were over 55 years of age. The park's restriction was permitted under both federal and state statutes, including the Fair Housing Act and the Housing for Older Persons Act. Taylor sued the park operators in district court alleging that the restriction was unconstitutional under the Fourteenth Amendment's Equal Protection Clause and the Fifth Amendment's Due Process Clause.

The District Court dismissed plaintiff's claims. The Ninth Circuit Court of Appeals affirmed the trial court's decision and held the restrictions constitutional.

In 1999, the Ninth Circuit Court of Appeals held that landlords could refuse to rent to unmarried couples. A detailed description of this case was reported by this newsletter in 1999 and is set forth below. The Ninth Circuit recently decided to re-review that case. We will report the outcome.

As we are all aware, California is currently experiencing an extraordinarily strong real estate market. Many sellers are receiving multiple competing offers to purchase their homes. As a result, many agents and/or brokerages are representing competing buyers for the same property. In my opinion, this multiple representation creates a dual agency, which must be treated with full disclosure. A lawsuit arising out of this issue was recently filed in the Santa Clara Superior Court.

In Debs v. Coldwell Banker, a buyer/plaintiff claims that he made an offer to purchase a home in Palo Alto for $2.8 million through his real estate agent and brokerage, Coldwell Banker. Plaintiff's offer was accepted by the sellers, but in a counter-offer, the sellers requested that they be permitted to remain on the property for 60 days after the close of escrow. While this 'hold over' issue was being resolved, another Coldwell Banker agent approached the seller, without the knowledge of the buyer, and represented that she had clients who would purchase the home for $3 million. That announcement prompted the sellers to reopen the bidding. The buyer/plaintiff eventually purchased the property for $3,195,000, $395,000 more than his original offer.

Plaintiff sued Coldwell Banker alleging that Coldwell Banker breached its fiduciary duty when its agent interfered with the transaction and drove the price of the house higher. Plaintiff further claimed the fact that Coldwell Banker was representing two buyers for the same property should have been disclosed to him. Coldwell Banker claims that it is acceptable business practice to allow agents to compete against each other. The case is currently in mediation after the court refused to dismiss the case on Coldwell Banker's motion.

I received two telephones call during the last week about lawsuits arising out of real estate agents' failures to put their listings on the multiple listing service ('MLS') or offer the listings to the open market. In both instances, there may be liability on the part of the agents.

To illustrate, in one instance, the agent, who was part of a large real estate brokerage, accepted a listing from a seller. The agent presented the listing at the office's sales meeting prior to the listing being shown on the MLS. Six agents from the listing agent's office said they had clients who would make offers. All six agents subsequently submitted offers on behalf of their clients before the listing was offered to the open market or posted on the MLS. One of those offers was accepted.

After the close of escrow, the sellers sued the listing agent and brokerage for failing to put the property on the MLS. The seller claimed that he could have received a lot more money had the listing been offered to the open market. This case is currently in litigation.

All listings should be placed on the MLS and offered to the open market. 'Pocket listings' are discouraged for the reasons described above. If a seller does not want his or her property put on the MLS, agents should have the seller sign a disclaimer which states that the agent recommends that the property be offered to the open market and placed on the MLS. If the property is not offered to the open market, the seller will likely receive less money.

Question:

What is the meaning of an 'as is' provision in an agreement for the sale of real property?

Answer:

The courts hold that an 'as is' provision in a real estate sales agreement means that a buyer takes the property in the condition visible or observable by him or her. It does not insulate the agent or seller from liability for affirmative or negative fraud. In other words, if the seller knows something about the property that cannot be seen by the buyer, the seller must disclose it. The seller will not be relieved of liability for unseen defects. However, the courts have noted that when a house is being sold in its 'as is' condition, the buyer is put on notice that there could be problems with the house.

In conclusion, if a house is being sold 'as is,' the buyer is accepting the visible condition and the defects disclosed by the inspectors and agents. If there are other unseen problems, the seller must disclose them.

The California Association of Realtors is currently updating the deposit receipt and purchase agreement and certain listing agreements. The new forms will be available in April 2000. Therefore, do not purchase too many of the current forms, as they will become obsolete.

In Stearman v. Centex Homes (2000) 00 C.D.O.S. 1503, a California appellate court held that plaintiffs can recover damages against a builder when a defective foundation results in cracked walls, ceilings and counter tops throughout the home under a strict liability claim. Defendant builder argued that such damages should not be recoverable because those damages are only injuries to the product itself and thus, not recoverable under a strict liability cause of action. In other words, the defendant argued that plaintiff's damages were economic damages, which are not recoverable under a strict liability theory. Economic damages include lost profits, replacement costs for defective goods or repair costs, which are not generally not physical in nature. The court rejected defendant's argument.

I was recently asked the following question, which I thought would be of interest to our readers.

Question:

My wife and I recently purchased a home in California. Three days after the close of escrow, we noticed that the level of water in the swimming pool had dropped considerably (approximately six inches). We contacted a pool contractor who confirmed that there was a significant leak. More importantly, the contractor stated that the pool had not been built to code. Public records confirmed that a permit had never been obtained for the pool, although a permit was required.

The sellers never disclosed the leak to us. However, the sellers have admitted that the pool had prior leaks and repairs. With respect to the permits, the sellers claim that they did not know that they needed a permit and that if it was required, they assumed their contractor would have obtained one. They are accepting no responsibility now.

We had a home inspection but not a pool inspection, because we were told they were of limited value. The sellers claim that another previous buyer had a pool inspection, which showed that the pool was acceptable. The report was never given to us.

Do we have a claim against the sellers or real estate agents?
Answer:

It was the sellers' responsibility to obtain a permit for the pool. The sellers are responsible for knowing and understanding the law. If they want to blame the contractor they can seek indemnification against him. The sellers should have disclosed the pool leaks and lack of permits. If the pool was inspected prior to you purchasing the house, assuming it was relevant and not too old, it should have been given to you.

Regarding the agents' liability, they are not responsible for checking the permitting. The Civil Code states that an agent's obligation is to conduct a reasonable visual inspection of all accessible areas and disclose any material defects. That obligation does not extend to public records unless there is a red flag which indicates that such review is necessary. Therefore, the agents are probably not liable for the lack of permitting. With regard to the leaking pool, the agents are only liable if the agents had reason to believe that the pool leaked. For example, had the sellers told the agents that the pool leaked or if the leakage was obvious during the agents' inspections, the agent would be obligated to disclose the issue.

It is good practice to conduct a pool inspection prior to purchase. If your agent told you it was not necessary, then there may be liability for failing to properly advise. If the agent had a report from a prior pool inspection, the agent should have provided it.

Construction defect litigation has become prolific in California. In response, the California Legislature is considering a bill aimed at reducing that litigation and making contractors liability insurance more available and affordable. The bill, AB 1221, would enact the California Homebuyer Protection and Quality Construction Act.

This bill would permit a licensed contractor to apply to the Contractors' State License Board to be certified as a participating home builder, which would mean that the contractor could issue a California home construction warranty. The bill would require the State License Board to promulgate regulations and to annually review the certification.

The bill would require the home construction warranty to meet specific minimum standards and procedures. It would allow a participating home builder to issue the warranty on new residential housing. The warranty would be effective for 10 years and binding on future purchasers.

The warranty would allow for the repair or replacement of any defined defective item or payment of the reasonable cost to repair or replace the defective item, at the builder's option. The warranty can include alternative dispute resolution proceedings including binding arbitration. The bill provides that if a homeowner elects to purchase a home subject to the warranty, the provisions of the warranty shall be deemed the exclusive election of remedies by the homeowner and participating builder. The homeowner would be deemed to have waived any tort remedies, including negligence, strict liability, implied warranties, fraud and misrepresentation. The bill would exclude claims for bodily injury or wrongful death.

If a homeowner subject to the warranty rejected a builder's reasonable offer during the alternative dispute resolution process, recovery by the homeowner would be limited. There would be no limitation if the builder failed to make a reasonable offer during the alterative dispute resolution process or failed to make agreed upon repairs.

The City of Antioch is considering an ordinance, which would require real estate brokers to disclose to buyers of homes in Antioch that the roads are inadequate causing excessive commutes to work. The ordinance would also require the disclosure that the schools in Antioch are overcrowded and some children may be diverted across town.

The proposed ordinance is causing a controversy in Antioch. Many people think the ordinance is unreasonable and unnecessary. Others contend that the ordinance is important since buyers are unaware of the issues since they look at homes on the weekend when there is no traffic. When these buyers move into their homes they are quite surprised the first day of their commute to work.

It is questionable whether such an ordinance is really necessary. Current law requires brokers and sellers to disclose all material facts affecting the value or desirability of a home. Arguably, if homeowners are so unhappy about the traffic and impacted schools that the City is considering an ordinance, these facts by definition are material and should be disclosed, irrespective of the proposed ordinance.

Shannon B. Jones Law Group has prepared a year end review of law affecting real estate professionals for 1999. The review includes summaries of real estate cases, legislation, attorney general opinions and articles from 1999. If you would like a free copy, please forward your request to Shannon B. Jones, sbj@sbj-law.com (email), (925) 648-4890 (telephone), (925) 648-0842 (facsimile) or P.O. Box 3142, Danville, CA 94526 (mail).

In Yergan v. Department of Real Estate (2000) 2000 Daily Journal D.A.R. 971, a California appellate court upheld the California Department of Real Estate's denial of a claim for recovery from the Real Estate Recovery Fund for professional negligence where the judgment did not include a claim for fraud. In Yergan, two sisters contracted with a real estate agent to represent them in the sale of their apartment building. Thereafter, the agent invested the proceeds of the sale in various other properties. Eventually, the properties purchased by the sisters and managed by the agent went into foreclosure and the sisters' investments were lost. The sisters' losses including their investments, undisclosed commissions and secret profits to the agent totaled in excess of $600,000. The sisters sued the agent for breach of fiduciary duty, fraud, negligent misrepresentation, emotional distress and fraudulent conveyance.
br>The parties settled the suit. The settlement agreement recited that plaintiffs had sued the agent for various claims including professional negligence and breach of fiduciary duty. Under the settlement agreement, the defendants agreed to pay plaintiffs two payments of $400,000 and $50,000, respectively. Defendants signed a stipulated judgment agreeing that if the $50,000 payment was not made, plaintiffs could file the judgment with the court and begin collection proceedings. That payment was not made and plaintiffs pursued collecting the judgment. Plaintiffs were unable to collect the judgment from defendants and made a claim against the Real Estate Recovery Fund.

The Department of Real Estate ('DRE') denied the claim because the judgment was not based on fraud, but on professional negligence and breach of duty. Plaintiffs filed an action in court. The trial court ruled in favor of the DRE. Plaintiffs appealed.

The appellate court affirmed and held in favor of the DRE. The court held that to recover under the Real Estate Recovery Fund, a claimant must have a valid final judgment for fraud. Plaintiffs left out the fraud claim from the settlement agreement, so they could collect damages under defendants' insurance policies. Insurance does not cover claims for fraud. The court concluded that plaintiffs had no right to funds from the Real Estate Recovery Fund.

In Ray v. Valley Forge Insurance Company (2000) 00 C.D.O.S. 718, a California appellate court recently held that an insurance company does not have a duty to defend a roofing contractor who was sued for giving 'bad advice' to a homeowners association. In Ray, Richard Ray, a roofing contractor, advised a homeowners' association regarding the type of roof it should install. The roof specified by Ray was not suitable because it caused the upstairs units to become unbearably hot at times.

The homeowners' association sued Ray. Ray tendered coverage of his defense to his insurance company under his commercial general liability insurance policy. The insurance company denied coverage and Ray sued.

The insurance company argued that coverage was provided under the policy if property damage was caused by an 'occurrence,' which was defined as an accident. The insurance company filed a motion for summary judgment on the ground that Ray's bad advice was intentional and deliberate and therefore, could not be an accident under the policy. Therefore, the insurance company argued there was no coverage. The trial court agreed, granted the motion and dismissed the case. Ray appealed. The appellate court affirmed.

This case is relevant to real estate professionals. Generally, when real estate professionals are sued, the claims arise from professional negligence for the failure to disclose or properly advise the agent's clients. The allegations arise out of giving 'bad advice.' Based on this case, agents should not expect their commercial general liability insurance policies to cover this type of suit. Agents should purchase errors and omissions insurance, which specifically covers this type of potential liability.

In McGill v. M.J. Brock & Sons, Inc. (1999) 99 C.D.O.S. 9825, a California appellate court held a builder potentially liable for failing to disclose that the road adjacent to plaintiffs' homes would be expanded from two to six lanes, even though the expansion was part of a highly publicized bond measure. In McGill, plaintiffs, with one exception, purchased their homes from defendant builder. Plaintiffs' homes were located next to Route 71 in Chino Hills, California. Plaintiffs allege that defendant misrepresented that plaintiffs' homes would be quiet and tranquil, with pleasant views. Plaintiffs further alleged that defendant failed to disclose that there was a plan to expand Route 71 from a two-lane road to a six-lane highway.

Defendant filed a motion for summary judgment arguing that the three-year statute of limitations had run. Defendant specifically argued that approximately seven years before filing the lawsuit, Proposition A was proposed to the voters, which would have provided funds for the expansion of Route 71. Although the Proposition failed at that time, a bond measure which was provided for the expansion of Route 71 was passed five years before the filing of plaintiffs' suit. Both the Proposition and bond measure were discussed in the local newspapers. Defendant argued that plaintiffs had to have known of the proposed expansion of the road no later than between five and seven years before bringing this suit. Since the suit had to be brought within three years of discovering the expansion, defendant argued that plaintiffs' suit was barred. The trial court agreed, granted defendants' motion and dismissed the case. Plaintiffs appealed and a California appellate court reversed the decision.

The appellate court held that there was no evidence that plaintiffs had actual knowledge of the Proposition or bond measure. The court also found that there was no evidence that the plaintiffs read the newspaper, so may not have known of the expansion through news media articles. The court reversed the judgment and allowed the case to progress against the builder.

Real estate professionals should consider this case in the context of disclosures. The court stated that the plaintiffs were not put on notice of the road expansion even though the issue was on the ballot twice and covered in the newspapers. When disclosing issues relating to property, do not assume that either the buyer or seller is aware of an issue just because it is publicized. Such publicity will not excuse an agent's failure to disclose.

The following is a discussion of new legislation affecting real estate professionals. These statutes are currently in effect.

Zoning Disclosures - Civil Code section 1102.17 requires a seller who has actual knowledge that his or her property is affected by or zoned in a district wherein certain manufacturing, commercial or airport uses are expressly permitted, to give written notice of that knowledge to any buyer. These zones are discussed in Code of Civil Procedure section 731a.

Transfer Disclosure Statement Amendment - Current law provides that a transfer disclosure statement is not required by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust when transferring property. This statute provides that a transfer disclosure statement is required if the trustee is a natural person who is sole trustee of a revocable trust and he or she is a former owner of the property or an occupant in possession of the property within the preceding year.

FHA Inspection Disclosure Form - As of August 1, 1999, the revised FHA Inspection Disclosure Form became mandatory for the sale of residential real estate which is 1-4 units, including mobilehomes on a permanent foundation, which involve FHA loans or HUD-owned property.

Mobile Home Transfer Disclosure Statement - A Mobilehome Transfer Disclosure Statement must be completed by sellers of personal property mobilehomes. There is also a section of the Statement for agents to conduct their inspection and disclose any visual defects. Mobilehome park owners must also complete a disclosure form entitled 'Mobilehome Park Rental Agreement Disclosure Form,' which provides information regarding the condition of the mobilehome park facilities.

Natural Hazard Disclosure Statement - There is a new section in the Civil Code (1103.2) which restates the requirements of the Natural Hazard Disclosure Statement ('NHDS'). The NHDS will no longer be included in the same Civil Code section as the transfer disclosure statement. There are also technical changes to the NHDS such as changing the word 'seller' to 'transferor' and 'buyer' to 'transferee.' The new statute also clarifies that real estate licensees and their clients can rely on NHDSs prepared by a licensed engineer, land surveyor, geologist or expert in natural hazard discovery and will not be liable for any inaccuracies in the report.

Mortgage Brokers - There are two changes to the laws pertaining to mortgage brokers. First, mortgage brokers no longer have to include the telephone number of the Department of Real Estate on their advertisements. Secondly, assistants to mortgage brokers who work on institutional loans are not required to have a real estate license, provided the employee does not participate in the negotiation between principals and the broker exercises reasonable supervision and control over the employee.

Uniform Electronic Transactions Act - This is a comprehensive statute effective January 1, 2000, which permits and regulates electronic transactions. This statute states that a contract will not be denied legal effect or enforceability solely because a required signature was recorded electronically. The statute validates all transactions formed, transmitted and recorded electronically, but excludes from coverage wills and trusts. To apply, the parties must agree to conduct the transaction by electronic means before entering the contract. A party who agrees to conduct a transaction by electronic means may refuse to conduct other transactions by electronic means and a recipient must have the ability to print and store the electronic record.

Fair Housing - Sexual orientation is now a protected class and civil right.

In Freeman v. San Diego Association of Realtors (1999) 1999 Daily Journal D.A.R. 12867, a California appellate court held that local associations of realtors who merged to form one corporate entity to sell multiple listing services do not violate antitrust laws. Freeman arises out of a multiple listing service offered by Sandicor, Inc. to agents in San Diego County. Sandicor was made up of all the local associations in San Diego County. Plaintiff alleged that the service violated California antitrust laws.

Plaintiff specifically claimed that Sandicor's service constituted pricing fixing because Sandicor was made up of the local associations of realtors in San Diego, and therefore, all competition had been eliminated. Plaintiff also claimed that the service illegally 'tied' some additional services to the MLS. ('Tying' means that to purchase a desirable product, the consumer must also purchase an undesirable product.) The additional services in this case included the processing of enrollment forms, maintaining records, inputting information, among other functions. Plaintiff also claimed that Sandicor's fee for accessing the MLS was excessive. Plaintiff further alleged that because Sandicor refused to allow plaintiff to act as a service center for Sandicor, the local associations had instituted an illegal boycott.

Defendants filed demurrers arguing that plaintiff could not legally state such claims. The court sustained the demurrers and dismissed the case. Plaintiff appealed and the appellate court affirmed the decision finding that there were no antitrust violations.

Although this decision is favorable to local associations of realtors, the issue of whether multiple listing services violate antitrust laws is not resolved. There is another similar case pending in federal court and the National Association of Realtors was sued under similar allegations. Also, it is likely that the Freeman decision will be appealed to the California Supreme Court.

On January 5, 2000, Jones Publishing issued a supplement to the book, 'A Real Estate Agent's Practical Guide to Avoiding Litigation.' If you have the book and would like a free copy of the supplement, please make your request to Jones Publishing, sbj@justicemail.com (e-mail), (925) 648-4890 (telephone) or P.O. Box 3142, Danville, CA 94526.

On December 29, 1999, Bill Lockyer, California Attorney General, published an opinion addressing the issue of whether a licensed residential mortgage lender may charge a borrower interest from the date its funds are paid into escrow rather than from the date the funds are disbursed from escrow for the borrower's use. The Attorney General concluded that a licensed residential mortgage lender may not charge a borrower interest prior to the time the funds are made available for the borrower's use. The Attorney General opined that such a practice would be an unfair business practice and in violation of Civil Code section 2948.5.

The California Supreme Court held last week that underground parking garages are not especially dangerous and their owners and/or property managers do not need to take special precautions against crime unless other factors are present. Sharon P. v. Arman Ltd. (1999) 99 C.D.O.S. 9807. In Sharon P, the plaintiff was sexually assaulted in a parking garage. She sued the property owners on the ground that the owners should have taken precautions, such as hiring security because the owners should have known that a crime such as the one against her was likely to occur since the garage offered criminals a place to lie in wait. The justices disagreed.

However, the Court found that crimes of a similar type may put the owners on notice of the creation of an environment where criminal activity is foreseeable. The Court left open the question of what types of security measures are adequate once a property owner is put on notice.

Natural Hazard Disclosure Statement - Assembly Bill 248 was enacted into law on October 10, 1999 and will be effective on January 1, 2000. AB 248 creates a new section in the Civil Code (1103.2) which restates the requirements of the Natural Hazard Disclosure Statement ('NHDS'). The NHDS will no longer be included in the same Civil Code section as the transfer disclosure statement. There are also technical changes to the NHDS such as changing the word 'seller' to 'transferor' and 'buyer' to 'transferee.' The new statute also clarifies that real estate licensees and their clients can rely on NHDSs prepared by a licensed engineer, land surveyor, geologist or expert in natural hazard discovery and will not be liable for any inaccuracies in the report.

AB 248 also adds Civil Code section 1102.17, which requires a seller who has actual knowledge that his or her property is affected by or zoned in a district wherein certain manufacturing, commercial or airport uses are expressly permitted, to give written notice of that knowledge to any buyer. These zones are discussed in Code of Civil Procedure section 731a.

If you would like a copy of AB 248, please e-mail your request to sbj@justicemail.com.

In Merulo v. Ross Towers, a jury in Orange County recently held a real estate agent and broker liable for fraud and breach of fiduciary duty. In Merulo, the plaintiff offered to purchase an apartment building for $700,000. The property was listed by the defendant broker and agent. Both broker and agent represented plaintiff in making the offer. The property was sold to a limited liability company in which plaintiff's real estate agent was a member for $755,000.

Plaintiff claimed the defendants agent and broker engaged in self-dealing, committed fraud and breached their fiduciary duty toward plaintiff. The jury agreed with plaintiff and awarded $95,000 in compensatory damages and $1,233,366 in punitive damages.

In late 1998, a California appellate court held in Field v. Century 21 (1998) 63 Cal.App.4th 18, that the two-year statute of limitations set forth in Civil Code section 2079.4 is not applicable to lawsuits brought by buyers against their real estate agent for breach of fiduciary duty. Upon reviewing the underlying facts in that case, there are many additional lessons that real estate agents can learn about their standard of care.

In Field, plaintiffs were represented by defendant/agent in the purchase of a rural home. Plaintiffs alleged that their agent misrepresented the following: the extent of an easement owned by the water district, which allowed the district to spill water into the home; the acreage on the property; and that the house violated setback requirements. The agent also failed to recommend that the septic tank be inspected and failed to receive and review the preliminary title report on the property until after the close of escrow. The agent was held liable and damages awarded.

In every transaction, the buyer's agent should always obtain the preliminary title report, review it and provide it to the buyers. If there are any questions regarding the report, contact the title company to obtain additional information or a copy of the document at issue. If there are additional questions pertaining to a document listed in the title report, ask an attorney to review it. In Field, it was undisputed that the agent breached her fiduciary duty by failing to obtain and review the preliminary title report prior to the close of escrow. Moreover, had she obtained and reviewed the report, she most likely would have learned of the extent of the water district's easement.

Plaintiffs also alleged that the agent misrepresented the acreage of the property. This is a common allegation especially when buyers set their price based on the size of the property. For example, some buyers agree to pay $250 per square foot for a house. If a house is not as large as represented, the buyers believe that they overpaid. Buyers' agents should always advise their clients that if size is an issue, the property (house and property) should be measured. All agents, representing buyers and sellers, should write on their inspection section of the transfer disclosure statement a notification which states, 'The size of the house and property have been represented to be and , respectively. This is not guaranteed. If the buyer is concerned about the size, it is recommended that the buyer arrange to have the house and property measured.' Also, it is advisable for buyers to obtain copies of any appraisals done on the property they are purchasing. The appraisal always includes measurements of the property. This verification can ensure that the representations by the seller regarding size are not an issue or alternatively, will raise a red flag if there are misrepresentations. For example, if the appraisal shows a size vastly different from that represented by the seller, the agent will know there is an issue.

The buyers further claimed in Field that the agent should have told them that the house violated setback requirements. In most circumstances, agents are not responsible for checking public records and knowing if a house violates setback requirements. However, sellers must disclose any such violations.

In Field, the agent did not recommend that the buyers have the septic tank inspected. If property being sold has a septic tank, agents should always recommend that it be inspected. If a septic tank is defective and an agent held liable for failing to recommend that it be inspected, the damages can be very extensive. In many jurisdictions, municipalities require that properties connect to the public sewage system instead of repairing or replacing a septic tank.

In Field, the court held that the two-year statute of limitations did not pertain to buyer's agents when they are sued for breach of fiduciary duty. However, the decision also teaches agents to obtain, review and give buyers the preliminary title report before the close of escrow, recommend that buyers have the property measured if size is a concern and always recommend that septic tanks be inspected.

In 1997, the natural hazard disclosure statement was introduced. Since that time, there has been a lot of confusion regarding when the statement is required. In addition, many private companies have been created to assist sellers and real estate agents in fulfilling the natural hazard disclosure statement requirement. This article briefly addresses the natural hazard disclosure statement requirement, the advantages to using a private company to fulfill the requirement and how to select a disclosure company.

In late 1997, Governor Pete Wilson signed into law a bill requiring sellers and their agents to disclose to prospective buyers that the property for sale is located in certain types of natural hazard zones, including certain flood areas, high fire hazard severity zones, wildland area which contains forest fire risks, earthquake fault zones and seismic hazard zones. These disclosures must be made on the statutory form known as the Natural Hazard Disclosure Statement or on a local option real estate disclosure statement. This requirement is applicable to properties subject to a transfer disclosure statement.

To fulfill the natural hazard disclosure requirement, sellers and agents have two options. They can conduct the research themselves or they can retain a private company to provide a disclosure report, including the natural hazard disclosure statement. There are several advantages to retaining a private company to conduct this research and fulfill this requirement. The most important advantage is that Civil Code section 1102.4 provides that sellers and agents cannot be held liable for inaccuracies in reports and disclosures when they rely upon a report or information provided by an expert. Most of the private disclosure companies are considered experts. Therefore, when a natural hazard disclosure statement is purchased from a private company, sellers and agents cannot be held liable for errors.

Another advantage to purchasing reports from private companies is that thehe report can be obtained quickly, sometimes within a couple of hours. Some companies even provide electronic service over the internet. The reports are generally very easy to obtain and therefore, it saves time, so the agent or seller does not have to conduct the research themselves. The reports are also relatively inexpensive, ranging between $39.99 and $99.99.

The disclosure company business has become extremely competitive offering consumers many options. The following is a discussion regarding qualities to look for in a disclosure company.

1. The disclosure company should provide a completed natural hazard disclosure form and not a blank form for the seller or seller's agent to complete. This will ensure that Civil Code section 1102.4 applies.

2. The disclosure company should include a statement on its report that the representations in the report are provided pursuant to Civil Code 1102.4. This insulates the seller and agent from liability for any inaccuracies or omissions in the report.

3. Use a disclosure company with adequate errors and omissions insurance, which depends on the size of the transaction. Check the coverages of the disclosure companies. Also, make sure that the seller and agents are covered by the insurance. Some companies only cover the person ordering the report, so ensure that the coverage is broader.

4. Use a disclosure company that will contractually indemnify the seller and agent. This indemnification is broader than the insurance and means that the company will defend the seller and seller's agent if any lawsuit is filed arising out of allegations that the disclosure report is inaccurate or deficient.

5. There are also practical considerations in selecting a disclosure company, such as how fast the report can be provided, as discussed above. Also, look at cost. Some companies are more expensive than others. Some companies will also not charge for the report if the sale falls through. Some companies charge for billing for the report through escrow, some do not. Also, some companies charge for updating the report.

6. Use a disclosure company that provides reports which are easy to read and understand. Purchasing a report that is confusing or difficult to read is pointless.

Agents and sellers should use the same due diligence in choosing a disclosure company as they do in choosing a pest control company, home inspector or escrow company. It is always advisable to properly research the company and product. Most disclosure companies can be located by searching the internet or contacting the author.

If you are interested in a presentation on current issues affecting real estate professionals, Shannon B. Jones, attorney at law and real estate broker, will be speaking at the Beverly Hills/Greater Los Angeles trade expo on October 28, 1999 at 2:00 p.m. at Le Meridien Hotel in Beverly Hills, California. All are welcome.

In Roland v. Velur (Los Angeles Superior Court Case No. LC036611), a real estate brokerage/investment company sued a competitor for defamation. The plaintiff claimed that it suffered a loss of reputation and sales because of defamatory statements made by a competitor. The plaintiff and defendant were competing for the sale of raw land in the Antelope Valley. When the plaintiff increased its compensation to its sales staff, defendants accused plaintiff of being immoral, unethical and stealing clients. Defendant also told prospective salespeople that by joining plaintiff, the salespeople could lose their licenses, may not collect commissions and may be sued. The jury awarded the plaintiff $1,000,000 in damages.

In Rappaport v. Sasson (Los Angeles Superior Court Case No. SC043364), a real estate salesman slipped on a driveway while showing the home for sale. The plaintiff claimed that he slipped on the concrete driveway, causing him to fall and break his femur, which required the insertion of a steel plate with 14 bolts into his upper leg and hip. The agent sued the property owner and painter who had recently painted the home and driveway. The jury found in favor of the plaintiff and awarded approximately $392,000.

"Woe To Those Agents Who Take Real Estate Sales Legalities Lightly", is an article written by Shannon B. Jones, Attorney at Law/Broker, and published in the September/October 1999 edition of the international real estate magazine, "The Real Estate Professional". The article discusses seven quick and easy steps to assist real estate agents in making their practice more efficient, better representing their clients and avoiding litigation.

The article is too lengthy to reproduce in this newsletter, but is available upon request by calling (925) 648-4890, faxing (925) 648-0842 or emailing to sbj@justicemail.com.

The following is a discussion and update regarding bills considered by the California legislature in its 1999 session.

AB 594 (Cardenas) amends the transfer disclosure statement. Current law provides that a transfer disclosure statement is not required by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust when transferring property. This bill provides that a transfer disclosure statement would be required if the trustee is a natural person who is sole trustee of a revocable trust and he or she is a former owner of the property or an occupant in possession of the property within the preceding year. This bill passed the legislature and will become law in 2000.

We previously reported on bills ACA 5 and SB 109 (see below for discussion). Both bills failed passage in Committee and reconsideration was granted.

AB 1316 (Correa) would allow a broker owed a commission for a commercial tenancy to demand arbitration. The legislation requires that the arbitration be done by a qualified arbitrator; the amounts must be above small claims jurisdiction and below $50,000; and the arbitrator's award may be enforced as a judgment without further legal action. This bill was amended to remove the provisions regarding arbitration and instead provide for a lis pendens. Thereafter, the bill was set for reconsideration in January 2000.

In Vandenberg v. Superior Court (1999) 99 C.D.O.S. 7191, the California Supreme Court addressed whether a decision in a binding arbitration can be used by a non-participating party against the losing party in a later proceeding. In Vandenburg, Vandenberg leased a parcel of land for an automobile sales and service facility. In 1988, Vandenberg discontinued business and the land reverted back to the owers. To prepare the land for sale, the owners/landlords removed three underground oil storage tanks. Testing revealed that the property was contaminated. The owners sued Vandenberg for damages arising out of the contamination. Vandenberg had numerous commercial general liability insurance policies, pursuant to which Vandenberg tendered defense. All of the insurers denied coverage except for one.

Vandenberg and the owners agreed to resolve their dispute by binding arbitration. The arbitrator found in favor of the owners and ordered Vandenberg to pay over $4 million in damages. The arbitrator also found that the contamination was not "sudden and accidental". Vandenberg asked the insurers to indemnify him, which request the insurers denied. Vandenberg filed suit.

The insurers filed motions for summary judgment asking the trial court to find that because the arbitrator in the case between Vandenberg and the owners held that the contamination was not "sudden and accidental", there was no coverage. The trial court granted the motion and Vandenberg appealed. The Court of Appeal reversed and the insurers appealed the issue to the California Supreme Court.

The Supreme Court addressed whether an issue decided by an arbitrator can be used against one of the parties to the arbitration in a later proceeding by a non-party. As applied to Vandenberg, the Court was deciding whether the insurance companies could use the arbitrator's decision that the release was not "sudden and accidental" against Vandenberg in a subsequent case involving the insurance carriers. The Court observed that there is limited judicial review in private arbitration. By choosing binding arbitration, parties agree to bypass the judicial system and thus avoid delays in the trial and appellate courts. The Court held that because an arbitrator's decision is outside the judicial system, the decision should not have an effect on subsequent litigation involving other parties called collateral estoppel. Therefore, the Supreme Court held that unless the parties agree, a finding or decision in a private binding arbitration cannot be used by a non-party in a subsequent proceeding against a party to the arbitration. In Vandenberg, the Court held that Vandenberg's insurers could not hold the decision of the arbitrator against Vandenberg. The insurers would have to relitigate the issue.

This holding is relevant to real estate professionals. Often times, buyers and sellers of real estate resolve their disputes by binding arbitration. Arbitration generally arises because the parties have agreed to a binding arbitration clause in the purchase and sale agreement for the property. However, the real estate agents, although involved in the dispute, are not parties to the binding arbitration. Therefore, the buyers and sellers usually arbitrate the dispute before action is taken against the agents. The Vandenberg decision is important because the Supreme Court is saying that a decision in an arbitration cannot be used later by a non-party against a party to an arbitration. Therefore, an agent who is involved in litigation arising out of a dispute which was previously arbitrated by the buyers and sellers cannot use the decision in the arbitration against either the buyers or sellers. For example, if the buyer brought the action initially and lost in arbitration, then sued the agents, the arbitrator's decision could not be used against the buyer unless the buyer previously agreed.

The Court also held that a commercial general liability insurance policies can cover losses pleaded as contractual damages. Most insurance policies exclude coverage for damages arising out of breach of contract claims. In Vandenberg, the Court held that instead of looking at the particular claim plead by the plaintiffs, an insurance company must look to the nature of the damage and the risk involved in light of the coverage language.

The book, "A Real Estate Agent's Practical Guide to Avoiding Litigation", by Shannon B. Jones, Attorney at Law, is now being recommended and endorsed by the Realty Purchasing Group through Landy Insurance. The Realty Purchasing Group is underwritten by Chicago Insurance Company, a subsidiary of Fireman's Fund. Landy Insurance is the national administrator for programs offering insurance coverage to Realtors, attorneys and accountants. Landy has been in business since 1949.

In Erlich v. Menezes (1999) 99 C.D.O.S. 6808, the California Supreme Court held that homeowners cannot recover emotional distress damages in a construction defect case arising out of a breach of contract claim. In Erlich, plaintiffs hired defendant Menezes, a general contractor, to build their "dream house". The house was completed and plaintiffs moved in. During the first rains, plaintiffs discovered that the house 'leaked from every conceivable location,' including walls, windows, doors and through the ceiling. Plaintiffs sued Menezes for breach of contract, negligence, fraud and negligent misrepresentation.

At trial, Menezes prevailed on the fraud and negligent misrepresentation claims. The jury found in favor of the plaintiffs on the breach of contract and negligence claims and awarded plaintiffs in excess of $400,000 for repairs and $150,000 for emotional distress. Menezes appealed and the appellate court affirmed the awards. The case was appealed to the California Supreme Court.

The Supreme Court granted review of the issue of whether emotional distress damages are available in a construction defect action arising out of breach of contract for negligent construction. The Court held that "The available damages for defective construction are limited to the cost of repairing the home, including lost use or relocation expenses, or diminution in value". Therefore, emotional distress damages are not available in these circumstances. However, the Court left open the availability of emotional distress damages under fraud or negligent misrepresentation claims.

A lawyer in Bakersfield recently filed a lawsuit against a real estate developer claiming his civil rights were violated when the developer refused to sell a house to the lawyer. The lawyer and his wife sued after the developer, Burlington Homes, canceled a sale in a new development upon learning that the plaintiff was a lawyer. The developer maintains a no-lawyer policy because he believes that attorneys increase his business costs by threatening litigation more often than non-lawyers.

The judge agreed with the developer's arguments that case law indicates that discrimination is permissible when committed for a legitimate business purpose under the Unruh Civil Rights Act. The judge allowed the lawyer's claim of damages for financial expenditures and for shame and embarrassment. The lawyer is appealing.

Civil Code section 2079.10a becomes effective July 1, 1999, which requires that all leases or contracts for the purchase of real property comprising one to four dwelling units contain the following notice in a minimum of 8-point type:

"Notice: The California Department of Justice, sheriff's departments, police departments serving jurisdictions of 200,000 or more and many other local law enforcement authorities maintain for public access a data base of the locations of persons required to register pursuant to paragraph (1) of subdivision (a) of Section 290.4 of the Penal Code. The data base is updated on a quarterly basis and a source of information about the presence of these individuals in any neighborhood. The Department of Justice also maintains a Sex Offender Identification Line through which inquiries about individuals may be made. This is a "900" telephone service. Callers must have specific information about the information they are checking. Information regarding neighborhoods is not available through the "900" telephone service."

Upon delivery of the notice set forth above, the lessor, seller or agent is not required to provide any additional information regarding the proximity of registered sex offenders. The information in the notice will not give rise to a cause of action by any sexual offender against the disclosing party.

In Cooper v. Cano (1999) 99 C.D.O.S. 4052, a California appellate court held that a quit claim deed can extinguish a deed of trust. In Cooper, Susan Cano separated from her husband Larry Cano. Subsequently, the parties entered into a marital separation agreement, wherein Larry received the couple's home, which included two lots, and Susan received a promissory note from Larry in the amount of $1.35 million secured by a deed of trust recorded against one of the lots. Larry later asked Susan for a quitclaim deed to the property, so he could obtain additional money using the property. Susan agreed, but according to her, did not intend to release the deed of trust. Larry subsequently sold the property to Cooper/plaintiff, pocketed the proceeds of the sale and failed to repay Susan the $1.35 million debt.

The Coopers brought an action to quiet title to the property. The trial court entered judgment in favor of the Coopers. Susan Cano appealed arguing that she still had a security interest in the house, which was unaffected by the quitclaim deed. The appellate court addressed the issue of whether a quitclaim deed given to the trustor of a deed of trust by its beneficiary will release the trust deed. This is the first time this issue has been addressed by an appellate court in California.

The court initially noted that generally security interests are released by a reconveyance deed and that a quitclaim deed is a very unconventional way of releasing a beneficiary's interest in a deed of trust. However, the quitclaim deed stated that Susan Cano was releasing the property to her husband and that it was her intention to grant all rights, title and interest in the property to Larry. By that language, the court held that Susan gave up all her rights to the property, including her security interest.

Although the court noted that this was a "disquieting" case in that both the Coopers and Susan Cano were innocent parties, it affirmed the trial court's decision and held that a quitclaim deed can extinguish a deed of trust.

Bill Lockyer, Attorney General for the State of California, recently issued an opinion that a county recorder cannot accept for recordation a "Notice of Disclosure." In the Opinion of Bill Lockyer (1999) 99 C.D.O.S. 3458, the attorney general addressed the issue of whether a county recorder can accept for recordation a document that would give notice of the proximity of an airport, power lines and potential traffic and parking problems against particular real property. The effect of such recordation would be that the information would be disclosed in title reports.

Government Code section 27280(a) allows the recordation of "Any instrument or judgment affecting the title to or possession of real property." The attorney general opined that in this situation, a "Notice of Disclosure would not affect or purport to affect the title or possession of, nor would it grant or purport to grant a lien, debt or duty respecting real property." Therefore, the attorney general concluded "that a county recorder may not accept for recordation a document denominated a 'Notice of Disclosure,' that gives notice of the proximity of an airport, power lines and potential traffic and parking problems to specified real property."

In Pacific Preferred Properties, Inc. v. Moss (1999) 99 C.D.O.S. 3449, a California appellate court ordered real estate brokers to pay the attorney's fees of the sellers of a home. In Pacific, the sellers/Mosses sold a house and as part of the consideration received a promissory note secured by a deed of trust recorded against a car wash. The Prudential California Realty represented both the buyers and sellers in the transaction. At that time, Prudential was operated by defendant Norcal Realty Partners ("Norcal") and Pacific Preferred Properties, Inc. ("Pacific") subsequently succeeded to Norcal's interest.

The deed of trust provided that if the car wash was ever sold, the holder of the note (sellers/Mosses) could require that the note be paid in full immediately. The car wash was subsequently sold and pursuant to the note, the sellers sent a letter requesting payment. Payment was not made and the sellers foreclosed on the car wash. The buyers of the house sued Pacific and Norcal, among others. Pacific and Norcal sued the sellers alleging that the due on sale clause was mistakenly included in the deed of trust and that the sellers were aware of the mistake.

The sellers filed a motion for summary judgment on the ground that there was no evidence proving that they knew that the due on sale clause was included by mistake. The court agreed and granted the motion. Thereafter, the sellers filed a motion for attorney's fees based on the following provision, which was included in the purchase agreement for the sellers' house. "In any legal action, proceeding or arbitration arising out of this agreement, whether instituted by or against the BUYER or SELLER, or the Brokers named herein, the prevailing party(s) shall be entitled to reasonable attorney's fees and costs." The brokers opposed the motion on the ground that there was no written agreements between the sellers and the brokers. The trial court denied the motion and the sellers appealed.

The appellate court reversed and found that the sellers were entitled to their attorney's fees. On appeal, the sellers argued that the brokers were parties to the contract and the appellate court agreed. The court noted that there were several references to the brokers throughout the buy-sell portion of the contract. In addition, "The attorney's fees provision in issue unambiguously includes the broker within the ambit of its benefit provisions and its performance obligations." "There can be no claim 'the prevailing party,' as used in the attorney's fees provision, is not intended to apply to the broker." The court concluded that in this case, "a tripartite contract concerning the award of attorney's fees is found between the buyer, seller and broker."

Agents need to be aware of the language of the contracts they are signing. If the attorney's fees clause in the body of the contract includes agents, the agent will most likely be bound. This is in contrast to a contract where the body specifically pertains to the buy-sell provisions between the buyer and seller and there is an isolated provision pertaining to the commission confirmation.

We are currently experiencing an extraordinarily strong real estate market. For the first time in a long while, sellers are receiving multiple offers for their properties and buyers are submitting competing bids. However, there are two consequences of this market of which real estate agents should be aware -- buyer's remorse and seller's reluctance.

I have recently received numerous calls from buyers, sellers and agents regarding transactions in which a party is attempting to extricate themselves from a purchase contract. Some buyers are so desperate to purchase a property that they bid the price up. When they succeed in obtaining an acceptance from the seller, the buyers either feel they paid too much or realize that they did not purchase the home of their dreams, but a home merely because they thought they would never find another. Some sellers, especially where there is a long escrow, accept an offer, but as escrow progresses, realize that the value of the property has appreciated. These sellers believe that if the property falls out of escrow, the sellers can re-list the property and obtain more money than they are receiving from their current buyers.

Real estate agents play key roles in ensuring that these transactions stay together and move toward closing. Buyers and sellers have specified periods of time in which to complete their respective tasks. Most real estate purchase agreements contain clauses allowing the buyers to conduct inspections and investigations. Attached to these clauses and other provisions, there are contingencies, which must be removed by the buyers. For example, the buyers must remove the loan contingency once they obtain financing and the inspection contingency once they have completed their investigations. The timing for these investigations and removal of the contingencies are set forth in the contract. Generally, the purchase agreement also sets forth the method by which the buyers should remove their contingencies - passive or active. Passive means no written notice is required to remove the contingency and active removal requires written notice.

Sellers have obligations of providing reports and information regarding the property within specified time periods. Sellers must also respond when buyers disapprove of any condition of the property. For example, the buyers want an item fixed. The seller must agree or refuse to fix it.

If the parties do not comply with their respective obligations within the specified time periods, the other party generally has the ability to cancel the contract. For example, if the buyer is required by the contract to complete all investigations and inspections and remove that contingency within 10 days and fails to do so, the seller can cancel the contract. If dates such as in this example are missed, the parties may hold the agent responsible. It is the agents' responsibility to keep track of these dates and ensure that the parties are fulfilling their obligations.

After the parties enter into a purchase agreement (deposit receipt), agents should prepare a calendar of events. Initially, the agents should mark the date scheduled for the close of escrow and all dates on which conditions must be met. For example, if the buyer has 10 days in which to conduct inspections, the agent should note that on his or her calendar. The agents should add dates to the calendar as escrow progresses. Agents may want to prepare a separate calendar for each transaction.

By keeping a calendar, agents will know when deadlines are arriving and make sure a transaction does not fall out of escrow. Alternatively, this will avoid the parties waiving contingencies that they had no intention of waiving. For example, if the passive method of removal is used and a date passes, the contingency may be inadvertently removed. If this occurs, an agent may be held liable for negligence. An agent must always be aware of dates and expiration of contingencies.

In a unique lawsuit, the Realtor Association of Greater Fort Lauderdale sued Property America Corporation, an internet real estate information service, for copyright infringement and breach of contract in Fort Lauderdale federal court. The Association claims that Property America is using, without permission, Multple Listing Service information owned by the Association. Property America claims that it does not copy the listing services presentation and that the Service does not own the facts about the properties.

This lawsuit may be the first of its kind. The outcome could affect how Multiple Listing Services operate in the future.

We recently wrote an article regarding the meaning of a binding arbitration clause. In that article, we cited Moore v. First Bank of San Luis Obispo (1998) 68 Cal.App.4th 768. Since the preparation of that article, the California Supreme Court has granted review of that case. We will keep you informed regarding the outcome.

Two bills are currently pending before the California legislature, which affect real estate professionals. Senate Bill 109 (Knight) would authorize a tax deduction for costs paid or incurred for private mortgage insurance by a first-time home buyer for each year that the home is owned by the first-time buyer until 20% of the mortgage has been paid.

ACA 5 (Honda) affects mechanic's liens. The California Constitution provides that mechanics, persons furnishing materials, artisans and laborers of every class, shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of the labor done and material furnished. ACA 5 would create an exception to the mechanics lien law where the property is a single-family, owner-occupied dwelling that is the primary residence of the owner of the property if the owner has paid in full, to the person to whom the owner is contractually obligated to make payment, the amount owed by the owner for the labor bestowed and material furnished upon that property that would form the basis of the claim of lien.

Many purchase agreements (deposit receipts) for real property contain an arbitration clause, whereby the parties agree to have any dispute arising out of the agreement decided by arbitration. However, the parties rarely understand the true of impact of agreeing to binding arbitration and are surprised at what they have given up when a dispute arises. This article addresses the meaning of the binding arbitration clause and the pros and cons of agreeing to it. It also discusses a new case decided by a California appellate court which further illustrates the primary problem of agreeing to binding arbitration.

Binding arbitration arises when the parties agree to refer the matter to an arbitrator for a decision. The parties' agreement can be in the form of a contract such a deposit receipt or after a dispute arises, the parties can agree to refer the matter to arbitration. If a contract contains a binding arbitration clause and a dispute arises, that matter will be decided by arbitration. If a party refuses, a court can order the case to arbitration.

In binding arbitration, the parties agree to be bound by the decision of the arbitrator. The parties have no rights to a jury and limited rights of appeal. Therefore, if the arbitrator is wrong in his or her decision, the losing party is generally without a remedy. In Moore v. First Bank of San Luis Obispo (1998) 68 Cal.App.4th 768, a California appellate court recently upheld an arbitrator's decision even though the trial and appellate courts acknowledged that the award contained a "legal error."

In Moore, plaintiffs borrowed money from defendant which loans were secured by deeds of trust against commercial property. Subsequently, plaintiffs agreed to provide deeds of trust secured by their personal residences as additional security. When the loans became delinquent, defendant began foreclosure procedures against plaintiffs' homes. Plaintiffs filed suit. The loan agreements contained a binding arbitration clause pursuant to which the case was referred to a panel of three arbitrators for a decision. After presentation of their case, the arbitrators found in favor of plaintiffs, but refused to award plaintiffs their attorneys' fees even though there was an attorneys' fees clause in the contract with defendant. Plaintiffs appealed to the trial court to recover their attorneys' fees. The trial court denied plaintiffs' motion and plaintiffs appealed.

The appellate court stated, "The arbitration award shows a clear error of law on this point." However, "We conclude that the award contains a legal error on its face which is not subject to judicial review." Despite those findings, the court affirmed the arbitrators' decision because an error of law is not a sufficient ground to change or vacate an arbitrator's award.

Moore illustrates the disadvantage of agreeing to binding arbitration -- if the arbitrator is wrong, it is almost impossible to overturn an arbitrator's decision. An arbitrator's decision can be changed in very limited circumstances such as: arbitrator misconduct

In Stevenson v. Baum (1998) 65 Cal.App.4th 159, a California appellate court held that a seller of real estate is not liable for a misrepresentation to the buyer when the alleged undisclosed fact is part of the public record. In Stevenson, defendant Baum offered his mobile home park for sale. He advertised that the park included 44 "approved" spaces. Plaintiffs offered to purchase the park. The purchase agreement stated that defendant was to provide title to the park free of easements other than those of record and defendant agreed to furnish a title policy. The title policy disclosed an easement for ingress and egress belonging to Standard Oil Company.

After plaintiffs purchased the park, Standard's successor notified plaintiffs that they would have to remove several mobile homes which encroached on the easement and blocked access to the pipeline. Plaintiffs subsequently learned that several years prior to the sale, Standard had asked defendant to move the same mobile homes so Standard could maintain the pipe line. Defendant had moved the mobile homes and returned them after Standard had completed its work. Defendant had not disclosed this fact to plaintiffs. Plaintiffs sued defendant for fraudulent misrepresentation and concealment. Defendant moved for summary judgment, which the trial court granted and dismissed the case. Plaintiffs appealed.

The appellate court held that the material fact -- the existence of the pipeline -- was immediately ascertainable from the public records. It was undisputed that the public records accurately described the location of pipeline. Had plaintiffs consulted the public records, they would have known that the pipeline was underneath the mobilehome spaces. The court stated that a reasonable person in plaintiffs' position knowing of the easement would have realized that the easement holder might exercise its rights of access. The court further noted, "By warning the Stevensons in the purchase contract that they took title subject to easements of record, Baum put them on notice of the above material facts, which satisfied his duty of disclosure under the express terms of the contract." The court affirmed the judgment.

In Thomas v. Anchorage Equal Rights Commission, et al. (1999) 99 C.D.O.S. 414, the Ninth Circuit appellate court refused to uphold a law prohibiting apartment owners from refusing to rent to unmarried couples. In Thomas, plaintiffs were the owners of residential rental properties in Anchorage, Alaska. Plaintiffs were also professed Christians who believed that cohabitation between unmarried individuals constituted the sin of fornication and that facilitating cohabitation in any way is tantamount to facilitating sin.

Both the State of Alaska and City of Anchorage have enacted laws aimed at preventing discrimination in rental housing, which make it unlawful "to refuse to sell, lease or rent ... real property to a person because of marital status." Plaintiffs declined to rent to unmarried cohabitants and vow to continue this practice. Plaintiffs filed suit against the Executive Director of the Alaska State Commission on Human Rights, the Anchorage Equal Rights Commission and the Municipality of Anchorage seeking relief from the court from this law on the ground that the law violates plaintiffs' constitutional rights under the Free Exercise Clause of the First Amendment. The district court held that application of the antidiscrimination laws to plaintiffs would violate their rights under the Free Exercise Clause and therefore, permanently enjoined the State and City from enforcing the laws against the landlords. The defendants appealed.

The Ninth Circuit Court of Appeals, which serves as the federal appellate court for California as well, held in a detailed decision, that the courts have not given unmarried couples any special consideration under the Equal Protection Clause, which shows that society lacks a compelling governmental interest in the eradication of discrimination based upon marital status. The United States Supreme Court has recognized a substantive due process right to live with relatives, such as spouses, but has declined to extend that right to "unrelated" individuals such as unmarried cohabitants. Moreover, the Fair Housing Act does not include marital status in its six protected categories. (Those categories include race, color, religion, sex, familial status or national origin.)

The Ninth Circuit concluded that there was no compelling government interest in eradicating marital status discrimination that would excuse what would otherwise be a violation of the Free Exercise Clause. Thus, the court held the laws unenforceable against the landlords.

I have received numerous inquiries regarding the use of handymen and Senate Bill 2217. To clarify, we have written the following article.

Many real estate agents retain or refer their clients to handymen to perform repairs, improvements or clean up. However, there are restrictions on the use of handymen. If a handyman is used in violation of the law and the work is deficient or inadequate, the client's only remedy is against the handyman, for the client may not recover through the Contractors' State License Board. Worse, if someone is injured on the job, the client may be held liable. If the work is deficient or the client is held liable, the client will most likely look to the agent for recovery since the agent recommended or hired the handyman. Therefore, it is important for real estate agents to understand the limits of using handymen.

The Contractors' State License law regulates the licensure and discipline of contractors. Prior to Senate Bill 2217 ("SB 2217"), which was signed into law by Governor Wilson on September 19, 1998, work where the aggregate contract price was less than $300 was exempted from the licensing requirements. SB 2217 raised that limit to $500. That limit includes labor and materials and is based on the total cost of the contract. The work must also be considered "casual, minor, or inconsequential."

This exemption does not apply where the work is part of a larger project or where contracts are divided into smaller contracts of less than $500, so as to avoid the licensing requirement. This exemption also does not apply to a person who advertises or puts out any sign, card or other device, which indicates to the public that he or she is a licensed contractor or qualified to engage in the business of a contractor.

Any person who performs work under this exemption must disclose that he or she is not a licensed contractor to the purchaser. At the time of making a bid or prior to entering into a contract, whichever occurs first, the handyman must provide the following notice in capital letters in at least 10-point roman boldface type or in contrasting red print in at least 8-point roman boldface type:
"I, (individual's name), AM NOT LICENSED BY THE CONTRACTORS' STATE LICENSE BOARD. STATE LAW REQUIRES ANYONE WHO CONTRACTS TO DO CONSTRUCTION WORK TO BE LICENSED BY THE CONTRACTORS' STATE LICENSE BOARD IN THE LICENSE CATEGORY IN WHICH THE CONTRACTOR IS GOING TO BE WORKING--IF THE TOTAL PRICE OF THE CONTRACT IS $500 OR MORE (INCLUDING LABOR AND MATERIALS). LICENSED CONTRACTORS ARE REGULATED BY LAWS DESIGNED TO PROTECT THE PUBLIC. IF YOU CONTRACT WITH SOMEONE WHO DOES NOT HAVE A LICENSE, THE CONTRACTORS' STATE LICENSE BOARD MAY BE UNABLE TO ASSIST YOU WITH A COMPLAINT. YOUR ONLY REMEDY AGAINST AN UNLICENSED CONTRACTOR MAY BE IN CIVIL COURT, AND YOU MAY BE LIABLE FOR DAMAGES ARISING OUT OF ANY INJURIES TO THE CONTRACTOR OR HIS OR HER EMPLOYEES."

The person performing the work must maintain a copy of the above signed notice for four years. This notice only needs to be provided once to a purchaser where subsequent work is performed.

It is recommended that real estate professionals only use or recommend licensed contractors. However, if handymen are used, they should only perform work totaling less than $500 and make the proper disclosure.

In Marcus & Millichap Real Estate Investment Brokerage Company v. Hock Investment Company, et al. (1998) 1998 Daily Journal D.A.R. 12144, a California appellate court refused to compel arbitration where all the parties did not agree to the arbitration clause in the contract. In Marcus, plaintiffs purchased a 79-unit apartment complex. Marcus & Millichap, real estate brokerage, represented both the buyers and sellers. The purchase agreement contained an arbitration clause which stated that any controversy arising out of the contract would be resolved by arbitration. The contract also included an arbitration notice clause, which provided that by initialing in the space below the clause, the parties agreed to arbitration. The buyers initialed the agreement, but the sellers did not.

After the close of escrow, the buyers sued the sellers and agents alleging misrepresentations and concealment regarding plumbing problems in the complex. Marcus & Millichap filed a motion to compel arbitration. The trial court denied the motion on the ground that the sellers had not initialed the arbitration provision in the purchase contract, therefore, they did not agree to the clause. Marcus & Millichap appealed.

The appellate court affirmed the trial court's ruling and held that an agreement to arbitrate is a contract and must be agreed upon by all parties to be bound. If any parties fail to agree, it is not a contract and will not be enforced. In this case, the sellers failed to agree, so the agreement to arbitrate was unenforceable.

In Roth v. Malson (1998) 98 Daily Journal D.A.R. 11169, a California appellate court held that a qualified response to a counter-offer in a real estate transaction does not constitute formation of a contract. In Roth, a buyer made an offer to purchase real property, which was listed for sale. The seller responded to the offer with a counter-offer. The buyer responded to the seller's counteroffer by returning a counter to the counteroffer. The seller declined the buyer's counter to the counteroffer and took the property off the market. The buyer sued claiming that the buyer's counter to the counteroffer was virtually identical to the seller's counteroffer, so in substance, the buyer agreed to the seller's counteroffer. The buyer also argued that he mistakenly signed the counter to the counteroffer instead of under the acceptance portion of the agreement. Therefore, the buyer contended the parties had a binding contract. The seller filed a motion for summary judgment arguing that there was no contract. The trial court granted the motion and the appellate court affirmed. The buyer/plaintiff appealed.

The appellate court noted that the buyer's counter to the seller's counteroffer called for a response from the seller before a contract could be formed. In the absence of a response from the seller, no contract was formed.

The court also stated: "Wisely, the real estate industry has developed standardized forms for the use by the general public in buying and selling real estate. [The form used here] provide[s] easily understood information and procedures to facilitate the transfer of real property between buyer and seller. As an added boon, litigation is no doubt minimized. Yet people still manage to create problems, intentionally or unintentionally. This case is the perfect example. The buyer, having deliberately or unintentionally, signed the form in the wrong place, now seeks to enforce the 'agreement.' Can any reasonable person ignore the possibility that a plaintiff who seeks to enforce such an 'agreement' in his favor would not use his actions to avoid the purchase if it were not in his favor. This potential for game-playing must be avoided at all costs. The form is clear. The facts are clear. Plaintiff did not absolutely and clearly accept the counter offer. [Emphasis added.]" The appellate court held in favor of the seller.

In Furla v. Jon Douglas Company (1998) 98 Daily Journal D.A.R. 8178, a California appellate court allowed a purchaser to maintain a suit against the seller's real estate agents for misrepresenting the square footage of the home. In Furla, plaintiff purchased a home in Los Angeles for $935,000. Prior to reaching an agreement, the sellers' agents represented that the home was approximately 5500 square feet. The sellers' agents were relying on a statement by the daughter of the seller regarding the size of the home. The multiple listing service also indicated that the square footage was approximately 5500 square feet. One of the seller's agents stated that she had no reason to believe that the house was not 5500 square feet. In reaching the sales price, plaintiff determined that he wanted to pay no more than $170 per square foot. Therefore, he agreed to pay $935,000.

After the close of escrow, plaintiff learned that the house was between 4437 and 4617 square feet, not 5500 square feet as represented. Plaintiff sued the seller and listing broker and agents.

Defendants filed a motion for summary judgment asking that the case be dismissed on the grounds that defendants did not know the house was substantially less than 5500 square feet, defendants had no reason to believe the house was less than 5500 square feet, defendants breached no duty to plaintiff and plaintiff did not rely on any statements by defendants. The trial court granted the motion and the appellate court reversed.

The appellate court held that a jury should decide the issue of whether defendants had a reasonable basis for believing that the square footage of the house was 5500 square feet. The court was responding to a declaration produced by plaintiff prepared by a real estate expert stating that any competent agent would have known that the house was not 5500 square feet. Defendants also argued that plaintiff could have obtained an accurate determination of the square footage by hiring a professional to measure the property. The court held that this issue should be decided by a jury. The defendants also pointed out that the purchase agreement contained a clause which provided that "Broker" did not make any representations to the buyer regarding the size, boundaries or encroachments regarding the property. However, the provision defined "Broker" to mean the buyer's broker not the seller's agents. Therefore, it was inapplicable to defendants. The appellate court concluded that the issues in this case should be decided by a jury and not a court. Thus, the decision to dismiss the case was reversed.

On June 9, 1998, Governor Pete Wilson signed Assembly Bill 1195, which amends current law regarding the Natural Hazard Disclosure Statement. It substitutes a new form for the form previously approved in 1997. If you would like a copy of the form, please email your request to us and we will mail you a copy.

In Field v. Century 21 (1998) 63 Cal.App.4th 18, a California appellate court held that the two-year statute of limitations set forth in Civil Code section 2079.4 is not applicable to lawsuits brought by buyers against their real estate agent for breach of fiduciary duty. In Field, plaintiffs were represented by defendant/agent in the purchase of a rural home. Plaintiffs alleged that their agent misrepresented the following: the extent of an easement owned by the water district which allowed the district to spill water into the home, the acreage on the property, and that the house violated setback requirements. The agent also failed to recommend that the septic tank be inspected. It was undisputed that the agent breached her fiduciary duty by failing to receive and review the preliminary title report on the property until after the close of escrow.

The agent was held liable and damages awarded. The agent appealed because the court refused to dismiss the case based on the two-year statute of limitations set forth in Civil Code section 2079.4. That section provides that any action arising out of an agent's failure to make a reasonable visual inspection and disclose material defects noted during that inspection must be brought within two years from the close of escrow, transfer of title or date the plaintiff moved onto the property. The appellate court affirmed.

The appellate court held that Civil Code section 2079 limits an agent's duty of inspection to a visual inspection. However, the court held that the fiduciary duty of an agent to a buyer is "substantially more extensive than the nonfiduciary duty codified in section 2079." The court stated in part, "The broker as a fiduciary has a duty to learn the material facts that may affect the principal's decision." The court concluded that the statute of limitations set forth in Civil Code section 2079.4 applies to claims for negligence and negligent misrepresentation brought against a nonfiduciary broker for failure to visually inspect or disclose. It does not apply to actions against a fiduciary.

In Hornisher, et al. v. McBail Homes, et al. (Contra Costa Superior Court Case No. C9405504, plaintiffs sued the builder/developer of their homes for construction defects, including cracking, unlevel floors, and indications of foundation movement. Three of the thirty plaintiffs went to trial on a "test basis." One of the three settled for $20,000. The jury awarded the other two $276,949.

In Parmenter, et al. v. Alma Associates, et al. (Solano County Superior Court Case No. L001759), plaintiffs sued the developer of their homes alleging construction defects arising out of settlement of soils caused by a storm drain. The developers settled the case by repurchasing the units from the plaintiffs and sued its subcontractors who installed the storm drain. The jury awarded $1,875,000.

In Gorden v. Preece, et al. ( Los Angeles Superior Court Case No. SC038-088), plaintiffs purchased a home from defendants. Prior to the purchase, the home had been remodeled by the owners. Plaintiffs experienced leaking in the home, which they alleged had occurred as a result of the remodel. Plaintiffs alleged that although the sellers knew of the leaking, it was not disclosed. The jury found in favor of the sellers, but awarded plaintiffs $167,000 against the contractor who performed the repairs.

In Perez v. Virtue (Palm Springs Superior Court Case No. 72576), plaintiff sued the appraiser of his home alleging that the appraiser overvalued the home and failed to disclose an encroachment. The defendant/appraiser claimed that he met the standard care. The jury found in favor of the defendant.

In Lopez v. Joe Enos & Associates, et al. (Sacramento County Superior Court No. 542726), defendant real estate broker Joe Enos represented plaintiffs and sellers (dual agency) in the sale of a three acre parcel of property. The property contained underground storage tanks, which was disclosed. After the sale, the tanks were removed and contamination discovered. Plaintiffs sued claiming that Enos should have advised them of the problems associated with underground tanks. The jury found for the defense.

In Brown v. FSR Brokerage (1998) 62 Cal.App.4th 766, a seller of property sued his agents alleging that the agents failed to disclose that they were representing both the purchaser and seller in a dual agency. The trial court granted the defendants' motion for summary judgment and the appellate court reversed.

In Brown, the plaintiff/seller claimed that his agents told him during negotiations for the sale of his property that they were representing him exclusively, when in truth the agents represented both the buyer and seller. Defendants provided the court with an agency disclosure form disclosing that there was a dual agency, escrow instructions showing that the brokerage represented both the buyer and seller and commission instructions showing that the brokerage would receive the entire commission. All the documents were signed by the plaintiff. In response, the plaintiff claimed that he signed the documents without reading them and did not know that they contained such representations.

The court held that there was an issue of fact as to whether the disclosure of the dual agency was made to the plaintiff and that a jury should decide the issue.

On September 20, 1998, Governor Pete Wilson signed Senate Bill 1989 regarding disclosure obligations in real property transactions pertaining to Megan's Law. There has been a lot of confusion in the real estate industry regarding parties' and agents' obligations of disclosure of registered sexual offenders. This new law clarifies those obligations.

SB 1989 will add Section 2079.10a to the California Civil Code. It requires that after July 1, 1999, all leases or contracts for the purchase of real property comprising one to four dwelling units contain the following notice in a minimum of 8-point type:

"Notice: The California Department of Justice, sheriff's departments, police departments serving jurisdictions of 200,000 or more and many other local law enforcement authorities maintain for public access a data base of the locations of persons required to register pursuant to paragraph (1) of subdivision (a) of Section 290.4 of the Penal Code. The data base is updated on a quarterly basis and a source of information about the presence of these individuals in any neighborhood. The Department of Justice also maintains a Sex Offender Identification Line through which inquiries about individuals may be made. This is a "900" telephone service. Callers must have specific information about individuals they are checking. Information regarding neighborhoods is not available through the "900" telephone service."

Upon delivery of the notice set forth above, the lessor, seller or agent is not required to provide any additional information regarding the proximity of registered sex offenders. The information in the notice will not give rise to a cause of action by any sexual offender against the disclosing party.

Sellers and real estate agents often use "handymen" to perform various repairs and/or upgrades to homes. The law limited the use of handymen to performing work of less than $300 and where it is "casual, minor, or inconsequential". Senate Bill 2217 was recently enacted which raised the $300 limit to $500 and requires handymen to disclose that they are not licensed contractors.