Effective January 1, 2015, California law requires real estate brokers and agents to provide their clients and prospective clients with specific new disclosures, including (1) an initial disclosure form regarding the nature of agency relationships, which is typically provided at the time a listing agreement is entered into; and (2) an additional disclosure form to be presented in connection with a specific lease or purchase transaction. Owners/landlords may elect at their option not to execute the initial disclosure form.
What You Need to Know:
- Effective January 1, 2015, California Civil Code § 2079 has been expanded to apply to commercial property transactions in addition to residential property transactions.
- Brokers/agents are required to provide owners/landlords with a disclosure form entitled “Disclosure Regarding Agency Relationship” either (i) before entering into a listing agreement or (ii) as soon as practicable prior to presenting an offer for purchase or lease.
- The required form of disclosure is set forth in Civil Code § 2079.16. This form is essentially identical to the forms that have been required in connection with residential property transactions for many years. Many brokerages/agencies are developing their own disclosure form, and trade organizations, such as the AIR Commercial Real Estate Association, provide a form for use by members.
- In addition to providing the “Disclosure Regarding Real Estate Agency Relationship” required by Civil Code § 2079.16, a broker/agent is now also required to sign and deliver a specific disclosure pursuant to Civil Code § 2079.17 stating which party the broker/agent represents and whether he or she represents that party exclusively or represents both parties. This additional disclosure form is required to be delivered prior to or concurrently with the execution of a lease or purchase contract, but it may be combined with the required Civil Code § 2079.16 disclosure in a single document.
- Pursuant to Civil Code § 2079.15, an owner, seller or lessor may decline to sign the § 2079.16 general disclosure form. In that event, the broker/agent will continue to be in compliance with his or her legal obligations by setting forth, signing and dating a written declaration of the facts of the refusal.
Tips for Owners/Landlords. If you use your own forms, now is a good time to carefully review listing agreements for all brokers you hire, whether for leases or for purchase and sale transactions. If your forms do not already refer to dual agency, you may wish to consider adding a provision that states that as an owner you do not consent in advance to any dual agency representation. This gives you the opportunity to evaluate your options and consider all the facts if you are presented with a proposed dual agency representation by your broker. There may be circumstances under which you do not feel comfortable having the same broker represent both sides of the transaction. The new disclosure form rules now allow you to reserve your right to evaluate these facts at the time dual agency representation is proposed for your review. In addition, it is important to note that your listing agreement and any disclosure you do elect to sign should state that in the event of a conflict between your listing or brokerage agreement and the terms of the disclosure, the terms of the agreement shall control unless you specifically agree to the contrary.
Owners/landlords may elect from time to time to approve dual agency, and in that case they will want to sign only the second disclosure form presented for a particular transaction. We recommend that it be clear that such consent is only for that particular transaction and not for any future transaction or prospective transaction unless the owner/landlord specifically consents in writing.
Tips for Brokers/Agents. Failure to disclose dual agency in accordance with the new disclosure rules is a breach of applicable law, and may also be construed as a breach of the covenant of good faith and fair dealing. Failure to make the required disclosures may preclude a broker/agent from recovering compensation for his or her services, and expose the broker/agent to liability for any damages. In that regard, Civil Code § 2306 states: “An agent can never have authority, either actual or ostensible, to do an act which is, and is known or suspected by the person with whom he deals, to be a fraud upon the principal.”
If a broker/agent is accused of a breach of good faith, it is the broker/agent’s burden to prove “that he acted with the utmost good faith toward his principal and that he make [sic] a full disclosure prior to the transaction of all the facts relating to the transactions under attack.” Bate v. Marsteller ((1959) 175 Cal. App. 2d 573), citing Schwarting v. Artel, 40 Cal.App.2d 433, 441.
Your listing agreement should also provide that owners/landlords will execute additional disclosure forms upon reasonable request. It is imperative that a broker/agent obtain executed disclosures from owners/landlords and, if an owner/landlord is unwilling to execute any disclosures, have the owner/landlord execute a form documenting the reasons the owner/landlord declined to sign.