Investing in California real estate often requires assistance from real estate professionals, who have specialized education and experience in particular aspects of the real estate business. The term “professional” often means that a person has obtained a license or certification from a state agency charged with monitoring and enforcing ethical obligations. Certain professions require a license from the state, followed by continuing education and adherence to a code of conduct, like California real estate agents and brokers.
The term “professional,” however, sometimes simply refers to an individual who works in real estate, but who is not bound by a specific code of professional ethics. In either case, real estate professionals owe certain duties to clients and investors, and are liable for damages if they breach those duties.
Real Estate “Professionals”
The question of whether an individual is a licensed real estate “professional” can be critically important. Certain functions require licensure from a state organization. The California Department of Real Estate (DRE), for example, issues licenses authorizing individuals to broker the sale or purchase of real estate on behalf of someone else. An individual who provides real estate broker services without a license is in violation of state law, and may be subject to penalties ranging from civil or administrative fines to criminal prosecution. Licensed individuals who fail to meet the requirements set forth by the DRE may be subject to discipline, including license suspension or revocation. Investors should conduct due diligence with regard to whether a broker is licensed and in good standing.
The term “real estate professional” may also apply to individuals who work in real estate, but do not perform services that require a license. Serving as a real estate syndicator, for example, does not require any specific license, although real estate education, training, and experience is certainly helpful in that role. No distinct set of ethical rules applies to individuals in this sort of role, but they may be subject to fiduciary duties under both statutory and common law.
Duty of Loyalty
Real estate brokers act as an “agent” for their clients, meaning that they owe them the fiduciary duty of loyalty. When a real estate syndicator organizes a syndicate as a limited partnership or limited liability company, with the investors as partners or members in the business entity, the syndicator owes them a duty of loyalty. This duty requires a person to act solely in the best interest of their client or business partner, and to avoid self-dealing and other acts that might harm the client’s or partner’s interests.
In the event that a breach of the duty of loyalty occurs, potential remedies may include:
– Rescission of the contract with the breaching person, without penalty to the claimant;
– Forfeiture of any commission or other compensation that would otherwise be owed to the person in breach; and
– Monetary damages to compensate for actual losses caused by the breach.
Duty of Disclosure
Real estate brokers have a statutory duty to disclose any information to a prospective buyer that could affect the value, marketability, or desirability of a property, or which the broker has reason to believe could affect the buyer’s decision. This duty is separate from the duty of loyalty discussed above, which only applies when an agent/principal relationship exists. The duty to disclose is is a duty to the general public, which requires a broker to make disclosures to a prospective buyer even when the broker represents the seller. Failure to make required disclosures can result in rescission of a broker contract or contract for sale, or forfeiture of commission.
More Blog Posts:
The Duties of a California Real Estate Syndicator, Titles and Deeds, July 30, 2018
California Real Estate Agents’ and Sellers’ Duty of Disclosure to Prospective Buyers, Titles and Deeds, September 18, 2017
Is it Fraud for Owners and Real-Estate Agents to Fail to Disclose a Planned Taking in California? Titles and Deeds, March 31, 2017