Reference Book - A Real Estate Guide

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AUTHORITY OF AGENTS

AUTHORITY OF AGENTS somebody Wed, 07/19/2023 - 02:09 am

AUTHORITY OF AGENTS

The authority of agents may be express (actually conferred) or may be apparent or implied (ostensibly
conferred). (Civil Code § 2315 and Lyne v. Bonner (1954) 129 Cal. App. 2d 743 and Walter v. Libby (1945)
72 Cal. App. 2d 138). An agent's authority is limited to that which has been actually or ostensibly conferred by
the principal. The Civil Code provides that every agent has authority to:

A. Do everything necessary, or proper or usual in the ordinary course of business, for effecting the purpose of
the agency; and

B. Make representations as to facts not including the terms of the agent’s authority, but upon which the agent's
right to use his or her authority depends, and truth of which cannot be determined by the use of reasonable
diligence on the part of the person to whom the representation is being made. (Civil Code § 2319).

The agent has such authority as the principal actually or ostensibly confers upon the agent (Civil Code § 2315).
Actual authority is that authority a principal intentionally confers upon the agent, or intentionally, or by want of
ordinary care, allows the agent to believe that he or she possesses (Civil Code § 2316). Ostensible authority is
that authority a principal intentionally, or by want of ordinary care, causes or allows third persons to believe that
the agent possesses. (Civil Code § 2317). Ostensible authority is sometimes referred to as apparent or implied
authority. This authority is distinguishable from express or actual authority which is created by an agreement
between the principal and agent which specifically identifies the activities which the agent is allowed to
undertake.

1. Express Authority

Express authority is created by the contract of the principal which completely and precisely delineates those
activities which the agent is authorized to undertake. For example, if the principal authorizes the agent to
acquire a particular single-family residence for the price of $100,000, the agent has express authority to do

precisely that and nothing else. The agent would not have express authority to purchase the house for $105,000
or to purchase a different house.

2. Implied Authority

Implied authority exists because it is often impractical or even impossible for the principal to specifically
delineate every aspect of the agent's authority. Implied authority may be derived from express authority and
exists to the extent that it is reasonably necessary to accomplish the overall objectives of the agency. In the
example given directly above, the agent had express authority to purchase a particular property at a special
price. The agent might have implied authority to set the time limits for performance of the agreement, receive
notifications from the seller, waive conditions in the agreement and possibly undertake efforts to obtain
financing for the benefit of the buyer.

Implied authority cannot conflict with expressed authority but it may exist where there is no relevant grant of
express authority. The determination of whether implied authority has been given usually involves determining
the custom and practice of the community, and whether the specific act was reasonably necessary for achieving
the objectives for which the agency relationship was created.

The real estate broker should carefully consider the exercise of implied authority when acting on behalf of
principals in real property or real property secured transactions. Real estate brokers are special agents whose
actions typically require ratification by their principals.

3. Apparent Authority

Apparent authority depends not upon the express or implied agreement between the principal and the agent, but
upon the reasonable expectations of third parties who have been led to believe that the agent is authorized to act
on behalf of the principal. Apparent authority is distinctly different from actual or express authority, and is
sometimes referred to as ostensible authority by estoppel. Ostensible authority by estoppel arises when the
principal, by words or conduct, leads a third party to believe that another person is his agent.

In other words, apparent or ostensible authority will arise and the principal will be estopped to deny the
existence of the agency, or the scope of the agent's authority when the principal's actions have created the
appearance of authority in the agent, and a third party reasonably relies to his detriment upon this authority.
The most common way in which questions concerning apparent authority arise is where the principal has placed
a limitation upon the normal and ordinary authority of the agent and fails to communicate this limitation to a
third party dealing with the agent. In most cases, the third party will not be bound by this special limitation.

4. Liability of Principal to Third Parties

The principal is liable to persons who have sustained injury through a reasonable and prudent reliance upon the
ostensible, whether implied or apparent, authority of an agent. The act of the agent can never alone establish
ostensible, whether implied or apparent authority, but silence upon the part of the principal who knows that an
agent is holding himself or herself out as vested with certain authority may give rise to liability of the principal.

For instance, when the principal executes and entrusts to the agent a negotiable or non-negotiable instrument
containing blanks and the agent fills them in, principal will be bound to third persons who rely upon the
instrument, even though the agent was not so authorized. The authority conferred upon an agent to fill in the
blanks of a negotiable or non-negotiable instrument does not extend to inserting the name of the other party to
the transaction without the knowledge, consent of and disclosure to the principal. For example, to form a
contract the name and identity of the lender must be known to the borrower when the borrower executes the
promissory note. (Civil Code § 1558, Jackson v. Grant (1989) 876 F2d, 764).

5. Emergency Broadens Authority

An agent has expanded authority in an emergency, including the power to disobey instructions where it is
clearly in the interests of the principal, and where there is no time to obtain instructions from the principal. An
example of this authority occurs in the relationship between a property manager and an owner when an
immediate repair or replacement is required to protect the property and to provide necessary services to the
tenant.

6. Restrictions on Authority

An agent who is given the power to sell and convey real property for a principal also possesses the power to
give the usual covenants of warranty unless there are express restrictions in this regard in the agent's agreement
with the principal. Also, an agent can never have authority, either actual or ostensible, to do an act which is
known or suspected by the person with whom the agent deals to be a fraud upon the principal. Unless
specifically authorized, an agent has no authority to act in the agent's own name except when it is in the usual
course of business for the agent to do so. (Civil Code § 2315 et seq.). Remember, a real estate broker acts as a
special agent with limited authority which generally does not include the power to act in the place instead of the
broker's principal.

An agency to sell the property does not carry with it the authority to modify or cancel the contract of sale after it
has been made. A limited agency as created between a seller and a real estate broker to sell the property
ordinarily empowers the real estate broker as a special agent to find or procure a buyer, but does not authorize
the agent to enter into a contract to convey title to the property on behalf of a principal. Unless otherwise
specified, the authority of a general agent to sell the property only permits a sale for cash, or its equivalency,
and the agent is not entitled to accept goods in payment.

An agent who has authority to collect money on behalf of his or her principal may endorse a negotiable
instrument received in payment only where the exercise of this power is necessary for the performance of the
agent's duty and where the principal has specifically granted the power to endorse the instrument. Where an
agent is expressly authorized to collect money, the agent may accept a valid check and the agent's receipt of the
check on behalf of the principal will be considered payment to the principal.

A real estate broker who negotiates a loan on behalf of a lender ordinarily has no authority to collect payments
from the borrower, except in those instances where the broker as a special agent of the lender has possession of
the security and the borrower has knowledge of this fact, or the broker has received written authority from or
has entered into a written servicing agreement with the principal delegating the collection of payments (and
generally other loan servicing functions) to the broker. The delegation to the broker of loan servicing functions
also occurs in the context of administration, management, and operation agreements as part of an investment
contract relationship established when issuing securities. (Securities and Exchange Comm. v. W. J. Howey Co.,
328 U.S. 293 (1946) and Securities and Exchange Comm. v. Glenn W. Turner Enterprises, Inc., et al., No. 72-
2544, 474 F.2d 476; 1973 U.S. App. LEXIS 11903; Fed. Sec. L. Rep. (CCH) P93,748). The borrower must
have actual notice of the existence of the servicing agreement and the authority of the real estate broker as the
special agent of the lender. (Business and Professions Code §§ 10233, 10233.2 and 10237 et. Seq. and Civil
Code § 2937).

7. Ratification of Unauthorized Acts

Occasionally, a person may act as agent without any authority to do so, or the agent may act beyond the scope
of the agent's authority. The alleged principal may not be bound by such acts. A principal may under certain
circumstances ratify the acts of the agent and thus become bound. Not only must the principal intend to ratify,
but:

a. The agent must have professed to act as a representative of the principal;

b. The principal must have been capable of authorizing the act both at the time of the act and at the time of
ratification (e.g. sometimes the promoters of a proposed corporation make contracts on its behalf, but the
corporation cannot ratify them - though it may achieve the same result by other means);

c. The principal must have knowledge of all the material facts (unless ratification is given with the intention
to ratify whatever the facts may be);

d. The principal must ratify the entire act of the agent, accepting the burdens with the benefits;

e. The principal must ratify before the third party withdraws.

(Civil Code §§ 2310 et seq.).

Once ratified the legal consequences are the same as though the act had been originally authorized. Generally
an act may be ratified by any words or conduct showing an intention upon the part of the principal to adopt the
agent's act as the principal's own. Acquiescence or acceptance of benefits by the principal must be with full
knowledge of the facts, unless made with the intention to ratify whatever the facts may be.

Where the principal's ignorance of the fact arises from the principal's own failure to investigate, and the
circumstances are such as to put a reasonable person on inquiry, the principal may be held to have ratified the
act in spite of lack of full knowledge. A ratification can be made only in the manner that would have been
necessary to create the original authority for the act ratified. Accordingly, in real property dealings, the
ratification must be generally in writing. (Civil Code § 2310 et seq.).

8. Duty to Ascertain Scope of Agent's Authority

No liability is incurred by the principal for acts of the agent beyond the scope of the agent's actual or ostensible
authority. A third party who deals with an agent and knows of the agency is under a duty to ascertain its
purpose and scope. If the agent acts beyond the agent's actual authority and the conduct of the principal has not
been such as to give the agent ostensible authority to do the act, the third party cannot hold the principal liable
for such acts. (La Malfa v. Piomobo Bros. (1945) 70 Cal.App.2d 840, 844-845 citing Ernst v. Stearle, 218 Cal.
233, 240):

"A third person, such as appellant, is not compelled to deal with an agent, but if he does so, he must take the
risk. He takes the risk not only of ascertaining whether the person with whom he is dealing is the agent, but
also of ascertaining the scope of his powers. The rule is cogently stated in 1 Mechem on Agency, second
edition, section 743, page 527, as follows: 'An assumption of authority to act as agent for another of itself
challenges inquiry. Like a railroad crossing, it should be in itself a sign of danger and suggest the duty to "stop,
look and listen." It is therefore declared to be a fundamental rule, never to be lost sight of and not easily to be
overestimated, that persons dealing with an assumed agent whether the assumed agency be a general or special
one, are bound at their peril, if they would hold the principal, to ascertain not only the fact of the agency but the
nature and extent of the authority, and in case either is controverted, the burden of proof is upon them to
establish it.’ "

9. Power of Attorney

A power of attorney is a written instrument giving authority to an agent. The agent acting under such a grant of
authority is generally called an "attorney in fact". A special power of attorney authorizes the attorney in fact to
do certain prescribed acts on behalf of the principal. Under a general power of attorney, the agent may transact
all of the business of the principal. Powers of attorney are strictly construed and ordinarily where an authority
is given partly in general and partly in specific terms, the general authority is limited to acts necessary to
accomplish the specific purposes set forth.

Real Estate brokers should not be given powers of attorney in the same matter for which the broker is acting
within the course and scope of the real estate license as a compensated agent. It is a legal maxim that one
should not exercise a power of attorney to one's own economic advantage or benefit.

10. Authority to Receive Deposits

The general rule is that when the scope of authority of a real estate broker has been limited to producing a buyer
ready, able and willing to purchase the property upon terms prescribed by the broker's principal, the broker has
no authority to accept a deposit from the buyer. Even when an agent has express authority to negotiate a sale of
real property, this does not give him or her implied or ostensible authority to collect the purchase price. When

an agent does so, the agent is acting as the agent for the buyer and not the seller. Consequently any
misappropriation of these funds by the broker would result in loss to the buyer and not the seller.

This general rule of law does not apply, however, where the broker actually had authority to receive a deposit
on behalf of the seller. Virtually all listing agreement forms in use today give express authority to the broker to
accept an earnest money deposit on behalf of the seller. The authority granted a listing broker also applies to
any subagents of the seller. The authority, however, would not apply to a broker who is acting only as an agent
of the buyer.

In those cases where a down payment has been paid to the broker and not deposited in escrow, title to such
payment vests in the seller when the seller accepts the purchase contract. Further, where an agreement for sale
of real property provides that a deposit with the broker is to become a part of the down payment when the seller
puts in escrow a deed evidencing good title, the deposit becomes the seller's property when the deed is put in
escrow. Thereafter, the broker cannot, except at the broker's own risk, return the deposit to the buyer.
Similarly, money received by the seller's agent under a deposit receipt with a valid liquidated damages clause is
generally (in the case of the buyer's breach) not recoverable by the buyer. (Civil Code §§ 1057.3 and 1671).

The rationale behind this rule is that money received by a broker as agent or subagent for the seller belongs to
the seller when the offer has been accepted. The broker may not return the funds to the buyer without the
consent of the seller.

11. Checks

In those cases where an earnest money deposit has been paid to the broker with written instructions to hold and
not negotiate the check until acceptance of the offer, the buyer's instructions should be followed. But the seller
must be informed in writing that the buyer's check is being held and not negotiated. This disclosure should be
given to the seller no later than the actual presentation of the offer to the seller, and the notice must be
acknowledged by the seller prior to or concurrent with the seller's acceptance of the offer. (Business and
Professions Code § 10176(a)).

It is acceptable practice to include the disclosure as a term and condition of the offer. During the time between
the receipt of the check by the broker and the acceptance of the purchase offer by the seller, the broker must
enter the fact of receipt of the check into the broker's trust fund records and hold the check in a safe place. (10
CCR, Chapter 6, §§ 2831 and 2832).

Although there may be a custom in real estate transactions for a broker to accept a check or promissory note
instead of cash as an earnest money deposit, the existence of such a custom does not justify the acceptance of
such instruments, unless there is full disclosure to the seller. While checks have been universally accepted as
the equivalency of money in business transactions, promissory notes are not. The maker of a check represents
that sufficient funds are in the bank account upon which the check has been drawn, and the failure to have such
money may be a crime. The maker of a note does not represent that he or she has sufficient money to pay the
sums owing (pursuant to the terms of the note) at the time of its original execution and delivery, and the maker's
failure to pay the note when it is due is generally not a crime.

California Law has held that a post-dated check may be considered the equivalent of a promissory note.
Therefore, a broker should not accept a post-dated check from a buyer since this may result in
mischaracterization of the form of earnest money deposit without adequate disclosure to the seller. As our
society moves towards more electronic or wire transfer of funds, other forms of earnest money deposits may
well be used in real property transactions. Full and complete disclosure to the seller is required of the form, the
amount, and disposition of the earnest money deposit.

12. Promissory Notes

A real estate broker, like a trustee, has an affirmative duty to disclose all material facts which might influence a
principal's decision. Thus the broker who impliedly represents to a principal that the broker has received cash
from a purchaser as an earnest money deposit (when in fact the broker has accepted a non-negotiable
promissory note) has violated the Real Estate Law. The use of promissory notes as earnest money deposits
should be reviewed, in advance, by the real estate broker's legal counsel.

13. Escrow Depository

In those cases where an earnest money deposit has been paid by the buyer directly into a neutral escrow under
typical escrow instructions which provide for the exchange of money and a deed on stipulated conditions, the
buyer is said to have conditionally delivered the money to the escrow holder. Escrow is defined to mean any
transaction wherein one person, for the purpose of effecting the sale, transfer, encumbering, or leasing of real or
personal property to another person, delivers a written instrument, money, evidence of title, or other thing of
value to a third person to be held by such person until a happening of a specified event or a performance of a
prescribed condition, when it is then to be delivered to a grantee, grantor, promisee, promisor, obligee, obligor,
bailee, bailor, or any agent thereof. (Financial Code § 17003 and Civil Code § 1057).

While it may be argued that the buyer retains title to the money until the conditions imposed by the buyer have
been performed, the escrow holder upon receipt of written escrow instructions from the seller will generally not
return the earnest money deposit to the buyer without the concurrence of the seller. It is the obligation of the
buyer and seller to insure that all funds deposited with the escrow holder are returned to the person who
deposited the funds or who otherwise are entitled to the money if the purchase agreement is not completed and
the escrow is not timely closed.

The failure to execute any required documents to cause the funds to be returned, unless said funds are being
held to resolve a good faith dispute, may result in damages being imposed up to $1000 plus reasonable
attorney's fees. (Civil Code § 1057.3). Should the buyer and seller be unable to mutually resolve any disputes
regarding the return of earnest money deposits, the escrow holder will generally file an interpleader action
seeking declaratory relief from a court of competent jurisdiction. The cost of such action will typically be
deducted from the earnest money deposits.

When the buyer and seller have each fully performed under an agreement (all conditions of escrow have been
satisfied or waived), the escrow holder becomes the agent of the seller as to the purchase money and the agent
of the buyer as to the deed. The escrow holder thereupon delivers the money to the seller and the deed to the
buyer.

14. Commingling and Conversion

Commingling occurs when real estate licensees deposit money belonging to another or others into a bank
account owned or controlled by the licensee that is other than a properly constructed trust account.
Commingling can also occur when real estate licensees join or integrate the property belonging to another or
others with property of the licensee in an unauthorized manner and in violation of applicable law. Depending
upon the facts, joining or integrating the money or property belonging to another or others with the money or
the property of the licensee may be characterized as conversion.

The real estate licensee who is guilty of commingling and/or conversion creates a risk of the funds or the
property of the client/principal being included in an attachment for personal or business claims against the
licensee. (Business and Professions Code § 10176(e)). Hence, the Real Estate Law requires real estate brokers
to place all funds received on behalf of clients/principals in an authorized trust bank account no later than three
business days following the receipt of the funds by the broker or the broker’s salespersons or broker associates.

Alternatively, the real estate broker may place the client’s/principal’s funds with a “neutral” escrow depository
(e.g., a title company or licensed public escrow), or the broker may promptly deliver the funds to the
client/principal who is entitled to receive them. Trust bank accounts of real estate brokers must be established
and maintained in compliance with the Real Estate Law and are not available to real estate salespersons. A
salesperson or a broker associate must immediately deliver all client/principal funds to the broker, or deliver the
funds as instructed by the broker for whom the salesperson or broker associate acts as an agent. (Business and
Professions Code §§ 10145 and 10146 and 10 CCR, Chapter 6, § 2830.1 et seq.).

Real estate brokers are required to keep separate records for each beneficiary or transaction, accounting for the
funds of the client/principal that are deposited into the trust bank account. These separate records are to include
information sufficient to identify the beneficiaries, the transactions, and the parties to the transactions, as
required pursuant to 10 CCR, Chapter 6, § 2831.1.

Maintaining proper trust account records is essential for the protection of the public. For example, FDIC
insurance coverage available per bank account is extended to each beneficiary identified separately in the
broker’s trust bank account records. Accordingly, a beneficiary whose trust assets, trust liabilities, and net trust
balances are properly maintained on a daily basis as part of the separate records of the broker’s trust bank
account (whether manually or through software) will be separately recognized by the FDIC under their
insurance coverage. Should the bank depository become insolvent or be subject to a regulatory enforcement
action, separate FDIC insurance coverage for each beneficiary is extremely important

A real estate broker is authorized to deposit into the broker’s trust account certain defined funds belonging to
the broker without being in violation of Business and Professions Code 10176(e). These funds of the broker
include an amount not to exceed $200, to pay service charges or fees levied or assessed against the trust account
by the bank or financial institution with which the trust account is maintained. The broker also may deposit
funds into the trust bank account that belong in part to the broker’s client/principal and in part to the broker
when it is not reasonably practical to separate such funds. The client/principal funds that may be maintained in
the same trust bank account with the funds of the broker must be received in connection with debt service on
mortgage loans co-owned by the broker and the client/principal, or the funds may represent the proceeds of
rental income from a property co-owned by the broker and the client/principal.

Certain predicates apply to this exemption from the definition of commingling, including that the funds
belonging to the broker are to be disbursed no later than twenty-five days after their deposit, provided no
dispute exists between the broker and the broker’s client/principal as to the broker’s portion of the funds. Other
predicates apply before the broker may rely on this limited exemption. (10 CCR, Chapter 6, § 2835).

If the broker fails to comply with the Real Estate Law regarding the handling of trust funds, the broker is
subject to disciplinary action by the Commissioner and may be subject to criminal action for conversion of
funds belonging to the public. It is recommended real estate brokers consult with legal counsel and with a
certified public accountant before establishing trust fund handling, trust bank account procedures, or when
proposing to join or integrate the money or property of the client/principal with the money or property of the
licensee.

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CONCLUSION

CONCLUSION somebody Wed, 07/19/2023 - 02:09 am

CONCLUSION

The subject of agency and fiduciary duty is complex and has proven to be difficult to understand and apply,
particularly by real estate brokers and mortgage brokers when performing as special agents of the principals
they serve. The discussion in this Chapter is intended to enhance the knowledge of the real estate and mortgage
brokerage industries regarding the duties and obligations owed by brokers and their salespersons and broker
associates when acting as principals only in real property transactions: as principals and special agents, or as
special agents of the principals to real property transactions (buying, selling, leasing, exchanging or property
managing), and to real property secured transactions (the making and arranging of loans).

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CREATION OF AGENCY RELATIONSHIPS

CREATION OF AGENCY RELATIONSHIPS somebody Wed, 07/19/2023 - 02:09 am

CREATION OF AGENCY RELATIONSHIPS

The relationship of principal and agent can be created by agreement between them, referred to as an actual
agency, by ratification or by estoppel, or as the result of the conduct of the parties and the agent's inherent
relationship with third parties (i.e., an ostensible or implied agency). Typically, the status of the real estate
broker performing as a special agent of a principal in a real property or real property secured transaction is
created by an express agreement (an actual agency). When created in this manner, the basic principles of
agency law arising out an agreement are applicable.

1. Employment Contract

The duty to know and understand the agency relationship being constructed by an agreement or occurring as a
result of the conduct of the parties is placed primarily upon the broker. When a real estate broker and a
principal enter into an employment contract authorizing the broker to act on behalf of the principal, an actual
agency relationship is created. (Civil Code § 2299). Since a real estate broker draws clients from all walks of
life, it is incumbent upon the broker (in view of the broker's knowledge and expertise) to see that the
employment agreement with the principal establishes the agency relationship, is in a correct form, and is
constructed according to the circumstances and in a fair manner.

2. When is the Agency Relationship Established?

As indicated above, the relationship between an agent and a principal is usually based upon an agreement, either
expressed or implied. In the real estate industry, the most common and standardized agency agreement is that
which arises between a seller or lessor of property, or an owner of a property who is an intended borrower and
his or her broker. Such agency agreements are known as "listings." Agency agreements can also be made
between an agent and a prospective buyer, lender, or tenant/lessee. Agreements with buyers, tenants/lessees, or
lenders are more common in non-residential transactions, although the use of such agreements for residential
sales appear to be increasing. In any case, an agency agreement must be in writing for the agent to be able to
enforce a commission claim based upon a breach of contract theory. (Civil Code § 1624(d); Phillippe v. Shapell
Industries (1987) 43 Cal. 3d 1247, 1255-1258).

3. Right to Compensation

A. Breach of Contract vs. Tort Theory

The broker's right to compensation and the amount must be clearly set forth in the listing agreement. The
obligation to pay compensation to the broker must be in writing. A real estate broker can act upon a letter
received from an owner, whether voluntarily sent by the owner or in answer to the broker's solicitation. When
relying upon letters, the broker should be very careful to see that the letter contains an employment clause, or
authorizes the broker to find or procure a buyer, tenant/lessee, or a lender, and describes the compensation the
broker is entitled to receive as a result of accomplishing the purpose and scope of the agency.

Civil Code § 1624(d) and the Phillippe case mean that a broker is not entitled to recover a commission under a
breach of contract theory, unless there is a signed agreement between the broker and the principal. The
agreement can be a listing agreement, some other form of agency agreement, or the agreement to pay the
commission may be set forth in the purchase agreement itself. For instance, one court held that a defaulting
buyer was liable to the buyer's agent for a $100,000 commission on the grounds that the broker was a third party
beneficiary of the purchase agreement between the buyer and seller. (Chan v. Tsang (1991) 1 Cal.App.4th
1578).

Similarly, loan brokers should have but often do not have written agreements with their principals. Even
without written agreements, loan brokers may be able to enforce payment of their compensation by reference to
other loan documents and disclosures exchanged between the borrower and the broker that identify the
commissions, fees, costs and expenses being paid to or charged by the broker, and which obligate the borrower
for the payment of such compensation. However, if there is no written agreement obligating the principal to
pay compensation, the real estate broker generally will not be able to recover the compensation, regardless of
the extent to which services were rendered for the benefit of the principal.

An example is where a seller and broker enter into a 90 day listing agreement which expires before a buyer is
found. The seller instructs the broker to continue working on finding a buyer, but does not sign a written
extension of the listing agreement. Can the broker recover a commission if a buyer is procured? Answer: Quite
probably not.

An agency agreement and all extensions or modifications of it must be in writing to be enforceable. In this
case, the listing agreement expired and the agent is working without an agreement. The broker may very well
be a continuing agent of the principal for purposes of soliciting for buyers, but the broker is without a written
agreement for compensation. Should the broker be successful in producing a buyer willing, ready, and able to
purchase the property pursuant to the terms, conditions, and covenants authorized and agreed to by the
principal, unless the broker is able to successfully argue the principal waive the termination date of the listing
contract the broker may be unsuccessful in enforcing compensation. The result of the argument may create a
conflict with Business and Professions Code § 10176(f).

At least in one case, a real estate broker was successful in obtaining a commission based upon a claim arising
out of an intentional interference with a prospective economic advantage. The real estate broker, Mr. Buckaloo,
did not have a written commission agreement with the seller. Based upon an oral contract with the seller, Mr.
Buckaloo expected to earn a commission if the property were sold. Mr. Buckaloo found a buyer and showed
him the property. The seller and the buyer apparently conspired to avoid paying Buckaloo a real estate
commission, and closed the sale without informing Mr. Buckaloo. Mr. Buckaloo sued for intentional
interference with a prospective economic advantage, based upon his allegation he was the "procuring cause" of
the sale.

The Supreme Court saw the inequity in the fact situation and ruled in Mr. Buckaloo's favor. The Court held that
Buckaloo had no contractual right to a commission because there was no compliance with the Statute of Frauds
(Civil Code § 1624) in the absence of a written agreement for payment of the commission. In this case, the
claim for commission was not based upon an alleged breach of contract, but rather it was based upon a tort
theory of recovery. The Supreme Court held that the tort theory of interference with an economic advantage
arising out of the relationship between the parties would support Mr. Buckaloo's commission claim, even
though Mr. Buckaloo would be unable to enforce the underlying oral commission agreement on a breach of
contract theory. (Buckaloo v. Johnson (1975) 14 Cal. 3d 815). Notwithstanding the Buckaloo case, the real
estate broker is well advised to obtain written agreements for payment of compensation when acting as an agent
for a principal in a real property or real property secured transaction.

It is unlawful for any licensed real estate broker to employ or compensate, directly or indirectly, any person for
performing any of the acts for which a license is required who is not a licensed real estate broker, or a real estate
salesperson licensed under the broker employing or compensating him or her; provided, however, that a
licensed real estate broker may pay a commission to a broker of another state. No real estate salesperson shall
be employed by or accept compensation from any person other than the broker under whom he is at the time
licensed. It is unlawful for any licensed real estate salesperson to pay any compensation for performing any of
the acts within the scope of the Real Estate Law to any real estate licensee, except through the broker under
whom he or she is at the time licensed. (Business and Professions Code § 10137).

The above prohibition against sharing commissions with unlicensed persons applies only to a payment made by
a licensee to a non-licensee as compensation for the performance of acts for which a real estate license is
required. Thus, the payment of a portion of a commission by a licensee to a principal in the transaction does not
constitute a violation of § 10137, but if there is a commission rebate to the buyer in the transaction that fact
must be disclosed by the agent to the seller who has paid the commission. (Business and Professions Code §§
10138, 10139, and 10139.5).

To summarize the foregoing discussion regarding breach of contract and tort theories, the following conclusions
should be considered:

1. Commissions can only be paid to a licensed real estate broker who, in turn, may pay all or a portion of the
commission to a licensed salesperson or broker associate provided that the salesperson or broker associate has a
written contract with the broker. (Business and Professions Code §§ 10136, 10137, and 10138 and 10 CCR,
Chapter 6, § 2726).

2. No salesperson shall be employed by or accept compensation from any person other than the broker with
whom he or she is at the time licensed, and no salesperson shall pay compensation for performing any of the
acts for which a license is required to any real estate licensee except through the real estate broker under whom
the salesperson is licensed. (Business and Professions Code § 10137).

3. The listing broker must have a valid, written contract with the principal for whom the broker is acting, e.g.,
the seller landlord/lessor, or borrower. (Civil Code § 1624(d); Phillippe v. Shapell Industries (1987) 43 Cal. 3d
1247).

4. The selling broker must either have a valid written agreement with the buyer, tenant/lessee, or lender or be
the "procuring cause" of the sale, tenancy or loan. (Civil Code § 1624(d); Phillippe v. Shapell Industries (1987)
43 Cal. 3d 1247; Buckaloo v. Johnson (1975) 14 Cal. 3d 815.)

B. Procuring Cause

In addition to showing that the broker has produced a ready, willing and able buyer, the broker must sometimes
show that he or she was the "procuring cause" of the transaction before becoming entitled to a commission.
This definition is particularly important in the case of more than one cooperating broker who has been working
with a buyer, or where the broker is operating under an open listing and more than one broker may be
competing for the payment of the commission. "Procuring cause" may be defined as a cause originating or
setting in motion a series of events which, without breaking their continuity, results in the accomplishment of
the prime object of the employment of the broker. (Pass v. Industrial Asphalt of California, Inc., (1966) 239
Cal.App.2d 776, 782; Rose v. Hunter (1957) 155 Cal.App.2d 3/9, 323).

The foregoing definition, while often repeated, is somewhat difficult to apply in practice. The broker is
certainly the procuring cause if the parties enter into an agreement authorizing the broker to solicit buyers on
behalf of the seller, and the broker produces a buyer in conformance with the listing agreement. What if the
broker simply introduces the parties who then make their own agreement? Assuming there are no significant
lapses of time, the broker is still probably the "procuring cause". (Buckaloo v. Johnson (1975) 14 Cal. 3d 815).

A common problem occurs when an ungrateful buyer, who was shown property by a broker, goes directly to the
seller or listing broker to make the agreement to either avoid or reduce the amount of commission paid. Based
upon the definition of "procuring cause," the broker who showed the property to the buyer is probably the
"procuring cause", although in the practical world the problems of proof that the broker will face suggest that
the case may be difficult to win.

4. Essential Elements of an Agency Agreement

The essential terms of an agency listing agreement are: (1) The names of the parties; (2) The identity of the
property; (3) the terms and conditions of the anticipated sale, lease or loan; (4) the amount of commission or
other compensation to be paid; (5) the expiration date of the agency; and (6) signatures of all parties concerned.
In addition, an agency agreement concerning owner occupied residential property must contain a statement in
ten point bold print or larger, acknowledging that commission amounts are negotiable and are not set by law.

It is advisable for a real estate broker to include such a statement in all transactions where the broker is acting
within the course and scope of the real estate license and is claiming, contracting for, or expecting
compensation for his or her services.

5. Types of Listing Agreements

The type of listing agreement and the terminology used to designate the form of listing varies somewhat among
localities. The four kinds of listing agreements most commonly used are: (1) the open listing; (2) exclusive
agency listing, (3) exclusive right to sell listing and (4) the net listing. In addition, local real estate boards or
associations either directly or indirectly provide a service known as a multiple listing which is not a listing
agreement. Rather, it is a mechanism and a medium through which information concerning listed properties is

disseminated among a wide group of real estate brokers and their salespersons and broker associates.

When the relationship between the real estate broker and seller results in an exclusive agency, the listing
agreement must contain a definite, specified date of final and complete termination. (Business and Professions
Code § 10176(f). Regardless of the relationship between the real estate broker and the seller, the description of
the real property which is the subject of the listing must be included although it need not be as detailed as
required in an instrument of conveyance or encumbrance. The description should, however, identify the
property with certainty. A description that can be made certain is sufficient, e.g., "My house on Tenth Street,
City," would be acceptable if the owner had but one house on Tenth Street. It would not be acceptable if this
person owned two houses on Tenth Street.

A. Open Listing

An open listing is the most informal of the four principal kinds of listing agreements, and is distinguished by the
fact that the owner retains the right to revoke the listing at any time, to sell the property him or herself, or to list
the property with another broker. Open listings often generate questions regarding a real estate broker's claim to
a commission, because the sale of the property by either the owner or any subsequently hired agent will defeat
the original broker's right to a commission.

B. Exclusive Agency

An exclusive agency is an agreement by which the owner agrees to employ a particular real estate broker and no
other to solicit buyers, tenants/lessees, or lenders. Under an exclusive agency listing, the broker's right to a
commission is protected as against other brokers for the duration of the listing agreement. However, under an
exclusive agency agreement, the owner retains the right to sell, encumber or rent/lease the property on his or her
own and, in that event, the owner can terminate the agency agreement and defeat the broker's claim to a
commission or other compensation.

C. Exclusive Right to Sell

The exclusive right to sell listing affords the real estate broker the greatest protection and makes him or her the
sole agent for the sale, renting or leasing, or encumbering of the property. Under such an agreement, the broker
is entitled to a commission provided only that the property is sold, rented or leased, or encumbered during the
listing period, regardless of who procures the buyer, the tenant/lessee, or lender. In other words, under an
exclusive right to sell agreement, the owner relinquishes both the right to list the property with other agents and
the right to defeat the broker's claim for a commission by selling, renting or leasing, or encumbering the
property him or herself.

It should be noted that in "sheltered" loan transactions arranged by real estate brokers pursuant to Article 7 of
the Business and Professions Code, commencing with § 10240, the period of time during which exclusive
authority may be granted to solicit lenders to procure a loan is limited to 45 days. (Business and Professions
Code § 10243).

D. Net Listing

A net listing is one which contemplates the seller realizing a specific net price with the real estate broker's
commission consisting of any sum that is received in excess of the seller's net proceeds. For example, if the
seller enters into a net listing with a broker for a $100,000 net price, the broker would receive no commission if
the net proceeds of the sale are $100,000 or less. On the other hand, if the proceeds of the sale are $125,000,
the broker is entitled to a commission of $25,000.

Because of the potential for creating conflicts of interest between the real estate broker acting as a special agent
and the principal, some states such as Massachusetts and New York limit or prohibit the use of net listing
agreements. Net listings are not illegal in California. However, the net listing can easily lead to a breach of the
agent's fiduciary duties and obligations. Therefore, net listing should be used only with highly sophisticated
clients, or with clients who are independently represented by another professional and, of course, with full
disclosure of all material facts involved in all transactions. (Business and Professions Code §§ 10176(a), (g)
and (h)).

E. Multiple Listing

The multiple listing and the multiple listing service (M.L.S.) creates a means by which information concerning
individual listings is distributed to all participants and subscribers of the service. For example, a seller lists
property for sale with a broker. The broker then transmits a memorandum of the listing which includes
information such as the type of property, its size, location, the listed price and other relevant information. This
memorandum is then transmitted to the M.L.S. which in turn publishes, either in a booklet and/or computerized
data sharing format, the information submitted by the original listing broker. Other brokers throughout the
region are thereby made aware of the existence of the listing and can contact the listing agent on behalf of
prospective buyers for the property.

When this is done, it is common that the listing broker will split any commission received with the broker who
procures the buyer for the property. The broker who cooperates with the listing broker to procure a buyer is
known as the selling broker. The selling broker may be acting as a subagent of the seller, an agent of the listing
broker, or may be performing as the exclusive agent of the buyer.

F. Legal Significance of the M.L.S.

Two features of the M.L.S. are of legal significance to real estate brokers. The first is that information
submitted to M.L.S. may later be admissible in court on the claim that the M.L.S. profile was incorrect and
therefore was a misrepresentation. In addition, when a real estate broker or his salesperson or broker associate
submits a listing to the M.L.S., the broker typically makes a unilateral offer to compensate the cooperating
broker who procures a willing, ready and able buyer. Further, the seller typically authorizes the listing broker to
cooperate and share commissions with other brokers who are members of the M.L.S., for the purpose of
delegating to the cooperating brokers some of the listing broker's responsibilities, i.e., the assignment to solicit
for and procure the buyer.

In such event, the cooperating broker becomes the subagent of the seller, unless the agency relationships are
clearly bifurcated in writing limiting the cooperating broker to performing as an agent only of the buyer. Civil
Code §§ 2079 et seq. [agency disclosure]; Civil Code §§ 2349, 2350 and 2351).

G. In the Context of a Listing Relationship, Authority of an Agent to Perform Authorized Acts on Behalf of the
Principal

A pervasive aspect of agency law involves the agent's authority to act on behalf of the principal. Related to this
concept is whether and to what extent will the principal be liable for agreements entered into, conducts of, or
misconducts or wrongdoing committed by the agent. For instance, an agent, acting on behalf of an owner of
real property, hires a contractor to perform an inspection of and to make certain repairs on the owner's property.
Is the owner contractually obligated to pay for the services? Suppose that unknown to the owner, the agent for
the owner (who is a real estate broker authorized to solicit for and to procure a buyer) falsely represents to the
buyer there is a new roof covering on the property. Is the owner and seller liable for the broker's engagement of
the contractor or for the misrepresentation regarding the roof covering? The answer to both of these questions
is probably yes, depending upon the extent of the agent's authority.

The real estate broker should not confuse the authority of an agent to act on behalf of the principal under the
principal’s express authority, whether written or oral, with the broker's limited authority as a special agent. Real
estate brokers are special agents who are licensed and regulated to solicit and negotiate on behalf of their
principals, but generally not to bind or act in the place and stead of the principals. As special agents, real estate
brokers are authorized within the course and scope of the agency to make certain representations on behalf of
owners and sellers of real property.

H. Consideration in the Listing Context

Consideration is not essential to the creation of an agency. One may gratuitously undertake to act as an agent
and will still be held to certain standards demanded of an agent for compensation. Under the Real Estate Law,
one who acts as a gratuitous agent does not need a real estate license. However, in any transaction subject to
the Real Estate Law, and where there is an expectation of compensation, regardless of the form, time, or
implicitly source of payment, then a license is required. (Business and Professions Code § 10131. et seq.).

Needless to say, compensation or the expectation of compensation is viewed broadly. For instance, benefits
arising out of a joint venture relationship, or even out of the sharing of overhead, have been held to be sufficient
compensation to established licensed activity. (Stickel v. Harris (1987) 196 Cal.App.3d 575, 585; James Jones
v. Kellman (1988) 199 Cal.App.3d 131-136).

Generally, the agreement between the real estate broker and his or her principal provides for the payment of
consideration, usually in the form of a commission. The payment of consideration arises out of the agreement
between the principal and the broker. The agreement can be classified as either unilateral or bilateral. A
unilateral agreement is one in which one party makes a promise to induce some act or performance by the other
party, but the latter can act or not act as he chooses. For example, in the case of an open listing, the intended
seller agrees to pay compensation to the real estate broker if the broker procures a buyer, but there is no
obligation on the part of the broker to do so.

A bilateral agreement is one in which a promise by one party is given in exchange for a promise by the other
party. For example, the exclusive right to sell listing (since the obligation upon the broker to use due diligence
and best efforts to procure a buyer is either express or implied) is a bilateral agreement because it involves an
exchange of promises. As previously noted in this Chapter, it is essential for the real estate broker to be able to
enforce payment of compensation on a breach of contract theory that the agreement retaining the broker be in
writing (Civil Code § 1624(a)(3); Phillippe v. Shapell Industries (1987) 43 Cal. 3d 1247, 1255-1258.)

In the relationship established between the listing broker and cooperating brokers under traditional M.L.S. rules,
the cooperating broker is appointed as a subagent of the principal (i.e., the seller). As a result of such
appointment, the subagent may generally seek compensation from the principal. The more recent M.L.S. rules
result in a unilateral offer of payment of compensation and not of subagency. See the discussion in this Chapter
regarding subagency.

Where the principal's direct authority to cooperate with other brokers is unclear or contradictory, the
cooperating broker has been obligated to seek compensation from the listing broker. (Goodwin v. Glick (1956)
139 Cal.App.2d Supp. 936). When the principal's authority is direct and clear, the cooperating broker has been
able to secure payment of the commission from the principal. (Schmidt v. Berry (1986) 183 Cal.App.3d 1299).
Although legal theories exist such as "third party beneficiary agreements" to support the payment of
commissions to cooperating brokers, the latter may find it difficult to seek compensation directly from the
principal because of a lack of privity of contract between the cooperating broker and the principal.

I. Mortgage Brokers

Real estate brokers perform as mortgage brokers when soliciting or negotiating loans, or when collecting
payments or performing other related services for borrowers or lenders, including holders of promissory notes,
when the loans are secured directly or collaterally by liens on real property. These licensees also perform as
mortgage brokers when offering to sell, buy, or exchange promissory notes on behalf of the holders when the
loans are secured directly or collateral by liens on real property. (Business and Professions Code §§ 10131(d)
and (e), 10131.1 et seq., 10166.01 et seq., 10230 et seq., 10237 et seq., and 10240 et seq., and 10 CCR, Chapter
6, §§ 2840 through 2846).

Mortgage brokers may also engage (when authorized) in the collection of advance fees and in the issuance of
securities, as defined in the Real Estate Law. When issuing securities, mortgage brokers are also subject to the
Corporate Securities Law of 1968 and the applicable regulations of the Corporations Commissioner. (See,
among others, Business and Professions Code §§ 10026, 10085, 10085.5, 10131.2, 10131.3, and 10146, and 10
CCR, Chapter 6, §§ 2970 and 2972; and, among others, Corporations Code §§ 25019 and 25206, and 10 CCR,
Chapter 3, §§ 260.115 and 260.204.1).

Mortgage brokers solicit or negotiate loans to be delivered to financial institutions or to licensed lenders, as well
as to private parties who invest private equity capital to fund loans or purchase promissory notes or interests
therein secured directly or collaterally by liens on real property. When doing so, mortgage brokers act as agents
and fiduciaries of the borrower or lender, or both; or the promissory note holder and the purchasers of such
notes, or both. When acting for both principals in either circumstance, mortgage brokers are dual agents.
(Business and Professions Code §§ 10131 et seq., 10166.01 et seq., 10176(d), 10177(n), 10177(q), 10177.6.,

10230 et seq., 10237 et seq. and 10240 et seq; and Civil Code §§ 2295 et seq., and 2923.1, and 10 CCR,
Chapter 6, § 2840 et seq.).

When loans are arranged to be delivered to financial institutions or to licensed lenders, mortgage brokers
typically are the agents and fiduciaries of at least the borrowers in such transactions. Depending upon the facts,
mortgage brokers may also become the agents and fiduciaries of financial institutions or licensed lenders
funding the loans for defined purposes, e.g., obtaining appraisal and credit reports or completing and delivering
required disclosures or issuing required notices of rights on behalf of the lenders/creditors. In such fact
situations, mortgage brokers are typically dual agents. (Business and Professions Code §§ 10131 et seq.,
10176(d) and 10177(q) and Civil Code §§ 2295 et seq. and 2923.1).

When acting within the course and scope of the real estate broker’s license, mortgage brokers are not solely
performing as facilitators or intermediaries. Pursuant to applicable law, mortgage brokers must generally be
agents and fiduciaries of at least one of the principals to the loan transactions or to the purchase and sale of
promissory notes. When loans are delivered to private parties, mortgage brokers must be the agents and
fiduciaries of the private parties, whether funding loans or purchasing existing promissory notes or interests in
either the loans or the notes. Generally, mortgage brokers are also the agents and fiduciaries of the borrowers in
such transactions. (Business and Professions Code §§ 10131 et seq., 10176(d), 10177(n), 10177(q), 10230 et
seq., 10237 et seq., and 10240 et seq.; and Civil Code §§ 2295 et seq., and 2923.1, and the Real Estate
Commissioner’s Regulations pertaining thereto, including 2840 et seq., and Corporations Code §§ 25004,
25100(e), 25102.5, and 25206 and the Corporations Commissioner’s Regulations pertaining thereto, including
10 CCR, Chapter 3, §§ 260.115 and 260.204.1).

Regardless of the nature of the intended loan transaction or the type of security property, mortgage brokers act
as special agents and fiduciaries of their principals pursuant to Civil Code § 2297. When performing mortgage
brokerage services, as defined, mortgage brokers are agents and fiduciaries of the borrowers and may be agents
and fiduciaries of the lenders/creditors. (Business and Professions Code §§ 10131 et seq., 10166.01 et seq.,
10176(d) and 10177(q), and Civil Code §§ 2295 et seq. and 2923.1).

Whether mortgage brokers act as the agents and fiduciaries of the borrowers or the lenders/creditors, or for the
promissory note holders or the intended purchasers, or for both principals in the same transaction as dual agents,
the common law as well requires mortgage brokers to place the interests of their principals ahead of their own.
This duty and obligation to represent and act in the interests of their principals is incumbent upon mortgage
brokers, regardless of the nature of the loan transaction, the services being provided, or the type of security
property, including when acting as servicing agents, or in connection with loan modifications, extensions, or
forbearances. (Business and Professions Code §§ 10131 et seq., 10166.01 et seq., 10176, 10177, 10230 et seq.,
10237 et seq., and 10240 et seq.). (Realty Projects, Inc. v. Smith (1973) 32 Cal.App.3d 204, 108 Cal. Rptr. 71
and Wyatt v. Union Mortgage Co. (1979) 24 Cal. 3d 773 [157 Cal. Rptr. 392; 598 P.2d 45] and Montoya v.
McLeod (1985) 176 Cal.App.3d 57, 64, 221 Cal. Rptr. 353 and Barry v. Raskov (1991) 232 Cal. App. 3d 447,
283 Cal. Rptr. 463 (Cal. App. 2 Dist.) and California Real Estate Loans, Inc. v. Wallace (1993) 18 Cal.App.4th
1575, 1580).

An agency relationship is established when a person represents a principal in dealings with third persons.
Agents are fiduciaries with rare exception when performing within the course and scope of the agency.
Mortgage brokers are agents and fiduciaries with prescribed duties and obligations when performing within the
course and scope of the real estate broker’s license. (Civil Code § 2297). However, fiduciary relationships may
exist with principals even when no third persons are involved. Examples include the relationships between
doctors and patients (principals) and between lawyers and clients (principals) when the services are performed
in the absence of third persons.

Black's Law Dictionary describes a fiduciary relationship as "one founded on trust or confidence reposed by one
person in the integrity and fidelity of another". A fiduciary has a duty to act primarily for the principal’s benefit
in matters connected with the undertaking and not for the fiduciary's own personal interest, including the
requirement mortgage brokers place the economic interests of the borrower ahead of the broker’s own economic
interest. (Business and Professions Code §§ 10131 et seq., 10166.01 et seq., 10176, 10177, including 10177(q),
10230 et seq., 10237 et seq., and 10240 et seq., and Civil Code §§ 2295 et seq. and 2923.1(a)).

Mortgage brokers are providing mortgage brokerage services when acting for compensation or in expectation of
compensation (whether paid directly or indirectly) to arrange or attempt to arrange residential mortgage loans as
exclusive agents of the borrowers. Mortgage brokerage services are also provided when mortgage brokers act
as dual agents for the borrowers and the lenders/creditors. Mortgage brokerage services, as defined, require the
residential mortgage loan be made by an unaffiliated third party. (Civil Code § 2923.1(b) (3)).

However, mortgage brokers may not rely solely on the language requiring the residential mortgage loan to be
made by an unaffiliated third party. For example, mortgage brokers may undertake to act as agents and
fiduciaries of the borrowers to procure lenders/creditors in intended loan transactions and then elect to make the
loan with funds the brokers own or control (whether directly or by an affiliated party). In such circumstances,
mortgage brokers are acting as principals and as agents and fiduciaries of the borrowers (and are agents and
fiduciaries of private parties who may join with the mortgage brokers to fund the loan or purchase the
promissory note or an interest therein. (Business and Professions Code §§ 10131 et seq., 10166.01 et
seq.,10176(d), 10177(q), 10230 et seq., 10237 et seq., and 10240 et seq., including 10240(b,) and 10 CCR,
Chapter 6, § 2840 et seq.; and Civil Code §§ 2295 et seq. and 2923.1(c); and Corporations Code §§ 25019,
25004, 25100(e), 25102.5, 25206 and 10 CCR, Chapter 3, §§ 260.115 and 260.204.1.).

Residential mortgage loans are defined to mean consumer credit transactions secured by residential real
properties improved by four or fewer residential units. (Civil Code § 2923.1(b) (4)). Real estate brokers
performing as mortgage brokers are licensed and authorized to not only make or arrange residential mortgage
loans, but to make and arrange loans secured by other than 1 to 4 residential units, e.g., land, income producing
property, and the like. Mortgage brokers are agents and fiduciaries, as well, in non-residential mortgage loan
transactions. (Business and Professions Code §§ 10131 et seq., 10230 et seq., 10237 et seq., and 10240 et seq.,
and Civil Code § 2295 et seq.).

The agency relationships between mortgage brokers and borrowers and lenders/creditors, or promissory note
holders or the intended purchasers of such notes, or when providing services to borrowers or lenders/creditors
(including acting as loan servicing agents) must be disclosed and consented to by the principals in each
transaction. Mortgage brokers are subject to this duty and obligation regardless of the nature of the transaction
or the type of security property, including when performing services on behalf or borrowers or lenders/creditors,
such as loan modifications, extensions, or forbearances. The appropriate standard of care requires mortgage
brokers, in writing, to disclose to and obtain consent from their principals to the agency relationships intended
before proceeding to act on behalf of their principals. (Business and Professions Code § 10176(d)).

Significant duties and obligations are imposed on mortgage brokers pursuant to federal and state law when
performing as agents and fiduciaries of one or more principals in loan transactions. Even when not acting as
agents and fiduciaries of both principals (dual agents) in loan transactions, the duties and obligations imposed
upon mortgage brokers include (among others), completing and delivering disclosures and notices of rights
required under applicable law. Mortgage brokers are also subject to specified disclosures and notices and may
not engage in prohibited conducts or in material loan terms in loan transactions that qualify as “high-cost”,
“higher-cost”, or “higher-priced”, as defined. (12 USC 2601 et seq.; and 24 CFR Part 3500 et seq.; USC 1601
et seq. and 12 CFR 226 et seq.; Business and Professions Code §§ 10131 et seq., 10166.01 et seq., 10176,
10177, 10230 et seq., 10237 et seq., 10240 et seq. and 10 CCR, Chapter 6, § 2840 et seq.; and Financial Code
§§ 4970 et seq. and 4995 et seq.).

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FIDUCIARY DUTIES OWED TO A PRINCIPAL BY AN AGENT, AN OVERVIEW

FIDUCIARY DUTIES OWED TO A PRINCIPAL BY AN AGENT, AN OVERVIEW somebody Wed, 07/19/2023 - 02:09 am

FIDUCIARY DUTIES OWED TO A PRINCIPAL BY AN AGENT, AN OVERVIEW

1. Loyalty and Confidentially

A real estate broker owes duties of loyalty and confidentiality to the broker's principal for whom the broker is
an agent and fiduciary. The broker is prohibited from personally profiting by virtue of the agency relationship,
except through the receipt of compensation for services rendered by the broker in accordance with the terms of
the employment agreement. This fiduciary duty and obligation of the broker as an agent of his or her principal
throughout the agency relationship is probably the most significant aspect of the relationship.

The courts have consistently equated the duty of an agent to a principal with the duty owed by a trustee to a
beneficiary. The Probate Code provides that, in all matters connected with a trust, a trustee is bound to act in
the highest good faith toward the trustee's beneficiary, and the trustee may not obtain any advantage over the
beneficiary by the slightest misrepresentation, concealment, duress or adverse pressure of any kind. (Probate
Code 16000, 16015 and Rodes v. Shannon (1963) 222 Cal. App. 2d 721, 725; Whipple v. Haberle (1963) 223
Cal. App. 2d 477, 36 Cal. Rptr. 9; Batson v. Strehlow (1968) 68 Cal. 2d 662, 674-675; Loughlin v. Idora Realty
Co. (1968) 259 Cal.App.2d 619, 629; Alhino v. Starr (1980) 112 Cal.App.3d 158, 169).

A broker may not unite his or her role as a special agent of a principal with his or her personal objectives (an
agent may not unite the agent's personal and representative characters) in the same transaction without
disclosure to and consent from the principal. The act of an agent within the course and scope of the agent's
authority is the act of the principal. In exercising that authority the agent is dealing with property or other
matters of grave concern to the principal. The agent has the principal's confidence and is, therefore, not
permitted to enjoy the fruits of any advantage which the agent might take of this confidential relationship. As a
fiduciary, the real estate broker performing as a special agent in relationships with a principal is bound by law to

exercise, among other duties, the utmost good faith, loyalty and honesty.

2. Fair and Honest Dealing

In addition to the fiduciary duties owed to a principal, a real estate broker who is the agent of a principal owes a
duty of fair and honest dealing to the other principal to the real property or real property secured transaction.
This duty includes, among others, the obligation to make a complete and full disclosure of all material facts.
Accordingly, the real estate broker owes the duty of full disclosure to a principal in a real property or real
property secured transaction even though the broker is not the agent and fiduciary of the principal to whom the
disclosures are being made. This is a duty which the courts have held to exist by reason of the agent's status as
a real estate broker. (Lingsch v. Savage (1963) 213 Cal. App. 2d 729, 736).

The duty of disclosure may also be found to exist by way of the agent's fiduciary obligation to the principal
upon whose behalf the disclosures are being made. Any misrepresentation or material concealment on the part
of the agent may afford the other principal grounds upon which to seek rescission or damages from the principal
for whom the agent is acting for purposes of making the disclosures. For example, a real estate broker must not
withhold from a prospective buyer material facts regarding the property which are known to, or should be
known to the broker, and which are unknown to the buyer or unascertainable by the buyer through diligent
attention or observation.

The duty of disclosure of a real estate broker representing the seller also includes the affirmative duty to
conduct a reasonably competent and diligent inspection of the residential property listed for sale, and to disclose
to prospective purchasers all facts materially affecting the value or desirability of the property that such an
investigation would reveal. (Easton v. Strassburger (1984) 152 Cal. App. 3d 90).

3. Disclosure Duties Pursuant to Civil Code § 2079 et seq.

After the Easton v. Strassburger decision, Civil Code § 2079 et seq., was enacted which provides:

a. A real estate broker has a duty to the buyer of residential real property of one to four units (including
manufactured homes) to conduct a reasonably competent and diligent visual inspection of property offered for
sale, and to disclose to said buyer all facts materially affecting the value or desirability of the property that such
an investigation would reveal, if the broker has a written listing contract with the seller to find/obtain a buyer or
is a broker who acts in cooperation with such a broker to find/obtain a buyer.

b. The above provision in (a) also applies to leases of such residential property with an option to buy and to real
sale property contracts as defined in Civil Code § 2985. (Civil Code § 2079.1).

c. The standard of care owed by a broker under this statute is the degree of care that a reasonably prudent real
estate licensee would exercise and is measured by the degree of knowledge through education, experience, and
examination, required to obtain a license under Part 1 (commencing at § 10000) of Division 4 of the Business
and Professions Code. (Civil Code § 2079.2).

d. The inspection to be performed does not include or involve an inspection of areas that are reasonably and
normally inaccessible to such an inspection, and if the property comprises: a unit in a planned development as
defined in § 11003.1 of the Business and Professions Code, a condominium as defined in Civil Code Section
783, or a stock cooperative as defined in § 11003.1 of Business and Professions Code.

e. The inspection does not include an inspection of more than the unit offered for sale, if the seller complies
with § 1368 of the Civil Code which requires a seller of such properties to furnish the buyer with copies of
covenants, conditions, and restrictions, by-laws, delinquent assessments and penalties, etc.

f. The inspection to be performed also does not include an affirmative inspection of areas off the site of the
subject property, or public records or permits concerning the title or use of the property. (Civil Code § 2079.3).

This disclosure law provides that in no event shall time for commencement of legal action for breach of duty
imposed by this article exceed two years from the date of possession, which means the date of recordation, the

date of close of escrow, or the date of occupancy, whichever comes first. (Civil Code § 2079.4). Nothing in
this disclosure law relieves a buyer or prospective buyer of the duty to exercise reasonable care to protect
themselves including those facts which are known to or within their diligent attention and observation. (Civil
Code § 2079.5).

The two year limitation for the commencement of legal action, and the limitations imposed upon the agent's
duties of disclosure (whether of material facts about the property or of the agency relationships intended) do not
apply to the agent's fiduciary duties owed to a principal to whom the disclosures are being made. The fiduciary
duties of a real estate broker acting as a special agent of a principal in a real property or real property secured
transaction are distinguishable from mere disclosure duties.

For example, should the real estate broker be acting as a dual agent or as the exclusive agent of the buyer to
whom disclosures of material facts are made, the real estate broker as an agent and fiduciary of the buyer has a
duty to "explain" the disclosures to the buyer and to "counsel" the buyer about the disclosures, including
recommending that inquiry be undertaken about the material facts to permit the buyer to make an informed and
considered decision. (Galeppi v. Waugh (1958) 163 Cal. App. 2nd 507, 511, and Salahutdin v. Valley of
California (1994) 24 Cal.App.4th 555). (In Chapter 20, see the seller property condition form to be completed
and delivered to buyer in timely fashion before title transfer which indicates the various actual disclosures
required.)

4. Real Estate Transfer Disclosure Statement (TDS)

In addition to the common law duties imposed on sellers of residential real property, the California legislature
enacted Civil Code §§ 1102-1102.17 that added disclosure duties for sellers of residential real estate. Civil
Code § 1102(a) applies to residential property transactions, including any transfer by sale, exchange, lease with
an option to purchase, any other option to purchase, or ground lease coupled with improvements “of real
property or residential stock cooperative, improved with or consisting of not less than one nor more than four
dwelling units, ” including manufactured homes (Civil Code § 1102(b). These provisions are mandatory and
cannot be waived by the parties Civil Code § 1102(c). (Realmuto v Gagnard (2003) 110 Cal 4th 193).
However, there are certain statutory exceptions, such as sellers who acquire property through foreclosure.
(Civil Code §1102.2 (c)).

Sellers must complete and deliver to the buyer a comprehensive real estate disclosure statement. (Civil Code
§§ 1102.1, 1102.3-1102.3a, 1102.6). The statutory disclosure form in Civil Code §1102.6 contains an extensive
list of items normally found in residential properties about which the seller is required to provide some
disclosure. (Alexander v McKnight (1992) 7 Cal 4th 973).

The seller's duty to deliver the disclosure form to a prospective buyer operates as a condition to the buyer's
obligation and duty to perform under a real estate purchase agreement. (Realmuto v Gagnard (2003) 110 Cal
4th 193). An action for negligent misrepresentation against a broker for violation of Civil Code §§ 1102-
1102.17 must be brought within 2 years after the date of the violation. (Civil Code §2079.4; Loken v Century
21-Award Props. (1995) 36 Cal. 4th 263, 272)

5. Malpractice Insurance Coverage

Because of the foregoing affirmative duties of disclosure being imposed upon real estate brokers when acting as
special agents of principals in real property transactions, the legislature was concerned that the codification of
these statutory duties may result in insurers seeking to exclude from errors and omissions coverage the duties
imposed upon real estate brokers. As a result, an amendment was made to the Insurance Code adding § 11589.5
of the Insurance Code which provides:

a. No insurer who provides professional liability insurance for persons licensed under the provisions starting
with § 10000 of the Business and Professions Code shall exclude from coverage under that policy liability
arising from the breach of the duty of the licensee arising under Article 2 (starting with § 2079) of Chapter 3 of
Title 6 of Part 4 of Division 3 of the Civil Code.

b. An insurer may exclude coverage against liability arising out of a dishonest, fraudulent, criminal, or
malicious act, or as the result of an error or omission committed by, and at the direction of, or with knowledge
of the insured.

The Legislature also declared that it is desirable to facilitate the issuance of professional liability insurance as a
resource for aggrieved members of the public, and declares that the provisions of this act are, and shall be
interpreted as, a definition of the duty of care found to exist by the court's decision under Easton v. Strassburger
(1984) 152 Cal. App. 3d 90, and the manner of its discharge. (Cal. Civil Code § 2079.12.)

6. General Disclosure Duties

In a fiduciary relationship it is the duty of the agent, in whom such trust and confidence are reposed by the
agent's principal, to make full disclosure of all material facts relating to the subject matter of the agency. For
example, the courts have held that negotiating a sale to the real estate broker's wife without making a full
disclosure to the principal is a violation of the duty which the broker owes to disclose all material facts. A later
case was concerned with the failure of the real estate broker to disclose to the seller that the buyer was the
broker's mother-in-law.

The court stated that where a seller's real estate agent is obligated to disclose to agent's principal the identity of
the buyer, and where the buyer is not the agent but has with the agent such blood, marital or other relationship
which would suggest a reasonable possibility that the agent could be indirectly acquiring an interest in the
property, such relationship is a material fact which the agent must disclose to the agent's principal.

In addition, a licensee who acts as a principal to a real estate transaction must disclose the fact of his or her
licensure to the other principal to the transaction (Business and Professions Code § 10177 (o)).

An agent's duty includes full disclosure and explanation of facts necessary for the principal to make an informed
and intelligent decision. In George Ball Pacific, Inc. v. Coldwell Banker & Co. (1981) 117 Cal. App. 3d 248
the court found that the broker had made an inaccurate representation when he arranged a lease without
knowing whether the lessor owned the property being leased.

Also, refer to the definition of a fiduciary and to the duties and obligations imposed on fiduciaries as discussed
in this Chapter in the section entitled, “Mortgage Brokers”. Fiduciary duties and obligations are equally
applicable to real estate brokers as well as to mortgage brokers who are real estate brokers acting within the
meaning of Business and Professions Code §§ 10131(d) and (e), 10131.1 et seq. and 10166.01 et seq.

7. Limits on Disclosure/Antidiscrimination Provisions

Licensees who participate in discriminatory practices in the housing market may incur liability under any of a
number of fair housing statutes. Brokers have been held to be covered by California's Unruh Civil Rights Act (
Civil Code § 51) (Lee v O'Hara (1962) 57 C2d 476).

The Fair Housing Act (FHA) (42 USC §§ 3601-3631; commonly referred to as Title VIII of the Civil Rights
Act of 1968) and the Civil Rights Act of 1866 (42 USC §§ 1981-1982) prohibit discriminatory practices in the
sale or rental of a dwelling and serve as potential bases for imposing liability for damages on brokers who
participate in discriminatory practices.

Another possible basis for imposing liability on brokers for discriminatory practices is the California Fair
Employment and Housing Act (Government Code §§ 12900-12996). Government Code § 12920, prohibits
discrimination based on “race, color, religion, sex, marital status, national origin, ancestry, familial status,
disability or sexual orientation in housing accommodations...” A broker who supplies information on the race,
color, sex, religion, ancestry, or national origin of a prospective buyer, even when requested by the seller,
violates the California Fair Employment and Housing Act (FEHA) ( Government Code §§ 12900-12996).

Brokers are also subject to administrative action under the Real Estate Law (Business and Professions Code §§
10000-10580) to revoke the broker's license. (Business and Professions Code § 10177(l); 10 CCR, Chapter 6,
§§ 2780-2781. (Also, Business and Professions Code §§ 125.6, 10170.5(a) (4); 10 CCR, Chapter 6 § 2725.

In addition, a licensee is not liable for failing to disclose a death at property sold or leased that occurred more
than three years before the transfer or if there was a death caused by AIDS at any time (Civil Code § 1710.2).

8. Reasonable Care and Skill

An agent moreover is under a duty to use reasonable care and skill (and depending upon the fact situation,
utmost care) to obey directions of the employer, and to render an accounting to the principal. The language in
Civil Code § 2079.16 requires "a fiduciary duty of utmost care, integrity, honesty and loyalty. . ." The
reasonable care and skill standard is assigned to the party in the transaction who is not the agent's principal.
Whether the standard is utmost or reasonable will depend upon the fact situation and the relationship between
the agent and the principal. A gratuitous agent (i.e., one who is not paid for the agent's services) cannot be
compelled to perform the undertaking, but such an agent who actually enters upon performance must obey
instructions and is bound to exercise the utmost good faith in dealing with the principal. This aspect of the
fiduciary duty is further embodied in Business and Professions Code § 10177 (g).

9. Agent May Not Act for More Than One Party Without Consent of Both

An agent cannot act for two or more principals in negotiations with each other unless each have knowledge of
and consent to the dual agency. Such conduct is opposed to public policy in that it places the agent in a position
where the agent may represent conflicting interests. Therefore, regardless of the real estate broker's honesty, or
the fairness of the contract in the particular case, the real estate broker cannot recover commissions from the
principals unless the dual agency is both disclosed and consented to by the principals. Further, it has been held
by the Supreme Court that an undisclosed dual agency is a ground for rescission by any principal without any
necessity of showing injury. (L. Byron Culver & Associates v. Jaoudi Industrial and Trading Corp. (1991) 1
Cal. App. 4th. 300, 305; McConnell v. Cowan (1955) 44 Cal. 2d 805, 811; Jarvis v. O'Brien (1957) 147 Cal.
App. 2d, 758, 759; and, Glenn v. Rice (1917) 174 Cal. 269, 272).

Even when the dual agency relationship is known and consented to by all parties, the agent owes to each party
the same duty of utmost good faith, honesty, and loyalty in the transaction, and the same duty to disclose
material facts which would affect the judgment of either principal. This rule of disclosure of dual agency is
specifically mentioned in the Real Estate Law, and its violation is cause for revocation or suspension of a real
estate license. (Business and Professions Code §§ 10176(a) and (d)). Also, disclosure to and consent by the
principals is required by law in transactions involving 1 to 4 residential units. (Civil Code § 2079.13 et seq.). It
is important to note that § 10176 (d) applies to any transactions within which a real estate broker or his or her
salespersons or broker associates are engaged as special agents acting within the course and scope of their
licenses.

10. No Secret Profits or Undisclosed Compensation

The courts have unequivocally held that an agent cannot acquire any secret interests adverse to the principal;
that the agent cannot lawfully make a secret personal profit out of the subject of the agency; and that if an agent
conceals the agent's interest in the property being conveyed or encumbered, the agent is liable to the principal
for all secret profits made by the agent.

In addition, the courts have held that where an agent falsely represents the amount at which a property may be
purchased by an offeror and then purchases for him or herself at a lower amount permitting the agent to pocket
the difference, the agent will be compelled to disgorge the secret profits. The fact that the offeror was willing to
pay the larger amount or that the property may have been worth the amount paid by the offeror is immaterial.

Claiming or receiving a secret profit or any form of undisclosed compensation is cause for discipline under
Business and Professions Code § 10176(g). (Ward v. Taggart (1959) 51 Cal. 2d 736). The obligation to disclose
all compensation regardless of the form, time, or source of payment is imposed upon real estate licensees
whether acting in a real property or real property secured transaction.

11. Attitude of the Courts

The decision in the case of Rattray v. Scudder (1946) 28 Cal. 2d. 214, is a clear exposition of the attitude of the
California Supreme Court toward the fiduciary relationship between the real estate broker and the principal. In
that case, a real estate broker was retained by an owner of real property to find a buyer for the property. The
fiduciary duties of the broker were violated when, without disclosing to the principal that broker had found a
buyer, the broker made misrepresentations about the salability of the property at the asking price. The broker
made untruthful and misleading statements to induce the principal to reduce the price of the property and to sell
it to the brokerage firm of which the broker was a member.

In commenting on duties and good faith of a broker the court held: "The law of California imposes on ... the real
estate agent the same obligation of undivided service and loyalty that it imposes on a trustee in favor of his
beneficiary. Violation of his trust is subject to the same punitory consequences that are provided for a disloyal
or recreant trustee."

A real estate broker when acting as an agent and fiduciary in a real property or real property secured transaction
is duty bound to inform a principal of every fact material to the principal. The duty to disclose material facts is
not limited to the relationship between the agent and the principal. A real estate broker and his or her
salespersons and broker associates each have duties to disclose material facts to the principal in a real property
or real property transaction even when the broker owes no fiduciary duty to that principal. For example, a
listing broker who is not a dual agent owes the duty of disclosure of material facts to the buyer.

When acting within the course and scope of a real estate license, a real estate broker, whether acting in a
fiduciary or nonfiduciary capacity, owes affirmative duties of disclosure. When the real estate broker is acting
within a fiduciary capacity, the broker's duty extends beyond mere disclosure to the duty of "explaining" and
"counseling" about that which has been disclosed, or should have been disclosed. Of course, the duty to
"explain" and to "counsel" is limited by the course and scope of the agency and by the license, knowledge,
experience, and training ascribable to real estate brokers. The duty to "counsel" includes the obligation to offer
advice and to make recommendations to the principal within the course and scope of the agency to permit the
principal to make informed and considered decisions.

Not only does the failure to abide by these fundamentals place the broker in a position of jeopardizing the
broker's license, but the courts have held that the broker as an agent of a principal in a real property transaction
is not entitled to any profit from the transaction in which such agent is guilty of violating these principles. In
the case of Thomas v. Snyder, (1930) 114 Cal. App. 397, 300 P. 117, it was held that "What is required of an
agent toward his principal is clearly set forth in the text found in 1 California Jurisprudence, page 789, as
follows: 'The proposition is conclusively settled that an agent is charged in full measure with the duty of good
faith in his dealings with his principal, touching the subject of his authority. The animating principle in this
proposition is that no one should, nor will he be permitted to enjoy the fruits of an advantage taken of a
fiduciary relation whose dominant characteristic is the confidence reposed in one person by another. The law
requires perfect good faith on the part of agents not only in form but in substance, and not only from agents
receiving compensation, but also from gratuitous agents. Indeed, the rule is so familiar as to be trite that the
obligation of an agent to his principal demands of him the strictest integrity and most faithful service.’ "

The requirements of law governing the relationship between agent and principal is to the effect that the agent
cannot be allowed to profit at the expense of the agent's principal, no matter whether the result is reached by
misrepresentation, concealment or other fraudulent device. In the case of Rempel v. Kells the court held that an
agent obtaining profits by fraudulent conduct and concealment from the principal is not even entitled to recover
expenses incurred by the agent in connection with the transaction. The duty of a real estate broker to disclose
material facts known by him to the seller employing him was again confirmed in the appellate court case,
Jorgensen v. Beach 'n' Bay Realty, Inc., (1981) (125 Cal. App. 3d 155).

In Jorgensen, the listing broker presented an offer to his seller that was only about 7 percent less than the listing
price. The broker presented the offer on behalf of a speculator for whom the broker hoped to act in future
transactions. When the broker presented the offer, he informed the seller that he was also acting on behalf of
the offeror and was therefore a dual agent in the transaction. The seller wished to counter offer on the price, but

the broker recommended that the seller not do so. The seller followed this recommendation. The sale was
consummated. Shortly thereafter the purchaser resold the property through the broker at a 13.5 percent profit.

In reversing a nonsuit for the broker, the appellate court held that the broker did not fully discharge his fiduciary
obligation to the seller by simply disclosing that he was acting as a dual agent in the transaction. It was the
broker's duty to disclose all material facts known to him which might have affected the seller's decision to
accept the offer. The court suggested that the facts known to the broker which might have affected the seller's
decision included (l) the fact that the buyer was acquiring the property for investment purposes and (2) the fact
that the broker had a substantial personal stake in negotiating a bargain purchase for the buyer. (Field v.
Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18).

12. Obligations of Real Estate Salespersons or Broker Associates

A real estate salesperson or broker associate is subject to the same duties and obligations arising out of the
fiduciary relationship between the broker and the broker's principal. The salesperson or broker associate is the
supervised employee or agent of the broker and is employed to carry on licensed activities on behalf of the
broker through whom the fiduciary duties of the salesperson or broker associate are owed to the principals of
the transaction. When a salesperson or broker associate owes a duty to a principal or, for that matter to a party
to a real estate transaction who is not a principal, that duty is the equivalent to the duty owed to the party for
whom the salesperson or broker associate functions. The term "broker associate" in this context refers to a real
estate broker who has entered into a written contract to act as the agent of another broker in connection with
acts requiring a real estate license and to function under the latter broker's supervision. (Civil Code §
2079.13(b)).

In performing the acts for which a real estate license is required, the salesperson or broker associate must
disclose to the broker's principal all the information the salesperson has or should have which may affect the
principal's decision. A failure on the part of the salesperson or broker associate to fulfill this obligation could
result in disciplinary action against the salesperson's license and may result in disciplinary action against the
license of the broker with whom these licensees are associated. Moreover, the broker will generally be held
liable in damages to the principal or any other party to whom the broker owed a duty for acts and omissions of
the broker's salesperson or broker associate.

Since the broker may be subject to administrative disciplinary action or civil liability for the acts of the broker's
salespersons or broker associates, the broker should take particular care in instructing salespersons or broker
associates about their duties and obligations to the broker's principals and other parties to whom the broker
owes a duty. The salespersons or broker associates should also exercise the greatest care in carrying out these
instructions of the broker when dealing with the broker's principals or any party to whom duties are owed.

Real estate salespersons and broker associates are subject to the same duties as a broker by whom they are
employed, including prescriptions against dual agency, secret profits or undisclosed compensation, and other
acts and omissions which violate an agent's duties to the agent's principal. Since a real estate broker has a
statutory duty to exercise reasonable supervision over the activities of his or her salespersons or broker
associates, it is quite possible for a broker to be disciplined for the acts and omissions of broker's salespersons
or broker associates in violation of provisions of the Real Estate Law even if the broker was not aware that
specific acts had taken place. (California Real Estate Loans, Inc. v. Wallace (1993) 18 Cal.App.4th 1575, and
Business and Professions Code §§ 10159.2, 10176(a), (b), (d), and (g), 10177(h), 10177.5 and 10179).

For purposes of a civil action, the duty of the qualifying broker under a corporate license to supervise
salespersons or broker associates is a duty owed to the corporation. In the case Walters v. Marler (1978) 83
Cal. App. 3d 1, a salesperson breached the duty to disclose to the buyer all material facts affecting the buyer's
decision. The court held that when a salesperson who is agent for the buyer acting through the supervising
broker, breaches a duty owed to the buyer, the qualifying broker's duty to supervise did not make the broker
individually liable for the damages suffered by the buyer. The broker's actions are considered the actions of the
corporation. Therefore, the corporation remains liable for damages resulting from the acts of its salesperson.

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INTRODUCTION

INTRODUCTION somebody Wed, 07/19/2023 - 02:09 am

INTRODUCTION

The subjects of agency and the fiduciary relationships between real estate brokers and their principals are
among the most difficult concepts for real estate licensees to understand and apply when engaged in real
property or real property secured transactions.

A significant percentage of claims presented to insurance carriers offering errors and omissions coverages
involve alleged negligence, professional negligence, negligent misrepresentations and breaches of fiduciary
duty by real estate licensees. Equally, civil actions brought against real estate licensees by the public usually
include causes of action for negligence, professional negligence, negligent misrepresentations and breaches of
fiduciary duty.

The purpose of this Chapter is to provide the reader with an understanding of the concept of agency and
fiduciary duty in the expectation that those who practice as real estate licensees will better perform their
responsibilities to the public they serve. Fiduciary duties include, among others, loyalty; confidentiality; the
exercise of utmost care (and in certain fact situations, reasonable care); full and complete disclosure of all
material facts; the obligation to account to the principal; the obligation to act fairly and honestly and without
fraud or deceit; and the duty to "explain" and "counsel" about that which has been disclosed or should have
been disclosed thereby permitting the principal to make an informed and considered decision to buy, sell, lease,
exchange, borrow or lend.

The concept of agency and fiduciary duty is quite old. According to Civil Code § 2295 (which was enacted in
1872), "An agent is one who represents another, called the principal, in dealings with third persons. Such
representation is called agency." In an agency relationship, the principal delegates to the agent the right to act
on his or her behalf, and to exercise some degree of discretion while so acting. The agency relationship
between a real estate broker and his or her principal results in a special agency typically limiting the broker to
soliciting and negotiating on behalf of the principal to the real property or real property secured transaction.
(Business and Professions Code § 10131 et seq.; Civil Code § 2297). Generally, real estate brokers are neither
entitled to act in the place and instead of nor are they entitled to bind their principals.

An agency relationship creates a fiduciary duty owed by the agent to the principal within the course and scope
of the agency and the authority granted by the principal. The fiduciary duty owed by real estate brokers to their
principals has been compared by the courts to the duty owed to the beneficiaries by a trustee under a trust.
(Civil Code § 2322, Probate Code §§ 16000-16105.)

In most real property transactions, the real estate broker acts as an agent for someone else - the principal - who
seeks to sell to, buy from, or exchange with a third party real property or a business opportunity. The real estate
broker also may be acting on behalf of another or others to negotiate a loan, the repayment of which is secured,
directly or indirectly, by real property. As a special agent, the real estate licensee is authorized to represent the
licensee's principal with third persons in real property or real property secured transactions. (Business and
Professions Code § 10131 et seq.; Civil Code § 2079.13 et seq. and § 2297.)

A real estate broker is a special agent who is authorized by the principal to carry out certain defined acts within
the course and scope of the agency established by the principal. The real estate salesperson is an agent of the
real estate broker, regardless of whether he or she is an employee for purposes of the Real Estate Law, or an
independent contractor of the real estate broker for federal and state income tax reporting purposes. The broker
in the real property transaction is responsible for his or her salesperson who acts as an agent of the broker.
When a salesperson owes a duty to the buyer, the seller, or to any principal or party in a real property
transaction, the duty is equivalent to the duty owed by the real estate broker for whom the salesperson acts.
Broker associates act as agents of the responsible broker in the same manner as salespersons. (Civil Code §
2079.13(b).)

The existence of an agency relationship invokes a vast and often complicated body of rules and regulations
which govern the rights and duties of principals and agents to each other and the obligations of both principals

and agents to third parties. The following discussion begins with an analysis of the distinctions between general
and special agents and the description of those relationships between parties which are other than agent and
principal.

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RIGHTS OF AGENT REGARDING A PRINCIPAL, AN OVERVIEW

RIGHTS OF AGENT REGARDING A PRINCIPAL, AN OVERVIEW somebody Wed, 07/19/2023 - 02:09 am

RIGHTS OF AGENT REGARDING A PRINCIPAL, AN OVERVIEW

1. Compensation - Performance Required Under Employment Contract

Generally

To be entitled to a commission the broker must (l) produce a buyer ready, willing and able to purchase upon the
terms and at the price stipulated by the seller or (2) secure from the prospective buyer a binding contract upon
terms and conditions which the seller subsequently accepts.

In the first situation, the real estate broker's right to compensation is based upon the broker's written
employment contract (listing). The listing agreement requires that the broker be the procuring cause of an offer
by a buyer ready, willing and able to purchase on the seller's listing terms. A ready and willing buyer generally
denotes one who is prepared to enter into a binding unconditional contract while an able buyer is one who has
the financial ability to obtain the funds necessary to consummate the transaction at the proper time.

From the broker's standpoint, a listing agreement is very much result oriented. The broker's right to a
commission is in no way dependent upon, nor is it affected by, the amount of work put into finding a buyer
ready, willing and able to purchase and in negotiating the "meeting of the minds" of buyer and seller. By the
same token if the broker expends no time and effort on behalf of the principal and yet is able to produce a buyer
who is ready, willing and able to purchase on the terms specified in the listing contract, the broker has earned a
compensation.

Payment of Compensation May Be Dependent on Any Lawful Condition

The payment of a commission under a listing contract may be made dependent upon any lawful condition. A
seller may be relieved from the obligation to pay a commission if it appears from the language of the contract
that the payment of a commission was contingent upon the happening of a condition that did not occur. The
burden is upon the broker to establish that he or she has earned a commission by fulfilling all of the conditions
of the contract. If the fulfillment of a condition is prevented by the fraud or bad faith of the seller, or through
collusion between the seller and other parties, the broker may recover compensation even if the condition has
not been met.

The amount or rate of compensation may not be part of a printed or form agreement for sale of residential real
property comprised of four units or less or the sale of a mobile home. Such agreements must contain a 10-point
boldface type notice that real estate commissions are not fixed by law and may be negotiated. The wording to
be used is set out in Business and Professions Code § 10147.5.

If Broker Performs Within Time Limit Broker is Entitled to Commission

Revocation of a broker's authorization cannot operate to deprive the broker of the compensation contracted for
or its equivalent in damages, for nonperformance of the owner's contract if, within the time specified in the
listing agreement, the broker has found a customer ready, willing and able to purchase upon the price and terms
in such contract. The principal will not be relieved from liability by a capricious refusal to consummate a sale
where the principal's voluntary act precludes the possibility of performance on the principal's part. This is
based upon the familiar principle that no one can avail himself or herself of the nonperformance of a condition
precedent who has occasioned its nonperformance. It is well settled that a principal cannot discharge an agent
pending negotiations by the agent with a prospective customer, then effect a sale to the customer, without
liability to the agent.

When the listing contract is for a definite period, and there is a valuable consideration extending from the
broker, e.g., a promise to use due diligence in locating a person ready, willing and able to purchase, the contract
is binding upon the seller as soon as executed. The agent cannot be prevented from earning a commission
within the period of the appointment by revocation of the broker's authority. However, the distinction must be
made between the power to revoke and the right to revoke.

If the principal no longer desires to have the agent act for the principal, then principal has the power to revoke
the agency at any time. Should the principal revoke the agency, the principal breaches the promises under the

listing contract and may be liable to the broker for the payment of a commission. The principal may revoke the
agency without liability, if it can be proven that the agent failed in the duty to use due diligence, or has breached
the fiduciary duties owed by the agent to the principal.

Agreements Between Brokers

An agreement between brokers cooperating in the sale of real property for a division of the fees or commissions
is neither illegal nor against public policy. It will be construed and enforced the same as other contracts not
required to be in writing, but no partnership or joint venture is created by such an agreement between the
cooperating brokers in their endeavors to sell real property listed with one of them.

In the case where a cooperating broker has been the procuring cause of the sale and this broker's services are
completed, this broker may be entitled to recover the selling broker's share of the commission from the listing
broker. In the case where the original broker fixed the compensation at a certain sum, the original broker
cannot deprive the assisting or cooperating broker of a portion of the commission by settling with the principal
for a lesser sum.

There is an implied warranty that the owner will pay the amount of the commission as specified, and the
original broker is liable to the other broker for the other broker's portion regardless of what the original broker
settles for, unless the consent of the assisting broker is obtained. The listing broker is liable to the cooperating
broker for the payment of the commission only if the listing broker has received a commission from the seller.
If an agreement for the division of a commission has been abandoned by the cooperating broker, the listing
broker may then sell the property without being liable to the other broker for a share of the commission earned.

Right of Principal to Secure Buyer

Where the listing is an open one, the sale by the owner of the property to a person who has not been referred to
the owner by the broker does not violate the listing agreement and creates no liability to the broker on the part
of the principal. Where there is no termination date in an open listing, the owner may not seek to take
advantage of a failure on the part of the broker to produce the person willing to purchase on the terms of the
listing by attempting to deal directly with the agent's prospect.

An agency contract which provides that the agency is irrevocable for a fixed time does not prevent the owner
from selling the property within that time to a person with whom the agent has had no prior negotiations.

Commission Negotiable Between Principal and Broker

The amount of commission is set out in a broker's contract of employment. In the absence of any evidence of
incapacity to read or any fraud to prevent the reading or understanding of the agreement to employ and pay
compensation, the party signing the written contract is bound by its express terms and conditions. Ordinarily,
the compensation of the broker is negotiated at a certain percentage of the purchase price obtained by the
owner. If no amount of compensation is mentioned in the contract of employment, the law implies a promise
on the part of the owner to pay the usual or customary commission charged in the neighborhood for like
services.

If the owner accepts an offer procured by the broker at a price which is less than the price specified in the listing
agreement, both the listing agreement and the deposit receipt usually expressly provide for the payment of a
commission to the broker.

2. Listing Agreement - No Deposit Receipt Contract. When Agency Is Executed

A broker has earned a commission when, within the life of the contract, the broker has fulfilled the terms of the
agency contract. As stated before, a buyer produced must be ready, willing and able to purchase upon the terms
and conditions specified by the owner. The readiness and willingness of a person to purchase real property may
be shown only by an offer to purchase from that person. Unless such person has made an offer to the seller to
enter into such a contract, this person cannot be considered as a person ready, willing and able to buy. The
buyer and seller must be brought into communication with each other. Merely putting a prospective purchaser
on the track of property which is on the market does not entitle the broker to the commission contracted for and,
even though a broker opens negotiations for the sale of the property, the broker will not be entitled to a
commission if the broker ultimately fails to induce the prospective buyer to make an offer on the property. This

is true even though the owner may subsequently sell the property to the person originally produced by the
broker at the price and upon the terms at which it was originally offered for sale.

The obligation assumed by the broker is to achieve a "meeting of the minds" of the buyer and seller as to the
price and other terms for the transaction. Thus, if a valid contract is executed by seller and buyer, the broker is
entitled to a commission even though the sale is never consummated.

Seller Responsible When Seller Negotiates Contract

A seller who negotiates the terms of the contract bears the responsibility for its form and contents. The broker
does not lose a commission if, after producing a buyer who is ready, willing and able to purchase on the terms
set forth in the listing agreement, an unenforceable contract is entered into through the mistake, inadvertence or
ignorance of the seller. If the seller undertakes alone to complete the contract, the broker is discharged from
any responsibility and the seller is estopped to deny the broker's commission claim on the ground that the
contract is unenforceable. (Business and Professions Code § 10147.5 for Negotiability and Notice
Requirements for commission agreements.)

Broker Who First Produces A Ready, Willing and Able Offeror Is the Procuring Cause

Where the listing is open, the broker who first produces a customer who is ready, willing and able to buy in
accordance with the listing is the procuring cause of the sale, and is entitled to the commission therefor. As
soon as a broker has found a buyer, it is the broker's duty to notify the principal. Where the listing is an open
one, the seller may accept the first satisfactory offer presented.

There is no duty on the part of the seller to ascertain whether the agent who presented the offer was the
procuring cause unless the seller has notice that another broker was the procuring cause. The seller may accept
an offer which does not conform to the terms of the listing agreement and will ordinarily be liable to pay a
commission to the broker who has presented the offer under the terms of the contract executed.

The owner is entitled to a reasonable time within which to investigate the financial responsibility of the
proposed purchaser before accepting the purchaser as such. If the offeror presented by Broker A decides not to
enter into a contract, but is thereafter induced by Broker B or another person to enter into the contract on
substantially the same terms that offeror originally declined, Broker A is not entitled to a commission under the
theory that Broker A is the procuring cause of the sale. On the other hand, Broker A is the procuring cause of
the sale if Broker A has negotiated a "meeting of the minds" of offeror and offeree notwithstanding the fact that
the written contract for the sale of the property is executed through negotiations by Broker B.

Seller Interference With Competing Agents Under Open Listing

Where competing brokers are endeavoring to negotiate a contract under an open listing, the agents must be
permitted to act freely and independently of each other without interference by the owner. Where there is
freedom and independence of action on the part of the agents, the owner is under no obligation to the agent who
was unsuccessful in effecting a contract for the sale of the property. The owner, on the other hand may not
avoid the payment of a commission by personally negotiating a contract with a prospect produced by the agent
on terms and conditions substantially similar to those offered through the agent.

3. Deposit Receipt Contract - No Listing

On occasion the only written agreement containing a promise to pay a commission to the broker is in the
contract to purchase between buyer and seller. To protect a right to a commission, the broker should attempt to
obtain a separate agreement for the payment of a commission, even if the listing is written up to terminate
within hours after an offer is presented. If a seller refuses to enter into such a separate agreement, the broker
will have to rely upon the deposit receipt and purchase agreement. Where this occurs, a question may arise on
the seller's obligation to pay a commission if the sale of the property is not consummated.

Whether there is an enforceable obligation on the part of the seller will often depend upon the wording of the
commission clause in the deposit receipt and purchase agreement. Business and Professions Code § 10147.5
sets out the form to disclose negotiability of commission amounts which notice must be provided to the
principal at the time commission agreements are executed. Whichever form agreement - listing or deposit
receipt - initially establishes, intends to establish, or alters the terms of a previously established right to

compensation by a licensee, it must contain the specified information regarding the negotiability of commission
amounts.

4. Both Listing Agreement and Deposit Receipt Contract

The broker's recovery of a commission is based upon the employment contract (listing). The execution of the
contract to sell is nevertheless significant in that it evidences the fact that the agent has produced an offer that is
acceptable to the owner.

5. Exclusive Listings

An additional basis for the recovery of compensation by the broker is provided where the listing is either an
exclusive agency or exclusive right to sell. In these cases the broker need not necessarily comply with the
performance requirements set forth under (2), (3), and (4), above. If the broker is prevented from performing
under an exclusive contract as the result of a sale by the owner or through another agent or through the
withdrawal of the property from the market by the owner, the broker will ordinarily be entitled to a commission
under the listing agreement.

6. Sale to Broker's Prospect After Termination of Listing

To recover a commission under a listing contract, the broker must have produced an offer satisfying the terms
of the listing contract within the time limit of the listing. The broker's negotiations during the life of a listing
with a prospect who ultimately purchases the property does not necessarily entitle the broker to a commission.
Special circumstances may nevertheless dictate that the agreed commission be paid to the broker.

For example, where the sale is consummated directly by the buyer and seller after the expiration of the listing
on the same terms as proposed through the broker, or with only a price reduction to the buyer, there is every
reason to believe that the broker was the procuring cause of the sale. Accordingly, the broker should be entitled
to the agreed compensation for these services.

The broker may also protect his or her commission by a so called protective or savings clause in the listing
agreement. Under this clause, the seller agrees to pay a commission to the broker if the property is sold within a
period of so many days after expiration of the listing to a person with whom the broker negotiated while the
listing was in effect. Ordinarily, the terms of a listing contract which includes such a protective clause requires
that the broker furnish the owner of the property with a list of prospective buyers with whom the broker has
negotiated within a prescribed number of days after expiration of the listing.

Even though the broker may not have negotiated with anyone during the term of the listing, the seller may
waive the expiration of the contract by encouraging the broker to continue efforts to find a buyer. If the broker
continues in reliance upon such a waiver and does produce an offeror to whom the property is ultimately sold,
the broker may be entitled to a commission even without literal compliance with the terms of the listing
contract. The broker will face the issue of waiver of the termination date of the listing agreement as compared
to compliance with Business and Professions Code § 10176(f). (See discussion this Chapter regarding Breach
of Contract v. Tort Theory.)

7. Intentional Interference with Prospective Economic Advantage

A broker may be entitled to recover a commission under a tort rather than a contractual theory of liability by
proving that the actions of the owner of the property constituted intentional interference with the prospective
economic advantage of the broker. In one such case, a broker negotiated with a prospective buyer of real
property without any kind of a listing agreement solely on the strength of a sign erected on the property by the
owner which read "FOR SALE - CONTACT YOUR LOCAL BROKER". The broker was aware of the merits
of the property from a previous listing of the property with him. After his discussions with the prospective
buyer, the broker informed the owner of the property in writing that he was the procuring cause should an offer
be made by the group with whom he had discussed the property.

Notwithstanding this notice, the owner sold the property to the group with whom the broker had negotiated
without his participation. While the court denied the broker's right to a commission under a contractual theory
for lack of any written agreement to pay the commission signed by the owner, it upheld the broker's right to sue

for commission under the theory that the owner and buyers had intentionally interfered with his reasonable
expectation of a commission for having negotiated the sale of the property. (See discussion this Chapter
regarding Breach of Contract v. Tort Theory.)

Criteria for Duty of Care

Although an agent's interests in prospective economic advantage may be protected against injury occasioned by
negligent conduct, there are six criteria for determining whether a duty of care is owed: l) the extent to which
the transaction was intended to affect the agent, 2) the foreseeability of harm to the agent, 3) the degree of
certainty that the agent suffered injury, 4) the closeness of the connection between the principal's conduct and
the injury suffered, 5) the moral blame attached to the principal's conduct, and 6) public policy regarding the
prevention of future harm.

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SPECIAL BROKERAGE RELATIONSHIPS

SPECIAL BROKERAGE RELATIONSHIPS somebody Wed, 07/19/2023 - 02:09 am

SPECIAL BROKERAGE RELATIONSHIPS

From time to time a broker may have occasion to make a sale of property included in the estate of a decedent.
Less frequently a broker may represent a Board of Education or the State of California. Finally, a broker may
be innocently embroiled in a lawsuit by merely holding assets claimed by two or more contesting parties. The
following comments throw some light on these special situations.

1. Probate Sales and Commissions

The representative of the estate of a decedent may initiate a probate sale by seeking offers to purchase directly
or through one or more brokers. (Probate Code § 10150.) The executor or administrator may sell the real
property of an estate where it is found to be in the best interests of the estate. Whether the sale is public or
private, it must be advertised by publication or posting of notice. (Probate Code §§ 10300 et seq.) Acceptance
of an offer by the estate representative is subject to probate court confirmation. The representative of the estate
of the decedent with court permission may grant an exclusive right to sell the property for a period of not to
exceed 90 days. (Probate Code § 10150.)

The broker's compensation and the court confirmation procedure is set forth in Probate Code § 10160 et seq.
Initial information concerning the property, the broker's compensation, and the court confirmation procedure, if
any, can be furnished by the attorney for the estate. If a bank or trust company has been appointed
representative, interested persons may apply directly to the trust office of the institution for information. If a
public administrator is the estate representative, inquiry may be made at that office. The broker should ask
about the Independent Administration of Estates and whether the administrator is entitled to sell the property
without the court's confirmation, but with notice to all beneficiaries. (Probate Code § 10400 et seq.).

An offer to purchase must be for a price which is not less than 90% of the property's appraised value (appraisal
date within one year of sale) and it must conform to statutory requirements, the rules of the local superior court
governing probate sales and the terms stated in the public notice of sale. The court will make efforts to assure
the executor or administrator of the estate has exposed the property to the market. (Probate Code § 10160 et
seq.).

The person making the offer returned to court for confirmation, and the broker representing that person, should
attend the confirmation hearing whether or not that person plans to participate in higher bidding for the
property. All prospective bidders and brokers should be familiar with local rules of court governing advance
bidding, deposits required and similar matters. Ordinarily after court confirmation of a sale, normal escrow
procedures are used to consummate the transaction on the terms and conditions approved by the court.

The payment of commissions to brokers participating in probate sales is generally within the discretion of the
probate court subject to certain standards prescribed by statute. For example, § 10162 of the Probate Code
provides that the compensation of the agent producing a successful bidder shall not exceed one-half of the
difference between the amount of the bid in the original return and the amount of the successful bid provided
that the limitation shall not apply to any compensation of the agent holding a contract with the estate
representative pursuant to § 10150 of the Probate Code.

It is obviously important that the broker who procures the offer which is accepted by the estate representative
and returned to the court for confirmation have a written contract with the representative. In the case of an over
bid in open court at the confirmation hearing, it is a matter of importance to the broker that the court be
informed that a licensed broker has produced the bid in question. If a purchaser not represented by an agent has
his overbid confirmed, the listing broker may receive a full commission on the original bid only. (Probate Code
§ 10162.5).

The court in its order confirming the sale will set forth the amount of commission to be paid and the division of
the commission if more than one broker is to be compensated. (Probate Code § 10160 et seq.)> Needless to
say, where an agent is also the purchaser, the court will carefully examine "the substantiality" of the agent's acts
in putting together "the best deal," for the estate, especially where the agent expects a commission. Estate of
Levinthal v. Silberts, 105 Cal. App. 3d 691 (1980).

2. Board of Education Sales Commissions

The Education Code provides that the governing body of any school district may pay a commission to a
licensed real estate broker who procures a buyer for real property sold by the board. The sealed bid for the
property must be accompanied by the name of the broker to whom the commission is to be paid and by a
statement of the rate or amount of the commission.

In the event of a sale on a higher oral bid to a purchaser procured by a qualified licensed real estate broker,
other than the broker who submitted the highest written proposal, the board will allow a commission on the full
amount for which the sale is confirmed.

Note: One-half of the commission on the amount of the highest written proposal will be paid to the broker who
submitted it, and the balance of the commission on the purchase price to the broker who procured the purchaser
to whom the sale was confirmed.

3. State of California Sales Commissions

From time to time, the State of California has real property for disposal. When bids received for this property,
after advertising, do not equal its appraised value, the Department of Finance may authorize employment of a
licensed real estate broker to effect the sale on a commission basis. This procedure does not apply to surplus
real property of the State Division of Highways.

4. Dismissal of Broker-Stakeholder from Suit

The real estate broker as escrow holder has often been named as a defendant in a law suit to recover money
which the broker is holding as a trustee in a transaction. All too often the licensee must retain counsel and pay
the expense of defending in such a suit.

Under the Code of Civil Procedure, where the only relief sought against one of several defendants is payment of
a stated amount of money, such defendant may upon affidavit that he or she is a mere stakeholder with no
interest in the amount and that parties to the action have made conflicting demands upon the defendant, and
upon notice to the other parties, apply to the court for an order discharging said broker from liability and
dismissing defendant-broker from the action. This is known as an interpleader action. The defendant must
however deposit the amount in dispute with the clerk of the court. The court may then dismiss this suit as to
defendant-broker.

The broker need not wait to become a defendant in a lawsuit. If there is a fund disputed by two or more
persons, the holder of the fund may file an interpleader action. The holder would deposit the fund with the
clerk. The pleading would allege that the holder has no interest in the fund, and it would require the other
parties to litigate their claims. The holder of the fund may be awarded attorney fees and costs. The complaint
in interpleader can be used when there is a dispute between buyer and seller concerning a deposit in a failed
transaction.

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TERMINATION OF AGENCY

TERMINATION OF AGENCY somebody Wed, 07/19/2023 - 02:09 am

TERMINATION OF AGENCY

Ordinarily an agency may be terminated in the following ways:

(a) The expiration of its term.

(b) The extinction of its subject.

(c) The death of the agent.

(d) The agent's renunciation of the agency.

(e) The incapacity of the agent to act as such. Civil Code § 2355.

1. When Principal May Revoke Agency

Because the relationship between a principal and agent is a personal one founded on the trust and confidence
which a principal places in his or her own agent, the principal has an absolute power under the law to revoke the
agency at any time unless the agency is coupled with an interest. For example, when the principal owns a real
property with the agent who is a real estate broker, and the two principals appoint the broker as the property
manager, the purpose and scope of the agency is coupled with the broker's interest as a joint owner of the
property.

Nevertheless, while the principal in most circumstances has an absolute power to revoke, the principal does not
necessarily have the right to do so and may be liable for breach of contract by revoking the agency without good
cause. The Civil Code provides that if the agency was created by a recorded instrument containing a power to
convey or execute instruments affecting real property, the revocation of the agency is not effective unless the
revocation is in writing and is acknowledged and recorded in the same place as the instrument creating the
agency.

2. Effect of Termination

According to Civil Code § 2355, notice of termination of an agency relationship must be given to third persons
if the agency is terminated as a result of expiration of the term, extinction of the subject matter or the death,
incapacity or renunciation by the agent. If the agency is in fact terminated in any of the ways enumerated in §
2355, the former agent is still an ostensible agent as to those third persons who have not received notice of
termination. If the agency is terminated through the death or incapacity of the principal or by the principal's
express act of revocation, it is effective as to third persons even though they have no notice. There is an
apparent internal contradiction in § 2356 in that it states that a contract entered into with an agent by a third
person who does not have actual knowledge of the death, incapacity or revocation by the principal is binding
upon the principal, the principal's heirs and other successors in interest.

3. Time When Revocation Can Be Made

As a rule, unless a real estate broker's authority is coupled with an interest in the property, the broker's
authorization may be revoked at any time by the principal. A real estate broker's right to earn a commission
under a listing agreement is not considered to be an interest in the contract which precludes termination by
death, incapacity or revocation on the part of the principal. This is true even if the broker is given a particular
time within which to perform under the terms of the listing agreement. On the other hand, the courts have
recognized circumstances where the contract of agency is irrevocable because the licensee has an interest in the
property which is the subject matter of the agency. While such agency contracts are generally irrevocable, the
real estate broker may still be discharged for breaching the fiduciary duties owed by the broker to the principal
or by acting adverse to the interests of the principal.

The principal's termination of the agency relationship by revocation may give a real estate broker a right to
damages for breach of contract or to the right to receive compensation pursuant to the terms of the listing
agreement. (Blank v. Borden (1974) 11 Cal. 3d 963-967). Withdrawal of the property from the market by the
owner prior to expiration of the listing is an example of a de facto revocation which may give the broker a cause
of action for agreed compensation under the listing contract. The California Supreme Court has held that a
clause in an exclusive listing contract providing for payment of the commission to the real estate broker on
withdrawal of the property from sale by the principal does not constitute an unenforceable penalty under
California law. If the listing is an open one, a sale negotiated by the owner or by a broker terminates the listing
and notice of termination need not be given to brokers other than the broker who has presented the offer which
has been accepted.

In the event an open listing specifies no fixed term of employment, the listing normally may be revoked by the
owner at any time without liability prior to production of a ready, willing and able buyer by the broker. If a

fixed term is specified it is possible that, despite revocation by the owner, the commission will be earned if the
broker produces such a buyer within the specified time.

Exclusive listing agreements must contain a definite, specified date of final and complete termination. If the
listing does not contain a definite termination date, the listing is unenforceable by the real estate broker and the
claim, demand or receipt of any fee under the agreement by the broker is a basis for disciplinary action against
that broker's license. (Business and Professions Code § 10176 (f)).

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THE DUTIES AND LIABILITIES OWED BY AN AGENT TO THIRD PARTIES, AN OVERVIEW

THE DUTIES AND LIABILITIES OWED BY AN AGENT TO THIRD PARTIES, AN OVERVIEW somebody Wed, 07/19/2023 - 02:09 am

THE DUTIES AND LIABILITIES OWED BY AN AGENT TO THIRD PARTIES, AN OVERVIEW

1. Warranty of Authority

If an agent acts in the name of the agent's principal with authority given by the principal, the principal is bound
by the agent's act. When the agent acts without authority or in excess of the agent's authority, the agent may be
held liable for resulting damages for having breached the agent's implied warranty of authority. While the agent
warrants the agents own authority, the agent does not impliedly guarantee the principal's capacity to contract.
The agent is not liable therefore if the principal is incapable of contracting through infancy or incompetency
unless the agent has expressly warranted capacity or fraudulently concealed the fact of incapacity.

To protect himself or herself against liability for breach of an implied warranty of authority, the agent should
clearly indicate to the third party that he or she is not sure of the authority granted by the principal and does not
warrant it or, on the alternative, that the authority granted by the principal is limited to that which has been
clearly defined by the principal and disclosed by the agent to the third party.

2. On Contracts

When a contract is negotiated and executed by an agent in the name of the principal, the agent will not
ordinarily be held liable for the performance of the contract. If, however, there is a lack of authority on the part
of the agent and a lack of a good faith belief on the agent's part that the agent possesses the authority, the agent
is liable for the performance of the contract as a principal. The agent is also personally liable for the
performance of the contract if the agent fails to reveal the name of the principal, or the fact that the agent is
acting in an agency capacity. If the fact of agency is disclosed in the contract, but the name of the principal is
not, the rule in California appears to be that the agent is personally liable for the performance of the contract.
To avoid the possibility of personal liability of the agent, the name of the principal for whom the agent is acting
must appear on the face of the contract.

The failure to disclose the name of the principal by an agent who is known to be acting as an agent is
distinguishable from the fact situation where the agent fails to disclose to a principal that there is a principal
distinguishable from the agent for whom the agent is acting. In a real property secured transaction, the court
held that the loan was rescindable by the borrower since the borrower never knew the identity of the actual
lender. For a contract to exist between two principals, it is essential that the principals are able to identify each
other. (Civil Code § 1558 and Jackson v. Grant (1989) 876 F. 2d 764, 766).

The manner in which an agent signs a contract with a third party on behalf of the agent's principal may be
significant in determining whether the agent has any personal liability to the third party. Ordinarily an agent
should enter the name of the principal as the contracting party and should then sign the instrument "by" himself
or herself as agent for that principal. By signing the contract in this manner, the agent is virtually assured that
he or she will not be held liable for the performance of the contract since the fact of agency and the name of the
principal are disclosed. There are other ways in which this double disclosure can be effected, but the method
described has the advantage of being time tested.

3. On Torts

Torts are private wrongs committed upon the person or property of another and arising from a breach of duty
created by law rather than by contract. An agent is liable to third parties for the agent's own torts whether the
principal is liable or not, and in spite of the fact that the agent acts in accordance with the principal's directions.
Where a person misrepresents his or her authority to act as agent for another, such person may be liable in tort
to the third party who relies on the representation to the third party's detriment.

Real estate brokers and their salespersons and broker associates by the very nature of their business are
constantly making representations to prospects concerning the property being offered for sale. A representation
may be merely an expression of opinion or "puffing" on the part of the broker but, on the other hand, it may be
reasonably understood by both the broker and prospective buyer to be a representation of fact and thus a part of
the contract if agreement is reached.

Material representations purporting to be fact which are false or misleading may result in liability of the real
estate broker. The same may be said with respect to a failure on the part of the broker to disclose material facts
about the property to the prospective buyer. In addition to incurring liability for damages to the buyer, a broker
may also be subject to disciplinary action by the Department of Real Estate against the broker's license for overt
misrepresentations or for failure to disclose material facts. (Business and Professions Cade § 10176(a) and
Pintor v. Ong (1989) 211 Cal. App 3rd 837).

4. Misrepresentations

A misrepresentation by the broker who is the exclusive agent of the seller to a prospective buyer of the lowest
price acceptable to a seller is not usually actionable by the buyer, because it is not a representation of a material
fact. The seller has a right to obtain the best price available and has hired the agent to achieve that end.
Therefore, the seller's agent should not make representations to the buyer about price except with the seller's
knowledge and consent. Representations about price to the buyer absent the seller's knowledge and consent
may be actionable by the seller. Equally, a misrepresentation about price to the buyer by the real estate broker
or his or her salesperson or broker associate who is acting as an agent of the buyer will usually be actionable by
the buyer. Practitioners who issue BPOs must be particularly careful. For instance, a licensee who issues a BPO
at the request of a seller should provide a copy of the BPO to the buyer when acting as a dual agent. Consent of
the seller should be obtained. Prudent practitioners should also notify the seller of the prospect that the buyer
(in a dual agency situation) may have the right to receive the BPO although it was initially prepared only for the
Seller.

Statements incorporated into the purchase contract are often in the form of promises comprising part of the
consideration extending from the seller to the buyer. If such a representation is made in good faith, the fact that
it is untrue will ordinarily not render the seller or seller's agent liable in tort. An untrue representation which is
a material ingredient of the purchase contract may, however, be the basis for an action for rescission and/or
damages by the buyer. The same holds true with respect to mutual mistakes of fact resulting from
representations made by the seller's agent. The mutual mistake may be the basis for a rescission of the purchase
contract, but neither the seller's agent nor the seller would ordinarily be liable in tort to the buyer.

5. Fraud v. Negligence

Misrepresentation may be either fraudulent or negligent. In either case the agent may be liable civilly for
damages incurred by the buyer on account of the misrepresentation or the agent may be subject to disciplinary
action against the broker's license. The principal may be vicariously liable in damages for the broker's
misrepresentations even where the principal was not the source of the erroneous information conveyed by the
broker acting as the principal's agent.

Certain misrepresentations, even though made by an agent with no evil intent, are defined by law as actual fraud
if they are positive assertions of that which is not true made in a manner not warranted by the information of the
person making the representation notwithstanding that such person believes it to be true. Constructive fraud as
defined in the California Civil Code includes any breach of duty which, without an actually fraudulent intent,
gains an advantage to the person in fault, or anyone claiming under him or her, by misleading another to his or
her prejudice, or to the prejudice of anyone claiming under him or her. (Carl Michel et al. v. Moore and
Associates, Inc. (2007) 156 Cal App. 4th 756 and Field v. Century 21 Klowden-Forness Realty (1998) 63
Cal.App.4th 18).

Thus, in the area of misrepresentations, the dividing line between fraud and negligence is often blurred and yet
there may be a significant difference in the agent's exposure in damages depending upon whether the
misrepresentation is found to be negligent or fraudulent. If found by a court or jury to be fraudulent, punitive
damages can be awarded against the person making the misrepresentation. Remember, a real estate broker
acting as a special agent in a real property or real property secured transaction may make no representation
without a reasonable basis for believing the representation is true, may assert no half-truths, and may not assert
a series of independent truths which when interconnected are expressly or inferentially misleading.

Furthermore, if a fraud judgment is entered against a real estate broker based upon the broker's performance of
acts for which a real estate license is required, disciplinary action may be taken against the broker based solely

upon the civil judgment. (California Real Estate Loans, Inc. v. Wallace (1993) 18 Cal.App.4th 1575. If on the
other hand, the broker's misrepresentation is found to be no more than negligent, a case against the broker for
negligence would have to be retried at the administrative level where the standard of proof required in order to
discipline is convincing proof to a reasonable certainty as opposed to the preponderance-of-evidence standard in
a civil negligence action.

6. Nondisclosures and Constructive Fraud

Civil liability of a real estate broker for misrepresentation and the possibility of disciplinary action against the
licensee may arise from the broker's failure to disclose as well as from overt misstatements. Liability for failure
to disclose may result where the broker has knowledge of facts materially affecting the value, desirability, or
intended use of the property, and which facts the broker does not convey to the prospective buyer knowing that
the buyer does not have the same information.

Cases imposing a duty of disclosure usually involve the concealment by the seller of latent defects in the
property. These cases have held that the real estate broker acting as an agent of the seller and the seller have a
duty to disclose facts materially affecting the value, desirability, or intended use of property, if the broker
knows that the buyer is unaware of these facts and they are not within the buyer's diligent attention including
the inspection of the property. The courts have sometimes referred to such non-disclosure as negative fraud.
(Easton v. Strassburger (1984) 152 Cal.App.3d 9099).

In addition, a fiduciary may be liable to its principal for constructive fraud even if his or her conduct is not
actually fraudulent. (Salahutdin v Valley of Cal., Inc. (1994) 24 Cal. 4th 555). In Salahutdin, a real estate agent
made affirmative statements about the size and subdivision prospects to the buyer but failed to disclose that he
did not investigate accuracy of these statements. Constructive fraud comprises any act, omission, or
concealment involving a breach of legal or equitable duty, trust, or confidence that results in damage to another
even if the conduct is not otherwise fraudulent. (Salahutdin v Valley of Cal., Inc., supra.).

7. “Puffing”

Even in some situations where a licensee honestly believes that representations to the prospective buyer are
nothing more than "puffing" or ''sales talk", a problem may develop if the impression made upon the buyer is
that the representation is one of fact. Statements by a real estate broker that the property being offered is the
"best on the street", or that the buyer "will receive handsome profits from the buyer's investment", were at one
time almost universally considered to be mere expressions of opinion. In more recent years, there appears to be
a growing tendency on the part of the courts to treat such statements as representations of material fact, because
persons of limited expertise and sophistication tend to rely upon such statements and to purchase property as a
result of such reliance.

A statement by a real estate broker, salesperson or broker associate that a house was "in perfect shape," while
obviously not literally true, has been described as a representation of a material fact by an appellate court
considering the question.

8. Gratuitous Agent

In addition to negotiating the "meeting of the minds" of seller and buyer in a real estate transaction, brokers do a
multitude of other things in order to consummate sales. For example, they order preliminary reports, complete
forms, process loan applications, arrange for pest control inspections, and assist in the preparation of escrow
instructions. In a sense, the broker performs many of these functions gratuitously since he or she has earned a
commission when he or she has produced an offer from a person who is ready, willing and able to purchase.
The standard of the industry, however, is that the broker does not deem the commission to be due and payable
until the close of escrow.

If the real estate broker acting in a sales transaction undertakes to aid the buyer in processing a loan application
and does not charge the buyer for that service, the broker is a gratuitous agent of the buyer for the purpose of
arranging the loan. The broker's failure to use reasonable care while acting in the capacity of a gratuitous agent
can result in the liability of the broker, if the buyer sustains an injury as a result of this negligence.

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THREE RELATIONSHIPS IDENTIFIED AND DEFINED

THREE RELATIONSHIPS IDENTIFIED AND DEFINED somebody Wed, 07/19/2023 - 02:09 am

THREE RELATIONSHIPS IDENTIFIED AND DEFINED

A party may be authorized to act on behalf of or in relationship to another in various ways:

1. The relationship is that of a principal and agent, whether that of a general agency or a special agency;

2. The relationship is that of an ordinary employer-employee between the principal and the second party;

3. The relationship is that of a principal and an independent contractor who is the second party performing
certain defined services.

1. General and Special Agents Defined

General Agents

A general agent is one who is authorized to conduct a series of transactions involving a continuity of service.
(Civil Code § 2295; Restatement (Second) of Agency, § 3(1)). General agents tend to be an integral part of a
business enterprise and do not require additional authorization for each transaction which they conduct on
behalf of their principal. For example, a branch manager of a company may have general authority to transact
the business of the branch on behalf of the company and is a general agent to that extent.

Special Agents

A special agent is one who conducts a single transaction or series of transactions not involving continuity of
service. (Civil Code § 2297; Restatement (Second) of Agency, § 3(2).) A real estate broker is usually a special
agent although, in appropriate circumstances, a form of general agency can arise. The distinction between a
general and special agent is important when determining the extent of an agent's authority to bind the principal
to agreements made by the agent with third parties, and when defining the course and scope of the agency
relationship.

Real estate brokers typically exercise limited authority as special agents to solicit and negotiate on behalf of
their principals from whom they must obtain ratification of agreements with third parties. Real estate brokers
and associate licensees they have engaged are neither licensed nor regulated to act as general agents. Rather
real estate licensees are licensed and regulated as special agents to carry out on behalf of another or others
certain defined activities for compensation or expectation of compensation in real property and real property
secured transactions.

A real estate broker is ordinarily a special agent who acts on behalf of the principal, but does not act in place or
instead of the principal. In order for a real estate broker to act in place and instead of the principal the agent
must be designated the attorney in fact pursuant to a power of attorney, which should only be used in
exceptional circumstances and with the advice of counsel. For example, the broker is not entitled to convey or
encumber title to the real property of his or her principal without the express written authority of that principal.
Such authority would typically require a power of attorney. While the listing agreement, known as an exclusive
right to sell, grants to the real estate broker the right to receive a commission regardless of whether the
principal, the listing broker or any other broker sells the property, such a listing agreement does not convey any
power to the listing broker to sell the property. Rather, the authority granted to the listing broker is the right to
solicit offers from prospective buyers (offerors) and the right to be compensated regardless of through whom
the property may be sold.

Broker Acting for Own Account Whether as a Principal Only or as a Principal and a Special agent of the Other
Principal

Not infrequently a real estate broker or salesperson will act in a real property transaction or real property
secured transactions for his or her own account. Because of professional background and contacts, a licensee is
more aware of investment and profit opportunities in real property or real property secured transactions than are

a majority of the people who do not possess real estate licenses. An effort to exploit these opportunities to
personal advantage may involve legal or ethical matters to be carefully considered by the licensee before
becoming involved in a transaction as a principal and, therefore, for the licensee's own account.

Even where a broker or salesperson is acting for his or her own account, i.e., as a principal to the transaction,
duties are owed to the other principal including the obligation to act honestly and fairly, in good faith, and
without fraud or deceit. These duties and obligations are expected of all parties to agreements. Real estate
licensees are generally subject to additional defined duties when acting as principals only in real property or real
property secured transactions. (Katz v. Departments of Real Estate (1979) 96 Cal.App.3d 895; Prichard v. Reitz
(1986) 178 Cal.App.3d 465).

In certain fact situations, brokers or salespersons have added duties to the principal to the transaction even when
acting only as principals for their own account. An example is when a broker or salesperson is acting as a
principal in a transaction who is an arranger of credit pursuant to Civil Code §§ 2956-2957. Licensees who are
principals in such transactions pursuant to Civil Code § 2957(a)(1) and (a)(2) must prepare and complete a
seller financing disclosure statement to be delivered to the other principal.

Civil Code § 2079.13(b) imposes a higher standard upon real estate licensees and upon the broker which whom
the licensee is associated (both salespersons and broker associates) even when acting as principals for their own
account. In particular, the Civil Code provides that: "The agent in the real property transaction bears
responsibility for his or her associate licensees who perform as agents of the agent. When an associate licensee
owes a duty to any principal or to any buyer or seller who is not a principal, in a real property transaction, that
duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions.”
(Civil Code § 2079.13(b) emphasis added.)

Numerous complaints are made to the Department of Real Estate resulting from the efforts of licensees to
secure profits in real property transactions by purporting to act as principals. In this connection they have
resorted to the use of options, net listings, guaranteed sales, and other types of agreements which combine
features of a listing with an obligation or right imposed upon or given to the licensee to act as a principal. The
use of options, net listings, and guaranteed sales is neither illegal nor unethical in California so long as a full
disclosure of the licensee's involvement in the transaction and the legal effect of such an agreement are
explained to the persons with whom the licensee is transacting business. The other party to the prospective
transaction must be advised and understand that the licensee may be acting as a principal, and potentially as
both an agent and a principal in the transaction, rather than simply as an agent.

When a real estate licensee is acting as a principal only in a transaction, it is essential that the other principal to
the transaction understand the role of the licensee. The other principal should be aware of the conflicts of
interest involved in such transactions and that the dealings with the licensee are at "arms-length" and not that of
a special agent and principal. Because of the potential for creating conflicts of interest between the agent and
the principal who is the other party to the transaction, some states such as Massachusetts and New York limit or
prohibit the use of net listing or agency agreements. Although net listings are not illegal in California, they can
easily lead to a breach of the agent's fiduciary obligations and should be used only with highly sophisticated
clients, or clients who are independently represented and, of course, with full disclosure of all of the conflicts
involved.

Since the broker or salesperson holds himself or herself out as a real estate licensee, the broker or salesperson
must be careful when acting as a principal only, or as both a special agent and a principal. It is easy for the
public to misunderstand the role of the licensee because the contacts between them usually arise out of the
marketing activities of the licensee. For example, office signs, signs on properties, stationery, newspaper
advertisements and business cards are all illustrations that the broker or salesperson is acting or intending to act
in a licensed capacity. Therefore, great care must be taken to dispel the agency image if the licensee chooses to
act as a principal only in a real property or real property secured transaction.

Also, it is important for the licensee to disclose and explain fact situations where the licensee may be acting
both as a principal and a special agent. An example of such a fact situation is when the licensee lists his or her
property on a multiple listing service, soliciting buyers through that medium, and the real estate firm with whom
the licensee is associated later becomes the agent of the buyer. Another example is where a real estate broker

has undertaken on behalf of the borrower to solicit for a lender to make a loan to the intended borrower. The
broker later decides to make the loan him or herself or out of broker controlled funds. As a result, the broker is
presumptively acting as both a principal and as a special agent in the loan transaction. (Business and
Professions Code §§ 10240(b) and 10241(j)).

It is particularly dangerous for as a licensee to start out as an agent in a transaction and then switch status before
the transaction is consummated to that of a principal only. In fact, it may not be possible to discharge the
responsibilities inherent in the agency relationship in the middle of a transaction. The usual result is the
licensee will be acting both as a principal and as a special agent of the other principal to the transaction. The
licensee must be scrupulous in informing the other principal of the inherent conflicts of interest when the
licensee is acting as a principal, and the licensee should recommend that the principal obtain independent
professional advice with regard to and before proceeding with the transaction.

Various court decisions indicate that the burden of proof under these circumstances is upon the licensee to show
that the principal was fully informed of this change of status. Obviously, such disclosures must be made in
writing (Civil Code § 2079.17 and Business and Professions Code §§ 10176(a) and (d)). Vague or ambiguous
disclosures will not be sufficient notice of a change of status by the licensee from special agent to principal
only.

Option to Purchase by the Broker as a Special agent

A somewhat similar situation arises when a broker who is employed as a special agent to find a buyer of real
property obtains an option to purchase the property by the owner which runs concurrently with the agency. In
such a case, the broker cannot ignore the interests of the principal and the broker may not take advantage of the
fiduciary relationship with the principal.

The law is well summarized in American Jurisprudence: "If a broker employed to sell property is also given . . .
an option to purchase the property himself, he occupies the dual status of agent and purchaser and he is not
entitled to exercise his option except by divesting himself of his obligation as an agent by making a full
disclosure of any information in his possession as to the prospect of making a sale to another." Again, a broker
should not proceed to obtain options to purchase from a principal for whom the broker is acting as an agent
unless the principal is highly sophisticated in such transactions, or is independently represented by a
professional, and receives full disclosure.

Disclosure of Conflicts and Profits by the Broker as a Special agent

In the language of The Restatement of Agency: "Before dealing with the principal on his own account . . . an
agent has as a duty, not only to make no misstatements of fact, but also to disclose to the principal all relevant
facts fully and completely. A fact is relevant if it is one which the agent should realize would be likely to affect
the judgment of the principal in giving his consent to the agent to enter into the particular transaction on the
specified terms. Hence, the disclosure must include not only the fact that the agent is acting on his own account
but also all other facts which he should realize have or are likely to have a bearing upon the desirability of the
transaction from the viewpoint of the principal.” (Restatements (Second) of Agency ' 390)

The very nature of combining listings, options, and guaranteed sale agreements place the licensee in a position
where he or she must exercise the utmost caution to avoid violating the fiduciary duties and obligations owed to
the principal. Additional problems arise in this context because the Real Estate Law and general principals of
agency require that the licensee make full disclosure to the principal of any compensation, commission or profit,
claimed or taken by the licensee with respect to the transaction. (Business and Professions Code § 10176 (g)).

2. Employer-Employee Relationship Defined

For centuries, the employment relationship was characterized as the law of Master and Servant. An employee is
defined in the Labor Code as one who renders personal services to the employer and who is performing the
service under the direction and control of the employer. For instance, a filing clerk in an office, or a machinist
in a factory is an ordinary employee. A broker is usually not an employee. Rather, a broker acts as a special
agent of his or her principal to accomplish the limited and specific purposes of the agency. In this relationship,
the broker is authorized to solicit, negotiate and to act on behalf of the principal within the course and scope of
the agency. However, the broker is not typically authorized to act in the place or instead of the principal. For

instance, an officer of a corporation often has the authority to bind his employer to agreements while a broker
must obtain a ratification or specific consent of the principal. Although there is some confusion in both the
statutes and reported cases, there is a distinction between an agent and an employee.

An employee is an agent of the employer but not all agents are employees. A real estate broker is an agent of
his or her principal but not an employee of the principal. On the other hand, the relationship between the real
estate broker and his or her licensees is that of a principal and an agent and employee. (Business and
Professions Code §§ 10032 and 10132, and Civil Code § 2079.13(b)). With regard to the liability and
responsibilities to third parties, it does not matter whether the salesperson or broker associate is classified as an
employee or agent. In either case, the supervising broker whether individually or through a real estate licensed
corporation is vicariously liable for the actions of the broker's agents and employees. Should the broker be a
corporation, the salesperson or broker associate is an agent and employee of the corporation, and not directly an
agent of the supervising qualifying broker in his or her individual capacity. (Walters v. Marler (1978) 83
Cal.App.3d 1, 35). However, the broker as the designated officer of the corporation is responsible to supervise
the agents and employees of the corporation to ensure full compliance with the Real Estate Law. (Business and
Professions Code § 10159.2).

3. Independent Contractor Defined

An independent contractor is one who, in rendering services, exercises an independent employment or
occupation and is responsible to the principal only for the results of his or her work. An important factor in
establishing independent contractor status is that the contractor determines the method of accomplishing the
work for which the contractor has been engaged. Salespersons and broker associates are usually characterized
as independent contractors of the broker for purposes of state and federal income tax reporting and for certain
other purposes such as Workers' Compensation Insurance coverage. (Unemployment Insurance Code § 650 and
26 USC § 3508). Accordingly, salespersons and broker associates are agents and employees of the supervising
broker in connection with dealings with the public but may, at the same time, be independent contractors for
income tax reporting and certain other labor related purposes.

To maintain independent contractor status for income tax reporting and related labor law purposes, it is
necessary for the supervising broker to specify in contracts with salespersons and broker associates that the
associates are independent contractors and not employees for income tax reporting purposes. However, the real
estate broker should not be confused by the implementation of independent contractor status for tax reporting,
Workman's Compensation, or other labor related purposes. The independent contractor relationship with
salespersons and broker associates does not in any way diminish the broker's responsibilities and liabilities for
the conduct of the broker's salespersons and broker associates who are acting as agents and employees for other
purposes. (Business and Professions Code §§ 10032, 10132, 10177(h) and 10159.2.) (Also, Manning v. Fox
(1984) 151 Cal.App.3d 531; Resnik v. Anderson & Miles (1980) 109 Cal.App.3d 569, 572-573; Gipson v.
Davis Realty Co. (1963) 215 Cal.App.2d 190, 206-207; Grand v. Griesenger (1958) 160 Cal.App.2d 397, 406).

4. Status of Mortgage Brokers

In view of the turmoil in the mortgage origination industry during the last 10 years, and culminating in the
mortgage meltdown of 2008, the legislature has enacted various specialized provisions pertaining to
independent contractors in the mortgage loan origination business. (Business and Professions Code §§
10133.1(c) (1) and (2) and 10177.6, § 10166.03; 10 CCR, Chapter 6, § 2841).

5. Interrelating Factors

A. Independent Contractor Status

For the most part, an independent contractor sells final results rather than time and the methods of achieving
those results are not subject to the control of the principal. The independent contractor agrees to do the work
contracted for in his or her own way. An independent contractor may also be an agent of the principal. For
instance, a real estate broker is typically an independent contractor acting as a special agent of the principal for

a defined limited purpose. On the other hand, office personnel such as secretaries, receptionists, and
administrative assistants are typically employees. At the same time, there are many independent contractors
who may not be agents. Examples of this relationship are building subcontractors, structural pest control
operators and other professionals such as architects and engineers who may be engaged to inspect and issue
reports on the condition of a real property, and who are not engaged to accomplish an activity on behalf of the
principal.

Many factors bear upon the issue of whether a given agent is an employee or an independent contractor.
Further, the agent may be an employee for certain purposes and an independent contractor for certain purposes,
e.g., the salesperson or broker associate engaged by the real estate broker. Some of these factors are: existence
or nonexistence of an independent calling; limited or unlimited right of principal to hire and fire; extent to
which the engagement agreement permits principal to give orders as to time and details; custom in the industry
as to scope of control; and payment by time or by job. In addition, real estate licensees have been given certain
statutory exemptions which allow salespersons and broker associates to be characterized as independent
contractors for income tax reporting, Workers' Compensation, and other labor related purposes when engaged in
brokerage sales and related services. (Unemployment Insurance Code § 650 and 26 USC § 3508.)

A legislative objective was pursued by the real estate industry to presumably allow real estate brokers and their
salesperson or broker associates to contract distinguishably from existing law regarding the employer’s
statutory obligation to indemnify the employee for acts occurring within the course and scope of the
employment. While the objective of having salesperson and broker associates indemnify the employing real
estate broker has not yet been tested in a reported case, this contractual relationship would not in any event
affect third parties, including the Department of Real Estate or members of the public. (Business and
Professions Code § 10032). These and many other elements will determine a person's status as an employee,
agent, independent contractor or some combination of the foregoing.

B. Public Liability: Broker’s Duty to Supervise

Even though an employer or principal may not be personally at fault, they can be held liable in damages for the
negligent conduct of their employees or agents who act within the general course and scope of their
employment or agency. This liability finds its most notable illustrations in cases involving automobile
accidents of employees while driving on the employer's business. If the wrongdoer is an independent contractor
for all purposes, the person who hired him or her would not ordinarily be liable for injuries caused by the
negligence of the independent contractor. Brokers should consider carrying general liability and Errors and
Omission insurance covering their salespersons, broker associates and office personnel regardless of their
contractual and employment relationships with the supervising broker.

The fact that the salespersons and broker associates may be independent contractors for income tax reporting
and labor related purposes does not alter the agency and employee relationship for other purposes. In Resnik v.
Anderson and Miles, 109 Cal.App.3d 569, 573 the California Second District Court of Appeals held, "a
salesman, insofar as his relationship with his broker is concerned, cannot be classified as an independent
contractor. Any contract which purports to change that relationship is invalid as being contrary to the law."

Some brokers may be unaware of their responsibilities to supervise the activities of salespersons and broker
associates even when the associate licensees are acting as principals. While the duty to supervise salespersons
and broker associates when acting as principals may be narrower than the duty to supervise these associates
when acting within the course and scope of the real estate license, the scope of the duty to supervise principal
transactions has wide-ranging implications. As aforementioned, the seller "carry back" financing is an example
of a principal relationship which would require broker supervision. Another example would be when a
salesperson or broker associate is acting as a principal to make loans through the supervising real estate broker
with the real estate broker being the arranger of the loan transaction. (Business and Professions Code §§ 10240
and 10241(j)).

Although many practitioners may be unaware of their obligations in this regard, the duty of the broker to
supervise the transactions of a salesperson or broker associate is well established. For instance, it is clear that
salespersons and broker associates are the agents of the broker by whom they are employed or with whom they

are licensed. A real estate salesperson does not have authority to act independently of the broker who employs
him. Rather, the salesperson acts on behalf of the broker, who is, in turn, the agent of the principal. (California
Real Estate Loans, Inc. v Wallace (1993) 18 CA 4th 1575; Manning v. Fox (1984) 151 Cal.App.3d 531; Resnik
v. Anderson & Miles (1980) 109 Cal.App.3d 569, 572-573; Gipson v. Davis Realty Co. (1963) 215 Cal.App.2d
190, 206-207; Grand v. Griesenger (1958) 160 Cal.App.2d 397, 406.).

Recent developments have expanded the scope of civil liability of brokers for the negligent acts of salespersons
and broker associates. (Business and Professions Code §10032; Civil Code § 2079.13 (b)) This is true
regardless of whether the salesperson treated by the hiring broker as an employee or independent contractor.
An employer is required by statute to indemnify an employee for all expenses or losses necessarily incurred in
the performance of his or her job or while obeying the directions of the employer, whether or not lawful, unless
the employee believed the acts to be unlawful at the time the directions were obeyed. (Labor Code §2802(a)).
Any contract made by an employee that purports to waive this right is null and void. (Labor Code §2804).

The Department of Real Estate has published comprehensive regulations pertaining to the broker’s duty to
supervise independent contractors and requires the supervising broker to establish policies, rules procedures and
systems to monitor the conduct of broker and salesperson associates (10 CCR, Chapter 6, § 2725).

C. Liability for Intentional Torts and Criminal Misconduct

Ordinarily, employers and principals are not liable for the intentional torts or criminal misconducts of the
employee or agent. However, the law recognizes various exceptions to this general rule. This is a complicated
and quickly evolving field and no effort is made here to fully explore the subject.

Under existing law, the supervising broker will be liable for the intentional torts or criminal misconducts of his
salespersons or broker associates where the supervising broker ratifies the misconduct, or where the broker
knew or should have known of the misconduct but failed to reasonably prevent it, e.g., the conduct was
reasonably foreseeable. (Alhino v. Starr (1980) 112 Cal. App. 3d 158, 173-175; also Inter Mountain Mortgage,
Inc. v. Sulimen (2000) 78 Cal.App.4th 1434). For instance, when a supervising broker knows a salesperson is
committing fraud, the broker must intervene and take necessary and appropriate steps to terminate the
misconduct, and the broker would be well advised to consider terminating the relationships with the perpetrators
of such misconduct.

D. Workers’ Compensation

Under the California Workers' Compensation Act, the broker may not necessarily be required to carry workers
compensation insurance covering salespersons and broker associates. However, the failure of the supervising
broker to carry workers' compensation coverage may result in liability to the broker if a court later concludes
that the real relationship between the parties for the purposes at issue was that of an employer and employee.
The broker will minimize the risks inherent in the uncertainties of the law in this field by carrying workers'
compensation insurance.

E. Social Security

A similar situation arises under the Federal Insurance Contributions Act and Federal Unemployment Tax Act.
Here the broker may submit broker's employment agreements with the salespersons or broker associates
together with detailed data as to operating methods to the District Director of Internal Revenue and obtain a
ruling whether the salespersons or broker associates are considered employees under these acts. The existing
exemptions available to real estate brokers have extended primarily to brokerage sales and related services.
Real estate brokers who are engaged in a broad list of licensed and non-licensed activities may wish to review
with legal counsel the effect of these activities upon the available exemptions from employee and employee
relationships for income tax reporting purposes. (26 USC § 3508; IRS Rev. Ruling 76-136, IRS Rev. Ruling
76-137, and California Attorney General Opinion 59 Ops. A.G. 369.)

The consequences of mischaracterizing the relationship in this context are serious. For example, if the IRS
rules that the salespersons or broker associates are employees for income tax reporting purposes, the supervising
broker may be liable for income taxes due from the salespersons or broker associates which should have been

withheld by the broker and timely paid to the IRS. Interest and penalties will be typically added to the amount
assessed by IRS. Supervising brokers should obtain the advice of a CPA and/or qualified tax attorney when
establishing policies and procedures in this regard.

F. Unemployment Insurance

The California Unemployment Insurance Act excludes brokers and salespersons who are remunerated solely by
way of commission from the definition of employee for purposes of maintaining unemployment insurance
coverage. (Unemployment Insurance Code § 650). The Employment Development Department (EDD) has
generally taken a more industry sympathetic view on this issue then has IRS. However, if IRS rules in a given
fact situation that salespersons or broker associates are employees of the supervising broker for income tax
reporting purposes, EDD is likely to follow the IRS ruling and impose the same relationships on the supervising
broker in the subject fact situation.

G. Personal Income Tax

In recent years IRS has been challenging the exemption available to real estate licensees under 26 USC 3508
when the activities involved are other then general sales brokerage and related services, e.g., licensed activities
such as mortgage brokerage, mortgage banking, and special project brokering such as new subdivision sales.
Real estate licensees may be still treated as independent contractors for both federal and state personal income
tax purposes, depending upon the fact situation.

This issue has been addressed in part by (1) the Federal Tax Equity and Fiscal Responsibility Act (TEFRA) and
(2) the amendment to § 650 and the addition of § 13004.1 to the California Unemployment Insurance Code.
Under these laws real estate licensees functioning on behalf of a supervising real estate broker, in certain fact
situations, are and remain exempt from treatment as employees for income tax reporting and other labor related
purposes provided that certain conditions are met.

Section 13004.1 provides that an individual will not be considered an employee for state income tax purposes if
all of the following conditions are met: (l) the individual is licensed by the Department of Real Estate and is
performing brokerage services as a real estate licensee on a commission basis; (2) substantially all
remuneration for such services performed is related directly to sales or other output rather than the number of
hours worked; and (3) the real estate services by that individual are performed pursuant to a written agreement
between the individual and the supervising broker and the agreement provides that the individual will not be
treated as an employee with respect to those services for state tax reporting purposes. Similar standards apply
for establishing independent contractor status for federal income tax reporting purposes.

It bears emphasis that the characterization of independent contractor status for state and federal income tax
reporting purposes has no effect upon the supervising brokers' (whether individual or corporate) civil or public
liability for the conduct or misconduct of salespersons or broker associates. (Business and Professions Code §§
10032, 10132, 10177(h) and 10159.2). (Also, Manning v. Fox (1984) 151 Cal.App.3d 531; Resnik v. Anderson
& Miles (1980) 109 Cal.App.3d 569, 572-573; Gipson v. Davis Realty Co. (1963) 215 Cal.App.2d 190, 206-
207; Grand v. Griesenger (1958) 160 Cal.App.2d 397, 406).

H. Employment Contract with Salespersons and Broker Associates

Commissioner's Regulation 2726 provides that every real estate broker must have a written agreement with each
salesperson or broker associate, whether licensed as a salesperson or as a broker. An engagement agreement
between the broker and salesperson is instrumental in establishing the relationship between them, but it is
ineffective to the extent that it conflicts with the Real Estate Law, other statutes, and applicable case law. It is
important to recognize that a written agreement is required with both salespersons and broker associates if either
is given access to and the ability to withdraw monies from the trust accounts of the supervising broker. (10
CCR, Chapter 6, § 2834).

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Chapter 13 - Non-mortgage Alternatives to Real Estate Financing somebody Wed, 07/19/2023 - 02:09 am

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INTRODUCTION

INTRODUCTION somebody Wed, 07/19/2023 - 02:09 am

INTRODUCTION

There are a variety of ways to acquire real estate interests without using mortgage financing. With the exception
of the real property sales contract, these methods are available only to large financiers, very strong tenants or
substantial institutions.

An all-cash purchase is an obvious alternative to mortgage financing. However, it is often difficult for an
individual to raise substantial sums of money and protect against unlimited liability.

Syndicate Equity Financing

Syndicates afford small investors opportunities to invest in high-yield real estate. A syndicate offers knowledge
of values and the ability to find, organize and manage a successful venture.

Commercial Loan

A straight bank loan can be used to purchase real property. The borrower obtains the loan based on good credit
or on some type of collateral (stocks, bonds, personal property) other than the real property.

Bonds or Stocks

Large, well-rated corporations can sell stocks or general obligation bonds in order to purchase real property
without using a mortgage.

Long-term Lease

This is a good approach if the property is usable as is. If the lessee is leasing only the land and has to pay for
construction of improvements, the overall cash investment will probably be larger than buying improved
property with a mortgage.

Advantages to the tenant are:

• Rent may be deductible as an expense. (If property was owned, only the improvements would be
depreciable.)

• Money freed for other uses can frequently be used more advantageously.

• Tenant’s total debt load is not increased.

Disadvantages to the landlord are:

• Often cannot find good tenants willing to lease.

• Tenant having a high credit rating at beginning of lease may go “sour” in a few years.

• Tenant may improve property with special purpose development and then go bankrupt

• Tenant may go bankrupt before completing construction, possibly burdening property with mechanic lien
claims leaving landlord with unsaleable and unleasable property.

Exchange

A trade or exchange of properties can be an alternative to mortgage financing, if the difference in valuation
between the properties can be reconciled and the trade made without financing difficulties.

Sale-Leaseback

A sale-leaseback is a popular option for companies with excellent credit. Also termed purchase-lease, sale-
lease, lease-purchase or leaseback.

Some advantages of sale-leaseback to seller/lessee may be:

1. Property is suited to needs.

2. Working capital not tied up in fixed assets.

3. Since leases are not considered long-term liability, rent may be tax deductible. Lease term is often longer
than mortgage. Balance sheet looks better and credit is enhanced.

4. Often more capital can be raised than by borrowing.

5. Tax deduction of lease payments is frequently better than depreciation since the land cannot be
depreciated.

6. By selling property at profit after development, seller acquires immediate use of additional cash.
Repayment is actually in rent paid over time in constantly inflating dollars.

7. For companies working under government contracts that call for cost plus a fixed fee, rent is an allowable
expense item but mortgage interest is not. (This is why many aircraft, electronic, and other defense plants
are leased rather than owned.)

Some advantages of sale-leaseback to buyer/lessor may be:

1. Transaction results in a long-term, carefree investment.

2. Property values may appreciate.

3. Lease payments may be higher than the mortgage payments. Lease payments may help pay off the
mortgage and lessor will still have title to the property.

4. Investment will not be paid off prematurely, as mortgages often are through refinancing. Investor will not
have to seek another good investment to replace the one prematurely paid off.

5. Lease terms often give lessor a claim against other assets of the lessee in the event of a default.

Sales Contract (Land Contract)

With certain exceptions, a real property sales contract is an instrument by which the seller (vendor) agrees to
convey title to real property after the buyer (vendee) has met certain conditions specified in the contract and
does not require conveyance within one year.

This device, variously designated ‘‘Installment Sales Contract,” “Agreement to Convey,” “Agreement for
Purchase and Sale,” “Land Sale Contract,” or “Land Contract of Sale,” must meet the requirements set forth in
Section 2985, et seq. of the California Civil Code.

Historically, the primary advantage of this instrument to a seller was the ease with which seller could eliminate
purchaser’s interest in the event of default. This advantage was considerably weakened by the court’s
conclusion, in Barkis v. Scott (34 Cal. 2d 116, 208 P. 2d 367), that California Civil Code Section 3275 was a
sufficient barrier to harsh and unreasonable foreclosure proceedings. After Barkis v. Scott, other cases have
expanded the remedies of defaulting vendees to include even willfully defaulting persons, which has effectively
taken away the automatic power of sale.

When selling a parcel of land under a sales contract which is not recorded, the seller is prohibited from
otherwise encumbering the parcel to an aggregate amount exceeding the amount due under the contract without
the written consent of the purchaser. This may be risky to a buyer with an unscrupulous seller.

A real property sales contract must recite the number of years to complete payment and, if a tax estimate is
made, the basis for it.

When selling real property under a real property sales contract, the seller must apply installment payments first
to payment(s) due on an obligation(s) secured by the property. The seller must hold in trust payments received
for taxes and insurance and use those funds only for those purposes, unless the payor and the holder of an
encumbrance on the property agree to some other use of those funds.

A real property sales contract for purchase of real property in a subdivision must clearly set forth the legal
description of the property, all the existing encumbrances at the date of the contract and the terms of the
contract.

The advantage which a land contract may have held as a security device seems to have dissipated in favor of the
use of a deed of trust with power of sale.

Disadvantages to buyer. The disadvantages of a sales contract to the buyer are:

1. The contract may include covenants restricting its assignment or transfer.

2. Most financial institutions regard a land contract as poor collateral.

3. Buyer has no assurance that the seller has good title at the time the contract is made. The buyer cannot
rescind the contract for this reason.

4. If, prior to full performance by the buyer and conveyance by deed, the seller is:

• adjudicated a bankrupt;

• dies, with title passing to heirs; or

• is adjudicated an incompetent;

the buyer can expect time-consuming, frustrating, and expensive litigation before obtaining a deed and
policy of title insurance.

5. After full performance, the buyer may receive defective title or no title at all, although normally the
contract will require delivery of a policy of title insurance. The buyer may have to pay the premium for
this.

Many of these disadvantages are largely eliminated by using a contract secured by a deed of trust or a three-
party instrument, where a trustee is appointed in the same way as in a deed of trust, coupled with title insurance
insuring the equitable title of the vendee and the legal title of vendor.

Prepayment. A buyer shall be entitled to prepay all or any part of the balance due on any real property sales
contract entered into on or after January 1, 1969 with respect to the sale of land which has been subdivided into
a residential lot or lots which contain a dwelling for not more than four families. Provided, however, that the
seller, by an agreement in writing with the buyer, may prohibit prepayment for up to a 12-month period
following the sale. Any waiver by a buyer of this provision is contrary to public policy and thus unenforceable
and void but would not affect the validity of the remainder of the contract.

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SECURITY AGREEMENTS, PERSONAL PROPERTY SECURED TRANSACTIONS, UNIFORM COMMERCIAL CODE – ARTICLE 9

SECURITY AGREEMENTS, PERSONAL PROPERTY SECURED TRANSACTIONS, UNIFORM COMMERCIAL CODE – ARTICLE 9 somebody Wed, 07/19/2023 - 02:09 am

SECURITY AGREEMENTS, PERSONAL PROPERTY SECURED TRANSACTIONS, UNIFORM COMMERCIAL CODE – ARTICLE 9

Agents in real estate transactions involving both personal and real property must be familiar with the transfer
and encumbrance of personal property. Because it is often difficult to determine whether or not a particular item
affixed to real property is a fixture, the obligation should be secured by both a trust deed/mortgage and a
personal property security instrument (mixed security).

Upon default and foreclosure of real property, Code of Civil Procedure Sections 580(b), 580(d) and 726
prevent or limit a deficiency judgment. Unless expressly stated in a contract between parties, no antideficiency
limitation exists in a personal property foreclosure.

Business opportunities. Business opportunity brokers are routinely involved in personal property transactions
which must fully satisfy the Bulk Sales Law (Uniform Commercial Code, Division 6) and the secured
transaction statutes (Uniform Commercial Code, Division 9). Assets of a business are commonly used as
collateral to create a security interest in the seller or lender.

Just as a trust deed or mortgage encumbers real property as security for an obligation (debt), a “security
agreement” creates a security interest in personal property.

To protect or “perfect” the interest created by a security agreement, as against other security interests and/or
lien creditors or subsequent purchasers, a Financing Statement (UCC-l) is usually filed. In most cases, a
security interest is perfected when it has attached and been properly filed with the appropriate filing officer (the
Secretary of State in Sacramento or the appropriate county recorder).

A security interest attaches when:

• there is agreement by the parties that it attach;

• value has been given; and

• the debtor has acquired rights in the collateral.

Once perfected, the secured party’s interest is protected against the debtor’s other creditors.

The Financing Statement should not be confused with the actual security agreement. The security agreement
creates the security interest.

Although a written agreement is not necessary where the collateral is in the possession of the secured party as a
pledge, a security interest is usually not enforceable unless there is a written security agreement, signed by the
debtor, describing the collateral.

Uniform Commercial Code (UCC)—Article 9

Division 9 (entitled “Secured Transactions, Sale of Accounts, Contract Rights and Chattel Paper”) of the
Uniform Commercial Code (UCC) contains the unified and comprehensive scheme for regulation and control
of the sale, creation and priority of all liens and security interests in personal property. It covers a transaction in
any form which is intended to create a security interest in personal property, including goods, documents,
installments, chattel paper, accounts or contract rights and similar items. The security interest gives the secured
party the right to foreclose and apply the sale proceeds toward the satisfaction of the secured obligation if the
debtor defaults.

Purpose of the UCC. The basic purpose of the Uniform Commercial Code is to provide a simple and unified
structure within which the immense variety of secured financing transactions can be completed.

As amended over the years, the UCC comprises a uniform, clear and easily available set of rules for the conduct
of commercial intra- and interstate transactions.

Filing system. Under the UCC, a Financing Statement, properly filed, perfects a security interest. Absent a
filed Financing Statement, subsequent purchasers without actual knowledge of the security interest might
acquire property free of the prior security interest. On the other hand, a secured party who does file is in most
cases protected from the interests of subsequent purchasers. UCC records are indexed by the true name of the
debtor.

Place of filing. The proper place to file in order to perfect a security interest is as follows:

• When the collateral is consumer goods, in the office of the county recorder in the county of the debtor’s
residence or, if the debtor is not a resident of this state, in the office of the recorder of the county in which
the goods are kept.

• When the collateral is crops growing or to be grown, timber to be cut or minerals or the like (including oil
and gas) or accounts subject to subdivision (5) of Section 9103, in the office where a mortgage on the real
estate would be recorded.

• In all other cases, in the office of the Secretary of State.

The proper place to file in order to perfect a security interest in collateral, including fixtures, of a transmitting
utility is the office of the Secretary of State. This filing also constitutes a fixture filing as to the collateral
described therein which is or is to become fixtures.

For filing purposes, the residence of an organization is its place of business if it has one or its chief executive
office if it has more than one place of business.

The proper place to file a financing statement as a fixture filing is in the office where a mortgage on the real
estate would be recorded.

Any subsequent filings such as Statements of Continuation, Termination, Release, Assignment and Amendment
must be filed in the same location as the original Financing Statement.

Erroneous filing. A filing made in good faith in an improper place or not in all of the places required is
nevertheless effective with regard to any collateral as to which the filing complied with the requirements and is
also effective with regard to collateral covered by the financing statement against any person who has
knowledge of the contents of the financing statement.

Change in debtor’s/collateral’s location. A filing which is made in the proper place in this state continues
effective even though the debtor’s residence or place of business or the location of the collateral or its use,
whichever controlled the original filing, is thereafter changed.

Proper filing. Presentation for filing of a Financing Statement, tender of the filing fee and acceptance of the
statement comprise filing under the code.

Duration of filing. A Financing Statement is effective for five years from the date of filing. For extension, the
secured party must file a Continuation Statement any time within the six-month period preceding expiration.
Succeeding Continuation Statements may thereafter be filed in the same manner to continue the effectiveness of
the original Financing Statement.

Filing information. If the Standard Form UCC-l or UCC-2 is used for filing, the filing officer will note the file
number and date and hour of filing and return the acknowledged copy to the person or firm indicated in the box
at the bottom of the standard form. If a non-standard form is used, the filing party must request an
acknowledgment and send the filing officer a duplicate copy of the form filed, which will be acknowledged and
returned.

The Secretary of State will furnish a certificate showing whether there is on file in its office any presently
effective Financing Statement, naming the Debtor and, if there is, giving the date and hour of filing of each
such statement and the names and addresses of each secured party named therein. This information and copies
of the pertinent financing statements may be obtained by filing a Request for Information or Copies form
(UCC-3) with the Secretary of State.

Priorities

One purpose of the Uniform Commercial Code Article 9 is to give lien rights to providers and installers of
fixtures. A provider’s perfected security interest in fixtures has priority over the conflicting interests of owners
and subsequent encumbrancers [Section 9313 (4) ].

A secured creditor who is first to make a proper filing has priority, regardless of when his/her claim arose.
However, Sections 9301(2) and 9312(4) grant sellers special priority on purchase money security interests
when perfected within 10 days of the purchaser’s receiving possession of the collateral.

Section 9312 of the UCC sets forth the basic rules of priority among conflicting security interests in the same
collateral and Section 9313 gives the priority rules for liens of a trust deed and other fixture filings.

Failure to File

If a Financing Statement is not filed, subsequent purchasers and secured parties without actual knowledge of it
take the property free of the prior security interest. Section 9201 provides, however, that the (unperfected)
Security Agreement is still valid between the debtor and secured party.

Escrow - Early Filing

A Financing Statement may be filed before a security agreement is made or before a security interest otherwise
attaches. In an escrow for a bulk sales transaction there is often need to promptly perfect a seller’s purchase
money security interest to establish priority over other liens which will be perfected when the legal ownership
changes. An escrow holder often files a Financing Statement to perfect the seller’s interest before escrow
closes. (If escrow fails to close, the escrow holder files a UCC-2 Termination Statement to remove the UCC-l
from the record.)

Fixture Filings

Under the UCC, tangible personal property includes “goods” and personal property deemed fixtures under the
law, meaning goods which are so related to particular real property that an interest in them arises under real
estate law. However, ordinary building materials to be incorporated into a building are not deemed fixtures.

A security interest in fixtures can be created by (1) specific provisions included in a trust deed or mortgage
secured by the real property or (2) a fixture filing in the form of a Financing Statement. Both must be recorded
in the county where the real property is located.

In either case, to qualify as a fixture filing, the instrument must contain:

1. a description of the goods which are or will become fixtures;

2. a legal description of the real property;

3. a statement that the goods are, or will become, fixtures; and

4. an assertion that the statement will be recorded in the county where the real property is located.

A fixture filing in the form of a Financing Statement is a lien on the fixture for 5 years from the date of filing,
unless a Continuation Statement is recorded prior to expiration to extend the Financing Statement/lien an
additional 5 years. A fixture filing in the form of a trust deed or mortgage is effective as long as the trust deed
or mortgage remain a lien.

As to enforcement, a fixture filing in the form of a Financing Statement is enforced according to the provisions
for personal property secured interests in the UCC. If the fixture filing is contained in a trust deed or mortgage,
the secured party has the option of proceeding under the UCC to enforce the lien or by foreclosure proceedings
under the trust deed/mortgage to enforce the lien on both the real and the personal property.

UCC 9402 provides:

• a Financing Statement form to be used as a fixture filing;

• the formal requisites of a Financial Statement; and

• amendments and contents of a mortgage to be used as a Financing Statement.

A copy of a security agreement signed by the debtor is sufficient as a Financing Statement if it contains all the
information required by Section 9402.

Caution

This discussion of the Uniform Commercial Code should not serve as a substitute for:

• statutory analysis when dealing with specific problems;

• consultation with legal counsel on legal matters; or

• proper financial advice on banking or financing problems.

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Chapter 16 - Taxation and Assessments somebody Wed, 07/19/2023 - 02:09 am

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ACQUISITION OF REAL PROPERTY

ACQUISITION OF REAL PROPERTY somebody Wed, 07/19/2023 - 02:09 am

ACQUISITION OF REAL PROPERTY

Tax planning is a key consideration in an analysis of the potential returns and risks of a real estate project.
Investors usually seek to:

1. shelter income from taxes; or

2. generate losses to shelter other earned income; or

3. obtain favorable capital gains treatment at disposition.

4. deferral of tax liability.

The manner in which an investor acquires real property can contribute to one or more of these goals.

Recent tax reforms have tended to eliminate most acquisition tax write-offs (e.g., prepaid interest) and there are
probably few immediate tax effects resulting from the mere acquisition of property. However, the method of
acquisition usually has important tax consequences at sale or other disposition of the property.

Title might be taken through a corporation or individually as community property, joint tenancy or tenancy in
common. Corporate ownership permits dealers to segregate their investment property from their stock in trade
and establish the true nature of each type of property. On the other hand, individual ownership allows greater
maneuverability if future plans are uncertain because the property can later be transferred to a corporation tax-
free.

If the taxpayer is in a relatively low tax bracket, individual taxes, particularly for a married person, will be less
than corporate taxes on a given amount of income. Although joint tenancy ownership will simplify processing
on death and reduce probate costs, the transfer of joint tenancy property cannot be controlled by will and the
half not included in the decedent’s gross estate does not receive a step-up in basis.

Adjusted Tax Basis

One of the most important factors in determining the amount of ultimate gain or loss on a transaction is the
“adjusted tax basis” of property, based on its original acquisition price. Property purchased has a basis equal to
the purchase price paid, adjusted for various items over the life of the property (e.g., depreciation). Property
received as a gift has a basis of the donor’s cost (or market value at date of gift if this is lower and taxpayer
desires to claim a loss). The beginning basis of property acquired from a decedent is generally the fair market
value at the date of death.

Tax Planning

The subject of income taxation in connection with real estate sales frequently arises in the context of ex-post
reporting of the facts. In most instances, once a tax related choice is made, it cannot be altered at the time of
filing a tax return. It is then too late to think about tax planning.

The price of a property may be less important than the financial or tax position of the buyer or seller for
purposes of developing acquisition and/or disposition strategies. Tax planning should start in the pre-
acquisition stage. Real estate has historically enjoyed a favorable position in both federal and state income tax
laws, but receipt of the available benefits requires tax awareness during the events leading up to acquisition and
continuing through the entire period of ownership.

Broker’s role. There are many subtleties in the tax laws relating to real estate income. Unless a real estate
broker is also an income tax investment counselor, the broker should never offer tax advice but should urge
clients to consult a real estate tax attorney, certified public accountant or other qualified person.

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CERTAIN ASSESSMENT STATUTES

CERTAIN ASSESSMENT STATUTES somebody Wed, 07/19/2023 - 02:09 am

CERTAIN ASSESSMENT STATUTES

Since 1885, California has enacted numerous statutes relating to special taxes and assessments and to the
formation of assessment districts throughout the state. The following are among the important assessment acts.

Vrooman Street Act

Passed in 1885, this act conferred authority on city councils to grade and finish streets, construct sewers, etc.,
within municipalities or counties. It provides for an election and the issuance of bonds secured by special funds
collected under tax levy. It also provides for the acquisition of public utilities by the municipality or county.

A property owner may arrange for street grading according to official specifications and secure a reduction in
the amount of the assessment.

Street Improvement Act of 1911

This act is utilized more than any other for street improvements in this state. Assessments are due in equal
installments during the term of the bonds. The local legislative body determines the rate of interest on the
bonds. The amount of assessment appears on the tax bill as a lien against the property. It may be partially or
wholly prepaid at any time, including prior to issuance of the bonds.

The Improvement Bond Act of 1915

Under the terms of this act, a public agency can issue bonds to finance subdivision street improvements. Bonds
usually carry a maximum of 6 percent interest. Owners of affected property bear the cost to redeem the bond.
Under certain circumstances, an improvement district cannot issue bonds until the California Districts Securities
Commission has approved the project.

Mello-Roos

The Mello-Roos Community Facilities Act of 1982 provides for a wider variety of facilities and services than
other improvement bond acts and has no requirement that such improvements will specifically benefit
individual properties. Although a Mello-Roos assessment is secured by a lien against the property and the
maximum tax rate approved may be greater than what will be needed to retire the bonds, the principal amounts

of the bonds are not tied to any specific parcels. As such, Mello-Roos is on the order of a general property tax
levy for general fund benefits and is not appropriate for inclusion in the land value of the parcels. The amount
of any unpaid assessment(s) will not appear on the property tax bill, but will be separately levied and collected.
Civil Code Section 1102.6b requires that a seller of one to four dwelling units disclose a Mello-Roos
assessment.

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DOCUMENTARY TRANSFER TAX

DOCUMENTARY TRANSFER TAX somebody Wed, 07/19/2023 - 02:09 am

DOCUMENTARY TRANSFER TAX

Section 11911 allows a county or city to adopt a documentary transfer tax to apply to transfers of real property
located in the county. Notice of payment is entered on the face of the deed or on a separate paper recorded with
the deed.

The tax is computed at the rate of 55 cents for each $500 of consideration or fraction thereof. If a portion of the
total price paid for the property is exempt because a lien or encumbrance remains on the property, this fact must
be stated on the deed or on a separate paper filed with the deed. Certain types of property transfers, such inter
vivos gifts, transfers by reason of death, or proportional transfers into a partnership owned by the same
individual or entity, are exempt from documentary transfer tax.

A city within a county which has adopted a transfer tax may also adopt its own transfer tax ordinance with the
tax amount fixed at one-half the rate charged by the county. The county collects the total tax in the amount
recited above but turns half the amount collected over to the city.

Some cities collect transfer taxes in excess of the amounts provided in Section 11911. In part, the authority for
this may lie in the distinction between charter cities and general law cities. A concerned party should contact
the recorder’s office for the status of a particular city’s transfer tax levy.

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FEDERAL TAXES

FEDERAL TAXES somebody Wed, 07/19/2023 - 02:09 am

FEDERAL TAXES

Federal Tax Liens

Any unpaid Internal Revenue Code tax becomes a lien on all property and rights to property of the taxpayer,
including property or rights to property acquired after the lien arises. A federal tax lien is not valid against
purchasers, holders of security interests (e.g., mortgages or mechanics’ liens) and judgment lien creditors until a
notice of lien has been filed in the proper place. Even though a notice of lien has been filed, it is not valid
against certain classes of creditors (known as “Super Priorities”) defined in Section 6323(b) of the Internal
Revenue Code. With respect to real property, the notice must be filed with the county recorder.

In addition to the general tax lien, the Internal Revenue Code provides for special liens for estate and gift taxes.
At the date of the decedent’s death, an unrecorded estate tax lien attaches to every part of the gross estate and
continues for a period of ten years. An estate tax lien is valid against most purchasers and transferees. (If the
estate elects to pay the tax in installments for up to fifteen years, the lien is recorded.)

An unrecorded gift tax lien attaches to all gifts made during the calendar year. If the gift tax is not paid by the
donor, the donee becomes personally liable for the tax. The gift tax lien extends for ten years from the time the
gifts were made.

Federal Gift Tax and the Unified Credit

This tax applies to completed voluntary transfers by an individual of any type of property for less than an
adequate and full consideration in money or money’s worth.

If a gift is a transfer of a present interest, there is an annual exclusion of $13,000. If a gift exceeds $13,000 in a
year, a return is due. If the gift is a transfer of a future interest (i.e., any interest that is to commence in use,
possession, or enjoyment at some future time), the exclusion does not apply and a return is due.

Two types of “indirect” transfers are no longer considered gifts and no return is due. These include any amount
paid on behalf of an individual:

1. as tuition to an educational organization; or

2. to any person who provides medical care.

The due date of the Federal Gift Tax Return is April 15 of the year following the gift. Any extension of time
granted for filing the form 1040 applies to the return. Any compliance questions should be referred to a tax
advisor or the local IRS office.

Even though a return may be due, there may not be a tax liability. For example, transfers between spouses are
not taxable gifts. Also, donors may make large transfers and use their Unified Credit rather than pay the gift
tax. The Unified Credit is a dollar for dollar offset against the tax. It was phased in as follows:

For Gift Tax Purposes: For Estate Tax Purposes:
Year Unified Credit Applicable Exclusion Amount Unified Credit Applicable Exclusion Amount
2002 and 2003 345,800 1,000,000 345,800 1,000,000
2004 and 2005 345,800 1,000,000 555,800 1,500,000
2006, 2007, and 2008 345,800 1,000,000 780,800 2,000,000
2009 345,800 1,000,000 1,455,800 3,500,000

To the extent the Unified Credit is used to offset a gift tax liability, it is unavailable for offset in settlement of
the transferor’s estate tax liability.

Social Security Tax

The federal government operates a retirement pay program. Self-employed persons are generally covered also.
This program, commonly known as “social security,” requires quarterly contributions by almost all employers.

Federal Insurance Contributions Act (FICA) withholdings are employee contributions to social security and
medicare. An employee’s FICA tax rate is 7.65%. The social security tax portion is applied to wages up to a
certain amount (e.g., $106,800 for 2010). The medicare portion applies to all wages.

Unemployment Tax

This federal tax is applicable only to those non-farm employers who:

1. pay wages of $1,500 or more during any calendar quarter; or

2. employ at least one employee for some portion of at least one day of each of at least 20 different weeks
(not necessarily consecutive) during the current or the preceding calendar year.

There are also specific requirements for those individuals employing agricultural or domestic workers.

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INCOME TAXATION

INCOME TAXATION somebody Wed, 07/19/2023 - 02:09 am

INCOME TAXATION

Federal Income Tax

While the Tax Reform Act of 1986 reduced most tax rates and simplified the rate structure, certain real property
tax benefits were changed or repealed. The 60% deduction for long-term capital gain was repealed and capital
gain was treated as ordinary income and taxed at a rate no higher than 28%. Mortgage interest also became
subject to different rules that could limit its deductibility, especially if the home was refinanced, or a second
mortgage, home equity loan, or line of credit was obtained. The rules regarding depreciation also changed, so
that all tangible property placed in service after December 31, 1986 was subject to the modified acceleration
cost recovery system (MACRS).

The Taxpayer Relief Act of 1997 changed the overall capital gains tax rate. The top rate for high income
earners was lowered from 28 percent to 20 percent. The lowest bracket was reduced from 15 percent to 10
percent. The new rates apply to assets sold after May 6, 1997. Investment property owners will experience
slightly different treatment regarding depreciation recapture under the new tax bill than in previous years. The
difference between the purchase price and selling price (profit) of a property will enjoy the lower overall capital
gains tax rate, but any gains due to depreciation recapture will be taxed at 25 percent. Individual taxpayers will
need to consult their tax specialist to determine the application of the new law to their investments.

Starting with 2008, there's a new zero percent tax rate on long-term capital gains. The zero percent rate applies
to individuals who are in the 10% and 15% marginal tax brackets. The zero percent rate is scheduled to expire
at the end of 2010, when capital gains rates will increase to at least 15%.

Capital Gains Tax Rates

Type of Capital Asset Holding Period

Tax Rate

Short-term capital gains (STCG)

Long-term capital gains (LTCG)

One year or less

More than one year

Ordinary income tax rates up to 35%

5% for taxpayers in the 10% and 15% tax brackets
(zero percent starting in 2008)

15% for taxpayers in the 25%, 28%, 33%, and 35%
tax brackets

Passive activity losses and credits. Before the Tax Reform Act of 1986, taxpayers, with some limitation, could
use deductions from one activity to offset income from any other activity. Similarly, most tax credits generated
in one activity could be used to offset tax on income from any of the taxpayer’s other activities.

In response to concerns that extensive tax shelter activity was unfair, Congress enacted the passive activity loss
(PAL) rules.

After 1986, income was separated into three categories: non-passive income, portfolio income, and passive
income. As a result of these PAL rules, taxpayers generally cannot offset non-passive or portfolio income with
losses from passive activities. Nor can they offset taxes on such income with credits from passive activities.
The new law does contain exceptions for certain activities, including rental real estate, and also has phase-in
rules for some losses.

A passive activity generally is any activity involving the conduct of any trade or business in which you do not
materially participate. In addition, any rental activity is a passive activity regardless of whether you materially
participate. For this purpose, a rental activity generally is an activity the income from which consists of
payments principally for the use of tangible property, unless substantial services are performed in connection
therewith. A taxpayer materially participates in an activity if the taxpayer is involved on a regular, continuous,
and substantial basis in the operation of the activity.

At-risk rules extended to real property. The at-risk rules have been extended to apply to the holding of real
property. The at-risk rules place a limit on the amount of deductible losses from certain activities often
described as tax shelters. Until 1987, activities associated with holding of real property (other than mineral
property) were not subject to the at-risk rules.

The at-risk rules apply to losses incurred through real property placed in service after 1986. In the case of an
interest in an S corporation, a partnership, or any other pass-through entity acquired after 1986, the at-risk rules
apply to real estate activities regardless of when the entity placed the property in service.

In general, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount
the taxpayer has at-risk in the activity at the end of the tax year. A taxpayer is considered at risk in an activity to
the extent of cash and the adjusted basis of other property the taxpayer contributed to the activity and certain
amounts borrowed for use in the activity.

A taxpayer is not considered at risk for amounts protected against loss through nonrecourse financing.
Nonrecourse financing is financing for which the taxpayer is not personally liable. However, an exception
applies to qualified nonrecourse financing secured by real property used in an activity of holding real property.
Qualified nonrecourse debt is debt for which no one is personally liable and that is:

1. borrowed by the taxpayer with respect to the activity of holding real property;

2. secured by real property used in the activity;

3. not convertible from a debt obligation to an ownership interest; and

4. a loan from, and guaranteed by, any federal, state, or local government, or borrowed by the taxpayer from a
qualified person.

A qualified person is a person who actively and regularly engages in the business of lending money. The most
common example is a bank. A qualified person is not:

1. a person related to the taxpayer (except as described later);

2. the seller of the property, or a person related to the seller;

3. a person who receives a fee due to the taxpayer’s investment in the real property, or a person related to that
person.

A person related to the taxpayer may be a qualified person if the nonrecourse financing is commercially
reasonable and on substantially the same terms as loans involving unrelated persons.

Depreciation

Depreciation is a deductible periodic accounting charge that represents the recovery of capital investment over
the useful life of property used in a trade or business or other income producing activity. Land is not included,
as it does not depreciate.

For depreciable properties acquired prior to January 1, 1981, the principal methods for computing depreciation
are straight-line, declining balance and sum-of-the-years’ digits.

For depreciable properties acquired on and after January 1, 1981 and before August 1, 1986, depreciation is
computed under a method called accelerated cost recovery system (ACRS), permitting cost recovery over much
shorter periods.

The Modified Accelerated Cost Recovery System (MACRS) must be used to depreciate property placed into
service after 1986. Taxpayers need to consult their tax advisors for more information on any changes in the
depreciation schedules that have been effected since 1986.

Appraisal and income tax concepts. Depreciation for tax purposes is to be distinguished from depreciation for
appraisal purposes. In appraisal practice, depreciation is loss in value due to any cause, including functional
obsolescence or physical deterioration. For income tax purposes, depreciation is a possible annual deduction
from taxable income in recognition of the fact an asset may become economically obsolete or wear out
physically and the owner has the right to recover his investment.

Improvements to real property are depreciable for income tax purposes if they are used in business or held for
the production of income and have a determinable life longer than one year.

Even if a taxpayer does not take a deduction for depreciation, the basis of the property is reduced by the amount
of the depreciation. Upon sale, the IRS charges the taxpayer with the full amount of depreciation the taxpayer
could have taken.

Home Mortgage Interest Deduction

For years beginning after 1987, the rules for deducting mortgage interest have been modified. The amount of
interest a taxpayer may deduct depends on the date, amount, and use of the loan.

In general, the interest on any loan obtained before October 14, 1987 and secured by a main or second home is
fully deductible.

If a taxpayer obtained a first loan after October 13, 1987 to buy, build, or substantially improve a main or
second home, interest is deductible on the first $1 million of principle ($500,000 if married filing separately).
Interest may be deductible on up to $100,000 of junior loan(s) secured by a taxpayer’s main or second home.

For more information, see IRS Publication 936, Limits on Home Mortgage Interest Deduction.

Mortgage Credit Certificates

State and local governments sometimes issue mortgage credit certificates (MCCs). Under any such program,
MCCs may be issued until a total dollar amount set by the state or local government is reached. An MCC
allows a borrower to use mortgage interest as a credit against income tax, making it easier for a low or
moderate income person to qualify for a loan for acquisition, qualified rehabilitation, or qualified home
improvement of a residence.

Disposition of Real Property - Tax Effects

The characterization and tax treatment of a sale of real property depend upon the use to which the transferor put
the property.

Sales or exchanges must be reported to the Internal Revenue Service on Form l099-S, Statement for Recipients
of Proceeds from Real Estate Transactions.

Capital gain is the taxable profit derived from the sale of a capital asset (generally, that property of a taxpayer
other than inventory). The gain is calculated as the sales price reduced by the adjusted basis, expenses of sale,
and closing costs. Adjusted basis is the original tax basis of the property adjusted for capital improvements,
depreciation and fixing-up expenses.

The capital gains deduction was repealed for tax years beginning after 1986. Although set to increase in 2011
tax year, currently long term net capital gains generally will be taxed at a rate no higher than 15%.

Special rules - sale of personal residence. Until the passage of the Taxpayer Relief Act of 1997, a taxpayer
was only permitted to postpone the gain on sale of principal residence by way of a one time only $125,000
exemption on the sale of his/her principal residence if the taxpayer was age 55 or older and had resided in the
home for at least three of the last five years. The principal residence replacement rule required the taxpayer to
purchase another principal residence of equal or greater value and use it within two years before or after sale of
the previous principal residence. The original gain was not recognized at the time of sale but was used to reduce
the cost basis of the new house

The Taxpayer Relief Act of 1997 granted a $500,000 capital gains tax exclusion to couples and a $250,000
exclusion to single filers, who sell their principal residence. The bill specified that:

The “rollover” and “over 55” requirements were repealed.

Individuals must have lived in the house for two of the last five years. For purposes of the exclusion, on
sales after September 30, 1988, taxpayers who are mentally or physically incapacitated are treated as
occupying the principal residence while they are in nursing homes or similar care facilities, as long as the
principal residence is actually occupied for periods aggregating at least one year of the applicable five-year
period. The facility must be licensed by a state or political subdivision to care for individuals in such
condition. [Internal Revenue Code §121(d)(7]

The sales transaction must have taken place after May 6, 1997.

Sellers and buyers who signed a binding contract between May 7, 1997 and August 5, 1997 could apply
either the old or new law into their transaction.

The new law gives buyers more options because they are no longer forced to purchase new homes of equal or
greater value. Individuals who meet the requirements can sell their homes every two years and still qualify. In
addition, individuals who marry someone who has already taken the “over 55” exclusion, or individuals forced
to sell because of an emergency, like a job transfer or large medical bills, will be able to use the new exclusion.
The new plan does not allow taxpayers to deduct losses on the sale of their property from their income tax.
Individuals will need to consult their own tax advisor to determine how to apply the new law to their particular
tax situation.

1031 exchanges. Property may be disposed of by exchange rather than sale. Some exchanges qualify as tax
deferred. If the exchange does not qualify as tax-free, it is treated in all respects as a sale.

To qualify as a tax-free exchange, the properties must be “like kind” in nature or character, not in use, quality
or grade. The “like-kind” rules give parties a relatively high degree of flexibility: a farm may be exchanged for
a store building; vacant land for an apartment building; a rental house for a vacant parcel. Personal use real
property does not qualify. A vacation property or a primary residence may qualify as “like-kind” property, and
qualify for tax free exchange treatment, provided certain guidelines are followed. If a tax-free exchange has
been made, neither gain nor loss is recognized at the time of the exchange, but is deferred by attributing to the
property received the same cost basis as that of the property transferred. The holding period of the new property
includes that of the old parcel.

Complications arise when like-kind property received is accompanied by cash or other assets (“boot”). When
boot is received, gain is recognized but losses are still excluded from recognition. The taxable gain is the lesser
of the value of “boot” received or the gain realized on the exchange. The result may be a fully taxable or a
partially tax-free exchange.

For example: A taxpayer exchanges a fourplex with a depreciated cost basis of $190,000 for a duplex worth
$194,000 plus $2,000 cash. The taxpayer’s gain is $6,000, but only a portion of this gain, the $2,000 boot, is
recognized and taxable at the time of the exchange. The remaining $4,000 of gain is not recognized at this time
but is postponed by leaving the cost basis of the new property at $190,000. Upon sale of the duplex, the
taxpayer must recognize the $4,000 of former gain.

If one of the properties exchanged is encumbered by mortgage debt, the debt relief is treated as boot received.
If both properties are encumbered, the debts are netted for purpose of determining the amount and assignment
of boot.

Of course, the principal difficulty in effecting a tax-free exchange is finding suitable properties and investors.
Usually, two real estate investors are not interested in each other’s property and a multi-party exchange must be
arranged.

The tax rule which requires an owner to carry over the basis of the old property as the basis for the new
property is a problem when exchanging pre-1981 properties for post-1981 properties. Special rules apply to
exchanges of pre-accelerated cost recovery system (ACRS) and post-ACRS properties. To avoid this problem,
a taxpayer may consider selling the pre-1981 property and purchase the post-1981 property with the proceeds.

Installment sales. Taxpayers selling real property and receiving one or more payments in a later year or years
must report the sale as an installment sale unless the taxpayer specifically elects otherwise.

By selling on multi-year terms, a taxpayer avoids bunching gain/income in the year of sale. Rather, recognition
of gain is deferred by spreading it over a number of tax years.

The installment sale method may be used for any kind of real estate, including vacant land. The taxable part of
installment payments is calculated by applying to each payment the profit percentage realized on the full
transaction. This percentage is found by dividing the realized profit on the sale by the full contract price. IRS
instructions should be followed for determining this percentage based on the contract price, selling price, gross
profit and payments received.

Example: Real property is sold for $200,000; unadjusted basis is $132,000; selling costs are $8,000.
Installment payments of $50,000 are to be made in the year of sale and in each of the next three years.

Contract price (selling price............ $200,000

Less: Selling costs and unadjusted basis. -140,000

Gross Profit............................. $60,000

Gross Profit Percentage = $60,000 ÷ $200,000 = 30%

For the year of sale and each of the following three years, a profit of $15,000 (30% of $50,000) is reported.

Leases. Rent is taxable to the lessor as ordinary income and, for non-residential property, deductible as a
business expense to the lessee. Payments by a lessee on execution of a lease may be either advance rent or a
security deposit. If the former, a (non-residential) lessee has a deduction and the lessor must report the payment
as income in the year paid. A security deposit remains the property of the lessee until default/forfeiture. If
forfeited, the deposit is deductible by the lessee and is income to the lessor. If the lessor pays the lessee interest
on the deposit, the lessee has reportable income.

If the lessee receives lease cancellation payments from the lessor, they are treated as being in exchange for the
sale of the lease to the lessor. If the lease is not a capital asset, the income is ordinary income to the lessee. The
lessor is treated as making an expenditure for the acquisition of a property right. The lessor’s payment must be
capitalized and added to the basis of the property. If the lessor receives lease cancellation payments from the
lessee, the lessor has ordinary income and the lessee treats the expenditure as a current business expense.

A lessor or lessee’s costs of procuring a lease (i.e., commissions, legal fees, and title expenses) must be
prorated over the life of the lease. It should always be remembered that losses and expenses of lessees of
residential property are considered personal and not deductible.

State Income Tax

As of January 2005, California generally conforms to the Internal Revenue Code (IRC). However, there are
continuing differences between California and federal tax law. When California conforms to federal; tax law
changes, not all of the tax changes made at the federal level are always adopted by California. For more
information refer to www.ftb.ca.gov and search for “conformity.”

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INTRODUCTION

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INTRODUCTION

NOTE: Unless otherwise indicated, all statutory references in this chapter are to the California Revenue and
Taxation Code.

Questions concerning taxes and assessments are raised in most real estate transactions. Taxation is an indirect
yet significant controlling device affecting estimates of value. It is important for those engaged in the real estate
business to know the variety of taxes and their effect on property transfers. Discussion of the specific taxes
mentioned in this chapter is for reference purposes only and should not be relied upon as a substitute for
professional advice. Full consideration may involve retaining the services of accounting, legal and tax
specialists. There are many categories of property that may be exempt from taxation. The county assessor
should be consulted for a determination in this area.

Federal, state and local governments tax real property. Local governments assess taxes directly on the property,
such as ad valorem property taxes, special assessments and transfer taxes. Most state governments have an
income tax. The federal and state governments tax property indirectly through the taxation of ordinary and
capital gain on income earned from real estate. Federal and state governments also tax property indirectly when
it is transferred through an estate or gift to others, i.e., estate and gift taxes.

Taxes may act as a deterrent to many individuals desiring to acquire or dispose of real property. Unless tax
benefits and burdens and tax planning alternatives are seriously considered by persons contemplating the
purchase or sale of real estate, the anticipated benefits of ownership may not be realized, and losses may be
sustained.

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MISCELLANEOUS TAXES

MISCELLANEOUS TAXES somebody Wed, 07/19/2023 - 02:09 am

MISCELLANEOUS TAXES

Sales and Use Tax

The California State Sales Tax is imposed upon retailers for the privilege of selling tangible personal property
at retail. The retailer is liable for this tax whether or not collected from customers.

The Use Tax is imposed upon the storage, use, or other consumption of tangible personal property purchased or
leased under certain conditions from a retailer. Use Tax is the liability of the purchaser and that liability is not
extinguished until the tax is paid to the state unless it was paid to, and a receipt for the tax was obtained from, a
retailer who is registered with and authorized by the state to collect the tax from the purchaser. Sales or Use
Tax also applies to certain leases of tangible personal property under specific conditions. The State Board of
Equalization administers these taxes.

A real estate broker may be concerned with the tax on sale of personal property. The tax applies to transfers of
buildings and the personal property which may convey with the sale of a house and which are not considered
occasional sales under the law if, pursuant to the contract of sale, the buildings are to be severed by the seller. If
the contract of sale requires they be severed by the purchaser, the transaction is not taxable as a sale of tangible
personal property. The tax may also apply to the value of machinery, equipment and fixtures that do not
constitute occasional sales, when included with the sale of a building.

Where a business which required a seller’s permit is being sold, the purchaser may be held liable as a successor
for tax owed by the seller. If there is any question, sufficient money should be held in escrow to cover possible
sales tax liability until a tax clearance is received from the State Board of Equalization.

Real Estate Broker and Mobilehome Sales

A real estate broker who sells mobilehomes as a retailer is required to hold a seller’s permit and report to the
Board of Equalization the sales or use tax applicable to these transactions. When such a broker sells a new
mobilehome for occupancy as a residence, the broker is classified as a retailer-consumer and is required to
declare and pay tax on 75% of the broker’s purchase price of the mobilehome . Unattached furnishings and
other items that are not part of the mobilehome unit remain subject to tax at the full retail selling price unless
otherwise exempt.

A real estate broker who sells used mobilehomes as a retailer is also required to hold a seller’s permit. The
application of tax to sales of used mobilehomes depends on whether the unit is subject to property tax or is
exempt, but sales tax would apply to any accessory items sold that are not a component part of the mobilehome
unit. For mobilehome units sold that are not subject to property tax, sales tax applies. When a real estate broker
acts as agent only, the purchaser is subject to use tax. If the mobilehome is subject to property tax, neither the
sales or use tax applies.

Any questions should be referred to the nearest office of the Board of Equalization.

Real estate salesperson and broker exclusion. Services performed as real estate salespersons and brokers are
excluded from covered employment for purposes of UI, ETT, DI and PIT withholding, if all of the following
conditions are met:

1. The individual must be a licensed real estate broker or salesperson;

2. Substantially all of the remuneration paid to the individual is based on sales or other output rather than by
the number of hours worked by the individual; and

3. There is a written contract between the individual performing the services and the person for whom the
services are performed; which contract provides that, for purposes of state taxes, the individual performing
the services will not be treated as an employee.

State Tax Lien Law

Under applicable State law, any tax liabilities which become due and payable, including penalties and interest,
together with any costs, constitute an enforceable State tax lien on all real property located in this State.
However, the lien is not valid against:

1. a successor in interest of the taxpayer without knowledge of the lien;

2. a holder of a security interest;

3. a mechanic’s lienor; or

4. a judgment lien creditor where the right, title, or interest was acquired prior to the recording of the State tax
lien.

(Government Code Sections 7150-7229)

Unemployment Insurance Tax

The California Unemployment Insurance (UI) Code requires contributions by employers for a national system
of unemployment insurance. Employers must also pay an employment training tax (ETT) and withhold state
personal income tax (PIT) and disability insurance (DI) from employees’ wages.

Real estate salespersons and brokers who are employees under common law rules and whose services are not
excluded, are subject to UI, ETT, DI and state PIT withholding. For further information about services in
excluded employment or in determining if an individual is an employee or an independent contractor, contact
the State Agency Employment Development Department.

California worker’s compensation law. An employer’s statutory liability toward an employee injured on the
job is covered by worker’s compensation insurance. While not technically a tax, it is included in this section
because it does involve payments by the employer. This insurance provides for weekly benefit payments to
employees unable to work as the result of an industrial injury or illness, as well as payment of all medical and
hospital costs in connection therewith.

Since California law is very specific about which employees must be covered, employers should be familiar
with Sections 3351-3700 of the California Labor Code. Problems are most likely to arise in the areas of
independent contractors and part-time employees. Additional information about the law and coverage can be
obtained from State Compensation Insurance Fund.

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PROPERTY TAXES

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PROPERTY TAXES

Property taxes are levied according to the value (ad valorem) of the property as of the date acquired, or the date
of completion of any new construction. Generally, the more valuable the property and/or the more current its
acquisition or construction date, the higher the tax. Property taxes, including Property Tax in-lieu of Motor
Vehicle License Fees, represent a major source of income for counties in California. Approximately half of
California’s one hundred million acres are owned by governments and therefore exempt from property taxation.
All property within the jurisdiction of a taxing authority is taxable unless specifically exempt.

California’s Property Taxes

In June of 1978, California voters approved Proposition 13, amending the State Constitution so that the
maximum annual tax on real property is limited to one percent of “full cash value” (market value) plus a
maximum of two percent annual inflation factor based on the Consumer Price Index (CPI), as calculated by the
California Department of Industrial Relations. (Sections 51 and 110.1) An additional sum is allowed to pay for
indebtedness on affected property approved by voters prior to the passage of Proposition 13. Also, selected new
indebtedness is allowed, only by a two-thirds vote of the residents affected. The passage of Proposition 39 in
2000, authorizes bonds for repair, construction or replacement of school facilities, classrooms, if approved by
55% local vote for projects evaluated by schools, community college districts, county education offices for
safety, class size, and information technology needs.

Property Tax Liens

Property taxes become liens against real property on January 1 of the year preceding the fiscal year (July 1 -
June 30) for which the taxes are levied. One-half the taxes on real property are due on November 1 and payable
without penalty until 5 p.m. (or close of business, whichever is later) on December 10. The second half is due
on February 1 and is delinquent if not paid by 5 p.m. (or close of business, whichever is later) on April 10. If
either December 10 or April 10 falls on a Saturday, Sunday, or legal holiday, the time of delinquency is
extended until 5 p.m. (or close of business, whichever is later) on the next business day. A ten percent penalty
applies to an installment that becomes delinquent. If the second installment is delinquent, the tax collector adds
a charge to place the property on the delinquent roll.

The Morgan Property Taxpayers’ Bill of Rights

The Morgan Property Taxpayers’ Bill of Rights (Section 5900, et seq.) and the related amendment to
subdivision (e) of Section 408 require that the assessor allow, upon request of an assessee (or his/her designated
representative), inspection and copying of documents, including an auditor’s work papers, relating to the

appraisal and assessment of assessee’s property. Further information concerning taxpayers’ rights relating to the
assessment, audit, and collection of property taxes in this state may be obtained from the State Board of
Equalization, Taxpayers’ Rights Advocate’s Office, P.O. Box 942879, Sacramento, CA 94279-0070.
Telephone: (800) 400-7115, www.boe.ca.gov.

Establishing Values

Operating under constitutional provisions and statutes, assessors have established real property values as
follows:

No change in parcel since February 28, 1975. If the parcel has not been further improved with structures and
has not been sold or transferred since February 28, 1975, the assessor has established a base value for the parcel
and then has applied an inflation rate to that base year value not to exceed 2% per year. Thus, the base year
value is locked in place and cannot be changed unless there is a change in ownership or new construction.

Parcel sold/changed ownership since February 28, 1975. If a parcel has sold or otherwise changed
ownership since February 28, 1975, its new base year value as of the date of change of ownership is enrolled
for the following lien date and shall be adjusted upward by up to 2% each year.

New construction. If the improvement on the parcel was newly constructed since February 28, 1975 and the
parcel remained in the same ownership prior to and after the construction, only the added “new construction”
receives a new base year value. The land may have one base year for valuation purposes while the
improvements constructed may have another. Only if the improvement is completed in the same assessment
year that the parcel is purchased would the land and improvement have the same base year. “New construction”
could also apply to land that has been significantly altered.

There are certain improvements which have been excluded from the definition of “new construction” for
purposes of reappraisal:

1. water conservation equipment for agricultural use;

2. fire detection or extinguishing systems or modification for fire-related egress;

3. modification for access by disabled person; and

4. seismic retrofitting

5. normal maintenance and repair

6. construction or addition of any active solar energy system, as defined in subdivision (b) of Section 63 of
the California Revenue & Taxation code

7. disabled person accessibility

8. environmentally contaminated property

Parcel further improved since February 28, 1975 (or since constructed, sold or transferred). If the parcel
has been further improved (e.g., by an addition or swimming pool) since February 28, 1975 (or since
constructed, sold or transferred), it has a 1975 base value year (or year of sale, construction or transfer) and an
additional base year value on the new improvement.

Change in Ownership Exclusions. There are a number of exclusions from change in ownership and
consequent reappraisal, some of which are described as follows:

1. Acquiring “comparable” replacement property for original property taken by a governmental agency in
eminent domain actions, per Section 68.

2. Replacing property destroyed by disaster. Section 69 requires comparable replacement property to be
acquired or newly constructed within 3 years of property substantially damaged or destroyed by governor-
declared disaster. Section 69.3 permits counties to enact ordinances allowing such replacement property
transfers from other counties. Section 70 requires that reconstructed property that is substantially
equivalent to damaged property is not reassessed “new construction.”

3. Transferring the principal residence and first one million dollars of full cash value of real property between
parents and their children pursuant to Section 63.1, provided that a claim for the exclusion is filed with the

assessor within 3 years of the date of transfer or within 6 months after the date of mailing of the notice of
supplemental or escape assessment.

Subject to subparagraph (B) of Section 63.1, transfers occurring on or after March 27, 1996 , between
grandparents and their grandchild or grandchildren, if the parents of that grandchild or those grandchildren,
who qualify as the children of the grandparents, are deceased as of the date of purchase or transfer All
parents do not have to be deceased. The child of the grandparent need only be single. As of January 1,
2006 if the child is married to a step-parent of the grand-child, a grandparent to grandchild exclusion will
also apply.

4. Transferring the base year value of one’s home (original property) to a replacement property for persons
over 55 or disabled persons who sold their original property pursuant to criteria in Section 69.5. Section
69.5 also allows a county board of supervisors, after consultation with affected local agencies located
within the boundaries of the county, to adopt an ordinance that authorizes the transfer, subject to the
conditions and limitations of this section, of the base year value of property that is located within another
county in the State of California. Currently there are 8 counties (Alameda, San Diego, Santa Clara, Los
Angles, San Mateo, Ventura, Orange and El Dorado) that have ordinances permitting intercounty transfers
of base year values. Since the counties authorizing the transfers are subject to change, it is recommended
you contact the county to verify current eligibility.

5. Transferring real property to a spouse per Section 63, or transferring real property into a trust where the
trustor/transferor is the sole present beneficiary of the trust or the trust is revocable by the trustor pursuant
to subdivision (d) of Section 62.

6. Transferring real property to a partnership or other legal entity by maintaining exactly the same
proportional interests of the transferors and transferees, resulting solely in a change in the method of
holding title, under Section 62(a)(2).

Reduction of value. Assessors must recognize declines in value. Under Section 51, the “taxable value” is the
lower of the base year value (compounded annually) or the full cash value (defined in Section 110) whichever
is less. It may be necessary for the property owner to expressly bring the decline in value to the assessor’s
attention. The county board of equalization is required to hear applications for reduction in assessment.

Exemptions

There are numerous properties that are assessed but are partially or totally tax-exempt, as well as some kinds of
real and tangible business and personal property that are neither assessed nor taxed. Under Section 218, the
homeowner’s exemption of the first $7,000 of full value applies to each residential property that is owner-
occupied on the lien date and meets other qualifying tests. (This includes an owner-occupied unit in a multiple
unit residential structure, an owner-occupied condominium, cooperative apartment, or unit in a duplex). Once
claimed, the homeowner’s exemption remains in effect until terminated. Termination of the homeowner’s
exemption can be triggered by a change in title-holder, even if temporary. Each homeowner is responsible for
notifying the assessor that the property is no longer eligible for exemption. An escape assessment plus a 25
percent penalty and interest may result from failure to notify the assessor of the ineligibility.

Section 205 provides an exemption of up to $4,000 of full value of any property subject to property tax (real,
personal, boats, planes, etc.) owned by qualifying veterans or the unmarried spouses of deceased veterans. This
exemption results in a tax savings of up to $40. The limitations are that it cannot apply to a property on which
the homeowner’s exemption has been successfully claimed. And for a non-home owning veteran to qualify,
there is a personal wealth cap of $5,000 for an unmarried veteran and $10,000 for a married veteran.. In
computing the $5,000 or $10,000 property limitation, one-fourth of the assessed value of the taxable property
and the full value of nontaxable property is used. Section 205.5 provides an exemption for disabled veterans
and/or their unmarried surviving spouses, as follows: depending on veteran’s income and extent of disability
(resulting from injury or disease incurred during military service), a disabled veteran may receive an exemption
of $40,000, $60,000, $100,000, or $150,000 of the full cash value of his/her residence. The county assessor can
provide application forms and other information regarding the disabled veteran’s exemption.

All growing crops, fruit, and nut-bearing trees less than four years old and grapevines less than three years old
are exempt. Properties held or exclusively used for human burial or owned by nonprofit entities, including
certain nursery and kindergarten-to-12th grade schools, hospitals, churches, nonprofit private schools and

colleges are exempt. Timber is no longer subject to property tax, but owners pay a yield tax on downed or
felled timber. However, timberland remains taxable. Public open-space lands used solely for recreation are also
exempt.

Supplemental Assessments

New procedures for enrolling adjustments to assessed valuations of real property have been used by assessors
since 1983. Prior to the enactment of the supplemental assessment system, when a change in ownership or
completed new construction occurred, increases in base year value were often delayed from 4 to 16 months,
resulting in an unwarranted reduction in taxes for some, with a proportionate (and inequitable) shift of the tax
burden to others.

The Legislature solved this inequity through Sections 75, et seq., under which assessors appraise at its full cash
value real property which has changed ownership or is newly constructed as of the date of the event. Added
taxes become due on the date the change in ownership occurs or the new construction is completed. This is
done by issuing a supplemental assessment to be added to a supplemental tax roll. The value determined
becomes the new base year value of the transferred or newly-constructed property. Just as for regular
assessments, there are appeal procedures for protesting supplemental assessments.

If reassessment takes place between January 1st and May 31st, inclusive, two supplemental assessments are
made (and the taxpayer receives two supplemental bills). A reassessment occurring between June 1st and
December 31st, inclusive, generates only one supplemental assessment.

If a property changes ownership more than once during an assessment year, or if there are multiple completion
dates for new construction during an assessment year, or any combination of transfers and construction, a
supplemental assessment is made for each occurrence.

Supplemental assessment of property that has decreased in value results in the auditor issuing a partial refund of
taxes paid in advance. The refund is sent to the new owner, not the original taxpayer. In the event of a
foreclosure and a subsequent sale the refund will be prorated.

New construction is excluded from supplemental assessment (under the “builder’s inventory exclusion –
Section 75.12) if the owner will not occupy but intends to market the improvement, and has so notified the
assessor in writing prior to or within 30 days of the date of commencement of construction. When the newly-
constructed improvements are transferred, leased or rented, a supplemental assessment is made as of that date.

County assessors are generally alerted to changes in ownership and construction starts through recorded
documents and permits. When the assessor determines that an ownership change or new construction
completion has occurred, the assessor:

1. places the supplemental assessment information on the roll;

2. notifies the auditor, who places an appropriate notation on the current roll or on a separate document kept
with the roll; and

3. sends a prescribed notice of supplemental assessment to the assessee.

The notice includes the new base year property value, the taxable value appearing on the current roll and/or roll
being prepared, information concerning the assessee’s right to review and to appeal the supplemental
assessment, and the procedure for filing a claim of exemption. If the property has decreased in value and the
supplemental assessment is a negative amount, the notice will advise the assessee that a refund will be made.

Filing a Change in ownership Statement. Section 480 requires that any person acquiring any interest in real
property or a manufactured home taxed as real property must file a change in ownership statement with the
county recorder or assessor. The change in ownership statement must be filed either at the time of recording, or
if the transfer is not recorded, within 45 days of the date of the change in ownership. Failure to file a change in
ownership statement within 45 days from the date of a written request by the assessor will result in a penalty of
one hundred dollars or ten percent of the taxes applicable to the new base year value, whichever is greater.

If the transfer is occasioned by a death, and probate is not involved, the transferee (or trustee, if applicable) has
150 days from the date of the death to file the change in ownership statement. If the property is subject to
probate, the statement must be filed prior to or at the time the inventory and appraisal are filed with the court.

Sections 480.3 and 480.4 require that county assessors and recorders make available to property buyers a
“Preliminary Change of Ownership Report” form. This form is to be completed by the buyer prior to transfer of
the property. If a document evidencing a change of ownership is presented to the recorder for recordation
without the concurrent filing of this preliminary change of ownership report, the recorder may charge an
additional recording fee of twenty dollars.

Statute of limitations on Escape and Supplemental Assessments. Section 532 provides assessors a four-year
statute of limitations for the enrollment of escape assessments. In cases of concealment or not filing a change of
ownership statement for an unrecorded change of ownership the statute of limitations is eight years. The
enrollment period is unlimited when a change of ownership statement is not filed for a recorded change of
ownership.

Section 75.11 (d) allows assessors four years to enroll supplemental assessments or eight years in cases of
concealment or not filing a change of ownership statement for an unrecorded change of ownership. The
enrollment period is unlimited in case of fraud.

In both cases, the statute of limitations for making escape and supplemental assessments does not begin to run
until July 1 of the assessment year in which the event occurred.. Where, for example, a change in ownership
occurred in 1992, and a change in ownership statement reporting it was filed, the assessor has only four years
from 1992 to enroll escape and supplemental assessments. If the change in ownership statement reporting it was
not filed, then assessor must enroll escape and supplemental assessments for all of the years since 1992,
including the year of discovery. The assessor’s statute of limitations does not commence until. July 1 of the
assessment year in which the event occurred.

If non-reporting occurs because of a fraudulent act or omission, the penalty of 75 percent of the additional
assessed value under Section 504 is added to the escape and supplemental assessments. The supplemental
assessment must be made within eight years, on or before the eighth July 1 following the July 1 of the
assessment year in which the event giving rise to the supplemental occurred, and the escape assessment must be
levied eight years after the July 1 of the year in which the property escaped taxation.

Postponement (Sections 20581, et seq.)

Senior citizens (62 years of age or older) and persons who are blind or disabled may defer payment of taxes on
their residences. To qualify, an individual must own and occupy the home, have at least a 20% equity in the
property (using the assessor’s full value as the standard), and have a yearly total household income of $35,500
or less for calendar year 2007. If married, only one spouse need qualify.

In applying the law, a lien in favor of the State of California is placed against the property and an interest rate
determined by the rate earned by the Pooled Money Investment Fund is charged. The postponed taxes and
interest are not recovered until the property is sold.

Complete information about the deferral program is available from the State Controller’s Office at P.O. Box
953, Sacramento, CA 95812. The toll free telephone number is 1-800-952-5661. Information is also available
on the California State Controller’s website at http://www.sco.ca.gov/col/taxinfo/ptp/index.shtml.

Tax Sale (Sections 3351 - 3972)

County tax collectors, not assessors, are charged with the responsibility of administering the law pertaining to
the sale of all properties that are “tax-defaulted” when five or more years have passed since the property taxes
were paid. The tax collector is required by law to attempt to sell within two years all properties which have
become tax defaulted and subject to the power to sell. The tax collector may sell properties to any person at a
public auction or under special circumstances, to adjoining property owners at a sealed bid sale. The minimum
price at which property may be sold at public auction is the sum of all taxes, penalties, costs and fees as
defined.

The minimum bid has to be approved by the County Board of Supervisors. After authorization by the State
Controller, the tax collector publishes or posts the required notices, setting the date of sale. At the sale, the
amount of the highest bid must be paid in cash or negotiable paper, or any combination thereof which the tax
collector specifies. Upon completion of the tax sale, the purchaser receives a tax deed conveying title free of all
encumbrances of any kind existing before the sale, except those shown in Section 3712.

If a tax-defaulted property is unusable because of size, location, or other conditions, the tax collector may sell it
at a sealed bid sale to contiguous property owners at a price established by the tax collector.

Buyers of tax-defaulted properties may include taxing agencies, revenue districts, and certain non-profit
organizations. In the case of residential property, the sale to a non-profit organization is conditioned upon the
rehabilitation and subsequent sale of the property to low-income persons. In the case of vacant property, the
non-profit organization must either construct a residential building on the property and sell the property to low-
income persons or dedicate the vacant property to public use.

Redemption (Sections 4101, et seq.)

Tax-defaulted real property may be redeemed upon payment of taxes, interest, costs and redemption penalties.
Redemption payment is made to the county tax collector, who then issues a certificate of redemption as
evidence of payment. Any person may elect to pay delinquent taxes in installments under article 4217 at any
time prior to 5 p.m. on June 30 of the firth year after the property became tax defaulted.

Delinquent taxes, costs, interest and penalties may be paid in five annual installments if the current taxes are
paid. Persons electing to pay delinquent taxes in installments may be subjected to a fee for processing their
request.

If the property has not been redeemed within five years after the initial declaration of default, the property will
become subject to the tax collector’s power to sell. The right of redemption terminates at the close of business
on the last business day prior to the date a tax collector’s auction begins. If the property is not sold, the right of
redemption is revived. If the property is redeemed, the tax collector will execute and record a “Rescission of
Notice of Power to Sell Tax-Defaulted Property.”

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SPECIAL ASSESSMENTS

SPECIAL ASSESSMENTS somebody Wed, 07/19/2023 - 02:09 am

SPECIAL ASSESSMENTS

Special assessments are levied for the cost of a public improvements or services such as streets, sewers,
irrigation, and drainage. Special assessments may be due periodically to improvement districts or be levied only
once by the city or county for a particular work or improvement. These assessments are not based on the value
of the property.

The liens created by special assessments are usually equal in priority to general tax liens.

Self-governing districts may be the source of special assessments. Activated under state law by the local city or
county or by vote of the residents, the district becomes a separate legal entity governed by a board of directors.

A district issues bonds to finance particular improvements such as water distribution systems, drainage
structures, irrigation works, or parking facilities. To pay off the bonds, the district has the power to assess all
lands included in the district on an ad valorem basis. This assessment is a lien on the land until paid. The lien
has priority over private property interests and can be foreclosed by sale similar to a tax sale.

Benefit Assessments

Rather than establishing a separate district for the purpose of constructing an improvement, the city or county
may establish an “improvement area” and assess the lands contained therein on the basis of benefits to be
received from the proposed improvement. A benefit assessment is often included on the property tax bill.

Benefit assessments are distinguished from special assessments chiefly by the differences in the assessment
base. However, there are other distinguishing characteristics. Benefit assessments are generally not considered
to be deductible as a tax on either California or federal income tax returns. There is a distinction made in federal
tax regulations between an assessment to finance improvements and an assessment to finance maintenance.
Only the latter is deductible.

The purposes for which benefit assessments are levied include lighting, flood control, transit, police protection,
fire protection, county service areas and paramedics.

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STATE TAXES

STATE TAXES somebody Wed, 07/19/2023 - 02:09 am

STATE TAXES

Inheritance Tax

The inheritance tax law was repealed as the result of the passage of Proposition 6 at the California election held
on June 8, 1982. The new estate law (below) is effective for estates of decedents who died after January 1,
1987.

Gift Tax

The gift tax law was also repealed as the result of the passage of Proposition 6 at the California election held on
June 8, 1982. The repeal is effective as to all gifts made after June 7, 1982.

Estate Tax

Proposition 6 also enacted the California estate tax. The purpose of this tax is to take advantage of a provision
in federal law which allows the estate to claim a credit against the federal estate tax for death taxes paid to the
state. The tax is fixed in the maximum amount that the federal government will allow as a credit for estate taxes
paid to the state. Therefore, this tax does not cost the estate anything because if the amount were not paid to the
state it would have to be paid to the federal government.

A California Estate Tax Return is required to be filed with the State Controller for the estate of every decedent
whose date of death is after January 1, 1987, if a Federal Estate Tax Return is required to be filed. The return is
due and any tax liability is payable on or before nine months after the date of death. There is a late filing
penalty of 5% of the amount of the tax due for each month or portion thereof up to a maximum of 25%. This
penalty can be waived for good cause. If an extension to file has been granted by the Internal Revenue Service

for the filing of the Federal Estate Tax Return, a like extension will be given for the California return. In
addition to the late filing penalty, interest at the rate of 12 percent per annum is chargeable on payments not
made within nine months after the decedent’s death.

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TAXATION OF MOBILEHOMES

TAXATION OF MOBILEHOMES somebody Wed, 07/19/2023 - 02:09 am

TAXATION OF MOBILEHOMES

Mobilehomes and manufactured homes are subject to local property taxation under prescribed circumstances.

Under Section 18551 of the Health and Safety Code there are four principal prerequisites for transforming a
mobilehome into real property:

1. obtaining a building permit;

2. attaching the mobilehome to an approved foundation;

3. recording a document reflecting that the mobilehome has been affixed to an approved foundation system;
and

4. obtaining a certificate of occupancy.

A mobilehome installed on a foundation system is deemed a fixture or improvement to the real property.

Section 5802 provides that the base year value of a mobilehome converted from the vehicle license fee to local
property tax shall be its full cash value on the lien date for the fiscal year in which it is first enrolled.

After a mobilehome is attached to a foundation system, the Department of Housing and Community
Development (HCD) must cancel the registration. Title is thereafter recorded with the county recorder and
ownership is transferred accordingly. Removal of the mobilehome from the foundation is prohibited unless the
following conditions are met:

1. all persons having title to any estate or interest in the real property consent to the removal; and

2. 30 days prior to removal, the owner of the mobilehome notifies HCD and the local assessor of its intended
removal.

HCD must be given written evidence of the consent to removal by all persons having title or interest in the real
property. HCD will then require the owner to obtain a transportation permit or mobilehome registration,
whichever it deems appropriate. Once removed from the foundation and the HCD license fee is paid, the
mobilehome is personal property and the assessor will remove it from the real property tax roll.

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Chapter 18 - Planning, Zoning, and Redevelopment somebody Wed, 07/19/2023 - 02:09 am

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GENERAL PLANS

GENERAL PLANS somebody Wed, 07/19/2023 - 02:09 am

GENERAL PLANS

In California, comprehensive plans are known as ‘‘general plans.” By state law, every city and county must
adopt its own general plan for long-term physical development. The plan must cover a local government’s
entire planning area. At a minimum, a planning area includes all land subject to the local government’s
jurisdiction and “any land [outside the city’s or county’s] boundaries which in the planning agency’s judgment
bears relation to its planning.” (California Government Code Section 65300). The general plan is extremely
important because all city and county land use decisions must be consistent with the general plan. It has been
described by California courts as being “a constitution for all future developments.”

State law also requires that the general plan address a comprehensive list of development issues falling under
seven major categories or “elements.” The seven elements are land use, circulation, housing; conservation,
open space, noise, and safety. Depending upon the jurisdiction’s location, its general plan may also be required
to address elements such as coastal development and the protection of mineral resources. In addition, the
general plan may include other concerns such as recreation, historic preservation, public services, and
hazardous waste management. The general plan, together with all its elements and parts, must constitute an
integrated, internally consistent and compatible statement of development policies for a planning area.

Preparation

Typically, general plans are arranged according to the following four basic components:

1. background data on and analysis of the local economy, existing and projected demographics (the
characteristics of human population such as size, growth, density, distribution and vital statistics), existing
land use, projected land use needs, existing and projected environmental conditions, and the capacities of
public facilities and services (e.g., sewer, water, and storm drainage systems, highways, transit, police and
fire protection, and schools);

2. a statement of goals and development policies based on the analysis of data that will guide community
development decision making;

3. diagrams that reflect and support the general plan’s statement of development policies (e.g., land uses,
circulation, noise level contours); and

4. a program of measures that will be subsequently adopted to implement the general plan (e.g., proposed
rezonings, specific plans, public works and other capital improvements, public financing techniques, etc.).

Some general plans are developed as a single document for the entire jurisdiction, while others are composed of
a combination of documents such as a jurisdiction-wide policy plan and a series of area or community plans,
which together cover the entire jurisdiction. Individual general plan formats differ from jurisdiction to
jurisdiction based on local conditions, needs, and philosophy.

Similarly, local conditions and preferences dictate who actually prepares a general plan document. Each local
planning agency is ultimately responsible for developing a plan. Some planning departments prepare their plans
in-house, while others assign all or part of the work to consultants or other planning agencies.

Hearings - Adoption or Denial

Once the plan is written, the planning commission holds at least one public hearing on the document. The
commission forwards its recommendations to the local legislative body, which also conducts at least one public
hearing and then either adopts, amends, or denies the plan by resolution. In some charter cities, the planning
commission may be authorized to take final action on the plan without holding a public hearing.

Importance of the General Plan

A general plan is the basis for future development proposals. It is the rationale behind a city’s or county’s
development regulations and decisions; a statement of local values that sets forth the future direction of
community development. It helps eliminate inefficient resource allocations associated with random or untimely
development. Finally, a general plan promotes fairness in the development entitlement process by discouraging
capricious decision making.

Until fairly recently, general plans were idealistic and inspirational, but had little legal effect. Community
development decisions such as rezonings, subdivision map approvals, and public works projects were not
required to be consistent with the plan.

Legislation, court decisions and legal opinions have established the general plan as the local constitution for a
community’s physical development. State law now requires that zoning ordinances of general law cities be
consistent with their general plan. In addition, every city and county in the state, except Los Angeles, is
prohibited by state law from approving a subdivision map proposal unless the map is found to be consistent
with the general plan. Furthermore every city and county, including Los Angeles, must deny a subdivision map
proposal which the city or county finds to be inconsistent with the general plan. A court decision in 1980
established that public works of all cities and counties must be consistent with the plan.

A 1984 California Appellate Court decision held that a local government may not grant a conditional use permit
if the general plan inadequately addresses pertinent state-mandated issues. Other decisions of the late 1970’s
and the 1980’s have also prohibited various development projects due to the inadequacy of local general plans.
Consequently, it is now in the best interests of real estate licensees, developers, local governments, and the
public to make sure that general plans are legally adequate and that their implementing actions meet the
consistency requirements.

Amendment to General Plans

Amendments to mandatory elements of general plans are limited to no more frequently than four times during
any calendar year. Although most amendments are initiated by city or county planning agencies, an amendment
may be initiated in any manner specified by the local legislative body. Additionally, amendment by an initiative
measure has been upheld by the California Supreme Court. If a development agreement is in effect, its terms
supersede amendments to the general plan if there is a conflict.

General Plan Implementation

Zoning is one of the best known and most frequently used tools for carrying out a general plan’s land use
proposals. Subdivision regulations, property tax incentives, land banking, transfer of development rights
programs, etc. also enact a general plan’s land use policies. As noted earlier, however, general plans are
comprehensive. They address development issues that go beyond land use, such as traffic circulation, public
works, public safety, and water reclamation. Implementation techniques, including specific plans, public

finance measures, and capital improvement programs tackle more than just land use planning issues. The
following is a discussion of two of the more popular implementation tools: specific plans and zoning.

After a municipality has adopted a general plan, it may prepare specific plans to systematically implement the
general plan. Specific plans usually pertain to a particular development site or sub-area of the general plan’s
planning territory. They contain a text and a diagram or diagrams detailing development specifications for,
among other things, land use and supporting infrastructure. They may also include phasing programs which
coordinate the timing of development with the general plan’s long-term outlook. Specific plans have a program
of implementation measures (e.g., proposed rezonings, public works, and public finance). Specific plans may
take the form of: detailed planning policy documents; zoning-like land use regulations that take the place of
zoning; urban development and design guidelines; capital improvement programs; and combined policy and
regulatory programs for guiding and controlling urban development.

Although expensive to prepare and sometimes difficult to administer, specific plans are increasingly popular
general plan implementation tools. Although specific plans contain planning provisions, they are not part of the
general plan, nor should they be confused with area or community plans which are sub-units of a general plan.
As in the case of a zoning ordinance, a specific plan is subordinate to and must conform to the general plan.
However, zoning, public works, tentative subdivision maps, parcel maps, and development agreements must be
consistent with an applicable specific plan. With regard to the hierarchy of planning documents, a specific plan
falls somewhere between the general plan and some of the most common general plan implementation
mechanisms of zoning and design guidelines. Specific plans have two distinct advantages over other general
plan implementation tools:

• They bring together in one document many of the factors necessary for successfully developing a land use
project.

• By matching proposed land uses with infrastructure, they help eliminate costly over or undersizing of
public utilities and streets.

Zoning

Most California cities and counties have adopted ordinances that divide their jurisdictions into land use districts
or zones. Within each zone a specific set of regulations control the use of land. There are often zones for single-
family residences, multi-family dwellings, commercial uses, industrial activities, open space or agriculture and,
sometimes, mixed uses.

The authority for local zoning is derived from the police power in Article XI, Section 7 of the California
Constitution. State law augments the authority by setting forth minimum standards and procedures for
exercising zoning regulations. This provides cities and counties with a great deal of local discretion in
controlling land use. Nevertheless, zoning, as a police power action, is invalid unless it rationally promotes the
public health, safety, and welfare.

A zoning ordinance consists of a map and a text. The map identifies and delineates the boundaries of the
various zones within a city or county. The text specifies zoning ordinance amendment and administrative
procedures, and sets forth the characteristics of each zoning category such as: permitted land uses; land uses
that require conditional use permits; minimum parcel sizes; building height limitations; lot coverage limits;
building setback standards; and housing unit and building densities.

While the nature of zoning ordinances is fairly well known to the general public, the relationship of zoning to
the general plan may not be as apparent. A zoning ordinance may appear to duplicate the general plan, as both
are concerned with land use. The zoning ordinance and the general plan each have texts setting forth
development standards. Both also have community land use maps and map-like diagrams.

However, zoning ordinances are very different from the general plan. The general plan covers a wide range of
land use issues and looks further into the future of an area. The general plan is policy-oriented, setting forth in
general terms the context in which site-by-site decisions are made. A zoning ordinance regulates land use from
the viewpoint of the individual project site. Therefore, a zoning ordinance is merely one of a variety of
measures used to implement the general plan. The general plan provides an overall perspective of the
community-wide consequences of individual rezonings which are commonly initiated by local governments
following an amendment or revision of the general plan. Rezonings are sometimes necessary for maintaining

zoning ordinance consistency with the general plan, although they are more commonly initiated by individual
property owners or developers.

Zoning is inherently inflexible. With the exception of “charter cities,” all cities and counties are subject to the
same basic zoning procedures and statutory requirements (including mandatory noticed public hearings before a
local planning commission and city council or board of supervisors). Zoning standards must also be applied
uniformly, while at the same time recognizing that different land parcels have their own particular
characteristics. Over the years, a variety of methods have evolved to make zoning more responsive and
accommodating to the many unique circumstances involving land use. “Floating zones,” special purpose
overlay or combining zones, mixed-use development, building block zoning and planned unit developments
exemplify some of these methods..

Typically, zoning districts have permitted uses, conditional uses and accessory uses. Permitted uses are those
allowed as a matter of right within the district. Conditional uses are those not allowed as a matter of right, but
which may be allowed by a local administrative body subject to specific conditions, usually after a public
hearing, thus having greater flexibility in applying the zoning criteria. Accessory uses are uses incidental to a
primary use permitted within the zoning district such as a shed in a residential district.

Zoning measures often establish various criteria with respect to types of uses, and also various aspects of the
types of uses allowed, such as building heights, minimum lot sizes, set-backs from property lines, open space
requirements, ratio of building floor areas to size of the lot, and other such criteria.

Planned unit development or planned development is a type of zoning classification. (This terminology also
describes certain land development techniques.) The term “planned development” is also used to describe a
certain type of common interest development that includes common areas and an owners association. As a
zoning mechanism, planned unit development designation applies to the development of land as a unit where it
is desirable to apply zoning regulations in a more flexible manner than those pertaining to other, more specific
zoning classifications, and to grant diversification in the location of structures and other site qualities. The
planned development zoning process is implemented by the local government’s review and approval of a
master plan or “precise” plan for the designated area. Approval usually includes various detailed planning and
development conditions to implement the precise plan.

If a property owner desires to use property in a manner not permitted under the applicable comprehensive
zoning ordinance he may seek the administrative relief of a conditional use permit or the legislative relief of an
amendment to the zoning ordinance. Such a rezoning or zoning amendment would have to be consistent with
the applicable general or specific plan. If the use sought is not consistent with the general or specific plan, then
an amendment of the general or specific plan would also have to be obtained.

Zoning and Use Variances

Sometimes the size, irregular shape, surroundings, unusual topography, or location of a parcel of land is such
that a use of the property cannot meet a zoning standard, such as a side-yard setback. This prevents the owner
from enjoying the development privileges available to other property owners in the same vicinity and zone. The
disadvantaged land owner may apply to the city or county for a waiver of the strict application of a zoning
standard (or standards) to his/her property. If granted, the waiver or “zoning variance” provides the property
owner with the same, but not additional, development privileges as neighboring parcels in the same zone.

In California, counties and general law cities are prohibited by state law from granting use variances that
authorize a land use not otherwise permitted in a zone. For instance, if retail sales are prohibited in a single
family residential zone, a zoning variance may not waive the restriction.

Conditional Use Permits

Zoning ordinances often list special land uses that are authorized in a zone subject to the granting of a
conditional use permit or special use permit. Land uses requiring such permits are usually potentially
incompatible with other activities existing in the zone. The proposed land use can create spillover effects such
as noise, traffic congestion, or air pollution that adversely affect the public’s health, safety, or welfare.
Conditional use permits may authorize the use as long as the project proponents agree to abide by conditions
that alleviate the spillover effects. If the project owner fails to comply with the conditions, the local government
may revoke the permit after a public hearing is held . A conditional use permit is said to run with the land in
that its provisions usually apply despite a change in ownership of the project site.

California Environmental Quality Act of 1970 (CEQA)

The California Environmental Quality Act of 1970 (CEQA) plays a major role in planning, zoning and other
land-use permitting decisions by government agencies. A primary purpose of CEQA is to provide procedures
and information to ensure that governmental agencies will consider and respond to the environmental effects of
their proposed decisions. The state has adopted CEQA Guidelines to implement the CEQA process.

CEQA and the CEQA Guidelines affect planning whenever city or county officials exercise their judgment or
discretion in approving, conditionally approving, or denying a development project which has the potential for
creating a significant impact on the environment. Examples of discretionary projects include: adoption or
amendment of general plans, specific plans, and zoning ordinances; granting of conditional use permits or
zoning variances; approvals of tentative subdivision maps or parcel maps; and development agreement
approvals. Ministerial projects, such as final subdivision maps and most building permits, are not subject to
CEQA; nor are projects which are specifically exempted by state law and regulations.

One of the first CEQA-related steps in the processing of a discretionary project proposal is the preparation of an
initial study. This study is a preliminary investigation and analysis, prepared by the lead government agency, of
the project’s potential for significant adverse effects on the environment. The initial study identifies the type of
environmental document that will be necessary for evaluating the project.

If the public agency determines that the proposal will not have a significant adverse effect, the city or county
prepares a negative declaration prior to making a decision on the development. As a means of expediting the
review and approval process, under appropriate circumstances, the local agency can issue a “mitigated”
negative declaration. A mitigated negative declaration is useful where the initial study has identified potentially
significant effects on the environment, but revisions to the project have been made or are agreed to which will
avoid or mitigate the potential effects to a point where no significant effect on the environment would occur.
The permit approvals for the project would have to provide for measures which implement the specific
mitigation measures.

If, however, the project may potentially cause one or more significant effects, the city or county must prepare
and certify an environmental impact report (EIR) prior to the development decision. An EIR identifies a
project’s significant, cumulative, and unavoidable environmental impacts, cites mitigation measures, and
discusses project alternatives, including “no project.” An EIR goes through two stages: draft and final. The
draft EIR is prepared by the lead government agency and sets forth a variety of information on various issues
required by the statute and Guidelines. It is circulated for public review and intra-agency consultation. After
public review of the draft EIR, the lead agency must prepare written responses to comments on the
environmental impact of the proposed project. The city or county must mitigate significant impacts by
incorporating feasible changes or alterations into the project which avoid or substantially lessen the impacts. If
one or more significant effects are unavoidable, the project may be approved only if the city or county decision-
makers adopt a statement of overriding considerations. This statement allows decision-makers to balance a
project’s social and economic benefits against its environmental consequences. It is an indication of the elected
official’s environmental, social, and economic priorities with regard to the project.

Speeding Up Routine Matters

To reduce the workload of the local planning commission and legislative body, communities may authorize
zoning administrators, zoning boards, or boards of zoning adjustment to handle many of the routine permits and
appeals. These hearing bodies enable the local planning commission and city council or board of supervisors to
spend more time on substantive planning policy and regulatory issues. Known as California’s Permit
Streamlining Act (commencing at California Government Code Section 65920), this change also quickens the
planning pace by setting time limits for processing planning applications. The Subdivision Map Act and the
California Environmental Quality Act also specify time limits.

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REDEVELOPMENT

REDEVELOPMENT somebody Wed, 07/19/2023 - 02:09 am

REDEVELOPMENT

Community Redevelopment Law (Health and Safety Code Sections 33000, et seq.) authorizes a local
government to adopt an ordinance subject to referendum to establish a redevelopment agency for the purpose of
correcting blighted conditions in a project area within its territorial jurisdiction. A project area for
redevelopment is not restricted to buildings, improvements, or lands which are detrimental to the public health,
safety, or welfare, but may also consist of an entire area in which such conditions predominate. A project may

also include lands, buildings, or improvements which are not detrimental to the public health, safety or welfare,
but whose inclusion is found necessary for the effective redevelopment of the area of which they are a part.

The fundamental purposes of redevelopment include: the expansion of the supply of low and moderate income
housing; the expansion of employment opportunities for jobless, underemployed, and low-income persons; and
the development of an environment for the social, economic, and psychological growth and well-being of all
citizens. To ensure that these objectives are met, the law provides special redevelopment financing and land use
control authority. The use of this authority may affect the title, resale, and use of properties within a
redevelopment project area. Under some circumstances, redevelopment powers and controls may extend to
low- and moderate income housing developed, with agency assistance, outside of redevelopment project areas.
Housing is the only activity a redevelopment agency may aid outside redevelopment areas.

In most instances, the city or county’s elected officials function as the community redevelopment agency board
of directors for the jurisdiction. For legal purposes, the redevelopment agency has status separate from that of
the jurisdiction in which it is established. The agency can sue and be sued; acquire property by eminent domain;
dispose of property; construct public improvements; borrow money from any public or private source; and
engage in a wide range of government and development activities mandated by redevelopment law.
Enforcement of redevelopment law occurs through public monitoring of agency planning functions and annual
reports, and civil legal challenges to perceived violations of the redevelopment plan or state or federal
requirements.

Housing Powers, Responsibilities, and Activities of Redevelopment Agencies

A community redevelopment agency (CRA) must replace, or cause to be replaced, low and moderate income
housing which is lost as a result of redevelopment activities. Replacement must be accomplished within four
years of the destruction, removal, rehabilitation or development of a dwelling unit. The agency must also
provide relocation benefits to households or businesses displaced as a result of its activities.

Prior to 1988, properties developed or assisted by a CRA were subject to affordability requirements that were
often contained in written agreements, and which were to be part of resale and leasing arrangements. The
agency monitors these arrangements for continuing compliance. Beginning in 1988, affordability requirements
on CRA units must be enforced through covenants, conditions, and restrictions in recorded deeds.

Funding Redevelopment Projects

Most redevelopment projects are funded through the issuance of tax allocation bonds secured by anticipated
property tax revenues. This procedure, called tax increment financing, allows the CRA to receive any increases
in project area property taxes which are a direct result of redevelopment activities. Tax allocation bonds are not
obligations of the city or any public entity other than the CRA. They can be issued by a CRA without voter
approval. Before issuing bonds to be secured by tax increments, the taxes being realized from all property
within the designated redevelopment area are calculated and recorded. This tax base, plus an equivalent portion
of the annual reassessments permitted under state law, continue to be allocated to the county and any other
taxing entities entitled to property taxes from the area. Property tax increments resulting from redevelopment
activities which may not begin to flow until two or three years after the project becomes active are allocated
back to the CRA to pay for debts incurred to accomplish redevelopment of the project area.

Expenditure of tax increments. All CRAs, unless exempted under the law, must set aside not less than twenty
percent (20%) of their tax increments in a special fund for low and moderate income housing. (See Health and
Safety Code Sections 50052.5, 50093, and 50105.) In carrying out this mandate, the agency may exercise any
or all of its powers, including the following: acquire and improve land or building sites; construct, acquire or
rehabilitate buildings or structures; donate land to private or public persons or entities; provide subsidies to or
for the benefit of low or moderate income households; develop land, pay principal and interest on bonds, loans,
advances, other indebtedness, or pay financing and carrying charges; and maintain the community’s supply of
mobilehomes.

Although tax increments are the major source of redevelopment financing, there are other tools available to
CRAs, such as general obligation lease revenue and mortgage revenue bonds; transient occupancy taxes; and
shares of sales taxes generated within the project area.

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THE NEED FOR PLANNING

THE NEED FOR PLANNING somebody Wed, 07/19/2023 - 02:09 am

THE NEED FOR PLANNING

Early American cities were relatively compact by today’s standards. Their land areas were limited primarily by
how far people could walk in going about their daily activities. As time progressed, urban populations surged
due to industrialization and immigration. As city centers became overcrowded, housing conditions declined,
sanitary systems were rendered inadequate, and there was a lack of parks and open space. Some cities turned
into very unpleasant and unhealthy places to live.

In the 1880’s with the coming of mechanized transportation (chiefly the electric trolley on rails), many people
moved to cleaner, less congested suburban areas. Land speculation flourished and urban sprawl went
unchecked. Sprawl intensified when automobiles became widely available. The development of the automobile
was paralleled by advancing techniques in road construction, bridge building, tunneling, reinforced concrete
construction, fireproofing and electric elevators. Cities not only expanded farther out, but also grew upward.

By the beginning of the twentieth century, civic leaders perceived the need for improving their urban
environments. City planning, which had existed for centuries, took on added importance in what became known
as the “City Beautiful” movement. The City Beautiful movement stressed public works and civic improvements
as a way of making cities more livable.

About the same time, city development plans gained prominence. City plans evolved into “comprehensive
plans”: expressions of community goals and values covering the planning needs of both public and privately
owned land.

The comprehensive plans contain public proposals and policies addressing the numerous components of an
urban area’s physical development. These public proposals and policies are a rational response to the problems
inherent in urbanization.

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Chapter 2 - The Real Estate License Examinations somebody Wed, 07/19/2023 - 02:09 am

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INTRODUCTION

INTRODUCTION somebody Wed, 07/19/2023 - 02:09 am

INTRODUCTION

IMPORTANT NOTE: The Salesperson and Broker examination format has changed since the
Reference Book was published in 2010. Please refer to Salesperson Examination Content and Broker
Examination Content for current information. (7/20/12)

The law requires that the Department of Real Estate (DRE) ascertain, by written examination, the competency of
a prospective real estate licensee. DRE cannot waive this examination requirement.

This chapter discusses the examination process in general, details the scope of the examinations and includes
practice questions.

A pamphlet titled Instructions to License Applicants provides detailed information about examination and
licensing procedures. Interested persons may obtain this pamphlet and an application to take an examination by
calling or writing any DRE office.

Additional information, forms, publications, and other items of interest to examinees, license applicants and
licensees is available on the Department of Real Estate (DRE) web site www.dre.ca.gov under Examinees and
Licensees.

Scope of Examination

Business and Professions Code Section 10153 requires that the real estate examinations test for the following:

• knowledge of the English language, including reading, writing and spelling; and of arithmetical
computations used in real estate and business opportunity practices;

• understanding of the principles of real estate and business opportunity conveyancing; the general purposes
and general legal effect of agency contracts, deposit receipts, deeds, mortgages, deeds of trust, chattel
mortgages, bills of sale, land contracts of sale and leases; and of the principles of business and land
economics and appraisals; and

• understanding of the obligations between principal and agent; of the principles of real estate and business
opportunity practice and the canons of business ethics pertaining thereto; and of the Real Estate Law, the
Subdivided Lands Law and the Commissioner’s Regulations.

Preparing for an Exam

Unless a prospective licensee has had experience with the various types of real estate transactions and has
thorough knowledge of real estate fundamentals, including the obligations of an agent and the laws and
regulations governing an agent’s activities, it is suggested that serious study be undertaken prior to taking the
examination. Even persons well grounded in these areas will find a review extremely valuable.

This book and DRE’s Real Estate Law book are useful study tools. In addition, public libraries and bookstores
have textbooks on California real estate law, practice, finance, economics and appraisal. Real estate courses are
available at colleges and private vocational schools.

Exam Construction

DRE’s testing program follows guidelines set by the State Personnel Board and other test authorities.
Periodically, DRE uses research studies to update the test specifications. Because there are differences in the
level and amount of knowledge required of salespersons and brokers, the exams differ in their emphasis and
difficulty.

Examination Weighting

DRE attempts to place proper emphasis on the content areas of the examinations. The exact weighting for each
subject area contained in the real estate broker and real estate salesperson license examination is included in the
current edition of DRE’s pamphlet Instructions to License Applicants. This publication is also available online
at the DRE web site at www.dre.ca.gov.

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REAL ESTATE SALESPERSON AND REAL ESTATE BROKER LICENSING EXAMINATION OUTLINE

REAL ESTATE SALESPERSON AND REAL ESTATE BROKER LICENSING EXAMINATION OUTLINE somebody Wed, 07/19/2023 - 02:09 am

REAL ESTATE SALESPERSON AND REAL ESTATE BROKER LICENSING EXAMINATION OUTLINE

Area 1 - Property Ownership and Land Use Controls and Regulations

• Classes of Property

• Property Characteristics

• Encumbrances

• Types of Ownership

• Descriptions of Property

• Government Rights in Land

• Public Controls

• Environmental Hazards and Regulations

• Private Controls

• Water Rights

• Special Categories of Land

Area 2 - Laws of Agency

• Law, Definition & Nature of Agency Relationships, Types of

• Agencies & Agents

• Creation of Agency & Agency Agreements

• Responsibilities of Agent to Seller/Buyer as Principal

• Disclosure of Agency

• Disclosure of Acting as Principal or Other Interest

• Termination of Agency

• Commission and Fees

Area 3 - Valuation and Market Analysis

• Value

• Methods of Estimating Value

Area 4 - Financing

• General Concepts

• Types of Loans

• Sources of Financing

• How to Deal with Lenders

• Government Programs

• Mortgages/Deeds of Trust/Notes

• Financing/Credit Laws

• Loan Brokerage

Area 5 – Laws of Agency

• Title Insurance

• Deeds

• Escrow

• Reports

• Tax Aspects

• Special Processes

Area 6 – Practice of Real Estate and Mandated Disclosures

• Trust Account Management

• Fair Housing Laws

Truth in Advertising

Record Keeping Requirements

Agency Supervision

Permitted Activities of Unlicensed Sales Assistants

DRE Jurisdiction and Disciplinary Actions

Licensing and Continuing Education Requirements and Procedures

California Real Estate Recovery Fund

General Ethics

Technology

Property Management/Landlord-Tenant Rights

Commercial/Industrial/Income Properties

Specialty Areas

Transfer Disclosure Statement

Natural Hazard Disclosure Statements

Material Facts Affecting Property Value

Need for Inspection and Obtaining/Verifying Information

Area 7 - Contracts

• General

• Listing Agreements

• Buyer/Broker Agreements

• Offers/Purchase Contracts

• Counteroffers/Multiple Counteroffers

• Leases

• Agreements

• Promissory Notes/Securities

Exam Rules - Exam Subversion

The typical rules for examinations apply: conversation is not permitted; the use of cell phones, PDAs, notes or
references to texts are strictly forbidden; dishonest practice of any kind will result in a nonpassing grade and
may be grounds for denying future examinations.

DRE may deny, suspend, revoke or restrict the license of an applicant or licensee who subverts or attempts to
subvert a licensing examination. Conduct which constitutes subversion includes but is not limited to the
following:

1. Removing exam material from a test site.

2. Reproducing exam material without authorization.

3. Using paid examinees for the purpose of reconstructing an examination.

4. Using improperly obtained test questions to prepare persons for examination.

5. Selling, distributing, or buying exam material.

6. Cheating during an exam.

7. Possessing unauthorized equipment or information during an examination.

8. Impersonating an examinee or having an impersonator take an examination.

Materials

Only the examination booklet, the answer sheet, a special pencil, and silent, battery-operated, pocket-size,
electronic calculator without a print-out capability or an alphabetic keyboard are allowed on an examinee’s
desk, along with the single page of scratch paper (for arithmetical calculations) which DRE will supply and
which MUST be turned in with the answer sheet and examination booklet.

Question Construction

Test items are phrased so that they measure the applicant’s knowledge without making him or her wonder about
their meaning. The questions must not be too difficult, too easy, unimportant or inappropriate for any reason. No

question is meant to be a trick or catch question. Words are used according to their commonly accepted
meanings.

Multiple Choice Exam

All test items in the real estate exams are multiple-choice. While the examinee may feel that more than one
answer has some element of correctness, the examinee must be able to eliminate the incorrect responses and
choose the correct answer.

Q and A Analysis

The following analyses illustrate the proper approach to exam questions:

Question:

Under no circumstances may a broker:

(a) receive a commission from both buyer and seller

(b) appoint a subagent

(c) misrepresent material facts

(d) sell the principal’s property to a relative.

Analysis:

(a) is incorrect. A broker may receive a commission from both parties provided both buyer and seller have
knowledge of the arrangement.

(b) is incorrect. A broker may get prior consent from the principal to appoint other brokers as subagents to
cooperate in selling the property.

(c) is correct. A material misrepresentation is a violation of law.

(d) is incorrect. The broker may sell to any purchaser provided the principal has full knowledge.

Question:

A valid bill of sale must contain:

(a) a date

(b) an acknowledgment

(c) the seller’s signature

(d) a verification.

Analysis:

(a) is incorrect. Although a date is advisable, it is not required.

(b) is incorrect. The law does not require an acknowledgment.

(c) is correct. A bill of sale is an instrument which has been executed (signed) and delivered to convey
title to personal property.

(d) is incorrect. Verification means to confirm the correctness of an instrument by an affidavit or oath.
Verification may be desirable but not required.

Examinees should be alert for questions phrased in the negative: e.g., “All of the following statements are
correct, except;” or, “which of the following are not ...?” In the following sample question, three of the
responses would be correct. However, the answer called for is the incorrect statement.

Question:

A valid deed must contain all of the following, except:

(a) the signature of the grantor

(b) a granting clause

(c) an adequate description of the property

(d) an acknowledgment of the grantor’s signature.

Analysis:

(a) is a correct statement. The grantor is the person who conveys title to another and without the grantor’s
signature title will not pass.

(b) is a correct statement. The granting clause is necessary to evidence the intent of the grantor.

(c) is a correct statement. The property being transferred must be described so the grantor knows exactly
what property is being conveyed to the grantee.

(d) is the incorrect statement. An acknowledgment is necessary for recordation but is not required to
make the deed valid.

Sample Multiple Choice Items

The following are examples of the types of questions that appear in the examination. No answers are provided.
The results of practice should be checked against appropriate sources.

1. Judgment liens differ from mechanics’ liens in that:

(a) mechanics’ liens are created by statute

(b) mechanics’ liens could take priority earlier than the date they are recorded

(c) judgment liens are voluntary liens

(d) judgment liens are not enforceable until recorded.

2. Tax delinquent real property not redeemed by the owner during the five-year statutory redemption period is
deeded to the:

(a) city

(b) county

(c) state

(d) school district.

3. The maximum commission a broker may charge a seller for the sale of residential income property is:

(a) set forth in the Real Estate Law

(b) negotiable

(c) no more that 10 percent of the total sales price

(d) determined by local custom.

4. In a typical percentage lease, rent is calculated as a percentage of:

(a) assets of the lessee’s business

(b) net sales of the lessee’s business

(c) gross sales of the lessee’s business

(d) net taxable income of the lessee’s business.

5. The position of trust assumed by the broker as an agent for a principal is described most accurately as:

(a) a gratuitous relationship

(b) a trustor relationship

(c) a fiduciary relationship

(d) an employment relationship.

6. The Federal Housing Administration’s role in financing the purchase of real property is to:

(a) act as the lender of funds

(b) insure loans made by approved lenders

(c) purchase specific trust deeds

(d) do all of the above.

7. Which of the following best defines “encumbrance”?

(a) The degree, quantity, nature, and extent of interest which a person has in real property

(b) The use of property by a debtor as security for a debt

(c) Any action taken relative to real property other than acquiring title

(d) Anything which affects or limits the title to real property.

8. Which item would an appraiser use to arrive at a net income for capitalization purposes?

(a) cost of loans against the property

(b) allowance for rent loss and vacancies

(c) federal income tax

(d) reserve for appreciation of buildings.

9. A clause in a trust deed stating that the rights of the beneficiary shall be secondary to a subsequent trust
deed is called:

(a) an acceleration clause

(b) an alienation clause

(c) a subdivision clause

(d) a subordination clause.

10. Private restrictions on the use of land may be created by:

(a) private land use controls

(b) written agreement

(c) general plan restrictions in subdivisions

(d) all of the above.

11. A listing agreement must contain the elements of a contract, which includes:

(a) competent parties

(b) unlawful object

(c) unspecified consideration

(d) being notarized by a notary public.

12. A quitclaim deed conveys only the present right, title and interest of the:

(a) grantor

(b) servient tenement

(c) grantee

(d) property.

13. If a $218,400 investment in real estate generates gross annual earnings of 15%, the gross monthly return
most nearly is:

(a) $3,276

(b) $2,820

(c) $2,740

(d) $2,548.

14. You are a California real estate broker. A prospect is referred to you by an out-of-state broker and you
consummate a sale by you. You want to split your commission with the cooperating broker. Under the
California Real Estate Law:

(a) you may pay a commission to a broker of another state

(b) you cannot divide a commission with a broker of another state

(c) you can pay a commission to a broker of another state only if he is also licensed in California

(d) none of the above.

15. Edison sold his land with an easement appurtenant for a road. The deed to the buyer contained an adequate
description of the land, but it failed to make reference to the easement. The buyer:

(a) takes title to landlocked property

(b) has a clouded title

(c) forfeits the easement to the servient tenement

(d) has the same right to the easement as the seller did.

16. If the broker, while acting as agent in a sale of real property, misrepresents the principal’s property to a
buyer, the broker may cause the principal to be subjected to:

(a) rescission of the sale by the buyer

(b) a court action for damages by the buyer

(c) tort liability

(d) any of the above.

17. An instrument which usually transfers possession of real property but does not
transfer ownership is:

(a) a trust deed

(b) a sublease

(c) a security agreement

(d) an easement grant.

18. As a matter of practice, the escrow holder is authorized to:

(a) order the termite inspection and authorize any corrective repairs to be made

(b) advise buyers on best financing available in the market place

(c) amend the commission instruction form at the request of the listing broker

(d) call for funding of buyers loan proceeds.

19. Community property is property owned by:

(a) churches

(b) husband and wife

(c) the municipality

(d) the community.

20. An apartment complex cost $1,800,000. It brings in a net income of $12,000 per month. The owner is
making what percentage of return on the investment?

(a) 7%

(b) 8%

(c) 11%

(d) none of the above.

21. A person holding title to real property in severalty would most likely have:

(a) a life estate

(b) an estate for years

(c) ownership in common with others

(d) sole ownership.

22. Under the Federal Truth-in-Lending Law, two of the most critical facts that must be disclosed to buyers or
borrowers are:

(a) duration of the contract and discount rate

(b) finance charge and annual percentage rate

(c) carrying charge and advertising expense

(d) installment payments and cancellation rights.

23. Appraisals of single-family dwellings are usually based on:

(a) capitalization of rental value

(b) asking prices of comparable houses

(c) sales prices of comparable properties

(d) the assessed valuations.

24. A contract based on an illegal consideration is:

(a) valid

(b) void

(c) legal

(d) enforceable.

25. The California “standard form” policy of title insurance on real property insures against loss occasioned by:

(a) a forgery in the chain of recorded title

(b) liens or encumbrances not disclosed by official records

(c) rights of parties in possession of the property

(d) actions of governmental agencies regulating the use or occupancy of the property.

26. A broker acting in a fiduciary capacity representing a client in dealings with third persons in selling, buying
from or exchanging real property is said to be bound by the laws of:

(a) limitations

(b) trusteeship

(c) agency

(d) power of attorney.

27. All persons are protected by the 1968 Federal Fair Housing Act and have a right to bring suit when:

(a) acts of discrimination deny them the opportunity to have neighbors who are members of minority
groups

(b) they are evicted by a landlord for having minority guests in their home

(c) acts of discrimination caused their loan for purchase of a residence to be denied

(d) any of the above occurs.

28. The chief distinguishing characteristic of real estate, when compared to personal property, is that it:

(a) depreciates over time

(b) is a capital asset

(c) can be held in severalty or tenancy in common

(d) is immovable.

29. Copies of all listings, deposit receipts, canceled checks, and trust records must be retained by a licensed real
estate broker for:

(a) one year

(b) two years

(c) three years
(d) five years.

30. If a contingency is put into a contract, it is important to be specific about the:

(a) nature of the contingency

(b) duration of the contingency

(c) method by which the contingency will be removed
(d) all of the above.

31. When a loan is fully amortized by equal monthly payments of principal and interest, the amount applied to
principal:

(a) and interest remains constant

(b) decreases while the interest payment increases
(c) increases while the interest payment decreases
(d) increases by a constant amount.

32. Joint ownership of real property by two or more persons, each of whom has an undivided interest (not
necessarily equal) without right of survivorship, is

(a) a tenancy in partnership
(b) a tenancy by the entireties
(c) a tenancy in common
(d) a leasehold tenancy.

33. A “loss in value from any cause” is a common definition of:

(a) economic obsolescence

(b) depreciation

(c) principle of contribution

(d) adverse leverage.

34. Which of the following is a lien?

(a) an easement

(b) a zoning restriction

(c) an attachment

(d) all of the above are liens.

35. Of the following, which is the most important reason for a broker to maintain a trust fund account in
addition to a regular business account?

(a) to provide a means of control over the destiny of transactions being negotiated

(b) it is easier from an accounting point of view

(c) the bank is responsible for any loss to the trust fund account resulting from embezzlement

(d) the consequence which could occur should legal action be taken against the broker.

36. If an appraiser finds that the fair rent for a vacant parcel of land is $1,400 per month and the interest rate is
11%, what is the approximate indicated land value?

(a) $109,090

(b) $138,560

(c) $184,800

(d) $210,000.

37. Economic obsolescence could result from each of the following, except:

(a) new zoning laws

(b) a city’s leading industry moving out

(c) misplacement of improvements

(d) an outdated kitchen.

38. As a real estate broker, you negotiate the sale of a residence. The building appears to be sound and
therefore, no termite inspection is ordered. However, before the escrow closes, you discover what you
consider to be evidence of termite infestation in a closet. Under these circumstances, you should promptly
disclose this information to:

(a) no one, as you might be mistaken and disclosure could “stop the sale” for which you would be liable
for the breach of contract

(b) first and only to the seller, as it is the seller’s responsibility to take whatever action is deemed
appropriate

(c) both buyer and seller for the appropriate resolution

(d) the Structural Pest Control Board so that an immediate inspection can be on record and the
discrepancies corrected by a licensed pest control contractor.

39. A subordination clause in a trust deed may:

(a) permit the obligation to be paid off ahead of schedule

(b) prohibit the trustor from making an additional loan against the property before the trust deed is paid off
(c) allow for periodic renegotiation and adjustment in the terms of the obligation

(d) give priority to liens subsequently recorded against the property.

40. Which of the following factors is least important in the appraisal of an old single-family residence?

(a) The purpose of the appraisal

(b) Adaptability of the building to the site

(c) Physical condition of the building

(d) Original cost of the construction.

41. A balloon loan is most nearly:

(a) a fully amortized loan

(b) a partially amortized loan

(c) a self-liquidating loan

(d) a standing loan.

42. A contractor obtained a construction loan, and the loan funds are to be released in a series of progress
payments. Most lenders disburse the last payment when the:

(a) building is completed

(b) notice of completion is filed

(c) buyer approves the construction

(d) period to file a lien has expired.

43. A grant deed is recorded in the county where the:

(a) escrow and title company’s place of business is

(b) seller permanently resides

(c) buyer permanently resides

(d) property is situated.

44. Brown purchased a $14,000 note secured by a second mortgage for investment purposes. The seller allowed
a 15% discount. The note provided for monthly payments of $1,220 including interest at 9% per annum
over a one-year term. Brown received full payment on the above terms. The yield on Brown’s investment,
expressed as a percentage, is:

(a) 23%

(b) 31%

(c) 34%

(d) 40%.

45. The covenant of quiet enjoyment most directly relates to:

(a) nuisances maintained on adjoining property

(b) possession of real property

(c) title to real property

(d) all of the above.

46. An interest in real property may be acquired by either prescription or by adverse possession. The interest
resulting from prescription is:

(a) the right to use another’s land

(b) a possessory title

(c) an equitable interest

(d) a private grant.

47. Generally, the taking of private land by governmental bodies for public use is governed by due process of
law and is accomplished through:

(a) exercise of the police power

(b) eminent domain

(c) reverter

(d) escheat.

48. Governmental land use planning and zoning are important examples of:

(a) exercise of eminent domain

(b) use of police power

(c) deed restrictions

(d) encumbrances.

49. Most contracts between a seller and broker for the purpose of selling real

estate are in the form of:

(a) a general power of attorney

(b) a novation

(c) a written agreement

(d) an assignment.

50. In arriving at an effective gross income figure, an appraiser of rental property makes a deduction for:

(a) real property taxes

(b) repairs

(c) vacancy

(d) depreciation.

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Chapter 21 - Trust Funds somebody Wed, 07/19/2023 - 02:09 am

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ACCOUNTING RECORDS

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ACCOUNTING RECORDS

General Requirements

An important aspect of the broker’s fiduciary responsibility to the client is the maintenance of adequate records
to account for trust funds received and disbursed. This is true whether the funds are deposited to the trust fund
bank account, sent to escrow, held uncashed as authorized under Commissioner’s Regulation 2832, or released
to the owner(s) of the funds. These records:

1. provide a basis upon which the broker can prepare an accurate accounting for clients.

2. state the amount of money the broker owes the account beneficiaries at any one time. (This is especially
important when there are a large number of transactions.)

3. prove whether or not there is an imbalance in the trust account. Some brokers audited by DRE have
disagreed that their trust accounts had a shortage or an overage in the amount disclosed by the audit, but
could not provide documentation to support their position.

4. guarantee that beneficiary funds deposited in the trust account will be insured up to the maximum FDIC
insurance coverage.

There are two types of accounting records that may be used for trust funds: columnar records in the formats
prescribed by Commissioner’s Regulations 2831 and 2831.1; and records other than columnar that are in
accordance with generally accepted accounting practices which include details specified in subdivision (a) of the
Regulations and are in a format that will readily enable tracing and reconciliation in accordance with Section
2831.2. Regardless of the type of records used, they must include the following information:

1. all trust fund receipts and disbursements, with pertinent details, presented in chronological sequence;

2. the balance of the trust fund account, based on recorded transactions;

3. all receipts and disbursements affecting each beneficiary’s balance, presented in chronological sequence;
and

4. the balance owing to each beneficiary or for each transaction.

Either manually produced or computerized accounting records are acceptable. The type and form of records
appropriate to a particular real estate operation as well as the means of processing transactions will depend on
factors such as the nature of the business, the number of clients, the volume of transactions, and the types of
reports needed. For example, manual recording on columnar records might be satisfactory for a broker handling
a small number of transactions, while a computerized system might be more appropriate and practical for a large
property management operation.

Columnar Records

A broker may decide to use the columnar records prescribed by Commissioner’s Regulations 2831 and 2831.1.
The records required will depend on whether the trust funds received are deposited to the trust account or are
forwarded to an escrow depository or to the owner of the funds. These records are:

1. Columnar Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account (DRE form RE
4522);

2. Separate Record for Each Beneficiary or Transaction (DRE form RE 4523); and

3. Record of All Trust Funds Received - Not Placed in Broker’s Trust Account (DRE form RE 4524).

The first two records are required when trust funds are received and deposited to the trust fund bank account.

The third record is required when trust funds received are not deposited to the trust account, but are instead
forwarded to the authorized person(s).

If the trust fund account involves clients’ funds from rental properties managed by the broker, the Separate
Record for Each Property Managed (DRE form RE 4525) may be used in lieu of the Separate Record for Each
Beneficiary or Transaction.

A broker who has an escrow division pursuant to Financial Code Section 17006(a)(4) must keep the above
mentioned records for escrow funds. (Commissioner’s Regulation 2951)

Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account

This record is used to journalize all trust funds deposited to and disbursed from the trust fund bank account. At a
minimum, it must show the following information in columnar form: date funds were received; name of payee or
payor; amount received; date of deposit; amount paid out; check number and date; and the daily balance of the
trust account.

All transactions affecting the trust account are entered in chronological order on this record regardless of payee,
payor or beneficiary. If there is more than one trust fund bank account, a different columnar record must be
maintained for each account, pursuant to Commissioner’s Regulation 2831.

Separate Record for Each Beneficiary or Transaction

This record is maintained to account for funds received from or for the account of each beneficiary, or for each
transaction, and deposited to the trust account. With this record, the broker can ascertain the funds owed to each
beneficiary or for each transaction. The record must show the following in chronological order: date of deposit;

amount of deposit; name of payee or payor; check number; date and amount; and balance of the individual
account after posting transactions on any date.

A separate record must be maintained for each beneficiary or transaction from whom the broker received funds
that were deposited to the trust fund bank account. If the broker has more than one trust account, each account
must have its own set of beneficiary records so that they can be reconciled with the individual trust fund bank
account record required by Commissioner’s Regulation 2831.2.

Record of All Trust Funds Received - Not Placed in Broker’s Trust Account

This record is used to keep track of funds received and not deposited to a trust fund bank account. In this
situation, the broker is handling the funds and must keep records of same. Examples are:

1. earnest money deposits forwarded to escrow;

2. rents forwarded to landlords; and

3. borrowers’ payments forwarded to lenders.

This record must show the date funds were received, the form of payment (check, note, etc.), amount received,
description of property, identity of the person to whom funds were forwarded, and date of disposition. Trust
fund receipts are recorded in chronological sequence, while their disposition is recorded in the same line where
the corresponding receipt is recorded.

Transaction folders usually maintained by a broker for each real estate sales transaction showing the receipt and
disposition of undeposited checks are not acceptable alternatives to the Record of Trust Funds Received But Not
Deposited to the Trust Fund Bank Account.

An exception to this record keeping requirement is provided in Commissioner’s Regulation 2831(e), which
states that a broker is not required to keep records of checks made payable to service providers, including but
not limited to escrow, credit and appraisal services, when the total amount of such checks for any transaction
does not exceed $1,000. However, a broker shall retain for three years copies of receipts issued or obtained in
connection with the receipt and distribution of such checks and, upon request of the Department or the maker of
the checks, a broker must account for the receipt and distribution of the checks.

Separate Record for Each Property Managed

This record is similar to, and serves the same purpose as, the Separate Record for Each Beneficiary or
Transaction. It does not have to be maintained if a separate record is already used for a property owner’s
account. The Separate Record for Each Property Managed is useful when the broker wants to show some
detailed information about a specific property being managed.

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ADDITIONAL REQUIREMENTS - DOCUMENTS

ADDITIONAL REQUIREMENTS - DOCUMENTS somebody Wed, 07/19/2023 - 02:09 am

ADDITIONAL REQUIREMENTS - DOCUMENTS

The following is an additional requirement of the Real Estate Law and the Commissioner’s Regulations relating
to the preparation and management of real estate transaction documents.

Person Signing Contract to be Given Copy

Under Business and Professions Code Section 10142, any time a licensee prepares or has prepared an agreement
authorizing or employing that licensee to perform any acts for which a real estate license is required or when the
licensee obtains the signature of any person to any contract pertaining to such services or transaction, the
licensee must deliver a copy of the agreement to the person signing it at the time the signature is obtained.
Examples of such documents are listing agreements, real estate purchase contract and receipt for deposit forms,
addenda to contracts, and property management agreements.

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AUDITS AND EXAMINATIONS

AUDITS AND EXAMINATIONS somebody Wed, 07/19/2023 - 02:09 am

AUDITS AND EXAMINATIONS

Because of the importance of trust fund handling, the Commissioner has an ongoing program of examining
brokers’ records. As necessary, audited licensees are made aware of deficiencies in trust fund handling and
record keeping. If an audit discloses actual trust fund imbalances or money handling procedures which may
cause monetary loss, appropriate disciplinary proceedings are initiated.

Section 10148 of the Business and Professions Code provides that a real estate broker shall retain for three years
copies of all listings, deposit receipts, canceled checks, trust records, and other documents executed by or
obtained by the broker in connection with any transaction for which a real estate broker license is required. The
retention period shall run from the date of the closing of the transaction or from the date of the listing if the
transaction is not consummated. After notice, such books, accounts and records shall be made available for
examination, inspection and copying by the Commissioner or a designated representative during regular
business hours, and shall, upon the appearance of sufficient cause, be subject to audit without further notice,
except that such audit shall not be harassing in nature.

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DOCUMENTATION REQUIREMENTS

DOCUMENTATION REQUIREMENTS somebody Wed, 07/19/2023 - 02:09 am

DOCUMENTATION REQUIREMENTS

Activities and Related Documents

In addition to accounting records, the Department of Real Estate requires that the broker maintain all documents
prepared or obtained in connection with any real estate transaction handled. Here is a list of typical activities and
the corresponding documentation.

Activity

1. Receiving trust funds in the form of:
Purchase deposits from buyers

Rents and security deposits from tenants
Other receipts

2. Depositing trust funds

3. Forwarding buyers’ checks to escrow

4. Returning buyers’ checks

5. Disbursing trust funds

6. Receiving offers and counteroffers from buyers
and sellers

7. Collecting management fees from the trust fund
bank account

8. Reconciling bank account record with separate
beneficiary records

Documentation

• Real estate purchase contract and receipt for
deposit, signed by the buyer

• Collection receipts

• Collection receipts

• Bank deposit slips

• Receipt from title/escrow company and copy

of check

• Copy of buyer’s check signed and dated by
buyer, signifying buyer’s receipt of check

• Checks issued

• Supporting papers for the checks, such as

invoices, escrow statements, billings,
receipts, etc.

• Real estate purchase contract and receipt for

deposit, signed by respective parties

• Agency disclosure statement

• Transfer disclosure statement

• Property management agreements between

broker and property owners. (Note: If only
one trust fund check is issued for
management fees charged to various
property owners, there should be a schedule
or listing on file showing each property and
amount charged, and the total amount, which
should agree with the check amount.)

• Cancelled checks

• Record of reconciliation

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GENERAL INFORMATION

GENERAL INFORMATION somebody Wed, 07/19/2023 - 02:09 am

GENERAL INFORMATION

Trust Funds and Non-Trust Funds

Since trust funds must be handled in a special manner, a licensee must be able to distinguish trust funds from
non-trust funds. Trust funds are money or other things of value that are received by a broker or salesperson on
behalf of a principal or any other person, and which are held for the benefit of others in the performance of any
acts for which a real estate license is required. Trust funds may be cash or non-cash items. Some examples are;
cash; a check used as a purchase deposit (whether made payable to the broker or to an escrow or title company);
a personal note made payable to the seller; or even an automobile’s “pink slip” given as a deposit.

The discussions in this chapter pertain to real estate trust funds received by licensees, and not to non-trust funds
such as real estate commissions, general operating funds, and rents and deposits from broker-owned real estate.
These other types of funds, as long as not commingled with trust funds, are not subject to the Real Estate Law
and Commissioner’s Regulations. It should be noted, however, that under certain circumstances the Department
of Real Estate does have the jurisdiction to look into transactions involving non-trust funds.

Why a Trust Account?

A trust account is set up as a means to separate trust funds from non-trust funds. Although it can certainly be
argued that keeping trust funds in a trust account will not prevent a dishonest broker from misusing the funds,
separating client’s funds from the broker’s own funds provides a better physical and accounting control over the
trust funds.

An important reason for designating a trust fund depository as a trust account is the protection afforded
principals’ funds in situations where legal action is taken against the broker or if the broker becomes
incapacitated or dies. Trust funds held in a true trust account cannot be ‘‘frozen” pending litigation against the
broker or during probate.

Trust funds also have better insurance protection if deposited into a trust account. The general counsel of the
FDIC, in an opinion in 1965, held that funds of various owners which are placed in a custodial deposit (trust
account) in an insured bank will be recognized for insurance purposes to the same extent as if the owners’ names
and interests in the account are individually disclosed on the records of the bank, provided the trust account is
specifically designated as custodial and the name and interest of each owner of funds in the account are
disclosed on the depositor’s records. Each client with funds deposited in a trust account maintained with a
federally insured bank is insured by the FDIC up to $250,000, as opposed to just $250,000 for the entire
account, as long as the regulatory requirements are met.

Trust Fund Handling Requirements

A typical trust fund transaction begins with the broker or salesperson receiving trust funds from a principal in
connection with the purchase or lease of real property. According to Business and Professions Code Section
10145, trust funds received must be placed into the hands of the owner(s) of the funds, into a neutral escrow
depository, or into a trust account maintained pursuant to Commissioner’s Regulation 2832 not later than three
business days following receipt of the funds by the broker or by the broker’s salesperson.

An exception to this rule is when a check is received from an offeror in connection with an offer to purchase or
lease real property. As provided under Commissioner’s Regulation 2832, a deposit check may be held uncashed
by the broker until acceptance of the offer if the following conditions are met:

1. the check by its terms is not negotiable by the broker, or the offeror has given written instructions that the
check shall not be deposited or cashed until acceptance of the offer; and

2. the offeree is informed, before or at the time the offer is presented for acceptance, that the check is being
held.

If the offer is later accepted, the broker may continue to hold the check undeposited only if the broker receives
written authorization from the offeree to do so. Otherwise, the check must be placed, not later than three
business days after acceptance, into a neutral escrow depository or into the trust fund bank account or into the
hands of the offeree if both the offeror and offeree expressly so provide in writing.

According to Business and Professions Code Section 10145, a real estate salesperson who accepts trust funds on
behalf of the broker under whom he or she is licensed must immediately deliver the funds to the broker or, if
directed to do so by the broker, place the funds into the hands of the broker’s principal or into a neutral escrow
depository or deposit the funds into the broker’s trust fund bank account.

A neutral escrow depository, as used in Business and Professions Code Section 10145, means an escrow
business conducted by a person licensed under Division 6 (commencing with Section 17000) of the Financial
Code or by any person described in subdivisions (a)(1) and (a)(3) of Section 17006 of the Financial Code.

Identifying the Owner(s) of Trust Funds

A broker must be able to identify who owns the trust funds and who is entitled to receive them, since these funds
can be disposed of only upon the authorization of that person. The person entitled to the funds may or may not
be the person who originally gave the funds to the broker or the salesperson. In some instances the party entitled
to the funds will change upon the occurrence of certain events in the transaction. For example, in a transaction
involving an offer to buy or lease real property or a business opportunity, the party entitled to the funds received
from the offeror (prospective buyer or lessor) will depend upon whether or not the offer has been accepted by
the offeree (seller or landlord).

Prior to the acceptance of the offer, the funds received from the offeror belong to that person and must be
handled according to his/her instructions. If the funds are deposited in a trust fund bank account, they must be
maintained there for the benefit of the offeror until acceptance of the offer. Or, as discussed in the previous
section, if the offeror wishes, his/her check may be held uncashed by the broker as long as he/she gives written
instructions to the broker to do so and the offeree is informed before or at the time the offer is presented for
acceptance that the check is being so held.

After acceptance of the offer, the funds shall be handled according to instructions from the offeror and the
offeree as follows:

• An offeror’s check held uncashed by the broker before acceptance of the offer may continue to be held
uncashed after acceptance of the offer, only upon written authorization from the offeree. [Commissioner’s
Regulation 2832(d)]

• The offeror’s check may be given to the offeree only if the offeror and offeree expressly so provide in
writing. [Commissioner’s Regulation 2832(d)]

• All or part of an offeror’s purchase money deposit in a real estate sales transaction shall not be refunded by
an agent or subagent of the seller without the express written permission of the offeree to make the refund.

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INTRODUCTION

INTRODUCTION somebody Wed, 07/19/2023 - 02:09 am

INTRODUCTION

Real estate brokers and salespersons receive trust funds in the normal course of doing business. They receive
these funds on behalf of others, thereby creating a fiduciary responsibility to the funds’ owners. Brokers and
salespersons must handle, control and account for these trust funds according to established legal standards.
While compliance with these standards may not necessarily have a direct bearing on the financial success of a
real estate business, non-compliance can result in unfavorable business consequences. Improper handling of
trust funds is cause for revocation or suspension of a real estate license, not to mention the possibility of being
held financially liable for damages incurred by clients.

This chapter discusses the legal requirements for receiving and handling trust funds in real estate transactions as
set forth in the Real Estate Law and the Regulations of the Real Estate Commissioner. It describes the requisites
for maintaining a trust fund bank account and the precautions a licensee should take to ensure the integrity of the
account. It explains and illustrates the trust fund record keeping requirements under the Business and
Professions Code and the Commissioner’s Regulations.

The discussions and examples in this chapter involve real property sales and property management trust account
transactions. Other types of real estate activities involving trust funds, although subject to the same laws and
regulations, may also have to comply with additional legal and regulatory requirements. While these other types
of transactions may require records significantly different from those illustrated, the record keeping
fundamentals still apply.

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OTHER ACCOUNTING SYSTEMS AND RECORDS

OTHER ACCOUNTING SYSTEMS AND RECORDS somebody Wed, 07/19/2023 - 02:09 am

OTHER ACCOUNTING SYSTEMS AND RECORDS

A broker may use trust fund records not in the columnar form as prescribed by Commissioner’s Regulations
2831 and 2831.1. Such records must be in accordance with generally accepted accounting principles and must
include detail specified in subdivision (a) of these Regulations and be in a format that will readily enable
tracing and reconciliation in accordance with Section 2831.2. Whether prepared manually or by computer, they
must include at least the following:

1. A journal to record in chronological sequence the details of all trust fund transactions.

2. A cash ledger to show the bank balance as affected by the transactions recorded in the journal. The ledger
is posted in the form of debits and credits. (In some cases the cash ledger may be combined with the
journal.)

3. A beneficiary ledger for each of the beneficiary accounts to show in chronological sequence the
transactions affecting each beneficiary’s account, as well as the balance of the account.

To comply with generally accepted accounting principles, there must be one set of journal, cash ledger, and
beneficiary ledger for each trust fund bank account.

Journal

A journal is a daily chronological record of trust fund receipts and disbursements. A single journal may be used
to record both the receipts and the disbursements, or a separate journal may be used for each. To meet minimum
record keeping requirements, a journal must:

1. Record all trust fund transactions in chronological sequence.

2. Contain sufficient information to identify the transaction such as the date, amount received or disbursed,
name of or reference to payee or payor, check number or reference to another source document of the
transaction, and identification of the beneficiary account affected by the transaction.

3. Correlate with the ledgers. For example, it should show the same figures that are posted, individually or in
total, in the cash ledger and in the beneficiary ledgers. The details in the journal must be the basis for
posting transactions on the ledgers and arriving at the account balances.

4. Show the total receipts and total disbursements regularly, at least once a month.

Cash Ledger

The cash ledger shows, usually in summary form, the periodic increases and decreases (debits and credits) in the
trust fund bank account and the resulting account balance. It can be incorporated into the journal or it can be a
separate record, for example a general ledger account. If a separate record is used, the postings must be based on
the transactions recorded in the journal. The amounts posted on the ledger must be those shown in the journal.

Beneficiary Ledger

A separate beneficiary ledger must be maintained for each beneficiary or transaction or series of transactions.
This ledger shows in chronological sequence the details of all receipts and disbursements related to the
beneficiary’s account, and the resulting account balance. It reflects the broker’s liability to a particular
beneficiary. Entries in all these ledgers must be based on entries recorded in the journal.

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QUESTIONS AND ANSWERS REGARDING TRUST FUND REQUIREMENTS AND RECORD KEEPING

QUESTIONS AND ANSWERS REGARDING TRUST FUND REQUIREMENTS AND RECORD KEEPING somebody Wed, 07/19/2023 - 02:09 am

QUESTIONS AND ANSWERS REGARDING TRUST FUND REQUIREMENTS AND RECORD KEEPING

Q. Are security deposits on rental units the property of the owner or should they be held in trust by the broker
for the tenant?

A. They are trust funds. As such, control and disbursement of the security deposits are at the instruction of the
property owner.

Q. Am I permitted to wait until checks deposited to my trust account have cleared before I issue a trust check
to fund a customer’s check?

A. Although the Real Estate Law is silent on this, good business practice dictates that you wait until a
customer’s check deposited to your trust account has cleared prior to the issuing of your trust check as a
refund.

Q. How should I handle an earnest money check which is to be deposited into escrow upon acceptance of the
offer?

A. Such a check may be held until the offer is accepted and then placed in escrow but only when directed to
do so by the buyer, provided you disclose to the seller the fact the check is being held in uncashed form. In
such cases, it is good practice to include such a provision in the deposit receipt. You must keep a columnar
record of the receipt of the check, the name of the escrow company and the date the check was forwarded
to the escrow.

Q. As a broker-owner of rentals, do I have to put security deposits in a trust account?

A. Money you receive on your own property is received as a principal, not as an agent. As such, these are not
trust funds and should not be placed in the trust account.

Q. Must I keep a deposit receipt signed only by the buyer and rejected by the seller?

A. Yes. Such a record must be maintained for three years.

Q. May I maintain one trust fund account for both collections from my property management business and
deposits on real estate sales transactions?

A. Since property management funds usually involve multiple receipt of funds and several monthly
disbursements, it is suggested that separate trust fund accounts be maintained for property management
funds and earnest money deposits. However, all trust funds can be placed in the same trust fund account as
long as separate records for each trust fund deposit and disbursement are maintained properly and the
account is not an interest-bearing account.

Q. If the buyer and seller decide to go directly to escrow and the buyer makes out a check to the escrow
company and hands it directly to the escrow clerk, do I have to maintain any records of this check?

A. No. You must maintain records only of trust funds which pass through your hands for the benefit of a third
party.

Q. How long must I keep deposit receipts?

A. Deposit receipts must be maintained for three years.

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RECONCILIATION OF ACCOUNTING RECORDS

RECONCILIATION OF ACCOUNTING RECORDS somebody Wed, 07/19/2023 - 02:09 am

RECONCILIATION OF ACCOUNTING RECORDS

Purpose

The trust fund bank account record, the separate beneficiary or transaction record, and the bank statement are all
interrelated. Any entry made on the bank account record must have a corresponding entry on a separate
beneficiary record. By the same token, any entry or transaction shown on the bank statement must be reflected
on the bank account record. This applies to columnar as well as to other types of records.

The accuracy of the records is verified by reconciling them at least once a month. Reconciliation is the process
of comparing two or more sets of records to determine whether their balances agree. It will disclose whether the
records are completed accurately.

For trust fund record keeping purposes, two reconciliations must be made at the end of each month:

1. reconciliation of the bank account record (RE 4522) with the bank statement; and,

2. reconciliation of the bank account record (RE 4522) with the separate beneficiary or transaction records
(RE 4523).

Reconciling the Bank Account Record With the Bank Statement

The reconciliation of the bank account record with the bank statement will disclose any recording errors by the
broker or by the bank. If the balance on the bank account record agrees with the bank statement balance as
adjusted for outstanding checks, deposits in transit, and other transactions not yet included in the bank statement,
there is more assurance that the balance on the bank account record is correct. Although this reconciliation is not
required by the Real Estate Law or the Commissioner’s Regulations, it is an essential part of any good
accounting system.

Reconciling the Bank Account Record With the Separate Beneficiary or Transaction Records

This reconciliation, which is required by Commissioner’s Regulation 2831.2, will substantiate that all
transactions entered on the bank account record were posted on the separate beneficiary or transaction records.
The balance on the bank account record should equal the total of all beneficiary record balances. Any difference
should be located and the records corrected to reflect the correct bank and liabilities balances. Commissioner’s
Regulation 2831.2 requires that this reconciliation process be performed monthly except in those months when
there is no activity in the trust fund bank account, and that a record of each reconciliation be maintained. This
record should identify the bank account name and number, the date of the reconciliation, the account number or
name of the principals or beneficiaries or transactions, and the trust fund liabilities of the broker to each of the
principals, beneficiaries or transactions.

Unexplained Trust Account Overages

When a broker performs a reconciliation pursuant to Commissioner’s Regulation 2831.2, the broker may find an
unexplained overage. An unexplained overage is defined as funds in a real estate broker’s trust account which
exceed the aggregate trust fund liability of such account where the broker is unable to determine the ownership
of such excess funds.

Unexplained trust account overages are trust funds and unless the broker can establish the ownership of such
funds, the funds must be maintained in the broker’s trust fund account or in a separate trust fund account
established to hold such funds.

Unexplained trust account overages may not be used to offset or cover shortages that may exist otherwise in the
broker’s trust account.

A broker must keep a separate record of unexplained trust account overages including a separate subsidiary
ledger to record the potential trust fund liability. Such records must include the date of recording and the date on
which such funds became an unexplained trust account overage. A broker holding unexplained trust account
overages must perform a monthly reconciliation of such funds in accordance with Commissioner’s Regulation
2831.2.

Suggestions for Reconciling Records

The following is a general discussion on how to perform the trust account reconciliations.

1. Before performing the reconciliations, record all transactions up to the cut-off date in both the bank account
record and the separate beneficiary or transaction records.

2. Use balances as of the same cut-off date for the two records and the bank statement.

3. For the bank account reconciliation, calculate the adjusted bank balance from the bank statement and from
the bank account record. (Brokers commonly err by calculating the adjusted bank balance based solely on
the bank statement, ignoring the bank account record. While they may know the correct account balances,
they may not realize their records are incomplete or erroneous.)

4. Keep a record of the two reconciliations performed at the end of each month, along with the supporting
schedules.

5. Locate any difference between the three sets of accounting records. A difference can be caused by:

• not recording a transaction

• recording an incorrect figure

• erroneous calculations of entries used to arrive at account balances

• missing beneficiary records

• bank errors.

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RECORDING PROCESS

RECORDING PROCESS somebody Wed, 07/19/2023 - 02:09 am

RECORDING PROCESS

Keeping complete and accurate trust fund records is easier when specific procedures are regularly followed. The
following procedures may be useful in developing a record keeping routine:

1. Record transactions daily in the trust fund bank account and in the separate beneficiary records.

2. Use consistently the same specific source documents as a basis for recording trust fund receipts and

disbursements. (For example, receipts pertaining to real estate resales will be recorded based on the Real
Estate Contract and Receipt for Deposit form, and disbursements will always be recorded based on the
checks issued from the trust account or debit notices from the bank.)

3. Calculate the account balances on all applicable records at the time entries are made.

4. Reconcile the records monthly to ascertain that transactions are properly recorded on both the bank account
record and the applicable subsidiary records.

5. Reconcile the trust records to the trust account bank statement on a monthly basis to ascertain that
amounts per the bank are in agreement with amounts per the trust fund records.

6. If more than one trust fund bank account is maintained, keep a different set of properly labeled columnar
records (cash record and beneficiary record) for each account.

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SAMPLE TRANSACTIONS

SAMPLE TRANSACTIONS somebody Wed, 07/19/2023 - 02:09 am

SAMPLE TRANSACTIONS

To demonstrate the record keeping requirements discussed in this chapter, we have simulated trust account
records for typical real estate transactions occurring over a thirty-day period. To set the stage, let us assume that
James Adams, a real estate broker, owns and operates a one-man real estate office specializing in residential
sales and property management. Broker Adams has one trust fund bank account. We will look at the trust
account activity for this office for the month of May, 2010.

The use of columnar records to record these transactions is illustrated in Exhibits 1 - 10 at the end of this
chapter. As previously discussed, a broker may use other types of records as long as they meet generally
accepted accounting standards.

2010 TRANSACTIONS

May 1 Opened a trust account with First County Bank, and deposited $100 of his own money to cover bank

service charges.

May 1 Entered into agreements to manage the following rental properties:

Address Owner’s Name T. Eddie Number of Units 1
a. 1538 South Ave. Anycity, CA
b. 3490 Tower St. Anycity, CA L. Stewart 4
c. 9152 High Way Anycity, CA W. Allen 4
d. 2351-2353 Kingston Way Anycity, CA S. Manly 2
e. 7365 Meadow Cir. Anycity, CA J. Bird 1

May 3 Deposited the following rents received from tenants of managed properties:

Tenant’s Rent
Property Name Received
a. 1538 South Ave. B. Hamns $600
b. 3490 Tower St., Unit 1 R. Robertson 350
c. 2351 Kingston Way I. Warren 450

$1,400

May 5 Received a $2,000 check payable to broker from Mr. and Mrs. Dennis White as deposit for their

offer to buy a house at 615 Lake Drive, Anycity, owned by Mr. and Mrs. Richard J. Jensen. Buyers’
offer instructed broker to hold the check uncashed until their offer was accepted by the Jensens.

May 5 Received and deposited $750 from T. Sundance representing rent of $500 for May 5 to 30, and

$250 security deposits for 7365 Meadow Circle.

May 5 Was notified by the Jensens that they accepted the offer on their property.

May 6 Deposited the $2,000 check from Mr. and Mrs. White.

May 8 Obtained an exclusive listing to sell a six-plex at 915 Galaxy St., Anycity, owned by R. Jays.

May 9 Received $1,000 from W. Allen, owner of 9152 High Way, to cover anticipated expenses for the

property. Amount was deposited the same day.

May 10 Issued the following checks to pay for various expenses connected with the managed properties
Check No. Payee Purpose Amount
1001 ABC Mortgage Co. Mortgage payment for 1538 South Ave. $450
1002 Anycity Treasury Utilities for 1538 South Ave. 35
1003 Professional Cleaning for 3490 55
Cleaners Tower St.
1004 Mr. Handyman Minor repairs on 2351 Kingston 25
TOTAL $565

May 14 Received a $4,000 check from B. Sun, payable to Title Escrow Company, with an offer to buy the
915 Galaxy property.

May 15 Received R. Jays’ acceptance of the buyer’s offer on 915 Galaxy Street.

May 16 Delivered the $4,000 check from B. Sun to Title Escrow Company.

May 19 Issued check number 1005 for $2,000 to First Title Co. for account of Mr. and Mrs. White, buyers

of the 615 Lake Drive property.

May 22 Received an offer and a $3,000 check as deposit from R. Olive to buy a single family house at
31009 Technology Street owned by T. Evans.

May 24 Returned R. Olive’s check after seller rejected the offer.

May 31 Charged property management fees to the following accounts and issued check number 1006 for

$330 payable to himself:

Property Owner Management Fee
T. Eddie $45
L. Stewart 100
W. Allen 80

S. Manly 60
J. Bird 45
Total $330

May 31 Sent statement of account to each owner of the managed properties.

Background Information

James Adams keeps four types of columnar records:

1. Record of all Trust Funds Received and Paid Out - Trust Fund Bank Account (hereinafter referred to as
“Bank Account Record”). This record is required under Commissioner’s Regulation 2831 for each trust
account a broker has.

2. Record of all Trust Funds Received - Not Placed in Broker’s Trust Account (hereinafter referred to as
“Record of Undeposited Receipts”). This is required under Commissioner’s Regulation 2831.

3. Separate Record For Each Beneficiary or Transaction (hereinafter referred to as “Separate Beneficiary
Record”). This is required under Commissioner’s Regulation 2831.1.

4. Separate Record For Each Property Managed (hereinafter referred to as “Separate Property Record”).
This serves the same purpose as the Separate Beneficiary Record.

To illustrate the recording process, listed below are the entries made on the books by James Adams as well as
the documents prepared or obtained as support for each transaction. The actual entries are shown on the
forms/exhibits at the end of this chapter.

Note that:

• Each entry to any record shows all the pertinent information of the transaction, such as the date, name
of payee, name of payor, amount, check number, etc.

• The daily bank balance is computed and posted on the Account Record after recording the
transactions.

• The balance owing to the client is computed and posted on the Beneficiary Record or Separate Property
Record, after posting transactions.

• Any entry made on the Bank Account Record has a corresponding entry on a Beneficiary Record or a
Separate Property Record, and vice versa.

• All records except the Record of Undeposited Receipts show entries in chronological sequence
regardless of transaction type. The Record of Undeposited Receipts shows the disposition of a trust
fund in the same line as the receipt is entered, rather than in chronological sequence.

Step-By-Step Narrative of Trust Account Entries

(Actual recording shown on Exhibits 1 - 10 at end of chapter.)

Transaction Date May 1 Documentation Deposit slip prepared by broker. Entries Record the deposit on: 1. The Bank Account Record. Balance is $100. (Exh. 1) 2. A newly prepared Separate Beneficiary for James Adams. Balance is $100. (Exh. 2)
May 1 May 3 Management agreements signed by property owners and broker. Collection receipts Nos. 2, 3 and 4 issued to B. Hamns, R. Robertson, and I. Warren, respectively. No entries needed since there was no receipt nor disbursement of trust funds. Record the $1,400 receipt on: 1. The Bank Account Record. New balance is $1,500. (Exh. 1) 2. Newly prepared Separate Beneficiary Records for: T. Eddie - balance is $600 (Exh. 4) L. Stewart – bal. is $350 (Exh. 5) S. Manly - balance is $450 (Exh. 6)
May 5 Real Estate Purchase Contract and Receipt for Deposit signed by Mr. and Mrs. White. Collection receipt No. 1 issued to the Whites. Enter transaction on the Record of Undeposited Receipts. (Exh. 3) No Separate Beneficiary Record is necessary since the check was not deposited.

May 5 Collection receipt No. 5

issued to T. Sundance.
Receipt showed that
$500 of the $750 was
for rent and the other
$250 was for security
deposit.

May 5 Real Estate Contract

and Receipt for trust
funds were received for
Deposit signed by Mr.
and Mrs. Jensen.

Record the $750 deposit on:

1. The Bank Account Record. (Exh.

1)

2. Separate Beneficiary Records for:

J. Bird - Sundance’s Security

Deposit, bal. is $250. (Exh. 7)

J. Bird - balance is $500. (Exh. 8)
(Since security deposits will be
accounted to the tenant in the future,
James Adams keeps a separate record
for deposits. Total liability to the
owner is the sum of the two records -
one for security deposits, another for
rents and other transactions.)

No entries were made since no trust
funds were received or disbursed.

Transaction

Date

May 6

Documentation

Deposit receipt
prepared by broker.

Entries

Record $2,000 deposit on:

1. Bank Account record. New balance

is $4,250. (Exh. 1)

2. A newly prepared Separate
Beneficiary Record - Mr. and Mrs.
White/Mr. and Mrs. Jensen.

Account balance is $2,000. (Exh. 9)

3. Record of Undeposited Receipts.
(Exh. 3) Shows disposition of
check previously entered on the
record.

May 8 Exclusive Listing

Agreement signed by
sellers and broker.

May 9 Collection receipt No. 6

issued to W. Allen.

May 10 Checks issued by

broker. Supporting
papers for each check.

May 14 Real Estate Purchase

Contract and Receipt
for Deposit signed by
B. Sun.

May 15 Real Estate Purchase

Contract and Receipt
for Deposit signed by
R. Jays.

May 16 Receipt issued by Title

Escrow Company.

Record receipt on:

1. The Bank Account Record. New
balance is $5,250. (Exh. 1)

2. A newly prepared Separate
Beneficiary Record - W. Allen.

Balance is $1,000. (Exh. 10)

Record disbursements on:

1. Bank Account Record. New

Balance is $4,685. (Exh. 1)

2. Separate Beneficiary Records for:
T. Eddie - New balance is $115.

(Exh. 4)

L. Stewart - New balance is $295.

(Exh. 5)

S. Manly - New balance is $425.

(Exh. 6)

Record receipt on the Record of

Undeposited Receipts. (Exh. 3)

No entry was needed since there was
no receipt or disbursement of funds.

Note disposition of check on the
Record of Undeposited Receipts.

(Exh. 3)

Transaction Date May 19 Documentation Entries Check issued by broker. Record disbursements on the: Receipt issued by First 1. Bank Account Record. New balance Title Company. is $2,685. (Exh. 1) 2. Separate Beneficiary Record - Mr. and Mrs. White/Mr. and Mrs. Jensen. New balance is $0. (Exh. 9)
May 22 Real Estate Purchase Contract and receipt for Deposit signed by R. Olive.
May 24 Real Estate Purchase Post the return of check on the Record Contract and Receipt of Undeposited Receipts. (Exh. 3) for Deposit rejected by T. Evans.
May 31 List showing the Record disbursements on the: breakdown of the check 1. Bank Account Record. New balance amount, showing the is $2,685. (Exh. 1) charge to each owner. 2. Separate Beneficiary Records for: New Owners Balance T. Eddie $70 L. Stewart $195 (NOTE: A list is W. Allen $920 necessary as support for S. Manly $365 a check disbursement J. Bird $455 chargeable to a number of beneficiaries. Posting the entries on the separate records without such a list is not sufficient.)

After recording the daily transactions, the next step in the trust fund accounting process is the reconciling of
records at the end of the month. James Adams prepared reconciliation schedules by comparing the bank balance
on the Bank Account Record with the bank statement balance (the bank reconciliation) and also with the total of
the Separate Beneficiary Records balances (the reconciliation report).

The bank statement and reconciliations are shown on the next two pages.

FIRST COUNTY BANK STATEMENT.

MAIN BRANCH.

5 Main Avenue

ANYCITY, CA 90002.

PAGE 1 of 1.

DATE OF THIS STATEMENT 05/31/10.

JAMES ADAMS.

TRUST ACCOUNT.

8310 ORANGE AVENUE.

ANYCITY, CA 90002.

CHECKING ACCT. 123456 CUSTOMER SINCE 1995.

SUMMARY: PREVIOUS STATEMENT BALANCE ON 04/30/10 . 00.00

TOTAL OF 5 DEPOSITS FOR....................... 5,250.00

TOTAL OF 4 CHECKS FOR......................... 2,540.00

TOTAL OF 1 OTHER DEBIT FOR........................ 7.00

STATEMENT BALANCE ON 05/31/10 ................ 2,703.00

CHECKS/ CHECKS.

OTHER CHECK DATE.
DEBITS NUMBER POSTED AMOUNT.
1001 5/14 450.00
1002 5/16 35.00
1003 5/16 55.00
1005 5/21 2,000.00

OTHER DEBITS.

DATE POSTED .
05/31 SERVICE CHARGE AMOUNT 7.00
DEPOSITS/ OTHER DEPOSITS DATE .
CREDITS POSTED AMOUNT.
5/1 100.00
5/5 1,400.00
5/5 750.00
5/6 2,000.00
5/9 1,000.00

DAILY .
BALANCE DATE AMOUNT DATE AMOUNT.
5/1 100.00 5/14 4,800.00
5/5 2,250.00 5/16 4,710.00
5/6 4,250.00 5/21 2,710.00
5/9 5,250.00 5/31 2,703.00

James Adams
Bank Reconciliation
First County Bank
May 31, 2010

Balance per bank statement, 5/31/10 .................................... $2,703.00

Add deposits in transit ...................................................... -0-

Less outstanding checks:
check #1004...................................... $25.00

#1006 ................................................. 330.00

Adjusted bank balance, 5/31/10.......................................... $2,348.00

Balance per books, 5/31/10.............................................. $2,355.00

Less May bank service charge ..............................................

Adjusted balance, 5/31/10............................................... $2,348.00

James Adams
Reconciliation Report
First County Bank
Account No. 123456
May 31, 2010

Beneficiary Balance

James Adams (Broker)...................................................... $93.00

W. Allen.................................................................. 920.00

J. Bird .................................................................. 250.00

J. Bird .................................................................. 455.00

T. Eddie .................................................................. 70.00

S. Manly.................................................................. 365.00

L. Stewart................................................................ 195.00

Total per subsidiary records......................................... $2,348.00

(Agrees with bank account record balance.)

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SEPARATE RECORD FOR EACH BENEFICIARY OR TRANSACTION

SEPARATE RECORD FOR EACH BENEFICIARY OR TRANSACTION somebody Wed, 07/19/2023 - 02:09 am

SEPARATE RECORD FOR EACH BENEFICIARY OR TRANSACTION
___________________FOR CLIENT'S FUNDS PLACED IN TRUST FUND BANK ACCOUNT

Identification Of Transaction (names, addresses,, account numbers, etc.)

James A. Adams

Trust Fund Balance - Broker

Description Discharge Of Trust Accountability For Funds Paid Out Trust Accountability F or F unds Received Account Balance
Date of Check Check Number Amount Date of Deposit Amount
Open TA Account 5-1-10 100.00 100.00
May '10 Bank Service Charge 5-31-10 SM 7.00 93.00

EXHIBIT 2.

RE 4523 I Rev. 5/10)

RECORD OF ALL TRUST FUNDS RECEIVED — NOT PLACED IN BROKERS TRUST ACCOUNT
(Include Notes and Uncashed Checks Taken As Deposits)

RE 4524 (Rev. 5/10) EXHIBIT 3

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 5/10) EXHIBIT 4

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 5/10) EXHIBIT 5

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 5/10) EXHIBIT 6

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 5/10) EXHIBIT 7

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 5/10) EXHIBIT 8

SEPARATE RECORD FOR EACH BENEFICIARY OR TRANSACTION.
FOR CLIENT'S FUNDS PLACED IN TRUST FUND BANK ACCOUNT.

Identification of Transaction (names, addresses, account numbers, etc.)

Mr. & Mrs. Whte/Mr. & Mrs. Jensen

RE: 615 Lake Drive, Anycity

Description Discharge Of Trust Accountability For Funds Paid Out Trust Accountability For Funds Received Account Balance
Date of Check Check Number Amount Date of Deposit Amount
Purchase Deposit 5-6-10 2.000.00 2,000.00
Deposit to Title Co. 5-19-10 1005 2.000.00 -0-

RE 4523, (Rev. 05/10) EXHIBIT 9

SEPARATE RECORD FOR EACH PROPERTY MANAGED.

RE 4525 (Rev. 05/10) EXHIBIT 10

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SUMMARY

SUMMARY somebody Wed, 07/19/2023 - 02:09 am

SUMMARY

We might say this chapter presents the three R's of trust funds: Responsibility, Requirements, and Records.

It is a real estate broker’s responsibility to protect clients’ funds at all times and keep clients fully informed of
the nature and disposition of all trust funds.

To aid brokers in carrying out this responsibility, the Real Estate Commissioner’s Regulations include
requirements concerning trust funds. A real estate broker also needs to meet other requirements from a practical
business point of view. To protect clients’ funds adequately and in the business-like fashion expected, the broker
must keep accurate records.

RE 4522 (Rev. 5/10) EXHIBIT 1

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TRUST FUND BANK ACCOUNTS

TRUST FUND BANK ACCOUNTS somebody Wed, 07/19/2023 - 02:09 am

TRUST FUND BANK ACCOUNTS

General Requirements

Trust funds, such as a purchase money deposit check, received by a licensee that are not forwarded directly to
the broker’s principal or to a neutral escrow depository or for which the broker does not have authorization to
hold uncashed must be deposited to the broker’s trust fund bank account. (Business and Professions Code
Section 10145)

Business and Professions Code Section 10145 and Commissioner’s Regulation 2832 require that a trust account
meet the following criteria:

1. designated as a trust account in the name of the broker as trustee;

2. maintained with a bank or recognized depository located in California; and

3. not an interest-bearing account for which prior written notice can, by law or regulation, be required by the
financial institution as a condition to withdrawal (except as noted in the discussion below of “Interest-
Bearing Accounts”).

A broker may have an out-of-state trust account if the account is insured by the Federal Deposit Insurance
Corporation (FDIC) and is used to service first loans for the types of note owners/investors specified in Section
10145(a)(2) of the Business and Professions Code.

Trust Account Withdrawals

According to Commissioner’s Regulation 2834, withdrawals from the trust account may be made only upon the
signature of one or more of the following:

1. the broker in whose name the account is maintained;

2. the designated broker-officer if the account is in the name of a corporate broker;

3. if specifically authorized in writing by the broker, a salesperson licensed to the broker; or

4. if specifically authorized in writing by the broker who is a signatory of the trust account, an unlicensed

employee of the broker covered by a fidelity bond at least equal to the maximum amount of trust funds to
which the employee has access at any time.

No arrangement under which a person named in items 3 or 4 is authorized to make withdrawals from a broker’s
trust fund relieves an individual broker or the broker-officer of a corporate broker licensee from responsibility or
liability as provided by law in handling trust funds in the broker’s custody.

Interest-Bearing Accounts

A trust fund bank account normally may not be interest-bearing. A broker may, however, at the request of the
owner of trust funds, or of the principals to a transaction or series of transactions from whom the broker has
received trust funds, deposit the funds into an interest-bearing account in a bank or savings and loan association
if all of the following requirements of Business and Professions Code Section 10145(d) are met:

1. The account is in the name of the broker as trustee for a specified beneficiary or specified principal of a
transaction or series of transactions.

2. All of the funds in the account are covered by insurance provided by an agency of the federal government.

3. The funds in the account are kept separate, distinct, and apart from funds belonging to the broker or to any
other person for whom the broker holds funds in trust.

4. The broker discloses the following information to the person from whom the trust funds are received and to
any beneficiary whose identity is known to the broker at the time of establishing the account:

• the nature of the account;

• how the interest will be calculated and paid under various circumstances;

• whether service charges will be paid to the depository and by whom; and

• possible notice requirements or penalties for withdrawal of funds from the account.

5. No interest earned on funds in the account shall inure directly or indirectly to the benefit of the broker or to
any person licensed to the broker, even if the funds’ owners would permit such an arrangement.

6. In an executory sale, lease, or loan transaction in which the broker accepts funds in trust to be applied to the
purchase, lease, or loan, the parties to the contract shall have specified in the contract or by collateral
written agreement the person to whom interest earned on the funds is to be paid or credited.

The only other situation where a real estate broker is allowed to deposit trust funds into an interest-bearing
account occurs when the broker is acting as an agent for a financial institution which is the beneficiary of a loan.
In this case the broker may, pursuant to Commissioner’s Regulation 2830.1, deposit and maintain funds received
from or for the account of an obligor (borrower) into an interest-bearing trust account in a bank or savings and
loan association in order to pay interest on an impound account to the obligor in accordance with Section 2954.8
of the Civil Code, as long as the following requirements are met:

1. The funds received from or for the account of the obligor are for the future payment of property taxes,
assessments or insurance relating only to a property containing a one-to-four family residence.

2. The account is in the name of the broker as trustee.

3. All of the funds in the account are covered by insurance provided by an agency of the federal government.

4. All of the funds in the account are funds held in trust by the broker for others.

5. The broker discloses to the obligor how interest will be calculated and paid.

6. No interest earned on the trust funds shall inure directly or indirectly to the benefit of the broker or to any
person licensed to the broker.

Commingling Prohibited

Funds belonging to a licensee may not be commingled with trust funds. Commingling is strictly prohibited by
the Real Estate Law. It is grounds for the revocation or suspension of a real estate license pursuant to Business
and Professions Code Section 10176(e).

Commingling occurs when:

1. Personal or company funds are deposited into the trust fund bank account. Except for what is provided in
Section 2835 of the Commissioner’s Regulations as noted below, this is a violation of the law even if
separate records are kept.

2. Trust funds are deposited into the licensee’s general or personal bank account rather than into the trust fund
account. In this case the violation is not only commingling, but also handling trust funds contrary to
Business and Professions Code Section 10145. It is also grounds for suspension or revocation of a license
under Business and Professions Code Section 10177(d).

3. Commissions, fees, or other income earned by the broker and collectible from the trust account are left in
the trust account for more than 25 days from the date they were earned.

A common example of commingling is depositing rents and security deposits on broker-owned properties into
the trust account. As these funds relate to the broker’s properties, they are not trust funds and, therefore, may not
be deposited into the trust fund bank account. Likewise, the broker may not make mortgage payments and other
payments on broker-owned properties from the trust account even if the broker reimburses the account for such
payments. Conducting personal business through the trust account is strictly prohibited and is a violation of the
Real Estate Law.

Commissioner’s Regulation 2835 provides that the following situations do not constitute “commingling” for
purposes of Business and Professions Code Section 10176(e):

(a) The deposit into a trust account of reasonably sufficient funds, not to exceed $200, to pay service charges or
fees levied or assessed against the account by the bank or financial institution where the account is
maintained.

(b) The deposit into a trust account maintained in compliance with item (d) below of funds belonging in part to
the broker’s principal and in part to the broker when it is not reasonably practicable to separate such funds,
provided the part of the funds belonging to the broker is disbursed not later than 25 days after the deposit
and there is no dispute between the broker and the broker’s principal as to the broker’s portion of the funds.
When the right of a broker to receive a portion of trust funds is disputed by the broker’s principal, the
disputed portion shall not be withdrawn until the dispute is settled.

(c) The deposit into a trust account of broker-owned funds in connection with mortgage loan activities as
defined in subdivision (d) or (e) of Section 10131 of the Business and Professions Code or when making,
collecting payments on, or servicing a loan which is subject to the provisions of Section 10240 of the
Business and Professions Code provided:

(1) The broker meets the criteria of Section 10232 of the Business and Professions Code.

(2) All funds in the account which are owned by the broker are identified at all times in a separate record
which is distinct from any separate record maintained for a beneficiary.

(3) All broker-owned funds deposited into the account are disbursed from the account not later than 25
days after their deposit.

(4) The funds are deposited and maintained in compliance with item (d) below.

(5) For this purpose, a broker shall be deemed to be subject to the provisions of Section 10240 of the
Business and Professions Code if the broker delivers the statement to the borrower required by Section
10240.

(d) The trust fund account into which the funds are deposited is maintained in accordance with the provisions of
Section 10145 of the Business and Professions Code and the Commissioner’s Regulations..

To summarize, a real estate broker’s personal funds may be in the trust account in the following two specific
instances:

1. Up to $200 to cover checking account service fees and other bank charges such as check printing charges
and service fees on returned checks. Trust funds may not be used to pay for these expenses. (The preferred
practice, however, is for the broker to have the bank debit his/her own personal account for any trust
account fees and charges.)

2. Commissions, fees, and other income earned by a broker and collectible from trust funds may remain in the
trust account for a period not to exceed 25 days. Regulation 2835 recognizes that it may not always be
practical to disburse the earned income immediately upon receipt. For instance, a property management
company may find it too burdensome to collect its management fee every time a rent check is received and
deposited to the trust account. Therefore, as long as the broker disburses the fee from the trust account
within 25 days after deposit there is no commingling violation. Note, however, that income earned shall not
be taken from trust funds received before depositing such funds into the trust bank account. Also, under no
circumstances may the broker pay personal obligations from the trust fund bank account even if such
payments are a draw against commissions or other income. The broker must issue a trust account check to
himself/herself for the total amount of the income earned, adequately documenting such payment, and then
pay personal obligations from the proceeds of that check.

Trust Fund Liability

Trust fund liability arises when funds are received from or for the benefit of a principal. The aggregate trust fund
liability at any one time for a trust account with multiple beneficiaries is equal to the total positive balances due
to all beneficiaries of the account at the time. Note that beneficiary accounts with negative balances are not
deducted from other accounts when calculating the aggregate trust fund liability.

Funds on deposit in the trust account must always equal the broker’s aggregate trust fund liability. If the trust
account balance is less than the total liability a trust fund shortage results. Such a shortage is in violation of
Commissioner’s Regulation 2832.1, which states that the written consent of every principal who is an owner of
the funds in the account shall be obtained by a real estate broker prior to each disbursement if such a
disbursement will reduce the balance of the funds in the account to an amount less than the existing aggregate
trust fund liability of the broker to all owners of the funds. Conversely, if the trust account balance is greater

than the total liability, there is a trust fund overage and the broker may be in violation of Business and
Professions Code Section 10176(e) for commingling.

A trust fund discrepancy of any kind is a serious violation of the Real Estate Law. Many real estate licenses have
been revoked after a DRE audit disclosed a trust account shortage. To ensure that the balance of the trust
account always equals the trust fund liabilities, a broker should implement the following procedures:

l. Deposit intact and in a timely manner to the trust account all funds that are not forwarded to escrow or to
the funds’ owner(s) or which are not held uncashed as authorized. This practice, required under
Commissioner’s Regulation 2832, lessens the risk of the funds being lost, misplaced, or otherwise not
deposited to the trust account. A licensee is accountable for all trust funds received whether or not they are
deposited. DRE auditors have seen numerous cases where trust funds received were properly recorded on
the books but were never deposited to the trust account.

2. Maintain adequate supporting papers for any disbursement from the trust account. Record the disbursement
accurately in both the Bank Account Record and the Separate Beneficiary Record. The broker must be able
to account for all disbursements of trust funds. Any unidentified disbursement will cause a shortage.

3. Disburse funds from a beneficiary’s account only when the disbursement will not result in a negative or
deficit balance (negative accountability) in the account. Many trust fund shortages are caused by
disbursements to a beneficiary in excess of funds received from or for account of that beneficiary. The
excess disbursements are, in effect, paid out of funds belonging to other beneficiaries. A shortage occurs
because the balance of the trust fund bank account, even if it is a positive balance, is less than the broker’s
liability to the other beneficiaries.

4. Ensure that a check deposited to the trust fund account has cleared before disbursing funds against that
check. This applies, for example, when a broker who has deposited an earnest money check for a purchase
transaction has to return the funds to the buyer because the offer is rejected by the seller. A trust fund
shortage will result if the broker issues the buyer a trust account check and the buyer’s deposit check
bounces or for some reason fails to clear the bank.

5. Keep accurate, current and complete records of the trust account and the separate record for each
beneficiary. These records are essential to ensure that disbursements are correct.

6. On a monthly basis, reconcile the cash record with the bank statement and with the separate record for each
beneficiary or transaction.

Summary - Maintaining Trust Account Integrity

In summary, to maintain the integrity of the trust fund bank account, a broker must ensure that:

1. his/her personal or general operating funds are not commingled with trust funds;

2. the balance of the trust fund account is equal to the broker’s trust fund liability to all owners of the funds;
and

3. the trust fund records are in an acceptable form and are current, complete and accurate.

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Chapter 23 - Developers of Land and Buildings somebody Wed, 07/19/2023 - 02:09 am

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DEVELOPER-BUILDER

DEVELOPER-BUILDER somebody Wed, 07/19/2023 - 02:09 am

DEVELOPER-BUILDER

Development and building requires financing for land acquisition, land use approval and subdividing,
construction, marketing, and carrying of inventoried properties financially until they are sold. A developer-
builder often finds it desirable to set up specialized subsidiary companies with separate financing needs: one
company to hold title and subdivide the property; another to conduct building operations; and another for sales
and marketing.

Subdividing and building is a cyclical business. High productivity and profit may be followed by a period of
depressed sales and losses. The cost of land, unpredictability of land use approvals, credit availability, interest
rates, inflation, and changing property values are all important factors.

Developers must find ways to build affordable homes despite increases in:

• demands from local agencies as conditions for approval of projects;

• wages;

• cost of building supplies;

• energy conservation and other building code requirements;

• aggressive competition;

• insurance costs;

• some cost-saving options often considered are:

• precut or prefabricated materials;

• use of fewer skilled craftsmen through standardization of jobs;

• complete on-site assembly of prefabricated units; and,

• reduction of land cost per home through increased density (e.g., planned development/cluster home and
condominium projects).

Even though production efficiency has increased, total construction costs have risen with inflation and the
demands of the consumer for more amenities.

Furthermore, a potential home builder needs to be aware of the risk that defective construction can lead to legal
claims from purchasers. This liability can endure for up to and possibly beyond ten years after the home is
completed and has been an increasing critical issue over the last two decades.

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HOME CONSTRUCTION

HOME CONSTRUCTION somebody Wed, 07/19/2023 - 02:09 am

HOME CONSTRUCTION

The details of home construction methods, special installations, price and quality of materials are not generally
within the scope of the real estate licensee’s role. There are, however, some general areas with which the
licensee should be familiar. Responses to some of the following questions will vary from community to
community or even within any given community:

1. What styles of architecture are common in your community and how are they best identified?

2. What are the approximate per square foot costs of homes of varying quality within your community?

3. Can you identify the different types and styles of windows with respect to location, function, materials and
operating mechanisms?

4. What kinds of floor materials are available? What is the cost differential? What are the qualities of
durability and comparative costs of installation and maintenance?

5. What are the materials most commonly used on the exterior surface of a house and what are the relative
costs of installation, upkeep and market acceptance?

6. What are the different types of heating/cooling systems for a home and their relative costs of installation
and operation?

7. What are current insulation standards for windows, roof, walls, and underfloor areas? What types of
materials are commonly used?

8. What can be done to prevent termites, dry rot and other fungus and insect infestations?

9. What are the most desirable roof pitches and roofing materials? Can you distinguish a hip roof from a
gable roof? What types of roofing materials are permitted in the community such as requirements for fire-
retardant roofs?

10. What window coverings and window systems are available to prevent excess sun infiltration or water
intrusion?

11. What are some common concerns about floor plans and specific rooms, i.e. separate dining or family
rooms?

12. What kinds of materials are approved for use in the water and plumbing systems, i.e., pvc, copper,
galvanized?

13. What kinds of materials are approved for use in electrical systems? What are some common devices that
protect against overloading the system?

14. What is the condition of the soil on which the house is built? Is structural integrity jeopardized by filled
ground? Slide conditions? Expansive soil? Drainage?

15. What restrictions, if any, run with the property?

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INTRODUCTION

INTRODUCTION somebody Wed, 07/19/2023 - 02:09 am

INTRODUCTION

The development of real estate provides a portion of the inventory that a real estate broker utilizes in his or her
business. Just as any retailer or wholesaler must stock adequate inventories of their products, the real estate
broker stocks listings of real property. The broker constantly replaces sold or expired listings with new listings,
some of which may come from developers in the form of “new homes or lots.”

Real estate developers usually function in a larger business “arena” than do real estate brokers. Developers
“manufacture” residential, commercial or industrial sites, either as vacant lot subdivisions or as improved or
partially improved subdivisions. Their goal is to supply the type and price range of product that will satisfy the
market.

In the course of business, a developer often:

• carries inventory of raw land, semi-finished and/or finished products, often for lengthy periods and for
several widely separated, ongoing projects both “spec” (for sale) and custom (pre-sold);

• uses personal funds or negotiates loans from land sellers, joint venture partners (private investors) or
financial institutions; and

• assumes large risks because of land planning uncertainties and possible misjudgment of the market which
result in delays and losses due to interest payments, carrying charges, overhead, and other costs.

Some developers specialize in converting raw land to finished lots, suitable for builders to buy and begin
construction of off-site as well as on-site improvements. Often the land developer will also install the principal
off-site improvements and infrastructure (roads and utilities). Other developer-builders plan and complete the
entire subdivision from raw land through construction and sale of homes. Developers can be national, regional
or local and many parts of California have historically had some or all to varying degrees. Developers tend to
be very entrepreneurial and usually are very market anticipatory. Interestingly, there are no state requirements
such as licensing for developers or subdividers.

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SUBDIVIDING

SUBDIVIDING somebody Wed, 07/19/2023 - 02:09 am

SUBDIVIDING

A subdivider builder or developer must understand the potential difficulties involved in subdividing and the
market for the project. The development plan must take into account state and local government regulation
(e.g., the Subdivided Lands Law, the Subdivision Map Act, the California Environmental Quality Act, zoning,
local general and specific plans and the effects of public opinion to the development).

Often, zoning and planning preconditions drastically reduce the potential of a property. Before a developer or
builder purchases property, he or she should consult with the local planning agency and private land use
specialists to evaluate the likelihood of final approval of a project and the probable time frames for
accomplishing the approval process.

A developer will use civil engineers, construction engineers, soil engineers, land use planners, building
architects, landscape architects, contractors, attorneys, title companies, bankers, real estate analysts, market
researchers, and cost accountants to formulate a plan consisting of the following:

l. physical layout of tract in engineered detail;

2. land use processing and approval schedule;

3. amenities to be provided;

4. initial financing and continuing financing until the last sale;

5. advertising and sales promotion.

To determine if the project will yield adequate profit, the developer must calculate:

1. cost of the land;

2. cost of government fees;

3. cost of off-site improvements (e.g., water mains, sewers, streets, gutters, curbs, sidewalks, and street
lighting);

4. survey, legal, marketing, financing and office/overhead costs; and,

5. the likely retail sales price(s) of the lots or units sometimes far into the future.

The developer’s educated guess at the rate at which the lots will sell (the absorption rate) will impact the
marketing, financing, and overhead costs, all adjusted for anticipated future price fluctuations.

The sum of all costs and expenses of the project is subtracted from the estimate of the retail sales price of the
lots to derive the estimated (pre-tax) profit along with factoring in the amount of time before profits will
actually be realized.

A developer may subdivide a large tract of land pursuant to a phased master plan designed to meet the
anticipated demand/absorption rate. These projects are more complex, with master governing restrictions and
more obstacles to state and local approval and generally take more time and therefore more uncertainty.

A broker may gain initial experience in subdividing by becoming involved in a more limited aspect of the
process. An owner of acreage might engage the broker as a subdivider, with the broker arranging the services
of skilled consultants (civil engineer, land planner, land use attorney, etc.) to accomplish subdivision of the
land. The broker and land owner may form a partnership: one contributing capital and land, the other
management and marketing (sweat equity).

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Chapter 25 - Mineral, Oil and Gas Brokerage somebody Wed, 07/19/2023 - 02:09 am

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HISTORY

HISTORY somebody Wed, 07/19/2023 - 02:09 am

HISTORY

History

Prior to 1943 there was much speculation in the sale and leasing of mineral, oil and gas lands, particularly
during the Depression period from 1933 to 1939. While it may seem strange that people invested in such highly
speculative ventures during that period, it is explained that they were desperation investments. Many persons
gambled their last resources in hope of gaining huge profits.

During the period mentioned, it was estimated that approximately 1,000 oil and gas salespersons were actively
engaged in every section of the state. They confined their sales to parcels in newly created oil and gas
subdivisions for the most part. While most oil and gas subdivisions were located in California, lands and leases
in Texas, Oklahoma, Illinois, New Mexico, Wyoming, Montana and various other states were offered. While
these lands were believed to have some potential for oil and gas production, the possibilities were rather
remote. In most cases, purchasers of interests lost the entire amount invested.

A statewide drive was undertaken in 1943 to end these activities. This was accomplished by the Department of
Real Estate (the Department) with the assistance of district attorneys, the Attorney General, Department of
Corporations and local police departments. Many promoters were convicted of grand theft and about 600
operators lost their real estate licenses as a result of formal hearings or failures to renew such license because of
the circumstances. The 1943 efforts resulted in legislation.

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MINERAL, OIL AND GAS REGULATION

MINERAL, OIL AND GAS REGULATION somebody Wed, 07/19/2023 - 02:09 am

MINERAL, OIL AND GAS REGULATION

The 1943 legislation required persons engaging in business as mineral, oil and gas brokers or salespersons
within this state to secure a Mineral, Oil and Gas (M.O.G.) license from the Department. In 1967, due to the
declining appeal of these types of transactions, the mineral, oil and gas salesperson license was discontinued.
However, the broker classification was retained. Licensed real estate brokers were not required to have an
M.O.G. license if the transfer of a mineral, oil or gas interest was “purely incidental” to the sale, lease or
exchange of real property. If not, a real estate licensee was required to obtain a special M.O.G. permit in order
to engage in not more than ten mineral, oil or gas transactions in a year.

In 1984, the licensing laws for mineral, oil and gas brokers were further simplified to conform them to those
relating to real estate brokers, and to eliminate bonding and quarterly report requirements.

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NO SEPARATE LICENSE REQUIREMENT - 1994

NO SEPARATE LICENSE REQUIREMENT - 1994 somebody Wed, 07/19/2023 - 02:09 am

NO SEPARATE LICENSE REQUIREMENT - 1994

Since January 1, 1994, an M.O.G. broker license is no longer required to allow anyone who is a licensed real
estate broker or salesperson to engage in M.O.G. transactions. Those who hold M.O.G. licenses may continue
to do so, and may renew their licenses, but no new M.O.G. licenses are issued. Instead, the definition of a real
estate broker has been expanded to include mineral, oil and gas transactions.

Transactions Requiring a Real Estate License

A real estate broker, or a salesperson duly employed by a broker, may now solicit, negotiate and broker the
sale, purchase or exchange of mineral, oil or gas properties. A licensee may also solicit borrowers or lenders,
negotiate loans, service loans, lease, rent and collect rents or royalties relating to M.O.G. properties.

A real estate license is also required to assist or offer to assist another in filing an application for the purchase
or lease, or to locate or enter upon mineral, oil or gas properties owned by the state or federal government.

Persons who act as principals in the purchase, lease or taking of an option on mineral, oil or gas land or
property must obtain a real estate license if the purpose of the transaction is to then sell, exchange, lease,
sublease or assign a lease on all or part of the property to another. Any person acting as a principal who offers
mining claims for sale or assignment must also have a real estate license.

Exempt Transactions

A real estate broker’s license is not required to engage in the following activities with respect to a mineral, oil
or gas property:

• acting as a depository under an oil and/or gas lease if it is not for the purpose of a sale;

• engaging in a transaction subject to a court order;

• engaging in the business of drilling for or producing oil or gas, or in the business of mining for or
producing minerals;

• negotiating leases or agreements between owners of mineral, oil or gas lands, leases, or mineral rights, and
specified production businesses, or entering into leases or agreements with owners on behalf of such
production businesses; and

• dealing with mineral rights or land, other than oil or gas rights or land, as the owner of the rights or land.

Mineral, Oil and Gas is a Technical Field

Mineral, oil and gas brokerage is a specialized branch of the general real estate brokerage business. The
primary prerequisites for success are a broad knowledge of the elementary principles of geology relating to this
field and sound knowledge of the fundamentals of real estate practice and ethics.

A person interested in focusing on M.O.G. transactions should develop a working knowledge of the technical
subject matter with particular emphasis upon the functions and duties of a real estate broker as they relate to
practice in the field of mineral, oil and gas brokerage.

Study References

Given the nature of this Reference Book and the relatively few persons specializing in this field, an extended
discussion of mineral, oil and gas subject areas is not warranted. There are a number of geology text books
available in bookstores, including California’s Changing Landscapes by Gordon B. Oakeshott, which focus on
the geology of California.

Considerable information concerning the oil and gas fields of this state, their structural conditions, importance,
quality of oil or gas produced, etc., may be obtained in various publications of the California Division of Oil,
Gas, and Geothermal Resources of the Department of Conservation. The California Geological Survey of that
Department also has publications and resources of value regarding mineral, mining, and geological matters.

Mineral, Oil and Gas Subdivisions

Mineral, oil and gas subdivisions are those created for the sale, lease or financing of 5 or more speculative
parcels of land for mineral, oil or gas purposes. The subdivision laws apply and there is no exemption for lots
of 160 acres or more. The property may be located in California or in any other state. If the developer proposes
to make sales in this state, the Department assumes jurisdiction.

No mineral, oil or gas subdivisions have been filed with the Department for a number of years, perhaps because
of the stringent conditions which must be met under the law and the widespread prospecting activities of the
major oil companies. Anyone interested in filing a mineral, oil or gas subdivision with the Department may
obtain details from the Subdivisions Technical Section in Sacramento.

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Chapter 27 - Glossary somebody Wed, 07/19/2023 - 02:09 am

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GLOSSARY

GLOSSARY somebody Wed, 07/19/2023 - 02:09 am

GLOSSARY

ABANDONMENT — The failure to occupy and use property that may result in a loss of rights.

ABATEMENT OF NUISANCE — Extinction or termination of a nuisance.

ABSOLUTE OWNERSHIP — See FEE SIMPLE ESTATE.

ABSTRACT OF JUDGMENT — A condensation of the essential provisions of a court judgment.

ABSTRACT OF TITLE — A summary or digest of all transfers, conveyances, legal proceedings, and any
other facts relied on as evidence of title, showing continuity of ownership, together with any other elements
of record which may impair title.

ABSTRACTION — A method of valuing land. The indicated value of the improvement is deducted from the
sale price.

ACCELERATED COST RECOVERY SYSTEM — The system for figuring depreciation (cost recovery) for
depreciable real property acquired and placed into service after January 1, 1981. (ACRS)

ACCELERATED DEPRECIATION — A method of cost write-off in which depreciation allowances are
greater in the first few years of ownership than in subsequent years. This permits an earlier recovery of
capital and a faster tax write-off of an asset.

ACCELERATION CLAUSE — A condition in a real estate financing instrument giving the lender the power
to declare all sums owing lender immediately due and payable upon the happening of an event, such as sale
of the property, or a delinquency in the repayment of the note.

ACCEPTANCE — The act of agreeing or consenting to the terms of an offer thereby establishing the
“meeting of the minds” that is an essential element of a contract.

ACCESS RIGHT — The right of an owner to have ingress and egress to and from owner’s property over
adjoining property.

ACCESSION — An addition to property through the efforts of man or by natural forces.

ACCRETION — Accession by natural forces, e.g., alluvium.

ACCRUED DEPRECIATION — The difference between the cost of replacement new as of the date of the
appraisal and the present appraised value.

ACCRUED ITEMS OF EXPENSE — Those incurred expenses which are not yet payable. The seller’s
accrued expenses are credited to the purchaser in a closing statement.

ACKNOWLEDGMENT — A formal declaration made before an authorized person, e.g., a notary public, by a
person who has executed an instrument stating that the execution was his or her free act. In this state an
acknowledgment is the statement by an officer such as a notary that the signatory to the instrument is the
person represented to be.

ACOUSTICAL TILE — Blocks of fiber, mineral or metal, with small holes or rough-textured surface to
absorb sound, used as covering for interior walls and ceilings.

ACQUISITION — The act or process by which a person procures property.

ACRE — A measure of land equaling 160 square rods, or 4,840 square yards, or 43,560 square feet, or a tract
about 208.71 feet square.

ACTUAL AUTHORITY — Authority expressly given by the principal or given by the law and not denied by
the principal.

ACTUAL FRAUD — An act intended to deceive another, e.g., making a false statement, making a promise
without intending to perform it, suppressing the truth.

ADDENDUM — Additional pages of material that are added to and become part of a contract.

ADJUSTABLE RATE MORTGAGE (ARM) — A mortgage loan which bears interest at a rate subject to
change during the term of the loan, predetermined or otherwise.

ADJUSTMENTS — In appraising, a means by which characteristics of a residential property are regulated by
dollar amount or percentage to conform to similar characteristics of another residential property.

ADMINISTRATOR — A person appointed by the probate court to administer the estate of a deceased person
who died intestate. (Administratrix, the feminine form.)

ADR — See ALTERNATIVE DISPUTE RESOLUTION.

AD VALOREM — A Latin phrase meaning “according to value.” Usually used in connection with real estate
taxation.

ADVANCE — Transfer of funds from a lender to a borrower in advance on a loan.

ADVANCE COMMITMENT — The institutional investor’s prior agreement to provide long-term financing
upon completion of construction; also known as a “take-out” loan commitment.

ADVANCE FEES — A fee paid in advance of any services rendered. Sometimes unlawfully charged in
connection with that illegal practice of obtaining a fee in advance for the advertising of property or
businesses for sale, with no intent to obtain a buyer, by persons representing themselves as real estate
licensees, or representatives of licensed real estate firms.

ADVERSE POSSESSION — A method of acquiring title to real property through possession of the property
for a statutory period under certain conditions by a person other than the owner of record.

AFFIANT — One who makes an affidavit or gives evidence.

AFFIDAVIT — A statement or declaration reduced to writing sworn to or affirmed before some officer who
has authority to administer an oath or affirmation.

AFFIDAVIT OF TITLE — A statement, in writing, made under oath by seller or grantor, acknowledged
before a Notary Public in which the affiant identifies himself or herself and affiant’s marital status certifying
that since the examination of title on the contract date there are no judgments, bankruptcies or divorces, no
unrecorded deeds, contracts, unpaid repairs or improvements or defects of title known to affiant and that
affiant is in possession of the property.

AFFIRM — To confirm, to aver, to ratify, to verify. To make a declaration.

AGENCY — The relationship between principal and the principal’s agent which arises out of a contract, either
expressed or implied, written or oral, wherein the agent is employed by the principal to do certain acts
dealing with a third party.

AGENT — One who acts for and with authority from another called the principal.

AGREEMENT — An exchange of promises, a mutual understanding or arrangement; a contract.

AGREEMENT OF SALE — A written agreement or contract between seller and purchaser in which they
reach a “meeting of minds” on the terms and conditions of the sale. The parties concur; are in harmonious
opinion.

AIR RIGHTS — The rights in real property to the reasonable use of the air space above the surface of the
land.

ALIENATION — The transferring of property to another; the transfer of property and possession of lands, or
other things, from one person to another.

ALIENATION CLAUSE — A clause in a contract giving the lender certain rights in the event of a sale or
other transfer of mortgaged property.

ALLODIAL TENURE — A real property ownership system where ownership may be complete except for
those rights held by government. Allodial is in contrast to feudal tenure.

ALLUVIUM — The gradual increase of the earth on a shore of an ocean or bank of a stream resulting from the
action of the water.

ALTA OWNER’S POLICY — An owner’s extended coverage policy that provides buyers and owners the
same protection the ALTA policy gives to lenders.

ALTA TITLE POLICY — (American Land Title Association) A type of title insurance policy issued by title
insurance companies which expands the risks normally insured against under the standard type policy to
include unrecorded mechanic’s liens; unrecorded physical easements; facts a physical survey would show;
water and mineral rights; and rights of parties in possession, such as tenants and buyers under unrecorded
instruments.

ALTERNATIVE DISUPUTE RESOLUTION (ADR) — The resolution of disputes by various means
including, but not limited to negotiation, mediation, and arbitration.

AMENITIES — Satisfaction of enjoyable living to be derived from a home; conditions of agreeable living or a
beneficial influence from the location of improvements, not measured in monetary considerations but rather
as tangible and intangible benefits attributable to the property, often causing greater pride in ownership.

AMORTIZATION — The liquidation of a financial obligation on an installment basis; also, recovery over a
period of cost or value.

AMORTIZED LOAN — A loan to be repaid, interest and principal, by a series of regular payments that are
equal or nearly equal, without any special balloon payment prior to maturity. Also called a Level Payments
Loan.

ANNEXATION — The attaching of personal property to land so that the law views it as part of the real
property (a fixture). Annexation can be actual or constructive.

ANNUAL PERCENTAGE RATE — The relative cost of credit as determined in accordance with Regulation
Z of the Board of Governors of the Federal Reserve System for implementing the Federal Truth in Lending
Act.

ANNUITY — A sum of money received at fixed intervals, such as a series of assured equal or nearly equal
payments to be made over a period of time, or it may be a lump sum payment to be made in the future. The
installment payments due to the landlord under a lease is an annuity. So are the installment payments due to
a lender.

ANTICIPATION, PRINCIPLE OF — Affirms that value is created by anticipated benefits to be derived in
the future.

APPELLANT — A party appealing a court decision or ruling.

APPRAISAL — An estimate of the value of property resulting from an analysis of facts about the property. An
opinion of value.

APPRAISER — One qualified by education, training and experience who is hired to estimate the value of real
and personal property based on experience, judgment, facts, and use of formal appraisal processes.

APPR0PRIATION OF WATER — The taking, impounding or diversion of water flowing on the public
domain from its natural course and the application of the water to some beneficial use personal and
exclusive to the appropriator.

APPURTENANCE: That which belongs to something, but not immemorially; all those rights, privileges, and
improvements which belong to and pass with the transfer of the property, but which are not necessarily a
part of the actual property. Appurtenances to real property pass with the real property to which they are
appurtenant, unless a contrary intention is manifested. Typical appurtenances are rights-of-way, easements,
water rights, and any property improvements.

APPURTENANT — Belonging to; adjunct; appended or annexed to. For example, the garage is appurtenant
to the house, and the common interest in the common elements of a condominium is appurtenant to each
apartment. Appurtenant items pass with the land when the property is transferred.

APR — See ANNUAL PERCENTAGE RATE.

ARBITRATION — A neutral third party who listens to each party’s position and makes a final binding
decision.

ARCHITECTURAL STYLE — Generally the appearance and character of a building’s design and
construction.

ARTICLES OF INCORPORATION — An instrument setting forth the basic rules and purposes under which
a private corporation is formed.

ARTIFICIAL PERSON — Persons created by law; a corporation.

ASSESSED VALUATION — A valuation placed upon a piece of property by a public authority as a basis for
levying taxes on the property.

ASSESSMENT — The valuation of property for the purpose of levying a tax or the amount of the tax levied.
Also, payments made to a common interest subdivision homeowners- association for maintenance and
reserves.

ASSESSOR — The official who has the responsibility of determining assessed values.

ASSIGNMENT — A transfer to another of any property in possession or in action, or of any estate or right
therein. A transfer by a person of that person’s rights under a contract.

ASSIGNMENT OF RENTS — A provision in a deed of trust (or mortgage) under which the beneficiary may,
upon default by the trustor, take possession of the property, collect income from the property and apply it to
the loan balance and the costs incurred by the beneficiary.

ASSIGNOR — One who assigns or transfers property.

ASSIGNS, ASSIGNEES — Those to whom property or interests therein shall have been transferred.

ASSUMPTION AGREEMENT — An undertaking or adoption of a debt or obligation primarily resting upon
another person.

ASSUMPTION FEE — A lender’s charge for changing over and processing new records for a new owner
who is assuming an existing loan.

ASSUMPTION OF MORTGAGE — The taking of a title to property by a grantee wherein grantee assumes
liability for payment of an existing note secured by a mortgage or deed of trust against the property,
becoming a co-guarantor for the payment of a mortgage or deed of trust note.

ATTACHMENT — The process by which real or personal property of a party to a lawsuit is seized and
retained in the custody of the court for the purpose of acquiring jurisdiction over the property, to compel an
appearance before the court, or to furnish security for a debt or costs arising out of the litigation.

ATTEST — To affirm to be true or genuine; an official act establishing authenticity.

ATTORNEY IN FACT — One who is authorized by another to perform certain acts for another under a
power of attorney; power of attorney may be limited to a specific act or acts or be general.

AVULSION — A sudden and perceptible loss of land by the action of water as by a sudden change in the
course of a river.

BACKFILL — The replacement of excavated earth into a hole or against a structure.

BALANCE SHEET — A statement of the financial condition of a business at a certain time showing assets,
liabilities, and capital.

BALLOON PAYMENT — An installment payment on a promissory note - usually the final one for
discharging the debt - which is significantly larger than the other installment payments provided under the
terms of the promissory note.

BARGAIN AND SALE DEED — Any deed that recites a consideration and purports to convey the real estate;
a bargain and sale deed with a covenant against the grantor’s act is one in which the grantor warrants that
grantor has done nothing to harm or cloud the title.

BASE AND MERIDIAN — Imaginary lines used by surveyors to find and describe the location of private or
public lands. In government surveys, a base line runs due east and west, meridians run due north and south,
and are used to establish township boundaries.

BASIS — (1) Cost Basis—The dollar amount assigned to property at the time of acquisition under provisions
of the Internal Revenue Code for the purpose of determining gain, loss and depreciation in calculating the
income tax to be paid upon the sale or exchange of the property. (2) Adjusted Cost Basis—The cost basis
after the application of certain additions for improvements, etc., and deductions for depreciation, etc.

BEARING WALL — A wall or partition which supports a part of a building, usually a roof or floor above.

BENCH MARK — A monument used to establish the elevation of the point, usually relative to Mean Sea
Level, but often to some local datum.

BENEFICIARY — (1) One entitled to the benefit of a trust; (2) One who receives profit from an estate, the
title of which is vested in a trustee; (3) The lender on the security of a note and deed of trust.

BEQUEATH — To give or hand down by will; to leave by will.

BEQUEST — Personal property given by the terms of a will.

BETTERMENT — An improvement upon property which increases the property value and is considered as a
capital asset as distinguished from repairs or replacements where the original character or cost is unchanged.

BILL OF SALE — A written instrument given to pass title of personal property from vendor to the vendee.

BINDER — An agreement to consider a down payment for the purchase of real estate as evidence of good
faith on the part of the purchaser. Also, a notation of coverage on an insurance policy, issued by an agent,
and given to the insured prior to issuing of the policy.

BLANKET MORTGAGE — A single mortgage which covers more than one piece of real property.

BLIGHTED AREA — A district affected by detrimental influences of such extent or quantity that real
property values have seriously declined as a result of adverse land use and/or destructive economic forces;
characterized by rapidly depreciating buildings, retrogression and no recognizable prospects for
improvement. However, renewal programs and changes in use may lead to resurgence of such areas.

BLOCKBUSTING — The practice on the part of unscrupulous speculators or real estate agents of inducing
panic selling of homes at prices below market value, especially by exploiting the prejudices of property
owners in neighborhoods in which the racial make-up is changing or appears to be on the verge of changing.

BONA FIDE — In good faith; without fraud or deceit; authentic.

BOND — Written evidence of an obligation given by a corporation or government entity. A surety instrument.

BOOK VALUE — The current value for accounting purposes of an asset expressed as original cost plus
capital additions minus accumulated depreciation.

BREACH — The breaking of a law, or failure of duty, either by omission or commission.

BROKER — A person employed for a fee by another to carry on any of the activities listed in the license law
definition of a broker.

BROKER-SALESPERSON RELATIONSHIP AGREEMENT — A written agreement required by the
regulations of the Real Estate Commissioner setting forth the material aspects of the relationship between a
real estate broker and each salesperson and broker performing licensed activities in the name of the
supervising broker.

B.T.U. — British thermal unit. The quantity of heat required to raise the temperature of one pound of water one
degree Fahrenheit.

BUILDING CODE — A systematic regulation of construction of buildings within a municipality established
by ordinance or law.

BUILDING LINE — A line set by law a certain distance from a street line in front of which an owner cannot
build on owner’s lot. A setback line.

BUILDING, MARKET VALUE OF — The sum of money which the presence of that structure adds to or
subtracts from the value of the land it occupies. Land valued on the basis of highest and best use.

BUILDING RESTRICTIONS — Zoning, regulatory requirements or provisions in a deed limiting the type,
size and use of a building.

BUNDLE OF RIGHTS — All of the legal rights incident to ownership of property including rights of use,
possession, encumbering and disposition.

BUREAU OF LAND MANAGEMENT — A federal bureau within the Department of the Interior which
manages and controls certain lands owned by the United States.

BUSINESS OPPORTUNITY — The assets for an existing business enterprise including its goodwill. As used
in the Real Estate Law, the term includes “the sale or lease of the business and goodwill of an existing
business enterprise or opportunity.”

BUYDOWN — See SUBSlDY BUYDOWN.

BUYER’S MARKET — The condition which exists when a buyer is in a more commanding position as to
price and terms because real property offered for sale is in plentiful supply in relation to demand.

BYLAWS — Rules for the conduct of the internal affairs of corporations and other organizations.

CAL-VET PROGRAM — A program administered by the State Department of Veterans Affairs for the direct
financing of farm and home purchases by eligible California veterans of the armed forces.

CC&Rs — Covenants, conditions and restrictions. The basic rules establishing the rights and obligations of
owners (and their successors in interest) of real property within a subdivision or other tract of land in
relation to other owners within the same subdivision or tract and in relation to an association of owners
organized for the purpose of operating and maintaining property commonly owned by the individual owners.

CCIM — Certified Commercial Investment Member.

CPM© — Certified Property Manager, a designation of the Institute of Real Estate Management.

CAPACITY — The legal ability to perform some act, such as enter into a contract or execute a deed or will.

CAPITAL ASSETS — Assets of a permanent nature used in the production of an income, such as land,
buildings, machinery and equipment, etc. Under income tax law, it is usually distinguishable from
“inventory” which comprises assets held for sale to customers in ordinary course of the taxpayer’s trade or
business.

CAPITAL GAIN — At resale of a capital item, the amount by which the net sale proceeds exceed the adjusted
cost basis (book value). Used for income tax computations. Gains are called short or long term based upon
length of holding period after acquisition. Usually taxed at lower rates than ordinary income.

CAPITALIZATION — In appraising, determining value of property by considering net income and
percentage of reasonable return on the investment. The value of an income property is determined by
dividing annual net income by the Capitalization Rate.

CAPITALIZATION RATE — The rate of interest which is considered a reasonable return on the investment,
and used in the process of determining value based upon net income. It may also be described as the yield
rate that is necessary to attract the money of the average investor to a particular kind of investment. In the
case of land improvements which depreciate, to this yield rate is added a factor to take into consideration the
annual amortization factor necessary to recapture the initial investment in improvements. This amortization
factor can be determined in various ways — (1) straight-line depreciation method, (2) Inwood Tables and (3)
Hoskold Tables. (To explore this subject in greater depth, the student should refer to current real estate
appraisal texts.)

CAP RATE — See LIFE OF LOAN CAP.

CARRYBACK LOAN — The extension of credit from the seller to the buyer to finance the purchase of the
property, accepting a deed of trust or mortgage instead of cash. Sometimes called a purchase money loan.

CASEMENT WINDOWS — Frames of wood or metal which swing outward.

CASH FLOW — The net income generated by a property before depreciation and other noncash expenses.

CAVEAT EMPTOR — Let the buyer beware. The buyer must examine the goods or property and buy at his
or her own risk, absent misrepresentation.

CERTIFICATE OF ELIGIBILITY — Issued by Department of Veterans Affairs - evidence of individual’s
eligibility to obtain VA loan.

CERTIFICATE OF REASONABLE VALUE (CRV) — The Federal VA appraisal commitment of property
value.

CERTIFICATE OF TAXES DUE — A written statement or guaranty of the condition of the taxes on a
certain property made by the County Treasurer of the county wherein the property is located. Any loss
resulting to any person from an error in a tax certificate shall be paid by the county which such treasurer
represents.

CERTIFICATE OF TITLE — A written opinion by an attorney that ownership of the particular parcel of
land is as stated in the certificate.

CHAIN — A unit of measurement used by surveyors. A chain consists of 100 links equal to 66 feet.

CHAIN OF TITLE — A history of conveyances and encumbrances affecting the title from the time the
original patent was granted, or as far back as records are available, used to determine how title came to be
vested in current owner.

CHANGE, PRINCIPLE OF — Holds that it is the future, not the past, which is of prime importance in
estimating value. Change is largely result of cause and effect.

CHARACTERISTICS — Distinguishing features of a (residential) property.

CHATTEL MORTGAGE — A claim on personal property (instead of real property) used to secure or
guarantee a promissory note. (See definition of Security Agreement and Security Interest.)

CHATTEL REAL — An estate related to real estate, such as a lease on real property.

CHATTELS — Goods or every species of property movable or immovable which are not real property.
Personal property.

CHOSE IN ACTION — A personal right to something not presently in the owner’s possession, but
recoverable by a legal action for possession.

CIRCUIT BREAKER — (l) An electrical device which automatically interrupts an electric circuit when an
overload occurs; may be used instead of a fuse to protect each circuit and can be reset. (2) In property
taxation, a method for granting property tax relief to the elderly and disadvantaged qualified taxpayers by
rebate, tax credits or cash payments. Usually limited to homeowners and renters.

CLOSING — (l) Process by which all the parties to a real estate transaction conclude the details of a sale or
mortgage. The process includes the signing and transfer of documents and distribution of funds. (2)
Condition in description of real property by courses and distances at the boundary lines where the lines meet
to include all the tract of land.

CLOSING COSTS — The miscellaneous expenses buyers and sellers normally incur in the transfer of
ownership of real property over and above the cost of the property.

CLOSING STATEMENT — An accounting of funds made to the buyer and seller separately. Required by
law to be made at the completion of every real estate transaction.

CLOUD ON TITLE — A claim, encumbrance or condition which impairs the title to real property until
disproved or eliminated as for example through a quitclaim deed or a quiet title legal action.

CODE OF ETHICS — A set of rules and principles expressing a standard of accepted conduct for a
professional group and governing the relationship of members to each other and to the organization.

COLLATERAL — Marketable real or personal property which a borrower pledges as security for a loan. In
mortgage transactions, specific land is the collateral. (See definition of Security Interest. )

COLLATERAL SECURITY — A separate obligation attached to contract to guarantee its performance; the
transfer of property or of other contracts, or valuables, to insure the performance of a principal agreement.

COLLUSION — An agreement between two or more persons to defraud another of rights by the forms of law,
or to obtain an object forbidden by law.

COLOR OF TITLE — That which appears to be good title but which is not title in fact.

COMMERCIAL ACRE — A term applied to the remainder of an acre of newly subdivided land after the area
devoted to streets, sidewalks and curbs, etc., has been deducted from the acre.

COMMERCIAL LOAN — A personal loan from a commercial bank, usually unsecured and short term, for
other than mortgage purposes.

COMMERCIAL PAPER — Negotiable instruments such as promissory notes, letters of credit and bills of
lading. Instruments developed under the law of merchant.

COMMINGLING — The illegal mixing of personal funds with money held in trust on behalf of a client. See
CONVERSION.

COMMISSION — An agent’s compensation for performing the duties of the agency; in real estate practice, a
percentage of the selling price of property, percentage of rentals, etc. A fee for services.

COMMITMENT — A pledge or a promise or firm agreement to do something in the future, such as a loan
company giving a written commitment with specific terms of mortgage loan it will make.

COMMON AREA — An entire common interest subdivision except the separate interests therein.

COMMON INTEREST SUBDIVISION — Subdivided lands which include a separate interest in real
property combined with an interest in common with other owners. The interest in common may be through
membership in an association. Examples are condominiums and stock cooperatives.

COMMON LAW — The body of law that grew from customs and practices developed and used in England
“since the memory of man runneth not to the contrary.”

COMMON STOCK — That class of corporate stock to which there is ordinarily attached no preference with
respect to the receipt of dividends or the distribution of assets on corporate dissolution.

COMMUNITY PROPERTY — Property acquired by husband and/or wife during a marriage when not
acquired as the separate property of either spouse. Each spouse has equal rights of management, alienation
and testamentary disposition of community property.

COMPACTION — Whenever extra soil is added to a lot to fill in low places or to raise the level of the lot, the
added soil is often too loose and soft to sustain the weight of the buildings. Therefore, it is necessary to
compact the added soil so that it will carry the weight of buildings without the danger of their tilting, settling
or cracking.

COMPARABLE SALES — Sales which have similar characteristics as the subject property and are used for
analysis in the appraisal process. Commonly called “comparables”, they are recent selling prices of
properties similarly situated in a similar market.

COMPARISON APPROACH — A real estate comparison method which compares a given property with
similar or comparable surrounding properties; also called market comparison.

COMPETENT — Legally qualified.

COMPETITION, PRINCIPLE OF — Holds that profits tend to breed competition and excess profits tend to
breed ruinous completion.

COMPOUND INTEREST — Interest paid on original principal and also on the accrued and unpaid interest
which has accumulated as the debt matures.

CONCLUSION — The final estimate of value, realized from facts, data, experience and judgment, set out in
an appraisal. Appraiser’s certified conclusion.

CONDEMNATION — The act of taking private property for public use by a political subdivision upon
payment to owner of just compensation. Declaration that a structure is unfit for use.

CONDITION — In contracts, a future and uncertain event which must happen to create an obligation or which
extinguishes an existent obligation. In conveyances of real property conditions in the conveyance may cause
an interest to be vested or defeated.

CONDITION PRECEDENT — A qualification of a contract or transfer of property, providing that unless and
until a given event occurs, the full effect of a contract or transfer will not take place.

CONDITION SUBSEQUENT — A condition attached to an already-vested estate or to a contract whereby
the estate is defeated or the contract extinguished through the failure or non-performance of the condition.

CONDITIONAL COMMITMENT — A commitment of a definite loan amount for some future unknown
purchaser of satisfactory credit standing.

CONDITIONAL ESTATE — Usually called, in California, Fee Simple Defeasible. An estate that is granted
subject to a condition subsequent. The estate is terminable on happening of the condition.

CONDITIONAL SALE CONTRACT — A contract for the sale of property stating that delivery is to be
made to the buyer, title to remain vested in the seller until the conditions of the contract have been fulfilled.
(See definition of Security Interest.)

CONDOMINIUM — An estate in real property wherein there is an undivided interest in common in a portion
of real property coupled with a separate interest in space called a unit, the boundaries of which are described
on a recorded final map, parcel map or condominium plan. The areas within the boundaries may be filled
with air, earth, or water or any combination and need not be attached to land except by easements for access
and support.

CONDOMINIUM DECLARATION — The document which establishes a condominium and describes the
property rights of the unit owners.

CONFESSION OF JUDGMENT — An entry of judgment upon the debtor’s voluntary admission or
confession.

CONFIRMATION OF SALE — A court approval of the sale of property by an executor, administrator,
guardian or conservator.

CONFISCATION — The seizing of property without compensation.

CONFORMITY, PRINCIPLE OF — Holds that the maximum of value is realized when a reasonable degree
of homogeneity of improvements is present. Use conformity is desirable, creating and maintaining higher
values.

CONSERVATION — The process of utilizing resources in such a manner which minimizes their depletion.

CONSIDERATION — Anything given or promised by a party to induce another to enter into a contract, e.g.,
personal services or even love and affection. It may be a benefit conferred upon one party or a detriment
suffered by the other.

CONSTANT — The percentage which, when applied directly to the face value of a debt, develops the annual
amount of money necessary to pay a specified net rate of interest on the reducing balance and to liquidate
the debt in a specified time period. For example, a 6% loan with a 20 year amortization has a constant of
approximately 8 1/2%. Thus, a $10,000 loan amortized over 20 years requires an annual payment of
approximately $850.00.

CONSTRUCTION LOAN — A loan made to finance the actual construction or improvement on land. Funds
are usually dispersed in increments as the construction progresses.

CONSTRUCTIVE EVICTION — Breach of a covenant of warranty or quiet enjoyment, e.g., the inability of
a lessee to obtain possession because of a paramount defect in title or a condition making occupancy
hazardous.

CONSTRUCTIVE FRAUD — A breach of duty, as by a person in a fiduciary capacity, without an actual
fraudulent intent, which gains an advantage to the person at fault by misleading another to the other’s
prejudice. Any act of omission declared by law to be fraudulent, without respect to actual fraud.

CONSTRUCTIVE NOTICE — Notice of the condition of title to real property given by the official records
of a government entity which does not require actual knowledge of the information.

CONTIGUOUS — In close proximity.

CONTOUR — The surface configuration of land. Shown on maps as a line through points of equal elevation.

CONTRACT — An agreement to do or not to do a certain thing. It must have four essential elements —
parties capable of contracting, consent of the parties, a lawful object, and consideration. A contract for sale
of real property must also be in writing and signed by the party or parties to be charged with performance.

CONTRACT, BILATERAL — A contract in which each party promises to do something.

CONTRACT, EXECUTED — 1) A contract in which both parties have completely performed their
contractual obligations. 2) A signed contract.

CONTRACT, EXECUTORY — A contract in which one or both parties have not yet completed performance
of their obligations.

CONTRACT, EXPRESS — A contract that has been put into words, either spoken or written.

CONTRACT, IMPLIED — An agreement that has not been put into words, but is implied by the actions of
the parties.

CONTRACT, UNILATERAL — When one party promises to do something if the other party performs a
certain act, but the other party does not promise to perform it; the contract is formed only if the other party
does perform the requested act.

CONTRIBUTION, PRINCIPLE OF — A component part of a property is valued in proportion to its
contribution to the value of the whole. Holds that maximum values are achieved when the improvements on
a site produce the highest (net) return, commensurate with the investment.

CONVENTIONAL MORTGAGE — A mortgage securing a loan made by investors without governmental
underwriting, i.e., which is not FHA insured or VA guaranteed. The type customarily made by a bank or
savings and loan association.

CONVERSION — (1) Change from one legal form or use to another, as converting an apartment building to
condominium use. (2) The unlawful appropriation of another’s property, as in the conversion of trust funds.

CONVEYANCE — An instrument in writing used to transfer (convey) title to property from one person to
another, such as a deed or a trust deed.

COOPERATIVE (apartment) — An apartment building, owned by a corporation and in which tenancy in an
apartment unit is obtained by purchase of shares of the stock of the corporation and where the owner of such
shares is entitled to occupy a specific apartment in the building. In California, this type of ownership is
called a “stock cooperative.”

CORNER INFLUENCE TABLE — A statistical table that may be used to estimate the added value of a
corner lot.

CORPORATION — An entity established and treated by law as an individual or unit with rights and
liabilities, or both, distinct and apart from those of the persons composing it. A corporation is a creature of
law having certain powers and duties of a natural person. Being created by law it may continue for any
length of time the law prescribes.

CORPOREAL RIGHTS — Possessory rights in real property.

CORRECTION LINES — A system for compensating inaccuracies in the Government Rectangular Survey
System due to the curvature of the earth. Every fourth township line, 24 mile intervals, is used as a
correction line on which the intervals between the north and south range lines are remeasured and corrected
to a full 6 miles.

CORRELATION — A step in the appraisal process involving the interpretation of data derived from the three
approaches to value (cost, market and income) leading to a single determination of value. Also frequently
referred to as “reconciliation.”

CO-SIGNER — A second party who signs a promissory note together with the primary borrower.

COST APPROACH — One of three methods in the appraisal process. An analysis in which a value estimate
of a property is derived by estimating the replacement cost of the improvements, deducting therefrom the
estimated accrued depreciation, then adding the market value of the land.

COTENANCY — Ownership of an interest in a particular parcel of land by more than one person; e.g. tenancy
in common, joint tenancy.

COUNTER OFFER — A response to an offer to enter into a contract, changing some of the terms of the terms
of the original offer. A counter offer is a rejection of the offer (not a form of acceptance), and does not
create a binding contract unless accepted by the original offeror.

COVENANT — An agreement or promise to do or not to do a particular act such as a promise to build a house
of a particular architectural style or to use or not use property in a certain way.

CRAWL HOLE — Exterior or interior opening permitting access underneath building, as required by building
codes.

CRE — Counselor of Real Estate, Member of American Society of Real Estate Counselors.

CREDIT — A bookkeeping entry on the right side of an account, recording the reduction or elimination of an
asset or an expense, or the creation of or addition to a liability or item of equity or revenue.

CURABLE DEPRECIATION — Items of physical deterioration and functional obsolescence which are
customarily repaired or replaced by a prudent property owner.

CURRENT INDEX — With regard to an adjustable rate mortgage, the current value of a recognized index as
calculated and published nationally or regionally. The current index value changes periodically and is used
in calculating the new note rate as of each rate adjustment date.

CURTAIL SCHEDULE — A listing of the amounts by which the principal sum of an obligation is to be
reduced by partial payments and of the dates when each payment will become payable.

DAMAGES — The indemnity recoverable by a person who has sustained an injury, either in his or her person,
property, or relative rights, through the act or default of another. Loss sustained or harm done to a person or
property.

DATA PLANT — An appraiser’s file of information on real estate.

DEBENTURE — Bonds issued without security, an obligation not secured by a specific lien on property.

DEBIT — A bookkeeping entry on the left side of an account, recording the creation of or addition to an asset
or an expense, or the reduction or elimination of a liability or item of equity or revenue.

DEBT — That which is due from one person or another; obligation, liability.

DEBTOR — A person who is in debt; the one owing money to another.

DECLINING BALANCE DEPRECIATION — A method of accelerated depreciation allowed by the IRS in
certain circumstances. Double Declining Balance Depreciation is its most common form and is computed by
using double the rate used for straight line depreciation.

DECREE OF FORECLOSURE — Decree by a court ordering the sale of mortgaged property and the
payment of the debt owing to the lender out of the proceeds.

DEDICATION — The giving of land by its owner to a public use and the acceptance for such use by
authorized officials on behalf of the public.

DEED — Written instrument which when properly executed and delivered conveys title to real property from
one person (grantor) to another (grantee).

DEED IN LIEU OF FORECLOSURE — A deed to real property accepted by a lender from a defaulting
borrower to avoid the necessity of foreclosure proceedings by the lender.

DEED OF TRUST — (See Trust Deed.)

DEED RESTRICTIONS — Limitations in the deed to a property that dictate certain uses that may or may not
be made of the property.

DEFAULT — Failure to fulfill a duty or promise or to discharge an obligation; omission or failure to perform
any act.

DEFEASANCE CLAUSE — The clause in a mortgage that gives the mortgagor the right to redeem
mortgagor’s property upon the payment of mortgagor’s obligations to the mortgagee.

DEFEASIBLE FEE — Sometimes called a base fee or qualified fee; a fee simple absolute interest in land that
is capable of being defeated or terminated upon the happening of a specified event.

DEFENDANT — A person against whom legal action is initiated for the purpose of obtaining criminal
sanctions (criminal defendant) or damages or other appropriate judicial relief (civil defendant) .

DEFERRED MAINTENANCE — Existing but unfulfilled requirements for repairs and rehabilitation.
Postponed or delayed maintenance causing decline in a building’s physical condition.

DEFERRED PAYMENT OPTIONS — The privilege of deferring income payments to take advantage of
statutes affording tax benefits.

DEFICIENCY JUDGMENT — A judgment given by a court when the value of security pledged for a loan is
insufficient to pay off the debt of the defaulting borrower.

DELEGATION OF POWERS — The conferring by an agent upon another of all or certain of the powers that
have been conferred upon the agent by the principal.

DEPOSIT RECEIPT — A term used by the real estate industry to describe the written offer to purchase real
property upon stated term and conditions, accompanied by a deposit toward the purchase price, which
becomes the contract for the sale of the property upon acceptance by the owner.

DEPRECIATION — Loss of value of property brought about by age, physical deterioration or functional or
economic obsolescence. The term is also used in accounting to identify the amount of the decrease in value
of an asset that is allowed in computing the value of the property for tax purposes.

DEPTH TABLE — A statistical table that may be used to estimate the value of the added depth of a lot.

DESIST AND REFRAIN ORDER — An order directing a person to stop from committing an act in violation
of the Real Estate Law.

DETERMINABLE FEE — An estate which may end on the happening of an event that may or may not occur.

DEVISE — A gift or disposal of real property by last will and testament.

DEVISEE — One who receives a gift of real property by will.

DEVISOR — One who disposes of real property by will.

DIRECTIONAL GROWTH — The location or direction toward which the residential sections of a city are
destined or determined to grow.

DISCOUNT — To sell a promissory note before maturity at a price less than the outstanding principal balance
of the note at the time of sale. Also an amount deducted in advance by the lender from the nominal principal
of a loan as part of the cost to the borrower of obtaining the loan.

DISCOUNT POINTS — The amount of money the borrower or seller must pay the lender to get a mortgage at
a stated interest rate. This amount is equal to the difference between the principal balance on the note and the
lesser amount which a purchaser of the note would pay the original lender for it under market conditions. A
point equals one percent of the loan.

DISCRETIONARY POWERS OF AGENCY — Those powers conferred upon an agent by the principal
which empower the agent in certain circumstances to make decisions based on the agent’s own judgment.

DISINTERMEDIATION — The relatively sudden withdrawal of substantial sums of money savers have
deposited with savings and loan associations, commercial banks, and mutual savings banks. This term can
also be considered to include life insurance policy purchasers borrowing against the value of their policies.
The essence of this phenomenon is financial intermediaries losing within a short period of time billions of
dollars as owners of funds held by those institutional lenders exercise their prerogative of taking them out of
the hands of these financial institutions.

DISPOSABLE INCOME — The after-tax income a household receives to spend on personal consumption.

DISPOSSESS — To deprive one of the use of real estate.

DOCUMENTARY TRANSFER TAX — A state enabling act allows a county to adopt a documentary
transfer tax to apply on all transfers of real property located in the county. Notice of payment is entered on
face of the deed or on a separate paper filed with the deed.

DOCUMENTS — Legal instruments such as mortgages, contracts, deeds, options, wills, bills of sale, etc.

DONEE — A person who receives a gift.

DONOR — A person who makes a gift.

DOUBLE DECLINING BALANCE DEPRECIATION — (See DECLINING BALANCE DEPRECIATION.)

DRAW — Usually applies to construction loans when disbursement of a portion of the mortgage is made in
advance, as improvements to the property are made.

DUAL AGENCY — An agency relationship in which the agent acts concurrently for both of the principals in a
transaction.

DUE ON SALE CLAUSE — An acceleration clause granting the lender the right to demand full payment of
the mortgage upon a sale of the property.

DURESS — Unlawful constraint exercised upon a person whereby he or she is forced to do some act against
his or her will.

EARNEST MONEY — Down payment made by a purchaser of real estate as evidence of good faith. A
deposit or partial payment.

EASEMENT — A right, privilege or interest limited to a specific purpose which one party has in the land of
another.

ECONOMIC LIFE — The period over which a property will yield a return on the investment over and above
the economic or ground rent due to land.

ECONOMIC OBSOLESCENCE — A loss in value due to factors away from the subject property but
adversely affecting the value of the subject property.

ECONOMIC RENT — The reasonable rental expectancy if the property were available for renting at the time
of its valuation.

EFFECTIVE AGE OF IMPROVEMENT — The number of years of age that is indicated by the condition of
the structure, distinct from chronological age.

EFFECTIVE DATE OF VALUE — The specific day the conclusion of value applies.

EFFECTIVE INTEREST RATE — The percentage of interest that is actually being paid by the borrower for
the use of the money, distinct from nominal interest.

EMBLEMENTS — The crops and other annual plantings considered to be personal property of the cultivator.

EMINENT DOMAIN — The right of the government to acquire property for necessary public or quasi-public
use by condition; the owner must be fairly compensated and the right of the private citizen to get paid is
spelled out in the 5th Amendment to the United States Constitution.

ENCROACHMENT — An unlawful intrusion onto another’s adjacent property by improvements to real
property, e.g. a swimming pool built across a property line.

ENCUMBRANCE — Anything which affects or limits the fee simple title to or value of property, e.g.,
mortgages or easements.

EQUITY — The interest or value which an owner has in real estate over and above the liens against it. Branch
of remedial justice by and through which relief is afforded to suitors in courts of equity.

EQUITY BUILD-UP — The increase of owner’s equity in property due to mortgage principal reduction and
value appreciation.

EQUITY PARTICIPATION — A mortgage transaction in which the lender, in addition to receiving a fixed
rate of interest on the loan acquires an interest in the borrower’s real property, and shares in the profits
derived from the real property.

EQUITY OF REDEMPTION — The right to redeem property during the foreclosure period, such as a
mortgagor’s right to redeem within either 3 months or 1 year as may be permitted after foreclosure sale.

EROSION — The wearing away of land by the act of water, wind or glacial ice.

ESCALATION — The right reserved by the lender to increase the amount of the payments and/or interest
upon the happening of a certain event.

ESCALATOR CLAUSE — A clause in a contract providing for the upward or downward adjustment of
certain items to cover specified contingencies, usually tied to some index or event. Often used in long term
leases to provide for rent adjustments, to cover tax and maintenance increases.

ESCHEAT — The reverting of property to the State when heirs capable of inheriting are lacking.

ESCROW — The deposit of instruments and/or funds with instructions with a third neutral party to carry out
the provisions of an agreement or contract.

ESCROW AGENT — The neutral third party holding funds or something of value in trust for another or
others.

ESTATE — As applied to real estate, the term signifies the quantity of interest, share, right, equity, of which
riches or fortune may consist in real property. The degree, quantity, nature and extent of interest which a
person has in real property.

ESTATE OF INHERITANCE — An estate which may descend to heirs. All freehold estates are estates of
inheritance, except estates for life.

ESTATE FOR LIFE — A possessory, freehold estate in land held by a person only for the duration of his or
her life or the life or lives of another.

ESTATE FROM PERIOD TO PERIOD — An interest in land where there is no definite termination date but
the rental period is fixed at a certain sum per week, month, or year. Also called a periodic tenancy.

ESTATE AT SUFFERANCE — An estate arising when the tenant wrongfully holds over after the expiration
of the term. The landlord has the choice of evicting the tenant as a trespasser or accepting such tenant for a
similar term and under the conditions of the tenant’s previous holding. Also called a tenancy at sufferance.

ESTATE AT WILL — The occupation of lands and tenements by a tenant for an indefinite period, terminable
by one or both parties.

ESTATE FOR YEARS — An interest in lands by virtue of a contract for the possession of them for a definite
and limited period of time. May be for a year or less. A lease may be said to be an estate for years.

ESTIMATE — A preliminary opinion of value. Appraise, set a value.

ESTIMATED REMAINING LIFE — The period of time (years) it takes for the improvements to become
valueless.

ESTOPPEL — A legal theory under which a person is barred from asserting or denying a fact because of the
person’s previous acts or words.

ETHICS — That branch of moral science, idealism, justness, and fairness, which treats of the duties which a
member of a profession or craft owes to the public, client or partner, and to professional brethren or
members. Accepted standards of right and wrong. Moral conduct, behavior or duty.

ET UX — Abbreviation for “et uxor.” Means “and wife.”

EVICTION — Dispossession by process of law. The act of depriving a person of the possession of lands in
pursuance of the judgment of a court.

EXCEPTIONS — Matters affecting title to a particular parcel of real property which are included from
coverage of a title insurance policy.

EXCHANGE — A means of trading equities in two or more real properties, treated as a single transaction
through a single escrow.

EXCLUSION — General matters affecting title to real property excluded from coverage of a title insurance
policy.

EXCLUSIVE AGENCY LISTING — A listing agreement employing a broker as the sole agent for the seller
of real property under the terms of which the broker is entitled to a commission if the property is sold
through any other broker, but not if a sale is negotiated by the owner without the services of an agent.

EXCLUSIVE RIGHT TO SELL LISTING — A listing agreement employing a broker to act as agent for the
seller of real property under the terms of which the broker is entitled to a commission if the property is sold
during the duration of the listing through another broker or by the owner without the services of an agent.

EXECUTE — To complete, to make, to perform, to do, to follow out; to execute a deed, to make a deed,
including especially signing, sealing and delivery; to execute a contract is to perform the contract, to follow
out to the end, to complete.

EXECUTOR — A man named in a will to carry out its provisions as to the disposition of the estate of a
deceased person. (A woman is executrix.)

EXECUTORY CONTRACT — A contract in which something remains to be done by one or both of the
parties.

EXPENSES — Certain items which appear on a closing statement in connection with a real estate sale.

FACADE — The front of a building, often used to refer to a false front and as a metaphor.

FAIR MARKET VALUE. This is the amount of money that would be paid for a property offered on the open
market for a reasonable period of time with both buyer and seller knowing all the uses to which the property
could be put and with neither party being under pressure to buy or sell.

FANNIE MAE — An acronymic nickname for Federal National Mortgage Association (FNMA).

FARMERS HOME ADMINISTRATION — An agency of the Department of Agriculture. Primary
responsibility is to provide financial assistance for farmers and others living in rural areas where financing is
not available on reasonable terms from private sources.

FEDERAL DEPOSIT INSURANCE CORPORATION — (FDIC) Agency of the federal government which
insures deposits at commercial banks, savings banks and savings and loans.

FEDERAL HOME LOAN MORTGAGE CORPORATION — An independent stock company which
creates a secondary market in conventional residential loans and in FHA and VA loans by purchasing
mortgages.

FEDERAL HOUSING ADMINISTRATION — (FHA) An agency of the federal government that insures
private mortgage loans for financing of new and existing homes and home repairs.

FEDERAL LAND BANK SYSTEM — Federal government agency making long term loans to farmers.

FEDERAL NATIONAL MORTGAGE ASSOCIATION — (FNMA) “Fannie Mae” a quasipublic agency
converted into a private corporation whose primary function is to buy and sell FHA and VA mortgages in
the secondary market.

FEDERAL RESERVE SYSTEM — The federal banking system of the United States under the control of
central board of governors (Federal Reserve Board) involving a central bank in each of twelve geographical
districts with broad powers in controlling credit and the amount of money in circulation.

FEE — An estate of inheritance in real property.

FEE SIMPLE — The maximum possible estate in land in which the owner holds unconditional power of
disposition; an estate freely transferable and inheritable.

FEE SIMPLE DEFEASIBLE — An estate in fee subject to the occurrence of a condition subsequent whereby
the estate may be terminated.

FEE SIMPLE ESTATE — The greatest interest that one can have in real property. An estate that is
unqualified, of indefinite duration, freely transferable and inheritable.

FEUDAL TENURE — A real property ownership system in which ownership rests with a sovereign who may
grant lesser interests in return for service or loyalty. This is in contrast to allodial tenure.

FHLMC — See FEDERAL HOME LOAN MORTGAGE CORPORATION.

FIDELITY BOND — A security posted for the discharge of an obligation of personal services.

FIDUCIARY — A person in a position of trust and confidence, as between principal and broker; broker as
fiduciary owes certain loyalty which cannot be breached under the rules of agency.

FIDUCIARY DUTY — That duty owed by an agent to act in the highest good faith toward the principal and
not to obtain any advantage over the latter by the slightest misrepresentation, concealment, duress or
pressure.

FILTERING — The process whereby higher-priced properties become available to lower income buyers.

FINANCIAL INTERMEDIARY — Financial institutions such as commercial banks, savings and loan
associations, mutual savings banks and life insurance companies which receive relatively small sums of
money from the public and invest them in the form of large sums. A considerable portion of these funds are
loaned on real estate.

FINANCING PROCESS — The systematic 5 step procedure followed by major institutional lenders in
analyzing a proposed loan, which includes — filing of application by a borrower; lender’s analysis of
borrower and property; processing of loan documentation; closing (paying) the loan; and servicing
(collection and record keeping).

FINANCING STATEMENT — The instrument which is filed in order to give public notice of the security
interest and thereby protect the interest of the secured parties in the collateral. (See definition of Security
Interest and Secured Party.)

FIRST MORTGAGE — A legal document pledging collateral for a loan (See “mortgage”) that has first
priority over all other claims against the property except taxes and bonded indebtedness. That mortgage
superior to any other.

FIRST TRUST DEED — A legal document pledging collateral for a loan (See “trust deed”) that has first
priority over all other claims against the property except taxes and bonded indebtedness. That trust deed
superior to any other.

FISCAL CONTROLS — Federal tax revenue and expenditure policies used to control the level of economic
activity.

FISCAL YEAR — A business or accounting year as distinguished from a calendar year.

FIXITY OF LOCATION — The physical characteristic of real estate that subjects it to the influence of its
surroundings.

FIXTURES — Appurtenances attached to the land or improvements, which usually cannot be removed
without agreement as they become real property; examples — plumbing fixtures, store fixtures built into the
property, etc.

FORECLOSURE — Procedure whereby property pledged as security for a debt is sold to pay the debt in
event of default in payments or terms.

FORFEITURE — Loss of money or anything of value, due to failure to perform.

FRANCHISE — A specified privilege awarded by a government or business firm which awards an exclusive
dealership.

FRAUD — The intentional and successful employment of any cunning, deception, collusion, or artifice, used
to circumvent, cheat or deceive another person whereby that person acts upon it to the loss of property and
to legal injury. (Actual Fraud — A deliberate misrepresentation or representation made in reckless disregard
of its truth or its falsity, the suppression of truth, a promise made without the intention to perform it, or any
other act intended to deceive.)

FRAUDS, STATUTE OF — (See Statute of Frauds.)

“FREDDIE MAC” — (See FEDERAL HOME LOAN MORTGAGE CORPORATION.)

FREEHOLD ESTATE — An estate of indeterminable duration, e.g., fee simple or life estate.

FRONTAGE — A term used to describe or identify that part of a parcel of land or an improvement on the land
which faces a street. The term is also used to refer to the lineal extent of the land or improvement that is
parallel to and facing the street, e.g., a 75-foot frontage.

FRONT FOOT — Property measurement for sale or valuation purposes; the property measured by the front
linear foot on its street line—each front foot extending the depth of the lot.

FRONT MONEY — The minimum amount of money necessary to initiate a real estate venture, to get the
transaction underway.

FROSTLINE — The depth of frost penetration in the soil. Varies in different parts of the country. Footings
should be placed below this depth to prevent movement.

FULLY INDEXED NOTE RATE — As related to adjustable rate mortgages, the index value at the time of
application plus the gross margin stated in the note.

FUNCTIONAL OBSOLESCENCE — A loss of value due to adverse factors from within the structure which
affect the utility of the structure, value and marketability.

FUTURE BENEFITS — The anticipated benefits the present owner will receive from the property in the
future.

GABLE ROOF — A pitched roof with sloping sides.

GAIN — A profit, benefit, or value increase.

GAMBREL ROOF — A curb roof, having a steep lower slope with a flatter upper slope above.

GENERAL LIEN — A lien on all the property of a debtor.

GIFT DEED — A deed for which there is no consideration.

GOODWILL — An intangible but salable asset of a business derived from the expectation of continued public
patronage.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION — An agency of HUD, which functions in
the secondary mortgage market, primarily in social housing programs. Commonly called by the acronymic
nickname “Ginnie Mae” (GNMA).

GOVERNMENT SURVEY — A method of specifying the location of parcel of land using prime meridians,
base lines, standard parallels, guide meridians, townships and sections.

GRADE — Ground level at the foundation.

GRADUATED LEASE — Lease which provides for a varying rental rate, often based upon future
determination; sometimes rent is based upon result of periodical appraisals; used largely in long-term leases.

GRADUATED PAYMENT MORTGAGE — Providing for partially deferred payments of principal at start
of loan. (There are a variety of plans.) Usually after the first five years of the loan term the principal and
interest payment are substantially higher, to make up principal portion of payments lost at the beginning of
the loan. (See Variable Interest Rate.)

GRANT — A technical legal term in a deed of conveyance bestowing an interest in real property on another.
The words “convey” and “transfer” have the same effect.

GRANT DEED — A limited warranty deed using the word “grant” or like words that assures a grantee that the
grantor has not already conveyed the land to another and that the estate is free from encumbrances placed by
the grantor.

GRANTEE — A person to whom a grant is made.

GRANTOR — A person who transfers his or her interest in property to another by grant.

GRATUITOUS AGENT — A person not paid by the principal for services on behalf of the principal, who
cannot be forced to act as an agent, but who becomes bound to act in good faith and obey a principal’s
instructions once he or she undertakes to act as an agent.

GRID — A chart used in rating the borrower risk, property and the neighborhood.

GROSS INCOME — Total income from property before any expenses are deducted.

GROSS MARGIN — With regard to an adjustable rate mortgage, an amount expressed as percentage points,
stated in the note which is added to the current index value on the rate adjustment date to establish the new
note rate.

GROSS NATIONAL PRODUCT (GNP) — The total value of all goods and services produced in an
economy during a given period of time.

GROSS RATE — A method of collecting interest by adding total interest to the principal of the loan at the
outset of the term.

GROSS RENT MULTIPLIER — A number which, times the gross income of a property, produces an
estimate of value of the property. Example — The gross income from an unfurnished apartment building is
$200,000 per annum. If an appraiser uses a gross multiplier of 7%, then it is said that based on the gross
multiplier the value of the building is $1,400,000.

GROUND LEASE — An agreement for the use of the land only, sometimes secured by improvements placed
on the land by the user.

GROUND RENT — Earnings of improved property credited to earnings of the ground itself after allowance is
made for earnings of improvements; often termed economic rent.

HABENDUM CLAUSE — The “to have and to hold” clause which may be found in a deed.

HEIR — One who inherits property at the death of the owner of the land, if the owner has died without a will.

HIGHEST AND BEST USE — An appraisal phrase meaning that use which at the time of an appraisal is
most likely to produce the greatest net return to the land and/or buildings over a given period of time; that
use which will produce the greatest amount of amenities or profit. This is the starting point for appraisal.

HIP ROOF — A pitched roof with sloping sides and ends.

HOLDER IN DUE COURSE — One who has taken a note, check or bill of exchange in due course:

1. before it was overdue;

2. in good faith and for value; and

3. without knowledge that it has been previously dishonored and without notice of any defect at the time it
was negotiated to him or her.

HOLDOVER TENANT — Tenant who remains in possession of leased property after the expiration of the
lease term.

HOMESTEAD — (exemption) — A statutory protection of real property used as a home from the claims of
certain creditors and judgments up to a specified amount.

HOUSING FINANCIAL DISCRIMINATION ACT OF 1977 (Holden Act) — California Health and Safety
Code Section 35800, et seq., designed primarily to eliminate discrimination in lending practices based upon
the character of the neighborhood in which real property is located. (See Redlining.)

HUD — The Department of Housing and Urban Development which is responsible for the implementation and
administration of U.S. government housing and urban development programs.

HUNDRED PERCENT LOCATION — A city retail business location which is considered the best available
for attracting business.

HYPOTHECATE — To pledge a thing as security without the necessity of giving up possession of it.

IMPERATIVE NECESSITY — Circumstances under which an agent has expanded authority in an
emergency, including the power to disobey instructions where it is clearly in the interests of the principal
and where there is no time to obtain instructions from the principal.

IMPOUNDS — A trust type account established by lenders for the accumulation of borrowers funds to meet
periodic payment of taxes, FHA mortgage insurance premiums, and/or future insurance policy premiums,
required to protect their security. Impounds are usually collected with the note payment. The combined
principal, interest, taxes and insurance payment is commonly termed a PITI payment.

INCOME (CAPITALIZATION) APPROACH — One of the three methods of the appraisal process
generally applied to income producing property, and involves a three-step process— (1) find net annual
income, (2) set an appropriate capitalization rate or “present worth” factor, and (3) capitalize the income
dividing the net income by the capitalization rate.

INCOMPETENT — One who is mentally incompetent, incapable; any person who, though not insane, is, by
reason of old age, disease, weakness of mind, or any other cause, unable, unassisted, to properly manage and
take care of self or property and by reason thereof would be likely to be deceived or imposed upon by artful
or designing persons.

INCORPOREAL RIGHTS — Nonpossessory rights in real estate, a rising out of ownership, such as rents.

INCREMENT — An increase. Most frequently used to refer to the increase of value of land that accompanies
population growth and increasing wealth in the community. The term “unearned increment” is used in this
connection since values are supposed to have increased without effort on the part of the owner.

INDEMNITY AGREEMENT — An agreement by the maker of the document to repay the addressee of the
agreement up to the limit stated for any loss due to the contingency stated on the agreement.

INDENTURE — A formal written instrument made between two or more persons in different interests, such
as a lease.

INDEPENDENT CONTRACTOR — A person who acts for another but who sells final results and whose
methods of achieving those results are not subject to the control of another.

INDORSEMENT — The act of signing one’s name on the back of a check or note, with or without further
qualification.

INITIAL NOTE RATE — With regard to an adjustable rate mortgage, the note rate upon origination. This
rate may differ from the fully indexed note rate.

INITIAL RATE DISCOUNT — As applies to an adjustable rate mortgage, the index value at the time of loan
application plus the margin less the initial note rate.

INJUNCTION — A writ or order issued under the seal of a court to restrain one or more parties to a suit or
proceeding from doing an act which is deemed to be inequitable or unjust in regard to the rights of some
other party or parties in the suit or proceeding.

INSTALLMENT NOTE — A note which provides for a series of periodic payments of principal and interest,
until amount borrowed is paid in full. This periodic reduction of principal amortizes the loan.

INSTALLMENT REPORTING — A method of reporting capital gains by installments for successive tax
years to minimize the impact of the totality of the capital gains tax in the year of the sale.

INSTALLMENT SALES CONTRACT — Commonly called contract of sale or “land contract.” Purchase of
real estate wherein the purchase price is paid in installments over a long period of time, title is retained by
seller, and upon default by buyer (vendee) the payments may be forfeited.

INSTITUTIONAL LENDERS — A financial intermediary or depository, such as a savings and loan
association, commercial bank, or life insurance company, which pools money of its depositors and then
invests funds in various ways, including trust deed and mortgage loans.

INSTRUMENT — A written legal document; created to effect the rights of the parties, giving formal
expression to a legal act or agreement for the purpose of creating, modifying or terminating a right. Real
estate lenders’ basic instruments are — promissory notes, deeds of trust, mortgages, installment sales
contracts, leases, assignments.

INTEREST — A portion, share or right in something. Partial, not complete ownership. The charge in dollars
for the use of money for a period of time. In a sense, the “rent” paid for the use of money.

INTEREST EXTRA LOAN — A loan in which a fixed amount of principal is repaid in installments along
with interest accrued each period on the amount of the then outstanding principal only.

INTEREST ONLY LOAN — A straight, non-amortizing loan in which the lender receives only interest
during the term of the loan and principal is repaid in a lump sum at maturity.

INTEREST RATE — The percentage of a sum of money charged for its use. Rent or charge paid for use of
money, expressed as a percentage per month or year of the sum borrowed.

INTERIM LOAN — A short-term, temporary loan used until permanent financing is available, e.g., a
construction loan.

INTERMEDIATION — The process of pooling and supplying funds for investment by financial institutions
called intermediaries. The process is dependent on individual savers placing their funds with these
institutions and foregoing opportunities to directly invest in the investments selected.

INTERPLEADER — A court proceeding initiated by the stakeholder of property who claims no proprietary
interest in it for the purpose of deciding who among claimants is legally entitled to the property.

INTERVAL OWNERSHIP — A form of timeshare ownership. (See Timeshare Ownership.)

INTESTATE — A person who dies having made no will, or one which is defective in form, is said to have
died intestate, in which case the estate descends to the heirs at law or next of kin.

INVOLUNTARY LIEN — A lien imposed against property without consent of an owner; example — taxes,
special assessments, federal income tax liens, etc.

IRREVOCABLE — Incapable of being recalled or revoked, unchangeable.

IRRIGATION DISTRICTS — Quasi-political districts created under special laws to provide for water
services to property owners in the district; an operation governed to a great extent by law.

JOINT NOTE — A note signed by two or more persons who have equal liability for payment.

JOINT TENANCY — Undivided ownership of a property interest by two or more persons each of whom has
a right to an equal share in the interest and a right of survivorship, i.e., the right to share equally with other
surviving joint tenants in the interest of a deceased joint tenant.

JOINT VENTURE — Two or more individuals or firms joining together on a single project as partners.

JUDGMENT — The final determination of a court of competent jurisdiction of a matter presented to it; money
judgments provide for the payment of claims presented to the court, or are awarded as damages, etc.

JUDGMENT LIEN — A legal claim on all of the property of a judgment debtor which enables the judgment
creditor to have the property sold for payment of the amount of the judgment.

JUNIOR MORTGAGE — A mortgage recorded subsequently to another mortgage on the same property or
made subordinate by agreement to a later-recorded mortgage.

JURISDICTION — The authority by which judicial officers take cognizance of and decide causes; the power
to hear and determine a cause; the right and power which a judicial officer has to enter upon the inquiry.

LACHES — Delay or negligence in asserting one’s legal rights.

LAND — The material of the earth, whatever may be the ingredients of which it is composed, whether soil,
rock, or other substance, and includes free or unoccupied space for an indefinite distance upwards as well as
downwards.

LAND CONTRACT — A contract used in a sale of real property whereby the seller retains title to the
property until all or a prescribed part of the purchase price has been paid. Also commonly called a
conditional sales contract, installment sales contract or real property sales contract. (See REAL PROPERTY
SALES CONTRACT for statutory definition.)

LAND AND IMPROVEMENT LOAN — A loan obtained by the builder-developer for the purchase of land
and to cover expenses for subdividing.

LANDLORD — One who rents his or her property to another. The lessor under a lease.

LATE CHARGE — A charge assessed by a lender against a borrower failing to make loan installment
payments when due.

LATER DATE ORDER — The commitment for an owner’s title insurance policy issued by a title insurance
company which covers the seller’s title as of the date of the contract. When the sale closes the purchaser
orders the title company to record the deed to purchaser and bring down their examination to cover this later
date so as to show purchaser as owner of the property.

LATERAL SUPPORT — The support which the soil of an adjoining owner gives to a neighbor’s land.

LEASE — A contract between owner and tenant, setting forth conditions upon which tenant may occupy and
use the property and the term of the occupancy. Sometimes used as an alternative to purchasing property
outright, as a method of financing right to occupy and use real property.

LEASEHOLD ESTATE — A tenant’s right to occupy real estate during the term of the lease. This is a
personal property interest.

LEGAL DESCRIPTION — A land description recognized by law; a description by which property can be
definitely located by reference to government surveys or approved recorded maps.

LESSEE — One who contracts to rent, occupy, and use property under a lease agreement; a tenant.

LESSOR — An owner who enters into a lease agreement with a tenant; a landlord.

LEVEL-PAYMENT MORTGAGE — A loan on real estate that is paid off by making a series of equal (or
nearly equal) regular payments. Part of the payment is usually interest on the loan and part of it reduces the
amount of the unpaid principal balance of the loan. Also sometimes called an “amortized mortgage” or
“installment mortgage.”

LEVERAGE — The use of debt financing of an investment to maximize the return per dollar of equity
invested.

LEVY — To impose a tax.

LIEN — A form of encumbrance which usually makes specific property security for the payment of a debt or
discharge of an obligation. Example — judgments, taxes, mortgages, deeds of trust, etc.

LIFE ESTATE — An estate or interest in real property, which is held for the duration of the life of some
certain person. It may be limited by the life of the person holding it or by the life of some other person.

LIFE OF LOAN CAP (CAP RATE) — With regard to an adjustable rate mortgage, a ceiling the note rate
cannot exceed over the life of the loan.

LIMITATIONS, STATUTE OF — The commonly used identifying term for various statutes which require
that a legal action be commenced within a prescribed time after the accrual of the right to seek legal relief.

LIMITED PARTNERSHIP — A partnership consisting of a general partner or partners and limited partners
in which the general partners manage and control the business affairs of the partnership while limited
partners are essentially investors taking no part in the management of the partnership and having no liability
for the debts of the partnership in excess of their invested capital.

LINTEL — A horizontal board that supports the load over an opening such as a door or window.

LIQUIDATED DAMAGES — A sum agreed upon by the parties to be full damages if a certain event occurs.

LIQUIDATED DAMAGES CLAUSE — A clause in a contract by which the parties by agreement fix the
damages in advance for a breach of the contract.

LIQUIDITY — Holdings in or the ability to convert assets to cash or its equivalent. The ease with which a
person is able to pay maturing obligations.

LIS PENDENS — A notice filed or recorded for the purpose of warning all persons that the title or right to the
possession of certain real property is in litigation; literally “suit pending;” usually recorded so as to give
constructive notice of pending litigation.

LISTING — An employment contract between principal and agent authorizing the agent to perform services
for the principal involving the latter’s property; listing contracts are entered into for the purpose of securing
persons to buy, lease, or rent property. Employment of an agent by a prospective purchaser or lessee to
locate property for purchase or lease may be considered a listing.

LIVERY OF SEISIN (SEIZIN) — The appropriate ceremony at common law for transferring the possession
of lands by a grantor to a grantee.

LOAN ADMINISTRATION — Also called loan servicing Mortgage bankers not only originate loans, but
also “service” them from origination to maturity of the loan through handling of loan payments,
delinquencies, impounds, payoffs and releases.

LOAN APPLICATION — The loan application is a source of information on which the lender bases a
decision to make the loan; defines the terms of the loan contract, gives the name of the borrower, place of
employment, salary, bank accounts, and credit references, and describes the real estate that is to be
mortgaged. It also stipulates the amount of loan being applied for and repayment terms.

LOAN CLOSING — When all conditions have been met, the loan officer authorizes the recording of the trust
deed or mortgage. The disbursal procedure of funds is similar to the closing of a real estate sales escrow.
The borrower can expect to receive less than the amount of the loan, as title, recording, service, and other
fees may be withheld, or can expect to deposit the cost of these items into the loan escrow. This process is
sometimes called “funding” the loan.

LOAN COMMITMENT — Lender’s contractual commitment to make a loan based on the appraisal and
underwriting.

LOAN-TO-VALUE RATI0 — The percentage of a property’s value that a lender can or may loan to a
borrower. For example, if the ratio is 80% this means that a lender may loan 80% of the property’s appraised
value to a borrower.

MAI — Member of the Appraisal Institute. Designates a person who is a member of the American Institute of
Real Estate Appraisers.

MARGIN OF SECURITY — The difference between the amount of the mortgage loan (s) and the appraised
value of the property.

MARGINAL LAND — Land which barely pays the cost of working or using.

MARKET DATA APPROACH — One of the three methods in the appraisal process. A means of comparing
similar type properties, which have recently sold, to the subject property. Commonly used in comparing
residential properties.

MARKET PRICE — The price paid regardless of pressures, motives or intelligence.

MARKET VALUE — The highest price in terms of money which a property will bring in a competitive and
open market and under all conditions required for a fair sale, i.e., the buyer and seller acting prudently,
knowledgeably and neither affected by undue pressures.

MARKETABLE TITLE — Title which a reasonable purchaser, informed as to the facts and their legal
importance and acting with reasonable care, would be willing and ought to accept.

MATERIAL FACT — A fact is material if it is one which the agent should realize would be likely to affect
the judgment of the principal in giving his or her consent to the agent to enter into the particular transaction
on the specified terms.

MATURITY DATE — The date by which a loan is to be paid in full.

MECHANIC’S LIEN — A lien created by statute which exists against real property in favor of persons who
have performed work or furnished materials for the improvement of the real property.

MEDIATION CLAUSE — A clause in a contract requiring mediation in the event of a dispute.

MERIDIANS — Imaginary north-south lines which intersect base lines to form a starting point for the
measurement of land.

MESNE PROFITS — Profit from land use accruing between two periods as for example moneys owed to the
owner of land by a person who has illegally occupied the land after the owner takes title, but before taking
possession.

METES AND BOUNDS — A term used in describing the boundary lines of land, setting forth all the
boundary lines together with their terminal points and angles. Metes (length or measurements) and Bounds
(boundaries) description is often used when a great deal of accuracy is required.

MILE — 5,280 feet.

MINOR — A person under 18 years of age.

MISPLACED IMPROVEMENTS — Improvements on land which do not conform to the most profitable use
of the site.

MISREPRESENTATION — A false or misleading statement or assertion.

MOBILEHOME — As defined in Business and Professions Code Section 10131.6(c), “mobilehome” means a
structure transportable in one or more sections, designed and equipped to contain not more than two
dwelling units to be used with or without a foundation system. “Mobilehome” does not include a
recreational vehicle, as defined in Section 18010.5 of the Health and Safety Code, a commercial coach, as
defined in Section 18012 of the Health and Safety Code, or factory-built housing, as defined in Section
19971 of the Health and Safety Code.

MODULAR — A system for the construction of dwellings and other improvements to real property through
the on-site assembly of component parts (modules) that have been mass produced away from the building
site.

MOLDINGS — Usually patterned strips used to provide ornamental variation of outline or contour, such as
cornices, bases, window and door jambs.

MONETARY CONTROLS — Federal Reserve tools for regulating the availability of money and credit to
influence the level of economic activity, such as adjusting discount rates, reserve requirements, etc.

MONUMENT — A fixed object and point established by surveyors to establish land locations.

MORATORIUM — The temporary suspension, usually by statute, of the enforcement of liability of debt.
Temporary suspension of development or utilities connections imposed by local government.

MORTGAGE — An instrument recognized by law by which property is hypothecated to secure the payment
of a debt or obligation; a procedure for foreclosure in event of default is established by statute.

MORTGAGE BANKER — A person whose principal business is the originating, financing, closing, selling
and servicing of loans secured by real property for institutional lenders on a contractual basis.

MORTGAGE CONTRACTS WITH WARRANTS — Warrants make the mortgage more attractive to the
lender by providing both the greater security that goes with a mortgage, and the opportunity of a greater
return through the right to buy either stock in the borrower’s company or a portion of the income property
itself.

MORTGAGE GUARANTY INSURANCE — Insurance against financial loss available to mortgage lenders
from private mortgage insurance companies (PMICs).

MORTGAGE INVESTMENT COMPANY — A company or group of private investors that buys mortgages
for investment purposes.

MORTGAGE LOAN DISCLOSURE STATEMENT — The statement on a form approved by the Real
Estate Commissioner which is required by law to be furnished by a mortgage loan broker to the prospective
borrower of loans of a statutorily-prescribed amount before the borrower becomes obligated to complete the
loan.

MORTGAGEE — One to whom a mortgagor gives a mortgage to secure a loan or performance of an
obligation; a lender or creditor. (See definition of secured party.)

MORTGAGOR — One who gives a mortgage on his or her property to secure a loan or assure performance of
an obligation; a borrower.

MULTIPLE LISTING — A listing, usually an exclusive right to sell, taken by a member of an organization
composed of real estate brokers, with the provisions that all members will have the opportunity to find an
interested buyer; a cooperative listing insuring owner property will receive a wider market exposure.

MULTIPLE LISTING SERVICE — An association of real estate agents providing for a pooling of listings
and the sharing of commissions on a specified basis.

MUTUAL SAVINGS BANKS — Financial institutions owned by depositors each of whom has rights to net
earnings of the bank in proportion to his or her deposits.

MUTUAL WATER COMPANY — A water company organized by or for water users in a given district with
the object of securing an ample water supply at a reasonable rate; stock is issued to users.

NARRATIVE APPRAISAL — A summary of all factual materials, techniques and appraisal methods used by
the appraiser in setting forth his or her value conclusion.

NEGATIVE AMORTIZATION — Occurs when monthly installment payments are insufficient to pay the
interest accruing on the principal balance, so that the unpaid interest must be added to the principal due.

NEGOTIABLE — Capable of being negotiated, assignable or transferable in the ordinary course of business.

NET INCOME — The money remaining after expenses are deducted from income; the profit.

NET LEASE — A lease requiring a lessee to pay charges against the property such as taxes, insurance and
maintenance costs in addition to rental payments.

NET LISTING — A listing which provides that the agent may retain as compensation for agent’s services all
sums received over and above a net price to the owner.

NOMINAL INTEREST RATES — The percentage of interest that is stated in loan documents.

NONCONFORMING USE — A property use that doesn’t’ conform to current zoning requirements, but is
allowed because the property was being used in that way before the present zoning ordinance was enacted.

NOTARY PUBLIC — An appointed officer with authority to take the acknowledgment of persons executing
documents, sign the certificate, and affix official seal.

NOTE — A signed written instrument acknowledging a debt and promising payment, according to the
specified terms and conditions. A promissory note.

NOTE RATE — This rate determines the amount of interest charged on an annual basis to the borrower. Also
called the “accrual rate”, “contract rate” or “coupon rate.”

NOTICE — (l) Actual Notice - Express or implied knowledge of a fact. (2) Constructive notice - A fact,
imputed to a person by law, which should have been discovered because of the person’s actual notice of
circumstances and the inquiry that a prudent person would have been expected to make. (3) Legal Notice—
Information required to be given by law.

NOTICE OF NONRESPONSIBILITY — A notice provided by law designed to relieve property owner from
responsibility for the cost of unauthorized work done on the property or materials furnished therefor; notice
must be verified, recorded and posted.

NOTICE TO QUIT — A notice to a tenant to vacate rented property.

NOVATION — The substitution or exchange of a new obligation or contract for an old one by the mutual
agreement of the parties.

NULL AND VOID — Of no legal validity or effect.

OBSOLESCENCE — Loss in value due to reduced desirability and usefulness of a structure because its
design and construction become obsolete; loss because of becoming old-fashioned and not in keeping with
modern needs, with consequent loss of income. May be functional or economic.

OFFER TO PURCHASE — The proposal made to an owner of property by a potential buyer to purchase the
property under stated terms.

OFFSET STATEMENT — Statement by owner of property or owner of lien against property setting forth the
present status of liens against said property.

OPEN-END MORTGAGE — A mortgage containing a clause which permits the mortgagor to borrow
additional money after the loan has been reduced without rewriting the mortgage.

OPEN HOUSING LAW — Congress passed a law in April 1968 which prohibits discrimination in the sale of
real estate because of race, color, or religion of buyers.

OPEN LISTING — An authorization given by a property owner to a real estate agent wherein said agent is
given the nonexclusive right to secure a purchaser; open listings may be given to any number of agents
without liability to compensate any except the one who first secures a buyer ready, willing and able to meet
the terms of the listing, or secures the acceptance by the seller of a satisfactory offer.

OPINION OF TITLE — An attorney’s written evaluation of the condition of the title to a parcel of land after
examination of the abstract of title.

OPTION — A right given for a consideration to purchase or lease a property upon specified terms within a
specified time, without obligating the party who receives the right to exercise the right.

ORAL CONTRACT — A verbal agreement; one which is not reduced to writing.

ORIENTATION — Placing a structure on its lot with regard to its exposure to the rays of the sun, prevailing
winds, privacy from the street and protection from outside noises.

OSTENSIBLE AUTHORITY — That authority which a third person reasonably believes an agent possesses
because of the acts or omissions of the principal.

OVERIMPROVEMENT — An improvement which is not the highest and best use for the site on which it is
placed by reason of excess size or cost.

OWNERSHIP — The right of one or more persons to possess and use property to the exclusion of all others.
A collection of rights to the use and enjoyment of property.

PACKAGE MORTGAGE — A type of mortgage used in home financing covering real property,
improvements, and movable equipment/appliances.

PARAMOUNT TITLE — Title which is superior or foremost to all others.

PARTICIPATION — Sharing of an interest in a property by a lender. In addition to base interest on mortgage
loans on income properties, a percentage of gross income is required, sometimes predicated on certain
conditions being fulfilled, such as a minimum occupancy or percentage of net income after expenses, debt
service and taxes. Also called equity participation or revenue sharing.

PARTIES (PARTY) — Those entities taking part in a transaction as a principal, e.g., seller, buyer, or lender in
a real estate transaction.

PARTITION — A division of real or personal property or the proceeds therefrom among co-owners.

PARTITION ACTION — Court proceedings by which co-owners seek to sever their joint ownership.

PARTNERSHIP — A decision of the California Supreme Court has defined a partnership in the following
terms — “A partnership as between partners themselves may be defined to be a contract of two or more
persons to unite their property, labor or skill, or some of them, in prosecution of some joint or lawful
business, and to share the profits in certain proportions.” A voluntary association of two or more persons to
carry on a business or venture on terms of mutual participation in profits and losses.

PARTY WALL — A wall erected on the line between two adjoining properties, which are under different
ownership, for the use of both properties.

PAR VALUE — Market value, nominal value.

PATENT — Conveyance of title to government land.

PAYMENT ADJUSTMENT DATE — With regard to an adjustable rate mortgage, the date the borrower’s
monthly principal and interest payment may change.

PAYMENT CAP — With regard to an adjustable rate mortgage, this limits the amount of increase in the
borrower’s monthly principal and interest at the payment adjustment date, if the principal and interest
increase called for by the interest rate increase exceeds the payment cap percentage. This limitation is often
at the borrower’s option and may result in negative amortization.

PAYMENT RATE — With respect to an adjustable rate mortgage, the rate at which the borrower repays the
loan—reflects buydowns or payment caps.

PENALTY — An extra payment or charge required of the borrower for deviating from the terms of the
original loan agreement. Usually levied for being late in making regular payment or for paying off the loan
before it is due, known as “late charges” and “prepayment penalties.”

PERCENTAGE LEASE — Lease on the property, the rental for which is determined by amount of business
done by the lessee; usually a percentage of gross receipts from the business with provision for a minimum
rental.

PERIMETER HEATING — Baseboard heating, or any system in which the heat registers are located along
the outside walls of a room, especially under the windows.

PERIODIC INTEREST RATE CAP — With respect to an adjustable rate mortgage, limits the increase or
decrease in the note rate at each rate adjustment, thereby limiting the borrower’s payment increase or
decrease at the time of adjustment.

PERSONAL PROPERTY — Any property which is not real property.

PHYSICAL DETERIORATION — Impairment of condition. Loss in value brought about by wear and tear,
disintegration, use and actions of the elements; termed curable and incurable.

PLAINTIFF — In a court action, the one who sues; the complainant.

PLANNED DEVELOPMENT — A subdivision consisting of separately owned parcels of land together with
membership in an association which owns common area. Sometimes the owners of separate interests also
have an undivided interest in the common area.

PLANNED UNIT DEVELOPMENT — (PUD) A term sometimes used to describe a planned development. A
planning and zoning term describing land not subject to conventional zoning to permit clustering of
residences or other characteristics of the project which differ from normal zoning.

PLANNING COMMISSION — An agency of local government charged with planning the development,
redevelopment or preservation of an area.

PLAT (of survey) — A map of land made by a surveyor showing the boundaries, buildings, and other
improvements.

PLEDGE — The depositing of personal property by a debtor with a creditor as security for a debt or
engagement.

PLEDGEE — One who is given a pledge or a security. (See definition of Secured Party.)

PLEDGOR — One who offers a pledge or gives security. (See definition of debtor.)

PLOTTAGE — A term used in appraising to designate the increased value of two or more contiguous lots
when they are joined under single ownership and available for use as a larger single lot. Also called
assemblage.

PLOTTAGE INCREMENT — The appreciation in unit value created by joining smaller ownerships into one
large single ownership.

POINTS — See Discount Points.

POLICE POWER — The right of the State to enact laws and enforce them for the order, safety, health, morals
and general welfare of the public.

POWER OF ATTORNEY — A written instrument whereby a principal gives authority to an agent. The agent
acting under such a grant is sometimes called an attorney in fact.

POWER OF SALE — The power of a mortgagee or trustee when the instrument so provides to sell the
secured property without judicial proceedings if a borrower defaults in payment of the promissory note or
otherwise breaches the terms of the mortgage or deed of trust.

PREFABRICATED HOUSE — A house manufactured and sometimes partly assembled before delivery to
building site.

PREFERRED STOCK — A class of corporate stock entitled to preferential treatment such as priority in
distribution of dividends.

PREPAID ITEMS OF EXPENSE — Prorations of prepaid items of expense which are credited to the seller
in the closing escrow statement.

PREPAYMENT — Provision made for loan payments to be larger than those specified in the note.

PREPAYMENT PENALTY — The charge payable to a lender by a borrower under the terms of the loan
agreement if the borrower pays off the outstanding principal balance of the loan prior to its maturity.

PRESCRIPTION — The means of acquiring incorporeal interests in land, usually an easement, by
immemorial or long continued use. The time is ordinarily the term of the statute of limitations.

PRESUMPTION — An assumption of fact that the law requires to be made from another fact or group of facts
found or otherwise established in the section.

PRIMA FACIE — Latin meaning first sight, a fact presumed to be true until disproved.

PRINCIPAL — This term is used to mean the employer of an agent; or the amount of money borrowed, or the
amount of the loan. Also, one of the main parties in a real estate transaction, such as a buyer, borrower,
seller, lessor.

PRINCIPAL NOTE — The promissory note which is secured by the mortgage or trust deed.

PRIOR LIEN — A lien which is senior or superior to others.

PRIORITY OF LIEN — The order in which liens are given legal precedence or preference.

PRIVATE MORTGAGE INSURANCE — Mortgage guaranty insurance available to conventional lenders
on the first, high risk portion of a loan (PMI).

PRIVITY — Mutual relationship to the same rights of property, contractual relationship.

PRIVITY OF CONTRACT — The relationship which exists between the persons who are parties to a
contract.

PROCURING CAUSE — That cause originating from a series of events that, without break in continuity,
results in the prime object of an agent’s employment producing a final buyer; the real estate agent who first
procures a ready, willing, and able buyer for the agreed upon price and terms and is entitled to the
commission.

PROGRESS PAYMENTS — Scheduled, periodic, and partial payment of construction loan funds to a builder
as each construction stage is completed.

PROGRESSION, PRINCIPLE OF — The worth of a lesser valued residence tends to be enhanced by
association with higher valued residences in the same area.

PROMISSORY NOTE — Following a loan commitment from the lender, the borrower signs a note,
promising to repay the loan under stipulated terms. The promissory note establishes personal liability for its
payment. The evidence of the debt.

PROPERTY — Everything capable of being owned and acquired lawfully. The rights of ownership. The right
to use, possess, enjoy, and dispose of a thing in every legal way and to exclude everyone else from
interfering with these rights. Property is classified into two groups, personal property and real property.

PROPERTY MANAGEMENT — A branch of the real estate business involving the marketing, operation,
maintenance and day-to-day financing of rental properties.

PRO RATA — In proportion; according to a certain percentage or proportion of a whole.

PRORATION — Adjustments of interest, taxes, and insurance, etc., on a pro rata basis as of the closing or
agreed upon date. Fire insurance is normally paid for three years in advance. If a property is sold during this
time, the seller wants a refund on that portion of the advance payment that has not been used at the time the
title to the property is transferred. For example, if the property is sold two years later, seller will want to
receive 1/3 of the advance premium that was paid. Usually done in escrow by escrow holder at time of
closing the transaction.

PRORATION OF TAXES — To divide or prorate the taxes equally or proportionately to time of use, usually
between seller and buyer.

PROXIMATE CAUSE — That cause of an event which, in a natural and continuous sequence unbroken by
any new cause, produced that event, and without which the event would not have happened. Also, the
procuring cause.

PUBLIC RECORDS — Records which by law impart constructive notice of matters relating to land.

PUBLIC TRUSTEE — The county public official whose office has been created by statute to whom title to
real property in certain states, e.g., Colorado, is conveyed by Trust Deed for the use and benefit of the
beneficiary, who usually is the lender.

PURCHASE AND INSTALLMENT SALEBACK — Involves purchase of the property upon completion of
construction and immediate saleback on a long-term installment contract.

PURCHASE OF LAND, LEASEBACK AND LEASEHOLD MORTGAGES — An arrangement whereby
land is purchased by the lender and leased back to the developer with a mortgage negotiated on the resulting
leasehold of the income property constructed. The lender receives an annual ground rent, plus a percentage
of income from the property.

PURCHASE AND LEASEBACK — Involves the purchase of property by buyer and immediate leaseback to
seller.

PURCHASE MONEY MORTGAGE OR TRUST DEED — A trust deed or mortgage given as part or all of
the purchase consideration for real property. In some states the purchase money mortgage or trust deed loan
can be made by a seller who extends credit to the buyer of property or by a third party lender (typically a
financial institution) that makes a loan to the buyer of real property for a portion of the purchase price to be
paid for the property. In many states there are legal limitations upon mortgagees and trust deed beneficiaries
collecting deficiency judgments against the purchase money borrower after the collateral hypothecated under
such security instruments has been sold through the foreclosure process. Generally no deficiency judgment
is allowed if the collateral property under the mortgage or trust deed is residential property of four units or
less with the debtor occupying the property as a place of residence.

QUANTITY SURVEY — A highly technical process in arriving at cost estimate of new construction and
sometimes referred to in the building trade as the “price take-off” method. It involves a detailed estimate of
the quantities of raw material (lumber, plaster, brick, cement, etc.,) used as well as the current price of the
material and installation costs. These factors are all added together to arrive at the cost of a structure. It is
usually used by contractors and experienced estimators.

QUARTER ROUND — A molding that presents a profile of a quarter circle.

QUIET ENJOYMENT — Right of an owner or tenant to the use of the property without interference of
possession.

QUIET TITLE — A court action brought to establish title; to remove a cloud on the title.

QUITCLAIM DEED — A deed to relinquish any interest in property which the grantor may have, without
any warranty of title or interest.

RADIANT HEATING — A method of heating, usually consisting of coils, or pipes placed in the floor, wall,
or ceiling.

RANGE — A strip or column of land six miles wide, determined by a government survey, running in a north-
south direction, lying east or west of a principal meridian.

RANGE LINES — A series of government survey lines running north and south at six-mile intervals starting
with the principal meridian and forming the east and west boundaries of townships.

RATE ADJUSTMENT DATE — With respect to an adjustable rate mortgage, the date the borrower’s note
rate may change.

RATIFICATION — The adoption or approval of an act performed on behalf of a person without previous
authorization, such as the approval by a principal of previously unauthorized acts of an agent, after the acts
have been performed.

READY, WILLING AND ABLE BUYER — One who is fully prepared to enter into the contract, really
wants to buy, and unquestionably meets the financing requirements of purchase.

REAL ESTATE — (See Real Property.)

REAL ESTATE BOARD — An organization whose members consist primarily of real estate brokers and
salespersons.

REAL ESTATE INVESTMENT TRUST — (See REIT).

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) — A federal law requiring the disclosure
to borrowers of settlement (closing) procedures and costs by means of a pamphlet and forms prescribed by
the United States Department of Housing and Urban Development.

REAL ESTATE SYNDICATE — An organization of investors usually in the form of a limited partnership
who have joined together for the purpose of pooling capital for the acquisition of real property interests.

REAL ESTATE TRUST — A special arrangement under Federal and State law whereby investors may pool
funds for investments in real estate and mortgages and yet escape corporation taxes, profits being passed to
individual investors who are taxed.

REAL PROPERTY — Land and anything growing on, attached to, or erected on it, excluding anything that
may be severed without injury to the land.

REAL PROPERTY LOAN LAW — Article 7 of Chapter 3 of the Real Estate Law under which a real estate
licensee negotiating loans secured by real property within a specified range is required to give the borrower
a statement disclosing the costs and terms of the loan and which also limits the amount of expenses and
charges that a borrower may pay with respect to the loan.

REAL PROPERTY SALES CONTRACT — An agreement to convey title to real property upon satisfaction
of specified conditions which does not require conveyance within one year of formation of the contract.

RECAPTURE — The process of recovery by an owner of money invested by employing the use of a rate of
interest necessary to provide for the return of an investment; not to be confused with interest rate, which is a
rate of return on an investment.

RECONVEYANCE — The transfer of the title of land from one person to the immediate preceding owner.
This instrument of transfer is commonly used to transfer the legal title from the trustee to the trustor
(borrower) after a trust deed debt has been paid in full.

RECORDING — The process of placing a document on file with a designated public official for public notice.
This public official is usually a county officer known as the County Recorder who designates the fact that a
document has been presented for recording by placing a recording stamp upon it indicating the time of day
and the date when it was officially placed on file. Documents filed with the Recorder are considered to be
placed on open notice to the general public of that county. Claims against property usually are given a
priority on the basis of the time and the date they are recorded with the most preferred claim going to the
earliest one recorded and the next claim going to the next earliest one recorded, and so on. This type of
notice is called “constructive notice” or “legal notice”.

REDEEM — To buy back; repurchase; recover.

REDEMPTION — Buying back one’s property after a judicial sale.

REDLINING — A lending policy, illegal in California, of denying real estate loans on properties in older,
changing urban areas, usually with large minority populations, because of alleged higher lending risks
without due consideration being given by the lending institution to the credit worthiness of the individual
loan applicant.

REFINANCING — The paying-off of an existing obligation and assuming a new obligation in its place. To
finance anew, or extend or renew existing financing.

REFORMATION — An action to correct a mistake in a deed or other document.

REHABILITATION — The restoration of a property to satisfactory condition without drastically changing
the plan, form or style of architecture.

REIT — A Real Estate Investment Trust is a business trust which deals principally with interest in land—
generally organized to conform to the Internal Revenue Code.

RELEASE CLAUSE — A stipulation that upon the payment of a specific sum of money to the holder of a
trust deed or mortgage, the lien of the instrument as to a specifically described lot or area shall be removed
from the blanket lien on the whole area involved.

RELEASE DEED — An instrument executed by the mortgagee or the trustee reconveying to the mortgagor or
trustor the real estate which secured the loan after the debt has been paid in full.

REMAINDER — An estate which takes effect after the termination of the prior estate, such as a life estate. A
future possessory interest in real estate.

REMAINDER DEPRECIATION — The possible future loss in value of an improvement to real property.

RENEGOTIABLE RATE MORTGAGE — A loan secured by a long term mortgage which provides for
renegotiation, at pre-determined intervals, of the interest rate (for a maximum variation of five percent over
the life of the mortgage.)

RENUNCIATION — When someone who has been granted something or has accepted something later gives
it up or rejects it; as when an agent withdraws from the agency relationship.

REPLACEMENT COST — The cost to replace a structure with one having utility equivalent to that being
appraised, but constructed with modern materials and according to current standards, design and layout.

REPRODUCTION COST — The cost of replacing the subject improvement with one that is the exact replica,
having the same quality of workmanship, design and layout, or cost to duplicate an asset.

RESCISSION — The cancellation of a contract and restoration of the parties to the same position they held
before the contract was entered into.

RESCISSION OF CONTRACT — The abrogation or annulling of contract; the revocation or repealing of
contract by mutual consent by parties to the contract, or for cause by either party to the contract.

RESERVATION — A right retained by a grantor in conveying property.

RESERVES — 1) In a common interest subdivisions, an accumulation of funds collected from owners for
future replacement and major maintenance of the common area and facilities. 2) With regard to mortgage
loans, an accumulation of funds, collected by the lender from the borrower as part of each monthly mortgage
payment, an amount allocated to pay property taxes and insurance when they are due.

RESPA — (See Real Estate Settlement Procedures Act.)

RESTRICTION — A limitation on the use of real property. Property restrictions fall into two general
classifications—public and private. Zoning ordinances are examples of the former type. Restrictions may be
created by private owners, typically by appropriate clauses in deeds, or in agreements, or in general plans of
entire subdivisions. Usually they assume the form of a covenant, or promise to do or not to do a certain
thing.

RETROSPECTIVE VALUE — The value of the property as of a previous date.

RETURN — Profit from an investment; the yield.

REVERSION — The right to future possession or enjoyment by a person, or the person’s heirs, creating the
preceding estate. (For example, at the end of a lease.)

REVERSIONARY INTEREST — The interest which a person has in lands or other property, upon the
termination of the preceding estate. A future interest.

REVOCATION — When someone who granted or offered something withdraws it; as when a principal
withdraws the authority granted to the agent, an offeror withdraws the offer or the DRE cancels a
salesperson or broker license.

RIGHT OF SURVIVORSHIP — The right of a surviving tenant or tenants to succeed to the entire interest of
the deceased tenant; the distinguishing feature of a joint tenancy.

RIGHT OF WAY — A privilege operating as an easement upon land, whereby the owner does by grant, or by
agreement, give to another the right to pass over owner’s land, to construct a roadway, or use as a roadway,
a specific part of the land; or the right to construct through and over the land, telephone, telegraph, or
electric power lines; or the right to place underground water mains, gas mains, or sewer mains.

RIGHT, TITLE AND INTEREST — A term used in deeds to denote that the grantor is conveying all of that
to which grantor held claim.

RIPARIAN RIGHTS — The right of a landowner whose land borders on a stream or watercourse to use and
enjoy the water which is adjacent to or flows over the owners land provided such use does not injure other
riparian owners.

RISK ANALYSIS — A study made, usually by a lender, of the various factors that might affect the repayment
of a loan.

RISK RATING — A process used by the lender to decide on the soundness of making a loan and to reduce all
the various factors affecting the repayment of the loan to a qualified rating of some kind.

SALE AND LEASEBACK — A financial arrangement where at the time of sale the seller retains occupancy
by concurrently agreeing to lease the property from the purchaser. The seller receives cash while the buyer is
assured a tenant and a fixed return on buyer’s investment.

SALE-LEASEBACK-BUY-BACK — A sale and leaseback transaction in which the leaseholder has the
option to buy back the original property after a specified period of time.

SALES CONTRACT — A contract by which buyer and seller agree to terms of a sale.

SALVAGE VALUE — In computing depreciation for tax purposes, the reasonably anticipated fair market
value of the property at the end of its useful life and must be considered with all but the declining balance
methods of depreciation.

SANDWICH LEASE — A leasehold interest which lies between the primary lease and the operating lease.

SASH — Wood or metal frames containing one or more window panes.

SATISFACTION — Discharge of a mortgage or trust deed from the records upon payment of the debt.

SATISFACTION PIECE — An instrument for recording and acknowledging payment of an indebtedness
secured by a mortgage.

SCRIBING — Fitting woodwork to an irregular surface.

SEAL — An impression made to attest the execution of an instrument.

SECONDARY FINANCING — A loan secured by a second mortgage or trust deed on real property. These
can be third, fourth, fifth, sixth mortgages or trust deeds, on and on ad infinitum.

SECONDARY MARKET — The buying and selling of existing deeds of trust and promissory notes. The
primary market is the one in which lenders loan money to borrowers; the secondary market is the one in
which the lenders sell their loans to the large secondary marketing agencies (FNMA, FHLMC, and GNMA)
or to other investors.

SECTION — Section of land is established by government survey, contains 640 acres and is one mile square.

SECURED PARTY — This is the party having the security interest. Thus the mortgagee, the conditional
seller, the pledgee, etc., are all now referred to as the secured party. (Uniform Commercial Code.)

SECURITY AGREEMENT — An agreement between the secured party and the debtor which creates the
security interest. (Uniform Commercial Code.)

SECURITY INTEREST — A term designating the interest of the creditor in the property of the debtor in all
types of credit transactions. It thus replaces such terms as the following — chattel mortgage; pledge; trust
receipt; chattel trust; equipment trust; conditional sale; inventory lien; etc., according to Uniform
Commercial Code usage.

SEISIN (SEIZIN) — Possession of real estate by one entitled thereto.

SELLER’S MARKET — The market condition which exists when a seller is in a more commanding position
as to price and terms because demand exceeds supply.

SEPARATE PROPERTY — Property owned by a married person in his or her own right outside of the
community interest including property acquired by the spouse (1) before marriage, (2) by gift or inheritance,
(3) from rents and profits on separate property, and (4) with the proceeds from other separate property.

SEPTIC TANK — An underground tank in which sewage from the house is reduced to liquid by bacterial
action and drained off.

SERVICING LOANS — Supervising and administering a loan after it has been made. This involves such
things as — collecting the payments, keeping accounting records, computing the interest and principal,
foreclosure of defaulted loans, and so on.

SET BACK ORDINANCE — An ordinance requiring improvements built on property to be a specified
distance from the property line, street or curb.

SEVERALTY OWNERSHIP — Owned by one person only. Sole ownership.

SHARED APPRECIATION MORTGAGE — A loan having a fixed rate of interest set below the market
rate for the term of the loan which also provides for contingent interest to be paid to the lender on a certain
percentage of appreciation in the value of the property against which the loan is secured upon transfer or sale
of the property or the repayment of the loan.

SHERIFF’S DEED — Deed given by court order in connection with sale of property to satisfy a judgment.

SIMPLE INTEREST — Interest computed on the principal amount of a loan only as distinguished from
compound interest.

SINKING FUND — Fund set aside from the income from property which, with accrued interest, will
eventually pay for replacement of the improvements.

SLANDER OF TITLE — False and malicious statements disparaging an owner’s title to property and
resulting in actual pecuniary damage to the owner.

SPECIAL ASSESSMENT — 1) Legal charge against real estate by a public authority to pay cost of public
improvements such as street lights, sidewalks, street improvements. 2) In a common interest subdivision, a

charge, in addition to the regular assessment, levied by the association against owners in the development,
for unanticipated repairs or maintenance on the common area or capital improvement of the common area.

SPECIAL POWER OF ATTORNEY — A written instrument whereby a principal confers limited authority
upon an agent to perform certain prescribed acts on behalf of the principal.

SPECIAL WARRANTY DEED — A deed in which the grantor warrants or guarantees the title only against
defects arising during grantor’s ownership of the property and not against defects existing before the time of
grantor’s ownership.

SPECIFIC PERFORMANCE — An action to compel performance of an agreement, e.g., sale of land as an
alternative to damages or rescission.

SREA — Society of Real Estate Appraisers.

STANDARD DEPTH — Generally the most typical lot depth in the neighborhood.

STANDBY COMMITMENT — The mortgage banker frequently protects a builder by a “standby”
agreement, under which banker agrees to make mortgage loans at an agreed price for many months into the
future. The builder deposits a “standby fee” with the mortgage banker for this service. Frequently, the
mortgage broker protects self by securing a “standby” from a long-term investor for the same period of time,
paying a fee for this privilege.

STATUTE OF FRAUDS — A state law, based on an old English statute, requiring certain contracts to be in
writing and signed before they will be enforceable at law, e.g.. contracts for the sale of real property,
contracts not be performed within one year.

STATUTORY WARRANTY DEED — A short term warranty deed which warrants by inference that the
seller is the undisputed owner, has the right to convey the property, and will defend the title if necessary.
This type of deed protects the purchaser in that the conveyor covenants to defend all claims against the
property. If conveyor fails to do so, the new owner can defend said claims and sue the former owner.

STRAIGHT LINE DEPRECIATION — A method of depreciation under which improvements are
depreciated at a constant rate throughout the estimated useful life of the improvement.

STRAIGHT NOTE — A note in which a borrower repays the principal in a lump sum at maturity while
interest is paid in installments or at maturity. (See Interest Only Note.)

SUBAGENT — A person upon whom the powers of an agent have been conferred, not by the principal, but by
an agent as authorized by the agent’s principal.

SUBDIVISION — A legal definition of those divisions of real property for the purpose of sale, lease or
financing which are regulated by law. For examples see — California Business and Professions Code
Sections 11000, 11000.1, 11004.5; California Government Code Section 66424; United States Code, Title
15, Section 1402(3).

“SUBJECT TO” A MORTGAGE — When a grantee takes title to real property subject to a mortgage,
grantee is not responsible to the holder of the promissory note for the payment of any portion of the amount
due. The most that grantee can lose in the event of a foreclosure is grantee’s equity in the property. (See also
“assumption of mortgage”.) In neither case is the original maker of the note released from primary
responsibility. If liability is to be assumed, the agreement must so state.

SUBLEASE — A lease given by a lessee.

SUBORDINATE — To make subject to, or junior or inferior to.

SUBORDINATION AGREEMENT — An agreement by the holder of an encumbrance against real property
to permit that claim to take an inferior position to other encumbrances against the property.

SUBPOENA — A legal order to cause a witness to appear and give testimony.

SUBROGATION — Replacing one person with another in regard to a legal right or obligation. The
substitution of another person in place of the creditor, to whose rights he or she succeeds in relation to the
debt. The doctrine is used very often where one person agrees to stand surety for the performance of a
contract by another person.

SUBSIDY BUYDOWN — Funds provided usually by the builder or seller to temporarily reduce the
borrower’s monthly principal and interest payment.

SUBSTITUTION, PRINCIPLE OF — Affirms that the maximum value of a property tends to be set by the
cost of acquiring an equally desirable and valuable substitute property, assuming no costly delay is
encountered in making the substitution.

SUM OF THE YEARS DIGITS — An accelerated depreciation method.

SUPPLY AND DEMAND, PRINCIPLE OF — In appraising, a valuation principle starting that market value
is affected by intersection of supply and demand forces in the market as of the appraisal date.

SURETY — One who guarantees the performance of another — Guarantor.

SURPLUS PRODUCTIVITY, PRINCIPLE OF — The net income that remains after the proper costs of
labor, organization and capital have been paid, which surplus is imputable to the land and tends to fix the
value thereof.

SURVEY — The process by which a parcel of land is measured and its area is ascertained.

SYNDICATE — A partnership organized for participation in a real estate venture. Partners may be limited or
unlimited in their liability. (See real estate syndicate.)

TAKE-OUT LOAN — The loan arranged by the owner or builder developer for a buyer. The construction
loan made for construction of the improvements is usually paid in full from the proceeds of this more
permanent mortgage loan.

TAX — Enforced charge exacted of persons, corporations and organizations by the government to be used to
support government services and programs.

TAX DEED — The deed given to a purchaser at a public sale of land held for nonpayment of taxes. It conveys
to the purchaser only such title as the defaulting taxpayer had.

TAX-FREE EXCHANGE — The trade or exchange of one real property for another without the need to pay
income taxes on the gain at the time of trade.

TAX SALE — Sale of property after a period of nonpayment of taxes.

TENANCY IN COMMON — Co-ownership of property by two or more persons who each hold an undivided
interest, without right of survivorship; interests need not be equal.

TENANT — The party who has legal possession and use of real property belonging to another.

TENANTS BY THE ENTIRETIES — Under certain state laws, ownership of property acquired by a husband
and wife during marriage, which property is jointly and equally owned. Upon depth of one spouse it
becomes the property of the survivor.

TENTATIVE MAP — The Subdivision Map Act requires subdividers to submit initially a tentative map of
their tract to the local planning commission for study. The approval or disapproval of the planning
commission is noted on the map. Thereafter, a final map of the tract embodying any changes requested by
the planning commission is required to be filed with the planning commission.

TENURE IN LAND — The mode or manner by which an estate in lands is held. All rights and title rest with
owner.

TERMITES — Ant-like insects which feed on wood and are highly destructive to wooden structures.

TERMITE SHIELD — A shield, usually of noncorrodible metal, placed on top of the foundation wall or
around pipes to prevent passage of termites.

TESTATOR — One who makes a will.

THIRD PARTY — Persons who are not parties to a contract which affects an interest they have in the object
of the contract.

THRESHOLD — A strip of wood or metal beveled on each edge and used above the finished floor under
outside doors.

TIDELANDS — Lands that are covered and uncovered by the ebb and flow of the tide.

TIME IS OF THE ESSENCE — A condition of a contract expressing the essential nature of performance of
the contract by a party in a specified period of time.

TIME-SHARE ESTATE — A right of occupancy in a time-share project (subdivision) which is coupled with
an estate in the real property.

TIME-SHARE PROJECT — A form of subdivision of real property into rights to the recurrent, exclusive use
or occupancy of a lot, parcel, unit, or segment of real property, on an annual or some other periodic basis, for
a specified period of time.

TIME-SHARE USE — A license or contractual or membership right of occupancy in a timeshare project
which is not coupled with an estate in the real property.

TITLE — Indicates “fee’’ position of lawful ownership and right to property. “Bundle of Rights” possessed by
an owner. Combination of all elements constituting proof of ownership.

TITLE INSURANCE — Insurance to protect a real property owner or lender up to a specified amount against
certain types of loss, e.g., defective or unmarketable title.

TITLE REPORT — A report which discloses condition of the title, made by a title company preliminary to
issuance of title insurance policy.

TITLE THEORY — Mortgage arrangement whereby title to mortgaged real property vests in the lender.
Some states give greater protection to mortgage lenders and assume lenders have title interest. Distinguished
from Lien Theory States.

TOPOGRAPHY — Nature of the surface of land; topography may be level, rolling, mountainous. Variation in
earth’s surface.

TORRENS TITLE — System of title records provided by state law (no longer used in California)

TORT — Any wrongful act (not involving a breach of contract) for which a civil section will lie for the person
wronged.

TOWNHOUSE — One of a row of houses usually of the same or similar design with common side walls or
with a very narrow space between adjacent side walls.

TOWNSHIP — In the survey of public lands of the United States, a territorial subdivision six miles long, six
miles wide and containing 36 sections, each one mile square, located between two range lines and two
township lines.

TRADE FIXTURES — Articles of personal property annexed by a business tenant to real property which are
necessary to the carrying on of a trade and are removable by the tenant.

TRADE-IN — An increasingly popular method of guaranteeing an owner a minimum amount of cash on sale
of owner’s present property to permit owner to purchase another. If the property is not sold within a
specified time at the listed price, the broker agrees to arrange financing to personally purchase the property
at an agreed upon discount.

TRANSFER FEE — A charge made by a lending institution holding or collecting on a real estate mortgage to
change its records to reflect a different ownership.

TRUST ACCOUNT — An account separate and apart and physically segregated from broker’s own funds, in
which broker is required by law to deposit all funds collected for clients.

TRUST DEED — Just as with a mortgage this is a legal document by which a borrower pledges certain real
property or collateral as guarantee for the repayment of a loan. However, it differs from the mortgage in a
number of important respects. For example, instead of there being two parties to the transaction there are
three. There is the borrower who signs the trust deed and who is called the trustor. There is the third, neutral
party, to whom trustor deeds the property as security for the payment of the debt, who is called the trustee.
And, finally, there is the lender who is called the beneficiary, the one who benefits from the pledge
agreement in that in the event of a default the trustee can sell the property and transfer the money obtained at
the sale to lender as payment of the debt.

TRUSTEE — One who holds property in trust for another to secure the performance of an obligation. Third
party under a deed of trust.

TRUSTOR — One who borrows money from a trust deed lender, then deeds the real property securing the
loan to a trustee to be held as security until trustor has performed the obligation to the lender under terms of
a deed of trust.

TRUTH IN LENDING — The name given to the federal statutes and regulations (Regulation Z) which are
designed primarily to insure that prospective borrowers and purchasers on credit receive credit cost
information before entering into a transaction.

UNDERIMPROVEMENT — An improvement which, because of its deficiency in size or cost, is not the
highest and best use of the site.

UNDERWRITING — Insuring something against loss; guaranteeing financially.

UNDUE INFLUENCE — Use of a fiduciary or confidential relationship to obtain a fraudulent or unfair
advantage over another’s weakness of mind, or distress or necessity.

UNEARNED INCREMENT — An increase in value of real estate due to no effort on the part of the owner;
often due to increase in population.

UNIFORM COMMERCIAL CODE — Establishes a unified and comprehensive method for regulation of
security transactions in personal property, superseding the existing statutes on chattel mortgages, conditional
sales, trust receipts, assignment of accounts receivable and others in this field.

UNIT-IN-PLACE METHOD — The cost of erecting a building by estimating the cost of each component
part, i.e., foundations, floors, walls, windows, ceilings, roofs, etc., (including labor and overhead).

URBAN PROPERTY — City property; closely settled property.

USURY — On a loan, claiming a rate of interest greater than that permitted by law.

UTILITIES — Refers to services rendered by public utility companies, such as — water, gas, electricity,
telephone.

UTILITY — The ability to give satisfaction and/or excite desire for possession. An element of value.

VACANCY FACTOR — The percentage of a building’s space that is not rented over a given period.

VALID — Having force, or binding force; legally sufficient and authorized by law.

VALLEY — The internal angle formed by the junction of two sloping sides of a roof.

VALUATION — Estimated worth or price. Estimation. The act of valuing by appraisal.

VA LOAN — A loan made to qualified veterans for the purchase of real property wherein the Department of
Veteran’s Affairs guarantees the lender payment of the mortgage.

VALUE — Present worth of future benefits arising out of ownership to typical users/investors.

VARIABLE INTEREST RATE — (VlRs or VMRs, Variable Mortgage Rates.) An interest rate in a real
estate loan which by the terms of the note varies upward and downward over the term of the loan depending
on money market conditions.

VENDEE — A purchaser; buyer.

VENDOR — A seller.

VENEER — Thin sheets of wood.

VERIFICATION — Sworn statement before a duly qualified officer to correctness of contents of an
instrument.

VESTED — Bestowed upon someone; secured by someone, such as title to property.

VOID — To have no force or effect; that which is unenforceable.

VOIDABLE — That which is capable of being adjudged void, but is not void unless action is taken to make it
so.

VOLUNTARY LIEN — Any lien placed on property with consent of, or as a result of, the voluntary act of the
owner.

WAINSCOTING — Wood lining of an interior wall; lower section of a wall when finished differently from
the upper part.

WAIVE — To relinquish, or abandon; to forego a right to enforce or require anything.

WARRANTY OF AUTHORITY — A representation by an agent to third persons that the agent has and is
acting within the scope of authority conferred by his or her principal.

WARRANTY DEED — A deed used to convey real property which contains warranties of title and quiet
possession, and the grantor thus agrees to defend the premises against the lawful claims of third persons. It is
commonly used in many states but in others the grant deed has supplanted it due to the modern practice of

securing title insurance policies which have reduced the importance of express and implied warranty in
deeds.

WASTE — The destruction, or material alteration of, or injury to premises by a tenant.

WATER TABLE — Distance from surface of ground to a depth at which natural groundwater is found.

WEAR AND TEAR — Depreciation of an asset due to ordinary usage.

WILL — A written, legal declaration of a person expressing his or her desires for the disposition of that
person’s property after his or her death.

WRAP AROUND MORTGAGE — A financing device whereby a lender assumes payments on existing trust
deeds of a borrower and takes from the borrower a junior trust deed with a face value in an amount equal to
the amount outstanding on the old trust deeds and the additional amount of money borrowed.

X — An individual who cannot write may execute a legal document by affixing an “X” (his/her mark) where
the signature normally goes. Beneath the mark a witness then writes the person’s name and signs his or her
own name as witness.

YARD — A unit of measurement 3 feet long.

YIELD — The interest earned by an investor on an investment (or by a bank on the money it has loaned).
Also, called return.

YIELD RATE — The yield expressed as a percentage of the total investment. Also, called rate of return.

ZONE — The area set off by the proper authorities for specific use; an area subject to certain restrictions or
restraints.

ZONING — Act of city or county authorities specifying type of use to which property may be put in specific
areas.

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Chapter 4 - Property somebody Wed, 07/19/2023 - 02:09 am

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FIXTURES

FIXTURES somebody Wed, 07/19/2023 - 02:09 am

FIXTURES

Fixtures are items of personal property which are attached to the land in such a manner as to be considered part
of the real property.

The courts have utilized five general tests to determine whether or not a given piece of personal property is a
fixture. These are:

1. The intention of the person incorporating the personal property into the land.

2. The method by which the property is incorporated into the land. The degree of permanence of the
annexation is significant. For example, if the attachment is by cement and plaster, the item so attached is
likely to be classified as a fixture.

3. The adaptability of the personal property so attached for ordinary use in connection with the land. If well
adapted, the item is probably a fixture.

4. The existence of an agreement between the parties involved as to the nature of the property affixed to the
land. If there is a clear agreement, the status of the attached item is not likely to be an issue.

5. The relationship between the person who adds or annexes the article and the person with whom a dispute
arises as to its character. This would usually involve seller and buyer or landlord and tenant.

Buyers and lenders inspecting property in contemplation of purchase or loan are justified in assuming that
whatever is attached to the land or building and is essential for its use will be part of the conveyance/security.
The contract should state clearly any desired exceptions.

A tenant may, during the term of the tenancy, remove from the premises anything the tenant has affixed thereto
for purposes of trade, manufacture, ornament or domestic use, provided the removal can be accomplished
without damage to the premises. This exception does not apply if the thing has, by the manner in which it is
affixed, become an integral part of the premises.

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HISTORICAL DERIVATIONS

HISTORICAL DERIVATIONS somebody Wed, 07/19/2023 - 02:09 am

HISTORICAL DERIVATIONS

In English Common Law, the word property referred not to the thing owned, but rather to the rights which the
owner had: the rights to possess, use, encumber, transfer and exclude others. Property consisted of a “bundle of
rights” or a “bundle of interests” a person had in a thing, whether the thing was real or personal property.

The early English courts distinguished between lawsuits in which the landowner, if wrongfully ousted, could
recover the land itself (the “real thing”) and those lawsuits in which the owner could recover only monetary
damages. By bringing a “real action,” the owner could receive the return of the land, the “real property.” An
action for monetary damages was called “personal,” and the owner’s limited interest was labeled “personal
property.”

In the feudal society of medieval England, an estate was the ownership interest that a person had in the land.
The estate was termed a freehold estate when the owner’s interest was not subject to certain servile incidents or
demands of the overlord. Only an owner of a freehold estate could bring a real action. Therefore, only freehold
estates were regarded as real property. A freehold estate was of indefinite duration. A less-than-freehold estate
was an interest of specified duration.

Freehold Estates

A freehold estate could be an estate in fee or a life estate. An estate in fee could be either absolute or qualified.

An estate in fee simple absolute was the largest estate recognized by the law. Among other rights, its owner
controlled its disposition, including the right to will it. Upon disposition, this estate could become qualified by a
condition. For example, grantor A could sell the estate to grantee B on the condition that the property be used
as a hostel for itinerant musicians. If B changed the use, A could reenter the property and terminate B’s estate.
Hence, B’s fee estate could be defeated and was termed fee simple defeasible.

A life estate would be created if grantor A conveyed real property to B for the life of B or the life of some other
person, with the initial grant controlling disposition of the estate upon the death of B (or the death of the other
person). Again, this was a freehold because its duration was not fixed in specified temporal terms (i.e., months
or years).

Less-Than-Freehold Estates

Less-than-freehold estates were the rights of tenants who rented or leased real property. These estates were
personal property.

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LAND DESCRIPTIONS

LAND DESCRIPTIONS somebody Wed, 07/19/2023 - 02:09 am

LAND DESCRIPTIONS

Every parcel of land sold, leased or mortgaged must be properly identified or described. These descriptions are
often referred to as legal descriptions. A good description is said to be one which describes no other piece of
property but the one involved in the transaction.

The three most common methods of describing property are: by recorded map; by U. S. Government section
and township; and by metes and bounds.

Recorded Map

In California, the Subdivision Map Act (Government Code Sections 66410 et seq.) requires the mapping of all
new subdivisions. The map shows the relationship of the subdivision to other lands and each parcel in the
subdivision is delineated and identified. When accepted by county or city authority, the map is filed in the
county recorder’s office. Documentation can then describe any lot in the subdivision by indicating the lot
number, the block, and the map. The description also includes the name of the city, county and state. For
example:

“Lot 14, Block B, Parkview Addition (as recorded July 17, 1956, Book 2, Page 49 of maps), City of
Sacramento, County of Sacramento, State of California.”

Description by Township and Section

In the township and section system, we begin with base lines, which are horizontal, and meridians, which are
vertical.

This system establishes a grid of vertical lines (“ranges”) and horizontal lines (“township” lines). The lines are
six miles apart. A square created by intersections is therefore six miles on each side and contains 36 square
miles. Each of these squares is called a township. (In order to correct for the spherical shape of the Earth,
additional guide meridians are run every 24 miles east and west of the meridian and standard parallels are run
every 24 miles north and south of the base line. These are known as correction lines.)

In land descriptions, we move “townships” (north or south) from a principal base line and “ranges” (east or
west) from a principal meridian,

California has three sets of base lines and meridians: the Humboldt Base Line and Meridian in the northwestern
part of the State; the Mt. Diablo Base Line and Meridian in the central part of the State; and the San Bernardino
Base Line and Meridian in the southern part of the State.

The description “township 4 north, range 3 east, Humboldt Base Line and Meridian” directs us to the township
which is 4 townships to the north from the Humboldt Base Line and 3 townships to the east from the Humboldt
Meridian.

Here is a township, with its 36 (square mile) sections numbered and further divided so that the smallest squares
are quarters of quarter sections, each containing 40 acres.

The following mathematical observations may aid understanding of section/township descriptions:

• a township is a square, six miles on each side;

• a township contains 36 sections;

• each of the 36 sections in a township is a square, one mile on each side;

• a mile is 5,280 feet;

• a square mile is 27,878,400 square feet (5,280 x 5,280);

• an acre is 43,560 square feet;

• each section in a township is 640 acres (27,878,400 divided by 43,560);

• a half-section is 320 acres;

• a quarter-section is 160 acres; and

• a quarter of a quarter-section (the smallest squares in the township plat) is 40 acres.

The following is the description for the diamond-shaped figure on the township on the preceding page.

Beginning at the NE. corner of SW. 1/4 of Sec. 17, thence southeasterly to the NW. corner of the SE. 1/4 of
Section 21, thence southwesterly to the SE. corner of the NW.1/4 of Sec. 29, thence northwesterly to the SW.
corner of the NE. 1/4 of Sec. 19, thence northeasterly to the point of beginning.

The description is linear, delineating the boundaries of the figure by connecting four points.

For practice, the reader may want to write out the descriptions of the other two figures. The description of the
figure in the upper right can begin: “The SE 1/4 of the NE 1/4 of the SE 1/4, and the S 1/2 of the SE 1/4 of
Section 10;” If the reader can locate and shade that portion, the reader can write the rest of the description in
like fashion.

The description of the third figure can begin as follows: “Beginning at the NW corner of the SE 1/4 of the NE
1/4 of Section 27, thence due east 3,960 feet,”. [Each side of a quarter of a quarter section measures 1,320 feet
(5,280 ÷ 4). The line/side described therefore measures 1,320 feet x 3 = 3,960 feet.]

Metes and Bounds Description

A “metes and bounds” description may be necessary when the property referred to is not covered by a duly
recorded map and is shaped so as to make it impractical to describe by section and township. Some metes and
bounds descriptions are lengthy and difficult for anyone but a civil engineer or surveyor to understand. A
complex metes and bounds description is a burden to county recorders and assessors.

A metes and bounds description starts at a fixed point of beginning and follows, in detail, the boundaries of the
land described in courses and distances from one point to another until returning to the point of beginning. If a
mistake is made at the point of beginning, the description is worthless.

Metes are measures of length: feet, yards, etc.

Bounds are measures of boundaries, both natural and manmade: e.g., rivers and roads. Landmarks (trees,
boulders, creeks, fences, roads and iron pipes, etc.), referred to as monuments, are often used in such
descriptions.

Older descriptions of this type used markers that have disappeared, been moved or otherwise been altered,
making the descriptions indefinite. Thus, since markers are subject to destruction and disappearance they
should be used only where necessary and every identifying feature should be designated.

Here is a drawing and metes and bounds description of a regular parcel (front and rear dimensions and sides are
the same).

Plat Map

Lots 1 to 8, block 10, tract 1502

Beginning at a point on the southerly line of “0” Street, 150 feet westerly of the SW corner of the intersection
of “0” and 8th Streets; running thence due south 300 feet to the northerly line of “P” Street; thence westerly
along the northerly line of “P” Street, 100 feet; thence northerly and parallel to the first course, 300 feet, to the
southerly line of “0” Street; thence easterly along the southerly line of “0” Street, 100 feet, to the point or place
of beginning.

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LEGAL DIFFERENCES BETWEEN REAL AND PERSONAL PROPERTY

LEGAL DIFFERENCES BETWEEN REAL AND PERSONAL PROPERTY somebody Wed, 07/19/2023 - 02:09 am

LEGAL DIFFERENCES BETWEEN REAL AND PERSONAL PROPERTY

The following are important legal differences between real and personal property:

1. To be enforceable, an agreement for the sale of real property must ordinarily be in a writing signed by the
party to be charged. An agreement for the sale of personal property must be in writing if the amount or
value of the property exceeds $500.

2. For the most part, the laws of the situs state govern the transfer of title to real property. Commercial sales
of personal property are subject to federal and state laws.

3. The state has provided by law a system for recording documents or instruments affecting the title or
interest in real property.

4. Tax laws often distinguish between real and personal property. To the property owner and the taxing
authority, the distinction may be one of considerable importance.

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OTHER DESCRIPTION METHODS

OTHER DESCRIPTION METHODS somebody Wed, 07/19/2023 - 02:09 am

OTHER DESCRIPTION METHODS

Government Lots

In the original government survey system, lakes, streams and other features were sometimes encountered which
created fractional pieces of land less than a quarter section in size. These fractional segments were identified by
number. The specific lot number then became the legal description for that land parcel and these parcels were
called government lots.

Today, acreage lost due to township correction lines and unascertainable errors is placed in the quarter sections
bordering the western and northern boundaries of a township. These geographical divisions which would
otherwise qualify as quarter-quarter sections are also referred to as “government lots.” A government lot does
not necessarily contain a standard number of acres.

Record of Survey

After establishing points or lines, a land surveyor or civil engineer who has made a survey in conformity with
land surveying practices may file a record of survey relating to boundaries or property lines with the county
surveyor in the county in which the survey was made. This record of survey map discloses: (l) material
evidence of physical change which does not appear on any map previously recorded in the office of the county
recorder; (2) a material discrepancy with information of record with the county; (3) any evidence that might
result in alternate positions of lines or points; and (4) the establishment of lines not shown on a recorded map
which are not ascertainable from an inspection of the map without trigonometric calculations.

The county surveyor, after examining a record of survey map filed with the surveyor’s office, will then file it
with the county recorder.

Assessor’s Maps

The county assessor may prepare and file in the assessor’s office an accurate map of any land in the county and
may number or letter the parcels in a manner approved by the board of supervisors. Section 327 of the Revenue
and Taxation Code provides “that land shall not be described in any deed or conveyance by a reference to any
such map unless such map has been filed for record in the office of the county recorder of the county in which
such land is located.”

Informal Method

In the absence of a title report, it is often found convenient to refer to a specific parcel of realty by street
number, name (e.g., “The Norris Ranch”), or blanket reference (e.g., “my lot on High Street”). These methods
are legal, but title companies will not ordinarily insure title involving such a description.

If there is doubt about the correct property description method to be used, a person should consult with a
licensed engineer or surveyor or with a title company.

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PERSONAL PROPERTY

PERSONAL PROPERTY somebody Wed, 07/19/2023 - 02:09 am

PERSONAL PROPERTY

Personal property is any property that is not real property. It includes money, movable goods or chattels,
evidences of debt and choses (things) in action.

“Choses in action” is a legal phrase used to describe the right to recover money or other personal property
through a judicial proceeding. It includes the right to recover something under a contract (e.g., money owed on
a note) and the right to recover damages for a tort or private wrong.

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THE MODERN VIEW

THE MODERN VIEW somebody Wed, 07/19/2023 - 02:09 am

THE MODERN VIEW

Today, we think of property as the thing (not the rights) owned. Property is either real or personal. Real
property consists of:

1. Land;

2. Anything affixed and regarded as a permanent part of the land;

3. That which is incidental or appurtenant to the land; and

4. That which is immovable by law.

Land

Land includes the soil, rock, and other substances that compose the material of the earth. It also includes space.
Not just the space on the surface of the earth, but also the space beneath it to the center of the earth and the
space above it to the top of the sky.

The courts have recognized a public right to the use of airspace above private land as a “highway” available to
all so long as such use does not unreasonably interfere with the landowner’s enjoyment of the property. The
courts also recognize the fluid and “fugitive” or moving nature of subsurface oil and gas. The right of the

landowner to drill vertically into his or her land for the purpose of capturing these substances is a valuable part
of what is included in the ownership of land, but this does not include any right to drill slantwise under a
neighbor’s land for this purpose.

Things Affixed to Land

These include buildings, bridges and trees, as well as anything that is affixed to them (e.g., the doors of a
building, permanently installed cabinets, or built-in appliances).

Incidental or Appurtenant to the Land

This form of real property includes anything which is by right used with the land for its benefit.

Examples are watercourses or easements/rights of way over adjoining lands and even passages for light, air, or
heat from or across the land of another. Another example is stock in a mutual water company. When such stock
is “appurtenant to the land,” ownership of the stock may not be transferred unless the land is transferred with it.

Crops

A tenant’s crops, industrial growing crops and things attached to or forming part of the land which are agreed
to be severed before sale or under a contract of sale, are treated as goods.

“Modern” Estates

Section 761 of the California Civil Code (enacted in 1872) classifies estates in real property, with respect to
duration, as:

1. Estates of inheritance or perpetual estates;

2. Estates for life;

3. Estates for years; or

4. Estates at will.

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Chapter 6 - Transfer of Interests in Real Property somebody Wed, 07/19/2023 - 02:09 am

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ACQUISITION AND TRANSFER OF REAL ESTATE

ACQUISITION AND TRANSFER OF REAL ESTATE somebody Wed, 07/19/2023 - 02:09 am

ACQUISITION AND TRANSFER OF REAL ESTATE

Usually, acquisition of property by one party entails a transfer from another party, and so we consider
acquisition and transfer together.

The basic distinction between real and personal property is not taken into account in the broad statutory
statement of how property is acquired. In the following discussion, however, the methods by which real
property is acquired or transferred are emphasized.

The Civil Code states that there are nine ways to acquire property: will, succession, accession, occupancy, and
by transfer as follows:

1. By will:

a. Formal or witnessed will.

b. Holographic will.

c. California Statutory will.

d. California Statutory will with Trust.

2. By succession:

a. Of separate property.

b. Of community property.

3. By accession:

a. Through actiocren (alluvion or reliction).

b. Through avulsion.

c. Through addition of fixtures.

d. Through improvements made in error.

4. By occupancy:

a. Abandonment.

b. Prescription.

c. Adverse possession.

5. By transfer:

a. Private grant.

b. Public grant.

c. Gift (to private person or to public, by dedication).

d. Alienation by operation of law or court action (partition, quiet title, foreclosure, declaratory relief).

6. By marriage.

7. By escheat.

8. By eminent domain.

9. By equitable estoppel.

Will

Property accumulated during life may be disposed of at death to designated beneficiaries. The instrument
achieves this disposition of property is called a will. The execution of a will during life has no effect on
property interests, as the instrument only becomes effective at death. This is the distinguishing feature between
wills and other instruments creating property interests such as deeds and contracts. The latter two instruments
create some present interest and are not dependent upon death to be effective.

Types of wills. The types of wills permitted by law are the witnessed will, holographic will, statutory will and
statutory will with trust. The first is a formal written instrument signed by the maker, and declared to be the
maker’s will in the presence of at least two witnesses who, at the maker’s request and in the maker’s presence,
also sign the will as witnesses. This document should be prepared by an attorney. A holographic will is one
entirely written, dated and signed in the testator’s own handwriting. No other formalities are required. Statutory
wills are prepared in accordance with a format authorized by statute.

When a person dies, title to his or her real property passes directly to the beneficiaries named in the will, or to
the heirs if the decedent did not leave a will. Title, however, is not marketable or insurable because the law
provides that on death all property is subject to the temporary possession of the executor or executrix,
administrator or administratrix, with a few exceptions. Legal title is also subject to the control of the probate
court for purposes of determining and liquidating creditors’ claims and for establishing the identity of the heirs,

devisees, and legatees of the estate.

Probate

Probate procedure commences with a petition for probate of a will or for letters of administration if there is no
will. A hearing is held and a representative is appointed to handle the estate. This person is referred to as an
executor or executrix if there is a will or an administrator or administratrix if there is no will, or if no personal
representative is named in the will.

Notice to creditors is then published, giving all creditors four months within which to file their claims. An
inventory and appraisement of the estate listing all the assets is filed with the county clerk. During
administration of the estate, the representative may sell estate property subject to court approval only.

After the time for filing and “creditors” claims have expired, the representative files an accounting of all
receipts and disbursements and requests court approval of the same. Finally, the representative petitions the
court to approve distribution of the remaining assets to the proper heirs and devisees. Small estates may be
exempt from probate administration or subject to special summary procedures.

Succession

If a person dies without leaving a will, the law provides for disposition of decedent’s property. This is called
intestate succession. A large number of special rules are included in the law depending upon the character of the
property and the relationship of the next of kin. In the simplest cases, separate property is divided equally
between a surviving spouse and one child, or split one-third to the surviving spouse and one-third to each of two
children, etc. One-half of the community property belongs to the surviving spouse and the other half is subject
to disposition by the decedent’s will. If there is no will, the decedent’s half of the community property
remaining after payment of his or her liabilities goes to the surviving spouse.

Accession

By accession, an owner’s title to improvements or additions to his or her property may be extended as a result
of either man-made or natural causes. For example, a fixture may be annexed to a building by a tenant, or a
neighbor may affix a wall or a building in such a way to the landowner’s property without agreement to remove
the improvement so as to extend the landowner’s title to the improvement.

By natural causes, through accretion, the owner of a riparian property (i.e., located along a moving body of
water such as a river or stream) or littoral property (i.e., located beside a pond, lake or ocean) may acquire title
to additional land by the gradual accumulation of land deposited on the owner’s property from the shifting of
the river or the ocean’s action. The land increase by this build-up of sediment (or alluvium) is called alluvion.
The gradual recession of water, leaving permanently dry land is accession caused by reliction. Rapid washing
away of land is called avulsion.

Addition of fixtures. Acquisition of title by addition of fixtures occurs when a person affixes something to the
land of another without permission and/or an agreement permitting removal of it. The thing so affixed belongs
to the owner of the land, unless the owner requires the former tenant to remove it.

Improvements made in error. At one time there was no compensation for the innocent person who mistakenly
improved someone else’s real property (e.g., built a house on another’s lot). However, the Legislature changed
this in 1953 by amending the Civil Code Section 1013.5. The change permits a person who affixes
improvements to the land of another, in good faith and erroneously believing - because of a mistake of fact or
law – that he or she has a right to do so, to remove the improvements upon payment of damages to the owner of
the land and any other persons having an interest therein who acquired the interest in reliance on the
improvements.

Abandonment. Abandonment is the voluntary surrender of possession of real property or a leasehold with the
intention of terminating one’s possession or interest and without assigning the interest to another. If the owner
of a leasehold interest (i.e., the lessee) abandons the property, the landlord reacquires possession and full control
of the premises. Mere non-use is not abandonment.

Prescription. An easement created by prescription is analogous to adverse possession (discussed below).
Although only the right to use someone else’s land results in a property interest that is thus acquired.

Adverse possession. The actual physical possession of property has always been accorded considerable weight
in connection with a variety of rights and obligations. Immediately upon occupying property, an adverse
possessor acquires a title to the property good against all the rest of the world except the state and the true
owner. Such occupation may ripen into legal title by adverse possession if the possession is:

1. by actual occupation;

2. open and notorious;

3. hostile to the true owner’s title;

4. under claim of right or color of title;

5. continuous and uninterrupted for a period of five years; and

6. accompanied by payment of all real property taxes for a period of five years.

Since title by adverse possession cannot be traced from the county recorder’s office, it is neither marketable nor
insurable until perfected by court decree.

Title by adverse possession usually cannot be acquired against a public body.

Transfer

Property is acquired by transfer when, by an act of the owner or of law, title to property is conveyed from one
person to another. It is the variations of transfer which are of primary concern to real estate brokers.

Private grant. Conveyancing, for consideration, of title to real property by private grant is very important to a
real estate broker and is discussed in Chapter 7.

Gift. An owner of property may voluntarily transfer property to another person without demanding or receiving
consideration. If the gift is real property, it would normally be conveyed by a deed.

Public dedication. Real property intended for public use can be acquired by a governmental body for such use
in any one of three ways: common law dedication, statutory dedication, and deed.

Common law dedication requires that the landowner’s conduct evidences an intent to devote the land to some
public use, such as by executing a deed describing a boundary as being a “street.” To be effective, the public
must accept this dedication by local ordinance or by public use.

The most common example of statutory dedication takes place under the Subdivision Map Act when a
landowner records a map on which certain areas are expressly dedicated to the public for streets and parks.
Dedication by deed is generally used in specific situations not involving subdivisions created under the
Subdivision Map Act. Usually, only an easement is transferred. However, many local governments now require
deeds so that fee title, rather than an easement, is acquired. This method avoids title problems arising upon
abandonment.

Alienation by court action. There are a variety of situations in which courts establish legal title regardless of
the desires of the record owners.

Any person may sue another who claims an adverse interest in real property. This type of proceeding is called a
quiet-title action and is the usual way of clearing tax titles, titles based upon adverse possession, and the title of
a seller under a forfeited recorded contract of sale.

A co-owner of property may sue the other co-owners, requesting a severance of the respective interests. If the
property cannot practically be divided physically, as is usually the case, the court may order a sale, transfer title
to the buyer, and divide the proceeds among the former owners. This proceeding is called a partition action.

A person holding a lien based upon contractual delinquency may ask that the court order sale of the property,
transfer of title to the purchaser, and application of the sales proceeds to the unpaid balance due under the
contract. This is called a foreclosure action. Mortgage and mechanic’s lien foreclosures are examples.

A person may, in cases of actual controversy, bring an action to determine his or her rights and obligations
under any written instrument. A judicial declaration of rights in advance of an actual tortious incident enables

the parties to shape their conduct so as to avoid a breach. This declaratory relief action is often used to construe
deeds, restrictions or homesteads, or to determine rights under an oral contract.

Execution sale. A plaintiff in an action who obtains a money judgment against a defendant can take appropriate
steps to get a writ of execution. This court order directs the sheriff (or marshal or constable) to satisfy the
judgment out of property of the debtor. Real property belonging to the debtor, and not exempt from execution,
is seized by the officer and sold at public auction.

The buyer receives a certificate of sale and, if no redemption is made within the time allowed by statute (usually
12 months), the officer executes and delivers a deed to the buyer.

Forfeiture. An owner may impose a condition subsequent in a deed. If the condition is breached, the grantor or
grantor’s successor has the power to terminate the estate and reacquire title. Similarly, the owner may impose a
special limitation in a deed. If the stated event occurs or the prescribed status fails to endure, the estate
automatically terminates and the grantor or his or her successor reacquires title. In both cases, property is
acquired by forfeiture with no need for consideration.

Marriage. Under California law, marriage does not effect a transfer of title to property. However, subsequent
earnings and acquisitions of husband and wife, or either, during marriage, when not acquired as separate
property, are community property. Each spouse has a present, existing and equal interest in such property.

Escheat. Escheat is the legal process by which title to property vests in the state, usually for lack of heirs or
want of legal ownership. Since a presumption exists that some heirs capable of taking title exist in every case,
the process of escheat is not automatic. Escheat proceedings can be based on an action initiated by the Attorney
General or on a decree of distribution by a probate court.

Eminent domain. By eminent domain, a governmental entity takes private property for public use, paying
compensation based on fair market value.

Equitable estoppel. Equity and good conscience sometimes require that title to real property be transferred if
justice is to be done. The former owner is barred or estopped from denying the title of the innocent claimant.

For example, if an owner permits a friend to appear to the world as the owner of certain property, and an
innocent third party buys the land from that apparent owner, the true owner is barred by the doctrine of
equitable estoppel from claiming ownership.

Similarly, if a person has no title, a defective title, or an estate smaller than the one purported to be conveyed,
but later acquires full title or estate, or perfects the title, the grantee (or grantee’s successor) gets the after-
acquired title by way of estoppel.

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CONTRACTS IN GENERAL

CONTRACTS IN GENERAL somebody Wed, 07/19/2023 - 02:09 am

CONTRACTS IN GENERAL

Probably no other area of the law is as important to real estate brokers, salespersons, and parties transferring
real estate than that of contracts. Nearly every consequential transaction includes one or more contracts. It is
important, therefore, to understand their nature and to be well acquainted with some of the broad rules
governing contract creation, operation and enforcement.

In this chapter we consider contracts in general. Chapter 7 focuses on contracts used most frequently in the real
estate business.

Contract Defined

Any term as broad in its application as “contract” is difficult to define with precision. California’s Civil Code
states the following: “A contract is an agreement to do or not to do a certain thing.” The American Law Institute
offers this definition: “A contract is a promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a duty.” Still another authority on the
subject, Corbin, submits a definition which combines the foregoing two versions: “A contract is an agreement
between two or more persons consisting of a promise or mutual promises which the law will enforce, or the
performance of which the law in some way will recognize as a duty.” The latter will serve as our working
definition, and its meaning will be clarified later when we analyze the essential elements of a contract.

Classification. It will be helpful to review certain terms which are commonly used to classify contracts. With
*
reference to manner of creation, a contract may be express or implied.

In an express contract, the parties declare the terms and put their intentions in words, either oral or written. In an
implied contract, however, the agreement is shown by acts and conduct rather than words. (In a hurry, you enter
the corner drugstore, where you have an account, pick up a pack of gum, wave it at the clerk; the clerk nods and
you leave. There is an implied contract that you will pay for the gum later.)

With reference to content of the agreement, a contract may be bilateral or unilateral. A bilateral contract is one
in which the promise of one party is given in exchange for the promise of the other party. (e.g., A tells B, “I’ll
give you $300 if you will promise to paint my house” and B so promises.) In a unilateral contract, on the other
hand, a promise is given by one party to induce some actual performance by the other party. The second party is
not bound to act but if the second party acts, the former is obligated to keep the promise. (e.g., A offers a reward
of $100 to anyone who will find and return A’s lost dog. B does not make any promise but just happens to find
and return the dog. A must pay B $100.)

With reference to extent of performance, a contract may be executory or executed. In an executory contract,
something remains to be done by one or both parties. In an executed contract, both parties have completely
performed.

Finally, with reference to legal effect, contracts may be classified as void, voidable, unenforceable, or valid. A
void agreement is not a contract at all. It lacks legal effect (e.g., an agreement to commit a crime; or, in
California, an attempt by a minor under 18 to make a contract relating to real property). A voidable contract is
one which is valid and enforceable on its face, but one which one or more of the parties may reject (e.g., certain
contracts of minors are voidable at the option of the minor; a contract induced by fraud may be voided by the
victim). An unenforceable contract is valid, but for some reason cannot be proved or sued upon by one or both
of the parties (e.g., a contract that cannot be enforced because of the passage of time under the statute of
limitations). A valid contract is one that is binding and enforceable. It has all the essential elements required by
law.

*

Contract implied in fact should be distinguished from contract implied in law. A contract implied in law evidences
obligations created by law for reasons of justice. A contract implied in fact would be the foundation of an employee’s claim
against a deceased employer’s estate for overtime wages.

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ESSENTIAL ELEMENTS A OF CONTRACT

ESSENTIAL ELEMENTS A OF CONTRACT somebody Wed, 07/19/2023 - 02:09 am

ESSENTIAL ELEMENTS A OF CONTRACT

Under the California Civil Code the existence of a contract requires:

1. Parties capable of contracting;

2. Mutual consent;

3. Lawful object; and

4. Sufficient consideration.

It may be helpful to add a fifth requirement which is present only in certain contracts: a proper writing.

Parties Capable of Contracting

For a valid contract, there must be two or more parties who have at least limited legal capacity. Generally
everyone is fully capable of contracting, except persons who are subject to certain limitations [unemancipated
minors, persons of unsound mind, aliens, and persons deprived of civil rights (e.g., convicts)].

Minors. A minor is a person under the age of 18 years. Under the Emancipation of Minors Law, a minor is
either unemancipated or emancipated (set free from parental control/supervision).

An unemancipated minor (hereafter “minor”) cannot give a delegation of power, make a contract relating to real
property or any interest therein, or make a contract relating to any personal property not in the minor’s
immediate possession or control. With certain statutory exceptions, a minor may disaffirm any contracts entered
into during minority or for a reasonable time after reaching majority. In case of a minor’s death within that
period, the minor’s heirs or personal representatives may disaffirm any contract into which the minor entered.

A minor is deemed incapable of appointing an agent; therefore, a delegation of authority (e.g., a power of
attorney) is void. A real estate broker can not serve as agent of a minor to buy or sell. A broker can represent an
informed adult in dealing with a minor, but the client assumes the risk of having the contract voided. However,
one may negotiate in real property with or for a minor only through a court-appointed guardian. For the minor’s
protection, the guardian needs court approval to carry out such negotiations.

Emancipation of Minors Law. Under this law (Family Code Sections 7000, et seq.), emancipated minors have
certain powers to deal with real property and are considered as being over the age of majority for certain
purposes, including the following: entering into a binding contract to buy, sell, lease, encumber, exchange, or
transfer any interest in real or personal property; conveying or releasing interests in property.

An emancipated minor is a person under 18 years of age who has entered into a valid marriage (even though
terminated by dissolution), is on active duty with any of the armed forces of the United States of America, or
has received a declaration of emancipation by petitioning the superior court of the county where he or she
resides.

Brokers dealing with minors must proceed cautiously and should seek the advice of their attorney.

Incompetents. California law provides that after the incapacity of a person of unsound mind has been judicially
determined, no contract can be made with such person until restoration to capacity. Similarly, a person who is
entirely without understanding but has not been judicially declared incompetent has no power to contract.

When dealing with incompetents concerning real property, proper procedure requires an appointment of a
guardian and court approval of the guardian’s acts.

Note: Both minors or incompetents, however, may acquire title to real property by gift or by inheritance. They
may convey, mortgage, lease or acquire real property pursuant to a superior court order obtained through
appropriate guardianship or conservatorship proceedings.

Aliens. In California, resident or nonresident aliens have essentially the same property rights as citizens. Section
671 of the Civil Code provides that “any person, whether citizen or alien, may take, hold, and dispose of
property, real or personal, within this state.” Federal law, however, provides certain restrictions on the property
rights of aliens.

Convicts. Persons sentenced to imprisonment in state prisons are deprived of such of their civil rights as may be

necessary for the security of the institution in which they are confined and for the reasonable protection of the
public.

Convicts do not forfeit their property. They may acquire property by gift, inheritance or by will, under certain
conditions, and they may convey their property or acquire property through conveyance.

Individual proprietors. The bulk of the nation’s business is conducted by individual proprietors, ordinary
partnerships, corporations, and, more recently, by limited partnerships and limited liability companies. The
first category does not present any special problems. The owner who is a sole proprietor takes title in his or her
own name, or, if married, the spouse may join as a grantee.

Partnership. In a partnership, two or more persons carry on a business as co-owners. The partnership may exist
if such intention can be proven whether or not the partners have reduced their agreement to a formal writing.
The more important characteristics of a partnership are the following: its lack of separate capacity to deal
independently from its members (with certain exceptions hereafter noted); customary equal participation of
members in management; co-ownership of partnership assets; individual interest of each partner in profits and
surplus; and the mutual agency relationship between partners making each the agent of the others insofar as
partnership business is concerned.

Partnership property consists of the originally invested and subsequent partnership acquisitions. Usually, the
best practice in investing in property usually is to take title in the name of the partnership itself. However, title
may also be taken in the individual name of one or more partners, or in the name of a third party as trustee for
the partnership. Although any authorized partner may then dispose of the property, it is customary for all
partners to execute the instrument of transfer.

If property is acquired in the partnership name, it should not be transferred until a “GP-1 form” is filed with the
Secretary of State and then recorded in the recorder’s office showing the names of the partnership and its
members.

The Uniform Partnership Act of 1994 became effective January 1, 1997. All partnerships formed prior to
January 1, 1997 were governed by the old Uniform Partnership Act (Corporations Code Section 15001, et seq.)
until January 1, 1999. On that date, the old Uniform Partnership Act was repealed and all partnerships were
governed by the Uniform Partnership Act of 1994 (Corporations Code Section 16100, et seq.).

Of course, if title to real property is in an individual’s name, both the individual and his or her spouse should
sign the instrument of transfer.

In order to enjoy some of the benefits of incorporation while retaining the partnership form, a possibility is to
create a limited partnership. This can only be achieved by filing a formal certificate. Limited partners may not
allow their names to be used in the business and may not participate in the control of the business. If all legal
requirements are met, the limited partners are not responsible for partnership debts beyond their investment. But
at least one partner must be a general partner with unlimited liability.

Limited liability companies. The Beverly-Killea Limited Liability Company Act (California Corporations
Code Sections 17000–17705) allows the formation of limited liability companies. It became effective, in
September of 1994.

To form a limited liability company, two or more persons must enter into an operating agreement and must
execute and file articles of organization with the California Secretary of State.

The end of the name of a limited liability company must contain, either the words “limited liability company”
or the abbreviation “LLC”. The words “limited” and “company” may be abbreviated to “Ltd.” and “Co.,”
respectively.

Subject to limitations contained in the articles of organization and compliance with other applicable laws, a
limited liability company may engage in any lawful business activity, except the banking, insurance, or trust
company business. (Corporations Code Section 17002)

Corporations Code Section 17101 sets forth the liability of members of a limited liability company. In part, the
liability parallels that of shareholders in a corporation, while the company is treated as a partnership for tax
purposes.

Corporations. The more important characteristics of a corporation are the following: separate capacity to deal
with property independently from its members; centralized control in a board of directors; liability of
shareholders normally limited to the amount of their investment; freely transferable shares; and continued
existence regardless of death or retirement of its shareholders.

Although a corporation may take title to property in its own name, it is an “artificial person” created by law, and
must function through human agents. Accordingly, corporate control is vested in the board of directors and so it
becomes important to have some evidence of the board’s decision in connection with the proposed property
transaction. The decisions of the board are usually in the form of resolutions authorizing certain officers to deal
with the corporate property. It should be noted that since a corporation has perpetual existence, it is not
permitted to take title to property in joint tenancy with right of survivorship.

Note: Some corporations are organized on a nonprofit basis. Members of such a nonprofit corporation are not
personally liable for the debts or obligations of the corporation, and in many respects such an organization is
similar in operation to a regular corporation. A board of directors controls its property and conducts its affairs.
The corporation may enter into contracts as well as acquire and dispose of real or personal property in its own
name.

Nonprofit associations. Sometimes transactions in real property will involve nonprofit associations: loosely
knit, unincorporated associations of natural persons for religious, scientific, social, educational, recreational,
benevolent or other purposes. Members of such associations are not personally liable for debts incurred in
acquisition or leasing of real property used by the association, unless they specifically assume such liability in
writing. These nonprofit organizations may, by statute, hold such property in the group name as is necessary for
business objects and purposes. Also, they may hold nonessential property for 10 years.

When an unincorporated association proposes to dispose of property, the conveyance should, in the case of
benevolent or fraternal societies or associations, be executed by its presiding officer and recording secretary
under seal after resolution is duly adopted by its governing body. In the case of other incorporated associations
for which no other provision is made by statute, conveyances may be executed by the president or other head,
and secretary, or by other specific officers so authorized by resolution. Such an association may record a
statement setting forth its names and the persons authorized to execute conveyances. California Corporations
Code Sections 20003 through 24007 govern unincorporated associations organized under California law.

Personal representative. A final category of parties to contracts, and one of considerable importance, is that of
personal representatives of decedents. A person who leaves a will may name an executor or executrix to carry
out its provisions. If a person dies intestate or fails to name an executor, the probate court will appoint an
administrator to administer the estate. The acts of these officials are generally subject to court supervision. Real
estate agents usually come in contact with executors and administrators when the latter are interested in selling
a parcel of real estate belonging to the estate.

Mutual Consent

The second element of a valid contract is that the parties who have capacity to contract shall properly and
mutually consent or assent to be bound. This mutual consent is normally evidenced by an offer of one party and
acceptance by the other party. An offer expresses the offeror’s willingness to enter into the contract. It must be
communicated to the offeree. The offer must also manifest a contractual intention. There need not be a true
“meeting of the minds” of the parties, for they are bound only by their apparent intentions that are outwardly
manifested by words or acts. Courts cannot read minds, and secret or unexpressed intentions, hopes and
motivations are immaterial. However, the assent must be genuine and free, and if it is clouded or negated by
such influences as fraud or mistake, the contract may be voidable at the option of one or both parties, depending
on the circumstances.

When negotiating a contract, some of the terms might be left open for future determination, or there might be a
condition which must be met before the parties become obligated (this may be called a “condition precedent”).
In either of these situations, it is usually held that only preliminary negotiations have taken place, mutual
consent has not been reached and a binding contract has not come into existence. In such cases even the courts
cannot guess what the parties will mutually agree upon.

Definite contract terms. Finally, the offer must be definite and certain in its terms. The precise acts to be

performed must be clearly ascertainable. Courts cannot make contracts for the parties, nor fix terms and
conditions. The offer must be “nonillusory” in character, meaning it must actually bind the offeror upon
acceptance.

If the offeror can cancel or withdraw at pleasure, without reasonable notice, the offer is illusory. Another
example is an offer/promise completely within the offeror’s control to perform or not to perform, such as an
offer to buy a property “contingent upon obtaining a $100,000 loan.” Without more conditions and specificity,
the offeror might not even apply for a loan. To avoid illusion, clauses in the contract should carefully specify
the details of the condition and should contain promises by both parties to provide some semblance of
mutuality. A clause in a deposit receipt conditioning the offer upon the obtaining of a loan by the offeror should
include the amount of the loan the buyer desires; interest rate; monthly installments; how secured; type (i.e.,
FHA, VA or conventional); an agreement by the buyer to use best efforts to procure such a loan; and an
agreement by the seller to cooperate in such efforts.

On many occasions, California courts have refused to enforce contracts because of uncertainty. In one case, a
broker provided in a deposit receipt that there was to be a first deed of trust in a fixed amount to a bank, and a
second to the seller for the balance. Interest in each case was fixed. The contract stated “total monthly payments
including interest, to be $95.” The court denied specific performance because the deposit receipt was silent as to
what portion of the $95 was to be paid to the bank and what portion to the seller.

Another agreement was drawn which was certain in all particulars except that it provided that the balance of the
purchase price was to be evidenced by a first and second mortgage. The agreement was silent as to the amount
of each mortgage and the uncertainty was critical because the parties disagreed as to the amounts of each
mortgage. The court refused to enforce the agreement.

Another contract was found to be too uncertain because it was silent as to the rate of interest on the deferred
balance and as to the date of maturity of the indebtedness.

Uncertainty and insufficiency were found in a form which was used containing a provision that an “extension of
time for 30 days may be granted by (blank)”. Since either party could extend, the court held that no one was in
fact authorized.

Provisions in a contract that state the property is to be improved with streets, water system, other utilities, and
paved boulevards are too indefinite for enforcement. The court will not determine where the streets are to run,
how many there are to be, or the area to be covered or how they are to be constructed.

Description of property. The problem of certainty and definiteness may be acute in connection with land
identification. A broker may not have the deed by which the owner acquired property, or the title report or
policy connected with it. The contract must, however, contain such a description, or at least include a unique
aspect of the property agreed to be sold so that it can be exactly ascertained. Where the broker has a former title
policy or a preliminary report, he should refer to the description by the title company’s name and policy
number. From such a mention or reference, it can be ascertained what property is meant. Oral evidence may be
used in court for the purpose of identifying the description, but not for the purpose of ascertaining and locating a
missing description or one that is too uncertain to be identified.

For example, it is very common to describe property by the street and house number, i.e.,: No. 19, 10th Street,
city, county and state. Usually, this is sufficient. However, if the seller has a large property with more than one
building on it, or an adjoining lot, this description would be insufficient. “My house and lot on 10th Street,
between A and B Streets” would be sufficient provided the owner did not have any other house and lot on that
block. “My land consisting of 96 acres located about four miles northeast from Porterville, California” was held
sufficient to enable the court to determine what land was meant, because that was all that the seller had in that
vicinity.

Termination of offer. The hope of the offeror is that the other party will accept and a contract will be formed.
But the offeror does not want to wait indefinitely, and need not. There are five ways to terminate an offer:

1. Lapse of Time. The offer is revoked if the offeree fails to accept it within a time period prescribed in the
offer. If the offer does not include a deadline for acceptance, the lapse of a reasonable time without
communication of acceptance may cause the offer to be considered to have been revoked. What is a
reasonable time is a question of fact dependent upon the circumstances.

2. Communication of Notice of Revocation. This can be done anytime before the other party has
communicated acceptance. It is effective even if the offeror said the offer would be kept open for a stated
period of time which has not yet elapsed. If the offeree pays to keep the offer open for a prescribed period
of time, an option is created, and the offeror must abide by its terms.

Sometimes an offer is made to sell property and the person to whom the offer is made later acquires reliable
information that the property has been sold to another party. This, too, constitutes a revocation.

3. Failure of offeree to fulfill a condition prescribed by the offeror or to accept in a prescribed manner. If the
offeree makes a qualified acceptance (as by changing the price), in effect a counteroffer is made and the
original offer is cancelled. It cannot later be accepted, unless revived by the offeror repeating it. Thus the
roles of the parties are exchanged, and the counteroffer itself may then be terminated like an original offer.
It should be noted here that this discussion of offer and acceptance, and the rest of the discussion as to
formation of contracts, may not apply to contracts between merchants for the sale of goods. These are
governed by the California Uniform Commercial Code.

4. Rejection by the offeree. An unequivocal rejection ends the offer, but simple discussion and preliminary
bargaining do not do so when they involve no more than inquiries or suggestions for different terms.

5. Death or insanity of the offeror or offeree revokes the offer.

Acceptance. Acceptance is the proper assent by the offeree to the terms of the offer.

The person to whom the offer is made must have knowledge of it before he or she can accept. Acceptance by
anyone other than the offeree is not possible. Most contracts are bilateral, but interesting problems arise in
connection with the less common unilateral contract, which is when the offeror asks for action, not a promise.
Normally, when the requested act is performed, the offer is automatically accepted. But if the offeree does not
intend an act to be an acceptance, or if there is no knowledge of the offer, there can be no acceptance and no
contract. This situation may occur when one returns a lost dog without seeing the ads offering a reward for its
return.

Acceptance must be absolute and unqualified, because if it modifies the terms of the offer in any material way,
it becomes a counteroffer. As already noted, this terminates the original offer. Indeed, if the acceptance is too
late or otherwise defective, the person making the offer cannot waive the delay or defect and treat the
relationship as a binding contract.

Acceptance must be expressed or communicated, though it may be sufficient without actually being received by
the person making the offer. Generally, silence is not regarded as an acceptance of an offer, because the party
making the offer cannot force the party to whom an offer is made to make an express rejection. Silence may
constitute an acceptance when the circumstances or previous course of dealing with a party places the party
receiving the offer under a duty to act or be bound. Acceptance may be made by implication to the
consideration tendered with an offer.

Acceptance of an offer must be in the manner specified in the offer, but if no particular manner of acceptance is
not specified, then acceptance may be by any reasonable and usual mode.

A contract is made when the acceptance is mailed or put in the course of transmission by a prescribed or
reasonable mode (e.g., by deposit of a telegram for transmission). This is so even though the letter of acceptance
is lost and never reaches the party making the offer, because the acceptance has been placed in the course of
transmission by the offeree.

Genuine assent. The final requirement for mutual consent is that the offer and acceptance be genuine. The
principal obstacles to such genuine or real assent are fraud, mistake, menace, duress or undue influence. If any
one of these obstacles is present, the contract may be voidable and a party to the alleged contract may seek
rescission (restoring both parties to their former positions), dollar damages or possibly reformation of the
contract to make it correct.

Fraud. Fraud may be either actual or constructive in nature. Normally, fraud exists when a person
misrepresents a material fact while knowing it’s not true, or does so with careless indifference as to its veracity.
A person must misrepresent with the intent to induce the other person to enter the contract, and the other must

rely thereon in entering the contract. “Material fact” is defined as an important fact which significantly affects
the party’s decision to enter into the contract.

Civil Code Section 1572 lists the following five acts which would be deemed actual fraud when done by a party
to a contract or with his or her connivance with intent to induce another to enter into the contract, or even
simply to deceive the other party:

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

2. The positive assertion, in a manner not warranted by the information of the person making it, of that which
is not true, though the person believes it to be true;

3. The suppression of that which is true, by one having knowledge or belief of the fact;

4. A promise made without any intention of performing it; or,

5. Any other act intended to deceive.

Ordinarily, misrepresentation of law does not amount to actionable fraud, because everyone is presumed to
know the law. Nevertheless, this may be actionable fraud where one party uses superior knowledge to gain an
unconscionable advantage, or where the parties occupy some sort of confidential relationship, even though the
guilty party is not a strict fiduciary.

Constructive fraud. Constructive fraud as defined in the Civil Code may first consist of first, any breach of
duty which, without an actual fraudulent intent, gains an advantage for the person in fault or anyone claiming
under that person by misleading another to the other’s prejudice or to the prejudice of anyone claiming under
the other person.

Second, it may consist of any such act or omission as the law specifically declares to be fraudulent without
respect to actual fraud. The element of reliance is essential, and where it is shown that no commitments were
made until independent investigation by others, there can be no action claiming fraud. Negligent
misrepresentation has also been held to be a species of fraud.

A distinction should be made between fraud in the inception or execution, and fraud in the inducement of a
contract. For example, if the promisor knows what he or she is signing and the consent is induced by fraud, the
contract is voidable by the promisor; but if the fraud goes to the inception or execution of the agreement so that
the promisor is deceived as to the nature of his or her act and actually does not know what is being signed, and
does not intend to enter into a contract at all, it is void. A voidable contract is binding until rescinded.
Conversely, a void contract needs no formal act for rescission.

If one signs a contract without reading it and therefore fails, through carelessness or negligence, to familiarize
oneself with the contents of a written contract prior to its execution, relief is denied. The court may reform or
cancel the contract, where such failure or negligence to sign the instrument without reading it, is induced by
false representation and fraud made by the other party in order to make provisions that are different than those
set out in the instrument.

A party to a contract who is guilty of fraud in its inducement is not relieved of the effects of the fraud by any
stipulation in the contract that states either that no representations have been made or that any right which might
be grounded upon them is waived. Such a stipulation or waiver will be ignored, because the fraud renders the
whole agreement voidable, including the waiver provisions.

False representations. Where false representations are made by an agent and the contract contains a recital
limiting the agent’s authority to make representations, the innocent principal may, by certain stipulations, be
relieved of liability in a court action for damages for fraud and deceit. The defrauded third party may
nevertheless rescind the contract. The guilty agent may, of course, be liable in damages for the wrongful act.

Mistakes. Another possible obstacle to genuineness of assent is mistake. Where both parties are mistaken as to
the identity of the subject matter of the contract, there can be no contract. Where the subject matter of the
agreement has, unknown to the parties, already ceased to exist, so that performance of the contract would be
impossible, there is no contract.

Mutual agreement as to the subject matter is the basis of a contract. If the parties to an agreement consent
thereto, a contract results. However, the contract may be voidable if there is a substantial mistake as to some
basic or material fact which induced the complaining party to enter into the contract. Negligence of the injured
party does not in itself preclude release from mistakes, unless the negligence is gross, such as where the party
simply fails to read the agreement. One who accepts or signs an instrument, which is on its face a contract, is
deemed to assent to all of its terms and cannot escape liability on the ground of not having read it. This is true
only in the absence of influences such as fraud, undue influence, or duress.

Mistakes are classified in the Civil Code as mistakes of fact or of law. A mistake of fact is one consisting of
ignorance or forgetfulness of a fact material to the contract, but which is not caused by the neglect of a legal
duty on the part of the person making it. Or it may consist of a mistaken belief in the existence of a thing
material to the contract, or a belief in the past existence of such a thing, which has not existed. A mistake of law,
on the other hand, is described as one which arises from a misunderstanding of the law by all parties involved,
all making substantially the same mistake while thinking they knew and understood the law.

A mistake may also be a misunderstanding of law by one party, which the other party is aware of but does not
rectify.

Duress, menace, undue influence. Sometimes a contract may be rendered voidable because it was entered into
under the pressure of duress, menace, or undue influence. All three, in effect, deprive the victim of the exercise
of free will, and so the law permits such person to void the contract, as well as other remedies under the law.

Duress involves coercion or confinement. While duress is technically the unlawful confinement of persons or
property, modern case law has expanded duress to include unlawfully depriving a person of the exercise of free
will. Economic compulsion or duress may result in a finding that a contract provision is unconscionable.

Menace consists of a threat to commit duress, including the threat of unlawful and violent injury to a person or
the person’s character.

Undue influence is unfair advantage taken by someone who has the confidence of another, or who holds a real
or apparent authority over another. It may involve taking an unfair advantage of another’s weakness of mind, or
taking a grossly oppressive and unfair advantage of another’s necessities or distress. Undue influence is most
frequently encountered in connection with contracts between persons in confidential relationships, where the
victim is justified in assuming the other party will not act contrary to the victim’s welfare. The relationships that
usually fall within this rule include trustee and beneficiary, broker and principal, attorney and client, guardian
and ward, parent and child, husband and wife, physician and patient, and employer and employee.

Lawful Object

Assuming now that parties are capable of contracting and have properly manifested their consent through an
offer and acceptance, the validity of their agreement might still be attacked on grounds of legality. The contract
must be legal in its formation and operation. Both its consideration and its object must be lawful. The object
refers to what the contract requires the parties to do or not to do. Where the contract has but a single object, and
that object is unlawful in whole or in part, or performance is impossible, the contract is void. If there are several
distinct objects, the contract is normally valid as to those objects which are lawful. An object is unlawful when
it is contrary to an express provision of the law, or contrary to the policy of express law.

In general, the law will not lend its resources to either party involved in an illegal contract. Thus, if a contract is
executory and illegal, neither party may enforce it. If it is executed, neither party may rescind and recover
consideration. But sometimes the law which was violated was designed to protect one of the parties; or the
parties are not equally blameworthy; or when one party repents and calls the deal off before any part of the
illegal object has been realized. In such cases, the law will provide appropriate relief.

Common violations. The objects and consideration of a contract must be legal and cannot violate some specific
prohibition of the law. If such violation does occur, its effect upon the contract may depend upon the particular
statute involved. Two types of situations in the real estate field involving statutory violations are:

1. Contracts of unlicensed “brokers” or “general contractors.” These persons are not permitted to enforce their
contracts.

2. Forfeiture clauses in deposit receipts, contracts of sale and leases.

A contract clause which specifies a fixed amount of damages in the event of a breach is known as a liquidated
damages clause. Except as discussed below, a liquidated damages clause is presumed valid, unless the party
seeking to invalidate the provision proves that it was unreasonable under the circumstances existing at the time
the contract was made.

A liquidated damages clause is void if the liquidated damages are sought to be recovered from (l) a party to a
contract for the retail purchase or rental of personal property or services primarily for that party’s personal,
family, or household purposes; or (2) a party to a lease of real property for use as a dwelling by that party or his
or her dependents.

Special rules apply to liquidated damages provisions in contracts for the purchase of residential real property.
These rules are explained below in the Section entitled “REAL ESTATE CONTRACTS.”

Special rules apply to liquidated damages clauses in construction contracts with certain government entities,
making provisions for amounts to be paid for each day of delay in construction valid unless manifestly
unreasonable at the time the contract was made.)

3. Contracts by which one is restrained from engaging in business may be void, although a person selling
goodwill may promise the buyer not to compete within a reasonably limited area for a specific period of
time.

4. Persons may not generally avoid responsibility for their own fraud or negligence merely by so providing in
a contract.

5. A contract calling for the payment of interest in excess of the California Constitution’s current limits may
be usurious depending upon the identity of the lending entity and the purpose of the loan. If such a contract
is usurious, that portion of the contract relating to the payment of interest is void.

6. In addition to the foregoing, brokers must be careful to comply with the numerous regulatory measures
incorporated in the Real Estate Law. Specific violations may prevent enforcement of a listing contract. It
should be noted that violations of law not only affect the enforceability of the contract involved, but may
also subject the violator to criminal punishment.

Sufficient Consideration

Even if the agreement meets all the requirements of a valid contract already discussed, it may fail because of the
lack of sufficient consideration. In general, every executory contract requires consideration. The consideration
may be either a benefit conferred, or agreed to be conferred, upon the person making the promise, or any other
person, or a detriment suffered or agreed to be suffered. It may be an act of forbearance or a change in legal
relations. Consideration is the price bargained for and paid for a promise, and it may, of course, be a return
promise. If a valid consideration exists, the promise is binding even though some motive other than obtaining a
consideration induced the promisor to enter into the contract.

Ordinarily, the nature of the consideration is reflected in the written agreement of the parties. The consideration
must have some value. A purely moral obligation may under some circumstances be consideration. There is no
requirement of adequacy to make the contract enforceable. Thus, an option to purchase valuable property may
be given for consideration of one dollar or some other nominal sum. It is only in an action for specific
performance that the amount is important, and in this event the equitable remedy will be denied unless an
adequate consideration is proved. Also, gross inadequacy of consideration may be a circumstance which,
together with other facts, will tend to show fraud or undue influence.

In a unilateral contract, a promise of the offeror is consideration for an act or forbearance sought from the
offeree. In a bilateral contract, a promise of one party is consideration for the promise of another, and generally
any valid promise, whether absolute or conditional, is sufficient consideration for another promise.

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INTERPRETATION, PERFORMANCE AND DISCHARGE OF CONTRACTS

INTERPRETATION, PERFORMANCE AND DISCHARGE OF CONTRACTS somebody Wed, 07/19/2023 - 02:09 am

INTERPRETATION, PERFORMANCE AND DISCHARGE OF CONTRACTS

The majority of all contracts are properly performed and discharged or executed without legal complications. If
difficulties arise, the parties themselves, or with the aid of legal counsel, will typically work out an amicable
settlement. But the courts remain available for the resolution of conflicts between contracting parties that cannot
be so settled. Set forth below are some of the rules which guide the courts in their interpretation of contracts.

Interpretation of Contracts

In general, contracts are interpreted so as to give effect to the mutual intention of the parties as it existed at the
time of contracting, insofar as that intention is ascertainable and lawful. A contract may be explained by
reference to the circumstances under which it was made, and the matter to which it relates. But the language of
the contract governs its interpretation, if the language is clear and explicit and does not involve an absurdity.
Obviously the language should be reduced to writing, for the wiles of the unscrupulous are infinite, and the
memory of every man and woman is finite and fallible.

Fortunately, as noted earlier, most contracts of interest to real estate brokers must be in writing under the Statute
of Frauds. A broker can render valuable service by ensuring that the writing clearly expresses the intention of
the parties. But when a written contract fails to express the real intention of the parties because of fraud, mistake
or accident, the courts will attempt to discover the real intention and disregard the erroneous parts of the
writing.

The execution of a contract in writing supersedes all negotiations and stipulations concerning the matter which
preceded or accompanied the execution of the instruction, even though the law may or may not require writing.
When a contract is partly written and partly printed, written parts control the printed part, and the parts which
are purely original control those which were copied from a form. If the two contradict the latter must be
disregarded.

Modification or alteration of a contract is a change in the obligation by a modifying agreement, which requires
mutual assent. A contract in writing may be altered by a new contract in writing, or by an executed oral
agreement, and not otherwise.

Parol evidence rule. Parol evidence refers to prior oral or written negotiations or agreements of the parties, or
even oral agreements contemporaneous with their written contract. The parol evidence rule prohibits the
introduction of any extrinsic evidence (oral or written) to vary or add to the terms of an integrated written
instrument, such as a deed, contract, will, etc. This rule helps to finalize agreements with certainty, and it

discourages fraudulent claims. On the other hand, the courts will permit such outside evidence to be introduced
when the written contract is incomplete or ambiguous, or when necessary to show that the contract is not
enforceable because of mistake, fraud, duress, illegality, insufficiency or failure of consideration, or incapacity
of a party.

Under the “parol evidence rule,” when a contract is expressed in a writing which is intended to be the complete
and final expression of the rights and duties of the parties, parol evidence is not admissible as evidence.

Where the parties come to an agreement by mistake or fraud, and the written instrument does not express their
agreement correctly, it may be reformed or revised by the court on the application of the party agreeing to it,
provided that this can be done without prejudice to the rights acquired by third persons in good faith and for
value.

Performance of Contracts

Regarding performance of contracts, it is common to find a party who would prefer to drop out of the picture
without terminating the contract. Under proper circumstances, this may be accomplished by assignment or by
novation.

Assignable contract. Whether the contract is assignable depends upon its nature and terms. Ordinarily, either a
bilateral or a unilateral contract is assignable unless it calls for some personal quality of the promisor, or unless
it expressly or impliedly negates the right to assign. The contract might expressly provide that it shall not be
assigned, or contain provisions which are equivalent to such expressed stipulations, or require consent to assign.

An assignment transfers all the assignor’s interests to the assignee. The assignee stands in the shoes of the
assignor, taking the assignor’s rights and remedies, subject to any defenses that the obligor has against the
assignor, prior to notice of the assignment. Where the subject matter of the assignment involves reciprocal
rights and duties, the assignor may transfer the benefit and may divest himself or herself of all rights, but cannot
escape the burden of an obligation by a mere assignment. The assignor still remains liable to the oblige. Even if
the assignee assumes the obligation, the assignor still remains secondarily liable as a surety or guarantor, unless
the obligee releases the assignor.

The assignment carries with it all the rights of the assignor. Thus the assignment of a note carries with it any
incidental securities such as mortgages or other liens.

In some cases the original contracting party who wants to drop out completely may do so by novation.

Novation is the substitution by agreement of a new obligation for an existing one, with intent to extinguish the
latter. The substitution may be a new obligation between the same parties, and/or a new party, either a new
debtor or a new creditor. A novation requires an intent to discharge the old contract and, being a new contract, it
requires consideration and other essentials of a valid contract.

Where one party is indebted to another and the creditor takes a promissory note for the sum owed, this does not
discharge the original debt, unless the parties expressly agree to it, or unless such intention is clearly indicated.
Ordinarily, for a novation, a particular form is not necessary required. It may be written or implied from
conduct where the intent sufficiently appears.

Time

The question of time is often significant in contracts. By statute, if a time is not specified for the performance of
an act required to be performed, a reasonable time is allowed. If the act is in its nature capable of being
performed instantly, it must be performed immediately upon being exactly ascertained, unless otherwise agreed.

If the last day for the performance of any act provided by law to be performed within a specified period of time
shall be a holiday, then such period is extended to the next day which is not a holiday.

Discharge of Contracts

In the matter of discharge of contracts, there are two extremes, full performance and breach of contract.
Between these extremes are a variety of methods of discharge of the contract including the following:

1. By part performance;

2. By substantial performance;

3. By impossibility of performance;

4. By agreement between the parties;

5. By release;

6. By operation of law; and

7. By acceptance of a breach of the contract.

Statute of Limitations

The running of the Statute of Limitations will bar any legal action seeking relief for a breach of contract. Civil
actions can be commenced only within the periods prescribed by the statute after the cause of action has
accrued. The policy of the law is to aid the vigilant. The person who “sleeps upon his rights” may be barred
from relief by this statute. The following is a summary of some of the clauses which are of special interest to
real estate brokers.

Actions which must be brought within 90 days. Civil actions for the recovery of or conversion of personal
property such as baggage alleged to have been left at a hotel, boarding house, lodging house, furnished
apartment house or furnished bungalow court, shall be commenced within 90 days from and the departure of the
owner of the personal property.

Within six months. An action against an officer, or officer defacto, to recover any goods, wages, merchandise
or other property seized by the officer in an official capacity as tax collector, or to recover the price or value of
any such goods or other personal property, as well as for damage done to any person or property in making any
such seizure. Also, actions on claims against a county which have been rejected by the board of supervisors are
included.

Within one year. An action for libel, slander, injury or death caused by wrongful act or neglect of another, or
by a depositor against a bank for the payment of a forged or raised check.

Within two years. An action upon a contract, obligation or liability not founded upon an instrument in writing
(other than open book accounts, accounts stated, and open, current and mutual accounts, where the limit is four
years); or an action founded upon a contract, obligation or liability, evidenced by a certificate or abstract or
guaranty of title of real property or by a policy of title insurance; provided, that the cause of action of such
contracts shall not be deemed to have accrued until the discovery of the loss or damage suffered by the
aggrieved party thereunder.

Within three years. Included are an action upon a liability created by statute, other than a penalty or forfeiture;
an action for trespass upon or injury to real property; an action for taking, detaining, or injuring any goods or
chattels, including actions for the recovery of specific personal property; an action for relief on the grounds of
fraud or mistake. (Cause of action does not accrue until discovery by the injured party of the facts constituting
the fraud or mistake.)

Within four years. An action upon any contract, obligation, or liability founded upon an instrument in writing,
except an action upon any bonds, notes, or debentures issued by any corporation or pursuant to permit of the
Commissioner of Corporations, or upon any coupons issued with such bonds, notes, or debentures, if such
bonds, notes or debentures shall have been issued to or held by the public, where the limit is six years; also
provided that the time within which any action for a money judgment for the balance due upon an obligation for
the payment of which a deed of trust or mortgage with power of sale upon real property or any interest therein
was given as security, following the exercise of the power of sale in such deed of trust or mortgage, may be
brought but shall not extend beyond three months after the time of sale under such deed of trust or mortgage.

An action to recover:

1. Upon a book account whether consisting of one or more entries;

2. Upon an account stated, based upon an account in writing;

3. A balance due upon a mutual, open and current account, provided that where an account stated is based
upon an account of one item, the time shall begin to run from the date of said item, and where an account
stated that is based upon more than one item, the time shall begin to run from the date of the last item.

Within five years. An action for mesne profits (i.e., profits accruing between the time an owner acquires title
and actually takes possession). Also included is an action for the recovery of real property.

Within ten years. An action upon a judgment or decree by any court of the United States or by any state within
the United States.

In connection with the Statute of Limitations, an action is commenced when the complaint is filed with a court
of competent jurisdiction.

Remedies for Breach

As a final possibility, a contract may be discharged by simple acceptance of breach of contract. If one party
fails to perform, the other may accept the contract as ended, concluding either that recoverable damages are too
limited to justify litigation or that the other party is “judgment proof” (i.e., without sufficient assets to satisfy a
judgment).

On the other hand, the victim of a breach of contract may not be willing to accept the breach. That person has a
choice of two, and sometimes three, courses of action, which includes:

1. Unilateral rescission.

2. Action for dollar damages.

3. Action for specific performance.

Rescission

To rescind based upon a breach of contract requires diligent compliance with the following statutory rules:

• One must rescind promptly after discovering the facts which justify rescission; and

• One must restore to the other party everything of value received from the other party under the contract, or
must offer restoration upon condition that the other party do likewise, unless the latter is unable or refuses
to do so.

If a court awards rescission, it may require that the rescinding party make any compensation to the other which
justice may require. It should be noted, however, that a party having the right to rescind may independently
accomplish a completed rescission, terminating further liability and discharging the contract.

Damages

Whenever a party to a contract is a victim of a breach, such party has suffered a detriment and may recover
monetary compensation, which is called damages. This party is entitled to interest (now 10% per annum)
thereon from the day the right to recover is vested. If the contract, itself, stipulates a legal rate of interest, that
rate remains chargeable after the breach as before, and until superseded by a verdict or other new obligation.

Damages for breach of contract must be reasonable, and exemplary damages which serve to punish the
defendant are generally not allowed normally, unless a strong showing of bad faith can be made. Generally, the
measure of damages is the amount which will compensate the party aggrieved party for all the detriment
proximately caused thereby, or which, in the ordinary course of things would likely result therefrom.
Sometimes, if the breach has caused no appreciable detriment, hence no dollar damages, the court will award
“nominal damages” (e.g., $1).

The detriment caused by the breach of an agreement to convey an estate in real property is deemed to be the
price paid and the expenses properly incurred in examining the title and preparing the necessary papers, with
interest thereon. In cases of bad faith, added to the above is the difference between the price agreed to be paid
and the value of the estate agreed to be conveyed, at the time of the breach, as well as the expenses properly
incurred in preparing to enter upon the land. On the other hand, the detriment caused by the breach of an
agreement to purchase an estate in real property is deemed to be the excess, if any, of the amount which would
have been due to the seller, under the contract, over the value of the property to the seller.

Sometimes, especially in building contracts, the parties will anticipate the possibility of a breach (e.g., a delay in
completion beyond a promised date). The parties may specify in the contract the amount of damage to be paid
in the event of a breach. Such liquidated damage agreements will be enforced by the courts provided the
amount specified is not so excessive as to constitute a penalty, and provided it would be impractical or
extremely difficult to fix the actual damage, and normally only if the contract expressly provides that liquidated

damages shall be the only remedy available in the event of breach of the contract.

Specific Performance

Generally, if dollar damages at law cannot provide an adequate remedy, equity will take jurisdiction and order
the defendant to perform the contract. Sometimes, equity may also enforce a promise to forbear from doing
something by granting an injunction.

Requirements to compel performance. Specific performance is especially important in the real estate business
in connection with contracts for the transfer of interests in land. Since every piece of land is unique, the law
presumes that the breach of an agreement to transfer real property cannot be relieved adequately by money
compensation. For specific performance to be available as a remedy, however, certain other requirements must
normally be met before the court will compel a party to perform a contract.

If specific performance is to be ordered, the remedy must be mutual. However, by statute, even if the agreed
counter-performance would not be specifically enforceable, specific performance may be compelled if (a)
specific performance would otherwise be an appropriate remedy, and (b) the agreed counter-performance has
been substantially performed or can be assured. Brokers dealing with prospective oil land and oil leases are
familiar with a contract provision that states the lessee may, at any time before or after discovery of oil on the
property, quitclaim the same or any part thereof to the lessor, whereupon the rights and obligations of the parties
to the lease shall cease. Such a clause, giving the lessee the right to abandon, robs the contract of mutuality.
Therefore, the contract cannot be specifically enforced.

An option for the purchase of real estate, where there is consideration is therefore, specifically enforceable
although the owner cannot at that time compel its performance. Neither can the owner withdraw the option
during the time agreed upon. Upon the written exercise of the option by the buyer according to its terms, a
contract of sale is created. It is this contract that gives rise to the remedy of specific performance. It is not
uncommon for an optionee, or other person who may not have signed a contract, to bring suit thereon for its
specific performance. The fact that the party brings such a suit establishes mutuality, because its subjects
oneself to the court and to agree to abide by the decree of the court.

Obligations which cannot be specifically enforced. By statute, the following obligations cannot be
specifically enforced: (l) to render personal service; (2) to employ another in personal service; (3) to perform an
act which the party has no lawful power to perform when required to do so; (4) to procure the consent of any
third person; and (5) an agreement where the terms are not sufficiently certain to make the precise act which is
to be done clearly ascertainable.

Thus, husband and wife must join in executing any instrument by which community real property or any
interest therein is sold, conveyed, or encumbered, or is leased for a longer period than one year.

Note: The right of a purchaser in good faith without knowledge of the marriage relation where one spouse alone
holds the record title to the real property may be established without the other spouse’s signature.

Since an agreement to procure the consent of a spouse or any third person cannot be specifically enforced, it is
exceedingly important to obtain the signature of the other spouse. In fact, the signatures of both spouses to any
contract relating to community real property should be secured.

Frequently this failure to procure the signature of the other spouse is cured by the seller putting into escrow the
deed signed by both husband and wife, or by the buyer putting into escrow a deed of trust signed by both. When
that is done the original want of mutuality is cured, provided it is done before an attempt is made by the other to
withdraw from the contract by the other party. It is not wise to rely upon this possibility, or even probability.
The alert real estate broker will obtain the signatures of all parties in the beginning.

It is not uncommon that there are two owners of property other than husband and wife. Therefore, it is
necessary to get the signatures of all of the owners, because the buyer could not compel specific performance of
the contract as to one-half of the property that it is contemplated that the whole is to be sold.

Adequate consideration — assent by fraud — merchantable title. Specific performance cannot be enforced
against a party to a contract if such party has not received adequate consideration. This doctrine does not require
that the highest price obtainable must be procured. It means that a price that is fair and reasonable under the

circumstances must be obtained. If a higher price is offered during the negotiations, it must be presented.

Thus, in one California case, the broker signed up a buyer at $30,000, knowing that $35,000 had been offered
for the property. The court held inadequacy was to defeat the buyer’s suit in specific performance. The court
also referred attention to the law which requires perfect good faith on the part of agents, not only in form but in
substance.

Furthermore, in order for the plaintiff to utilize the equitable remedy of specific performance, he or she must
show that the contract with the defendant is just and reasonable. The court denied specific performance in one
case because the seller had not been given adequate security to insure the payment of the balance of the price.

Specific performance cannot be enforced against a party to a contract if his or her assent was obtained by
misrepresentation, concealment, circumvention, or unfair practices of any party to whom performance would
become due under the contract, or by any promise of such party which has not been substantially fulfilled. This
is also true if such assent was given under the influence of mistake, misapprehension, or surprise.

Note: Where the contract provides for compensation in case of mistake, the mistake, if correctable, may be
compensated for, and the contract specifically enforced in other respects.

A buyer is always entitled to receive a merchantable title. Therefore, if the seller cannot give the buyer a title
free from reasonable doubt, the seller cannot specifically enforce such an agreement. This does not mean that
title needs to be merchantable at the time the original agreement was executed. It only means that title needs to
be merchantable at the time it becomes the duty of the seller to convey the title. If the parties agree that the
transfer of title will be subject to the agreement that title will be conveyed, these encumbrances should be
described in the contract and will not block specific performance.

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REAL ESTATE CONTRACTS

REAL ESTATE CONTRACTS somebody Wed, 07/19/2023 - 02:09 am

REAL ESTATE CONTRACTS

Real estate contracts include the following: (l) contracts for the sale of real property or of an interest therein; (2)
agreements for leasing of realty for a longer period than one year; and (3) agreements authorizing or employing
an agent or broker to buy or sell real estate for compensation or a commission.

These contracts are essentially like any other contract except that they must be in writing and signed by the
party to be charged to make them valid under the Statute of Frauds. Thus, as we have seen in the discussion on
contracts in general, there are four requirements: (l) parties capable of contracting; (2) their consent (i.e.,
genuine offer and acceptance); (3) a lawful object; and (4) sufficient consideration.

In the usual real estate sales transaction, the prospective buyer states the terms and conditions under which the
buyer is willing to purchase the property. These terms and conditions constitute the offer. If the owner of the
property agrees to all of the terms and conditions of the offer, it is an acceptance which results in the creation of
a contract. It does not make a difference whether the offer comes from the seller or the buyer. If the negotiation
ultimately leads to a definite offer on the one side and unconditional acceptance on the other side, a contract has
been created. To complete the contract for the sale of real property, the parties must reduce the terms and
conditions to writing and sign the contract.

Provisions in Contracts

Forms such as listing agreements (authorization to sell), deposit receipts, exchange agreements, and other real
estate contracts for the sale or exchange of real estate should contain the following provisions:

1. The date of the agreement;

2. The names and addresses of the parties to the contract;

3. A description of the property;

4. The consideration;

5. Reference to creation of new mortgages (or trust deeds) and the terms thereof; the terms and conditions of
existing mortgages, if any;

6. Any other provisions which may be required or requested by either of the parties;

7. The date and place of closing the contract.

A contract of sale normally calls for the preparation of a deed to convey the property. It is executory because
when the deed is properly signed and delivered to the purchaser the contract is executed.

Handling deposit on property in a sale. An earnest money deposit by a prospective purchaser of real property
is trust funds. The broker must handle the deposit as prescribed by the Real Estate Law and The Regulations.

Section 10145 of the Real Estate Law provides that the broker who receives trust funds must place the funds
into a trust fund account in a bank or other recognized depository, if the broker does not place the funds into a
neutral escrow or into the hands of the broker’s principal.

The regulations of the Commissioner dictate the procedures to be followed by a broker who elects to hold the
funds uncashed or places the earnest money deposit into the broker’s trust fund account until acceptance. The
contract usually provides that, upon acceptance, the deposit will be immediately placed into an independent
escrow or title company.

The provision of law that sanctions the handing over of all varieties of trust funds to a principal by the broker
poses some dilemmas for brokers when the trust funds, which are toward the purchase, are in the form of
deposits. The particularly troublesome predicaments brokers may face are the transactions in which the buyer
has allegedly breached a binding contract to purchase the real property. The law permits a broker to hand over
an earnest money deposit to the seller as soon as there has been an acceptance of the offer to purchase, unless
the terms of the contract provide otherwise. The question then becomes whether the broker, who has the money
in his or her trust fund account, can refuse to turn it over to the seller upon demand when the seller concludes
that the buyer has breached the contract?

There is no legal authority that provides a clear-cut answer to this question. Those knowledgeable in the Real
Estate Law in California contend the broker holds the earnest money deposit after an apparent acceptance of the
contract as an escrow holder rather than as an agent of the seller. The Department does not accept this
proposition. However, it does understand the broker is in a very difficult position when a transaction falls apart
and either or both parties demand the earnest money. To avoid the decision as to who is entitled to an earnest
money deposit and the later possibility of being held liable or subject to disciplinary action for making the
wrong decision, the broker is well advised to file an interpleader action and deposit the funds in the court where
the action is to be brought. If, as noted above, the trust funds have already been placed into an independent
escrow upon acceptance, the funds may be held there pending resolution of the dispute.

Forfeitures. Contracts for the sale of real property frequently include a provision that states if a prospective
buyer breaches the contract through no fault of the seller or broker, the deposit made by the buyer toward the
purchase shall be divided between the seller and the broker. Such provisions of cases of breaches by the buyer
by the forfeiture of the deposit come within the definition of liquidated damages clauses.

If the contract is for the purchase and sale of residential real property, defined as a dwelling of not more than
four residential units, and the buyer intends to occupy the dwelling or one of the units as a residence, the
following rules apply:

1. These special rules apply only to amounts actually prepaid, in the form of deposit, downpayment, or
otherwise.

2. If the amount paid pursuant to the liquidated damages clause does not exceed 3% of the purchase price, the
clause is valid unless the buyer proves that the amount paid is unreasonable.

3. If the amount actually paid pursuant to the liquidated damages clause exceeds 3% of the purchase price, the
clause is invalid unless the party seeking to enforce it proves that the amount paid is reasonable.

4. The provision must be separately signed or initialed by each party to the contract, and if it is a printed
contract, the provision must be set off in ten point bold type or contrasting red print in eight point type.

These rules do not apply to real property sales contracts, as defined in Civil Code Section 2985.

Effect of seller’s death on real estate contract. A real problem may ensue if a contract is entered into for the
sale or purchase of real estate and the seller dies before the time of taking title. A properly drawn real estate

contract contains a provision stating that all the terms of the contract are binding upon the heirs, executors,
administrators, and the assigns of the respective parties.

With this provision, the buyer’s rights are the same against the heirs, executors, administrators, or assigns of the
seller as the buyer had against the seller. Under these circumstances, the buyer may compel specific
performance of the contract by the seller’s heirs, administrators, executors, or assigns.

Uniform Vendor and Purchaser Risk Act (Civil Code Section 1662). In some circumstances, after a contract
is made for the purchase and sale of real property, a fire or other disaster destroys or seriously damages the
property. The question becomes who shall take the loss? Under California’s Uniform Vendor and Purchaser
Risk Act, any contract made in this state for the purchase and sale of real property shall be interpreted as
including an agreement that the parties shall have the following rights and duties unless the contract expressly
provides otherwise:

1. If, when neither the legal title nor the possession of the subject matter of the contract has been transferred,
and all or a material part thereof is destroyed without fault of the purchaser or is taken by eminent domain,
the seller cannot enforce the contract, and the purchaser is entitled to recover any portion of the price paid;

2. If, either the legal title or the possession of the subject matter of the contract has been transferred, and all or
any part thereof is destroyed without fault of the seller or is taken by eminent domain, the purchaser is not
relieved from a duty to pay the price, nor entitled to recover any portion thereof that has been paid.

Options

Since an option is a form of contract, the requirements for the enforceability of real estate contracts apply to
options. Some consideration, even though it might be only 25¢ on a $100,000 parcel of real estate, must in fact
pass from optionee to optionor. A mere recital of consideration alone is insufficient. Provisions of a lease,
however, constitute sufficient consideration to support an option contained in the lease. Option contracts
typically run from seller to buyer. That is, in exchange for consideration paid by the buyer, the seller is deprived
of the right and power to revoke the basic offer to sell. The buyer, in effect, purchases an agreed amount of time
in which to accept or reject the seller’s underlying offer concerning the property. Thus, the underlying offer is
rendered irrevocable for the period specified in the collateral option contract.

Although option rights are usually assignable unless there is a restriction to the contrary, they do not give the
optionee any interest in the land. For this reason, the optionee cannot mortgage his or her rights. However, the
holder of an unexercised option does, however, have an interest for which the holder may be entitled to
compensation upon condemnation of the land.

The option may be given either alone or in connection with the lease of the property. It may be in either the
customary form of an exclusive right to purchase or lease, or in the form of a privilege of first right of refusal to
purchase or lease. The option will terminate automatically upon expiration of the time specified without
exercise by the optionee. Additionally, the termination of a lease containing an option also usually terminates
the option. A renewal of the lease may, however, renew the option. The specific lease situation must sometimes
be carefully examined, since the option provisions and the lease provisions may be divisible.

An option to purchase real property is a written agreement whereby the owner of real property agrees with the
prospective buyer, that such buyer shall have the right to purchase the property from the owner at a fixed price
within a certain time. Terms of financing, payments, etc., should be set forth in such agreement. The
prospective buyer at buyer’s option may comply with all the terms of the agreement or be relieved from its
terms. The owner would not have recourse to any legal procedures for damages or specific performance. The
option does not bind the optionee to any performance. It merely gives the optionee a right to demand
performance. Time is of the essence in an option and is usually strictly construed. If no time is specified, a
reasonable time period is implied.

If an option is recorded by the optionee, but is not exercised before or on the date of the expiration of the option,
the optionee should remove the effect of the option from the records by recording a quitclaim deed.

The broker usually does not earn a commission for having secured a client who takes an option, as the broker’s
right of commission does not arise unless the option is exercised.

Listing Defined

A listing is a written contract by which a principal employs an agent to do certain duties (e.g., sell real property)
for the principal. Therefore, an agent holding a listing is always bound by the law of agency and has certain
fiduciary obligations to the principal that do not exist between two principals.

Net listing. In a net listing the compensation is not definitely determined, but a clause in the contract usually
permits the agent to retain as compensation all the money received in excess of the selling price that is accepted
by the seller. Under the Real Estate Law, failure of an agent to disclose the amount of an agent’s compensation
in connection with a net listing is cause for revocation or suspension of license. The disclosure must be done
prior to or at the time the principal binds himself or herself to the transaction. The agent is also required by the
Real Estate Law, in writing within one month of the transactions’ closing, to reveal to both buyer and seller the
selling price involved. The law, which is the usual practice, permits this information to be disclosed by the
closing statement of the escrow holder.

A net listing is perfectly legitimate, but it may give rise to a charge of fraud, misrepresentation and other abuses.
Accordingly, if a net listing is used, the commission arrangement should be thoroughly explained to the
principal.

Open listing. An open listing is a written memorandum signed by the party to be charged (usually the seller of
the property) which authorizes the broker to act as agent for the sale of certain described property. Usually, no
time limit is specified for the employment, although open listings can provide for a definite term. The property
is identified by a suitable description, and generally the terms and conditions of sale are set forth in the open
listing.

Open listings are the simplest form of written authorization to sell. They may be given concurrently to more
than one agent. Usually, the seller is not required to notify the other agents in case of a sale by one of them in
order to prevent liability of paying more than one commission. Where several open listings are given, the
commission is considered to be earned by the broker who first finds a buyer who meets the terms of the listing,
or whose offer is accepted by the seller. If the owner personally sells the property, the owner is not obligated to
pay a commission to any of the brokers holding open listings. The sale of the property under such an agreement
cancels all outstanding open listings.

Exclusive agency listing. An exclusive agency listing is a contract containing the words “exclusive agency.”
The commission is payable to the broker named in the contract, and if the broker or any other broker finds the
buyer and effects the sale, the broker holding the exclusive listing is entitled to a commission.

If a broker other than the broker holding the exclusive agency listing is the procuring cause of the sale, and the
procuring broker has some types of written agreement with the seller, the owner may be liable for the payment
of two full commissions. Because the listing refers to an agency and the owner is not an agent, the owner may
personally effect the sale without incurring liability for commission to the broker holding the exclusive agency
listing.

Exclusive right to sell listing. Another form of listing is the exclusive right to sell. Under such listing, a
commission is due to the broker named in the contract if the property is sold within the time limit by the said
broker, by any other broker, or by the owner. Frequently, this listing also provides that the owner will be liable
for a commission if a sale is made, within a specified time after the listing expires, to a buyer introduced to the
owner by the listing broker during the term of the listing. The real estate broker is usually obligated under the
terms of the listing contract to furnish a list of the names of persons with whom the broker has negotiated during
the listing period, within a specified number of days after the expiration of the listing.

The exclusive right and the exclusive agency type of listing must be for a definite term, with a specified time of
termination. If a broker does not provide for this, the broker’s license is subject to disciplinary action under the
Real Estate Law.

Multiple listing service. A multiple listing service is a cooperative listing service conducted by a group of
brokers, usually members of a real estate board. The group provides a standard multiple listing form which is
used by the members. It is usually an Exclusive Authorization Right to Sell listing form and provides, among
other things, that the member of the group who takes the particular listing is to turn it in to a central bureau.

From there, it, is distributed to all participants in the service and all have the right to work on it. Commissions
earned on such listings are shared between the cooperating brokers, with the listing broker providing for the
division of commission in each listing sent to other participants.

When broker is entitled to commission. Ordinarily the broker is entitled to a commission when the broker
produces a buyer who is ready, willing, and able to purchase the property for the price and on the terms
specified by the principal, regardless of whether the sale is ever consummated. Contracts may expressly provide
that no commission is payable except on a completed sale or on an installment of the purchase price when paid
by the buyer. Such provision controls in the absence of fraud or prevention of performance by the principal. The
broker must be the procuring cause of the sale. It is not sufficient that the broker merely introduces the seller
and buyer, if they are unable to agree on the terms of the sale within the time period of the agency.

The broker may, however, have a cause of action for the payment of commission if, within a specified time after
expiration of the listing, the property is sold to a buyer introduced by the broker during the term of the listing
contract.

Deposit Receipt

California brokers use a deposit receipt when accepting earnest money with an offer to purchase real property.
This is a receipt for the money deposited and, more importantly, the basic contract for the transaction. It should
set forth all the basic factors which are included in a contract of sale, including arrangements for financing. It
should contain a complete understanding among the buyer, seller, and broker as to the return of the deposit in
the event the offer is not accepted, and provisions for disposition of deposit money should the buyer fail to
complete the purchase.

Some of these provisions are incorporated by standard clauses in the deposit receipt forms. The terms and
conditions written into the offer must be done with extreme care by the broker or salesperson.

Agent must give copies of contracts. The real estate license law provides that brokers and salespersons must
give copies of documents and agreements to the persons signing them at the time the signature is obtained. The
law not only applies to copies of listing contracts and deposit receipts, but to any document pertaining to any of
the acts for which one is required to hold a real estate license.

Tender Defined

A tender in a real estate transaction is an offer by one of the parties to the contract to carry out that party’s part
of the contract. A tender is usually made at the time of closing of escrow (i.e., concluding the transaction). If
one of the parties defaults or is unable to carry out his or her contractual obligation, the other party makes the
tender. (If the seller, an offer of the deed and a demand for payment of the balance of the purchase price. If the
purchaser is ready, an offer of the money required and demand for the deed.) If litigation arisis out of some
dispute between the buyer and the seller, the party who made the tender can rightfully claim that he or she was
ready, willing and able to go through with the deal, and that the other party defaulted. If both parties were in
default, neither may recover any damages from the other. Whether the parties made a tender is a question of fact
that must be established by competent evidence.

The person must specify any objections at the time the tender is made or the objections are waived. The tender
of performance, when properly made, has the effect of placing the other party in default if the other party
refuses to accept it, and the party making the tender may rescind or sue for breach of contract or specific
performance.

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STATUTE OF FRAUDS

STATUTE OF FRAUDS somebody Wed, 07/19/2023 - 02:09 am

STATUTE OF FRAUDS

Contracts That Must Be Written

The law is more concerned with substance than with form. With reference to form, it is generally immaterial
whether a contract is oral or written, or even manifested by acts or conduct. Thus all contracts may be oral

except those specially required by a statute to be in writing.

Most contracts which are required by statute to be in writing are referred to as coming under the Statute of
Frauds. The Statute of Frauds was first adopted in England in 1677 and became part of the English common
law. Subsequently, it was introduced into this country and has been codified in California. The purpose of the
California Statute of Frauds is to prevent perjury, forgery and dishonest conduct on the part of unscrupulous
people in proving the existence and terms of certain important types of contracts.

The statute provides that certain contracts are invalid, unless the contract or some note or memorandum of the
contract is in writing and subscribed (i.e., signed) by the party to be charged or by his or her agent. Under
Section 1624 of California’s Civil Code, contracts that are required to be in writing are:

1. An agreement that by its terms is not to be performed within a year from the making thereof;

2. A special promise to answer for the debt, default, or miscarriage of another, except in the cases provided
for in Civil Code Section 2794;

3. An agreement for the leasing for a longer period than one year or for the sale of real property, or of an
interest therein. Such agreement, if made by an agent of the party sought to be charged, is invalid, unless
the authority of the agent is in writing and subscribed by the party sought to be charged;

4. An agreement authorizing or employing an agent, broker, or any other person, to purchase or sell real
estate, or to lease real estate for a longer period than one year, or to procure, introduce, or find a purchaser
or seller of real estate or a lessee or lessor of real estate where such lease is for a longer period than one
year, for compensation or a commission;

5. An agreement which by its terms is not to be performed during the lifetime of the promisor;

6. An agreement by a purchaser of real property to pay an indebtedness secured by a mortgage or deed of trust
upon the property purchased, unless assumption of the indebtedness by the purchaser is specifically
provided for in the conveyance of such property.

7. A contract, promise, undertaking, or commitment to loan money or to grant or extend credit, in an amount
greater than one hundred thousand dollars ($100,000), not primarily for personal, family, or household
purposes, made by a person engaged in the business of lending or arranging for the lending of money or
extending credit. For purposes of this section, a contract, promise, undertaking, or commitment to loan
money secured solely by residential property consisting of one to four dwelling units shall be deemed to be
for personal, family, or household purposes.

Relates to remedy. It should be noted that the Statute of Frauds relates to the remedy only and not to the
substantial validity of the contract. Thus, the contract which fails to comply with the statute is not void but
merely unenforceable. This, of course, is an important distinction. It is effective for all purposes until, in an
attempt to enforce it by action, its invalidity is urged. Moreover, the statute is a defense only and cannot be the
basis for affirmative action. It has been held that significant partial performance can excuse the lack of a
writing.

When a contract has been fully performed, the Statute of Frauds does not apply and may not be invoked for any
reason.

The note or memorandum required by the statute may be in any form since its purpose is simply evidence of the
contract. It may consist of one paper, or even a series of letters. It must however contain all the material terms
of the contract so that a court can determine to what the parties agreed. It must, bear the signature of the party to
be charged or held to the agreement. The other party bringing the action can always add his or her signature
later.

Real estate applications of the statute. It is readily apparent that several very important sections of the Statute
of Frauds apply to persons dealing in real estate. Practically all contracts for the sale of any interest in real
property must be in writing. This includes assignment of a percentage of the proceeds of oil produced from
designated lands. It embraces any and all instruments creating liens, such as trust deeds, mortgages, leases for
periods of longer than one year, rights to rights of way through property and any and all encumbrances incurred
or suffered by the owners, or by operation of law. “By operation of law” means judgments, attachments, or

restrictions placed on the property by legislative bodies, zoning ordinances, and other such means.

The statute does not apply to a lease for a year or less.

Commissions. The Statute of Frauds provides that for a broker to collect a commission when earned, the
contract providing for a commission must be in writing and signed by the party to be charged (e.g., a property
owner who employs the broker to produce a buyer; or a buyer who employs the broker to find a suitable
property).

The Statute of Frauds is applicable to situations where the lease of real estate for a period exceeding one year is
involved. A broker who is commissioned to seek a lessee of property for a term exceeding one year cannot rely
upon an oral agreement to collect a commission. If the broker is successful in negotiating the lease, the contract
with the lessor must be in writing or there must be reliable written evidence thereof to sustain a claim of
commission.

It has been held that the moral obligation to pay for services performed under oral authorization is sufficient
consideration to support a promise of compensation contained in escrow instructions later drawn up. It also has
been held that these provisions have no application to an oral agreement between brokers to share a commission
to be earned as a result of the sale or exchange of real estate.

The Statute of Frauds invalidates any unwritten agreement by a purchaser of real property to pay an
indebtedness secured by a mortgage or deed of trust upon that property, unless assumption of the indebtedness
is specifically provided for in the property conveyance.

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Chapter 9 - Landlord and Tenant somebody Wed, 07/19/2023 - 02:09 am

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LANDLORD AND TENANT

LANDLORD AND TENANT somebody Wed, 07/19/2023 - 02:09 am

LANDLORD AND TENANT

The distinguishing feature of a leasehold interest is the right to exclusive possession and use of real property, for
a fixed period of time, held by the lessee (or “tenant”). The lessor (or “landlord”), having parted with this right
to exclusive possession, merely holds the basic title (the “reversion”) during the existence of the lease. Hotel
guests, licensees and employees may all be privileged to use a given space under certain contractual conditions,
but since none of these has an exclusive right to possession, they are not governed by the laws regulating the
relationship of landlord and tenant.

A leasehold estate itself is chattel real. Although the lessee has an estate/interest in real property, the estate is in
fact a form of personal property, governed by laws applicable to personal property.

Types of Leasehold Estates

Most authorities classify leases into four categories, based on the lease term:

• Estate for years;

• Estate from period to period (periodic tenancy);

• Estate at will; and

• Estate at sufferance.

Estate for years. An estate for years is one which is to continue for a definite period fixed in advance by
agreement between landlord and tenant. The name is somewhat misleading because the period may be for less
than a year, measured in specific days, weeks, or months.

Estate from period to period. An estate from period to period (or periodic tenancy) is one which continues for
periods of time (typically year-to-year, month-to-month, or week-to-week) as designated by landlord and tenant
in their agreement. The most common periodic tenancy is the month-to-month tenancy.

Estate at will. An estate at will is one which is terminable at the will or unilateral decision of either party with
no designated period of duration. Tenancies at will are uncommon because the landlord’s acceptance of periodic
rents causes the tenancy to be treated like a periodic tenancy (Civil Code Section 1946). By statute, California
and certain other states have modified the potentially summary and abrupt conclusion of such estates to require
advance 30-day notice of termination by either party.

Estate at sufferance. An estate at sufferance is one in which the tenant who has rightfully come into possession
of the land retains possession after the expiration of the term. For example, a tenant who holds over after the
expiration of a lease would be deemed to be holding an estate at sufferance.

Dual Legal Nature of Lease

A lease is an oral or written agreement that creates and governs, by express or implied terms, a landlord-tenant
relationship. A lease has two characteristics, each of which has its own set of rights and obligations:

1. a conveyance by the landlord to the tenant of an estate in real property covering the premises leased (which
creates “privity of estate” between the landlord and tenant); and

2. a contract between the landlord and tenant which governs both the landlord’s delivery and maintenance of
the premises and the tenant’s possession of, use of, and payments for the premises (which creates “privity of
contract” between the landlord and tenant).

Verbal and Written Agreements

A lease with a term of one year or less may be created by verbal agreement. However, for the sake of clarity and
to reduce the risk of disagreement (both during the lease term and after tenant’s surrender of the premises), all
leases, even those with month-to-month terms, should be reduced to written form.

California’s Statute of Frauds requires a lease to be in writing if it either:

1. has a term longer than one year; or

2. has a term less than one year which expires more than one year after the agreement is reached.

An example of a lease with a term of less than one year that must be in writing is a lease for a ten month term
that begins three months from the date when an agreement is reached. Although one might automatically assume

that the lease would not need to be in writing since it is for a term of less than one year, the contractual
relationship (which will exist during the three month “pre-tenancy” period and the ten month term of lease) will
actually be maintained for thirteen months.

Unwritten leases that are for a term of longer than one year or that expire more than one year after the agreement
is reached are unenforceable. If a tenant enters into possession under an unenforceable lease, the tenant becomes
a tenant at-will.

Lease Ingredients

No particular words, form, or language are required to create an oral or written lease. However, the words used
must:

1. evidence the landlord’s and tenant’s intent to create a landlord-tenant relationship (which intent is apparent
from either the parties’ acts or deeds, or the language of a written agreement);

2. identify the parties;

3. describe the premises leased;

4. specify the time, amount, and manner of rental payments; and

5. establish a definite term.

Contract and Conveyance Issues

In light of its dual character of being a contract and a conveyance, an enforceable lease must satisfy specific
laws with respect to:

1. the creation and interpretation of a contract; and

2. the prerequisites for the transfer of an interest in real property.

Contract specifics. The general rules regarding the creation of a lease (and contract), in addition to those
governing whether or not there must be a writing, include:

1. mutual assent of landlord and tenant (i.e., an offer and an acceptance);

2. mutuality of obligation (i.e., neither party may have an unrestricted right to withdraw from the lease);

3. legal capacity of each party to contract (which, in general, excludes minors, persons of unsound mind, and
persons deprived of their civil rights); and

4. lawful object (e.g., use does not violate health and safety regulations or criminal statutes). Although a lease
may, indeed, have a lawful object, specific provisions within the lease may be deemed against public policy
and therefor void. For example, residential leases that waive tenant procedural rights (such as the right to
receive a notice of default) or rights regarding security deposits; or waive any future course of action
against the landlord.

As a contract, a written lease is construed according to the intent of the parties, as gathered from the language of
the lease and the performance of the parties under the lease, and in accordance with the rules of interpretation of
contracts. Furthermore, like other written contracts, the executory (yet to be performed) provisions of a written
lease may not be orally modified. Rather, such provisions must be modified in a writing signed by all parties to
the original lease. To the extent that the parties mutually agree to modify the lease with respect to fully
performed lease obligations, such modifications become executed modifications of the lease. When a lease is
negotiated in Spanish and is for a residential unit, the lease must be written in Spanish.

Execution, delivery and acceptance. In general, a written lease must be executed, delivered, and accepted
before it may be enforced according to its express terms. However, a lease signed and delivered by the landlord
is enforceable by the tenant even if the tenant fails to sign the lease. On the other hand, if the tenant takes
possession of the premises or pays the stipulated rent, having still failed to sign the lease, the tenant’s acceptance
of the landlord’s delivery of the executed lease and premises is presumed and the landlord may then enforce the
lease provisions against the tenant. The lease must be fully executed, however, before the landlord may enforce
the lease’s special contractual covenants (e.g., a covenant to repair) against the tenant.

Recording. A lease (or memorandum thereof summarizing key provisions) may be recorded in the official
public records of the county in which the leased premises are situated. However, even an unrecorded lease is
enforceable between the parties and against any party who, with notice of the tenant’s interest, receives an

interest in the property in which the premises are situated. If a lease term exceeds one year and the lease is not
properly recorded, and if the tenant’s possession under the lease does not give a bona fide purchaser notice of
the tenant’s on-going tenancy, that tenancy becomes subject (and subordinate) to the bona fide purchaser’s
interest in the leased premises.

Rights and Obligations of Parties to a Lease

A number of matters should be considered before entering into a lease agreement. Many of these are relatively
unimportant in an oral month-to-month tenancy, but become increasingly important in the case of written
leaseholds for a longer period of time. Since these subjects are each covered in considerable detail by contract
provisions of the instrument, each written lease must be studied to determine the rights and obligations of the
parties involved. Some of the more important aspects of a lease are:

1. term of lease;

2. rent;

3. security deposit;

4. possession, maintenance, and improvements;

5. liability of parties for injuries resulting from condition of premises;

6. transfer of interest in leased premises;

7. special covenants, conditions and provisions; and,

8. termination.

Term of lease. The lease term is that period of time during which the tenant may occupy the premises. Since the
lease term is an essential element of a lease, if the lease fails to specify its term, a specific period of time will be
implied as a matter of law, and the length of that period of time hinges on the nature of the lease and the
circumstances surrounding it.

A lease term need not commence with full execution of the lease, and it ordinarily is based on a fixed or
computable period. On some occasions, however, the length of a tenancy is either:

1. conditioned on the occurrence of an event which may trigger the commencement of the lease term,
terminate the lease term, or both; or

2. based on the life of the landlord.

A common example is a term which commences upon the landlord’s completion of certain improvements to the
premises and/or delivery thereof to the tenant. If, however, a lease is to commence upon the occurrence of a
future event, the lease becomes invalid if the term does not commence within 30 years of full execution of the
lease.

Where the parties fail to specify the lease term, the term is determined in accordance with the following statutory
presumptions, each of which applies to a certain type of rental property:

1. For lodgings, dwelling-houses, and residential properties, the period of time adopted for the payment of
rent. For example, if rental payments are due on a monthly basis, the lease term is equal to one month. If the
lease fails to address the period adopted for rental payments, the tenancy is presumed to be for one month.
(Civil Code Section 1944).

2. For agricultural or grazing properties, one year.

3. For all other properties where there is no custom or usage on the subject, the tenancy is for one month
unless otherwise designated in writing. (Civil Code Section 1943).

Even if the landlord and tenant do specify a lease term or the term is implied by statute, the following statutory
restrictions will supersede and limit the lease term:

1. A lease for agricultural or horticultural purposes cannot have a term exceeding 51 years.

2. A lease for any town or city lot cannot have a term exceeding 99 years.

3. A lease of land for the production of minerals, oil, gas, or other hydrocarbon substances cannot have a term
exceeding 99 years.

4. A lease of property owned by an emancipated minor or an incompetent person cannot have a term longer
than a probate court may authorize.

A lease renewal creates a new and distinct tenancy. Accordingly, the parties should execute an entirely new
instrument.

A lease extension is a continuation in possession under the original lease. A lease extension may also occur if
the tenant holds over with permission from the landlord. Indeed, if a tenant remains in possession of the
premises after expiration of the lease term and the landlord accepts rental payments, the parties are presumed to
have renewed the lease on the same terms and conditions on a month-to-month basis if rent is payable monthly,
and in no event longer than one year.

A contractual right to extend or renew a lease is an irrevocable offer by the landlord to lease the premises in the
future on specific terms. Such a right to extend or renew a lease is within the Statute of Frauds and, therefore, if
the original lease is covered by the Statute of Frauds or if the lease, as extended, would be covered by the
Statute of Frauds, the renewal or extension must be in writing to be enforceable.

To be enforceable, lease provisions for the extension or renewal of a lease must be reasonably specific and
contain all of the material terms. A provision on terms “to be mutually agreed upon” is generally unenforceable.
An unexercised option to extend the term for a specified period does not create a property right until it is
exercised unequivocally and in strict accordance with its terms. Whether specified in the lease or not, an option
hinges on the continued viability of the lease and must be exercised prior to expiration or earlier termination of
the lease. A lease that is limited to the hiring of residential real property and provides for an automatic renewal
or extension of the lease if the tenant either remains in possession after lease expiration or fails to give notice of
intent not to renew, is voidable by the party who did not prepare the lease. Provided, however, that such a lease
is valid if, in a printed lease, the automatic renewal clause is printed in 8-point boldface type and a recital of
inclusion of the automatic renewal clause appears in 8-point boldface type immediately above the signature line.

Rent. Rent is the consideration paid for possession, use, and enjoyment of leased property. A tenant’s obligation
to pay rent arises from either the express terms of a lease (privity of contract) or a tenant’s mere occupancy of
the premises where no gift is intended (privity of estate).

Through privity of contract, a tenant is bound by a covenant to pay rent even if the tenant never enters into
possession of the premises. Through privity of estate, even if a lease does not specify the terms for payment of
rent, an obligation to pay rent arises out of a tenant’s occupancy of the premises (again, assuming no gift is
intended).

Since, by statute, the term “rent” includes “charges equivalent to rent,” rental payments need not be paid in
currency (unless otherwise specified in the lease), but may be made in the form of goods, crops, and any other
product or other consideration agreed upon by the parties.

Unless there is either a course of dealing between the parties or a lease provision to the contrary, rental
payments are due at the end of each successive holding period or term (e.g., at the end of the day, week, month,
quarter, or year). In addition, in the absence of any lease provision to the contrary, rental payments must be
delivered to the demised premises. Most commercial and residential leases, however, specifically provide for
payment of rent in advance of the period covered by such payment and provide for payment of rent to a specific
address.

Rent paid by check constitutes payment of rent conditioned on the landlord presenting the check to the drawee
bank, and the tenant’s obligation to pay rent is merely suspended until the check is presented to the drawee bank.
If, however, the tenant knows that there are insufficient funds to honor the check at the time of delivery to the
landlord, the tenant’s obligation to pay rent is not suspended and the landlord may, immediately after the rent is
due, sue for the payment of rent or commence eviction proceedings. In addition, although the landlord is liable
for any loss caused by its delay in presenting a rental check to the drawee bank, the landlord’s acceptance of a
rental payment by check does not prejudice its right to sue for collection of rent or to evict the tenant for failure
to pay rent.

A late charge is enforceable by the landlord if the amount specified in the lease is reasonably related to the
landlord’s anticipated administrative costs and loss of interest caused by the late payment. However, since

forfeiture of a lease is a drastic remedy, when a lease does provide for a late charge the landlord may not have
the right to terminate the lease solely because of a late rental payment.

In general, rent that is paid in advance is due on a specific date and is not apportionable. However, if, after
prepayment of rent, the lease is terminated due to the fault of the landlord (thereby causing a “constructive
eviction”), or if the lease provides for apportionment of rent, the rule against apportionment is inapplicable. If
rent is not prepaid and the lease is terminated prior to the expiration of the term, the tenant is liable for that
portion of the rent due for the time during which the tenant had the right to occupy the premises.

Unless otherwise specified in the lease or unless terminated prior to the expiration of the lease term (for
example, due to complete destruction or condemnation of the premises, or the tenant’s death), a tenant must pay
rent throughout the term of the lease and thereafter until the tenant returns possession of the premises to the
landlord. If the tenant tenders possession of premises to the landlord upon the expiration of the lease, the
tenant’s rental obligation terminates at that time.

A tenant’s obligation to pay rent is generally deemed an “independent” lease obligation: i.e., independent of the
landlord’s lease obligations to the tenant. Therefore, even if the landlord fails to honor its lease obligations (e.g.,
fails to perform its maintenance obligations), the tenant must continue to pay rent according to the provisions of
the lease.

In contrast, if the landlord breaches a material covenant of the lease, the tenant’s obligation to pay rent may be
abated or terminated. For example, in a residential lease, if the landlord fails to honor the implied warranty of
habitability (which is deemed so material that it cannot be waived by the tenant), the tenant is deemed
constructively evicted and may remain in possession and abate rental payments in proportion to the impairment
of use and enjoyment of the premises. In addition, if a residential or commercial tenant is actually or
constructively evicted from the premises as a result of events not caused by the tenant, such as partial
condemnation or lack of access to the premises (and assuming that the risk of such occurrence is not allocated to
the tenant in the lease), the tenant’s rental obligations terminate if (and only if) the tenant vacates the premises.

Generally, if the leased premises are taken by government power or eminent domain, the lease will be
terminated as of the date of taking (unless the lease specifically provides otherwise), and the tenant’s obligation
to pay rent would cease. However, if only a portion of the leased premises is taken and the remaining portion is
still usable for the purpose for which it was leased, the tenant may still be obligated to continue to pay rent
according to the terms of the lease agreement. Thus, it may be advisable for the parties to provide in the lease
for a proportional abatement of rent if the leased premises are partially taken; and to specify what portion of the
premises (e.g., 50%), if taken, will constitute a complete taking and terminate the tenant’s obligation to pay rent.

Security deposit. A security deposit secures a tenant’s performance of lease obligations. It constitutes assurance
to the landlord that, in the very least and to the extent of the security deposit, the tenant’s monetary obligations
will be satisfied.

Although a security deposit is generally cash deposited with the landlord, other forms are often used in
commercial transactions: letters of credit and certificates of deposit. In addition, a security deposit may generally
be categorized pursuant to the terms of the lease as:

1. prepaid rent (generally for rent payable at the end of the term);

2. a forfeitable security deposit (forfeited in its entirety upon a tenant default specified in the lease);

3. a non-forfeitable security deposit (refunded at the end of the term, less debits attributable to specified tenant
defaults); or

4. a bonus for lease execution (non-refundable).

In any event, a security deposit is held by the landlord for the benefit of the depositing tenant, and a tenant’s
claim to the security deposit has priority over claims of all the landlord’s creditors except a trustee in
bankruptcy.

In a residential lease, notwithstanding the specific terminology (e.g., “advance payment,” “fee,” or “charge”) or
the purpose designated (e.g., a “cleaning” or “security” deposit) used to describe a tenant’s monetary deposit to
secure performance under the lease, the money deposited is a refundable security deposit. Any purported waiver

by a tenant of the right to a refund of the security deposit (less allowable debits attributable to the tenant’s
defaults as specified in the lease) is null and void.

A landlord may require that the tenant pay, regardless of the purpose therefor and in addition to the first month’s
rent, a maximum of:

• two months’ rent in the case of an unfurnished residential property;

• three months’ rent in the case of a furnished residential property.

If, however, the term of the lease is six months or longer, the landlord is not prohibited from collecting an
advance payment of not less than 6 months rents.

These limitations do not preclude the landlord and tenant from entering into a mutual agreement for the
landlord, at the request of the tenant and for a specified fee or charge, to make structural, decorative, furnishing,
or other similar alterations, if the alterations are other than cleaning or repairing for which the landlord may
charge the previous tenant as provided by Civil Code Section 1950.5 (e).

Within three weeks after a tenant vacates and surrenders the premises, but not earlier than the time that either the
landlord or the tenant provides a lawful notice to terminate the tenancy or not earlier than 60 calendar days prior
to the expiration of a fixed-term lease, the landlord must furnish the tenant, by personal delivery or by first class
mail, postage prepaid, a copy of an itemized statement indicating the basis for, and the amount if, any security
received and the disposition of the security and must return any remaining portion of the security to the tenant.
Along with the itemized statement, the landlord must also include copies of documents showing charges
incurred and deducted by the landlord to repair or clean the premises, as detailed by Civil Code Section 1950.5.

If the landlord sells the residential property or transfers its interest in the premises, the landlord may transfer the
security deposit (less any lawful deductions) to the new landlord. In the event of any such transfer, the landlord
must (by personal delivery or first-class mail, postage prepaid) give the tenant written notice specifying the
amount of the transfer, itemizing the deductions, and identifying the successor landlord by name, address, and
telephone number. Alternatively, the landlord may return the security deposit to the tenant, less any lawful
deductions, with a statement itemizing the deductions therefrom. The successor residential landlord has the same
rights and obligations with respect to a security deposit as the original landlord.

The existence of a security deposit creates a debtor/creditor relationship between the landlord and tenant.
Consequently, the landlord has a personal obligation to return the security deposit (less any lawful deductions).
If the original landlord fails to satisfy either statutory alternative set forth immediately above, both the original
landlord and the successor landlord remain personally liable to the tenant for the amount of the deposit (less any
lawful deductions).

If the landlord retains any portion of the deposit in bad faith, the landlord is liable for actual damages, along
with possible statutory penalty of up to twice the amount of the security. A court may award to the tenant
damages for bad faith whenever the facts warrant such an award.

The law governing commercial property security deposits is less onerous to landlords in each of the following
material respects (and is otherwise similar to that governing residential property security deposits):

1. The landlord may claim of the payment or deposit only those amounts as are reasonably necessary to
remedy tenant defaults in the payment of rent, to repair damages to the premises caused by the tenant, or to
clean the premises upon termination of the tenancy, if the payment or deposit is made for any or all of those
specific purposes.

2. If the claim of the landlord upon the payment or deposit is only for the defaults in the payment of rent and
the security deposit equals no more than one month’s rent plus a deposit amount clearly described as the
payment of the last month’s rent, then any remaining portion of the payment or deposit must be returned to
the tenant at a time as may be mutually agreed upon by the landlord and tenant, but in no event later than 30
days from the date the landlord receives possession of the premises.

3. If the claim of the landlord upon payment or deposit is only for defaults in the payment of rent and the
security deposit exceeds the amount of one month’s rent plus a deposit amount clearly described as the
payment of the last month’s rent, then any remaining portion of the payment or deposit in excess of an
amount equal to one month’s rent must be returned to the tenant no later than two weeks after the date the

landlord receives possession of the premises, with the remainder to be returned or accounted for within 30
days from the date the landlord receives possession of the premises.

4. If the landlord in bad faith fails to return the security deposit in a timely manner, the statutory penalty is
$200, in addition to any actual damages.

5. If the claim of the landlord upon the payment or deposit includes amounts reasonably necessary to repair
damages to the premises caused by the tenant or to clean the premises, then any remaining portion of the
payment or deposit must be returned to the tenant at a time as may be mutually agreed upon by landlord and
tenant, but in no event later than 30 days from the date the landlord receives possession of the premises.

Possession, maintenance and improvements. In a commercial lease, the landlord’s right of entry to perform
maintenance obligations should be set forth in the lease. If not, a landlord would likely be permitted access to
the premises to perform obligations under the lease, following reasonable advance notice.

In contrast, a landlord may enter premises rented to a residential tenant only in specific situations, at certain
times, and after giving (or attempting to give) advance notice.

Specifically, a landlord may enter a dwelling unit only:

1. in case of emergency;

2. to make necessary or agreed repairs, decorations, alterations, or improvements;

3. to supply necessary or agreed services;

4. to show the dwelling to prospective or actual purchasers, mortgagees, tenants, workers, or contractors;

5. where the tenant has abandoned or surrendered the premises; or

6. pursuant to court order.

A landlord may not abuse the right of access or use it to harass the tenant. Any purported waiver or modification
by tenant of the statutory protection in this regard is null and void.

Except for cases of emergency, unless the tenant has abandoned or surrendered the premises or the tenant is
present and consents at the time of entry, a landlord may only enter the dwelling unit during normal business
hours. Unless it is impracticable to do so, the landlord must give the tenant reasonable notice of intent to enter
the premises. Twenty four hours advance notice is presumed to be reasonable absent evidence to the contrary.

If the purpose of the entry is to exhibit the dwelling unit to prospective or actual purchasers, the notice may be
given orally, in person or by telephone, if the landlord or his or her agent has notified the tenant in writing
within 120 days of the oral notice that the property is for sale and that the landlord or agent may contact with the
tenant orally for the purpose described in the statute. Twenty-four hours is presumed reasonable notice in the
absence of evidence to the contrary. The notice must include the date, approximate time, and purpose of the
entry. At the time of entry, the landlord or agent must leave written evidence of the entry inside the unit. The
tenant and the landlord may agree orally to an entry to make agreed repairs or supply agreed services. The
agreement must include the date and approximate time of the entry, which must be within one week of the
agreement. In this case, the landlord is not required to provide the tenant a written notice.

While a landlord’s limited right of entry is defined by statute, a tenant’s remedy against a landlord who fails to
honor the statutory requirement is not specified in the statute. A tenant may, however, pursue either: the
common law remedy for breach of the implied warranty of quiet enjoyment, including invasion of privacy and
intentional infliction of emotional distress; or the statutory remedy of relief from harassment under California
Code of Civil Procedure Section 527.6.

Similarly, a landlord’s remedy against a tenant for failure to permit access (after providing the requisite notice)
is not defined by statute. Denied access, the landlord may have to seek entry under court order.

The essence of a tenant’s leasehold interest is possession, or the right to possess, the leased premises. In every
lease, the law implies a covenant on the part of the landlord to provide the tenant with possession and “quiet
enjoyment” of the premises. This “covenant of quiet enjoyment” constitutes a warranty by the landlord that the
landlord will not take any action or make any omission which disturbs a tenant’s right to possession and quiet
enjoyment of the premises. The covenant does not protect the tenant from the acts of third parties over whom the
landlord has no control.

A landlord can breach the covenant of quiet enjoyment in various ways, some of which are:

1. causing a tenant to be “evicted,” i.e., physically removed from the leased premises under circumstances
where the tenant otherwise has the legal and contractual right to possession.

2. denying a tenant access to the premises.

3. causing or permitting a third party who has paramount title to physically oust the tenant. For example, if a
lender forecloses upon the landlord’s property pursuant to a mortgage which is senior to the tenant’s lease
(and there is no “non-disturbance” agreement between the tenant and the lender), the lease is extinguished
and the foreclosing lender has the right to evict the tenant. This would constitute a breach of the covenant
by the landlord, even though it is the lender rather than the landlord actually evicting the tenant.

4. any disturbance, caused either directly by the landlord or by a person or circumstance within the landlord’s
legal control, of the tenant’s use or possession of the leased premises whereby the property is rendered
wholly or substantially unsuitable for the use for which it was leased. For example: a landlord’s attempt to
lease the property to a third party; harassing the tenant or making unwarranted threats of expulsion; making
extensive and unwarranted alterations to the leased property which materially and adversely interfere with
the tenant’s use and enjoyment thereof; or failing to make necessary repairs to the premises. Of course, a
tenant cannot establish a constructive eviction if the tenant, by wrongful or negligent action, causes the
defects in the premises.

It must be emphasized that a tenant must have a legal right to possession of the premises in order to make a
claim of breach of the covenant of quiet enjoyment. Thus, if a landlord evicts a tenant through proper legal
procedures following a default by the tenant under the lease, the tenant no longer has a legal right to occupy the
premises and eviction would not constitute a violation of the covenant of quiet enjoyment.

For many years, the courts held that a tenant relying on the doctrine of constructive eviction must surrender
possession of the premises in order to escape the obligation to pay rent. This rule still applies to leases of
commercial buildings. However, the California Supreme Court has held that there is no obligation to vacate the
premises in order to avoid the obligation to pay rent where the leased premises is a dwelling. Instead, the
California Supreme Court held that there exists an implied warranty of habitability from the landlord to the
tenant that the premises will be maintained in a condition to meet bare living requirements, and that if the
landlord breaches this implied warranty the tenant will remain liable for the reasonable rental value of the
premises in the condition existing at the time of the violation as long as the tenant continues to occupy the
premises. A condition which renders a dwelling partially or entirely uninhabitable, however, does not
automatically give the tenant the right to reduce or cease paying rent. Before the tenant may be entirely or
partially absolved from the obligation to pay rent, or may vacate the premises, the tenant must have given notice
to the landlord of the defects which allegedly render the premises uninhabitable or unusable and the landlord
must have failed to cancel or cure such defects within a reasonable time following receipt of tenant’s notice. If a
tenant vacates the leased premises or pays a reduced rent based upon even a good faith belief that the condition
of the premises supports a claim of constructive eviction, such tenant does so at the risk that a court may deny
the allegation that the premises are totally or partially uninhabitable. In such circumstances, a court may rule that
the tenant violated the lease by failing to pay the full amount of rent owed under the lease, entitling the landlord
to the same remedies as if a tenant simply defaulted in the obligation to pay rent, including ordering that the
tenant be evicted from the premises and awarding the landlord damages against the tenant for the reasonable
rental value of the premises for the remainder of the lease term.

A landlord of a residential dwelling has a legal duty to keep the dwelling in a habitable condition. Civil Code
Section 1941.1 sets forth the following criteria:

1. Effective waterproofing and weather protection of roof and exterior walls, including unbroken windows and
doors;

2. Plumbing or gas facilities which conformed to applicable law in effect at the time of installation, maintained
in good working order;

3. A water supply approved under applicable law, which is under the control of the tenant, capable of
producing hot and cold running water, or a system which is under the control of the landlord which
produces hot and cold running water, furnished to appropriate fixtures and connected to a sewage disposal
system approved under applicable law;

4. Heating facilities which conformed with applicable law at the time of installation, maintained in good
working order;

5. Electrical lighting, with wiring and electrical equipment which conformed with applicable law at the time of
installation, maintained in good working order;

6. Building, grounds, and appurtenances at the time of commencement of the lease or rental agreement in
every part clean, sanitary, and free from all accumulations of debris, filth, rubbish, garbage, rodents, and
vermin, and all areas under control of the landlord kept in every part clean, sanitary, and free from all
accumulations of debris, filth, rubbish, garbage, rodents, and vermin;

7. An adequate number of appropriate receptacles for garbage and rubbish, in clean condition and good repair
at the time of the commencement of the lease or rental agreement, with the landlord providing appropriate,
serviceable receptacles thereafter, and being responsible for the clean condition and good repair of such
receptacles under his control; and

8. Floors, stairways, and railings maintained in good repair.

9. A locking mail receptacle for each residential unit in a residential hotel, as required by Section 17958.3 of
the Health and Safety Code.

There are other statutory provisions which affect the landlord’s maintenance obligations. For example, the
California Health and Safety Code requires that every dwelling intended for human occupancy have an operable
smoke detector. The landlord is responsible for installing and maintaining the smoke detector, but if a smoke
detector is operable when the tenant takes possession, the tenant has a duty to inform the landlord if it becomes
inoperable.

It is not always clear that a landlord’s failure to maintain constitutes a breach of the implied warranty of
habitability. A court will decide this on a case-by-case basis. Generally, if a unit falls into disrepair but still
meets basic living requirements, the court will find that the landlord has not breached the warranty. Serious
housing code violations, lack of adequate heat, serious rodent infestation, or extremely unsafe utilities or
appliances are examples of factors upon which courts will base a finding that the implied warranty of
habitability has been breached.

In cases where a landlord breaches the implied warranty of habitability, a tenant is not obligated to give the
landlord notice and an opportunity to correct the conditions causing the breach of this warranty prior to
exercising the tenant’s remedies. Moreover, when this warranty is breached, a tenant is temporarily relieved of
its obligation to pay rent until the deficient conditions are corrected. However, a court will ultimately determine
the rental value of the premises in the substandard condition and the tenant will be obligated to pay that rent.
Accordingly, a court will often require the tenant to deposit with the court the rent the tenant otherwise would
have paid the landlord until the dilapidated condition is repaired and the court has determined the extent of the
tenant’s rental obligation for the period in which the property was in substandard condition. Alternatively, the
tenant can exercise the same remedy available for breach of the covenant of quiet enjoyment, vacate the
property, and be relieved of the obligation to pay rent for the remainder of the lease term. In either case, the
tenant can seek to recover monetary damages from the landlord for breach of the implied warranty of
habitability. However, as with the covenant of quiet enjoyment, a tenant who exercises his remedies for breach
of this warranty does so at the risk that the court will not agree that the warranty has been breached.

Civil Code Section 1941.2 provides that if a tenant fails in certain affirmative obligations and the failure
“contributes substantially” to a condition which renders the property uninhabitable or interferes substantially
with the landlord’s repair obligations, the landlord has no duty to repair the condition. The tenant’s obligations
under Section 1941.2 are as follows:

1. Keep his/her part of the property as clean and sanitary as the condition of the property permits (unless the
landlord has expressly agreed in writing to do so);

2. Dispose of rubbish, garbage, and other waste from the dwelling in a clean and sanitary manner (unless the
landlord has expressly agreed in writing to do so);

3. Properly use the plumbing, electrical and gas fixtures and keep them as clean and sanitary as their condition
permits;

4. Not permit any person on the property with the tenant’s permission to willfully or wantonly destroy, deface,
damage, impair, or remove any part of the structure or dwelling unit or the facilities, equipment, or
appurtenances thereto; nor may the tenant do any such thing; and

5. Occupy the property as an abode, using for living, sleeping, cooking, or dining purposes only those portions
which were designed or intended to be so used.

In addition to the implied covenant of habitability and the landlord’s maintenance obligations expressed in a
lease agreement, the California State Housing Law and various local housing codes require the landlord to keep
a dwelling in good condition in accordance with specified structural, plumbing, electrical sanitation, fire and
safety standards. Local government departments are generally empowered to investigate complaints and require
the landlord to make needed repairs and/or to impose a fine upon the landlord.

If the landlord fails to maintain a residential property in a condition fit for human occupancy, the tenant may
give the landlord notice to repair the premises. If, after receipt of tenant’s notice, the landlord fails within a
reasonable time to make the repairs necessary, the tenant has the statutory right to either:

1. spend up to one month’s rent in repairs (only twice in any twelve-month period); or

2. abandon the premises, in which case the tenant is relieved from the requirement of paying additional rent
and the performance of other conditions of the lease. (See Cal. Civil Code § 1942.)

Generally, in non-residential leases, the landlord is not under any implied obligation to make repairs or to
maintain the leased premises in a tenantable condition. The respective obligations of landlord and tenant with
respect to maintenance and repair are typically addressed in their lease agreement. For example, it is common in
a lease for a commercial building for the landlord to be obligated to maintain and repair the “structural
elements” of the building (i.e., the foundation, exterior walls, roof supports and roof), and for the tenant to agree
to maintain the remainder of the building, including interior, plumbing, electrical, heating, ventilation, and air
conditioning systems. In the absence of a specific covenant obligating the landlord to maintain or repair the
premises, the tenant is deemed to have taken the premises in “as is” condition and to have assumed the
obligation to maintain the premises in a safe condition.

Closely related to the landlord’s and tenant’s maintenance obligations under a lease is the obligation to cause the
premises to comply with laws existing as of the time the lease is entered into or enacted at any time during the
term of the lease.

In the non-residential context, the lease agreement should specify which party shall bear the responsibility of
complying with governmental laws and regulations affecting the leased premises, whether enacted before or
after the lease date. If the law does not explicitly place upon the landlord the obligation to comply with its
provisions, courts will look to the language of the lease agreement to determine where this responsibility lies.
However, the lease agreement will not necessarily be dispositive on the issue of who will ultimately have to bear
the time, expense, and effort necessary to bring the premises into compliance with applicable law. Using the
terms of the lease as a starting point, pursuant to the California Supreme Court case of Brown v. Green (8 Cal.
4th 812, 35 Cal. Rptr. 2d 598 1994), courts will endeavor to analyze the relevant provisions of the lease in light
of certain circumstantial factors in order to determine the “probable intent” of the parties in entering into the
lease. Among these factors are the length of the lease term, the cost of compliance in relation to the rent, the
nature of the repair (i.e., structural v. non-structural), the extent to which the tenant’s enjoyment of the premises
will be interfered with during the period in which the necessary alterations are made, and the likelihood that the
parties, in entering into the lease, contemplated that the particular law or regulation would become effective.

Governmental mandates affecting leased premises can be enacted at any time during the lease term and
compliance can be extremely expensive. Examples of governmental compliance issues which have been of great
significance to landlords and tenants include: the requirement that asbestos or other toxic substances be removed
from the leased premises; the requirement that the leased premises be reinforced for seismic safety; and the
requirement that alterations be made to the leased premises to comply with the Americans With Disabilities Act.
In light of the ambiguity in the standards set forth in Brown v. Green, it is important that both parties consider
the potential impact of unforeseen governmental mandates and address the issue accordingly in drafting the
lease.

The terms of the lease should address to what extent, if any, the landlord and the tenant have the right and/or
obligation to make alterations or improvements to the leased premises. A lease should also specify whether or
not the tenant has the right and/or the obligation to remove certain improvements upon the expiration or
termination of the lease. Upon installation of fixtures or improvements in the premises, the issue arises as to the
ownership thereof. Unless the landlord and tenant agree otherwise, many improvements and fixtures installed in
a leased premises will as a matter of law be deemed “permanent” and will become part of the premises (and thus
the landlord’s property) upon the expiration of the term. Thus, if a lease is not clear as to the nature of certain
improvements which a tenant desires to make to the premises, the tenant should first attempt to establish an
understanding with the landlord, perhaps entering into a separate agreement concerning such improvements.
Otherwise, the tenant may not have the right to remove its fixtures or improvements upon the expiration of the
lease term; or, the tenant may be obligated to remove certain fixtures or improvements which the tenant wanted
to leave in the premises. The general rule that improvements will become part of the premises has been modified
by statute in California in cases where a tenant has installed fixtures for the purposes of trade, manufacture,
ornamental or domestic use. Such fixtures may be removed by the tenant during or upon expiration of the term
of the lease unless they have become an integral part of the premises through the manner in which they are
affixed and if removal cannot be accomplished without injury to the leased property.

The law in its current state leaves much room for honest differences of opinion between the landlord and tenant
as to the characterization of fixtures and other improvements installed in the leased premises. It is therefore
preferable for the landlord and tenant to provide in advance by agreement for the disposition of fixtures.

Liability of parties for injuries resulting from condition of premises. Depending on the circumstances, both
residential and non-residential landlords may be held liable for injuries to tenants resulting from the condition of
the premises. A residential landlord can be held liable on simple negligence grounds for injuries resulting from
potentially hazardous conditions or defects in the premises existing at the time of renting the premises to the
tenant if such conditions or defects could have been discovered by a reasonable inspection of the premises.
Thus, if such an inspection would have revealed a potentially dangerous condition (e.g., a slippery bathtub or
staircase), the landlord may be held liable for failing to take corrective measures to mitigate the condition.
Merely warning a tenant will probably not be sufficient to protect the landlord from liability.

In addition, if a dangerous condition or defect does not exist at the commencement of the rental term but arises
later, a residential landlord has a duty to repair such condition or defect after receiving notice from the tenant
thereof. Failure to make such repair could subject the landlord to liability for injuries arising from such defect or
condition.

The law pertaining to a residential landlord’s liability for a “latent” defect in the premises (i.e., a defect which is
not discoverable by a reasonable, diligent inspection of the premises) existing at commencement of the rental
term, has changed significantly. Previously, in the case of Becker v. IRM Corp. (38 Cal. 3d 454, 213 Cal. Rptr.
213 1985), the California Supreme Court held that a residential landlord was “strictly liable” for injuries to
tenant resulting from a “defective” shower door which shattered, in spite of the fact that the “latent defect” in the
premises (i.e., the fact that the shower door was made of regular glass, as opposed to tempered glass), would not
have been discoverable by a reasonable inspection of the premises. Under such a ruling, a thorough, diligent
inspection of the premises would not insulate a residential landlord from liability for injuries to a tenant resulting
from the defective condition. However, in Peterson v. Superior Court (10 Cal. 4th 1185, 43 Cal. Rptr. 2d 836
1995), the California Supreme Court reversed its earlier holding in Becker and returned to the rule that a
landlord will only be liable for injuries resulting from defects in residential premises existing as of the
commencement of the rental term if the landlord is negligent in failing to discover and correct the defect in the
premises. Thus, while a landlord may still be liable if a court finds that a defect should have been discovered and
corrected by the landlord, the ruling in Peterson should provide residential landlords with some relief from
liability for defects which are not readily discoverable.

In leases of non-residential premises, a landlord generally will not be liable for injuries sustained by tenants
resulting from defects in the leased premises. However, the landlord will be liable for injuries resulting from the
landlord’s failure to correct such defects if the lease:

1. places the obligation on the landlord to maintain all or a portion of the premises (e.g., making the landlord
responsible for maintenance of the roof and structure);

2. contains an affirmative covenant requiring the landlord to correct or repair a defective item; or

3. gives the landlord control over a defective item or the area containing the defective item (e.g., defective or
dangerous sidewalk in common areas of shopping center or office building which landlord controls).

Additionally, the landlord may be held liable for resulting injuries if the landlord:

1. is under a statutory duty to repair the defective condition;

2. knows of or has reason to know of a “latent” defective condition and fails to disclose it to the tenant or to
adequately repair it; or

3. agrees to make a repair but does so negligently or fails to even make the repair.

Transfer of interest in leased premises by landlord. Unless prohibited by the terms of the lease, a landlord
may transfer its interest in leased property to a third party. Following such transfer, the lease will remain in force
and effect and the new landlord and the tenant will generally have the same rights and obligations with respect to
each other as did the prior landlord and tenant. However, an exception to this principal is set forth in California
Civil Code §823, which provides that successor landlord will not be liable for violations caused by the prior
landlord of covenants against encumbrances or relating to title or possession of the premises.

Transfer of interest in leased premises by tenant. Unless a lease expressly prohibits the tenant from
transferring its interest in the premises, the tenant may “assign” (i.e., transfer its entire remaining interest in the
premises for the remainder of the lease term) or “sublease” (i.e., transfer its right to a portion of the premises, or
its right to the entire premises for less than the entire remaining lease term) its interest in the premises to any
third party. Leases usually will either prohibit the tenant from subleasing or assigning its interest in the lease or,
more often, prohibit it without the landlord’s consent. Since the law favors the transferability of a tenant’s
leasehold rights, prohibitions against subleasing or assigning are construed strictly against the landlord.
Nevertheless, courts generally have held that a prohibition in a lease against assigning or subleasing without the
landlord’s consent will be valid if such consent is exercised in a reasonable manner.

Regardless of whether a transfer is called an “assignment” or a “sublease,” the nature of the transfer will
determine whether it will be legally treated as an assignment or a sublease. An assignment of a tenant’s interest
in a lease does not relieve the tenant from its liability under the lease, unless the landlord expressly agrees to do
so. The original tenant will remain liable under the lease throughout the remainder of the lease term. Likewise,
the successor tenant (the “assignee”), and each succeeding assignee will remain liable to the landlord throughout
the term. However, the extent of this remaining liability of an assignee depends on whether the assignee
expressly assumed the obligations of the assignor. If there is an express assumption, an assignee will be fully
liable under the lease. If, instead, there is an assignment without an express assumption by the assignee, the
assignee will be liable for certain obligations which derive from its “privity of estate” or its occupancy of the
premises, such as the payment of rent and the duty to maintain, but will not be liable for purely contractual
obligations under the lease, such as the obligation to pay the landlord’s attorney’s fees in the event of litigation
between the parties.

Likewise, in a sublease the original tenant remains liable to the landlord for all obligations under the lease and
for all acts or omissions committed by the subtenant. However, because there is neither “privity of contract” nor
“privity of estate” between a subtenant and a landlord, a subtenant generally has no direct obligation to the
landlord. The subtenant’s rights are derived entirely through the tenant. Thus, although a landlord has no right to
enforce the provisions of the lease directly against a subtenant, the landlord can enforce them against the tenant,
and if the landlord terminates the tenant’s lease for default, whether it was the tenant or the subtenant who
performed the act or omission leading to the default, the subtenant’s rights in the premises will be
simultaneously extinguished. Nevertheless, in some cases a landlord’s consent to a sublease, or a subtenant’s
assumption of the obligations of the tenant contained in the lease, creates a sufficient “direct” relationship to
enable the parties to enforce the terms of the lease against one another.

Termination. A lease automatically expires by its own terms at the end of the term specified in the lease. If
neither party commits a breach or other act justifying a termination of the lease, the tenancy will continue until
the term expires. If the tenancy is for a specified term (i.e., estate for years), the tenancy ends at the expiration of
the term without notice or any other act or deed by either party.

In addition, since a lease is a contract, it may be rescinded by a party if that party enters into the lease in reliance
upon the other party’s fraud or by either party if the parties enter into the lease in reliance upon a mutual
mistake.

A lease is terminated only when a landlord or tenant exercises a specific right set forth in the lease or prescribed
by statute, or when a lease-terminating event occurs that is not within the control of either the landlord or the
tenant.

In general, a lease may be terminated for any of the following reasons:

1. notice;

2. destruction of the premises;

3. commercial frustration of purpose;

4. merger of estates;

5. death of a party;

6. insolvency or bankruptcy of the tenant;

7. insolvency or bankruptcy of the landlord;

8. exercise of option to terminate;

9. tenant’s or landlord’s breach of a condition or covenant;

10. illegal use of the premises; or

11. abandonment and surrender of the premises.

[Notwithstanding any lease provision to the contrary, a lease may not be terminated for any reason which
contravenes public policy, including, without limitation: retaliatory eviction (e.g., retaliation by the landlord for
tenant’s reporting to governmental authorities the landlord’s health or safety code violations); discrimination
against children or physically disabled persons; or discrimination based on race, creed, color, national heritage,
or sex.]

Termination by notice. Although a tenant at sufferance is not entitled to notice and a tenant under a lease with
a specified term is not required to give or entitled to receive notice, either party to a tenancy at will or a periodic
tenancy may terminate a lease by giving notice thereof to the other in accordance with the terms and provisions
of the lease.

A tenancy at will may be terminated by not less than 30 days’ written notice, regardless of whether the tenancy
is created orally (and is an unenforceable lease), under no agreement, or otherwise.

Periodic tenancies, on the other hand, may be terminated by either party by written notice equal to the term of
the tenancy or 30 days, whichever is less. For example, if a tenant pays rent weekly, one week’s advance notice
is sufficient, and if a tenant pays rent only bi-annually, 30 days’ written notice is sufficient. Notwithstanding the
foregoing, a lease for an unspecified term may provide for termination upon as little as 7-days’ advance written
notice. In a month-to-month tenancy, the tenant’s notice of termination need not correspond to the due date for
rent. For example, if rent is payable in advance monthly and due on the first of the month, the tenant can give
written notice on the tenth of a month and move out on the tenth of the following month. The tenant will be
liable, of course, for rent for the first 10 days of the following month.

It should be noted that the foregoing termination rights may be modified by specific statutory limitations on a
landlord’s ability to terminate tenancies without cause pursuant to local rent control ordinances, laws pertaining
to publicly-owned and federally assisted housing projects, and mobilehome tenancies.

Destruction of the premises. If neither party assumes the duty to repair or rebuild, either party may terminate
the lease upon complete destruction of the premises (so long as the party seeking to terminate the lease is not a
cause of the destruction). If the premises are only partially destroyed (due to no fault of the tenant), the tenant
may terminate the lease upon delivery of written notice to the landlord if a substantial portion of the premises is
damaged or if a material portion of the premises necessary for tenant’s use is damaged. Unless the lease
provides otherwise, however, a tenant may not terminate the lease if the damage or destruction occurs to a part
of the property not actually leased by the tenant; e.g., a ground lessee may not terminate a lease if a building
situated on the leased land is damaged or destroyed.

If damage or destruction occurs and the lease continues in effect (either because neither party has the right to
terminate the lease or neither party elects to do so), the tenant may not apportion rent if the lease does not permit
apportionment and rent is required be paid in advance, even if the premises are uninhabitable. Of course, if the

tenant is entitled to exercise a right to terminate, a shrewd tenant desirous of staying in the premises would
probably threaten to exercise its right to terminate if the landlord would not permit a retroactive apportionment
of rent.

If a commercial landlord assumes an unconditional obligation to repair or rebuild the leased premises in the
event of damage or destruction (as contrasted with an obligation merely to repair and maintain the premises), the
tenant cannot terminate the lease. A landlord’s general covenant to repair and maintain the premises, however,
does not preclude the tenant from exercising a right to terminate when the premises are totally destroyed. In
addition, if a commercial lease gives the tenant a right to terminate the lease within a certain period of time after
the damage or destruction occurs, the tenant may terminate the lease within that time-frame, even if the landlord
has commenced the repair or rebuilding.

Frustration of commercial purpose. Although a tenant may lease property for a specific purpose, the tenant
may not terminate the lease because that purpose is frustrated. However, if the lease specifies and limits the
tenant’s use of the premises, the tenant may be excused from performance and terminate the lease if the tenant
may no longer use the premises for the purpose specified in the lease.

A tenant’s right to terminate for frustration of purpose, however, is only available in cases of extreme hardship.
Indeed, the tenant’s purpose must be completely frustrated. A “significant” or “material” frustration (e.g., the
tenant’s purpose becomes more difficult or less profitable) is not sufficient to justify termination. In addition, the
tenant must not have assumed the risk of the occurrence of the intervening event (regardless of how
unimaginable the event was at the time of entering into the lease), the intervening event must have been
unforeseeable at the time of entering into the lease, and the intervening event must be uncontrollable by the
tenant at the time of its occurrence.

Merger of estates. When a landlord acquires the leasehold estate (e.g., by tenant’s assignment of the lease and
surrender of the premises to landlord), or the tenant acquires title to the premises superior to that of the landlord
(and there is no intervening estate), the landlord’s fee simple ownership interest in the property and the tenant’s
leasehold interest are deemed to “merge” as a matter of law. In such a case, the lease is terminated and the tenant
is relieved of its obligation to pay rent.

Death of a party. A lease terminable at the will of the landlord and tenant is terminated upon the death (or
incapacity) of either party upon delivery of written notice to the other of such death (or incapacity). Although
written notice is not required to terminate a tenancy at will or at sufferance upon the death of either party, if the
landlord desires to terminate the lease upon the death of the tenant, the landlord must file and prosecute against
the tenant an unlawful detainer action. In the absence of a provision to the contrary contained in the lease, a
lease for a fixed term is not terminable or terminated upon the death of either party.

Insolvency or bankruptcy of tenant. In light of the “automatic stay” imposed on a bankrupt’s financial and
legal affairs, as long as a tenant has an interest in a lease a landlord may not, without prior bankruptcy court
approval, recover possession of the bankrupt tenant’s premises or evict the tenant therefrom.

The trustee in bankruptcy must, however, accept or reject a bankrupt’s leases within a certain period of time
(which period varies according to the nature of the property and the bankruptcy filing). If the trustee fails to do
so within the specified time-frame, the lease is deemed rejected.

While the trustee decides whether to reject or confirm the lease, the landlord may petition the bankruptcy court
for relief from the automatic stay (which requires a showing of either inadequate protection or both that the
tenant lacks equity in the premises and the lease is not essential to the reorganization). During that time, the
court may enforce specific lease provisions, including, without limitation, provisions regarding payment of rent
and maintenance of the premises.

A lease is generally breached if a trustee rejects it. After rejection, the landlord can proceed with unlawful
detainer proceedings to recover possession. In addition, as soon as a plan of reorganization is filed and the
automatic stay is removed, the landlord may employ remedies for defaults which occurred after the bankruptcy
petition.

Insolvency or bankruptcy of landlord. A trustee’s power to reject leases entered into by a now bankrupt
landlord is limited to:

• leases that would not, under federal bankruptcy law, be binding on a bona fide purchaser;

• situations where rejection would provide substantial benefit to the bankrupt’s estate and other creditors.

If the trustee elects to reject a lease, the tenant may treat the lease as terminated or may remain in possession of
the premises as permitted under state law.

Exercise of option to terminate. A lease may provide that it is terminable at the election of a particular party
(or either party) upon: the occurrence or non-occurrence of a particular event (e.g., sale of the premises); the
passage of time; or simply the party’s election, for no particular reason at all. Such options to terminate may be
exercised only by the delivery of notice from the terminating party to the other in strict accordance with the
terms and provisions specified in the lease, regardless of statutory notice requirements for termination of leases.

Tenant’s or landlord’s breach of a condition or covenant. A condition is a prerequisite to a party’s
performance. If the condition does not occur, the party whose performance is conditioned need not perform. The
non-occurrence of a lease condition entitles the party whose performance is conditioned to terminate the lease. A
covenant, however, is a promise to do or not do a certain act. If the promise is not honored, the non-breaching
party is generally only entitled to remedies for breach of lease (such as suing for damages or injunctive relief),
which are usually less drastic than termination.

Lease provisions are often construed as both conditions and covenants. Because of the severity of the remedy for
breach of a condition (termination), a court is likely to construe an ambiguous provision as merely a covenant.
In addition, conditions are narrowly construed, and even if a condition is breached, the breach must generally be
material or substantial to warrant the remedy of termination and forfeiture.

On the other hand, some covenants are so material to the efficacy of the lease that their breach justifies
termination and forfeiture. For example, a landlord’s implied covenant of habitability in a residential lease and a
tenant’s express covenant to not assign a lease or use the premises for unlawful purposes are deemed so material
that their breach may warrant termination and forfeiture of the lease.

A landlord’s and tenant’s covenants to one another are the inducements by each of them to the other to enter into
the lease transaction, and to the extent that covenants are not merely incidental or subordinate to the main
purposes of the lease, they are mutual. Accordingly, a landlord’s and tenant’s covenants to one another are
deemed dependent obligations, and each party’s performance of its covenants is a condition precedent to its
right to recover for the breach of a covenant by the other party. For example, if a landlord fails to continue to
provide quiet possession of the premises or constructively evicts the tenant, the tenant may elect to terminate the
lease.

There is, however, one significant exception to the doctrine of dependent covenants: if the tenant fails to pay
rent, the landlord must continue to honor its lease obligations (e.g., the promise to maintain and repair the
premises) and, conversely, if the landlord fails to honor its lease obligations, the tenant must continue to pay
rent. This exception, however, does not apply to the landlord’s implied covenant of habitability for residential
premises. If the landlord breaches the implied covenant of habitability, the tenant may withhold rent until the
landlord satisfies its maintenance and repair obligations.

Illegal use of the premises. A tenant’s occasional use of the premises for an illegal purpose is not grounds for
termination unless the lease specifically provides therefor, though the landlord may seek alternative remedies
against the tenant. Only an illegality that specifically relates to the use of the premises may justify a termination
of the lease.

Abandonment and surrender of the premises. A surrender of the premises (and termination of the lease), by
mutual agreement of landlord and tenant, occurs upon an actual abandonment of the premises by the tenant and
acceptance of them by the landlord. Upon surrender, the leasehold and fee title estates are merged, and the
tenant remains liable for only its “pre-surrender” obligations.

A surrender may occur by express mutual agreement between the landlord and tenant, or by implication and
operation of law. If a lease is surrendered and that lease is required by the Statute of Frauds to be in writing, the
surrender must also be in writing, unless the surrender either occurs by an executed oral agreement or operation
of law.

For example, a surrender by implication and operation of law occurs if a tenant abandons the premises and
tenders it to the landlord, and thereafter the landlord relets the premises to a new tenant. In this scenario, the
landlord will be deemed to have accepted the abandoned premises from the original tenant and that lease is
automatically terminated, even without a writing, and the landlord will be estopped from asserting that the
premises were not surrendered since it took actions inconsistent with such an assertion.

Condemnation of Leased Property

If a leased property is condemned under a proceeding in eminent domain, the tenant is ordinarily released from
all of his or her obligations under the lease agreement, including the obligation to pay rent. If the premises are
only partially taken and the portion of the property which has not been condemned may still be used by the
tenant for the purpose for which it was leased, the tenant must continue to pay rent according to the terms of the
lease agreement.

Notice Upon Tenant Default

If a landlord desires to terminate a lease upon the tenant’s default, the landlord must comply with requirements
set forth in the California Code of Civil Procedure. The required written notice must specify that the tenant must,
within three days, either comply with the terms of the lease (if the breach is of a nature which can be cured by
the tenant) or vacate and surrender the premises. Compliance with this procedural requirement is a prerequisite
to the filing of an unlawful detainer action.

Service. The notice of default may be served:

1. by personal delivery on the tenant;

2. if the tenant is absent from the premises and from the tenant’s usual place of business, by leaving a copy
with a person of suitable age and discretion at the tenant’s residence or place of business and mailing a copy
to the tenant at the tenant’s residence; or

3. if the tenant’s place of residence or business address cannot be ascertained, or if a person of suitable age
and discretion cannot be found, by affixing a copy in a conspicuous place on the premises, delivering a copy
to the person occupying the premises, and mailing a copy to the tenant at the premises.

It must be noted that delivery of a notice in accordance with the statutory requirements does not automatically
terminate the lease. See the discussion below regarding unlawful detainer actions.

Non-Waivable Tenant Rights

Any provision in a residential lease executed after January 1, 1976, which purports to modify or waive any of
the following tenant rights is void and unenforceable:

1. A tenant’s rights with respect to the security deposit, as set forth in California Civil Code Section 1950.5;

2. A tenant’s rights with respect to limitations on the landlord’s ability to enter the premises, as set forth in

California Civil Code Section 1954;

3. A tenant’s right to assert a cause of action against the landlord which may arise in the future;

4. A tenant’s right to a notice, as provided by law;

5. The procedural rights available to a tenant in any litigation involving the tenant’s rights and obligations
under the lease;

6. A tenant’s right to have the leased premises maintained in a habitable condition and in compliance with all
applicable health, safety, environmental, and other laws, rules, regulations, and ordinances; and,

7. A tenant’s right to have the landlord exercise a duty of care to prevent personal injury or personal property
damage where that duty is imposed by law.

Remedies of Landlord

Right to maintain lease in effect. In the event the tenant is in default in rental payments, the landlord may sue
for each installment as it becomes due. (Civil Code Section 1951.4) This is true whether the tenant remains in
possession or abandons the premises.

In any suit by the landlord to collect unpaid rent, the tenant may assert certain defenses, such as any right of the
tenant contained in the lease to withhold or offset rent due to landlord’s failure to comply with the lease, or the
landlord’s breach of the implied warranty of habitability.

In any event, this remedy is usually unsatisfactory to the landlord from a financial standpoint, and is thus not
often used.

Termination of lease. If a tenant breaches the obligation to pay rent or any other obligation under the lease, and
fails to cure the violation or quit the premises after three days’ notice from the landlord, the landlord can
terminate the lease under Civil Code Section 1951.2, and receive damages resulting from the breach. Where the
tenant abandons the property, the landlord usually retakes possession for the tenant’s account and relets the
premises to others. At the end of the term, the landlord sues the old tenant for damages in the amount of the
difference between the lease rental and the lesser amount actually obtained by reletting. On the other hand,
where the tenant refuses to give up possession although in default in rental payments, the landlord normally
serves a three-day notice and files an unlawful detainer action as a means to regain possession of the premises.

Unlawful detainer. A landlord who seeks to oust a defaulting tenant from possession of the premises may bring
an action in ejectment (which is a long process), or the more common and expeditious procedure of unlawful
detainer. Because of the complexities involved in properly prosecuting an unlawful detainer, the landlord is
likely to employ an attorney or reputable eviction service.

The remedy of unlawful detainer is available against a tenant who:

1. holds over after expiration of the term for which the property has been let.

2. continues in possession after default in payment of rent.

3. continues in possession after neglect or failure to perform conditions or covenants of the lease or agreement
under which the property is held, including any covenant not to assign or sublet.

4. commits waste or causes a nuisance upon the leased premises.

5. fails to quit (i.e., leave/vacate) after giving written notice of intention to terminate lease.

In most cases, a three-day notice to cure a breach or quit is required. In instances where a breach of a lease
cannot be cured, the three-day notice need not give the tenant the option to cure the breach.

The purpose of the unlawful detainer procedure is to provide a landlord with a relatively quick and direct means
of regaining possession of leased premises following a tenant default in instances where the tenant refuses to
vacate voluntarily. It is intended to encompass all claims a landlord may have against the tenant resulting from
the tenant’s default. Nevertheless, in connection with granting the landlord possession of the leased premises, a
court in an unlawful detainer proceeding can award the landlord damages for rent owing up through the date of
the court’s judgment. A landlord cannot recover in an unlawful detainer proceeding rent which would have been
owed by the tenant under the lease after the date of the unlawful detainer judgment. If the landlord desires to
recover post-judgment rent or other damages from the tenant (e.g., losses resulting from tenant’s physical
damage to the premises), the landlord must do so in a separate proceeding.

Because possession is the focus of an unlawful detainer proceeding, if a tenant relinquishes possession of the
leased premises to the landlord prior to the commencement of the unlawful detainer trial the case is converted
into an ordinary civil lawsuit for damages and will not receive priority on the court’s calendar as would an
unlawful detainer proceeding.

A defendant/tenant in an unlawful detainer proceeding has five days from service of the summons in which to
file an answer with the court, or judgment will be entered in favor of the landlord. In the tenant’s answer, the
tenant must raise any affirmative defenses it may have to the landlord’s unlawful detainer, or they will be
deemed waived. The most common defenses to an unlawful detainer action are allegations that:

1. the landlord has not complied with the procedural requirements for an unlawful detainer (e.g., failure to
properly serve tenant with a three-day notice);

2. the landlord has breached the implied warranty of habitability;

3. the unlawful detainer was brought in retaliation for some lawful exercise of the tenant’s rights (e.g., tenant’s
reporting landlord to governmental authorities for violation of building or health codes); or

4. the landlord is evicting the tenant on the basis of the tenant’s race or some other form of prohibited
discrimination.

After granting judgment in favor of the landlord in an unlawful detainer proceeding, the court will authorize the
local sheriff or other evicting authority to remove the tenant and the tenant’s property from the premises. A
landlord is not permitted to enter the premises and forcibly remove the tenant or the tenant’s property.

Disclosures by Owner or Rental Agent to Tenant

The owner of every multi-unit dwelling or a party signing a rental agreement on such owner’s behalf must
disclose the name and address of each person authorized to manage the premises and to receive process for
notices and demands on behalf of the owner. In the case of an oral rental agreement, on written demand by the
tenant, the owner or person acting on the owner’s behalf must furnish the tenant with a written statement
containing such information, which must be kept current. The statutory requirement to furnish a tenant with this
information is enforceable against a successor owner or manager.

If the party who enters into a rental agreement on behalf of the owner fails to comply with the above provisions,
such person is deemed an agent of each person who is an owner for the purpose of service of process, notices
and demands and for the purpose of performing the obligations of the owner under the law and the rental
agreement. It should be noted that the law provides for optional methods of disclosure. A printed or typed
written notice containing the required information may be placed in every elevator and in one other conspicuous
place. Where there are no elevators, notices must be posted in at least two conspicuous places.

Laws Protecting Tenants’ Rights With Respect to Foreclosed Properties

As recently as early 2008, in the absence of a written lease agreement requiring greater notice, California law
required that an owner provide only a 30-day notice to a tenant to vacate the property for any reason (other than
the failure to pay rent, which required a 3-day notice). However, recent legislation has changed the rules.

Signed as an urgency measure in 2008, Senate Bill 1137gives tenants at least 60 days after a foreclosure before
they can be asked to vacate the property. The provisions of SB 1137 are due to sunset (be repealed) on January
1, 2013. To review a copy of the bill and get more details, please visit www.leginfo.ca.gov.

Federal legislation was enacted effective May 20, 2009, requiring property owners who have taken a residential
property by foreclosure, to give their tenants at least a 90 day notice to vacate the property before beginning the
eviction process. That federal law is applicable nationwide and it is known as “Protecting Tenants At
Foreclosure Act”. The law is found at Title 7 US Code section 701 (“the Act”). See http://thomas.loc.gov.

The Act provides that if a tenant is renting under a lease entered into before the notice of foreclosure was
communicated to the tenant, the tenant may remain in the property until the lease ends, unless the owner sells the
property to a purchaser who will occupy the property as his primary residence. In that case, the owner may
properly give the tenant a 90day notice to vacate.

While the Act provides greater protection to tenants than State law, local law may provide even more protection.
If a particular property is subject to local “rent control” or “housing assistance” laws, or so-called “just cause for
eviction” ordinances, those laws may provide even greater protection than the Act itself. As an example, even
the Act itself provides that the owner of a residential property which is subject to a “housing assistance
contract”, and who has a lease with a tenant in that property, is subject to any additional protections in the
housing assistance contract (this typically applies to “Section 8” properties).

Finally, a California bill effective January 1, 2011 requires tenants be told of their rights when the property they
occupy is foreclosed. Senate Bill 1149 requires that tenants who are living in foreclosed homes be given notice
of their rights and responsibilities under these state and federal laws by requiring a cover sheet be attached to
any eviction notice that is served within one year of a foreclosure sale. The cover sheet would delineate the laws
and rights a tenant may have in cases where the property he or she occupies is foreclosed upon. The bill also
seeks to help protect tenants who would otherwise have a negative mark on their rental history by prohibiting the
release of court records in a foreclosure-related eviction unless the plaintiff landlord prevails. To review a copy
of the bill and get more details, please visit www.leginfo.ca.gov.

Additional Resource

That State of California, Department of Consumer Affairs annually publishes a booklet entitled “California
Tenants, A Guide to Residential Tenants’ and Landlords’ Rights and Responsibilities”. A copy of the booklet
can be downloaded from the Department of Consumer Affairs’ web site at www.dca.ca.gov.

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