Governor signs new law on Commercial Disclosure
By Robert J. Enos, Senior Litigation Attorney
On August 15, 2014, Governor Brown signed SB 1171 extending Agency Disclosure obligations to commercial property transactions.
Existing California law (Civil Code Section 2079.13(k)) requires listing and selling agents in Residential transactions to provide the seller and buyer with a disclosure form that tells both seller and buyer whether the agent is acting as the buyer’s agent, as the seller’s agent, or as a dual agent representing both the buyer and seller. Effective January 1, 2015, the Civil Code Section is revised to define “Real Property” as including property that constitutes or is improved with one to four dwelling units, any commercial real property, any leasehold in these types of property exceeding one year’s duration, and mobilehomes, when offered for sale or sold through an agent.
The inclusion of leaseholds in the definition is very significant since it addresses the undisclosed potential conflict when a broker represents both a tenant and a landlord in the same transaction.
In the past the legislature refrained from extending the duty to disclose dual agency relationships to commercial property transactions because it was the presumed a purchaser of commercial real estate is more experienced in his or her dealings in real estate and is usually represented by an agent who represents only the buyer’s interests. In most instances that presumption likely remains true.
Proponents held that there is a common misconception that parties involved in commercial real estate transactions are always (1) sophisticated, (2) of equal bargaining power, or (3) equally knowledgeable in real estate as the other party or the brokers involved. To illustrate, a small business owner may only have one real estate transaction over a period of years is not going to be as sophisticated as a landlord whose primary business is real estate and who is negotiating multiple leases a year with the help of a team of sophisticated professionals. That business owner is at a severe disadvantage at the bargaining table and should be educated on the duties or limited duties the licensed real estate professionals involved in the transaction owe to all parties.”
Opponents argued that simply requiring disclosure of multiple agency relationships and allowing commercial practitioners to utilize their own contracts and forms is sufficient to protect the parties.
The Agency Disclosure requirements in California first arose in the 1984 case of Easton v. Strassburger (152 Cal.App.3d 90) wherein the court held that real estate licensees owed certain duties of care to the property buyers, including while representing the sellers in a residential home transaction. At that time, the court was not inclined to extend the duty to commercial transactions because of the perceived experience and sophistication of commercial buyers and sellers. However, since then discussion has continued in the real estate industry as to whether these protections should be extended to commercial transactions. With the passage of SB 1171, that extension has been extended concerning Agency relationships.
To comply with this new law, agents and brokers must, in every commercial transaction provide both the seller and buyer a Disclosure Regarding Real Estate Agency Relationship found at Civil Code Section 2079.16. As with other disclosures under both the Civil Code Section 1102, et seq., and 2079, et seq., the duty to provide a written disclosure can not be waived. Even in the event of a buyer or seller who is out of the area and not able to meet face to face with the disclosing agent or broker.
While placing a new burden on the industry, this new law should not deter agents from commercial transactions, especially as dual agents.
Having taken this step, many are wondering if the legislature may similarly extend the statutory Real Estate Transfer Disclosure obligations as well. We’ll keep watch for this. If you want to know more, contact Robert Enos at firstname.lastname@example.org or call him at our office (916) 966-2260.
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