CONTRACTS IN GENERAL - assess CONTRACTS IN GENERAL ... 2 CE DIGEST PARTIES CAPABLE OF ... Advertisements placed in newspapers, magazines, or other mass media do not consti-

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Chapter Index Chapter 2 Chapter 3 Chapter 4 Chapter 5

CHAPTER 1

CONTRACTS IN GENERAL

The single most important application of law to the field of real estate is in the area

of contracts. Virtually every real estate transaction involves a contract. These contracts are

very important to the parties involved in the transaction. A well drafted contract protects

both sellers and buyers of real estate. Well designed agreements also protect a broker's right

to a commission.

Contracts must be interpreted and understood by others involved in the real estate

transaction. The written agreements reached between the sellers and buyers of real estate

provide the foundation for the instructions that guide the escrow holder. Should a legal

dispute arise, the contracts drafted in the transaction will be read and translated by the courts

and the attorneys of the parties who are involved in the transaction.

Lenders, title insurers, and real estate licensees could all be affected by the interpreta-

tion of these drafted real estate contracts. For this reason, all real estate licensees should

strive to know the rules governing the creation and operation of contracts. More specifi-

cally, real estate licensees need to know how to apply the law of contracts to real estate

transactions.

CONTRACTS DEFINED

A contract is an agreement to do or not to do a certain thing. It may be written or

oral. In order to create a contract that is legally valid, the agreement must contain certain

essential elements. The four essential elements that must be present to create a valid

contract are:

Parties who are capable of contracting

Mutual consent

A lawful object

Consideration

Contracts that contain these elements are binding and enforceable. This means that if

the contract is breached, the injured party can seek the help of the courts to enforce the

contract or award money damages for nonperformance.

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PARTIES CAPABLE OF CONTRACTING

To create a valid contract, there must be two or more persons who have the legal

capacity to enter into a binding contract. Most people are considered to be legally capable.

There are, of course, exceptions.

In California, parties who are considered to lack the capacity to enter into contracts

would include:

Minors

Incompetents

Aliens

Convicts

Both parties to a contract must have the legal capacity to contract. If one of the

parties lacks capacity, the contract is voidable by the person who lacks the capacity. Or, the

contract may be void from its inception.

Corporations are considered to be legally competent parties. The individual who

enters into the contract for the corporation must have been given the authority to do so by

the Board of Directors of the corporation. This authority is usually given in the form of a

corporate resolution.

MINORS

One of the conditions required to qualify a person as having legal capacity is that of

age. A person who is 18 years of age or older is considered to be an adult. An adult person

can enter into a legally binding contract. A person who is under the age of 18 is considered

to be a minor. A minor cannot enter into a legally binding contract.

A minor cannot give a delegation of power or make a contract relating to real prop-

erty. Any contract that a minor would enter into may be disavowed and made void by the

minor. A minor is incapable of appointing an agent. Any such delegation of power such as

giving another person a power of attorney to buy or sell real property for the minor is void.

For this reason, a broker could not act as an agent for the minor to buy or sell real property.

A contract entered into by an adult and a minor may only be disaffirmed and made

void by the minor. Therefore, an adult who enters into a contract with a minor does so at his

own risk. Although a minor has the legal right to disaffirm a contract with an adult, the

minor is liable under the contract until steps are taken to void the contract. Any

consideration received by the minor must be returned to the other party.

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RATIFICATION

Ratify means “to give formal sanction to; approve and so make valid.” A person,

who approves a voidable contract that he or she has a right to disaffirm, “ratifies” the con-

tract. Ratification applies to a voidable contract. Take the case of a minor who enters into a

contract with an adult. Later, after the minor has reached the legal age of eighteen, the

person’s conduct continues to indicate that he or she approves of and is satisfied with the

contract. The party’s acts and conduct would “ratify” the contract and eliminate the right to

disaffirm.

EMANCIPATED MINORS

The Emancipation of Minors Act is contained in the Civil Code. Based on this act,

an emancipated minor is a person under 18 years of age who:

Is married;

Has been married even though the marriage has been dissolved;

Is on active duty with the armed forces of the United States;

Has received a declaration of emancipation by petitioning the Superior Court in the

county where he or she resides.

Persons, who fall into one of these categories, are considered as being over the age of

majority and do have certain powers to deal with real property. Emancipated minors may

enter into legally binding contracts to: 1) Sell 2) Buy 3) Lease 4) Encumber 5)

Exchange or, 6) Transfer any interest in real or personal property.

INCOMPETENTS

Under California law, a person, who has been judged in a court of law to have an

unsound mind, would be classified as being mentally incompetent. Should this happen, the

incompetent person would not have the legal capacity to enter into a contract until such time

as the person’s capacity is restored.

Similarly, a person who is entirely without understanding has no power to contract.

This is true even if the person has not been judicially determined to be incompetent. The

best procedure is for the incompetent person to be represented by a court appointed guardian

or conservator. Any acts of the guardian or conservator on matters concerning real property

would be subject to court approval.

If someone makes a contract while drugged or intoxicated, the contract is voidable by

that person. A mentally incompetent person cannot legally contract. Any such contract

would be void. Minors or incompetents may convey, mortgage, lease or acquire real

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property through the acts of their guardians or conservators subject to court approval. Both

minors and incompetents may acquire title to real property through a gift or an inheritance.

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.” Under federal

law, however, there are certain restrictions upon the property rights of aliens.

CONVICTS

Persons sentenced to imprisonment in state prisons are deprived 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, however, forfeit their property. They

may acquire property by gift, inheritance, or by will under certain conditions. They may

also convey their property or acquire property through a conveyance.

MUTUAL CONSENT

The second element of a valid contract is that the parties, who have the legal capacity

to contract, must mutually consent to be bound by the contract. To have mutual consent, we

need:

A definite offer made by one of the parties to the contract, and

A genuine acceptance made of the offer by the other party to the contract.

These two components of offer and acceptance form the essential element of “mutual

consent” needed to form a valid contract. To satisfy the requirement of mutual consent,

there must be a “meeting of the minds” by the parties as to the terms and conditions of the

agreement. The assent of both parties must be genuine and freely made. The party who

makes the offer is known as the offeror; and, the party who accepts the offer is the

offeree.

A DEFINITE OFFER

Advertisements placed in newspapers, magazines, or other mass media do not consti-

tute definite offers. These kinds of advertising can be characterized as an invitation to enter

into preliminary negotiations to make an offer. These mass media serve to announce that

certain items or properties are for sale. Similarly, other communication forms such as

proposals, preliminary negotiations, and, listings are not definite offers.

An agreement to agree is not a contract. It is an illusory contract. The term

“illusory” is used to describe “that which has a false appearance.” An offer from an offeror

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who promises to “buy your property if I can find acceptable financing” is an example of an

illusory offer. The offeror is not making a real promise since there is no standard on which

to base a determination of what is acceptable financing. It is left to the offeror to determine

what is “acceptable financing” and does not effectively bind the offeror to the contract.

A true offer must:

Demonstrate a present intent on the part of the offeror to enter into a contract with

the offeree in exchange for the offeree’s promise to: a) Perform some act; or, b)

Refrain from doing something.

Be definite and certain as to its terms and the acts that are to be performed. The

preciseness of the wording in a contract becomes very important if the contract has to

be interpreted later in a court of law. The contract must set forth the conditions of

performance with enough certainty so that the court can determine the validity of the

contract, whether or not it has been breached, and the rights of the parties to the

agreement.

Be communicated to the person who can accept the offer. To be effective, the offer

may only be communicated voluntarily by the offeror or through his or her duly

authorized agent.

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CASE HISTORY

GOODYEAR v. MUNOZ (1985) 170 C.A. 3d 919

Goodyear Rubber Corp. held a lease with an option to purchase certain real property

for “fair market value” from Munoz. When Goodyear attempted to exercise their option,

Munoz refused their tender offer of $80,000. Munoz claimed the term “fair market value”

was too uncertain to support performance of the contract and that the option was therefore

unenforceable. Goodyear filed a complaint for specific performance. The trial court

entered a summary judgment in favor of Munoz.

The Court of Appeal reversed this decision. The court held that the term “fair market

value” was a generally accepted and well-established means of property valuation requiring

neither greater specificity nor future agreement of the parties to be specifically enforceable.

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ACCEPTANCE OF OFFER

When an offeree accepts and communicates his or her acceptance of a definite and

certain offer from an offeror, a binding contract is formed. An offer must be accepted in the

manner specified in the contract. However, if an exact method of accepting the contract is

not stated, any reasonable manner is deemed to be legally sufficient.

The acceptance of an offer must be absolute and unqualified. If the terms of the offer

are modified in any kind of a material way by the offeree, it becomes a counteroffer. The

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acceptance of the offer must be within the time limit specified in the contract. If no time is

specified, then acceptance must be within a reasonable time. Once accepted, the death or

insanity of either party will not terminate the contract.

An offeree, who receives an offer that he would like to accept after making certain

changes to its terms or conditions, is making a counteroffer. The original offer is legally

rejected. The offeree now becomes the offeror of the counteroffer; the original offeror

becomes the offeree.

Each change made in an offer or counteroffer should be dated and initialed by all

parties to the transaction. Additionally, if it is a real estate contract, the broker must give

copies of the contract or changes to the parties signing or initialing at the time the contract is

signed or the changes are made.

A contract is made when the acceptance is mailed or put in the course of transmission

by any prescribed or reasonable mode such as 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 since the acceptance has been placed in the course of transmission by the offeree.

TERMINATION OF AN OFFER

The hope of a person who makes an offer is that the other party will accept the offer

and that a contract will be formed. However, the offeror usually does not want to wait

indefinitely to find out if the offer is accepted. An offer may be terminated in a number of

ways.

Lapse of Time - An offer is revoked if the offeree fails to accept the offer within the

time period specified in the contract. The offeror generally specifies that the

offeree’s acceptance must be communicated to the offeror by a certain date. If the

offeree’s acceptance is not received by that date, the offer is considered to have been

revoked.

Revocation of Offer - An offer may be withdrawn at any time before the offeror

receives communication of the offeree’s acceptance in writing. This is true 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,

it becomes an option contract and the offeror must abide by its terms.

Failure of Offeree to Fulfill a Condition - If the offeree fails to fulfill a condition

prescribed by the offeror or to accept the offer in a prescribed manner, the offer may

be terminated. If the offeree makes a qualified acceptance such as by changing the

price, the offer becomes a counteroffer and the original offer is dead. It cannot later

be accepted unless revived by the offeror making the same offer over again.

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Rejection by the Offeree - An unequivocal rejection ends the offer. However,

requests for clarification or preliminary bargaining do not have the same effect if

they involve no more than inquiries or suggestions for different terms.

Death or Insanity of the Offeror or Offeree - Revokes the offer. However, should

one or both of the parties to the contract die or become incapacitated after accep-

tance of the offer, the contract becomes binding upon the heirs or guardians.

An Illegal Purpose - If the conditions or the purpose of the contract are illegal, then

the contract is terminated.

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CASE HISTORY

GIBBS v. AMERICAN SAVINGS & LOAN 217 C.A. 3rd 1372

James and Barbara Gibbs submitted an offer for $180,000 to American Savings and

Loan to purchase a house in Woodland Hills that American had taken back in foreclosure.

A short while later the Gibbs received a counteroffer from American Savings. The counter-

offer contained several additional terms and conditions but made no mention of the purchase

price.

Mrs. Gibbs received the counteroffer on June 6, 1985 at approximately 8:45 a.m.

She then drove to her husband's worksite to get his signature on the counteroffer, signed it

herself, and drove to her office where she prepared an envelope and certified mail receipt

and gave the ready-to-mail envelope to the mail clerk at her office to mail at approximately

10:00 a.m on the morning of June 6, 1985.

At approximately 11:00 a.m. on the same morning (June 6th), Barbara Gibbs had a

telephone conversation with an employee from American Savings during which the thrift's

employee informed Mrs. Gibbs that the counteroffer contained an error since American

Savings had intended to increase the purchase price to $198,000 and that because of this

error the counteroffer was revoked.

American Savings then took the position that no contract had been formed since they

had withdrawn their counteroffer prior to receipt of the Gibbs's offer. The Gibbs insisted

that they had accepted the counteroffer before it was revoked by placing it in the hands of

the mail clerk for mailing prior to being informed that American Savings was withdrawing

their counteroffer. The trial court found for American Savings and Loan. The Gibbs

appealed the decision.

It is a basic principle of contract law that an offeror may withdraw an offer to enter

into a contract at any time prior to receiving the offeree's acceptance of the offer. In the trial

court's proceedings, evidence had been presented that indicated that giving their acceptance

to the mail clerk on June 6th did not meet the standard of putting their acceptance "in the

course of transmission" to the other party. This was based on the fact that although the

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Gibbs' acceptance of the counteroffer had been given to the mail clerk on June 6th, their

acceptance was not postmarked until the following day June 7, 1985. Therefore, American

Saving's revocation occurred prior to the Gibbs' acceptance.

Civil Code Section 1583 provides "consent is deemed to be fully communicated

between the parties as soon as the party accepting an offer has put his or her acceptance in

the course of transmission to the offeror. This means that the acceptance must be placed

out of control of the accepting party in order to be considered "in the course of

transmission." In California, an acceptance is deemed to be communicated upon deposit in

the mail. In this case, however, the acceptance was given to the mail clerk on June 6th. The

postmark of June 7 on the envelope was clearly after the June 6th withdrawal of the

American Savings' counteroffer and prior to the Gibbs' acceptance. Based on these facts,

the trial court's verdict was upheld by the appeals court.

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GENUINE ASSENT

The element of mutual consent is “clouded” if it is induced by:

Fraud

Mistake

Duress

Menace

Undue influence

If any one of these obstacles is present, the contract is voidable at the option of the

injured party. The injured party may seek to have the contract rescinded in which case both

parties would be restored to their original positions. Or, the party, who has the option to

make the contract void, may sue for dollar damages.

FRAUD

Fraud exists when a person misrepresents a material fact. A “material fact” means an

important fact which significantly affects the party’s decision to enter into the contract.

Fraud is either actual or constructive.

Actual Fraud: Exists when a person intentionally misrepresents a material fact

knowing that it is not true in order to induce the other party to enter into a contract.

The Civil Code lists five acts which could be construed as actual fraud.

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;

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3. The suppression of that which is true, by one having knowledge or belief of

the fact;

4. A promise made without any promise of performing it; or,

5. Any other fact designed to deceive.

MISTAKES

Another possible obstacle to genuine assent between parties occurs when either one

or both of the parties is mistaken as to the subject matter of the contract. A contract in

which a “mistake” is made is void or voidable. Where both parties are mistaken as to the

subject matter of the contract, there is no contract. Where the subject matter of the contract

has ceased to exist and this fact is not known to either party, there is no contract.

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 could cause a person to enter a

contract against his or her will. The law allows the person on whom the unlawful pressure

has been applied to void the contract at a later date.

LAWFUL OBJECT

A 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. If a contract has a single object and that object is unlawful or is impossible to per-

form, the contract is void. If there are several distinct objects, the contract is normally valid

as to those parts that are lawful.

An object is not lawful that is contrary to an express provision of the law or to good

morals. In general, the law does not lend its support to either party involved in an unlawful

contract.

SUFFICIENT CONSIDERATION

Every contract requires a sufficient consideration. Consideration is anything of value

which induces a person to enter into a contract. Consideration may be: 1) A promise 2)

An act, or 3) Money.

All consideration is considered to be “valuable” consideration which means it is

something that the parties consider to be of value. The exception to this statement is “love

and affection” which is termed “good consideration.”

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In summary, contracts require certain essential elements to be classified as valid and

binding contracts. These elements are: 1) Capable parties; 2) Mutual consent; 3) A law-

ful object; and, 4) Consideration. Real estate contracts, however, usually require a fifth

essential. Real estate contracts generally must be in writing in order to be enforceable.

INTERPRETATION OF CONTRACTS

The majority of all contracts are properly performed and discharged or executed

without legal complications. If contractual disputes occur, 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

settled by the parties. It is helpful, therefore, to understand the rules which guide the courts

in their interpretation of contracts.

In general, contracts are interpreted to give effect to the mutual intent of the parties at

the time the contract was formed. A contract may be explained by reference to the circum-

stances under which it was made and the subject matter of the contract. However, if the

language of the contract is clear and explicit, the language of the contract will govern its

interpretation.

Under the Statute of Frauds, virtually all real estate contracts must be in writing to be

enforceable. Real estate licensees can perform the ultimate in consumer protection service

by seeing to it that what is written in a sales contract clearly sets forth the intentions of all

parties to the contract. However, when a written contract fails to express the real intention

of the parties because of fraud, mistake, or accident the courts will seek to regard such real

intention and disregard the written parts of the contract that are in error.

A written contract will take precedence over all negotiation either oral or written that

took place prior to the forming of the contract. When a contract is partly written and partly

printed, written parts control the printed parts. In addition, the parts which are purely

original control those which were copies from a form. The modification or alteration of a

contract creates a change in the terms and conditions of the contract and requires the mutual

assent of the parties to the contract.

PAROL EVIDENCE RULE

Courts are often asked to interpret the meaning of a contract. This gives rise to the

question of whether the courts can consider other evidence that is not set forth in the written

contract. The general rule is that oral statements or representations made prior to the form-

ing of a contract which modify the subject matter of a written contract are inadmissible in a

court of law.

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This is known as the parol evidence rule. This rule prevents the introduction of prior

oral or written agreements which would modify or contradict the written contract drawn up

between the parties. Parol evidence may be used, however, to show a later verbal modifica-

tion of a written contract or to clarify an ambiguity.

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CASE HISTORY

WILSON v. GENTILE (1992) 8 C.A. 4th 759

In this case, a dispute arose as to the proper exercise of a lease option to purchase.

The lessor brought an unlawful detainer action and the lessee, in turn, filed an action for

declaratory relief and specific performance. The “lease option” agreement provided that the

lessee must exercise the option right personally in writing “within thirty (30) days prior to

the expiration of this option.” The trial court granted summary judgment for the lessee,

determining that the lessee properly exercised his option to purchase the leased property

seven days before the option period expired.

The lessor appealed. However, the Court of Appeals upheld the trial court’s decision

determining that the lessee exercised the option within the period allowed by the agreement.

The court held that in the context of an “option to buy,” as opposed to an option to renew a

lease, the language “within 30 days prior to” is properly interpreted to allow exercise of the

option during the 30-day period immediately preceding the expiration of the option.

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CLASSIFICATION OF CONTRACTS

There are certain terms that are used to classify contracts. A listing of these terms

would include:

MANNER OF CREATION

There are two terms generally used to describe the manner in which a contract is

created. A contract may be an express contract. Or, a contract is an implied contract. An

express contract is created “in words.” These words may be placed into writing which sets

forth the terms of the agreement between the parties. Or, they may be conveyed in an oral

agreement.

An implied agreement is one created by the acts and conduct of the parties rather

than in words.

EXAMPLE: You have a credit account at the local drugstore. You go into the

drugstore and select an article that you wish to purchase from the shelf. The

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clerk is talking to another customer but you catch her eye and show her the

article that you wish to buy. She nods affirmatively. You turn around and exit

the store. Was a contract created? Yes! It would be an implied contract even

though not one word passed between you and the clerk.

CONTENT OF THE CONTRACT

The content of the agreement may be bilateral or unilateral. A bilateral contract is

one in which the promise of one of the parties is given in exchange for the promise of the

other party.

EXAMPLE: Able tells Baker, “I’ll pay you $7,000 if you will promise to

remodel both my bathrooms.” Baker responds, “I promise that I will remodel

both your bathrooms for the $7,000 you will pay.”

In a bilateral contract, both parties promise to do something or refrain from doing

something.

A unilateral contract, on the other hand, is an agreement between the parties whereby

one party promises to do something in exchange for the act of the other party.

EXAMPLE: Able’s pet dog is lost. Able puts up reward posters saying, “I

promise to pay a $200 reward to anyone who finds my lost dog.” At this point,

nobody has actually promised to find the dog and no agreement exists between

the parties. However, if someone finds and returns the dog to Abel, has a

contract been made? Yes! It is based on the exchange of a promise by one of the

parties to do something in exchange for the performance of some act by the other

party. It is a unilateral contract.

PERFORMANCE

In reference to the extent of the performance of a contract, you will find the use of

the terms “executory” and “executed” to describe a contract. In an executory contract,

certain terms and conditions contained in the contract have yet to be performed. In a

contract described as “executed,” all the terms and conditions have been met by both of the

parties to the contract.

LEGAL EFFECT

Contracts may be classified in four ways in terms of the legal effect of the contract:

Valid

Void

Voidable

Unenforceable

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A valid contract is one that contains all the legal essentials required to create a

legally binding contract. It is a good contract and is binding on both parties to the agree-

ment. It is enforceable by both parties to the agreement. If the conditions required to create

a valid contract have been met, any party to the contract may seek help in a court of law

should there be a breach in the contract. The injured party may ask the courts to help

enforce the contract as created or award money damages as compensation for the breach of

the contract.

A void contract is a contract that is lacking in one or more of the legal essentials

required. A void contract has no legal effect. It is not binding on or enforceable by any of

the parties to the contract.

A voidable contract is a contract that is valid and enforceable on its face but may be

made void by one or all of the parties because of some defect. A contract induced by fraud

would be voidable by the injured party. It is however, valid until made void.

An unenforceable contract is one in which one or both of the parties cannot be com-

pelled to perform under the terms of the contract. An example would be the lapse of the

time limitation required under the Statute of Limitations. Another example would be an oral

contract that under the Statute of Frauds is required to be in writing. All void contracts are

unenforceable.

STATUTE OF FRAUDS

The Statute of Frauds is a law that requires certain contracts to be in writing to be

enforceable in a court of law. The parties to a contract, which under the Statute of Frauds is

required to be in writing, are barred from enforcing their rights if the contract is not in writ-

ing. The injured parties may not seek the help of the courts in finding a legal remedy.

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 codi-

fied in California. The purpose of this law is to prevent perjury, forgery, and dishonest con-

duct on the part of unscrupulous people in proving the existence and terms of certain

important types of contracts.

WRITING REQUIRED

The statute provides that certain contracts are invalid unless they are in writing and

signed by the parties or their agents. Under Section 1624 of the California Civil Code, the

contracts that are required to be in writing that pertain to real estate are:

An agreement that by its terms is not to be performed within a year of its

creation.

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An agreement for the leasing for a longer period than one year, or for the sale of

real property, or of an interest in real property.

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.

An agreement which by its terms is not to be performed during the lifetime of

the promisor or an agreement to devise or bequeath any property, or to make any

provisions for any reason by will.

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.

REMEDIES

The Stature of Frauds relates to the remedy only and not to the validity of the con-

tract. A contract, which is required by this statute to be in writing but is not, is not void. It

is merely unenforceable. It is an effective contract for all purposes except in the case where

the contract is breached. The injured party cannot pursue the help of the courts in seeking a

legal remedy.

When a contract has been fully performed, the Statute of Frauds no longer applies

and may not be called upon by the parties for any reason. The writing required by the law

may be in any form. Its main purpose is to provide evidence that a contract exists and that

the parties have entered into an agreement. The writing must contain, however, all the

material terms of the contract so that a court can determine what the parties agreed. It must

provide evidence that the party being charged signed the agreement.

REAL ESTATE APPLICATIONS

Several of the sections contained in the Statute of Frauds have an important impact

on persons dealing in real estate. Practically all contracts of sale or purchase giving any

right, title, or interest in real property must be in writing. The words “transfer of real estate

or of an interest therein” include such transactions as:

Assignment of a percentage of the proceeds of oil produced from designated

lands

All instruments creating liens such as trust deeds

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Leases for periods of time of more than one year

Rights to rights-of-way through property and any and all encumbrances incurred

or suffered by the owners

To sum up, the easiest way to remember which real estate contracts fall under the

Statute of Frauds is to take the approach that all real estate contracts must be in writing in

order to be enforceable. The exception is, of course, a lease for 1 year or less which may be

oral and still be enforceable.

STATUTE OF LIMITATIONS

The Statute of Limitations is a law which establishes certain time limitations in

which to bring a legal action for breach of contract. The injured party must start legal pro-

ceedings within a certain period of time or the courts will not help the party.

This California law sets forth a number of important time frames for real estate.

Some of the time periods that real estate licensees should be familiar with are:

An oral contract or title insurance claim - 2 years

An action for trespass upon real estate - 3 years

All rights arising out of a real estate contract - 4 years

An action to recover real property such as a quiet title action, adverse

possession, or tax sale - 5 years

Recovery under a judgment lien - 10 years after it has been recorded

PERFORMANCE AND DISCHARGE OF CONTRACTS

In the majority of contracts, the contracting parties perform properly according to the

terms and conditions of the agreement without legal complications. However, sometimes a

transaction can break down despite the best efforts of the principals and their agents. If

difficulties do arise, the parties, sometimes with the aid of legal counsel, will attempt to

work out an amicable settlement. However, if this fails, the courts are available to resolve

the differences between the parties.

There are three ways, generally, that a contract may be discharged. They are:

Performance

Agreement

By law

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PERFORMANCE

Most contracts are discharged by the full performance of the parties. However, a

person may wish to withdraw from a contract without terminating it. Under the proper con-

ditions, this may be accomplished through either an assignment or a novation.

ASSIGNMENT

An assignment is the transfer of a person’s rights under a contract to another person.

The new party literally “steps into the shoes” of the original contracting party and assumes

that person’s rights and responsibilities contained in the provisions of the contract. The

effect is that the person making the assignment (assignor) drops out of the contract. The

person receiving the assignment (assignee) continues on in meeting the terms and conditions

of the agreement.

A contract may be assignable depending upon the nature of the terms of the con-

tract. Most unilateral and bilateral contracts are assignable unless the terms of the contract

expressly prohibit an assignment. The assignee becomes primarily liable under the contract.

The assignor still retains a secondary liability.

The following types of contracts may not be assigned:

An option in which the consideration is an unsecured promissory note

A contract that expressly prohibits an assignment. If this type of contract is

assigned, it is voidable by the injured party

Personal service contracts such as a listing may not be assigned

A deed cannot be assigned

NOVATION

A party may withdraw from a contract through a novation. A novation is the

substitution by agreement of a new obligation for an existing one with the intent of extin-

guishing the existing contract. The substitution may be a new contract between the same

parties or a new party may be involved. A novation requires the intent to discharge the old

contract. The new contract must have all the legal essentials required to create a contract

including a sufficient consideration.

DISCHARGE BY AGREEMENT

In the event there is a breach of contract, the injured party may look to the courts for

help. The court’s remedies include court actions for specific performance, money damages,

or liquidated damages.

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However, as a practical matter, the time and cost of pursuing a remedy in a court of

law may exceed the benefits to be gained. In addition, the possibility exists that the judge

may not agree with the person initiating the lawsuit. In this event, the party suing could end

up losing the case in court. For this reason, the injured party may find it more practical and

prudent to agree with the other party and simply mutually rescind the contract.

When both parties agree to mutually rescind the contract, it has the effect of releasing

each other from the contract and restoring each party to their original positions. For the

protection of everyone, the agreement to cancel should be in writing and signed by the

parties to the original contract.

DISCHARGE BY LAW

If one of the parties to the contract fails or refuses to perform his or her obligations

without legal justification, the contract is breached. A breach of contract by one of the

parties gives the other party or parties several potential “causes of action.” The injured

party may make a legal claim in court for one of three possible legal solutions. They are:

UNILATERAL RESCISSION - If a breach occurs, the wronged party may

seek to unilaterally rescind the contract. However, the suing party must use

reasonable diligence to rescind promptly upon discovering the facts that would

entitle the party to rescind. In addition, the party seeking to rescind must restore

to the other party everything of value received from the other party under the

contract. Or, offer to restore same if the other party will do the same.

SUE FOR DAMAGES - The victim of a breach of contract has, obviously,

been wronged. The courts take the approach that the aggrieved party may be

awarded compensation in the form of money for being wronged. This type of

compensation is known as damages.

SPECIFIC PERFORMANCE - If dollar damages would not provide an

adequate remedy, the courts may order the performance of the original contract

on its terms and conditions. This type of action may be sought by either party

when the non-breaching party still wishes to proceed with the sale or purchase.

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

compensated adequately by the payment of money damages. For specific performance to be

available as a remedy, however, certain other requirements must be met before the court will

order a person to perform a contract. These requirements are:

The consideration in the contract must be adequate.

The contract must be just and reasonable as to the party against whom it is being

enforced.

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The contract must be sufficiently certain or definite.

The “legal” remedy must be inadequate

The performance ordered by the court must be substantially the same as that

called for in the contract.

FORFEITURES

Contracts often contain a provision "liquidating" or setting the damages a non-

breaching party will receive in the event of a contract breach by the other party. The

purpose of these provisions is to provide a fixed or, at least, easily determined amount of

damages if a default occurs. In this day of expensive and time-consuming litigation, this is

important because it presets the amount of damages to be awarded in the case of a forfeiture.

The provision in the contract that achieves this objective is known as a "Liquidated

Damages" clause.

If the contract is for the purchase and sale of residential real property, of not more

than four units and the buyer/owner intends to occupy one of the units, the following rules

apply:

These special rules apply only to amounts actually prepaid, in the form of

deposit, down payment or otherwise.

If the amount paid in accordance to the liquidated damages clause does not

exceed three (3) percent of the purchase price, the clause is valid unless the

buyer proves that the amount paid is unreasonable.

If the amount actually paid in accordance with the liquidated damages clause

exceeds three (3) percent of the purchase price, the clause is invalid unless the

party seeking to enforce it proves that the amount paid is reasonable.

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 (10)

point bold-type or contrasting red print in eight (8) point type.

REAL ESTATE CONTRACTS

CONTRACT PREPARATION

Real estate contracts provide the foundation for the agreements reached by the parties

in a real estate transaction. The two major contracts that all licensees need to be thoroughly

familiar with are the listing agreement and the purchase agreement. It is imperative in

reducing the risks involved in a typical real estate transaction that real estate licensees fully

understand these forms and be well trained in their usage.

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Real estate contracts adhere to the same essentials as contract law in general. They

follow the same requirements for contract formation, enforceability, and rules applicable to

contract interpretation. These essentials include: 1) Parties capable of contracting 2)

Mutual consent 3) A lawful object and 4) Sufficient consideration. In the case of real

estate contracts, however, a fifth requirement is that they be in writing in order to be

enforceable in a court of law.

A real estate agent should make it a practice to use the approved preprinted standard

listing contracts and purchase agreements fill-in forms offered through state boards and

associations. The use of this type of form acts as a risk reducer to avoid the possibility of a

misunderstanding by one or both of the parties in the transaction. The preprinted forms

have been prepared by legal experts and state the items that need to be in a contract to fully

"legally package" the transaction.

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CASE HISTORY

FRANKLIN v. HANSEN 1963 59 C. 2d 570

Hansen owned residential property in Newport Beach. Franklin had acted as an

agent for Hansen in the rental of Hansen’s property and had informed Hansen that he would

like to represent Hansen as his agent in the sale of Hansen’s property.

A sale price of $115,000 was agreed upon. Over the period of the next few months,

several offers were received. However, all the offers were for less than $115,000. Hansen

eventually agreed that he would accept an offer of $100,000. At this point, no written

agreement existed between Hansen and Franklin on the sale of the property. Hansen had

assured Franklin that a signed listing was unnecessary as his word was good.

A short while later Franklin received an offer for $100,000. Franklin telephoned the

seller and requested Hansen to send him a telegram authorizing him to sell the property.

Hansen complied and sent a telegram confirming he would sell the property for $100,000.

Franklin proceeded with the sale and then called Hansen again to tell him that the property

had been sold and that he had accepted a check for $5,000 as a down payment. Hansen

stated he was pleasantly surprised and consented to the suggested escrow agent.

However, when a standard form deposit receipt providing for payment of a 5%

commission to Franklin was presented, Hansen refused to sign it and indicated he wished

“to get out of the deal.” At a meeting between Franklin, Hansen, and the buyers of the

property, the buyers refused to waive their rights under the agreement. Hansen admitted he

was “stuck” with the deal and that Franklin would receive his commission. Subsequently,

however, Hansen refused to sign any of the documents necessary to complete the sale of the

property and also refused to pay the agreed upon commission.

Franklin sued for his $5,000 commission citing Hansen’s promise to abide by the

verbal listing of the property and the telegram in “confirmation thereof.” Hansen relied on

the statute of frauds as his main defense. However, the trial court, after taking into account

all the transactions between the parties, awarded a judgment to Franklin.

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Hansen appealed contending that neither the telegram nor any other writing consti-

tuted a sufficient memorandum or ratification of a contract of employment to satisfy the

statute of frauds. The appeals court ruled in favor of the appellant, Hansen, and reversed the

trial court’s decision.

The appeals court based its decision on its finding that a written agreement must

specify that it is a contract of employment. Hansen’s telegram to Franklin confirming that

he would sell the property contained no reference to the fact that Hansen was employing

Franklin or to any representation that he would pay a commission. If Hansen’s telegram had

stated that Hansen was employing Franklin to sell the property, a payment of a commission

would have been inferred. The court held that a listing agreement must unequivocally show

the fact of employment of the broker seeking to recover a real estate commission. The

appeals court concluded that in Franklin v. Hansen, the telegram failed to use any words in

recognition of a contractual obligation and, therefore, was insufficient under the statute of

frauds to support Franklin’s claim for a commission.

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INSURING MARKETABLE TITLE

It is especially important in the transfer of real property that a marketable title is con-

veyed. Lenders and buyers would be very reluctant to commit their funds to real estate

transaction unless they have assurances that the title to the subject property was merchant-

able. Buyers want to know that there are no hidden interests in the real property they are

proposing to buy. A title is merchantable if there are reasonable assurances as to the rights

of the parties involved in the transaction.

A grant deed conveys two implicit promises with the transfer of title. When the word

"grant" is used in a deed, the seller is warranting that: (1) He or she has not already con-

veyed the title to somebody else, and (2) That the title is free and clear of any encum-

brances such as taxes, assessments, and any other liens other than the ones that are being

disclosed to the buyer. These warranties usually do not appear on the face of the deed. The

word "grant" carries with it these two implied warranties.

COMMON AREAS OF RISK IN REAL ESTATE CONTRACTS

The preponderance of lawsuits filed in real estate transactions stem from misrepre-

sentations, negligence, and non-disclosures. The best proactive risk control steps that

can be taken to reduce the potential for this type of lawsuit is to do the right thing, in the

right way, and at the right time. The best way to accomplish this feat is to make sure you

fully document your activities, conversations, and recommendations and disclose what you

know or discover about a property that your client is interested in buying or selling. Simply

said, this means "When in doubt, disclose it - and put it in writing"!

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SCOPE OF AGENT'S DUTIES AND LIABILITIES

The listing contract is generally the written agreement between the seller and real

estate broker that creates an agency relationship. It is an express agency. The agent holding

the listing is bound by the rules of law applying to the agency relationship and owes certain

obligations to the principal. A real estate licensee, who is performing his or her services

under a written listing contract, has two sets of responsibilities. There are the responsibili-

ties and legal obligations set forth in the terms and provisions of the listing contract. And,

there are the fiduciary responsibilities created by the agency relationship established as a

result of the written listing agreement. If the listing contract is unenforceable, the broker

cannot be held liable for failing to fulfill the broker’s contractual obligations. However,

even if the contract is unenforceable, the broker may be held liable for a failure to meet his

or her fiduciary duties imposed by the agency relationship.

The listing agreement clearly spells out the scope and the limits of the agent's duties

and responsibilities in the handling of the transaction. A sure way to reduce the risks in any

transaction is to make sure that all licensees are thoroughly familiar with what is written on

the listing agreement. And, that they clearly understand what duties they are required to do

as well as what is beyond the scope of their agency and, therefore, that they are not legally

required to do.

No liability is incurred by the principal for acts of an agent that are 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 determine its 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.

It is a good idea to remember that the listing agreement must be in writing if the

agent expects to receive a commission. An oral agreement to buy or sell real estate can be

valid, but it is not enforceable in a court of law. All licensee's should be aware of California

Civil Code Section 1624 (a) (4).

SECTION 1624

(a) The following contracts are invalid, unless they, or some sort of memorandum

thereof, are in writing and subscribed by the party to be charged or by the party's agent.

(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 the lease is for a longer period than one year, for compensation or

commission.

Most real estate licensees operate as "special agents" in pursuing their real estate

activities. A special agent is one who has been employed to do a specific thing such as

finding a buyer for a particular property that a seller is interested in selling. Therefore, his

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or her authority is limited to this single transaction. All licensees should strive to be aware

of the limits of the authority given to them and not to exceed the scope of this authority.

*****************************************************************

CASE HISTORY CARLETON V. TORTOSA

(1993) 14 Cal. App. 4th 745

In this case, an experienced real estate investor, Carleton, employed Mary Tortosa, a

real estate broker, in the sale of two residential rental properties and the purchase of two

residential rental properties. Carleton executed listing agreements, real estate disclosure

statements, and real estate purchase contracts in completing the transactions. These docu-

ments advised him that Tortosa's responsibilities as a broker did not include giving advice

on the tax consequences of the transactions.

After the transactions were completed, Carleton was informed by his accountant that

he had incurred a tax liability of approximately $34,000 because these transactions were not

structured to qualify as tax-deferred exchanges under the Internal Revenue Code. Carleton

then brought a professional negligence action, alleging in substance that Tortosa had "failed

to exercise reasonable care and skill in undertaking her duties as a broker by neglecting to

warn plaintiff his transactions could have adverse tax consequences and by failing to struc-

ture the transactions as tax-deferred exchanges."

In completing the transactions, Carleton had signed two listing agreements with

Tortosa, one for each of the properties he was selling. Both listings advised in writing that

"A real estate broker is the person qualified to advise on real estate. If you desire legal or

tax advice, consult an appropriate professional." On all four of the transactions, Tortosa

furnished plaintiff a written "Disclosure Regarding Real Estate Agency Relationship" form

which advised the plaintiff: "The above duties of the agent in a real estate transaction do not

relieve a Seller or a Buyer from the responsibility to protect their own interests. You should

carefully read all agreements to assure that they adequately express your understanding of

the transaction. A real estate agent is a person qualified to advise about real estate. If legal

or tax advice is desired, consult a competent professional."

The trial court ruled in favor of Tortusa. Carleton appealed but the appellate court

affirmed the trial court's decision.

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Real estate licensees should also remember that giving legal advice or input into

another person's legal decisions in a real estate transaction represents the unauthorized

practice of law. This type of advice is a criminal offense that could lead to a fine or jail.

Real estate brokers and agents should, as a matter of course, make it a practice to suggest

that clients seek expert advice in areas such as law, appraisal, tax matters, or other special-

ized fields, where the client has a significant problem and is asking for advice.

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Some real estate licensees may have a good deal of knowledge and expertise on

matters such as real estate law and tax matters. However, it is not their duty to give expert

advice about structural defects, tax questions, soil stability, and environmental hazards. All

licensees do have a duty, however, to advise their clients about selecting appropriate experts

to conduct tests, inspections, and prepare reports. It is always a good idea to provide your

clients with a list of experts in a given specialized field and let them make their own deci-

sion as to who they may wish to select.

CONTRACT PROVISIONS

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 con-

ditions constitute the offer. If the owner of the property agrees to all of the terms and

conditions of the offer, it constitutes the seller’s acceptance. This offer and genuine accep-

tance creates a contract.

It makes no difference whether the offer comes from the seller or buyer. If the

negotiation finally leads to a definite offer on the one side and an unconditional acceptance

on the other side, a contract of sale has been effected. All that is legally required to com-

plete the contract for the sale of real property is to reduce the terms and conditions to

writing, and to have the parties sign the contract.

Forms such as listing agreements, purchase agreements, exchange agreement, and

other real estate contracts should, at a bare minimum, contain the following provisions:

The date of the agreement

The names and addresses of the parties to the contract

A description of the property

The consideration

Reference to creation of new trust deed, if any, and the terms thereof - Also, the

terms and conditions of existing trust deeds

Any other provisions which may be required by either of the parties

The date and place of closing the contract

The contract should contain a description of the property so that it may be referred to

with certainty. A contract of sale normally calls for the preparation of a deed to convey the

property. It is executory in that when the deed is properly signed and delivered to the pur-

chaser, the contract is executed.

The reality of modern day real estate practice is that the purchase agreement used

today contains many provisions to insure the legal protection of all the parties to the trans-

action. Professionally drafted real estate real estate forms such as a listing agreement or

purchase agreement are designed to incorporate the conditions, disclosures, and addendums

that are frequently required in the real estate transaction of today.

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DEPOSITS

Earnest money deposits by a prospective purchaser of real property are known as

trust funds. The deposit must be handled by the broker as prescribed in the Business and

Professions Code.

Section 10145 of the Real Estate Law provides that the broker, who receives trust

funds, must place the funds into one of three places. The broker may place the monies into

a trust fund account in a bank or other recognized depository. The broker may also deposit

the funds into a neutral escrow. Or, the broker may place the funds into the hands of the

principal. These are the only three things that a broker can do with funds given to him or her

in trust. Whichever of these acts is done, the law requires that it be done not later than three

business days following receipt of the funds by the broker or broker's salesperson.

The Regulations of the Real Estate Commissioner set forth the procedures to be fol-

lowed by the broker who elects to place the earnest money deposit into the broker’s trust

fund account. The regulations require that the earnest money deposit shall be maintained in

the trust fund account for the benefit of the party making the offer until there has been an

acceptance of the offer.

EFFECT OF SELLER’S DEATH ON REAL ESTATE CONTRACT

A real estate contract, properly drawn, usually contains a provision which states that

all the terms of the contract are to be binding upon the heirs, executors, administrators, and

the assigns of the respective parties.

In the event this wording is used, the buyer’s rights are the same against the execu-

tors, administrators, or assigns of the seller as the buyer had against the seller. Under these

circumstances, the buyer may compel the seller’s heirs, administrators, executors, or assigns

specifically to perform the contract.

UNIFORM VENDOR AND PURCHASER RISK ACT

Although it happens infrequently, it is possible that after a contract has been entered

into for the purchase of real property that the property could be seriously damaged or

destroyed. If this happens, the question will come up as to who is liable for the loss.

Under the California Uniform Vendor and Purchaser Risk Act, this is decided by

considering when the legal title and the possession of the property are transferred. If neither

the legal title nor the possession of the property has been transferred and the property is

damaged, the seller cannot enforce the contract. This assumes that the property’s damage

was through no fault of the buyer. And, the buyer is entitled to recover any portion of the

price paid. If, however, either the legal title or the possession has been transferred, the

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buyer is not entitled to recover any portion of monies paid. This position assumes that the

destruction to the property was through no fault of the seller.

CONTINGENCIES

Contingencies are conditions or provisions which have been inserted into contracts.

A condition is an act or event that limits or qualifies the duty of the parties to a contract to

perform. These conditions or provisions generally require the completion of a certain act or

the happening of a certain event before the contract becomes binding upon the parties.

Contingencies give either one or both of the parties the opportunity to cancel the transaction

should:

The act upon which the condition is based not be performed

The event upon which the condition is based not occur

Contingencies limit or qualify the duty of the parties to a contract to perform until the

unmet conditions in the contract are resolved. If a contingency provision is not met, the

party who benefits by the provision may cancel the contract by written notification of the

cancellation to the other party. The party canceling is then relieved of his or her duty to

perform under the terms of the contract. On the other hand, once the contingency provisions

in a contract have been satisfied or removed, then both parties have a duty to perform under

the terms and conditions of the contract.

The placing of a contingency provision into a contract can often serve a useful pur-

pose. It allows a buyer or seller to enter into a real estate sales agreement and give evidence

of their good faith contractual intent. While, at the same time, limiting their liability under

the contract until the contingency provision or conditions placed into the contract can be met

or resolved. Typical examples of contingency clauses found in contracts would include:

Lender approval of buyer’s loan

Approval of soil conditions report

Buyers sale of current home before contract becomes binding

Receiving an appraisal on property of a certain amount

Receipt of termite and roofing reports

Property inspection report from a qualified home inspector

Care should be taken that a contingency or condition placed into a contract be

certain, definite, and clearly understandable so that a reasonable person would know

precisely what is intended. It is of the utmost importance, that all parties to the contract

know exactly what their obligations are as stated in a contingency clause to avoid later mis-

understandings. Contingency provisions may benefit the buyer, the seller, or both of the

parties to the transaction.

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TYPES OF CONTINGENCIES

The California Civil Code defines a contractual obligation as being conditional when

the rights or duties of any party to the contract depend upon the occurrence of an uncertain

event. The Civil Code describes and governs conditions and contingency clauses which are

found in contracts, deeds, and other real estate related documents.

There are three ways to describe contingency clauses or conditions found in real

estate sales agreements based on their relationship to the date that escrow closes.

Conditions Precedent - An act that must be performed or an event that must occur before

the agreement becomes binding and enforceable between the parties (C.C. Sec. 1436).

Conditions precedent are typically acts that are to be performed or events that are to occur

during the escrow period before the closing date of escrow.

EXAMPLE: Sharon Ferguson enters into a sales agreement with Mr. Brown to

buy his home contingent upon her ability to qualify for and obtain a 30 year loan

from a savings and loan for $150,000 at an interest rate of 8.25% per year. Should

the bank approve her loan request at the terms specified or at terms that are more

attractive, Sharon is bound to the contract and has a duty to perform by meeting the

other terms and conditions in the contract and paying the required purchase price.

If, on the other hand, Sharon is denied her loan or it is approved under less favor-

able terms that set forth in the contingency clause, she is excused from performance

under the terms of the contract and may cancel the agreement.

Conditions Concurrent - Conditions which are mutually dependent and are to be

performed at the same time by the parties to the contract (C.C. Sec. 1437). Conditions

concurrent are acts or events that have been set forth in the sales agreement which each

party is to perform separately prior to the closing date of escrow. By the terms and condi-

tions of a real estate contract, the seller generally has a duty to deliver a marketable title,

deliver a termite report, and furnish title insurance. The buyer has a duty to obtain financing

and provide for the delivery of funds in the amount of the purchase price of the property to

escrow. Should either party fail to perform the conditions concurrent stated in the contract,

the other party may terminate the contract based on the failure of the other party to perform.

Condition Subsequent - A condition subsequent is rare, and refers to a future event, which

if it occurs, releases one or both of the parties to the contract.

Section 1439 of the Civil Code further states that before any party to an obligation

can require another party to perform any act under it, he must fulfill all conditions precedent

thereto imposed upon himself, and must be able and offer to fulfill all conditions concurrent

so imposed upon him on the like fulfillment by the other party.

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CASE EXAMPLE

In the case of Fogarty v. Saathoff (1982) 128 CA 3d 780, the parties entered into a

contract for the purchase and sale of a condominium. The contract provided for a 21 day

escrow period and that time was of the essence. The escrow instructions expressly gave

either party the right to cancel the escrow if the escrow was not in a position to close at the

end of the specified period. The instructions called for a deposit of a small down payment

and deposit of the balance of the purchase price before the close of escrow.

It further provided that closing of escrow was contingent on the buyer obtaining a

conventional loan and that notification by the lender of loan approval would terminate the

contingency. The buyers did not deposit the balance or provide loan approval within the

escrow period. A week after the expiration of the escrow period, the seller gave written

notice of cancellation to the escrow holder.

The trial court found that when the seller purported to cancel the escrow, she had not

deposited into escrow either a termite report or a policy of title insurance as was called for

in the purchase contract and the escrow instructions. And, that her attempt to cancel the

escrow constituted an anticipatory breach of the contract. The trial court concluded that the

buyers' performance was not a condition precedent to the seller’s performance, and

therefore the performance of each party was concurrently conditional on performance by

the other. At this point, the trial court gave judgment for specific performance in favor of

the buyers and against the sellers.

The Court of Appeals reversed the trial court’s decision. They concluded that the

trial court erred in concluding that the seller’s obligations to provide a termite clearance and

a policy of title insurance were conditions concurrent with the buyers’ obligations to give

notice of the bank’s approval of its loan and to deposit the balance of the purchase price.

The court further reasoned that a policy insuring the buyers’ title could not be deliv-

ered until title to the property was transferred. The termite clearance provision referred to

the "lender’s requirements" and requiring the seller to furnish a termite report and clearance

before the buyers had solidified the deal by obtaining loan approval was not commercially

reasonable.

The appeals court decided that in the absence of an express provision to the contrary,

it would be unreasonable to expect or require a seller to incur the expense of a termite

inspection and report while the transaction was still contingent upon the buyer’s obtaining a

loan commitment for the great bulk of the purchase. They concluded that the removal of the

contingency by depositing into escrow a notice of the lender’s approval of the loan applica-

tion was a condition precedent to the seller’s obligation to obtain a termite inspection and

report.

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In this case the escrow instructions expressly gave either party the right to cancel the

escrow if the escrow was not in a position to close at the end of the 21 day escrow period.

The appeals court ruled in favor of the sellers since, in their view, the failure to remove the

loan approval contingency was a condition precedent that had not been met and, in actuality,

there was no impediment to the seller closing the escrow as had occurred.

CONTINGENCY REMOVAL

If the act or event called for in a contingency clause occurs, the contingency is said to

be “satisfied.” It is eliminated from the contract. The other terms and conditions of the

contract then become binding and enforceable on both parties and the transaction can

proceed.

If the act or event does not transpire, the person, who benefits from the contingency,

may:

Exercise his or her right to avoid performance of the contract and cancel it

Disapprove of the conditions or reports (such as a contract that is contingent on

buyer’s approval of a property inspection report made by a qualified home

inspector)

Give up the right to waive the contingency and proceed on with the contract.

A waiver is defined as “to voluntary give up a claim or right.” The party who

benefits from the contingency may deliberately relinquish his or her right to cancel and pro-

ceed onward toward the completion of the contract. A contingency may be waived in

writing, orally, or by the conduct of the party who benefits by the contingency. The surest

way, however, to avoid later disputes, misunderstandings, or possible arbitration is to pre-

sent a written notice of waiver to the other party.

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CASE EXAMPLE

The case of Sabo v. Fasano (1984) 154 C.A. 3d 502 illustrates the waiver of a condi-

tion through words and deeds. In this case, the sellers listed an apartment building that they

owned for sale. They later received an offer by a prospective buyer that was conditioned on

the seller’s acceptance within a five day period. The sellers did not accept the offer until

one day after the expiration date stated in the offer.

The buyer went forward with the purchase of the property, opening escrow, deposit-

ing money in escrow and arranging financing for the sale. The buyer also communicated to

the sellers his intent to go forward with the transaction.

The trial court held that the sellers’ signature on the deposit receipt (the offer) could

not constitute an acceptance because the offer had already expired. The trial court also

found that, assuming the buyer waived the seller’s late acceptance, there was no communi-

cation of that waiver to the sellers, and therefore no mutual consent to the contract.

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The Court of Appeal reversed. The court held the buyer had waived the sellers’ late

acceptance and that the trial court’s finding that the buyer’s waiver was not communicated

to the sellers was not supported by the evidence. The court held the evidence demonstrated

an unequivocal desire of the buyer to go ahead with the purchase of the property. And that

this desire was communicated to the sellers through the buyer’s words and deeds.

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PASSIVE REMOVAL OF CONTINGENCIES

In the passive method, the buyer has a set number of days to complete all inspections,

investigations, and review applicable items. If the buyer does not give the seller written

notice of any items disapproved or of cancellation within the time period indicated, it will be

assumed that the buyer has completed all inspections and is ready to proceed on with the

transaction.

If the buyer does give the seller written notice of any items disapproved within the

time limits set, the seller will then be given a set number of days to respond to the buyer. If

the seller is unwilling or unable to repair or correct any items disapproved or does not

respond within the time periods specified, the buyer may cancel the contract. If the buyer

does not give a notice of cancellation within the time period indicated on the contract, the

buyer shall conclusively be deemed to have elected to proceed with the transaction without

repair or correction of any items which seller has not agreed in writing to repair or correct.

ACTIVE REMOVAL OF CONTINGENCIES

Some professionally prepared real estate contracts give the parties to the contract an

active method for removing the contingencies from the contract. This method requires the

buyer to give a written statement to the seller that the contingencies are acceptable to the

buyer and are removed from the contract. This notice must be delivered to the seller within

the time frames specified in the contract. If the seller is not informed in writing within the

time specified, the seller has the option of canceling the contract by providing written notice

to the buyer.

The buyer also has the right in the active method to deliver to the seller a written

disapproval of any of the contingency items or a written cancellation based on any contrac-

tual cancellation right the buyer may have. Both of these acts must be completed within the

time periods the parties have agreed to in the sales agreement.

If the seller does not respond to a written disapproval from the buyer of any of the

contingency items, the buyer has the right to cancel the contract or to elect to proceed with

the contract. Either notice must be delivered to the seller in writing within the time frames

agreed to by the parties. If a buyer disapproves a contingency and, then, later elects to pro-

ceed with the contract upon being informed that the seller will not correct the defect, the

buyer assumes the financial expense needed to correct the defect.

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RESOLVING DISPUTES IN REAL ESTATE CONTRACTS

In the last twenty years, the real estate industry in California has enjoyed several real

estate “boom” periods. These periods of rapid growth produced a near frenzy of interest in

a rush to acquire real estate for the purposes of home ownership and speculation. As a result

of these conditions, the real estate industry became more competitive, more highly regu-

lated, and much more complicated.

During this period of time, there has also been a dramatic increase in the use of law-

suits to resolve contractual disputes involving the buying and selling of real property.

Buyers and sellers of real estate have become increasingly sensitive to the potential to

become the target of a potential lawsuit in their transactions involving real estate. Resolving

disputes through judicial litigation can be costly, time consuming, disruptive, and extremely

traumatic. For these reasons, alternative methods of resolving disputes have grown in use in

an attempt to find a better way to seek resolution of conflicts and disputes in real estate

transactions.

Mediation and arbitration are both processes that have gained widespread use and

popularity as alternatives to litigation in real estate matters. These processes are known as

“Alternative Dispute Resolution (ADR)” methods. In 1988, the California Association of

Realtors began to advocate the use of arbitration in dispute resolution. Nowadays, most

preprinted, standard form Real Estate Purchase Agreements and Deposit Receipts also

contain an “arbitration clause.” As a natural evolution, most contracts added a “mediation

clause” to their contract in the event the parties to the contract chose not to use arbitration as

the method to be used to handle conflicts between the parties..

Mediation and arbitration are two different and distinctive processes. Real estate

licensees have a real need to become more knowledgeable on the mechanics, benefits, and

limitations of both of these ADR processes. Real estate licensees must be in a position to

discuss these methods with their clients and advise them of the key points and differences

that exist between the two methods. In addition, if conflicts arise that cannot be resolved

through negotiation between the parties to a contract, real estate agents may well find them-

selves involved in a mediation or arbitration proceeding. For these reasons, licensees should

become familiar with ADR methods and their use in the real estate field.

MEDIATION

In this process, an impartial third party (mediator) assists the parties who are in

conflict in resolving their dispute. Negotiation is a central theme in the mediation process.

The negotiator can meet with the parties, who are in conflict, together as well as individu-

ally. The negotiator is not empowered to reach a final decision that will then bind the

parties and be enforceable in a court of law. The negotiator’s role is to assist and guide the

parties to reach a mutually acceptable compromise or solution between themselves.

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Mediation services are available through the American Arbitration Association

(AAA) or Judicial Arbitration and Mediation Services, Inc. (JAMS). There are other local

services provided by legal associations. The mediators that staff these providers are often

retired judges, lawyers, or attorneys who are currently practicing in the real estate field.

One of the important benefits of mediation in dispute resolution is that it is a volun-

tary process. The parties elect to use this method because they do not want to get involved

in the more time consuming and costly processes of arbitration or litigation.

BENEFITS OF MEDIATION

Here is a partial list of the benefits of mediation as compared to arbitration or litiga-

tion.

Generally, this process is low cost when compared to other alternatives.

The parties do not lose control of the outcome. Each party is actively involved in

reaching a mutually agreeable settlement.

The process is confidential.

Saves time and money because it is faster than arbitration or litigation.

Parties still retain the right to later go to arbitration or litigation if the mediation is

not successful.

ARBITRATION

Arbitration is a nonjudicial process in which an arbitrator is chosen to settle the

dispute between the parties who are in conflict. The use of arbitration in place of litigation

to settle real estate contractual disputes is increasing in use. The arbitrator is empowered to

render a ruling to settle any disputes between the parties. The arbitrator's decision is legally

binding and enforceable in the State of California.

MECHANICS OF ARBITRATION PROCESS

The process starts when two parties, who cannot agree on a contract issue, decide

turn the matter over to a third party to help them sort it out. This act is known as “submis-

sion.” Submission can be accomplished in two ways. One method is for the parties to

proceed forward with the contract and, if a dispute arises, to agree in writing at that time to

submit the issue to arbitration for resolution. The other method would be to place a clause,

known as an arbitration clause, in the original contract. If this clause is signed or initialed

by both parties in the original contract, it would automatically form an agreement to submit

any disputes that may arise to arbitration.

Real estate purchase agreements used today usually contain arbitration agreements.

If both parties initial this arbitration clause, they are agreeing in advance to submit any

future disagreements or conflicts to arbitration for resolution. In this paragraph, the parties

agree to first use mediation to settle their disputes if any arise. This clause in most cases

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states that if mediation doesn’t provide a satisfactory resolution that the dispute be then

submitted to arbitration for a binding resolution. It is well to keep in mind that the arbitra-

tion clause is optional. If the parties do not initial the clause or it is struck out, the arbitra-

tion clause does not apply to the contract.

The arbitration proceeding involves a hearing at which the parties and arbitrator or

arbitrators are present. Each party is allowed to present their evidence and any testimony is

heard. The arbitrator then considers the evidence presented, deliberates, and then renders a

decision. The arbitrator’s decision, known as the “award” is binding and legally enforceable

in a court of law.

The fact that the arbitrator can reach a decision that is final and binding on the parties

is one of the advantages of the arbitration process. However, it is also one of the major dis-

advantages inasmuch as an arbitrator’s decision is final. This process offers only a limited

right of review. There is no appeal of the arbitrator’s award. The courts will not review the

arbitration proceedings nor reverse any decisions.

EXCLUSIONS

The Code of Civil Procedures provides that certain types of real property transactions

in areas involving court supervision or jurisdiction are not subject to resolution of disputes

by arbitration. This would include:

Probate

Unlawful detainer actions

Eminent domain proceedings

Marital dissolution

Foreclosure liens

ADVANTAGES OF ARBITRATION

In general, the resolution of real estate disputes through the process of arbitration

offers the following list of advantages and benefits:

It is conclusive - a decision is reached and finalized

The process is usually must faster than litigation saving both time and money

It is private

Less formal than court cases

Choice of an impartial arbitrator who is usually experienced in areas involving the

particular real estate dispute being arbitrated.

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REDUCING RISKS IN REAL ESTATE TRANSACTIONS

Due to the complexities of "doing business" in today's real estate market, real estate

brokerages need to adopt official risk management policies that address the company's risk

control procedures and rules. Risk control policies and procedures should hold a central

place in the company's policy manual.

The areas of real estate activity that lead to lawsuits are readily identifiable as

evidenced by the nature of local court cases. Some lawyers state that 90 percent of the

liability cases filed involve misrepresentation and 90% of these cases involve "negligent

misrepresentation. These are situations where a salesperson says something they believe to

be true based on what a seller says but the statement turns out to be false. These are the type

of situations that can be minimized. How is it done? By the broker, office manager, and

supervisors undertaking the responsibility to manage risk by educating, training, and super-

vising employees and associates to recognize areas of risk and how to handle these areas.

The goals of the company's risk management program and the benefits of this pro-

gram to the salespeople should be clearly stated. These goals must also be communicated to

agents and employees in a manner that will be understood. Feedback should also be

undertaken to make sure that all company policies and procedures are fully understood.

While it is management's responsibility to see that a risk control program is created,

the company's sales agents should also undertake their own program. This can be done

through self-study and attempting to stay current on all matters relating to risk control.

Also, as has been mentioned several times in this book, the sales associate's first line of

defense is to make the proper disclosures and thoroughly document all relevant conversa-

tions and actions taken by the licensee and the client. A complete, well-documented trans-

action file is a sales associate's best protection in a court of law.

TRANSFERRING RISKS TO OTHER PARTIES

In the "sue-happy" environment of modern day real estate practice, the use of inspec-

tors and other 3rd party "experts" has become a part of many real estate transactions.

Professional experts and inspectors can provide valuable information that your clients can

use to help them evaluate whether or not they want to buy or sell a property. The suggested

use of public agencies, experts, or inspectors is often specifically stated in the purchase

agreement. However, even if this is the case, it is good risk management policy to recom-

mend that a principal seek outside professional help in areas that could open up the licensee

to future legal action.

The use of home warranty plans can serve as an excellent risk-reducer. These plans

provide benefits for buyers, sellers, and brokers. The buyer gets a certain degree of security

and predictability regarding the condition of the purchased property. And, the seller/broker

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is not faced with an inflated lawsuit resulting from a modest problem with an appliance or

system.

When making a recommendation to a client that they seek professional help on a

specific matter, do not refer them to a particular vendor or service provider. Give your

client a list of service providers and then let them make their own selection of who they

choose to use. In this way, you once again minimize legal liability.

It is an excellent business practice for the licensee to document the fact in his or her

transaction/conversation log that the recommendation was made. And, at what point in the

negotiations it was made. If a claim of negligence concerning a specific event were to arise

at a later date, written documentation that the agent had presented this option to the principal

could greatly help to reduce the possibility of legal liability.

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CHAPTER ONE -HIGHLIGHTS

ESSENTIAL ELEMENTS FOR VALID CONTRACT

1. Parties who are capable of contracting

2. Mutual consent

3. A lawful object

4. Consideration

PARTIES WHO LACK CAPACITY TO CONTRACT

1. Minors (Under 18 years of age)

2. Incompetent

3. Aliens

4. Convicts

EMANCIPATED MINORS (Under 18 but meet certain conditions)

1. Is currently married

2. Has been married but marriage has been dissolved

3. Is on active duty with the Armed Forces

4. Has received a declaration of emancipation from Superior Court

Emancipated minors may: 1) Sell 2) Buy 3) Lease 4) Encumber 5) Exchange

6) Transfer both real and personal property

MUTUAL CONSENT (Two requirements)

1. A definite offer made by one of the parties to the contract

2. A genuine acceptance made of offer by other party

TERMINATION OF OFFER 1. Lapse of time

2. Offer is revoked

3. Failure of offeree to fulfill a condition

4. Rejection by the offeree

5. Death or insanity of offeror or offeree

7. An illegal purpose

ACTUAL FRAUD 1. Exists when a person misrepresents a fact

2. A “material fact” - An important fact which affects the party’s decision to enter into a

contract

CLASSIFICATION OF CONTRACTS

1. Express contract - Created by words

2. Implied contract - Created by acts of party

3. Bilateral contract - Exchange of a promise for a promise

4. Unilateral contract - Exchange of a promise for an act

5. Executory contract - Certain terms and conditions have yet to be performed

6. Executed contract - All terms and conditions have been performed

LEGAL EFFECTS OF CONTRACTS

1. Valid - Contains all legal essentials to create a binding contract

2. Void - Lacks one or more of the legal essentials

3. Voidable - A valid contract that may be made void by one of the parties

4. Unenforceable - Cannot be enforced in a court of law.

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CHAPTER ONE - HIGHLIGHTS

STATUTE OF FRAUDS - A law that requires certain contracts to be in writing to be enforceable in a

court of law. Virtually all real estate contracts must be in writing.

STATUTE OF LIMITATIONS - A law that establishes certain time limitations to bring a legal action

for a breach of contract.

REAL ESTATE CONTRACTS

DEPOSITS - Must be placed not later than three business days into:

1. Hands of the principal

2. An escrow account

3. The broker’s trust account

CONTINGENCIES

1. Conditions or provisions which have been inserted into a contract

2. A condition is an act or event that limits or qualifies the duty of the parties to a contract to

perform

3. If a contingency is not met, either one or both parties may terminate the agreement

TYPES OF CONTINGENCIES

1. Condition Precedent - Act that must be performed or event that must occur before the

agreement becomes binding and enforceable between the parties.

2. Condition Concurrent - Conditions which are mutually dependent and are to be performed

at the same time by the parties to the contract

3. Condition Subsequent - Refers to a future event. When and if the event happens, the

condition is no longer binding on other party

ALTERNATIVE DISPUTE RESOLUTION (ADR) - Processes, other than law suits, used to resolve

disputes arising from real estate contracts.

1. Mediation - Uses a neutral and impartial third party (mediator) to assist the parties to reach a

voluntary and mutually acceptable settlement of dispute

Advantages

Allows parties in dispute to retain in control of proceedings

Less expensive than arbitration or lawsuit

It is voluntary. Parties enter into it in an attempt to resolve dispute

2. Arbitration - Nonjudicial process in which arbitrator acts as judge. Arbitrator makes a final

decision to resolve disputes.

Advantages

It is conclusive - a decision is reached and finalized

The process is usually faster than litigation saving time and money

It is private

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Chapter Index

CE DIGEST 37

CHAPTER ONE Review Quiz

1. Which of the following is one of the legal essentials required to create a valid contract?

a) A lawful object

b) Mutual consent

c) Consideration

d) All of the above

2. Jones, who is a minor, enters into a contract with an adult to buy real property. Under the

circumstances, which of the following is true?

a) If the contract is voided, Jones may keep any consideration received

b) Jones is liable under the contract until steps are taken to void the contract

c) The contract may only be voided or disaffirmed by Jones

d) Both (b) and (c) above

3. To satisfy the requirement of mutual consent in a contract there must be a “meeting of the

minds” by the parties as to the terms and conditions of the agreement. Which of the

following elements must be present?

a) A definite offer made by one of the parties

b) A genuine acceptance made of the offer by the other party

c) Both a) and b) above

d) Neither a) or b) above

4. A contract that is induced by fraud, menace, or duress is:

a) Voidable

b) Valid

c) Void

d) Incomplete

5. Consideration in a contract may be:

a) An act

b) Money

c) A promise

d) Any of the above

6. An agreement between two parties whereby one party promises to do something in exchange

for the act of the other party is known as:

a) A bilateral contract

b) A unilateral contract

c) An express contract

d) An executory contract

38 CE DIGEST

CHAPTER ONE Review Quiz

7. Under the Statute of Limitations, the time limitation to initiate a court action involving a real

estate contract is:

a) Two years

b) Three years

c) 4 years

d) 5 years

8. An act that must be performed or an event that must occur before a real estate agreement

becomes binding and enforceable between the parties is known as a:

a) Condition precedent

b) Condition concurrent

c) Condition subsequent

d) None of the above

9. In a real estate contract, which of the following may be used to resolve a dispute between

the parties?

a) Mediation

b) Arbitration

c) A lawsuit

d) Any of the above

10. All of the following are considered to be an advantage of using arbitration instead of judicial

litigation to settle a real estate dispute except:

a) It is private

b) It is more formal than a lawsuit

c) It is faster

d) It is less costly

Chapter Index

CE DIGEST 39

CHAPTER 2

AGENCY & THE LISTING CONTRACT

A listing contract is an employment contract in which an owner of real property is

employing a broker to procure a purchaser for the owner’s property under the terms of

authority set forth in the listing contract. It is a personal service contract between a seller

and the broker. The agreement must be in writing to be enforceable in a court of law. It

must be signed by the owner and indicate the intent of the owner to employ the broker for

the purpose of achieving a sale of the property. Since it is a personal service contract, the

death of either the seller or the broker will terminate the listing contract.

The listing contract is generally the written agreement between a seller and real estate

broker that creates the agency relationship. It is an express agency. The agent holding the

listing is bound by the rules of law applying to the agency relationship and owes certain

obligations to the principal. A broker, who is performing his or her services under a written

listing contract, has two sets of responsibilities. There are the responsibilities and legal

obligations set forth in the terms and provisions of the listing contract. And, there are the

fiduciary responsibilities created by the agency relationship established as a result of the

written listing agreement. If the listing contract is unenforceable, the broker cannot be held

liable for failing to fulfill the broker’s contractual obligations. However, even if the contract

is unenforceable, the broker may be held liable for a failure to meet his or her fiduciary

duties imposed by the agency relationship.

LOYALTY AS A FIDUCIARY

A real estate agent owes a loyalty to the agent’s principal and is prohibited from

personally profiting by virtue of the agency. The exception, of course, is the receipt of the

agreed upon compensation for the services rendered by the agent. The fiduciary obligation

of the agent to his or her client throughout their dealings is probably the most significant

aspect of their relationship. The courts have consistently equated the duty of an agent to a

principal to the duty owed by a trustee to a beneficiary.

A trustee may not obtain any type of advantage over the beneficiary by the slightest

misrepresentation, concealment, duress, or adverse pressure of any kind. The courts gener-

ally apply this same concept to the relationship of a real estate agent to his or her principal.

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Real estate brokers and salespersons are considered by law to be fiduciaries. They

have a duty to act primarily for the principal's benefit and not their own. A fiduciary must

act with the highest degree of care and good faith in relations with the principal and on the

principal's business.

The act of an agent, within the scope of the agent’s authority, is the act of the

principal. In exercising that authority, the agent is dealing with real property that is of

considerable value 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 agent in relations with the principal is

bound by law to exercise the utmost good faith, loyalty, and honesty.

********************************************************************

CASE HISTORY

TIMMSEN V. FOREST E. OLSON, INC. (1970) 6 C.A. 3d 860

In this case, the sellers of real property sued the broker who handled the sale of their

property for breach of a real estate broker's fiduciary obligation to a principal. The plaintiffs

(Timmsen) owned a residence in Van Nuys, California. They were inexperienced and

unsophisticated in business dealings especially in real estate.

Timmsen listed his house for sale after discussing the property with one of the

broker’s salespeople at a branch office of the broker. The salesperson prepared a listing

agreement which included a commitment by the seller “to subordination” on the sale of the

property. Neither the seller nor the salesperson knew the meaning of the term.

Another salesperson for the broker learned of the listing and contacted a builder to

advise him of the terms of the listing “since the terms would be very favorable to someone

in the builder’s position.” The builder inspected the property and submitted an offer to buy

the property for $47,500 and that his purchase money encumbrance would be subordinated

to any construction loan placed on the property as long as it did not exceed $300,000. The

offer was also subject to the buyer getting the property rezoned and approval of a title

report. The broker’s salesperson exercised no judgment concerning the terms inserted by

the builder, thus failed to do anything on behalf of the client.

Instead of thinking about the offer from the standpoint of their client, the broker’s

sales representatives merely proceeded to attempt to get the sellers to accept the offer. The

sellers raised doubts about the subordination agreement. These doubts were brushed aside

by the broker’s salespeople who advised the seller since they had signed a listing agreement

that they had no choice but to accept the subordination clause contained in the offer. The

price of $49,500 for the property would have been fair without the subordination. However,

for a sale involving subordination, a reasonable price would have been at least $70,000.

CE DIGEST 41

An escrow was opened. Later, the sellers refused to sign the escrow instructions

since they had been advised that the subordination provisions of the agreement were unjust

and unfair. The builder sued the sellers for specific performance. The courts ruled in favor

of the buyer. The sellers made a cash settlement with the buyer for $7,500. The sellers then

sued the real estate broker and his agents for breach of fiduciary obligations owed by

brokers and agents to sellers as their principals. The trial court granted a nonsuit against the

sellers and the sellers appealed. The appeals court reversed the trial court’s decision in

favor of the sellers. The appeals court summarized the facts of the case in this light:

The sellers in this case were unsophisticated in real estate transactions.

The defendants in the case were experienced real estate salespeople and

brokers.

The defendants inserted in the listing agreement a subordination provision and

advised the plaintiffs incorrectly as to its meaning.

The defendants procured an offer that was financially unsound to plaintiffs'

interest and misrepresented to plaintiffs that they were obligated to accept it.

That when plaintiffs refused to accept the offer, defendants obtained plaintiffs'

consent to a counteroffer that was also financially unsound to their interests.

That defendants orally obtained the buyer’s approval of the counter-offer and

signed the buyer’s name on it making it unenforceable under the Statute of

Frauds.

That defendants knew that plaintiffs did not want to consummate the

transaction, knew the contract was unenforceable, and did not disclose such

facts to plaintiffs. In addition to attempting to force them to proceed ahead with

the sale by telling them they would lose at least $5,000 if they failed to com-

plete the sale.

That defendants failed to take into account the interests and obligations owing

their principals but acted solely for their own selfish interest and not the

interests of the purchaser.

That as a result of this misconduct, plaintiffs suffered damages in attempting to

avoid the sale.

The findings of the court in the Timmsen v. Forest E. Olson, Inc. case, related above,

set forth several points of key significance to all licensees:

The relationship between a broker and his principal is fiduciary in nature and

imposes upon the broker the duty of acting in the highest good faith toward his

principal. The duty of good faith precludes the broker from assuming a position

adverse to that of his principal unless the principal consents. Moreover, it

places upon the broker a legal obligation to disclose to his principal all the facts

within his or her knowledge which are material to the matter in connection with

which the agent is employed.

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When the acts of an agent have been questioned by his principal and the

fiduciary relationship has been established, the burden is cast upon the agent to

prove that he acted with the utmost good faith toward his principal and that he

make a full disclosure prior to the transaction of all the facts relating to the

transaction under attack.

An agent who violates his duty to use reasonable care, skill and diligence is

liable for any losses which his principal may sustain as the result of his

negligence or breach of duty.

*****************************************************

DUTIES OWED TO PRINCIPAL

The basic duties owed by a real estate agent to his or her principal when entering into

the agency relationship created by the written listing agreement are:

Duty to Use Reasonable Care and Skill

Full Disclosure of All Material Facts

Loyalty and Confidentiality

Duty of Utmost Good Faith

Duty to Obey

These duties represent legal obligations imposed by the law that set the level of

performance that is expected of real estate licensees. They set the standards on which the

behavior of real estate licensees is judged in their real estate activities. A breach of these

duties may give rise to disciplinary measures brought by the Real Estate Commissioner,

lawsuits for damages by injured parties, or a real estate board’s ethical procedures if the

licensee is a member of a local board.

DUTY TO USE REASONABLE CARE AND SKILL

Real estate licensees, by virtue of the licensing and continuing education training

required by law, are regarded as professionals by the general public as well as by the courts.

They are expected to possess a higher level of knowledge and a higher degree of compe-

tence in real estate dealings than the general public. The standards of reasonable care and

skill the courts use in judging a licensee’s actions are those that should be expected when

compared to the knowledge and competence exhibited by competent licensees engaged in

the real estate business.

For example, in the Timmsen v. Forest E. Olson, Inc. case discussed previously, the

salesperson prepared a listing agreement for the sellers that included a commitment by the

sellers “to subordinate” in the sale of their property. The meaning of the term “to subordi-

nate,” within the context of a real estate transaction, was not known to the sellers.

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Unfortunately, for the principals, the real estate agent handling their transaction was also

unaware of the meaning of the term and the consequences to the sellers in committing to do

so in the sale of their home.

The action of the sales agent in allowing his client to make this commitment repre-

sents a breach of the duty of reasonable care and skill. While this term is not generally

known or understood by the general public, a competent practitioner of real estate should

most certainly know the implications of subordination. And, most certainly is not acting in

the best interests of his or her principal by allowing them to commit to do so without

making a full disclosure of the implications of making this type of commitment.

************************************************

CASE HISTORY

SANTOS v. WING 1961 C.A. 2d 678

Santos owned 100% of the stock of the Woodland Avenue Corporation, whose sole

asset was an apartment house in Menlo Park, California. Santos gave a listing for the sale of

the apartment building to a broker named Carl Horvitz. After the listing, Santos received

several offers through Horvitz to exchange the property but no offers to buy the property.

After the property had been on the market for awhile, Horvitz and Wing, who was a

salesperson for Horvitz, made an offer to jointly purchase the property. When the sales

agreement was executed, it included an acknowledgment clause to the effect that the seller

was aware of the fact that both the prospective buyers held real estate licenses. The offer

was made as an offer for the outright purchase of the property. No mention was made of

exchanging the property. In addition, at the time of the signing of the final documents,

evidence existed that Santos had an attorney and there was also evidence that Santos had

previously been advised in tax matters by an accounting firm.

About 15 months after the sale, it was discovered that Santos had a tax liability of

$16,000. The tax liability could have been avoided if the sale had been made in the form of

the sale of all the stock in the corporation that owned the property to the buyers rather than

the corporation selling the property outright to the buyers.

Santos sued to have the sale overturned and for a reconveyance of the property back

to him. Santos charged the defendants with a failure to exercise the care and skill standard

in the locality for the kind of work the defendants were expected to perform. Santos

charged that the defendants owed him a duty to fairly investigate and give him preliminary

advice on the method by which this transaction should be carried out from a tax liability

standpoint. The trial court ruled in favor of the defendants, Horvitz and Wing, and found

that there was no violation of any fiduciary relationship on the part of the defendants.

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Santos appealed. The appeals court found that there was ample evidence to support

the trial court’s findings and affirmed its judgment. The appeals court ruled that there was

no evidence suggesting that the broker, or his salesperson, had any knowledge of the appel-

lant’s tax situation. There was no evidence showing that the respondents tried to give

Santos any tax advice. On the contrary, the evidence supported the fact that they urged

Santos to seek expert advice. Also, that Santos did have both an attorney and an accountant

to give him advice.

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All licensees are held to a standard of reasonable skill in their real estate activities. A

licensee, however, who claims to be an expert in a specific area is held to a much higher

standard. As an example, a licensee who performs a comparative market analysis to help a

seller arrive at a realistic listing price is quite a different situation than a licensee claiming to

be an “expert appraiser” and, attempting to appraise a “special purpose property.”

CASE EXAMPLE A prospective seller tells a real estate agent that she wishes to dispose of a 40 unit

apartment complex that she owns in Torrance, California. She also states that she wishes to

enter into an exchange for a larger income producing property in order to defer as much of

the taxable gain as possible. The real estate agent has sold only a few residential properties

in her career and has no in-depth knowledge of current tax laws or of the tax ramifications

of a real estate exchange.

The agent, however, informs the seller that it should be easy to exchange the property

and that she, in fact, has experience in structuring exchanges designed to minimize the tax

due at the time of the exchange. It would be highly unethical for the agent to enter into such

a complex transaction involving both legal and tax consequences and represent herself as a

“specialist” unless, of course, the licensee has had specialized training in this area.

As a matter of course, licensees should make it a practice to suggest that clients seek

expert advise in areas such as law, appraisal, tax matters, or other specialized fields, where

the client has a significant problem in a particular area and the licensee cannot give his

client reasonably accurate or authoritative advice. A licensee most certainly can give an

opinion to his client. However, in areas that might have a significant legal or tax effect on a

transaction, a licensee would be well advised to also suggest the client seek professional

help in the specific areas being questioned.

FULL DISCLOSURE OF ALL MATERIAL FACTS

In a fiduciary relationship, it is a paramount duty of an agent to make a full disclo-

sure of all material facts relating to the agency to his or her principal. The agent must

CE DIGEST 45

disclose any information that might influence the principal's decision to sell or not to sell.

This would include such material items as:

The sale price the property could bring

The possibility of a higher sales price

The tax consequences of a sale vs. an exchange

All offers received by the agent

The form of the down payment (Cash, check, promissory note etc.)

Any relationship (family or business) that the agent may have with either the

buyer or the seller

Buyer’s financial condition

Any property defects discovered by agent’s inspection

Any profits gained by an agent as a result of the agency relationships that are not

known to the principal

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CASE HISTORY

DE ST. GERMAIN v. WATSON (1950) 95 C.A. 2d 862

In 1948, a broker named De St. Germain, spoke to a Mr. Zimmerman about selling a

portion of Zimmerman’s property for him. Zimmerman entered into an oral agreement with

De St. Germain that the broker could look for buyers for the property. A short time later,

the seller received a call from the broker stating that he had found a buyer for the property.

De St. Germain, presented a deposit receipt signed by the buyer which stated that a

$1,000 deposit had been received with the offer. Nothing was said regarding the deposit

which, in fact, was a non-negotiable promissory note. The broker did not inform the seller

of this fact and the seller signed the contract. The seller later testified that he would not

have signed the contract had he known the deposit was a promissory note.

The buyer later backed out of the transaction. The seller, before he was made aware

of this fact, received calls from other persons about the property but turned them down on

the assumption the place was sold.

The broker’s license was suspended by the Real Estate Commissioner for a 15 day

period. An appeals court later stated that while the broker did not intend to mislead the

seller nor did he act in a fraudulent or dishonest manner, his acceptance of a promissory

note without a disclosure to the seller still violated the spirit and letter of the real estate law.

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OBEDIENCE, LOYALTY, & CONFIDENTIALTY

A real estate agent, who is acting in the role of a fiduciary, has been entrusted with

the confidence of the principal. The agent is bound to act in good faith and with due regard

to the interests of the principal. As a fiduciary, a real estate agent is under an obligation to

46 CE DIGEST

give diligent and faithful service to his or her principal and to obey all legal instructions of

the principal. The duty of diligence requires the agent to make a reasonable effort to help

the principal reach the goals of the agency. A real estate broker must perform as promised

in the listing contract. Real estate brokers and salespersons can be held liable for any loss

caused by the failure to obey the principal’s instructions. A principal may terminate the

agency relationship if a broker, who promises to “use due diligence” and make a reasonable

effort to promote the sale of the property and find a buyer, fails to do so.

The agent must put the principal’s interest above all others including the agent’s own

interests. A principal will often disclose confidential information to his fiduciary. An agent

is duty bound to respect this confidentiality and remain, at all times, loyal to the principal.

An agent in a fiduciary relationship must not disclose confidential information to others or

take advantage of it himself. An agent of the seller, who informs a prospective buyer that

the seller would probably take less than the listed price, is in breach of his fiduciary duty

unless he has the consent of the principal to do so.

AGENT’S AUTHORITY

The Civil Code provides that every agent has the authority:

To do everything necessary, or proper, or usual in the ordinary course of

business, for effecting the purpose of the agency;

To make representations as to facts involved in the transaction in which the agent

is engaged.

The authority of an agent may be actual or ostensible. 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. Ostensible authority is

that authority a principal intentionally, or by want of ordinary care, causes third persons to

believe that the agent possesses.

The principal is liable to persons who have sustained injury through a reasonable and

prudent reliance upon the ostensible authority of an agent. The act or declaration of the

agent can never alone establish ostensible 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.

When a principal executes and entrusts to the agent a negotiable or non-negotiable

instrument containing blanks and the agent fills them in, the principal will be bound to third

persons who rely upon the instruments even though the agent was not authorized to

complete the documents.

CE DIGEST 47

RESTRICTIONS ON AUTHORITY

An agent, who is given the power to sell and convey real property for a principal,

also has the power to convey the usual promises of warranty unless there are express

restrictions in this regard in the listing agreement with the principal. The Civil Code

expressly states that 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 is dealing to be fraud

upon the principal. An agent has no authority to act in the agent’s own name unless it is

specifically authorized and is in the usual course of business for the agent to do so.

An agency relationship created by a listing agreement does not carry with it the

authority to modify or cancel a purchase agreement after it has been made. The authority

given to an agent by the listing agreement ordinarily gives the agent the authority to find a

purchaser but does not authorize the agent to enter into a contract to convey the title on

behalf of a principal. Unless otherwise specified, the authority to sell only permits a sale for

monies and an agent is not authorized to accept goods instead of money funds.

An agent, who has authority to collect money, may endorse a negotiable instrument

received in payment only where it is necessary for the performance of the agent’s duty.

Where an agent is expressly authorized to collect money, the agent may accept a valid check

and the agent’s receipt of the check will be considered payment to the principal. An agent,

who negotiates a loan on behalf of a lender/principal, ordinarily has no authority to collect

from the borrower except in those instances where the agent has possession of the security

and the borrower has knowledge of this fact.

RATIFICATION OF UNAUTHORIZED ACTS

Occasionally, a person may act as an agent without any authority to do so; or, a true

agent may act beyond the scope of the agent’s authority. The alleged principal is not bound

by such acts. However, a principal may, under certain circumstances, ratify the acts of the

agent and become bound. For this to happen the principal must intend to ratify and the

following have to occur:

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

The agent must have been capable of authorizing the act both at the time of the

act and at the time of ratification;

The principal must have knowledge of all the material facts;

The principal must ratify the entire act of the agent and accept the burdens with

the benefits;

The principal must ratify before the third party withdraws.

48 CE DIGEST

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.

If the principal's ignorance of the facts arises from the principal’s own failure to

investigate, and the circumstances are such as to raise a question in the mind of a reasonable

person, 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. In transactions involving real property, the ratification

must be in writing.

DUTY TO DETERMINE SCOPE OF AGENT’S AUTHORITY

No liability is incurred by the principal for acts of an agent that are 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 determine its 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.

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.

AUTHORITY TO RECEIVE DEPOSITS

Virtually all listing agreements now 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 subagents of the seller. The authority, however, would not apply to a broker who

is acting only as an agent of the buyer.

Except for a check to be held uncashed until acceptance of the offer, a broker may

legally only do three things with deposits received by the broker. They are:

Place the funds accepted on behalf of the seller into the seller's hands

Place the funds into a neutral escrow depository, or

Place the funds into a trust fund account in the name of the broker as trustee at a

bank or other financial institution.

CE DIGEST 49

Whichever of these actions is selected, it must be performed not later than three

business days following receipt of the funds by the broker or the broker's salesperson.

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 a deed evidencing

good title into escrow, the deposit becomes the seller's property when the deed is put in

escrow. Similarly, money received by seller's agent under a deposit receipt with a valid

liquidated damages clause is generally not recoverable by the buyer if the buyer breaches

the contract.

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. In general, the broker

may not return the funds to the buyer without the consent of the seller.

CHECKS AND PROMISSORY NOTES

A broker who accepts a check or promissory note as an earnest money deposit must

make a full disclosure to the seller. If a buyer has given a check to the broker as an earnest

money deposit with written instruction to hold 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.

During the time between receipt of the check by the broker and acceptance of the

purchase offer by the seller, the broker must record receipt of the check on broker's trust

fund records and hold the check in a safe place. Also, 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 create confusion in the

mind of the seller as to the form of earnest money deposit received without adequate

disclosure to the seller.

While checks are universally accepted as equivalent to cash 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 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

as the note requires and failure to pay is generally not a crime.

A broker violates the Real Estate Law if he or she directly or by implication

misrepresents to his or her principal that a purchaser has given cash or a check as an earnest

money deposit when, in fact, the broker has accepted a non-negotiable promissory note.

50 CE DIGEST

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REGULATIONS OF THE REAL ESTATE COMMISSIONER

Section 2832 - Trust Fund Handling

(a) Compliance with Section 10145 of the Real Estate Law requires that the broker place

funds accepted on behalf of another into the hands of the owner of the funds, into a neutral

escrow depository, or into a trust fund account in the name of the broker as trustee at a bank

or other financial institution not later than three business days following receipt of the

funds by the broker or by the broker's salesperson.

(b) Except as expressly provided by subdivision (d) of Section 10145 of the Code or by a

regulation in this article, the account into which the trust funds are deposited shall not be an

interest bearing account for which prior written notice can by law or regulation be required

by the financial institution as a condition to the withdrawal of funds.

(c) A check received from the offeror may be held uncashed by the broker until acceptance

of the offer if:

The check by its terms is not negotiable by the broker or if the offeror has given

written instructions that the check shall not be deposited nor cashed until

acceptance of the offer and

The offeree is informed that the check is being so held before or at the time the

offer is presented for acceptance

(d) In these circumstances, if the offeror's check was held by the broker in accordance with

subdivision (c) until acceptance of the offer, the check shall be placed into a neutral escrow

depository or the trust fund account, or into the hands of the offeree if offeror and offeree

expressly so provide in writing, not later than three business days following acceptance of

the offer unless the broker receives written authorization from the offeree to continue to

hold the check.

(e) Notwithstanding the provisions of subdivisions (a) and (d), a real estate broker who is

not licensed under the Escrow Law (Section 17000 et seq., of the Financial Code) when

acting in the capacity of an escrow holder in a real estate purchase and sale, exchange, or

loan transaction in which the broker is performing acts for which a real estate license is

required shall place all funds accepted on behalf of another into the hands of the owner of

the funds, into a neutral escrow depository or into a trust fund account in the name of the

broker as trustee at a bank or other financial institution not later than three business days

following receipt of the funds by the broker or by the broker's salesperson.

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ESCROW

When a buyer deposits earnest money directly into a neutral escrow depository, the

delivery is conditional. A case could be made that the buyer retains title to the money until

the conditions have been performed. However, the escrow holder will generally not return

CE DIGEST 51

the earnest money deposit to the buyer without obtaining approval from the seller. If a

transaction does not close as agreed, it is the obligation of buyer and seller to insure that all

funds deposited into escrow are given to the person who is entitled to the money.

If the buyer and seller are unable to resolve a dispute regarding an earnest money

deposit, the escrow holder may file an interpleader action seeking declaratory relief from the

court. If the buyer and seller perform as agreed, the escrow holder becomes the agent of the

seller as to the purchase money and the agent of the buyer as to the deed. At closing, the

escrow holder delivers the money to the seller and the deed to the buyer.

COURT ACTION TO RECOVER DEPOSIT

A real estate broker may be named as a defendant in a lawsuit for recovery of money

the broker is holding as a trustee in a transaction. If the only relief sought against the

defendants is payment of a stated amount of money, the defendant may, after notice to the

other parties, apply to the court for an order of discharge from liability and dismissal from

the action. This is known as an interpleader action. The defendant broker must deposit the

money in dispute with the clerk of the court. The court may then dismiss the suit as to the

broker. A 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 and

deposit the fund with the court. The pleading would allege that the holder has no interest in

the fund, and it would require the other parties to litigate their claims.

COMMINGLING

The agent who places a client’s money in the agent’s personal bank account is guilty

of commingling and creates a risk of having it attached for personal claims against the

agent. Consequently, real estate licensees are required by law to place all funds received on

behalf of principals in a special trust account unless they place the funds into an escrow or

deliver them to the principal. The broker must deposit checks for collection within three

business days following their receipt. If the broker fails to do so, the broker is liable to

disciplinary action by the commissioner. A salesperson should immediately deliver all

deposits into the hands of or into the control of the salesperson’s broker.

SALESPERSON’S DUTIES AND OBLIGATIONS

A real estate salesperson, to the same extent as the salesperson’s broker, is subject to

the obligations arising out of the fiduciary relationship between the broker and the broker’s

principal. The salesperson is the agent of the broker and is employed to carry on licensed

activities on behalf of the broker. In performing these acts for which a license is required,

the salesperson must disclose to the broker’s principal all of the information the salesperson

has which may affect the principal’s decision in a transaction involving the principal. A

failure on the part of the salesperson to fulfill this obligation could result in disciplinary

action against a salesperson’s license.

52 CE DIGEST

Moreover, the broker could be held liable for damages to the principal for acts and

omissions of the salesperson. Since the broker may be subject to administrative disciplinary

action of civil liability for the acts of the broker’s salespersons, the broker should take

particular care in instructing his or her salespeople on their duties and obligations to the

broker’s principal. The salespersons should also exercise the greatest care in carrying out

these instructions given by the broker in dealing with the broker’s clients.

A real estate salesperson is also subject to the prohibitions of the Real Estate Law

against dual agency, secret profits, and other acts and omissions, which violate an agent’s

duties to the agent’s principal. Since a broker has a statutory duty to exercise reasonable

supervision over the activities of salespeople licensed to him, it is quite possible for a broker

to be disciplined for the acts and omissions of the broker’s salespeople that are in violation

of the provisions of the Real Estate Law even if the broker was not aware that these acts had

taken place.

It should be noted that the duty of the qualifying broker, under a corporate license, to

supervise salespeople is a duty owed to the corporation. In the California Appellate Court

case of Walters v. Marler (1978) C.A. 3d 83, a salesperson, who had not been appointed as

a subagent by the qualifying broker, breached the duty to disclose to the purchaser all

material facts affecting the purchaser’s decision. The court held that when a salesperson,

who is an agent for a buyer, breaches such a duty, the qualifying broker’s duty to supervise

does not make the broker individually liable to the purchaser. The broker’s actions are

considered the actions of the corporation.

DUTIES OF AGENT TO THIRD PARTIES

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 acts. When the agent acts without authority,

or in excess of the agent’s given authority, the agent may be held liable for resulting

damages for having breached agent’s implied warranty of authority.

While the agent warrants the agent’s own authority, the agent does not impliedly

guarantee the principal’s capacity to contract. The agent is not liable, therefore if the prin-

cipal is incapable of contracting through incompetency, such as a minor or one who has

been judged to be mentally incompetent, unless the agent has expressly warranted capacity

or fraudulently concealed the fact of incapacity. To protect himself 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 principals and does not

warrant it.

CE DIGEST 53

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 on the contract. If however, there is lack of

authority on the part of the agent and the lack of good faith belief on the agent’s part that the

agent possesses the authority, the agent is liable on the contract as a principal.

The agent is also personally liable on 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 on 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 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 for that of the

principal. By signing the contract in this manner, the agent is virtually assured that he or

she will not be held liable on the contract since the fact of agency and the name of the prin-

cipal are disclosed.

ON TORTS

Torts are private wrongs committed upon the person or property of another and aris-

ing from a breach of duty created by law rather than contract. An agent is always 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 a

tort to the third party who relies on the representation to the third party’s detriment.

Real estate agents, by the very nature of their business, are constantly making

representations to prospects concerning the property being offered for sale. A representa-

tion may be merely an expression of opinion or "puffing" on the part of the agent. But, on

the other hand, it may be reasonably understood by both the agent and prospective purchaser

to be a representation of fact and 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 agent. The same may be said with respect to a failure on the part of

the agent to disclose material facts about the property to the prospective purchaser. In addi-

tion to incurring liability for damages to the purchaser, an agent may also be subject

to disciplinary action against the agent’s license for overt misrepresentations or for failure to disclose material facts.

54 CE DIGEST

MISREPRESENTATIONS

A misrepresentation to the prospective buyer of the lowest price acceptable to the

owner is not usually actionable because it is not a representation of a material fact. The

owner has a right to obtain the best price available and has hired the agent to achieve this

goal.

Statements, incorporated into the contract, are often in the form of promises

comprising part of the consideration extending from the owner to the purchaser. If such a

representation is made in good faith, the fact that it is untrue will ordinarily not render the

owner or owner’s agent liable in tort. An untrue representation, which is a material

ingredient of the contract, however, could lead to a court action for rescission or damages by

the purchaser. The same holds true with respect to mutual mistakes of fact resulting from

representations made by the agent. The mutual mistake may be the basis for a rescission of

the contract, but neither the agent nor the principal would ordinarily be liable in tort to the

buyer.

FRAUD VS. 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 misrepresenta-

tions. The agent may also be subject to disciplinary action against the agent’s license. The

owner may be vicariously liable in damages for the agent’s misrepresentations even where

the owner was not the source of the erroneous information conveyed by the 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 even

if the person believes it to be true. Constructive fraud is defined as “a breach of duty, as by

a person in a fiduciary capacity, without any fraudulent intent, which gains an advantage to

the fiduciary by misleading the other person.”

There is a fine line that separates a misrepresentation as to whether it is fraud or

negligence. If a statement is found by a court to be fraudulent, punitive damages can be

awarded against the person making the misrepresentation. If a fraud judgment is against a

real estate licensee, disciplinary action may be taken against the licensee based solely on the

civil judgment. If a licensee’s misrepresentation is found to be no more than negligence, a

case against the licensee would be conducted at an administrative level where the level of

proof required is substantially less than required in a civil suit.

NONDISCLOSURES

Civil liability of a real estate licensee for misrepresentation, and the possibility of

disciplinary action against the licensee, may arise from a licensee’s failure to disclose as

well as actual misrepresentation. In a situation where a licensee has knowledge of material

CE DIGEST 55

facts, which the licensee does not convey to a prospective buyer while knowing that the

buyer does not have the same information, the liability for silence may be imposed.

Cases involving a duty of disclosure usually involve the concealment of latent defects

in the property by the seller. These cases have held that the agent of the seller, as well as the

seller, has a duty to disclose facts materially affecting the value of the property if the agent

knows that the buyer is unaware of these facts and they are not within the buyer’s diligent

attention. The courts have sometimes referred to such non-disclosures, as in the case of

Easton v. Strassburger, as negative fraud.

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CASE HISTORY

SHAPIRO v. SUTHERLAND (1998) 64 Cal. App. 4th 1534

The Sutherlands had lived in a home in Burbank, California for fifteen years. David

Sutherland worked for IBM. IBM had an established employee relocation policy to assist

employees who might be transferred to different parts of the country for a company move.

In those cases where a transferred employee was unable to effect a timely sale of his or her

current residence prior to moving, the relocation policy involved a relocation company

(Prudential) who would step in and buy the property. The purchase price of the sale was

based on a price established by three independent appraisals of the property.

In 1992, David Sutherland accepted a promotional transfer to an IBM facility in the

State of Washington. Since the Sutherlands were unable to conclude a satisfactory sale of

their home, they entered into a home purchase agreement with Prudential. Under the terms

of that agreement, Prudential paid the Sutherlands $349,000. The Sutherlands then pro-

ceeded to move to Washington. However, it was several weeks after the move before all the

relevant legal documents in this transaction were received from Prudential. The Sutherlands

executed the documents and returned them to Prudential along with a Transfer Disclosure

form.

The TDS form included a question which asked "Are you aware of any

Neighborhood noise problems or other nuisances." The Sutherlands checked the "No" box

and they both signed the form right below the printed certification that the "information

herein is true and correct to the best of (their) knowledge as of the date signed by (them).

This express representation was allegedly false and untrue. The record reflects

without dispute that the Sutherlands' next-door neighbors were, over a period of years, a

source of disturbing noises and commotion. Loud arguments and late night music has

caused the Sutherlands to call the police on a number of occasions.

Prudential, however, did not know of these matters. It had physical control of the

Sutherland home at all times after the Sutherlands had vacated it in July of 1992, but the

home remained unoccupied. Prudential attempted to resell the Sutherland home but were

unable to do so for several months. After a number of months trying to sell the home,

56 CE DIGEST

Prudential sold the home to Shapiro for $250,000 which was $99,000 less than Prudential

had paid the Sutherlands.

Shortly after moving in, Shapiro discovered the loud noises and disturbances being created

by their neighbors next door. Since he was unable to resolve these problems, Shapiro sub-

mitted a notice of rescission to the Sutherlands and Prudential. The Sutherlands either

rejected or ignored Shapiro's rescission. Shapiro then filed a court action alleging fraudu-

lent misrepresentation, fraudulent concealment, and negligent misrepresentation. The

Sutherlands responded by filing a motion for summary judgment on Shapiro claiming that

they were not the parties who had sold the property to Shapiro and they had no contractural

relationship with him. Prudential also asked for a summary judgment pointing out that they

had no knowledge of a noisy neighbor problem or the Sutherlands' alleged misrepresenta-

tion of this fact. The trial court agreed with both Sutherland and Prudential and entered a

judgment in favor of the defendants. Shapiro then appealed.

The appeals court considered the matter and reviewed the many legal aspects at issue

in this particular case. At the end of their deliberations they reversed the trial court's

summary judgments in favor of both Sutherland and Prudential and remanded the case back

to the trial court for further proceedings with the views expressed in the appeals court's

opinions.

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PUFFING

Even in a situation where a licensee honestly believes that representations to the pro-

spective buyer are nothing more than “sales talk” or “puffing” a problem may arise. This

could occur if the impression made upon the buyer is that the representation is one of fact.

At one point in time, if an agent made statements like "best on the street" or that the buyer

"will receive outstanding profits from the buyer's investment" were mostly considered to be

mere expressions of opinion.

In more recent years, however, there appears to be a growing tendency on the part of

the courts to treat such statements as representations of material fact. The court’s thinking is

that buyers, with very little expertise and sophistication, tend to rely upon such statements

and to purchase property as a result of this reliance. A statement by a licensee that a house

was “in perfect shape,” while obviously not literally true, has been described as a represen-

tation of a material fact by an appellate court considering the question.

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.

They order title 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 the broker or broker’s salesperson has

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earned a commission when he or she has produced an offer from a person who is ready,

willing, and able to purchase.

If the broker undertakes to aid the buyer in processing a loan application and does not

charge the buyer for that service, the broker is the gratuitous agent of the buyer for the

purpose of obtaining 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

injury as a result of this negligence.

TORTS OF THE PRINCIPAL

An agent is always personally liable for the torts which the agent commits regardless

of the liability or absence of liability of the principal. However, the agent cannot be held

liable for torts committed by the principal. For example, if the principal supplies the agent

with false information concerning the property and the agent passes this information along

to a prospective buyer in reasonable reliance upon its truth, the agent is not liable to the

buyer for what amounts to republishing the misrepresentation.

LICENSE REQUIREMENTS

A person must have a real estate broker or salesperson license in order to negotiate

the purchase, sale, or exchange of real property or a business opportunity for another person

for compensation. In order to recover in any action for a real estate commission, the plain-

tiff must allege and prove that the plaintiff was licensed as an active broker or salesperson at

the time of the transaction.

UNLAWFUL PAYMENT OF COMPENSATION

It is unlawful for a licensed real estate broker to compensate another person for any

acts which require a real estate license unless the other person is a licensed broker or sales-

person licensed under the broker employing or compensating him or her. However, a broker

may pay a commission to a broker in another state.

A real estate salesperson may not be employed or accept compensation from any

person other than the broker under whom he or she is, at the time, licensed. Also, it is

unlawful for any licensed real estate salesperson to pay any compensation to any other real

estate licensee except through the broker under whom he is licensed.

The above prohibition against sharing a commission with an unlicensed person

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, a payment of a portion

of a commission by a licensee to a principal in the transaction does not constitute a violation

of Section 10137 of the Real Estate Law. However, if there is a commission rebate to the

buyer in the transaction, this fact must be disclosed by the agent to the seller.

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COMPENSATION - PERFORMANCE REQUIRED

Generally, to be entitled to a commission, the broker must:

(1) Produce a buyer ready, willing, and able to purchase under 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 (meaning the listing). The listing agreement requires

that the broker be the procuring cause of an offer by a buyer who is ready, willing, and able

to purchase on the seller’s listing terms. A ready and willing buyer denotes one who is pre-

pared to enter into a binding unconditional contract. 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 results oriented. The

broker’s right to a commission is in no way dependent upon the amount of work put into

finding a buyer who is ready, willing, and able to purchase and in negotiating a “meeting of

the minds” between the buyer and the seller. By the same token, if the broker expends no

time and effort on behalf of the seller and, yet, is able to produce a “ready, willing, and

able” buyer on terms acceptable to the seller, the broker has earned a commission.

PAYMENT 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.

PERFORMANCE WITHIN TIME LIMIT EARNS COMMISSION

Revocation of a broker’s authorization cannot operate to deprive the broker of the

compensation for damages if, within the time specified, the broker has produced a “ready,

willing, and able” buyer to buy under the terms of the contract. The principal will not be

relieved from liability by a refusal to consummate a sale where the principal’s voluntary act

precludes the possibility of performance on the principal’s part. It has been well established

that a principal cannot discharge an agent who is negotiating with a prospective customer

and then sell the property 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, the contract is binding upon the seller as soon as executed. The

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agent cannot be prevented from earning a commission within the time period of the listing

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 the principal has the power to revoke the agency at any time. But,

if the principal does revoke the listing, the principal breaches the promise under the listing

contract and becomes liable to the broker for payment of a commission.

AGREEMENT BETWEEN BROKERS

An agreement between brokers who are cooperating in the sale of real property for a

commission split is not illegal nor against public policy. This type of an agreement is

construed and enforced the same as other contracts not required to be in writing. In the

case, where a cooperating broker has been the procuring cause of the sale, and the broker’s

services are completed, the broker is 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 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 money specified in the contract. The original broker is liable to the other

broker for the other broker’s portion regardless of what the original broker settles for in the

way of compensation unless the consent of the cooperating 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.

RIGHT OF PRINCIPAL TO SECURE BUYER

In an open listing, if the owner of the property sells the property to a person who has

not been referred to the owner by the broker, it does not violate the listing agreement. Nor,

does it create a commission liability to the broker on the part of the seller. If the open listing

has no termination date, an owner may not attempt to by-pass the broker and try to sell the

property to a buyer with whom the broker has been in contact. In an exclusive agency

listing, where the agency is irrevocable for a fixed time, the owner may, however, sell the

property within the time limit to a person with whom the broker has had no prior

negotiations and not incur a commission liability.

COMMISSION RATE IS NEGOTIABLE

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 of it, its

express terms and conditions bind the party signing the written contract.

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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. Both the listing

agreement and the deposit receipt usually expressly provide for the payment of a

commission to the broker if the owner accepts an offer procured by the broker at a price

which is less than the price specified in the listing agreement.

LISTING AGREEMENT - NO DEPOSIT RECEIPT CONTRACT

A broker has earned a commission when, within the life of the contract, the broker

has brought the buyer and seller together and enabled them to enter into a binding contract.

As stated before, a person 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 that is on the market does not entitle

the broker to a commission. 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 of the transaction. Thus, if the seller and

buyer execute a valid contract, the broker is entitled to a commission even if the sale of the

property is never actually consummated.

SELLER RESPONSIBLE WHEN 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 unen-

forceable contract is entered into through the mistake, inadvertence, or ignorance of the

seller. If the seller undertakes to complete the contract on his or her own, the broker is

discharged from any responsibility and the seller is estopped to deny the broker’s commis-

sion claim on the grounds that the contract is unenforceable.

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BROKER AS PROCURING CAUSE IN OPEN LISTING

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 com-

mission. As soon as a broker has found a customer, it is the broker’s duty to notify the prin-

cipal. 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 rea-

sonable 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 substan-

tially the same terms that the 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.”

INTERFERENCE FROM SELLER UNDER AN 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 effect-

ing 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.

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 the buyer and seller. In order to protect

a right to a commission, the broker should attempt to obtain a separate agreement for the

payment of a commission even if it is a listing that 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 agreement. Where this occurs, a question may arise on the seller’s

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obligation to pay a commission if the sale of the property is not consummated. Whether or

not 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.

Business and Professions Code Section 10147.5 sets out the "Negotiability and

Notice Requirements" for commission agreements. Whichever form agreement (usually

listing) initially establishes, intends to establish or alters terms of a previously estab-

lished right to a compensation by a licensee, must contain specified information as indicated in the following section.

******************************************************

SECTION 10147.5 - REAL ESTATE LAW

NEGOTIABILITY OF REAL ESTATE COMMISSIONS -

NOTICE REQUIREMENT

(a) Any printed or form agreement which initially establishes or is intended to establish, or

alters the terms of any agreement which previously established a right to compensation to be

paid to a real estate licensee for the sale of residential real property containing not more than

four residential units, or for the sale of a mobilehome, shall contain the following statement

in not less than 10-point boldface type immediately preceding any provision of such agree-

ment relating to compensation of the licensee:

NOTICE: The amount or rate of real estate commissions is not fixed by law. They are set

by each broker individually and may be negotiable between the seller and broker.

(b) The amount or rate of compensation shall not be printed in any such agreement.

(c) Nothing in this section shall affect the validity of a transfer of title to real property.

(d) As used in this section, “alters the terms of any agreement which previously established

a right to compensation” means an increase in the rate of compensation, or the amount of

compensation if initially established as a flat fee, from the agreement which previously

established a right to compensation. ***************************************************

BROKER RECOVERY OF COMMISSION

An additional basis for the recovery of compensation by a broker is provided where

the listing is either an exclusive agency or exclusive right to sell. If the broker is prevented

from performing under an exclusive contract as a 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.

TERMINATION OF AGENCY

Ordinarily, an agency may be terminated by the acts of one or both of the parties or

by operation of law. An agency is also terminated by the expiration of its term, extinction

of its subject matter, or the death or incapacity of either principal or agent.

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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. While the principal

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 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.

EFFECT OF TERMINATION

According to Civil Code, Section 2355, notice of termination of an agency relation-

ship must be given to third persons if the agency is terminated as a result of expiration of its

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 in Section 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.

TIMING OF REVOCATION

As a rule, an agent’s authority may be revoked at any time by the principal. The

principal’s termination of the agency relationship by revocation may give a real estate agent

a right to damages for breach of contract. Withdrawal of the property from the market by

the owner prior to expiration of the listing is an example of a de facto revocation that gives

the broker a cause of action for an agreed compensation under a 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 agent on withdrawal of the prop-

erty 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 owner

normally may revoke the listing 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.

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Exclusive listing contracts must contain a definite, specified date of final and

complete termination date. If the listing does not contain a definite termination date, the

listing is unenforceable by the agent.

*********************************************

CASE HISTORY

COLEMAN V. MORA (1968) 263 C.A. 2d 137

On August 4, Mora gave Coleman an exclusive listing to sell his property. The

listing was to expire on December 31st of the same year. On November 25th, Coleman

received a letter from Mora revoking the agency. The revocation of the agency relationship

was based on the fact that during the approximately three and one-half months of the

listing’s existence, Coleman had not produced a single prospect who had made an offer or

even looked at the property. The only visible activity initiated by Coleman was to run an

advertisement that the property was for sale along with a number of other properties.

At the end of October, Mora listed his property with another brokerage on an

exclusive basis. Then on November 25th, as stated above, Mora sent his written revocation

of his agency relationship with Coleman. And, finally, on November 30th, prior to the

expiration of the time period of his original listing with Coleman, Mora accepted an offer

received through his new broker and sold the property. Coleman then sued for his

commission on the basis that since his listing with Mora was an exclusive listing he was

entitled to his commission.

The trial court ruled that Coleman had failed in his duty to make a diligent effort to

find a buyer for the property and that Mora had good cause to revoke their agency

relationship. The court found that in this case that the sole inducing consideration given by

Coleman in the listing agreement was to promise to make a diligent performance of services

in seeking a buyer. Mora’s promise in the listing was to give Coleman an irrevocable

agency and to pay a commission for any sale whether resulting from Coleman’s efforts or

not.

The court found that Coleman did not, as contended, exercise reasonable diligence in

seeking prospects prior to the notice revoking his agency. The court ruled that the

intervening period of over three and one-half months was of sufficient duration to afford

Coleman a reasonable time to show his good faith intention to perform.

The court also stated that a person, who makes a contract with another to perform

services as an agent for him is subject to a duty to act in accordance with that promise. And,

that a principal may discharge an agent before the time fixed in the contract of employment

where the agent fails to perform a material part of the promised service. The trial court’s

findings were later upheld upon appeal.

*********************************************

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EXCLUSIVE LISTINGS

An exclusive listing is a contract in which an owner/seller “hires” one broker on an

exclusive basis to find a buyer for his or her property. The seller agrees to pay the broker a

commission if the broker finds a buyer who is “ready, willing, and able” to buy the property

on terms that are acceptable to the seller. Most real estate listing agreements are written on

an exclusive basis. There are two types of exclusive listings:

Exclusive agency listing

Exclusive right to sell listing

Section 10176 (f) makes it a violation of the Real Estate Law to write an exclusive

listing that does not contain a definite, specified date of final and complete termination. The

failure of an agent to insert a definite termination date on an exclusive listing agreement is

grounds for the suspension or revocation of an agent’s license. If the contract set forth a

definite termination date, but the agent had added verbiage such as, “or until either party

gives a 5 day written notice," the termination date would be considered to be indefinite and

in violation of the law. *************************************************************************8

CASE HISTORY

NYSTROM v. FIRST NATIONAL BANK OF FRESNO (1978) 81 C.A. 3d 759

The facts of this case centered upon the legality of a definite termination date

contained in an exclusive listing. These facts are summarized as follows:

First National Bank initiated foreclosure proceeding on an apartment building when

the owner/borrower defaulted on the bank’s loan. First National then entered into a letter

agreement with Nystrom, a real estate broker, to act on their behalf to collect rents and

obtain renters for the property. For this service, Nystrom was to receive a 5% commission

on the rents collected that was to be paid when the property was sold through the

proceedings of a trustee’s sale or when the default was cured. The agreement further

provided that if the property was sold at the trustee’s sale, the bank would give Nystrom an

exclusive listing to sell the property for a minimum of 90 days. The agreement specified a

6% commission be paid on the sale.

Shortly after the signing of the letter agreement with the bank, Nystrom was advised

by an officer of the bank that the property was going to be “deeded back” to the bank and

that he should proceed to find a buyer for the property. Nystrom found such a buyer and

submitted an offer to the bank. The bank declined to accept the offer. The bank told

Nystrom that the party in possession of the property had refused to give them a deed. And,

that they had obtained the title to the property through a deed in lieu of foreclosure about

three weeks prior to the date the property was to be sold at the trustee’s sale. The bank then

proceeded to sell the property through another broker without notifying Nystrom there had

been any changes.

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A lawsuit followed in which the bank contended that the agreement with Nystrom

regarding the exclusive listing never became operative inasmuch as it was conditioned on

the property being sold through a trustee’s sale that never occurred. The bank also

contended that the exclusive listing agreement was illegal and unenforceable since it did not

contain a definite termination date.

Section 10176 (f) of the Real Estate Law states that it is unlawful for a broker to fail

to include a definite, specified termination date in an exclusive listing The exclusive listing

must be clear as to its date of expiration. The trial court gave a summary judgment to the

bank. Nystrom appealed.

The appeals court reversed the trial court's decision and ruled in favor of Nystrom.

The appeals court summarized that:

The letter agreement had an uncertain beginning date but a definite termination

date and was therefore not illegal or in violation of Section 10176.

The manner of acquisition of title could not make any difference to the parties and

the rights and obligations of the parties were not dependent upon the occurrence of

the trustee’s sale.

*****************************************************

Section 10142 of the Real Estate Law requires that an agent give a copy of the listing

agreement to the owner/seller at the time that the owner’s signature is obtained. The fact

that an agent failed to have an owner/seller sign an exclusive listing does not render the

listing agreement void. It does, however, subject the agent to disciplinary action. Most

listing agreements contain an acknowledgment statement to the effect that the seller has read

and understands the listing agreement and has received a copy of the contract signed by both

the seller and the broker. This statement provides written verification of the receipt of the

listing contract and protects the broker against a later claim by the seller that he or she did

not receive a copy of the document.

EXCLUSIVE AGENCY LISTING

In this type of listing, an owner/seller employs the services of a particular broker to

find a buyer for the owner’s property. If the listing agent or any other agent procures a

buyer who is “ready, willing, and able” to purchase the property on terms that are acceptable

to the seller, the listing broker has earned his or her commission. However, the distin-

guishing feature of an exclusive agency listing is that it allows the owner to retain the right

to sell the property himself during the term of the listing. Should this occur, the owner is

not liable to pay a commission to the listing agent or any other agent.

This type of exclusive listing would generally be used should an owner have several

sales prospects with whom he may have been negotiating prior to entering into the exclusive

listing. The owner, understandably from his point of view, may wish to continue these

CE DIGEST 67

negotiations. From the listing broker’s standpoint, however, an exclusive agency listing

does not afford the broker the complete protection of knowing that should a sale occur

during the listing period for any reason, the broker has earned his or her commission.

The most practical approach to using an exclusive agency listing is to have the owner

list his prospects and then set a time limit for a sale to be consummated. If the owner, sells

to any of the prospects that have been “registered” with the broker during the time frame

established, the owner is not liable to pay a commission. However, once the time period has

expired, this condition is then removed and the listing rolls over into an exclusive right to

sell listing.

EXCLUSIVE RIGHT TO SELL LISTING

The exclusive right to sell listing is the listing form most commonly used by real

estate brokers throughout California. In this type of listing, the owner is legally obligated to

pay a commission to the broker if the property is sold during the listing period by anyone

including the owner. The broker would not have to prove that he was the “procuring cause”

of the sale.

OPEN LISTINGS

An open listing is a written memorandum signed by a seller authorizing a broker to

act as the agent for the sale of a property. It is a non-exclusive listing that may be given to

any number of brokers at the same time. Usually no termination date is given. The first

broker, who finds a buyer that meets the terms of the listing and whose offer is accepted by

the seller, earns the commission.

A sale of the property automatically cancels all open listings given to other brokers

by the seller. The seller does not have to notify other agents that the property has been sold

and is no longer on the market. Should the seller sell the property by himself, he would not

be liable to pay a commission on the sale. The broker who is the “procuring cause" and

consummates the sale is the broker who has legally earned the commission.

NET LISTINGS

In this type of listing, the amount of the commission to be paid to the broker is not set

forth in the terms of the listing. This type of listing usually contains a clause which provides

that the agent may retain as compensation, for the agent’s services, all sums received over

and above a net amount to be received by the owner. Both the exclusive listings and open

listing discussed previously in the text can be “net listings.” This means that both exclusive

and open listings retain their key features as related previously. They are also “net listings”

however, because they have the added distinguishing characteristic of a seller who agrees to

accept a set amount as the sales price of his or her property and agrees that the agent is

entitled to any amount above that set figure.

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Net listings are legal but are rarely used by agents in California. The major reason

for their lack of use in real estate activities is that net listings can easily lead to charges of

misrepresentation and fraud from the agent’s principal. The following account of the facts,

as presented in a past disciplinary hearing before the Real Estate Commissioner, give

evidence to this possibility: The Administrative Law Judge, who presided at the hearing,

found the following facts:

The real estate agent, in this case, obtained a net listing from a seller authorizing the

sale of property. The net listing agreement provided that the seller would receive

$10,000 net from the sale, and that the agent would receive any excess over $10,000

as a commission.

After determining the value of the property, the agent set the price and advertised it

for sale at $13,950.

The agent subsequently received an offer from a buyer to purchase the property for

$12,950.

The agent refused to present the $12,950 offer to the seller by falsely representing

to the buyer that the seller had turned down other offers for that same amount.

Subsequently, the agent received another offer from the same buyer for $13,950 and

began the steps necessary to transfer title to the buyer and to pay the seller the

agreed upon amount of the sales price of $10,000. The agent did not present the

$13,950 offer directly to the seller.

In addition, the agent failed to reveal to the seller the amount of compensation that

he expected to realize from the transaction before the seller signed the documents

relinquishing the title of the property to the buyer. The seller only learned the

amount of the agent’s compensation after title had been transferred to the buyer.

The facts of the case, as determined by the administrative judge indicated a clear

violation of Section 10176 (g) of the Real Estate Law and were grounds for the revocation

or suspension of a real estate license. This provision requires an agent to disclose the

amount of the agent’s compensation in a net listing to the seller prior to or at the time the

principal binds himself or herself to the transaction. An agent must keep in mind that

legally required disclosure requirements apply to agency relationships and all listings

agreements including a net listing.

********************************************************************

SECTION 10176 (G) - REAL ESTATE LAW

(g) The claiming or taking by a licensee of any secret or undisclosed amount of

compensation, commission or profit or the failure of a licensee to reveal to the employer of

such licensee the full amount of such licensee’s compensation, commission or profit under

any agreement authorizing or employing such licensee to do any acts for which a license is

required under this chapter for compensation or commission prior to or coincident with the

signing of an agreement evidencing the meeting of the minds of the contracting parties,

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regardless of the form of such agreement whether evidenced by documents in an escrow or

by any other or different procedure.

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BROKER’S COMMISSION

The compensation clause in an exclusive right to sell listing will be specific and

unequivocal. If this section were left blank, an agent would not be entitled to a commission.

Authorizing an agent to find a buyer for the property does not automatically imply that the

owner will pay a fee if the agent is successful. In a well drafted compensation clause it will

state that the seller agrees to pay a commission to a broker if the broker procures a buyer

during the stated time period, or any written extension, on the terms specified or on any

other terms acceptable to the owner. The clause generally will also state that the broker is

entitled to a commission if:

The property is sold, exchanged, or otherwise transferred during the above

listing period, or any written extension, by Owner, or through any other source

The property is withdrawn from sale, or transferred, conveyed, or leased with-

out the consent of Broker, or made unmarketable by Owner’s voluntary act

during the above listing period.

An agreement to sell or exchange the property is made by Owner within ninety

(90) days after the termination of this agreement to persons with whom Broker

has had negotiations during the listing period; provided that the names of such

persons are submitted in writing to the owner prior to the owner entering into a

new listing agreement with another broker or within five (5) days after the

termination of this Agreement, whichever occurs first. Presentation of a

written offer during the term of the listing constitutes sufficient notice of

such persons.

The amount of the commission on the listing agreement is generally stated as a percentage of the purchase price or a dollar amount.

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CASE HISTORY

FILANTE v. KIKENDALL (1955) 134 C.A. 2d 695

A broker, Filante, entered into a two-month listing agreement with the seller of a

motel, named Kikendall. The asking price for the property was $110,000 and the down

payment was to be $35,000. The broker was to receive a commission of 5% on the first

$50,000 of the selling price and 2% on the balance of the selling price. At the bottom of the

listing agreement, the seller had the broker insert the wording “No sale after May 1, 1952.”

The reason given for the insertion of this statement was that the motel owner wanted the

property sold by May 1, and that if it was not sold by that time that he was going to keep it.

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During the term of the listing, Filante advertised the property and it was shown to a

prospective buyer, Tenenbaum, by Smith, a broker who worked for Filante. Tenenbaum

orally stated that he would buy the property for $100,000. In leaving the property, however,

Tenenbaum noticed that freeway construction was underway nearby to the motel which

gave him some concern about the purchase of the motel. The next day, he left town for a

period of eighteen days.

On May 3rd, Kikendall’s son, who had an ownership interest in the motel, called

Smith and wanted to know what happened with Tenenbaum. He went on to tell Smith to

"Get busy on him" and “We want to close this sale and get it over with.” Smith went to see

Tenenbaum but was unable to do so since he was out of town. He left a card asking

Tenenbaum to contact him upon his return. On May 22, Tenenbaum went to Filante’s office

to discuss the motel with Smith. Smith reassured Tenenbaum that he did not think the

freeway construction would have a negative effect on the motel’s business. Tenenbaum told

Smith that he was not convinced and wanted to investigate the matter further.

At this point in time, which was now beyond the expiration date of the original

listing, Smith went to Kikendall and told him that they had worked hard on the listing, were

still working hard to close the sale with Tenenbaum, and requested the broker be given a

new listing on the property. Kikendall told him that he would have to see his son about a

new listing but told Smith “But in the meantime, you go ahead and work on it.” Thereafter,

Smith went to see Tenenbaum who told him he liked the motel and that he was going to buy

it. The buyer then proceeded to contact the sellers directly and offer to buy the motel for

$98,000. On May 23rd, the seller and buyer executed escrow instructions for the sale and

purchase of the motel for $98,000. The buyers paid $30,000 into escrow at that time. The

escrow was completed on June 9, 1952.

In a court action by the broker to recover his commission, the sellers claimed that no

purchaser was procured by the broker during the term of the original listing at the asked for

price and, therefore, the broker was not entitled to a commission. The seller also argued that

the plaintiff was not the procuring cause of the transaction since the buyer came directly to

them and prevailed upon them to accept $98,000 after the broker’s listing had expired. The

court’s finding concluded that:

A provision in a real estate listing agreement limiting the time for performance by

the agent may be waived orally by the principal; and whether or not there has been

a waiver depends upon the facts and circumstances of the particular case.

Where an owner of real estate, after the time limit in a listing contract within which

a broker was to sell the property had expired, encouraged the broker to continue his

efforts to find a purchaser, and the broker did so with the owner’s knowledge and

approval, with the result that a purchaser was produced to whom the owner sold the

property, the time limit in the contract was waived and the broker was entitled to

his commission.

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BROKER’S SAFETY CLAUSE

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 that 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 and should be entitled to the agreed compensation for his

services. The broker may also protect his or her commission by inserting a “safety clause”

in the listing agreement.

In a "safety clause," a 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

with a list of prospective purchasers with whom the broker has negotiated within a

prescribed number of days after the 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 (Filante v. Kikendall, Page 66). 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 depending on the circumstances of the

situation.

Under the broker’s safety clause there is no protection of the broker’s compensation

if the owner re-lists the property with another licensed real estate broker during the period

that the “safety clause” is effective, provided the employment of another broker is by a valid

listing agreement. A collusive agreement with another broker intended to deprive the

original listing broker of the protective advantages of the “safety clause” is unlawful.

OTHER PROVISIONS

Generally speaking, most listing contracts will also contain clauses covering the

following items:

Lockbox: Authorizes the agent to place a key repository on the listed property.

Owner Obligations and Warranties: Owner agrees to perform certain

obligations and deliver certain items in the course of the transaction such as

allowing broker and cooperating brokers to show the property, not to obstruct the

broker’s performance in any way, provide a signed Transfer Disclosure Statement,

and warrants the accuracy of the property information furnished to the broker.

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Owner’s Instructions and Authorizations: Owner sets forth in this section the

extent of the authority that the owner/seller is giving to the broker in order to assist

the broker to find a buyer for the property. These items would include the placing

of the listing into the local MLS service, place a “For Sale” sign on the property,

and install a lockbox among other things. Also, the owner agrees or disagrees in

this section to obtain a preliminary title report, obtain a structural pest control

report, and provide a home protection plan.

Transfer Disclosure Statement: The listing will require that the seller (unless

exempt) provide a Real Estate Transfer Disclosure Statement (TDS). Normally,

the selling broker will deliver the TDS to the buyer. The listing may hold the bro-

ker harmless if the seller fails to make the proper disclosures.

Equal Housing Opportunity clause: This clause sets forth the intentions of the

parties to the listing contract to act in compliance with both the federal and state

fair housing laws.

Mediation and Arbitration clauses: Most listing agreements contain provisions

that, if initialed by both the broker and the seller, constitute an agreement to refer

all disputes or claims “in law or equity” arising out of the listing or any resulting

transaction to mediation or arbitration.

BUYER’S AGENT LISTING TO LOCATE PROPERTY

Many agents choose to represent buyers only on an exclusive basis to find properties

that are suitable for purchase. Exclusive listing agreements for this type of situation exist

and contain many of the clauses that are similar to the seller/broker agreement discussed in

the preceding pages of this text. An exclusive right to represent listing must be in writing to

be enforceable under the Statute of Frauds. Oral listings are unenforceable. The terms in a

buyer’s listing are very similar to the standard seller listings given to brokers.

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CHAPTER TWO - HIGHLIGHTS

THE LISTING CONTRACT

1. It is a contract of Employment

2. Must be in writing to be enforceable in a court of law

3. Classified as a personal service contract - Death of Seller or Broker terminates the contract

4. Listing contract between seller and broker creates an agency relationship

5. Agent holding listing has TWO sets of responsibilities

a. The legal obligations set forth in the terms of the listing contract, and

b. The fiduciary responsibilities created by the agency relationship

FIDUCIARY RELATIONSHIP - Created by Listing Contract

1. Agent has a duty of loyalty to his or her principal

2. Agent is prohibited from personally profiting as a result of the agency relationship

3. The act of an agent within the scope of the agent's authority, is the act of the

principal

4. As a fiduciary, an agent is legally and morally bound to exercise the utmost good

faith, loyalty, and honesty in dealings with the principal

5 An agent has a legal obligation to disclose to his principal all the facts within his knowledge

which are material to the subject matter of the agency

6, Agent who violates his duty to use reasonable care, skill, and diligence is liable for any losses

that his or her principal may sustain as a result of agent's negligence

AGENT'S AUTHORITY

The Civil Code provides that every agent has the authority:

1. To do everything necessary, or proper, or usual in the ordinary course of business for effecting

the purpose of the agency

2. To make representations as to facts involved in the transaction in which the agent is engaged

AUTHORITY TO RECEIVE DEPOSITS

When scope of authority of licensee is limited to producing a ready, willing, and able buyer on

terms that are acceptable to the seller, a broker has no authority to accept a deposit. In this

circumstance, if agent takes a deposit, agent is acting on behalf of the buyer. Any misappropriation of

funds is buyer's loss

1. Most listing contracts give express authority to agent to accept an earnest money deposit from

buyer. Also applies to subagents

2. Broker must place all funds accepted into one of three places within three business days

following receipt of funds: a) Hands of principal b) Neutral escrow depository (c) Broker's

trust account

AGENT'S RIGHTS

1. To be entitled to a commission, a broker must:

a. Produce a buyer ready, willing, and able to purchase under terms and conditions which are

acceptable to the seller

b. Secure from the prospective buyer a binding contract upon terms and conditions which the

seller subsequently accepts

2. By law, commission rate set between seller and broker must be negotiable

3. Payment of commission may be made dependent upon any lawful condition

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CHAPTER TWO - HIGHLIGHTS

4. Seller may be relieved of obligation to pay commission if pay was contingent on condition that

did not occur

5. Burden is upon broker to establish that he or she earned a commission by fulfilling all of the

conditions of the contract

6. If fulfillment of a condition is prevented by: a) Fraud or bad faith of seller or b) Collusion

between the seller and other parties - broker may recover compensation even if the condition has

not been met

TERMINATION OF AGENCY

1. Agency may be terminated by: a) Acts of one or both of the parties b) Operation of law

c) Expiration of its term d) Extinction of its subject matter

e) Death or incapacity of principal or agent

2. Principal may also revoke agency at any time. However, principal's revocation might give

agent a right to a cause of action for a commission under a listing contract.

TYPES OF LISTINGS

Law requires an agent to give a copy of listing agreement to owner/seller at time seller's signature is

obtained.

1. EXCLUSIVE AGENCY LISTING

a. Seller employs one broker to represent seller on an "exclusive" basis - Broker may, however,

cooperate with sub-agents in sale

b. If property sold during listing period, broker is entitled to a commission. EXCEPTION: If

owner sells on own, without any assistance from broker, seller may not be liable to pay a

commission to the broker.

2. EXCLUSIVE RIGHT TO SELL LISTING

a. Most commonly used listing form in California

b. Owner is legally obligated to pay commission to broker if property sold by anyone during

listing period including the owner

NOTE: All exclusive listing contracts must contain a definite, specified date of final and

complete termination date. If no definite termination date, contract is unenforceable and

agent is subject to disciplinary action by the Real Estate Commissioner.

3. OPEN LISTING

a. A written memorandum authorizing broker to act as agent for the sale of a property

b. A non-exclusive listing that may be given to many brokers at the same time

c. Usually no termination date is given

d. Commission earned by first broker who finds a buyer who meets terms of listing and whose

offer is accepted by seller

e. Sale of property automatically cancels all open listings given to other brokers

4. NET LISTING

a. The amount of the commission to be paid to broker is not set forth in the terms of the listing

b. Usually contains a clause which states broker may retain all monies received above and

beyond the net amount of money seller is to receive as specified by seller in listing contract

c. Legal, but rarely used in California because this type of a listing can easily lead to charges

of misrepresentation and fraud from agent's principal

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CHAPTER TWO Review Quiz

1. Which of the following is a true statement regarding a listing contract?

a) It is an employment contract

b) It is a personal service contract

c) It must be in writing to be enforceable in a court of law

d) All of the above

2. All of the following are true statements regarding an agency relationship except:

a) An agent who violates his duty to use reasonable care is not liable for losses

sustained by the principal as a result of the agent's negligence

b) An agent has a duty to act in the highest good faith toward his principal

c) An agency relationship is fiduciary in nature

d) An agent has a legal obligation to disclose all material facts relating to the subject of

the agency

3. Which of the following would be considered a material fact in a real estate transaction that

might influence a principal's decision to sell?

a) The possibility of a higher sales price

b) The form of the down payment

c) Any property defects discovered by agent's inspection

d) All of the above

4. All of the following statements are true regarding an agent's fiduciary duties of obedience,

loyalty, and confidentiality except:

a) The agent must give diligent and faithful service to his principal

b) A principal may not terminate an agency relationship under any circumstances even

if the agent fails to use due diligence in seeking to obtain the goals of the agency

c) The agent must obey all legal instructions of the principal

d) The agent must put the principal's interest above his own interests

5. Regarding the unlawful payment of commission, which of the following is true?

a) A broker may pay a commission to an unlicensed person

b) A salesperson may directly compensate another salesperson

c) A broker may pay a commission to a broker in another state

d) Both a) and b) above

6. Which of the following listings would require a definite termination date?

a) An exclusive agency listing

b) An exclusive right to sell listing

c) An open listing

d) Both a) and b) above

76 CE DIGEST

CHAPTER TWO Review Quiz

7. The Real Estate Law requires that an agent give a copy of a signed listing agreement to the

seller/owner:

a) At the time of execution

b) Within three business days of its signing

c) Within one month of signing

d) Prior to the signing of a binding sales agreement

8. Johnson gave a listing to Broker Lopez to sell her home. Prior to the expiration of the

listing, Johnson sold the property on her own to a friend with whom she had been

negotiating prior to giving the listing to Lopez. Which of the following is true?

a) If the listing was an exclusive right to sell, Lopez would have to prove that he was

the "procuring cause" to be entitled to a commission

b) If the listing was an open listing, the sale automatically cancels all open listings

given to other brokers

c) If the listing was an exclusive agency listing, Johnson may not be liable to pay a

commission to Lopez

d) Both b) and c) above

9. Regarding an open listing, which of the following is true?

a) It is a non-exclusive listing

b) It may be given to more than one broker at the same time

c) The agent who is the "procuring cause" of the sale is the agent entitled

to a commission

d) All of the above

10 All of the following statements regarding net listings are correct except:

a) Net listings are legal in California but used rarely because they can easily lead to

charges of fraud

b) There is no requirement in the Real Estate Law that requires an agent to disclose the

amount of commission received in a net listing to the seller

c) In a net listing, the broker is entitled to all of that portion of the sales price that

exceeds the set amount the seller agreed to accept in the listing agreement

d) The amount of commission received by the agent must be disclosed to the seller

prior to or at the time the principal binds himself to the contract

Chapter Index

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CHAPTER THREE

REAL ESTATE DISCLOSURES

During recent years, the buying and selling of real estate has become more compli-

cated and expensive. The stakes are higher and the risks of significant losses have esca-

lated. Lawsuits commonly are being filed against real estate agents, buyers, and sellers of

real estate when problems arise in real property transactions. Confusion and disagreement

are far too common. Numerous laws and statutes have been enacted that have a significant

effect on real estate transactions in the area of “disclosures.”

A disclosure is an item of information which is required by law to be conveyed from

one person involved in a real estate transaction to another person. The word “information”

relates to certain facts, data, figures, or news. The definition of the word “convey” means to

transmit or communicate from one person to another. And, the phrase "required by law"

means some obligation imposed by a legal authority such as the State legislature, a court, or

the Bureau of Real Estate.

The rise in the number of disclosures, now required in real estate transactions, has

been brought about by the feeling on the part of sellers and buyers of real estate that they

were treated unfairly. This feeling has translated itself into numerous efforts to seek relief

through the courts or State legislature. Because of the pressure, these two government

bodies have responded by enacting statutory disclosure requirements in real estate transac-

tions.

LOYALTY TO FIDUCIARY

A real estate agent owes a loyalty to the agent’s client and is prohibited from person-

ally profiting by virtue of the agency except through the receipt of the agreed compensation

for services. The fiduciary obligation of the agent to a client throughout their dealings is

probably the most significant aspect of their relationship. The courts have consistently

equated the duty of an agent to a principal to the duty owed by a trustee to a beneficiary.

The Civil 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. The trustee may not obtain

any advantage over the beneficiary by the slightest misrepresentation, concealment, duress,

or adverse pressure of any kind. The courts generally apply this same concept to the

relationship of a real estate agent to his or her principal.

78 CE DIGEST

An agent may not mix his or her own personal agenda with the agent’s representation

of a client in the same transaction. The act of an agent, within the 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 agent in relations with

the principal is bound by law to exercise the utmost good faith, loyalty, and honesty.

FAIR AND HONEST DEALING

A real estate licensee, who is the agent of a seller, also owes a duty of fair and honest

dealing to the buyer. This is a duty which the courts have held to exist by reason of the

agent’s status as a real estate licensee. The duty may also be found to exist by way of the

agent’s fiduciary obligation to the seller since any misrepresentation or material

concealment on the part of the agent may afford the buyer grounds upon which to seek

rescission or damages from the seller.

An agent must not withhold from a prospective buyer material facts regarding the

property which are known to the agent and unknown to the buyer. And, these facts are

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. Also, 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 CA 3d 90).

EASTON V. STRASSBURGER

Before the California Court of Appeals decided the landmark case of Easton v.

Strassburger, a broker was obligated to disclose any material fact known or accessible only

to the broker or his or her principal. A material fact is one that will affect the decision of the

buyer to purchase the real property or the price at which the buyer would pay to buy the

property. By the same token, a material fact to the seller is one which affects the decision of

the seller to sell or the price at which the seller would sell.

The Easton case imposed an additional duty on brokers and sales people in California

that had, heretofore, not been required. Under the Easton decision, a real estate licensee is

responsible not only for what is known or accessible only to him or his principal, but also

for what the licensee “should have known” following a reasonably competent and diligent

inspection. The courts, by virtue of this decision, eliminated a licensee’s ability to rely on

the fact that he did not know of a defect or problem or that the problem was accessible only

to him or his principal. A real estate licensee is now required to “investigate” and to

CE DIGEST 79

ascertain whether problem conditions or defects (“red flags”) exist. A licensee, who

chooses to disregard an obvious “red flag” indicator, does so at his or her own risk.

The Easton case involved the sale of a home that had been built on earth fill and had

not been properly compacted. The owners were aware of slide activity as a result of this

engineering problem. However, they did not disclose these facts, or the corrective actions

they had taken, to either the agent or the buyers. The buyers purchased the property totally

unaware of the past history of slides and suffered severe damage as a result.

When the court considered the evidence brought forth in the subsequent court case,

they found:

At least one of the listing agents knew the property had been built on fill.

The listing agents had seen netting on a slope which had been placed there to repair

the slide that had occurred most recently prior to the sale

One of the listing agents had testified that he had observed that the floor was not

level.

Another one of the listing agents stated in court that uneven floors were indicators

of soil problems.

The courts concluded that the listing agents in the Easton case were guilty of negli-

gence because they failed to disclose what “they should have known” following a

reasonably competent and diligent inspection of the residential property listed for sale.

The “red flag” theory is the basis for the inspection requirement. Red flags are

supposed to warn of danger. In real estate, a “red flag” is an indication or observable con-

dition that would alert a competent licensee that there may be underlying defects or

problems in the property. The licensee is not charged with knowing the underlying

problem. However, the licensee must be observant enough to identify the obvious indica-

tors of a problem and make a disclosure based on these indicators.

REAL ESTATE TRANSFER DISCLOSURE STATEMENT

There are many specific facts about a particular piece of property that could

materially affect its value and desirability. These facts would include items such as:

The age and any defects or malfunctions of any structural components such as the

plumbing, electrical, and mechanical systems of the dwelling

Easements, common driveways, or fences

Room additions, structural alterations, repairs, or replacements made without

required building permits

80 CE DIGEST

Flooding, drainage, or soil problems on the building site

Zoning violations

Homeowners’ association obligations, deed restrictions, or “common area”

problems

Citations against the property or lawsuits against the owners which also affect the

property

It is well to keep in mind that the California courts have long held that a seller has a

duty to disclose material facts affecting the value or desirability of a property that are not

known or accessible to a buyer. A failure to do so could trigger a lawsuit for fraud.

Also, Section 2079 of the Civil Code states that it is unlawful for an agent to not

disclose to a prospective purchaser facts known to the licensee affecting the value or desir-

ability of a property, when the licensee has reason to believe that such facts are not known

to nor are readily observable by a prospective purchaser.

CIVIL CODE SECTION 1102

This existing law became effective in California on January 1, 1987. Its provisions

require that a Real Property Transfer Disclosure Statement (TDS) be given by a seller of

residential dwellings of 1-4 units to a prospective buyer. This requirement applies to

certain transactions which would include:

Sale transactions

Exchanges

Lease options

Ground leases with improvements

Some contracts involving residential stock cooperatives

The law does not apply to various transfers such as probate sales, foreclosure sales,

and by a trust. In addition, the following property transfers are also exempt:

Transfers requiring a public report (subdivision sales)

A transfer as a result of a failure to pay property taxes

Transfers or exchanges to or from any government entity

A transfer by the State Comptroller pursuant to the Unclaimed Property Law

Transfers between spouses

The statement of the property’s condition must be delivered to the prospective buyer

as soon as is practicable. It is well to keep in mind that if any disclosure or amended

CE DIGEST 81

disclosure is delivered in person after a binding contract has been signed and agreed to by

the buyer and seller, the buyer has the right to terminate the contract by providing written

notice to the seller or the seller’s agent within three days. The time within which to

terminate is 5 days if the buyer receives the transfer disclosure statement or any

amendments by mail.

The main purpose of the transfer disclosure form is to provide a regulated method to

allow the seller to disclose those facts about the condition of the property that might affect

its value or desirability. This would include structural or material defects, malfunctioning

systems, and any other problem areas that might adversely affect the property’s value. To

fulfill this requirement in the process of the sales transaction, the seller is legally required to

make a reasonable inspection of the property before preparing the disclosure statement.

Sellers of real property should be made aware of the fact that their disclosure obliga-

tions in the sale of real property are well documented in various California court cases,

statutes, and real estate law.

FORM OF DISCLOSURE STATEMENT

The language of the disclosure statement is prescribed by law and may not be varied

The TDS form is divided into five sections:

Section I - Allows the seller to state other disclosures that have or will be made in addition

to the information contained in the transfer disclosure form. Examples would include

geologic, earthquake and seismic hazard zone disclosures, and flood zone disclosures.

Section II - Is completed by the seller. This section provides the buyer a list of the items

contained in the subject property that are covered by the disclosure statement. It asks the

seller to reveal any significant defects or malfunctions in components and systems located in

or on the property of which the seller is aware. In addition, it provides for a disclosure of

other such items such as soil problems, zoning violations, drainage problems, structural

additions without building permits, encroachments, and easements.

The Civil Code (Section 1102.7) requires that each disclosure required and each act

which is performed in making the disclosure be made in “good faith.” This means that the

seller deals with the facts regarding the condition of the property “honestly” in the conduct

of the real property transfer.

The TDS is not a warranty of any kind by the seller as to the condition of the

property. However, in Section II of the form, it clearly states that prospective buyers may

rely on the information provided in deciding whether and on what terms to purchase the

subject property.

Section III - Contains the Agents Inspection Disclosure. The agent, who represents the

seller (generally the listing agent) has a responsibility to conduct an investigation and

inspection of the property being listed. This requirement is independent of the legal

82 CE DIGEST

requirements of the seller. For example, if the seller happens to be selling certain property

that is exempt from the transfer disclosure requirements outlined in the Civil Code, this does

not automatically relieve the agent of his or her inspection responsibilities.

The case of Easton V. Strassburger set a standard in California which licensees are

legally required to follow. As a result of this case, the California Civil Code requires that

all licensees involved in a real estate transaction conduct a reasonably competent and

diligent visual inspection of the subject property and make their own disclosure to a

prospective buyer of all material facts affecting the value or desirability of the property.

The listing agent is not responsible for the accuracy of the seller’s disclosures on the

form. However, the agent has the duty to conduct his or her own visual inspection and

disclose the facts of this inspection to the buyer. The facts of this inspection should be

stated in Section III of the TDS. The Civil Code does not require the licensee to inspect

those areas that are normally and reasonably inaccessible.

Section IV - This section is to be used to disclose the facts of an independent inspection of

the property made by the selling agent (generally the agent of the buyer) if more than one

agent is involved in the transaction. Remember, that all licensees involved are required to

make their own inspection of the property.

Section V - Provides the suggestion to the seller and buyer that they “may wish to obtain

professional advice and/or inspections of the property and to provide for appropriate

provisions in a contract between them with respect to any advice, inspections, or defects.”

The information contained in the transfer disclosure statement may be amended or modified in writing by the seller or the seller’s agent. The amended or modified report must be redelivered to the prospective buyer as soon as is

practicable and, preferably, before the execution of an offer to purchase. Should the amended disclosures be received after the execution of a sales contract, the

buyer has the right to terminate the contract.

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CASE HISTORY

LINGSCH v. SAVAGE (1963) 213 C.A. 2d 737

In this case, an action for damages for fraud was brought against the sellers/owners

of property located in San Francisco and the broker who handled the transaction for the

sellers. The plaintiffs contended that at the time of the sale the building was in a state of

disrepair, that the units contained in the building were illegal, and that the building had been

condemned by the city. They further contended that all of these facts were known to the

sellers when the building was sold to them.

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The suit contended that the buyers were not told of these facts and that they relied on

these non-disclosures when buying the property. It was also alleged that the property’s

actual market value was $5,000 less than it would have been in the condition represented.

The defendants in the case claimed that no evidence of fraud was present since the

buyers had signed a purchase contract in which they agreed to purchase the property “in its

present state and condition.” The contract also contained the statement that “the under-

signed purchaser hereby agrees to purchase the herein described property for the price and

according to the conditions herein specified...” The trial court dismissed the case on the

basis that sufficient facts did not exist to support a claim of fraud and give the plaintiffs the

relief they sought.

Upon appeal, the appeals court decided that the facts of the case did not support any

allegations of fraud based on intentional and affirmative misrepresentations, negligent

misrepresentations, or false promises. It did, however, rule that the mere nondisclosure of

certain facts suggested the possible existence of fraud. The plaintiffs in the original case

were allowed to amend their original complaint and file a new complaint supporting their

allegations of fraud.

Several important principles emerged from the appeal court’s decision:

Where a seller of real property knows of facts materially affecting the value or

desirability of the property that are known or accessible only to him and also

knows that such facts are not known to, or within the reach of the diligent attention

and observation of the buyer, the seller is under a duty to disclose those facts to the

buyer and his failure to fulfill such a duty constitutes actual fraud.

A seller’s agent or broker is liable for his affirmative and intentional mis-

representation to a buyer and is also liable for mere nondisclosure to the buyer of

defects known to the agent and unknown and unobservable by the buyer, since the

agent’s conduct amounts to a representation of the nonexistence of the facts that he

has failed to disclose.

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DELIVERY OF TRANSFER DISCLOSURE STATEMENT

The Civil Code requires that the transferor (seller) deliver the disclosure statement to

the transferee (buyer) as soon as is practicable. Delivery must be made to the prospective

transferee by personal delivery or by mail. The delivery may be made by either the seller or

the seller’s agent.

In a “For Sale By Owner” transaction, the responsibility for the delivery will,

obviously, fall on the shoulders of the owner/seller of the property. If only one agent is

involved, then that agent must deliver the TDS to the buyer. If there is both a listing agent

and a selling agent, it is the responsibility of the selling agent to deliver the disclosure

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statement to the prospective transferee. If the licensed real estate person, who is responsible

for delivering the disclosures cannot obtain the TDS and does not have written assurance

from the transferee that the disclosure has been received, the licensee should advise the

transferee in writing of his or her rights to the disclosure statement. The licensee

responsible for delivery must maintain a record of the action taken to effect compliance with

this law for a period of three years from the date of the closing of the transaction.

As has already been pointed out in this text, should the transfer disclosure statement

be delivered to the buyer after the execution of a binding purchase agreement between the

seller and the buyer, the buyer may terminate the sales contract. The buyer has three days

within which to cancel by providing written notice to the seller or the seller’s agent of the

termination.

Suppose that for some reason, the TDS was not actually delivered to the buyer until

after the transaction had closed and the title had been transferred. Could the sale be

overturned and both parties returned to their original positions? No! This would not

invalidate the sale. It could, however, make the seller, broker, or both of them liable to the

buyer for damages.

LIABILITY FOR ERRORS OR OMISSIONS

A seller or agent is not liable for any error, inaccuracy, or omission of information

that was not within their personal knowledge. Nor, are they liable if the information was

provided by a public agency or “expert” individual such as a licensed engineer or contractor.

The seller or agent, however, must exercise ordinary care in obtaining and conveying this

“third party” information.

The delivery of a report by a licensed engineer, land surveyor, geologist, structural

pest control operator, contractor, or other expert to the buyer constitutes compliance with

the transfer disclosure requirements. In many cases, this type of information is made a part

of the transfer disclosure statement. The delivery of information that is required to be

disclosed from a public agency or “expert” individual relieves the seller or seller’s agent of

any further duty to disclose information relating to that item of information.

FAILURE TO COMPLY

The failure to disclose information required in the transfer disclosure statement will

not invalidate a sale. However, anyone who willfully or negligently violates or fails to

perform any duty prescribed by any provision of the transfer disclosure laws is liable for the

actual damages suffered by the buyer as a result of the omission.

AGENT'S DUTY

An agent's duty under the transfer disclosure laws is to make a reasonably competent and

diligent visual inspection of the property being transferred. The agent is then required to disclose

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the property's condition, and any deficiencies uncovered by this "visual inspection," in the

appropriate sections of the Transfer Disclosure Statement. The agent's inspection is limited

to those areas of the property that are "accessible" to the agent. The agent is not charged

with a duty or responsibility to investigate details that may exist beyond the boundary lines

of the property or in the public records. Of course, any material fact that is known to the

agent affecting the value of desirability of the property should be disclosed regardless of the

nature of the information.

A California court case (Robinson v. Grossman - 1997 57 C.A. 634) more clearly

defines the limits of an agent's duty in this area.

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CASE HISTORY

ROBINSON V. GROSSMAN (1997) 57 C.A. 4th 634

This case involved the sale of a hillside home near San Diego. The home had been

built and owned by the present owners (Helms and Grossman) for about two years before

they listed the property with a local broker for sale. The house was subsequently purchased

by the Robinsons with the assistance of their real estate agent. Helms and Grossman

completed a transfer disclosure form and both the listing and selling agents in the

transaction conducted a visual inspection of the property and made their disclosures on the

transfer document.

Prior to the closing of escrow and during her inspection of the property, the listing

agent noticed hairline stucco cracks, ceiling and wall water stains, and peeling paint in

several areas of the house. When the listing agent questioned the sellers about these

conditions, she was told that the cracks were cosmetic and that the peeling had been caused

by a leak that had since been repaired. The listing agent did not write any of these items

down on her portion of the TDS. Nor, did the sellers express any awareness of any

foundation-related defects on their portion of the document.

On the buyer's side, both the buyers and their real estate agent observed the cracks

and other conditions noted above. The selling agent noted the cracks in her portion of the

TDS and advised the Robinsons to get a geologic report. The buyers, as a result of these

conditions, had a general home inspection performed which satisfied them that the

foundation was stable and opted not to bring in their own engineer for an inspection. They

then proceeded to close escrow. A few weeks later, when the Robinsons attempted to have

a swimming pool installed on the property, the excavation collapsed requiring backfilling

and recompaction.

The Robinsons sued the sellers and listing agent and others for professional

negligence and negligent and intentional misrepresentation. The trial court dismissed the

fraud and negligence charges against the listing broker and agent. The court found that even

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though the listing agent had made material statements that were inaccurate, she had a

reasonable basis for believing they were true.

The appellate court upheld the trial's courts findings. In the opinion of the appeals

court, an agent's duty requires that a listing broker conduct a reasonably competent and

diligent inspection of the property. It does not require that the listing agent verify the

seller's representations. Given no evidence to the contrary, it is reasonable for an agent to

accept the seller's representation as truthful and accurate. Thus, a listing agent's

representations, even though false, may not create any liability on the part of the agent to the

buyers, if the representations were made with a reasonable basis, such as a statement from

the agent's principal, that they were true. The court's statement regarding this point was:

"...under the post-Easton statutory scheme, once the sellers and their agent make the

required disclosures, it is incumbent upon the potential purchasers to investigate and make

an informed decision based thereon. In making the required disclosures, the seller's agent is

required only to act in good faith and not convey the seller's representations without a

reasonable basis for believing them to be true."

"

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AGENCY RELATIONSHIP DISCLOSURE

Due to the way in which real estate is marketed in California and across the rest of

the country, there has always been some confusion among real estate agents and the general

public as to actually “who” an agent represents in a real estate transaction. In an attempt to

clarify these relationships between buyers, sellers, and agents, the State legislature enacted

legislation which required real estate licensees to disclose their relationship to their clients

in writing.

The resulting law required that licensees acting as listing and selling agents in

residential real estate transactions make written and oral disclosures concerning the role

they would play in the real estate transaction. The resulting "Agency Disclosure Form"

clearly detailed the duties and obligations undertaken by licensees when they agreed to

represent a client in a specific transaction. Agency disclosure requirements apply to

transactions involving the sale, exchange, or lease for more than one year of residential property improved with one to four dwelling units. This requirement also includes

mobile homes and mixed-use properties.

DEFINITIONS

To understand an agent’s responsibilities under this law, you need to be familiar with

the classic definition of the term agency. An agent is one who represents another, called the

principal, in dealings with a third person(s). Such a representation is called agency. Once

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this agency relationship is created, the licensee has a fiduciary relationship with his or her

principal. A fiduciary incurs the highest obligations under the law.

Within the context of the agency disclosure laws certain words are used in a manner

that differs from the more accepted definitions of these terms. To more fully understand

their duties and obligations, licensees should use the following agency definitions in

interpreting the legal requirements imposed on them:

Agent: The employing broker.

Listing Agent: The agent who obtains the listing.

Associate Licensee: A real estate licensee whose license has been placed with an

employing broker.

Selling Agent: The agent who finds a buyer for the real property and sells the

listing. This term could also apply to an agent who obtains the listing (listing agent)

and then finds a buyer and sells the property (selling agent). In other words, the

agent performs the functions of both the listing and selling agent in the same

transaction.

Dual Agent: An agent acting as agent for both the seller and buyer in a real

property sales transaction.

COMPLIANCE WITH AGENCY DISCLOSURE LAW

In general, to comply with this law, listing agents and selling agents must give the

seller and buyer in the transaction a copy of an agency disclosure form, and obtain a signed

acknowledgment from the seller and buyer that they have received the form. The California

Association of Realtors recommends that agents and associate licensees use a three-step

process to insure compliance with the agency relationship disclosure laws. The three steps

are to disclose, elect, and confirm.

STEP #1 - DISCLOSE

A short study of a pre-printed agency disclosure form will reveal that there are three

alternatives available to a real estate licensee regarding agency relationships in a real estate

transaction. The licensee may represent the seller. The licensee may represent the buyer.

Or, the licensee may represent both the seller and buyer as the agent of both. Each of these

choices carries with it certain duties and responsibilities that the licensee owes to the person

he or she is representing in the transaction.

PURPOSE OF DISCLOSURE STEP

The purpose of the agency disclosure law is to insure that sellers and buyers in real

estate transactions are made aware of the type of representation that they are entitled to as

early in the transaction as possible. For example, the law requires that the listing agent give

a copy of the disclosure form to the seller prior to entering into a listing agreement to

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represent the seller in the transaction. A listing agreement is an employment contract. So,

prior to actually being employed by the seller, the listing agent is legally required to educate

the seller as to the type of representation available and what this representation entails.

A study of a standard, pre-printed "Agency Relationship Disclosure Form" will

reveal that very specific duties and obligations are spelled out. For example, the wording on

most of these forms clearly points out that a listing agent or associate licensee representing

the seller owes that seller a fiduciary duty of utmost care, integrity, honesty, and loyalty in

dealings with that seller. At the same time, the same licensee owes both the seller and

buyer:

The diligent exercise of reasonable skill and care in performance of the agent’s

duties.

A duty of honest and fair dealing and good faith.

A duty to disclose all facts known to the agent materially affecting the value or

desirability of property that are not known to, or within the diligent attention and

observation of, the parties.

THE MECHANICS OF THE DISCLOSURE STEP In addition to being delivered to the seller prior to the execution of a listing

agreement, the listing agent must have the seller sign the disclosure form acknowledging

that the seller has received it prior to the execution of a listing agreement. The listing agent

is required to give a disclosure form to the seller only. If the listing agent is the same as the

selling agent (In-House sale), then only one disclosure form is given to the seller even if

more than one associate licensee is involved.

In practice, the disclosure form may well be presented to the seller during the listing

presentation for the prospective client’s review and signature just prior to the time that the

client signs the listing agreement. A copy of the signed and acknowledged disclosure form

becomes a part of the permanent file for the transaction and should be retained by the

agent/broker for a period of three years.

The selling agent is required to give a disclosure statement to both the buyer and the

seller. The legal requirement is that the selling agent provide the seller with the disclosure

statement as soon as practicable prior to presenting the seller with an offer to purchase. This

delivery of the disclosure form by the selling agent to the seller is required even if the listing

agent has already provided the seller with the form.

If the selling agent is able to deal on a face-to-face basis with the seller, the selling

agent may deliver the form directly to the seller. If the selling agent is not able to deal

directly with the seller, the selling agent may prepare the form and present it to the listing

office for delivery. In actual practice, it will probably be given to the listing agent with a

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request to deliver it to the seller. The listing agent will have the seller sign and acknowledge

the form and return it to the selling agent for his or her files. The delivery of the disclosure

form requirement may also be met by mailing the prepared form by certified mail to the

seller’s last known address. If this is done, no signed acknowledgment of receipt is

required.

DELIVERY TO BUYER

The selling agent is also required to make a disclosure of agency relationships to the

buyer. The delivery to the buyer is to be made as soon as practicable. This means that it

must be done sometime between the time that the selling agent determines that the

prospective buyer is serious and qualified, and prior to the time that the selling agent, or

associate licensee, helps the buyer prepare and execute an offer to purchase the property.

If a seller or buyer refuses to sign and acknowledge the disclosure form, the agent, or

an associate licensee acting for the agent, should write up the facts of the refusal. When this

declaration of facts has been prepared, signed, and dated, it should become a part of the

agent’s permanent record of the transaction.

STEP #2 - ELECT

The listing agent in a real estate transaction has two choices of agency relationships

available. The listing agent may act exclusively as the seller’s agent or as a dual agent

representing both the seller and the buyer. By virtue of the act of taking an exclusive listing

from the seller, the listing broker becomes the agent of that seller and takes on the duties and

responsibilities of that agency. Therefore, a listing agent cannot represent the buyer only

in the transaction. The provisions of the Civil Code specifically prohibit a listing agent from

acting exclusively as the buyer’s agent.

The listing agent is required to disclose to the seller as soon as practicable which of

these two options the listing agent has elected. In actual practice, the listing agent should

make his or her election of agency relationships known to the seller as soon as possible

after delivery of the legally required agency disclosure form to the seller.

The selling agent has three options in his or her selection of an agency relationship.

The selling agent may represent the: 1) Buyer exclusively; or 2) Seller exclusively; or

3) Both the buyer and seller. **********************************************

CASE HISTORY HUIJERS V. DEMARRAIS

(1993) 11 C.A. 4th 676

In this case, a listing agent failed to present an agency disclosure form to a seller

prior to entering into a listing agreement with the seller as required by Civil Code §

2079.12-2079.24. The failure to deliver the disclosure rendered the listing agreement

voidable at the seller’s option. In this case, the real estate broker who took the listing was

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previously working with a buyer to locate property for the buyer. Once the property was

found, the broker then proceeded to take a listing from the seller. The agency disclosure

form was presented to the seller, not at the time of taking the listing but, instead, at the time

the purchase contract was signed.

The courts shed light in their ruling as to what constitutes substantial compliance

with the agency disclosure laws. In this case, they ruled that a real estate agent who signs an

exclusive right to sell listing agreement with a property owner without first providing the

seller with an agency disclosure form, which tells the property owner that a broker can act

as a dual agent, does not substantially comply with the disclosure law. This is true even

though the agent did provide the disclosure form at the time the purchase contract was

signed. The objective of a statute requiring a disclosure prior to signing the listing

agreement is to allow the seller to make a more intelligent decision about whether to sign.

The full measure of protection that the Legislature intended to provide to the seller cannot

be achieved if the listing agent fails to provide a disclosure form prior to entering into the

listing agreement. Adhering to the requirement that a “selling agent” provide a disclosure

form as soon as practicable prior to presenting the seller with an offer to purchase does not

relieve a selling agent who is also a listing agent from complying with the advance

disclosure required by the law.

The law requires that the selling agent disclose the election of the agency

representation desired as soon as is practicable. Once again, good business practice dictates

that the selling agent disclose his or her election as soon as possible after the “Step #1”

mandatory delivery of a disclosure form to both the buyer and the seller.

It was clearly the intent of the state legislature in enacting agency disclosure

legislation to clear away the confusion as to “who is representing who” in a typical real

estate transaction. The longer that either a selling agent or listing agent delays in making

their election known the greater the risk of allegations of improper representation arising as

the transaction progresses.

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The election may be made orally, but the relationship selected must be confirmed in

writing. The written confirmation must be made in either the:

Purchase contract and receipt for deposit agreement; or

In a separate writing

If the confirmation is made by a separate writing, it must be signed and

acknowledged by the parties in the particular agency relationship involved. The written

confirmation must be executed by all parties involved prior to execution of the purchase

contract

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STEP #3 - CONFIRMATION

If the listing agent is representing the seller exclusively, both the listing agent and the

seller must sign the confirmation. If the listing agent is representing both the seller and the

buyer in the transaction, then all parties (seller, buyer, and listing/selling agent) should sign

the confirmation. The selling agent should provide the seller and buyer with separate

written confirmations signed by the seller, buyer, and selling agent. The confirmation may

also be made in the purchase contract and receipt for deposit.

RULES OF AGENCY DISCLOSURE REQUIREMENTS

Here are a few general provisions of the agency disclosure laws that all real estate

licensees should know:

A listing agent, who is also a selling agent, may not be the agent for a buyer only.

Payment of compensation to the agent does not determine who is the agent’s

principal.

A dual agent may not tell the seller that the buyer is willing to pay more, nor may a

dual agent tell the buyer that the seller will take less, without the express written

consent of the party.

Associate licensees, who are all employed by the same real estate brokerage firm

whether in the same office or a different branch office are considered to be one

entity. This means that one associate licensee cannot act as the listing agent and

another associate licensee as the selling agent. In the event the real estate brokerage

was acting as the listing agent, both licensees may act as the seller’s agent

exclusively or as dual agents of both the seller and the buyer.

All real estate licensees need to be thoroughly familiar with all aspects of the agency

disclosure law. The effective use of uniform written disclosures, if effectively followed and

made a part of the written record of the transaction to be maintained by the licensee, will go

a long way toward eliminating confusion in the minds of sellers and buyers as to “who is

representing who” in a transaction. In addition, this law avoids the potential for litigation or

license revocation in the case of an undisclosed dual agency.

DUAL AGENCY

An agent cannot legally act for two or more principals in negotiations with each other

without the knowledge and consent of both of the principals. 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 agent’s honesty or the fairness of the

contract in the particular transaction, the agent cannot collect a commission from the

principals unless the dual agency is both disclosed and consented to by the principals.

The California Supreme Court has held that an undisclosed dual agency is grounds

for rescission by any principal without any necessity of showing injury. Even when the dual

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agency position 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. The agent also has a

duty to disclose any material fact that would affect the judgment of either party. This rule of

agency is specifically mentioned in the California Real Estate Law and its violation is cause

for revocation or suspension of a real estate license.

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DUAL AGENCY CAN LEAD TO CONFLICTS (The following paragraphs regarding Dual Agency were excerpted from the Fall 2007 issue

of the Real Estate Bulletin which is published by the

California Department of Real Estate.)

"Dual agency is permitted in real estate transactions provided the principals are noti-

fied in advance and consent to it. Without the principals prior knowledge and consent, a

dual agent is not entitled to recover a commission, even if no one is harmed as a result of the

dual agency or the non-disclosure. Failure to disclose a dual agency may subject an agent to

discipline by the Real Estate Commissioner (Business& Professions Code § 10176 (d)).

Civil Code § 2079.21 expressly permits dual agency, but there is an inherent possible

conflict of interest because it prohibits a dual agent from disclosing either principals negoti-

ating strategy. That is, the dual agent has the same fiduciary duty to disclose all material

facts as if involved in a single agency, but he or she must refrain from disclosing to the

buyer "that the seller is willing to sell.at a price less than the listing price" without the

seller's express written consent, and he or she must refrain from disclosing to the seller "that

the buyer is willing to pay a price greater than the offering price "without the buyer's

express written consent.

PERILS OF DUAL AGENCY

Dual agency commonly arises where two salespersons associated with the same

broker undertake to represent two or more parties to a transaction, in which case the broker

is then the dual agent and each salesperson has the duties of a dual agent. Also dual agency

commonly occurs where a listing broker, who is the agent of the seller, also becomes the

agent of the buyer, either by agreement or through conduct in representing the buyer's

interests. In such cases, the dual agent owes the above-discussed fiduciary duties to both

principals in the transaction, and must comply with the statutory exception on disclosure of

negotiation strategy discussed above.

Even where a dual agent carefully complies with all of the applicable statutory

disclosure and consent requirements, pitfalls remain. One major problem is that a dual

agent's traditional fiduciary duties to both principals remain in effect throughout the term of

the agency, and are not necessarily fulfilled by the agent's proper use of required written

disclosures early in the transaction. Except for price negotiation strategy, all agents must

affirmatively notify their principals of potentially material facts they discover during the

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transaction. But what if a dual agent learns of "confidential" information - unrelated to price

negotiation strategy - "Principal A" (A) which would clearly be material to the interest of

"Principal B" (B) in the transaction? Under the rules discussed above, the agent may be

violating his duty of disclosure to B if he remains silent, and he may be violating his duty of

confidentiality to A if he discloses the information to B. Unless the agent can obtain

express written consent from A authorizing disclosure and subsequently disclose the infor-

mation to B, the law provides no clear solution to this problem or protection for the agent

who violated his or her duties.

The best option for the dual agent may be to withdraw from the transaction once he

or she realizes there is an irresolvable conflict of interest. An agent violates his or her

fiduciary duties when his or her own interests are placed ahead of those of his principals or

favors one principal over the other. However, the Department has seen that some agents

may be unwilling to do so if it requires forfeiting their commission, or possibly inconven-

iencing one or both principals. Nevertheless, proceeding in such circumstances is risky for

the agent.

For example, in a recent unpublished appellate case, the sellers and buyers executed a

contract for the purchase and sale of residential property with a dual agent ("Smith"). Smith

knew the property was subject to tax liens and judgments in excess of the purchase price of

the property and did not disclose this fact to the buyers. The following events took place

between execution of the contract and close of escrow:

Sellers informed Smith that they were working on a compromise settlement of the

tax liens with the I.R.S. and that if a settlement could not be reached, the sellers

would not be able to transfer title to the buyers at close of escrow.

Buyers learned independently of the tax liens and inquired of Smith about them.

Smith said the sellers were "working on compromising" the tax liens, which would

be no problem.

Sellers were unable to compromise the liens and could not transfer title at time of

escrow.

In short, Smith did not perform his fiduciary duty to the buyers. There was a real risk

that the sellers would be unable to consummate the deal which was, of course, material to

the buyers' judgment about whether to proceed with the transaction. Smith also violated the

duty of good faith to the buyers by omitting the facts from the statements in effort to

comfort the buyers about the status of the I.R.S. negotiations, which amounted to an

affirmative misrepresentation on Smith's part in light of the agent's fiduciary disclosure

obligations.

Smith and the employing brokerage were exposed to civil liability based upon

(among other things) the above-discussed breaches of fiduciary duties to the buyers. In such

cases, courts may conclude the dual agent remained silent about the negative material facts

out of a desire to obtain the anticipated commission. Such inferences lend support to claims

against the agent.

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Other problems with dual agency arise with the inherent difficulty in price negotia-

tions for the property, as well as the belief that the requisite disclosure forms absolve the

agent from further disclosures. In a 1998 appellate case, a listing agent was alleged to have

acted on behalf of both the seller and the buyer during negotiations concerning the prospec-

tive purchase of real property. Prior to presenting the purchase offer to the seller, the listing

agent assured the buyer that he thought the seller would accept an offer below the list price

of the property. The seller was then convinced to reduce the list price. However, evidence

was unclear as to whether the listing agent informed the seller that he was representing the

buyer at or before the time the listing agent relayed the purchase offer to the seller.

Although the dual agency was disclosed in the escrow instructions, which the seller had

initialed but not read, the court found that such disclosure did not absolve the listing agent

or his employing broker of liability to the seller for breach of duty. The listing agent did not

call attention to the dual agency in the manner it was disclosed, and the disclosure came too

late to allow the seller to incorporate it in his judgment of whether to proceed with the

transaction.

In conclusion, although there may be advantages to acting as a dual agent, the

potential perils of dual agency must be understood. The following question should always

be considered by a licensee who is about to act as a dual agent: Is the reward worth the risk

of a lawsuit or license discipline?"

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NATURAL HAZARDS DISCLOSURE

In California, sellers of real property or their sales agent must disclose to a potential

buyer if the property is located in one of six "natural hazard" zones. This requirement

applies to both residential and nonresidential properties. If either the seller or the seller's

agent fail to provide a buyer with a natural hazards disclosure in one form or another, they

may be liable for any actual damages suffered by the buyer. The six zones or areas that

have been designated as natural hazard zones are:

A flood hazard zone as designated by the Federal Emergency Management Agency

An area of potential flooding after a dam failure (also known as an "inundation

area" (These areas are designated by the State Office of Emergency Services)

A very high fire hazard severity zone (Designated by the California Department of

Forestry and Fire Protection

A wildland fire area (Also known as a "state responsibility fire area)

An earthquake fault zone as designated by the State Geologist, and

A seismic hazard zone - which is also designated by the State Geologist

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The Natural Hazards Disclosure requirement specifies that a Natural Hazards

Disclosure Statement (NHDS) or local option form must be given in all transactions that

require the use of Transfer Disclosure Form (TDS). This means that this requirement

generally applies in the sale or transfer of residential properties of four units or less. If

the subject property requires the use of a Transfer Disclosure Statement and also is located

in one or more of the six designated natural hazards zones, a Natural Hazards Disclosure

Statement is required. On the other hand, if the transaction is not covered by the TDS law

or is exempt from the TDS, the NHDS does not have to be provided even if the property is

located in one or more zones. However, if the sale or transfer of property that is exempt

from the TDS occurs and the property is located in a designated natural hazard zone, this

fact should be disclosed by the seller to the buyer in one form or another.

The Natural Hazards Disclosure Statement contains statements as to whether or not a

subject property is located in one of the six designated natural hazard zones. It allows the

seller and/or the seller's agent to provide a "Yes" or "No" answer as to whether the property

is located in one or more of these areas. The form also states that these hazards could limit

the ability of the buyer to develop the property, obtain insurance, or receive assistance in the

event of a disaster.

FEDERAL LAW REQUIRES LEAD-BASED PAINT DISCLOSURE

To protect the public from exposure to lead from paint, dust, and soil, the U.S.

Congress passed the Residential Lead-Based Paint Hazard Reduction Act of 1992. This

law, which is also known as Title X, directed HUD and the EPA to require disclosure of

information on lead based paint hazards before the sale or lease of most housing built before

1978. The purpose of this law was to insure that buyers or renters of housing built before

1978 would receive the information necessary to protect themselves and their families from

lead-based paint hazards.

IMPLEMENTATION AND AFFECT OF LAW

Title X became effective on a staggered basis. For owners of more than 4 dwelling

units, the effective date was September 6, 1996. For owners of 4 or fewer units, the

effective date was December 6, 1996. This law applied to all housing defined as “target

housing.” This includes most private housing, public housing, housing receiving Federal

Assistance and Federally owned housing built before 1978.

Housing that is not affected by this rule includes:

“0-bedroom dwellings” such as lofts, efficiencies, and studios.

Leases of dwelling units of 100 days or fewer, such as vacation homes or short-term

rentals.

Designated housing for the elderly and the handicapped unless children reside or are

expected to reside there.

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Rental housing that has been inspected by a certified inspector and is found to be free

of lead-based paint.

Sellers and lessors are also required to disclose available lead information about

common areas so that families can be informed about preventive actions. Common areas

are those areas in multifamily housing structures that are used or accessible to all occupants.

SAFETY FACTORS OF LEAD-BASED PAINT

Approximately three-quarters of the nation’s housing built before 1978 contains

some lead-based paint. This paint, if properly managed and maintained, poses little risk. If

allowed to deteriorate, lead from paint can threaten the health of occupants, especially

children under 6 years old.

If families and building owners are aware of the presence of lead-based paint and the

proper actions to take, most lead-based paint hazards can be managed. The EPA pamphlet

“Protect Your Family from Lead in You Home” provides important information for families

and home owners to help them identify when lead-based paint is likely to be a hazard and

how to get their home checked.

SELLER & LESSOR RESPONSIBILITIES

Under Title X, owners of residential real property who sell or lease their property are

required to:

Disclose all known lead-based paint and lead-based paint hazards in the home and

any available reports on lead in the housing.

Give buyers or renters a copy of the EPA pamphlet “Protect Your Family from Lead

in Your Home.” This pamphlet is available through the National Lead Information

Clearinghouse and the U.S. Government Printing Office. In California, the EPA

pamphlet is incorporated in the California “Environmental Hazards: A Guide for

Homeowners, Buyers, Landlords, and Tenants,” which has been developed and

published by the California Environmental Protection Agency in cooperation with

the California Department of Health Services. The combination of the federal and

state booklets, when presented to a prospective buyer or tenant fulfills the

environmental hazards disclosure requirement of California law as well as the lead-

based disclosure requirements mandated by the Residential Lead-Based Paint

Hazard Reduction Act of 1992.

Include certain warning language in the purchase agreement or lease as well as

signed statements from all parties verifying that all requirements were completed

Retain signed acknowledgments for 3 years as proof of compliance.

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In the case of a purchase, the owner must also give the prospective buyer a 10-day

opportunity to have the dwelling tested for lead-based paint hazards. Owners, who are

renting their property, are not required to give a copy of the EPA pamphlet ”Protect Your

Family from Lead in Your Home,” to existing tenants. However, when the lease is

renewed, the owner is required to provide the tenant with a copy of the pamphlet.

Sellers of residential dwellings are not required to conduct or finance an inspection or

risk assessment of the property prior to sale. In addition, there is nothing in the new law that requires a building owner to remove lead-based paint or lead-based paint

hazards discovered during an inspection or risk assessment. The parties to the contract,

however, are free to negotiate hazard reduction activities as a contingency of the purchase

and sale of the housing.

INSPECTION AND CERTIFICATION PROGRAMS

An owner, who has an inspection or risk assessment made on his property to

determine if it is free of lead based paint, must have this done by a certified inspector. The

Environmental Protection Agency is developing certification requirements for individuals

and firms conducting lead-based paint inspections, risk assessments, and abatements. The

certification requirements that EPA is developing will insure that inspectors engaged in

lead-based paint activities have completed an EPA-certified training program or an EPA-

approved state program. Meanwhile, EPA and HUD recommend that people inspect the

qualifications and training of individuals and firms before hiring them to conduct risk

assessments, inspections, or abatements.

AGENT’S RESPONSIBILITIES

Real estate licensees, who are involved in a transaction involving residential real

property must insure that:

Sellers and landlords are made aware of their obligation under this rule.

Sellers and landlords disclose the proper information to lessors, buyers, and

tenants.

Sellers give purchasers the opportunity to conduct an inspection.

Lease and sales contracts contain the appropriate notification and disclosure

language and proper signatures.

An agent is responsible for informing a seller or lessor of his or her obligations under

the new law. In addition, the agent is responsible if the seller or lessor fails to comply,

however, an agent is not responsible for information withheld by the seller or lessor.

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LIABILITIES

A failure to comply with this law can lead to some stiff civil and criminal penalties.

Under this rule, sellers, landlords, or agents who fail to provide the required notices and

information are liable for triple the amount of damages. Lenders, under this disclosure

regulation, do not have an exposure to liability. This rule, however, does not affect other

state and/or federal legal requirements regarding the obligations and responsibilities of

lenders.

STRUCTURAL PEST CONTROL REPORT

Another important disclosure requirement can be a Structural Pest Inspection Report

and written confirmation of the presence or absence of wood destroying pests. California

law does not actually require that a structural pest control inspection be performed on real

property prior to sale. However, if an inspection report and certification is made a condition

of the sale, or is required to obtain financing, it triggers delivery obligation on the part of the

seller or the seller’s agent.

If a pest control inspection is made a condition of sale, the seller or seller’s agent

must deliver to the buyer a copy of the inspection report and written confirmation as soon as

practical prior to the execution of a binding sales contract or the transfer of title. If, for any

reason, the report and confirmation were not delivered to a buyer, it could provide grounds

for the rescission of the sales contract.

NEED FOR INSPECTION REPORT

In most cases, a structural pest control inspection and written certification are made a

condition of the sale. The buyer wants to know the condition of the property prior to

purchasing, and the lender wants to know the status revealed by such a report prior to

funding a loan to be used to purchase the property. A report is mandatory in the case of an

FHA or VA loan. The inspection and written certification must be done by a company or

individual who is licensed by the Structural Pest Control Board to perform this type of work.

COVERAGE OF INSPECTION AND CERTIFICATION

When a structural pest control report is requested, the pest control company is

required by law to disclose that a separated report is available. A separated report means

that the pest control operator’s report will separately identify the recommendations for

corrective work as:

Section 1 - Infestation or infection which is evident.

Section 2 - Conditions which are present and deemed likely to lead to infestation or

infection

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The purpose of the two sections is to make it easier to determine whether the seller or

buyer pays for the corrective work. The question of who pays for any corrective work

required is usually determined by local custom. However, it is a negotiable item. Either the

seller or buyer could agree to pay all of the cost of the corrective work. Or, they could agree

to split it. Customarily, the seller pays for all the Section 1 work. The buyer generally pays

for all of the Section 2 work.

AGENT’S RESPONSIBILITIES

Under the Civil Code, the real estate broker, who is acting as the listing agent in the

transaction, shall affect the delivery of the inspection report, certification, and notice of

work completed, if any, to the buyer. The delivery must be made as soon as practical and

before transfer of title or the execution of a real property sales contract. Under the

provisions of the Civil Code, delivery to a buyer must be in person or by mail and delivery

to the husband or wife is deemed sufficient unless the contract states otherwise.

If more than one real estate broker licensee is acting as an agent in the transaction,

the broker who has obtained the offer made by the buyer shall affect delivery of the required

documents to the transferee. Unless, the transferor, has given written directions to another

real estate broker licensee acting as the agent of the transferor in the transaction to affect

delivery. If the responsible broker cannot obtain the required documents to deliver to the

buyer, he should advise the buyer of the buyer’s rights under the Civil Code regarding the

required documentation. As always, the real estate broker or associate licensee who is

responsible to affect the delivery of the pest control documentation should keep a written

record of the actions taken to affect compliance.

With older homes, it is highly desirable to obtain a structural pest control report at the

time the property is listed. This is particularly true if, during his or her visual inspection, the

agent observes red flags such as: 1) Wood from house in contact with ground; 2) Areas

where wood is continuously exposed to moisture; 3) Evidence of existing termite damage

4) Mud tunnels inside or outside the house or other tell tale signs. Having the report

available when the offer is prepared makes it easier to overcome the hurdle of an

unfavorable report.

SMOKE DETECTORS

State law requires that dwelling units be equipped with smoke detectors approved by

the State Fire Marshal. In an existing dwelling, there must be a battery operated smoke

detector outside each sleeping area. As of August 14, 1992, new construction that exceeds

$1,000 and requires a permit or includes the addition of a sleeping room must include smoke

detectors in each bedroom and at a point centrally located outside the bedrooms. This

requirement also applies to additions, alterations, or repairs. In new construction, the smoke

detectors must be hard wired with battery back-up.

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The seller must give the buyer written certification of smoke detector compliance as

required by the Health and Safety Code Section 13113.8. This may be done in the purchase

agreement or on the transfer disclosure form.

WATER HEATER BRACING

It is the seller's duty to see that each water heater is braced, anchored or strapped, in accordance with the California Plumbing Code, to resist falling or

horizontal displacement during an earthquake. Under the provisions of the Health and Safety Code, Section 19211, the seller must give the buyer written certification of compliance.

MELLO-ROOS BONDS AND TAXES

The Mello-Roos Community Facilities Act of 1982 authorizes the formation of community

facilities districts. Mello-Roos liens are municipal bonds that are used to finance the

construction of streets, sewers and other infrastructure needs before a housing development

is built. These liens allow developers to raise money that is used to complete these off-site

improvements before offering homes or condos for sale in a subdivision.

The sellers of one to four residential units that are located in a Mello-Roos tax

districts are legally required to disclose that the property is subject to a Mello-Roos tax levy.

Usually, the developer pays this lien until the property is sold. The buyer then becomes

responsible to pay any tax levies in the future.

A real estate broker is legally required to disclose to a buyer that a property located in

a Mello-Roos tax zone may be subject to future tax levies. This law applies to the sale or

lease (5 years or more) of one to four residential units. A buyer or tenant, who fails to

receive this disclosure prior to signing a real estate purchase agreement, has a three day right

of rescission following delivery of the disclosure.

EARTHQUAKE DISCLOSURES

The California Seismic Safety Commission has developed a "Homeowner's Guide to

Earthquake Safety." This guide includes information on geologic and seismic hazards,

explanations of related structural and nonstructural hazards. It also includes

recommendations for mitigating earthquake damage, and a statement that safety cannot be

guaranteed with respect to major earthquakes. And, that only precautions such as

retrofitting can be undertaken to reduce the risk of various types of damage.

If a buyer receives a copy of the Homeowner's Guide, neither the seller nor the

broker or sales agent are required to provide additional information regarding geologic and

seismic hazards. However, both sellers and brokers must disclose what they actually know

including whether a property is in an earthquake fault zone.

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Delivery of a booklet is required in the following transactions:

Transfer of any real property improved with a residential dwelling built prior to

January 1, 1960 and consisting of one to four units any of which are of

conventional light-frame construction

Transfer of any unreinforced masonry building with wood-frame floors or roofs

built before January 1, 1975. Commercial buildings would receive a copy of a

Commercial Property Owner's Guide

In residential transfers of from 1-4 units, the following structural deficiencies and any

corrective measures taken, which are within the seller's actual knowledge, are to be

disclosed to prospective buyers.

Absence of foundation anchor bolts

Unbraced or inappropriately braced perimeter cripple walls

Unbraced or inappropriately braced first-story walls

Unbraced or inappropriately braced fir-story walls

Unreinforced masonry perimeter foundation

Unreinforced masonry dwelling walls

Habitable room or rooms above a garage

Water heater not anchored, strapped, or braced

ENERGY CONSERVATION RETROFIT

State law prescribes minimum energy conservation standards for all new

construction. Some local governments also have ordinances that impose additional energy

conservation measures on new and/or existing homes. These local ordinances may impose

energy retrofitting as a condition of the sale of an existing home. The seller and/or the

seller's agents are to disclose to a prospective buyer the requirements of the various

ordinances as well as who is responsible for compliance.

Federal law requires that a "new home" seller (including a subdivider) disclose in

every sales contract the type, thickness, and R-value of the insulation which has been or will

be installed. However, if the buyer signs a sales contract before it is known what type of

insulation will be installed, or if there is a change in the contract regarding insulation, the

seller shall give the buyer the required information as soon as it is available.

DISCLOSURE OF DEPOSITS

A broker, who accepts a check or promissory note as an earnest money deposit, must

make a full disclosure of this fact to the seller. If a buyer has given a check to the broker as

an earnest money deposit with written instruction to hold the check until acceptance of the

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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 at the time of the actual presentation of the offer to the seller.

During the time between receipt of the check by the broker and acceptance of the

purchase offer by the seller, the broker must record receipt of the check on the broker's trust

fund records and hold the check in a safe place.

While checks are universally accepted as equivalent to cash 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. Failure to have sufficient funds in a

checking account to cover the amount of a check written upon that account may be a crime.

The maker of a note, on the other hand, does not represent that he or she has sufficient

money to pay as the note requires, and failure to pay is generally not a crime.

A broker violates the Real Estate Law if he or she directly or by implication

misrepresents to the broker's principal (seller) that a purchaser has given cash or a check as

an earnest money deposit when, in fact, the broker has accepted a non-negotiable

promissory note.

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT

Federal law requires that a buyer of real property must withhold and send to the

Internal Revenue Service 10% of the gross sales price if the seller of the real property is a

"foreign person." The primary grounds for exemption from this requirement are

The seller's non-foreign affidavit and U.S. taxpayer I.D. number

A qualifying statement obtained through the IRS attesting to other arrangements

resulting in collection or exemption of the tax, or

The sale price does not exceed $300,000 and the buyer intends to reside in the

property

Because of the number of exemptions and other requirements relating to this law,

principals and agents should consult the IRS or a qualified tax advisor for more information

prior to communicating information of this type to sellers.

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CHAPTER THREE - HIGHLIGHTS

AGENT’S DUTIES

1. A real estate agent owes a loyalty to the agent’s client and is prohibited from profiting

personally at the client’s expense

2. The Courts have consistently equated the duty of an agent to his or her principal to that of the

duty owed by a trustee to a beneficiary

3. As a fiduciary, the agent must exercise the utmost good faith, loyalty, and honesty to his or

her principal

4. An agent owes a duty of fair and honest dealing to the buyer

5. An agent must not withhold from a prospective buyer material facts regarding a property that

are known to the agent and unknown to the buyer

6. A licensee has an affirmative duty to conduct a reasonably competent and diligent inspection

of a seller’s property if the agent is representing the seller

EASTON V. STRASSBURGER

Landmark Case: Imposed duty on brokers and sales people to make them responsible for “what they

should have known” following a reasonably competent and diligent inspection of a property

1. A “red flag” on a property is a property condition or defect that could affect the value or

desirability of the property

2. A licensee is not charged with knowing the underlying problem of a “red flag” condition.

The licensee must, however, be observant enough to identify the obvious indicators of a

problem and make a disclosure based on these indications.

TRANSFER DISCLOSURE STATEMENT

1. Must be given to all buyers of residential dwellings (1-4) units by the seller or seller’s agent

2. Must be delivered to buyer as soon as practicable

3. If disclosure is delivered after the signing of a binding contract between seller and buyer,

buyer has three days within which to terminate transaction

4. The TDS is a regulated way for a seller to provide a buyer with a disclosure of property

conditions that might affect the value or desirability of the property

DELIVERY OF TRANSFER DISCLOSURE STATEMENT

1. Delivery may be made of TDS by mail or personal delivery

2. In “For Sale by Owner,” the owner/seller is responsible for delivery of TDS

3. If one agent involved, the agent is responsible to deliver to buyer

4. If both a listing agent and selling agent, the selling agent is responsible

AGENCY RELATIONSHIP DISCLOSURE

Civil Code Section 2373-2382 - Became law January 1, 1988

1. Applies to sales, exchanges, and leases for more than 1 year of 1-4 unit residential dwellings

2. Definitions: An agent is one who represents another, called the principal, in dealings with a

third person(s)

3. Listing agent must deliver an agency disclosure form to a seller prior to entering into a listing

agreement to represent the seller

4. Listing agent is legally required to deliver and obtains a signed acknowledgement from the

seller only

5. Selling agent is required to give a disclosure statement to both the buyer and seller

6. Selling agent must provide disclosure form to seller as soon as is practicable

7. Selling agent must provide disclosure form to buyer prior to buyer entering a binding sales

agreement with seller

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CHAPTER THREE - HIGHLIGHTS

AGENCY RELATIONSHIP DISCLOSURE (CONT'D)

8. Dual Agency: To represent both the seller and the buyer, agent must have the knowledge and

consent of all parties to the transaction. An undisclosed dual agency is unlawful. Can lead to

revocation or suspension of license.

NATURAL HAZARDS DISCLOSURE

In California Sellers or seller's agents must disclose to a potential buyer if the property is located in one

of six natural hazard zones. Required in the sale of residential properties of 4 units or less. Zones are:

A flood hazard zone as designated by FEMA;

An area of potential flooding after a dam failure (Also known as an "inundation" area;

A very high fire hazard severity zone;

A wildland fire area (Also known as a "state fire responsibility);

An earthquake fault zone;

A seismic hazard zone

FEDERAL LEAD-BASED PAINT DISCLOSURE

Created when Congress passed the Residential Lead-Based Paint Hazard Reduction Act of 1992 (Also

known as Title X). This law directed HUD and the EPA to require disclosure of information on lead

based paint hazards before the sale or lease of most housing built before 1978. Approximately, three-

quarters of the nation's housing built before 1978 contains some lead based paint. Sellers must:

Disclose all known lead-based paint and lead-based paint hazards in the home

Give buyer or renter copy of EPA pamphlet "Protect Your Family from Lead in Your Home."

Include certain warning language in the purchase agreement or lease

Retain signed acknowledgement for 3 years as proof of compliance

Agents must insure that:

Sellers and landlords are made aware of their obligations under this law

Sellers and landlords disclose the proper information to lessors, buyers, and tenants

Sellers give purchasers the opportunity to conduct an inspection

Leases and sales contracts contain the appropriate notification and disclosure information

STRUCTURAL PEST CONTROL REPORT

Inspection Report is not legally required by California law prior to sale. However, if report is made a

condition of the sale (as it normally is), it triggers delivery obligation by seller or seller’s agent

Seller must deliver inspection report to buyer as soon as practical prior to execution of a

binding sales contract

If not delivered, provides grounds for rescission of sale

Report is mandatory for FHA and VA loans

Civil Code places burden for delivery of inspection report on seller’s agent

If more than one agent, buyer’s agent shall effect delivery.

MELLO-ROOS LIENS (Municipal Bonds used to finance construction of streets, sewers and other

infrastructure needs before a subdivision is built). Key Facts:

Allows developers to raise money to complete off-site improvements before sale of property

Sellers of 1-4 residential units in Mello-Roos areas must disclose liens to buyers before sale

Developer usually pays lien until property is sold

Buyer usually takes over payment upon purchase

If disclosure not made, buyer or lessor has three day right of rescission following delivery of

disclosure Chapter Index

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CHAPTER THREE Review Quiz

`

1. The landmark case in which the court ruled that a real estate agent is responsible for what

the licensee “should have known” following a reasonably competent and diligent inspection

of a property is:

a) Easton v. Strassburger

b) Jones v. Mayer

c) Wilson v. Gentile

d) Lingsch v. Savage

2. All of the following are correct statements regarding a Real Property Transfer Disclosure

Statement (TDS) except:

a) It is legally required to be given by the seller of residential dwellings of 1-4 units to

the buyer

b) It requires the seller to disclose those facts about the condition of a property that

might affect its value or desirability

c) It is required to be given in all real estate property transfers

d) It must be delivered to the buyer as soon as is practicable

3. A real property transfer disclosure statement is required to be given by the owner of one to

four residential dwelling units in all of the following transfers except a:

a) Lease option

b) Sales transaction

c) Transfer between spouses

d) Ground lease with improvements

4. If there is both a listing agent and a selling agent involved in a real estate transaction, the

responsibility to deliver the transfer disclosure statement to the buyer rests with the:

a) Seller

b) Selling agent

c) Listing agent

d) Escrow officer

5. Which of the following is true if the transfer disclosure statement is delivered to the buyer

after the execution of a binding purchase agreement?

a) The buyer may terminate the sales contract

b) The buyer has three days within which to cancel

c) The termination must be by written notice to the seller or the seller’s agent

d) All of the above

6. An agency disclosure form must be given by licensees to sellers and buyers in real estate

transactions involving:

a) All multi-family residential dwelling units

b) Residential property improved with 1-4 dwelling units

c) All types of property

d) Mobilehomes only

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CHAPTER THREE Review Quiz

7. A listing agent must deliver an agency disclosure statement to a seller:

a) As soon as practicable prior to presenting the seller with an offer

b) Never since it is the selling agent’s responsibility

c) Prior to entering into a listing agreement to represent the seller in the transaction

d) After the signing of a binding sales agreement between the seller and buyer but prior

to the opening of escrow

8. Which of the following is true regarding a dual agency?

a) If a dual agency is not disclosed to one of the principals in a real estate transaction,

the principal may rescind the contract

b) It is legal if it is disclosed and consented to by all principals

c) If undisclosed, it is cause for the revocation of a real estate license

d) All of the above

9. A Natural Hazards Disclosure Statement must be used by a seller of real property if his or

her property is located in:

a) A flood hazard zone

b) An earthquake fault zone

c) A wildland fire area

d) All of the above

10. Under the Residential Lead-Based Paint Hazard Residential Act of 1992, a seller must give

the buyer an opportunity to have the dwelling tested for lead-based paint hazards. By law,

the length of time is:

a) One week

b) 10 days

c) Two weeks

d) 30 days

Chapter Index

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CHAPTER 4

ENVIRONMENTAL LAWS & CONCERNS

Since the mid-1960’s, the Federal government has enacted a significant number of

environmental laws that work together to protect our health, our environment, and our

future. In general, the objectives of these pieces of legislation have been to protect the envi-

ronment, protect the health of all of our citizens, conserve our national resources, and reduce

the proliferation of pollution and waste. All of these laws work together to make a cleaner,

safer world.

Laws set out a framework or a basic outline of what needs to be done. Then, a

government agency, such as the Environmental Protection Agency, writes rules, regulations,

and policies to fulfill what the law says should be done. Most of the major environmental

laws emanate at the federal level and apply to the entire United States. Each state also has

its own laws and its own agencies to implement the laws enacted by the state's own

governmental bodies..

IMPACT OF ENVIRONMENTAL LAWS ON REAL ESTATE

These comprehensive Federal laws, as well as the supporting state and local laws and

regulations, can have a significant impact on real estate values. The discovery that a prop-

erty is contaminated with hazardous waste can dramatically reduce a property’s value. It

could certainly affect a seller or a buyer. Either one could be held liable for potentially huge

clean-up costs of the waste materials. In turn, a lender’s collateral for the loan on the prop-

erty could be drastically reduced. Under certain circumstances, the lender might become

liable for the clean-up costs. A real estate licensee could, conceivably, be held liable for a

failure to disclose environmental problems concerning a particular property that should have

been known following a reasonably diligent and competent inspection of the property.

Due to the widespread potential liability created by federal and state environmental

laws and regulations, all members of the real estate community (licensees, lenders,

appraisers, sellers, buyers, landlords, and tenants) need to be familiar with the more

important environmental laws and regulations that affect real estate and its value.

Sellers and buyers of real estate, in particular, will look to real estate licensees, who

represent them in a real estate transaction, to provide the knowledge, advice, and guidance

needed to consummate transactions without incurring liability or losses to the principals

involved. Clients and the courts do not place the burden on licensees to become "experts" in

all types of environmental matters. However, it is expected that licensees be sufficiently

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well informed on environmental hazards and potential environmental " red flags" to provide

the level of duty and care owed to a principal in a real estate transaction.

This knowledge of environmental concerns will help alert real estate professionals to

the possibility of potential environmental problems on a property being sold. In the case of

real estate licensees, developing a broader understanding of environmental issues provides

another consumer protection tool with which to better serve their clients. And, indeed, in

this era of heightened emphasis on "consumer protection," it is incumbent on all real licen-

sees to be in a position to correctly advise a client on environmental matters. Not only do

clients expects to be advised on their environmental concerns, they expect licensees to help

them solve any environmental problems that might arise. Clients also expect their agents to

provide them with the information and resources needed to make informed, intelligent

decisions in real estate transactions.

To begin, let's take a brief look at the federal laws that regulate the environmental

issues that pose the greatest concern for the real estate community. In the sale of developed

property, whether it is residential, industrial, or commercial, the same areas of concern are

shared. This requires an awareness of potential environmental problems in basic areas such

as:

Indoor Air Quality

Soil Contamination

Lead-Based Paint

Asbestos

Radon

Safe Drinking Water

An understanding of the laws and regulations of most concern to real estate licensees

will provide the foundation to deal with the environmental issues, problems, and concerns

they may encounter.

NATIONAL ENVIRONMENTAL POLICY ACT

The federal government enacted the National Environmental Policy Act (known as

NEPA) in 1969. This act was one of the first laws ever written that established a broad

national framework for protecting our environment. NEPA now provides the “umbrella”

which covers most of the federal laws and regulations on environmental matters and policies

enacted either prior to or after the enactment of NEPA.

NEPA's basic policy is to assure that all branches of government give proper consid-

eration to the environment before taking any major federal action that significantly affects

the environment. The NEPA process is intended to help public officials make decisions that

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are based on an understanding of environmental consequences and take actions that protect,

restore, and enhance the environment.

The stated purposes of this act are:

To declare a national policy which will encourage productive and enjoyable

harmony between man and his environment;

To promote efforts which will prevent or eliminate damage to the environment

and stimulate the health and welfare of man;

To enrich the understanding of the ecological systems and natural resources

important to the Nation; and

To establish a Council on Environmental Quality

And, in addition to the stated objectives of establishing a broad national policy to

address environmental concerns and establish a Council on Environmental Quality, NEPA

created the Environmental Protection Agency (EPA).

GOALS OF NATIONAL ENVIRONMENTAL POLICY ACT

One of the two major goals of NEPA is to place the obligation on federal agencies to

consider every significant aspect of the environmental impact of a proposed action. A

proposed action means a project undertaken by a federal agency such as the construction of

a highway, waterway, bridge, or dam. Proposed actions would also include other projects

that require a federal permit such as construction by a private firm in a “wetlands area.”

The other major goal of NEPA is to provide a means to insure that the federal agency

proposing the action inform the public of its findings regarding the effects of the project on

the environment in its decision-making process. The legal requirements to attain these two

goals in NEPA insured that the legislation’s thrust be toward an environmental evaluation of

a proposed action prior to the start of a project rather than in finding fault after the project

was significantly completed. Also, to make sure that other parties and the public have a role

in the environmental evaluation process.

ENVIRONMENTAL IMPACT STATEMENT

NEPA mandates that an environmental impact statement (EIS) be included in every

report or proposal for legislation and other major federal actions that significantly effect the

quality of the human environment. Actually, NEPA regulations require various levels of

analysis of possible environmental effects depending on the circumstances and the likely

degree of environmental impacts.

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The agency involved first makes a determination as to the significance of the

proposed action on the environment. If a determination is reached that the impact will not

significantly affect the environment, no EIS has to be prepared. The agency issues a

“finding of no significant impact” that may be subject to review by the public before a final

decision to bypass the EIS is reached.

If the findings reveal that the project could have a significant impact, the responsible

federal agency will prepare an EIS. This statement will include:

The environmental impact of the proposed action

Any adverse environmental effects which cannot be avoided should the

proposed action be implemented

Alternatives to the proposed action

The relationship between local short-term uses of man’s environment and

maintenance and enhancement of long term productivity, and

Any irreversible and irretrievable commitments of resources which would be

involved if the proposed action should be implemented

Proposed federal projects are subject to lawsuits by private citizens if:

No EIS is filed, or

An EIS is filed that does not address significant potential environmental damage,

or

The EIS fails to consider viable alternatives

Most court cases relate to when an EIS needs to be prepared and to the adequacy of

the EIS coverage. The Courts have the power to rule that a project be halted until an EIS or

a new EIS is prepared that sufficiently addresses all the required factors required in an Envi-

ronmental Impact Statement (EIS).

PUBLIC PARTICIPATION

Another cornerstone of the National Policy Act is that the public participate in the

decision making steps of the Environmental Impact Statement process. In fact, the public

participation aspects of the NEPA are regarded by many as the most valuable aspect of the

law. Agencies must provide public notice of NEPA-related hearings, public hearings, and

the availability of environmental documents. The purpose of this notification is to insure

that persons and agencies, who may be interested in or affected by a project, be informed of

the proposed action prior to any final decisions being reached.

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******************** CASE STUDY

SAN BERNARDINO VALLEY AUDUBON SOCIETY, INC.

v. COUNTY OF SAN BERNARDINO (1984) 155 C.A. 738

An Audubon society brought an administrative mandamus proceeding seeking

judicial review of the adequacy of an environmental impact report (EIR). The EIR was in

connection to a proposed cemetery project and had been approved by the County Board of

Supervisors.

The California Environmental Quality Act mandates that when an EIR identifies that

a proposed project will have a significant effect on the environment, the board make

findings that changes or alternatives have been required that mitigate these significant

effects. Or, that such mitigation features are infeasible. The record showed that discussion

of feasible alternative sites took place at the hearings on the EIR. However, nowhere in the

record were there any findings by the board of any alternative sites. The court also

discovered that the record did not show substantial evidence to support the board’s

determination the proposed use was consistent with the county’s general plan.

The trial court granted the motion for administrative mandamus and ordered the

county to set aside all actions taken to approve the cemetery. The court referred the EIR

back to the board of supervisors with instructions to prepare a legally adequate EIR with a

discussion of alternative sites, and the preparation of legally adequate findings regarding the

feasibility of mitigated measures, and the preparation of adequate findings with respect to

the consistency of the cemetery with the county general plan.

The trial court awarded the Audubon society attorney fees. The Court of Appeals

later affirmed the trial court’s decision. ***************************************************

COUNCIL ON ENVIRONMENTAL QUALITY

The Council on Environmental Quality, which was created through the enactment of

NEPA, advises the President on environmental policy matters. It has three members who

are appointed by the President. As one of its functions, the council prepares an environ-

mental quality report for the President each year reviewing environmental issues and their

status. In addition, the report makes recommendations for overcoming deficiencies in areas

of environmental concern.

Other functions performed by the Council include:

Gathering and analyzing trends in environmental quality and presenting

reports on such trends to the President

Conducting surveys and analyses

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Reviewing and appraising Federal programs and policies

Developing policy proposals to improve environmental quality and the natural

resource base

ENVIRONMENTAL PROTECTION AGENCY

The United States Environmental Protection Agency has emerged as the federal

agency whose major role is to oversee and enforce federally enacted minimum standards

dealing with environmental protection, specifically pollution control programs. This agency

is empowered with far reaching regulatory and enforcement authority and administers many

of the major pieces of federal legislation concerning the environment passed since the

1960’s.

The Environmental Protection Agency was originally created in 1970. Prior to that

time, environmental law consisted of a hodge-podge of environmental protection laws

enacted by the various states and local communities. President Richard Nixon realized that

a need existed for a federal agency that would set national guidelines for the environment,

monitor these guidelines, and enforce them.

To create this new agency, certain functions were taken from other federal agencies

such as the Department of the Interior, of Agriculture, and Health, Education, and Welfare

and transferred into to the newly formed EPA. The newly created Environmental Protection

Agency was initially charged with the responsibility to administer the Clear Air Act (1970)

that had been enacted to abate air pollution created by industry and motor vehicles. The

EPA's other major responsibilities in its early years included the Federal Environmental

Pesticide Control Act (1972) and the Clear Water Act (1972) that regulated municipal and

industrial waste water discharges. By the mid-1990's the EPA was enforcing 12 major stat-

utes, including laws designed to control such activities as ocean dumping, safe drinking

water, insecticides, and asbestos hazards.

COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION

AND LIABILITY ACT (CERCLA)

One of the better known laws that is enforced by the Environmental Protection

Agency is CERCLA. CERCLA became federal law in 1980. It is also known as the Super-

fund Law. CERCLA is the environmental law most likely to affect buyers, sellers, and

lenders in real estate transactions. The liability provisions of CERCLA place the sometimes

enormous costs of cleaning-up a hazardous waste site on the shoulders of parties held

responsible for the contamination. The costs of clean-up on a property, in some cases, may

exceed the actual market value of a property.

The major purposes of CERCLA are:

To provide a method of paying for the restoration of the environment caused by

the use and disposal of hazardous materials.

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To establish the authority in the federal government to recover the costs of

cleaning up sites that have been damaged as a result of the disposal of

hazardous materials.

It also provides the government with the authority to hold responsible parties

liable for the cost of cleaning up and restoring the property. These parties are

referred to as PRP’s (potentially responsible parties).

CERCLA LIABILITY

CERCLA authorizes the EPA and other parties to recoup the costs of identifying and

cleaning-up a hazardous waste site from the parties responsible for the contamination.

These potentially responsible parties (PRP’s) may be:

Present owners and operators of a site;

Corporations or individuals if they owned the property at the time of the

disposal of the hazardous waste;

Parties who generated the hazardous waste;

Persons who arranged for the hazardous waste to be disposed at the site; or

Any corporation or individual who transported the hazardous waste.

The liability imposed under CERCLA is strict liability. This means that a “Poten-

tially Responsible Person (PRP)” may be held liable whether or not he or she was responsi-

ble for, knew about, or was in any way negligent regarding the contamination. If there is

more than one PRP involved, the liability is joint and several. This means that the EPA can

collect the entire cost of the clean-up from a single PRP and leave that party with the

responsibility of collecting from the other contributing parties.

The only defenses that can be used by PRP’s to avoid liability under CERCLA and

avoid the costs of clean-up are to demonstrate and prove that the contamination was:

An act of God

An act of War; or

An act or omission of a third party

Obviously, an Act of God or an Act of war are rarely used. The main shields to

avoid liability for clean-up costs under CERCLA are an act or omission of a third party and

the innocent landowner defense.

THIRD PARTY DEFENSE

Under CERCLA, a defendant may only use this defense if the person, who released

the hazardous wastes, is a party unknown to the defendant. The United States Code, Section

9607 (b)(3), describes a third party as “other than one whose act or omission occurs in

114 CE DIGEST

connection with a contractual relationship, existing directly or indirectly, with the defen-

dant.” The action must have been undertaken without the knowledge or consent of the

defendant. The defendant must be able to prove that the “third party” acted independently

and was not an employee or agent of the defendant.

To preserve this defense, the defendant must be able to show that once the

contamination was discovered, the defendant took action and initiated steps to prevent

further unauthorized dumping of hazardous wastes on the property. The owner of the

property must report the contamination to the EPA and take steps to prevent further

contamination of the property.

SUPERFUND AMENDMENT AND REAUTHORIZATION ACT (SARA)

This amendment to CERCLA was enacted in 1986. For real estate buyers, the most

important provision in this legislation was the establishment of the “innocent landowner’s

defense.” This defense, which was added to the original law by this amendment, lessened

the strict liability requirement of CERCLA by providing a defense that exempts “innocent

landowners” from having to pay the clean-up costs of an environmentally contaminated

property.

To claim a defense as an “innocent landowner,” a defendant in a superfund suit must

establish that he or she:

Did not know, or had no reason to know, that the property was contaminated at

the time it was purchased;

Purchased the property after the improper disposal of the hazardous materials;

Had exercised “due diligence” by making “all appropriate inquiry” into the

previous ownership and use of the property consistent with good commercial or

customary practice.”

Acquired the contaminated property through an inheritance

The “innocent landowner’s” defense is also available to a government entity that

acquired the property through escheat or condemnation.

******************** CASE STUDY

UNITED STATES v. SHELL OIL CO.

(1985) 605 F. SUPP. 1064

The United States filed a suit against the Shell Oil Co. under the Comprehensive

Environmental Response, Compensation and Liability Act of 1980 (CERCLA). The

CE DIGEST 115

government sought to recover costs it had incurred and would incur in responding to

hazardous waste contamination at the Rocky Mountain Arsenal near Denver, Colorado.

The arsenal property was owned by the U.S. Department of the Army. The Army

used the property for the manufacture, testing, and disposal of various chemical agents and

munitions. The Army leased certain portions of the property to Shell Oil and its predeces-

sors for the manufacture, packaging, and other handling of pesticides, herbicides, and other

chemicals.

The Army’s wastes and all or some portion of Shell’s wastes were disposed of

through a common sanitary sewer system and common contaminated waste disposal system

built and operated by the Army. The waste disposal system failed and released into the

environment hazardous substances from the wastes generated by the Army, Shell Oil, and

other tenants. The released chemicals contaminated air, land, ground water, and lakes on the

arsenal property and threatened to contaminate the environment outside the arsenal. The

contamination also killed migratory birds, fish, and wildlife found in and around the arsenal

property.

In 1975, the State of Colorado issued an administrative order to the Army and Shell

directing them to cease and desist from the discharging of chemical wastes. The order

further directed them to clean up all sources of certain chemicals and to undertake a ground

water monitoring program. By 1983, the Army had incurred expenses of $48,000,000 in

responding to releases of hazardous chemicals at the arsenal. The Army had also developed

several comprehensive plans for the further clean-up of the arsenal ranging from costs of

$210,000,000 to $1,800,000,000. The United States suit against Shell identified the com-

pany as a “Potentially Responsible Person” and alleged that Shell was responsible for all or

a substantial portion of the response costs for further clean-up costs under CERCLA.

Shell sought dismissal from certain of the claims on the grounds that the contamina-

tion had occurred prior to the enactment of CERCLA. The court concluded that the whole

purpose of CERCLA was retrospective and remedial and that CERCLA authorized recovery

of pre-enactment response costs. The court also concluded that Shell qualified as a

“Potentially Responsible Party” under CERCLA. Shell also sought dismissal of the

$1,800,000,000 estimated remedial costs for further clean-up costs arguing that the amount

represented a “worst case” scenario and represented the most expensive clean-up option.

The court denied their motion for dismissal.

******************** DUE DILIGENCE UNDER CERCLA & SARA

The EPA, the courts, or enacted statutes, have not yet set forth specific guidelines as

to what constitutes "appropriate inquiry." However, SARA suggests that the following be

considered:

Any specialized real estate knowledge or experience of the buyer

Any difference between the selling price and the property’s value if

uncontaminated

116 CE DIGEST

Commonly available information about the property

How obvious or apparent is the hazardous waste to competent inspection

Since the introduction of CERCLA and the later amendments to it by SARA, concern

has grown within the real estate community. Buyers, sellers, and lenders have developed a

growing realization that, on certain types of real estate transactions, they could find them-

selves responsible for enormous environmental clean-up costs. They also realize that

finding themselves as a party in a transaction involving a contaminated property could

trigger extensive red tape and expensive environmental litigation.

Lenders have become increasingly reluctant to extend credit on certain properties

without obtaining environmental clearance should they have to foreclose and take over the

ownership of the property. They could become legally liable for hazardous substances

found on properties that they own as well as on properties on which they hold a security

interest and participate in the management of the property.

These facts tend to raise the “red flag” of caution concerning the lender’s policy in

the approving and making of real estate loans. Newer EPA regulations have tended to

reduce lender concerns over potential liability by stating that for the purpose of superfund

liability, a lender is not technically considered to be “the owner” if the property is disposed

of within six months of the foreclosure.

It is becoming increasingly prudent for sellers, buyers, and lenders to take actions to

protect themselves and minimize their liability in transactions that warrant it. One of the

best ways to exercise due diligence under CERCLA and SARA is to have an Environmental

Site Assessment (ESA) done on the property. This can provide the "all appropriate inquiry"

feature in SARA to qualify as an "innocent landowner." There are also insurance

companies that write Environmental Liability Insurance that can be used to provide

protection if needed.

The Federal National Mortgage Association (FNMA) and the Federal Deposit

Insurance Corporation (FDIC) publish guidelines for lending institutions when considering

loans on properties that raise environment concerns. These guidelines contain excellent

information, however, for all members of the real estate community.

RESOURCE CONSERVATION AND RECOVERY ACT (RCRA)

This environmental law, that was enacted in 1976, has evolved through a series of

amendments to give the EPA virtually “cradle to grave” authority to monitor hazardous

wastes. It empowers the EPA with far reaching authority to regulate the generators and

transporters of hazardous wastes as well as parties who treat, store, and dispose of hazardous

wastes. This law also establishes the legal authority to defray the clean-up costs of

contaminated properties.

CE DIGEST 117

The original legislation was the Solid Waste of Act of 1965, which was a narrow

piece of legislation dealing with non-hazardous solid waste. It was amended and expanded

in 1970 and then again in 1976 through the enactment of the Resource Conservation and

Recovery Act of 1976. Later, it was combined with the Hazardous and Solid Waste

amendments (HSWA) in 1984 to emerge in its present form. Amendments made in 1986 to

RCRA enabled EPA to address problems that could result from underground tanks storing

petroleum and other hazardous substances. RCRA focuses only on active and future

facilities and does not address abandoned or historical sites.

There are nearly two million Underground Storage Tanks (USTs) around the country.

USTs can harm the environment through leaks or spills. UST owners and operators must

clean up any damage their tanks may have caused. New tanks must also meet stringent

standards and be operated to minimize the chance of leaks or spills.

ADMINISTRATION

This program is administered at the federal level through the Office of Solid Waste.

The administrator of this federal office is charged with the responsibility of administering

this legislative program which includes such functions as:

The definition and identification of materials that are to be classified as “solid”

and “hazardous” wastes.

The maintenance of lists of materials that are classified as “hazardous” that would

fall under the provisions of this act.

The setting of standards and guidelines that provide a “paper trail” from the

generator of these wastes through the transporters and storers to the final disposal

of the wastes by the disposer.

The development of guidelines for state hazardous waste programs.

The issuing of permits for the treatment, storage, or disposal of hazardous wastes.

RCRA gives the Administrator and the EPA broad and far-reaching powers. It

authorizes that a suit may be brought on behalf of the United States government to

immediately restrain persons contributing to the handling, storage, treatment, transportation,

or disposal of solid or hazardous wastes upon receipt of evidence that such may present

imminent and substantial endangerment to human health or the environment.

DEFINITION OF HAZARDOUS WASTE

One of the major problems of waste generators, handlers, and transporters is to

determine if a waste material falls under the regulatory provisions of RCRA. One of the

EPA’s functions, under RCRA, is to define, update and maintain lists of both solid and

118 CE DIGEST

hazardous waste materials in an attempt to clarify the issue. The first step in attempting to

comply with this law is to determine if the EPA classifies the material as a solid waste.

This determination is complicated inasmuch as solid wastes may be liquid, semi-

liquid, or gaseous waste products. This determination, however, is vital because the provi-

sions of RCRA apply to solid wastes that the EPA also classifies as being hazardous. A

solid waste that is non-hazardous or a hazardous waste that is non-solid would fall under or

be subject to the regulatory provisions of this legislation.

The statutory definition of a hazardous waste as provided by RCRA is: "A solid

waste, or combination of solid wastes, which because of its quantity, concentration, or

physical, chemical, or infectious characteristics may cause, or significantly contribute to an

increase in mortality or an increase in serious irreversible, or incapacitating reversible,

illness, or pose a substantial present or potential hazard to human health or the environment

when improperly treated, stored, transported, or disposed of, or otherwise managed."

Under RCRA, a hazardous waste possesses the four features of “ignitability,

corrosivity, reactivity, or toxicity.” Waste material that in itself is not hazardous would

become subject to regulation if it happened to possess even a small amount of substances

that the EPA classified as being hazardous. A solid waste is considered to be hazardous if it

is a waste mixture containing one or more listed hazardous wastes or exhibits one or more

characteristics of hazardous waste (ignitability, corrosivity, reactivity, or toxicity).

A REGULATORY "PAPER TRAIL

RCRA requires generators of significant amounts of hazardous waste to initiate a

“trail of paper” that identifies each of the handlers and transporters of these substances. This

tracking system is known as the Manifest System (or cradle to grave). This establishes a

framework that allows the EPA to track the movement of these waste products and to

identify responsible parties for any violation of RCRA. Violations of this legislation can be

very expensive with fines of up to $50,000 per day.

******************** CASE STUDY

UNITED STATES v. REILLY TAR & CHEMICAL CORP.

(1982) 346 F. SUPP. 1100

In 1917, Reilly Tar & Chemical Corporation began to operate a plant in St. Louis

Park, Minnesota. At this plant, it refined coal tar in creosote oil and other products, and

treated wood products with creosote oil and other preservatives. For fifty-five years, until

the plant ceased operations in 1972, Reilly Tar generated chemical wastes that were

handled, stored, treated, and disposed of at the Reilly Tar site.

CE DIGEST 119

In 1982, the U.S Government and the State of Minnesota brought actions against

Reilly Tar under the Resource Conservation and Recovery Act, the Comprehensive

Environmental Response, Compensation, and Liability Act, and state law for alleged con-

tamination of the ground and the underlying groundwaters in and around the city of St.

Louis Park. The plaintiffs alleged that Reilly Tar spilled, leaked, and discharged chemical

wastes generated at the Reilly Tar site directly into the ground causing the wastes to seep

into the ground and into the area surrounding the plant site.

The plaintiffs further alleged that these chemicals had migrated into the groundwater

beneath and surrounding the site. The groundwater beneath the Reilly Tar site was part of

the water system supplying drinking water in the Minneapolis-St.-Paul metropolitan area.

The chemicals previously discharged at the Reilly site were carcinogens and toxic and

would continue to move into the drinking water unless preventative measures were taken.

Reilly Tar claimed they were not liable for clean-up costs and sought dismissal of all actions

based on their contentions that:

The federal and state laws invoked were jurisdictional and only applied if the

pollution crossed state lines

Statutes do not apply to prior owners of inactive sites

Complaints failed to allege sufficient facts to establish an “imminent and

substantial endangerment” to the public health, welfare, and environment.

The District Court ruled that both RCRA and CERCLA could be interpreted to apply

to intrastate pollution; that the complaints were sufficient to establish an imminent and

substantial endangerment to health and the environment and, therefore, subject to claims of

the state under the Acts; and, that the liability for clean-up costs is absolute, subject only to

defenses of acts of God, acts of war, and certain acts and omissions of third parties. The

District Court denied all motions for dismissal.

This case points up the fact that the courts give a broad and liberal interpretation in

environmental cases to preserve the intent of Congress through the enactment of RCRA and

CERCLA. This intent was to give the federal government the tools necessary for a prompt

and effective response to hazardous waste problems. And, in addition, that parties held

responsible for problems caused by the disposal of chemical poisons bear the cost and

responsibility to remedy the harmful conditions they created.

********************

THE CLEAN AIR ACT OF 1970

Outdoor air quality is affected by many human and natural activities. Manufacturing

companies, power plants, small businesses, automobiles, and forest fires are all sources of

air pollution. Any activity that releases materials into the air affects air quality.

120 CE DIGEST

The basic purpose of the Clean Air Act, when initially enacted, was to protect human

health and the environment from emissions that pollute outdoor air. This law authorized the

Environmental Protection Agency to establish National Ambient Air Quality standards

(NAAQS) to protect public health and the environment. The EPA, in implementing this

Act, has established federal standards for mobile sources of air pollution, for sources of 189

hazardous air pollutants, and for the emissions that cause acid rain. It also established a

comprehensive permit system for all major sources of air pollution. EPA's Office of Air and

Radiation (OAR) is concerned with pollution prevention, indoor and outdoor air quality,

industrial air pollution, pollution from vehicles and engines, radon, acid rain, stratospheric

ozone depletion, and radiation protection. OAR also acts as the lead office for developing

the scores of regulations required under The Clean Air Act.

Under CAA, individual states are responsible for establishing procedures to attain

and maintain the standards developed by the EPA. The Act requires that each state adopt

plans, and submit them to the EPA to insure that they are adequate to meet the legal

requirements of the law. These plans are known as State Implementation Plans (SIPs).

Amendments made to CAA in 1990, require the EPA to impose sanctions in areas that fail

to submit a SIP, fail to submit an adequate SIP, or fail to implement a SIP. The states also

share responsibility for issuing and enforcing air pollution permits. In some areas, local

governments will test vehicle emissions and monitor other air quality issues.

******************** CASE STUDY

(The following news article was released by the EPA for publication on May 17, 2001)

"EPA APPROVES NEW YORK AND NEW JERSEY PLANS

TO REDUCE SMOG-FORMING CHEMICALS"

"In an effort to make smoggy summer days a thing of the past, the U.S.

Environmental Protection Agency (EPA) has given final approval to New York and New

Jersey's plans to reduce nitrogen oxide pollution. Nitrogen oxides are a key ingredient of

smog, the murky, steamy and unhealthy air that can cause some to reach for their inhalers or

take a trip to the hospital. EPA's approvals of the New York and New Jersey plans are part

of an overall strategy to curb the transport of harmful pollutants across state borders.

Under the strategy, commonly called the NOx SIP Call, EPA is requiring 19 states in

the midwest, south, northeast, and the District of Columbia to place further controls on

nitrogen oxides, which are primarily emitted by large industrial boilers and power plants.

Each of these states and the District must meet a set "budget" that limits nitrogen oxide

emissions.

The budgets were calculated based on what would be emitted in that state if all of its

power plants and boilers were clean. These budgets will generally require large reductions

CE DIGEST 121

in nitrogen oxide emission in the midwest and south, with more modest reductions in the

northeast, where nitrogen oxide pollution is already stringently controlled. The NOx SIP

Call will help the entire eastern portion of the country meet federal health-based standards

for smog, the most persistent and serious air pollution problem in the northeast.

This plan will reduce nitrogen oxide emissions a total of about one million tons per

ozone season. For their parts, New York is reducing its seasonal nitrogen oxide emissions

by 16,000 tons and New Jersey is reducing its emissions by 9,000 tons. The plans that EPA

has approved lay out these reductions and meet the requirements of EPA's overall plan."

***********************************************

INDOOR AIR

Indoor air is often more polluted than the air outside our homes and places of

business. Indoor pollution sources that release gases or particles into the air are the primary

cause of indoor air quality problems in a home. Inadequate ventilation can increase indoor

pollutant levels by not bringing in enough outdoor air to dilute emissions from indoor

sources and by not carrying indoor air pollutants out of the home. High temperature and

humidity levels can also increase concentrations of some pollutants. There are many

sources of indoor air pollution in any home. These include:

Combustion sources such as oil, gas, kerosene, coal, wood, and tobacco

products

Building materials and furnishings as diverse as deteriorated asbestos-

containing insulation, wet or damp carpet, and cabinetry or furniture made of

certain pressed wood products

Products for household cleaning and maintenance, personal care, or hobbies

Central heating and cooling systems and humidification devices

Outdoor sources such as radon, pesticides, and outdoor air pollution

If too little outdoor air enters a home, pollutants can accumulate to levels that can

pose health and comfort problems. Unless they are built with special mechanical means of

ventilation, homes that are designed and constructed to minimize the amount of outdoor air

that can "leak" into and out of the home may have higher pollutant levels than other homes.

However, because some weather conditions can drastically reduce the amount of outdoor air

that enters a home, pollutants can build up even in homes that are normally considered

"leaky."

SAFE DRINKING WATER ACT (SDWA)

The Safe Drinking Water Act was originally passed by Congress in 1974 to protect

public health by regulating the nation's public drinking water supply. The law encompasses

many requirements that are designed to protect drinking water and its sources. The sources

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of drinking water include waters taken from rivers, lakes, reservoirs, springs, and ground

water wells. SDWA authorizes the Environmental Protection Agency to set national health-

based standards for drinking water to protect against both naturally-occurring and man-

made contaminants that may be found in drinking water.

The Safe Drinking Water Act applies to every public water system in the United

States. There are currently more than 170,000 public water systems providing water to the

American public. The responsibility to make sure these public water systems provide safe

drinking water is divided among the EPA, the individual states, water systems, and the

public. SDWA provides a framework in which these parties work together to protect this

valuable resource.

The EPA sets national standards for drinking water based on scientific analysis to

protect against health risks, considering available technology and costs. These National

Primary Drinking Water Regulations set enforceable maximum contaminant levels for

particular contaminants in drinking water or require ways to treat water to remove

contaminants. The EPA sets primary drinking water standards through a three-step process:

First Step: The EPA identifies contaminants that may adversely affect public

health and occur in drinking water with a frequency and at levels that pose a

threat to public health.

Second Step: The EPA determines a maximum contaminant level goal for

contaminants it decides to regulate.

Third Step: The EPA specifies a maximum contaminant level which is the

maximum permissible level of a contaminant in drinking water that is delivered

to any user of a public water system.

National drinking water standards are legally enforceable. This means that both the

EPA and the states can take enforcement actions against water systems that do not meet

safety standards. The EPA and states may issue administrative orders, take legal actions, or

fine utilities. The EPA and the states also work to increase water systems understanding of,

and compliance with, the existing standards.

TOXIC SUBSTANCES CONTROL ACT (TSCA)

The Toxic Substance Control Act of 1976 was enacted by Congress to give the EPA

the ability to track the 75,000 industrial chemicals currently produced or imported into the

United States. The EPA repeatedly screens these chemicals and can require reporting or

testing of those that may potentially pose an environmental or human-health hazard.

Based on these test results and other information, the EPA may regulate the

manufacturing, distribution, and disposal of any chemical that represents an unreasonable

risk of injury to human health or the environment. Under the provisions of TSCA, a variety

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of regulatory tools are available to the EPA. The agency's choice of remedies may range

from a total ban on the production, use, and import of a chemical to the placement of a

warning label at the point of sale.

As a result of amendments enacted over the years, the role of TSCA has been

expanded from its original mandates and now covers four title areas of responsibility:

Title I - Control of Toxic Substances - Includes provisions for testing

chemical substances and mixtures; manufacturing and processing notices;

regulating hazardous chemicals, substances, and mixtures; managing imminent

hazards; and reporting and retaining information.

Title II - Asbestos Hazard Emergency Response - These provisions gave the

EPA the authority to impose more requirements on asbestos abatement in

schools. This title now requires the inspection of schools for asbestos and

appropriate response actions and mandates periodic reinspection. It also

requires accreditation of persons who inspect for asbestos-containing material

in school, public, and commercial buildings.

Title III - Indoor Radon Abatement - The purpose of this legislation was to

assist states in responding to the threat to human health posed by exposure to

radon. The EPA is required to publish an updated citizen's guide to radon

health risk, and to perform studies of the radon levels in schools and radon

contamination in federal buildings.

Title IV - Lead Exposure Reduction - The purpose of this legislation is to

reduce environment lead contamination and prevent adverse health effects as a

result of lead exposure particularly in children. Its provision include identifying

lead-based paint hazards, defining levels of lead allowed in various products

including paint and toys, and establishing state programs for the monitoring and

abatement of lead exposure levels, including training and certification of lead

abatement workers.

Under TSCA, the EPA classifies chemical substances as either "existing" chemicals

or "new" chemicals. The EPA maintains a database of chemicals known as the TSCA

Chemical Substance Inventory which lists "existing" chemicals. The EPA has mechanisms

in place to track the thousands of new chemicals that industry develops each year with either

unknown or dangerous characteristics. EPA can then control these chemicals as necessary

to protect human health and the environment. TSCA supplements other Federal statutes

including the Clean Air Act. The TSCA program is run by the EPA and is not delegated to

any state agency.

POLLUTION PREVENTION ACT

A trend that is gaining in favor that tends to mitigate liability under federal

environmental laws, is embodied in the Pollution Prevention Act of 1990. Earlier

environmental law focused on various ways to treat wastes after they were created in order

to protect the environment. Gradually, however, real estate sellers, buyers, and lenders are

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developing a growing realization that whenever possible, avoiding wastes altogether is a far

better and safer solution than treating and disposing of existing hazardous and household

waste.

The Pollution Prevention Act of 1990 focused industry, government, and public

attention on reducing the amount of pollution produced through cost-effective changes in

production, operation, and raw materials use. Opportunities for source reduction are often

not realized because existing regulations, and the industrial resources required for

compliance, focus on treatment and disposal. Source reduction is fundamentally different

and more desirable than waste management or pollution control.

The biggest incentive for industries to reduce waste through source reduction is that

the cost of disposing of hazardous wastes is getting more and more expensive. When

companies produce less waste, their disposal costs are lower. Companies may also profit

from selling or saving recovered materials. Industries can reduce the amount of waste they

produce in many ways such as:

Manufacturing Process Changes: Process changes involve either eliminating

a process that produces a hazardous waste or changing the process so that it

produces little or no hazardous waste.

Source Separation: Refers to preventing hazardous waste from coming into

contact with nonhazardous waste. It is the cheapest and easiest way to reduce

hazardous waste. Source separation reduces costs for disposal, handling, and

transportation and is widely used by industry.

Recycling: Also referred to as recovery and reuse, is common in industry.

Recycling removes a substance from a waste and returns it to productive use.

Industries commonly recycle solvents, acids, and metals.

Substitution of Raw Materials: Involves replacing raw materials that

generate a large amount of hazardous waste with those that generate little or no

waste. Manufacturers can substantially reduce waste volume through

substitution.

Product Substitution: Involves finding nonhazardous substitutes for materials

and products used routinely in homes and businesses.

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Chapter Index

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CHAPTER 4 - HIGHLIGHTS

ENVIRONMENTAL LAWS & REGULATIONS

Early Legislation

1. Created starting in mid-1960’’s

2. PURPOSES: 1) Protect the environment 2) Protect the health of citizens 3) Conserve our

national resources 4) Reduce spread of pollution and waste

GENERAL LIABILITY

1. Environmental laws require that owners can be held liable for clean-up costs of contaminated

properties

2. If lender assumes ownership of contaminated property through foreclosure - Lender may become

liable.

NATIONAL ENVIRONMENTAL POLICY ACT (NEPA) - Enacted in 1969

NEPA created the: 1) Council on Environmental Quality 2) The Environmental Protection Agency

(EPA) 3) Framework for Environmental Impact Statement (EIS)

1. Council of Environmental Quality - Has 3 members; Appointed by President

2. Council prepares environmental quality report each year for President

3. Council reviews and appraises Federal programs and policies

GOALS OF NEPA

1. Places obligation on federal agencies to consider every significant aspect of the environmental

impact of a proposed federal action or program such as construction of a highway, dam, or bridge

2. Provide the means to insure that the federal agency proposing action inform public of its findings

regarding effect of project on environment in decision-making process.

ENVIRONMENTAL IMPACT STATEMENT (EIS)

NEPA mandates that an Environmental Impact Statement be included with every proposed federal

action or program significantly affecting the environment

1. If a determination is reached that impact will not significantly affect the environment, no EIS has

to be prepared

2. Agency issues a “finding of no significant impact” - subject to review by public before decision to

bypass EIS is reached

3. Proposed federal projects are subject to lawsuits by private citizens if: 1) No EIS is filed 2) An

EIS is filed which does not address significant potential environmental damage, or 3) The EIS

fails to consider viable alternatives

COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY

ACT (CERCLA)

1. Became law in 1980. Also known as Superfund law

2. CERCLA authorizes EPA to recoup costs of clean-up from responsible parties

3. “Potentially Responsible Parties (PRP’s)” may be: 1) Present owners and operators of a site

2) Corporations or individuals who owned property at time of hazardous waste disposal

3) Parties who generated the hazardous waste 4) Persons who arranged for the hazardous waste

to be disposed of at the site 5) Any corporation or individual who transported the waste.

4. Strict Liability under CERCLA - Means a PRP may be held liable whether PRP was responsible

for, knew about, or was negligent regarding contamination

5. The only defenses that can be used by PRP to avoid liability under CERCLA are: 1) An act of

God 2) An act of War 3) An act or omission of a 3rd party

6. Third Party Defense - Defendant must be able to prove contamination was done by party unknown

to PRP and that 3rd party acted independently not as agent or employee of defendant.

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CHAPTER 4 - HIGHLIGHTS

SUPERFUND AMENDMENT AND REAUTHORIZATION ACT (SARA)

1. 1986 amendment to CERCLA.

2. Established “innocent landowner’s defense.” Very important to real estate buyers.

3. To claim defense of “innocent landowner,” defendant must prove that 1) Buyer did not know or

had no reason to know that property was contaminated at time of purchase 2) The property was

purchased after the improper disposal of hazardous materials 3) Buyer had exercised “due

diligence” by making “all appropriate inquiry” into previous ownership and use of property

consistent with customary practice

RESOURCE CONSERVATION AND RECOVERY ACT (RCRA)

1. Administered at federal level by Office of Solid Waste

2. Functions of federal agency include 1) Definition of materials that are to be classified as “solid”

or “hazardous” wastes 2) Maintenance of lists that are classified as “hazardous” that fall under

RCRA 3) Setting of standards and guidelines for generators, transporters, storage facilities, and

disposers of hazardous wastes 4) Development of guidelines for state hazardous waste programs

5) Issuing of permits for the treatment, storage, or disposal of hazardous wastes

SAFE DRINKING WATER ACT (SDWA)

1. Passed by Congress in 1974 to protect public health by regulating the nation's public drinking

water supply.

2. Sources of Drinking Water: Includes waters taken from: 1) Rivers 2) Lakes 3) Reservoirs

4) Springs, and 5) Ground water wells.

3. SDWA authorizes the Environmental Protection Agency to set national health-based standards for

drinking water to protect against both naturally occurring and man-made contaminants.

4. There are more than 170,000 public water systems in the United States

5. National drinking water standards are legally enforceable. Both the EPA and states

can take enforcement actions against water systems that do not meet safety standards.

6. Legal actions include: 1) Issue administrative orders 2) Take legal actions, or

3) Fine utilities.

TOXIC SUBSTANCES CONTROL ACT (TSCA)

1. Enacted by Congress to give the EPA the ability to track the 75,000 industrial chemicals currently

produced or imported into the U.S.

2. EPA may regulate the manufacturing, distribution, and disposal of any chemical that represents an

unreasonable risk of injury to human health or the environment.

3. If a substance is considered hazardous, the EPA remedies may range from a total ban on the

production, use, and import of a chemical to the placement of a warning label at the point of sale.

4. Under TSCA, the EPA has the responsibility for lead exposure reduction

5. The EPA maintains a database of chemicals known as the TSCA Chemical Substance Inventory

which list "existing" chemicals.

6. The TSCA program is run by the EPA and is not delegated to any state agency.

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Chapter Index

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CHAPTER FOUR Review Quiz

1. Which of the following persons would be concerned about the possibility that a real estate

property might be environmentally contaminated?

a) The seller of the property

b) The lender who intends to use the property as collateral for his loan

c) The buyer of the property

d) All of the above

2. All of the following were created through the enactment of the National Environmental

Policy Act except the:

a) Environmental Protection Agency (EPA)

b) Innocent landowner’s defense

c) Council on Environmental Quality

d) The requirement for Environmental Impact Statements (EIS’s)

3. Which of the following is true regarding the Council for Environmental Quality?

a) It has 3 members

b) The council reviews and appraises Federal programs and policies

c) The members of the council are elected and serve on the council for 5 years

d) Both a) and b) above

4. Under CERCLA, if there is more than one “Potentially Responsible Party (PRP) involved,

the liability is joint and several. This means the:

a) Government can hold a single person liable for the entire cost of cleaning up the

contaminated property

b) The present owner is liable for the contamination of the previous owner

c) The buyer, seller, and lender are each liable for 1/3 the cost of clean-up

d) The government can only collect from the person who caused the contamination of

the property

5. Which of the following legal defenses can a "Potentially Responsible Party" use to avoid

liability under CERCLA and avoid the costs of cleaning up a contaminated property?

a) An act of God

b) An act of War

c) An act or omission of a third party

d) Any of the above

6. All of the following are true statements regarding the Superfund Amendment and

Reauthorization Act (SARA) except:

a) This amendment added the "innocent landowner" defense to the list of defenses that

the defendant in a Superfund suit could use

b) Lessened the strict liability of CERCLA by providing a defense that exempts

"innocent landowners"

c) Barred parties who acquired the property through inheritance from using the

"innocent landowner" defense d) SARA was enacted in 1986

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CHAPTER FOUR Review Quiz

7. Which of the following prudent actions might an individual or corporation that is involved

in a real estate transaction take to reduce to their exposure to environmental liability?

a) Have an environmental site assessment made on the property to attempt to establish

the "innocent landowner" defense

b) Buy an adequate amount of environmental liability insurance

c) Both (a) and (b) above

d) Neither (a) or (b) above

8. Under the Resource Conservation and Recovery Act (RCRA), all of the following are

classified as one of the characteristics of a “ hazardous waste” except:

(a) Radioactive

(b) Ignitable

(c) Corrosive

(d) Reactive

9. Under the Safe Drinking Water Act, both the EPA and the states have the right to enforce

national drinking water standards. Should either the EPA or an individual state discover that

a water system is not meeting these safety standards, they can:

a) Issue an Administrative Order directing the water system to take corrective action

b) Take legal action

c) Fine the water system

d) Any of the above

10. All of the following are true statements concerning the Toxic Substance Control Act

(TSCA) except:

a) The EPA delegates the authority to administer TSCA to the states

b) The EPA has the ability to track the 75,000 chemicals produced or imported into the

U.S.

c) The EPA, under TSCA, has the responsibility for lead exposure reduction

d) Under TSCA, the EPA has the responsibility to publish an updated citizen's guide to

radon health risk

Chapter Index

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CHAPTER 5

ENVIRONMENTAL HAZARDS

In modern day real estate practice, the cardinal rule is to disclose early and disclose

often. Most active real estate practioners are well aware that the days of "caveat emptor"

have almost disappeared from the national real estate scene. Real estate licensees have a

duty to inform a principal of all material facts. A material fact is one that would likely

influence a principal in making a decision to sell property or to buy property or the price and

terms at which the seller will do so. Most certainly, any potential environmental hazard, and

resulting liability would profoundly affect a seller's or buyer's decision in a real estate

transaction.

If a licensee becomes aware of an environmental hazard or problem involving a real

estate transaction in which the agent is involved, he should make both the seller and buyer

aware of it as early as possible. This gives seller and buyers more time to consider the

degree or severity of the problem and what can be done about it. The real estate buyers of

today are well educated on health and safety issues and want to be informed of any

information that might effect them and their families.

Most state real estate associations advocate the use of some type of seller property

disclosure form in residential transactions. A seller disclosure statement in a real estate

transaction describes the condition of the property. It also lists any known defects that

might affect the value or desirability of the property. The use of this type of seller

disclosure form is one of the better ways to insure that the buyer will be satisfied that he or

she was treated honestly and fairly. This is a rather important consideration since estimates

are that almost two-thirds of all lawsuits in the United States against real estate licensees are

filed charging misrepresentation or a failure to disclose property defects.

While property disclosure statements vary from state to state, in some states it has

become mandatory that sellers provide this type of documentation to buyers. In California,

for instance, it is legally required that a seller of from one-to four residential units provide

the buyer with a Real Property Transfer Disclosure Statement (TDS). This statement of the

property's condition must be delivered to the prospective buyer as soon as is practical. The

statement would include a disclosure of any structural or material defects, malfunctioning

systems, and any other problem areas that might adversely affect the property's value. In

today's market, this definitely includes a disclosure of any existing or potential environ-

mental hazards.

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LEAD

Lead is a heavy, comparatively soft, malleable metal found in rocks and soils. It has

long been recognized as a harmful, highly toxic, environmental pollutant. In 1991, the then

Secretary of the Department of Health and Human Services called lead the "number one

environmental threat to the health of children in the United States." There are many ways in

which humans can be exposed to lead. Lead can be found in the air that we breathe, our

drinking water, the food we eat, contaminated soil, deteriorating paint, and dust.

Airborne lead enters the human body when an individual breathes in or swallows

lead particles or lead dust. Lead can leach into drinking water from certain types of

plumbing materials such as lead pipes, copper pipes with lead solder, and brass faucets. It

can also be found on walls, woodwork, and the outside of homes and buildings in the form

of lead-based paint. Lead can also be deposited on floors, windowsills, eating and playing

surfaces, or in the dirt outside the home. Children can swallow harmful amounts of lead if

they play in the dirt or in dusty areas and then put food or other items into their mouth

before washing their hands.

Children are more vulnerable to lead exposure than adults since lead is more easily

absorbed into growing bodies. Also, the tissues of small children are more sensitive to the

damaging effects of lead. Children, who have been exposed to excessive levels of lead, run

the risk of incurring severe physical and mental health problems such as:

Brain damage

Slower physical growth

Damaged kidneys

Impaired hearing

Headaches

Appetite loss

Learning and behavioral problems

In adults, lead can increase blood pressure, cause digestive problems, kidney damage,

nerve disorders, sleep problems, muscle and joint pain, and mood changes.

SOURCES OF LEAD IN HOMES AND BUILDINGS

The four major sources of excessive lead exposure in homes and commercial

buildings are:

Lead-based paint

Lead contaminated dust

Lead contaminated soil, and

Drinking water.

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Of these four major contributors, lead-based paint is of particular concern because of

its relationship to lead contaminated dust, and lead contaminated soil. Lead-based paint

becomes the trigger to increased overall lead exposure as a result of this relationship. As an

example, lead in paint can contribute lead to dust and soil and, in turn, lead in soil can be

carried indoors and contribute more lead exposure in the form of interior dust.

LEAD-BASED PAINT

Lead was widely used as a major ingredient in most interior and exterior oil-based

paints that were in use until the late 1970's. In 1978, because of growing concerns regarding

lead as a health hazard, the Consumer Product Safety Commission banned the use of paint

containing high levels of lead for all homes and most buildings. The Department of

Housing and Urban Development (HUD) estimates that more than 75% of the housing built

prior to 1978 contains some lead-based paint.

Lead-based paint that is intact and in good condition is usually not a hazard.

However, lead based paint that is peeling, chipping, chalking, or cracking is a hazard and

needs immediate attention. Lead-based paint may also pose a hazard on surfaces children

can chew, or in areas with heavy wear. These areas include windows and window sills,

doors and door frames, stairs, railings, banisters, porches, and fences.

DETERMINING IF LEAD IS PRESENT IN PAINT

The most reliable way to determine if the paint in a home or building contains lead is

to test the paint. There are several recommended methods that can be used to determine the

lead content of paint. They are:

Paint Scrapings - In this method, paint chips are cut as samples and these

samples are sent to a qualified laboratory for testing. The main advantage of

this method is its accuracy. A qualified laboratory will have the capabilities to

thoroughly test the samples and best determine the degree of lead content. The

main disadvantage of this method is that 30-50 paint samples may need to be

taken. This could cause considerable damage to the existing woodwork in the

home and can be fairly costly. In addition, lab processing can be slow which

could cause delays.

Chemical Spot Testing - A chemical solution is applied to the suspect paint in

a home. This causes a chemical reaction and the paint will change its color if

lead is present. This test is quick and inexpensive. It enables the tester to

determine whether or not lead is present in painted woodwork in the home.

However, this test will not determine how much lead is in the paint. It loses a

little accuracy because of this feature. It can also be destructive since the

samples must be scraped to determine the lead content on the lower levels of

the sample.

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X-Ray Florescence - This method exposes a radioactive source to the paint

surface to determine the percentage of paint contained in the lead. It is

expensive. However, it is very accurate and the testing can be conducted on the

site. It does require that the test be performed by a trained professional.

LEAD CONTAMINATED DUST

When painted surfaces bump or rub together they generate lead dust. Likewise, dry-

scraping, sanding, or heating lead paint during repainting or remodeling also creates huge

amounts of poisonous lead dust. This lead dust can pose a definite health hazard. In

addition to indoor sources of house dust, there are neighborhood sources. Neighborhood

sources could include the demolition of a nearby building, sandblasting of a bridge, or other

activities involving structures that might contain lead-based paint. Also lead may be

brought into the home on clothing of family members employed in lead related occupations,

or as the result of some hobbies.

LEAD CONTAMINATED SOIL

Soil can become contaminated with lead from deteriorating exterior paint and from

leaded gasoline emissions. These sources have added substantially to the naturally

occurring lead found in soils. Also, industrial sources such as smelters, recycling facilities,

and mining activities can result in lead contamination in residential areas. Excessive levels

of lead in soil can be a hazard to children who play in the bare soil. It can also contaminate

the home when people bring soil into the house on their shoes.

DRINKING WATER

Lead contamination of drinking water usually occurs after water leaves the local

public water system or an individual's water well. The most likely sources of lead in

drinking water are generally found in the plumbing fixtures built into a home or commercial

building. Lead levels in a home are likely to be highest if:

A home or building has faucets or fittings made of brass which contain some

lead, or

A home or water system has lead pipes, or

A home has copper pipes with lead solder and the home is less than five years

old, or

The home or building has naturally soft water, or

Water often sits in the pipes for several hours/

Up through the early 1900's, it was common practice to use lead pipes for interior

plumbing. Also, lead piping was often used for the service connections that join residences

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to public water systems. Eventually, copper pipes replaced lead pipes in most residential

plumbing. However, the use of lead solder with copper pipes continued to be widely used.

Experts regard this lead solder as the major cause of lead contamination of household

drinking water in U.S. homes today.

Lead pipes are generally found only in homes built before 1930. Amendments to the

Safe Drinking Water Act that went into effect in 1988, require the use of "lead-free" pipe,

solder, and flux in the installation or repair of any public water system, or any plumbing in a

residential or non-residential facility connected to a public water system. Pipes and fittings

are now considered "lead-free" when they contain not more than 8.0 percent lead.

However, new brass faucets and fittings can also leach lead even though they

are "lead free." Any plumbing device or fixture, domestically produced or imported, that

contains any amount of lead and is in contact with the water is a potential source of

contamination. Brass fittings and plumbing fixtures containing 8.0 or less lead have been

found to contribute high lead levels for a considerable period of time after their installation.

This is true even in cases where these devices are in contact with relatively non-corrosive

waters. The amount of lead that may leach into the water from a brass faucet or fixture is

not solely related to the amount of lead contained in the product. The amount of lead

leaching from a plumbing product is greatly, but not exclusively, influenced by the

manufacturing process.

Newer homes, less than 5 years old, generally have a higher risk of lead

contamination than older homes. As a home gets older, mineral deposits form a coating on

the inside of the pipes if the water is not corrosive. This coating insulates the water from the

solder. But, during the first five years before the coating forms, water is in direct contact

with the lead. It is highly likely that water in homes or buildings less than five years old

have a high level of lead contamination.

SAFE LEVELS OF LEAD IN DRINKING WATER

Federal standards initially limited the amount of lead in water to 50 parts per billion

(ppb). In light of new health and exposure data, the EPA has set an action level of 15 ppb.

If tests show that the level of lead in your household water is in the area of 15 ppb or higher,

it is a signal that steps should be taken to reduce the level of lead in the household's drinking

water. This is especially true if there are young children in the household. The EPA

estimates that more than 40 million U.S. residents use water that can contain lead in excess

of 15 ppb.

IDENTIFYING LEAD LEVELS IN DRINKING WATER

Lead that is dissolved in water cannot be seen, tasted, or smelled. The only sure way

to tell whether or not there are harmful quantities of lead in drinking water is to test it. One

"red flag" as to the presence of lead in a home's drinking water would be if the home has

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lead pipes. Lead is a dull gray metal that is soft enough to be easily scratched with a house

key. Other "red flags" that are indicators of possible lead contamination would include:

Frequent leaks

Rust-colored water

Stained dishes or laundry

Non-plastic plumbing is less than five years old

If one is suspicious of elevated lead levels in a household's drinking water, the local

water supplier might be able to provide useful information including whether or not the

service connector used in a home or area is made of lead. Testing is especially important in

high-rise buildings where flushings might not work.

To test the drinking water, samples will have to be collected from the tap and sent to

a qualified laboratory for analysis. For information on how to proceed, a concerned

homeowner might contact the local water utility or health department for information and

assistance. In some instances, these authorities might have the resources themselves to test

the water for the homeowner. Generally speaking, a qualified testing company should be

listed in the "yellow pages" of the local telephone directory.

It is advisable to make sure that the lab used has been approved by the state or by the

EPA as being able to analyze drinking water samples for lead contamination. To find out

which labs are qualified, contact the local or state health department or environmental

office.

REDUCING LEAD LEVELS IN DRINKING WATER

There are a number of actions that can be taken to reduce lead levels in homes or

buildings. Obviously, if the problem is stemming from installed lead pipes or the use of

lead solder, then these items should be removed. Other steps that can be taken would

include:

Do not drink water that has been in contact with the home's plumbing for more

than six hours such as overnight or during the normal workday. Before using

the water for drinking or cooking, "flush" the cold water faucet being used by

letting the water run until is gets as cold as possible. Buildings built prior to

about 1930 may have service connectors made of lead. Letting the water run

for an additional 15 seconds after it cools, will also "flush" the service

connector. Flushing is important because the longer water is exposed to lead

pipes or lead solder, the greater the possible lead contamination.

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Never cook with or consume water from the hot-water tap. Hot water dissolves

more lead more quickly than cold water. So, do not use water taken from the

hot tap for cooking or drinking. If you need hot water, draw water from the

cold tap and heat it on the stove. Use only thoroughly flushed water from the

cold tap for any consumption.

If you are served by a public water system contact your supplier and ask

whether or not the supply system contains lead piping and whether the water is

corrosive. If either answer is yes, ask what steps the supplier is taking to deal

with the problem of lead contamination. Drinking water can be treated at the

plant to make it less corrosive. Treatment to reduce corrosion will also save the

homeowner and the water supplier money by reducing damage to plumbing.

Water mains containing lead pipes can be replaced, as well as those portions of

lead service connections that are under the jurisdiction of the supplier.

RADON

Radon is a colorless, odorless, tasteless, radioactive gas that occurs naturally from the

decay of uranium in soils and rocks. As the uranium breaks down, it releases radon gas that

enters homes through dirt floors, cracks in concrete walls and floors, floor drains, and

sumps. When radon becomes trapped in buildings and concentrations build up indoors,

exposure to radon becomes a concern.

Any home may have a radon problem. This means new and old homes, well-sealed

and drafty homes, and homes with or without basements. Sometimes, radon enters the

home through well water. Radon gas is measured in PicoCuries per liter of air (pCi/L).

PicoCuries per liter (pCi/L) is a unit of measure for levels of radon gas. Sometimes test

results are expressed in Working Levels (WL) rather than PicoCuries per liter of air. A

level of 0.02 WL is usually equal to about 4 pCi/L in a typical home. Nearly one out of

every 15 homes in the United States is estimated to have an elevated radon level (4 pCi/L or

more). Since radon cannot be seen, tasted, or smelled, special instruments are necessary for

its detection.

HARMFUL EFFECTS OF RADON

The predominant health effect that can result from breathing indoor air that contains

elevated levels of radon is lung cancer. Drinking water that contains high radon levels may

also pose risks. However, these risks are believed to be much lower than those from

breathing air containing radon. The Surgeon General of the United States has warned that

radon is the second leading cause of lung cancer in the United States today. Only smoking

causes more lung cancer deaths. Individuals who smoke tobacco and live in a home with

high radon levels have an especially high risk of lung cancer.

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TESTING FOR RADON

The U.S. EPA recommends that homeowners should attempt to reduce radon levels in

any home that has an annual average level of radon over 4 pCi/L. The mitigation method

chosen will depend on the construction of the house, extent of radon reduction required, and

cost. Since you can't see radon, the only way to determine its presence is to test for it. If

they choose to do so, radon testing can be done by homeowners on their own. There are

many kinds of low cost "do-it-yourself" radon test kits that can be purchased through the

mail and in hardware stores or other retail outlets. Persons, who are involved in real estate

transactions as either a seller or buyer, may want to hire a professional testing company to

perform the testing. The EPA recommends that persons hiring a professional testing

company should contact their state radon office to determine if the contractor is federally or

state certified.

There are several types of radon testing devices. They include:

Passive Devices - This type of radon testing device does not need power to

function. Passive devices include charcoal canisters and alpha-tract detectors

that can be purchased in hardware or drug stores. They also can be ordered by

mail or by phone. These devices are exposed to the air in the home for a

specified period of time and then sent to a laboratory for analysis. Both short-

term and long-term passive devices are generally inexpensive. Some of these

devices may have features that offer more resistance to test interference or

disturbance than other passive devices. Qualified radon testers may use any of

these devices to measure the home's radon level.

Active Devices - Active radon testing devices require power to function. These

devices include continuous radon monitors and continuous working level

monitors. They continuously measure and record the amount of radon or its

decay products in the air. Many of these devices provide a report of this

information that can reveal any unusual or abnormal swings in the radon level

during the test period. In addition, some of these devices are specifically

designed to detect test interferences. Some technically advanced active devices

offer anti-interference features. Although these tests may cost more, they may

insure a more reliable result.

The EPA recommends that testing devices be placed in the lowest level of the home

suitable for occupancy. This means testing in the lowest level (first floor, basement,) that a

buyer could use for living space without renovations. The test should be conducted in a

room that is to be used regularly such as a family room, living room, playroom, den, or

bedroom. It is suggested that testing not be done in a kitchen, bathroom, laundry room or

hallway.

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Usually, the buyers decide where to locate the radon test based on their anticipated

use of the home. A buyer and seller should explicitly discuss and agree on the test location

to avoid any misunderstanding at a later date. Their decision should be clearly

communicated to the person performing the test.

LENGTH OF RADON TESTING

The two methods generally employed to test for radon are short-term testing and

long-term testing. Because radon levels vary with changes in climate, humidity, and other

factors, long term testing is more accurate in determining year-round average radon levels.

However, if the results of the test are needed to decide how to identify and handle a radon

problem quickly, short-term testing might be more appropriate.

Short-Term Testing - This is the quickest and easiest way to determine the

current level of radon gas in a home. An activated charcoal packet is placed on

the lowest level of a home that is currently in use as living space and is left

undisturbed for 48 hours. After this period, the packet is mailed to a qualified

laboratory for analysis. The results of the test are generally returned to the

sender with further instructions or recommendations within a two week period.

Long-Term Testing - If the objective of the test is to determine the most

accurate reading of a home's year round average radon level, a long term test is

highly recommended. Long term testing is done for a minimum time period of

90 days. The mechanics of the test procedures are similar to those used in

short-term testing. It is simply done over a longer period with more accurate

results.

If a property being tested is the subject property in an on-going real estate

transaction, or is about to be put on the market by a seller, or is being considered for

purchase by a potential buyer, the results are generally needed quickly. If this is the case,

any of the following three options for short-term testing are acceptable in determining

whether the home should be fixed. Any real estate transaction related test for radon should

include steps to prevent or detect interference with the test device.

Should the results be needed quickly, one of these three options could be used.

If Using a Passive Testing Device - Take two short-term tests at the same time

in the same location for at least 48 hours, OR

If Using a Passive Test Device - Take an initial short-term test for at least 48

hours. Immediately upon completing the first test, do a second test using an

identical device in the same locations as the first test, OR

If Using an Active Testing Device - Test home one time with a continuous

monitor for at least 48 hours.

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In either of the options using a passive testing device, if the average radon level is 4

pCi/L or more, the house needs to be fixed. In the testing situation where an active testing

device is used, only one test is required. However, once again, if the average radon level is

4 pCi/L or more corrective action should be taken.

REDUCING RADON LEVELS

A variety of methods are used to reduce radon in a home or building. In some cases,

sealing cracks in floors and walls may help to reduce radon. In other cases, simple systems

using pipes and fans may be used to induce radon reduction. Such systems are called "sub-

slab depressurization" and do not require major changes to a home. These systems remove

radon gas from below the concrete floor and the foundation before it can enter the home.

Similar systems can also be installed in houses with crawl spaces. Lowering high radon

levels requires technical knowledge and special skills. In most cases, it is best to use a

contractor who is trained to fix radon problems. A trained mitigation contractor can study

the radon problem in a home and make knowledgeable recommendations on the proper

treatment method.

SALES ASPECTS OF RADON TESTING

More and more, home buyers and renters are asking about radon levels before they

buy or rent a home. Because real estate sales can happen quickly, there is often little time to

deal with radon and other issues. Smart sellers are opting to have their homes tested prior to

putting the home on the market. This allows the sellers to fix the problem (take steps to

reduce radon levels if elevated) and solve any potential problems before they arise. If the

test shows that radon levels are acceptable or non-existent, the seller can simply hold on to

the test results in case a potential buyer expresses an interest in the results. During home

sales:

Buyers often ask if a home has been tested and if elevated levels were reduced

Buyers frequently want tests made by someone who is not involved in the home

sale

Buyers might want to know the radon levels in areas of the home (like a

basement they plan to finish) that the seller might not otherwise test

Many of the new homes being built today are built to be radon-resistant. The EPA

has Model Standards including drawings that are available and show how radon-resistant

features can be built in at the time of construction. Homes that are built to be radon-

resistant will most likely contain these basic elements:

Gas-Permeable Layer - This layer is placed beneath the slab or flooring

system to allow the soil gas to move freely underneath the house. In many

cases, the material used is a 4-inch layer of clean gravel. This gas-permeable

layer is used only in homes with basement and slab-on-grade foundations. It is

not used in homes with crawlspace foundations.

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Plastic Sheeting - Plastic sheeting is placed on top of the gas-permeable layer

and under the slab to help prevent the soil gas from entering the home. In crawl

spaces, the sheeting is placed directly over the crawlspace floor.

Sealing and Caulking - All below-grade openings in the foundation and walls

are sealed to reduce soil gas entry into the home.

Vent Pipe - A gas tight pipe runs from the gas-permeable layer through the

house to the roof to safely vent radon and other soil gases to the outside.

UNDERGROUND STORAGE TANKS (USTs)

An underground storage tank (UST) system is a steel or fiberglass tank, or a

combination of tanks and connected piping having at least ten percent of its volume

underground. The tank system includes the tank, underground connected piping,

underground ancillary equipment, and any containment system. Federal UST regulations

apply only to underground tanks and piping used to store either petroleum or hazardous

substances such as solvents, methanol, and anti-freeze.

As these tanks age, they can develop leaks (releases). At the present time, over

445,000 releases had been reported to the EPA. Releases can be caused by:

Improper Installation - Improper installation is a significant cause of

fiberglass-reinforced plastic (FRP) and steel UST failures (particularly piping

failures). Improper layout of piping runs, incomplete tightening of joints, and

inadequate cover pad construction can lead to the failure of the delivery piping.

According to the EPA, most leaks result from piping failure.

Corrosion - Many USTs are made of bare steel that corrodes over time and

causes leaks.

Spills and Overfills - Oil or hazardous substances can be spilled during

delivery to the UST. Or, the UST can be overfilled causing the material to flow

on and seep into the surrounding soil.

These releases can threaten human safety and health as well as the environment

because UST systems contain hazardous and toxic chemicals. When a tank leaks, the oil,

chemical, or substance enclosed escapes and percolates through the surrounding soils. Rain

water then carries the substance to a subsurface aquifer that may, in turn, transport the

contamination to a stream, lake, or wetland area. Fumes and vapors can travel beneath the

ground and collect in areas such as basements, utility vaults, and parking garages. These

substances pose a serious threat of explosion, fire, and asphyxiation or other adverse health

effects.

Since approximately one-half of the population of the United States relies on

groundwater as their source of drinking water, groundwater pollution is generally

considered to be the most serious problem created by leaking USTs. The most common

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source of ground water pollution is gasoline that is leaking from USTs at auto service

stations. It has been estimated that one gallon of petroleum can contaminate a water supply

for 50,000 people. Many municipal and private wells have had to be shut down as the result

of contamination caused by releases from UST systems.

The specific health hazards from drinking petroleum contaminated water include

damage to the central nervous system, leukemia, kidney and liver damage, and other

problems associated with the intestinal tract.

REGULATION OF USTs

In 1984, Congress directed the U.S. EPA to develop regulations for underground

storage tank systems. Many USTs are also subject to state regulations. EPA's Office of

Underground Storage Tanks (OUST) developed the Federal Regulations which delegate

USWT regulatory authority to approved State programs. States with approved programs

operate in lieu of the Federal regulations. There are currently 28 states with approved UST

programs.

Preventing and cleaning up releases are the two primary goals of the programs that

regulate USTs. Cleaning up petroleum releases is difficult and usually very costly. It is

easier and less costly to prevent releases before they happen. The old adage of "an ounce of

prevention being worth a pound of cure" is particularly relevant to UST systems.

Replacement costs for leaking tanks are estimated at one dollar per gallon of storage

capacity. Should the site require a cleanup operation, the costs can become very high.

The following types of tanks do not have to meet federal UST regulations:

Farm and residential tanks of 1,100 gallons or less capacity holding motor fuel

used for noncommercial purposes

Tanks storing heating oil used on the premises where it is stored

Tanks on or above the floor of underground areas, such as basements or tunnels

Septic tanks and systems for collecting storm water and wastewater

Emergency spill and overfill tanks.

Flow-through process tank

NEW REGULATIONS FOR USTs

Congress addressed the problem of the rapidly increasing numbers of leaking USTs

in the United States by passing legislation that took effect in December of 1998. This

legislation established higher standards regarding the construction and installation of new

USTs and imposed higher qualifications for owners and operators of USTs. It also created

two classes of USTs.

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Existing USTs - This description encompassed all UST systems that were installed

prior to the December 1998 legislation. By this legislation, owners and operators of

"existing USTs" were required to upgrade their older UST's to meet the higher

standards mandated by the new laws and regulations. Deadlines were established

for these owners to either upgrade their UST's to comply with these new

requirements or to close down their "substandard" units. Since all imposed

deadlines have passed, existing UST's that have not been closed down or upgraded

are considered to be out-of-compliance and the owners subject to fines of up to

$11,000 per day per violation.

New USTs - This term applies to UST's installed after December 1998. USTs

falling into this category are legally required to meet four requirements:

Spill and overfill prevention devices must be installed

Tanks and piping must include leak detection devices

Tanks and piping must be corrosion protected

Tanks and piping must be certified as meeting industry standards for proper

installation

Under current regulations, all federally regulated USTs must be registered with the

appropriate regulatory authority and meet leak detection requirements. In addition, the

owners and operators of USTs must:

Meet financial responsibility requirements

Perform a site check and take corrective action in response to leaks, spills and

overfills

Follow regulatory rules during installation of new tanks and closure of existing

tanks

Maintain records as required, and

Have periodic checks performed on corrosion protection and leak detection systems

UST RED FLAGS

Real estate licensees have a duty to disclose all material facts known to them that

might affect the value and desirability of a property. In the case of USTs, it is also desirable

to know something about the past and present use of surrounding properties. The real estate

licensee needs to be aware of the possibility that nearby properties may have or have had

USTs that leaked.

In marketing residential properties it may only be a remote possibility that USTs

could be found on other nearby properties. However, on commercial and industrial sites

there is a real possibility that USTs exist or have been present in the past. It is always a

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possibility that USTs on nearby sites could be the source of hazardous materials that could

be carried to the subject property by groundwater and contaminated its soil. Visual

evidence of pumps, input or vent pipes coming out of the ground, or oil spots would signal a

potential "red flag" of the presence of USTs.

TESTING FOR LEAKS

The only way to determine if leaks, spills, or overfills have contaminated the soil

around a UST is to test. All tests should be conducted by an EPA or state certified

professional. The three most commonly used tests to determine if a UST is leaking are:

Soil Borings - The method usually recommended by environmental

professionals in real estate transactions. Holes are drilled in the ground to a

depth of two feet below the base of the UST. A decontaminated drill is then

lowered and collects soil samples. These samples are labeled and packaged in

dry ice and shipped to an EPA approved lab to be analyzed.

Tank Integrity Test - This method is commonly used in the testing of gasoline

tanks. However, most real professionals do not consider it accurate enough to

be used in a real estate transaction because it can produce false readings. The

results on this test method rely on multiple factors such as temperature, air

pressure, and ground water fluctuations. These factors, along with the

possibility of operator error, most generally render this test's readings as too

unreliable for the purposes of making buy or sell decisions on real estate.

Soil Vapor Analysis - This method is also used in testing soils near gasoline

stations. In this method, shallow holes are drilled around the UST and a pipe is

inserted into these holes. A probe is then used to obtain an air sample that is

analyzed for petroleum content.

ASBESTOS

Asbestos is a fibrous mineral that may be found in residential, commercial, and

industrial buildings. In most cases, the presence of asbestos in a building is not a serious

problem. The mere presence of asbestos in a home or a building is not hazardous. It can,

however, become a problem if the asbestos materials become damaged over time. Damaged

asbestos may release fibers that, when inhaled, can become a health hazard.

Asbestos fibers are very strong and heat-resistant. In past years these characteristics

lead to the use of asbestos in a wide range of products found in buildings to provide

insulation, strength, and fire protection. Intact or sealed (painted or taped over) asbestos is

not harmful unless it becomes friable. Friable means the material can be easily crushed or

pulverized to a powder by hand pressure. Friable materials have a higher potential to

release fibers. Asbestos fibers that are released into the air and inhaled can accumulate in the

lungs and pose a health risk. This risk can be divided into two general categories: 1) risk of

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asbestosis; and 2) increased risk of cancer. Most persons diagnosed with asbestosis have

been exposed to asbestos in the work place.

WHERE ASBESTOS CAN BE FOUND

In 1989, the U.S. Environmental Protection Agency (EPA) announced a phased ban

of asbestos products to be completed by 1996. For this reason, most products made today

do not contain asbestos. The few products that remain on the market today, that contain

asbestos that could be inhaled, must be labeled. However, until the 1970's many types of

building products and insulation materials used in homes, commercial, and industrial

buildings contained asbestos. The most common items in buildings and the conditions that

could trigger the release of fibers include:

Resilient Floor Tiles (vinyl, asbestos, asphalt, and rubber) - Found on vinyl

sheet flooring and adhesives used for installing floor tiles. Sanding tiles can

release fibers. So may scraping or sanding the backing of sheet flooring during

removal.

Steam Pipes, Boilers, and Furnace Ducts - Insulated with an asbestos blanket

or asbestos paper tape. These materials may release asbestos fibers if damaged,

repaired, or removed improperly.

Cement Sheet, Millboard, and Paper - Used as insulation around furnaces

and wood burning stoves. Repairing or removing appliances may release

asbestos fibers. So may cutting, tearing, sanding, drilling, or sawing insulation.

Door Gaskets - Used in furnaces, wood stoves, and coal stoves. Worn seals

can release asbestos fibers during use.

Soundproofing or Decorative Material - Sprayed on walls and ceilings.

Loose, crumbly, or water-damaged material may release fibers. So will

sanding, drilling, or scraping the material.

Patching and Joint Compounds - For walls and ceilings, and textured paints.

Sanding, scraping, or drilling these surfaces may release asbestos

Asbestos Cement Roofing, Shingles, and Siding - These products are not

likely to release asbestos fibers unless sawed, drilled, or cut.

ASBESTOS POSES A HUMAN HEALTH HAZARD

The Environmental Protection Agency classifies asbestos as a known human

carcinogen. If asbestos fibers are inhaled, the likelihood of contracting lung cancer or

cancer of the lining of the chest or abdomen increases. As more asbestos is inhaled, the risk

of developing cancer further increases. Smokers who are exposed to high levels of asbestos

have a much greater risk of developing lung cancer than non-smokers exposed to the same

level. Symptoms of cancer may not develop until 10-40 years after the first exposure.

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IDENTIFYING ASBESTOS CONTAINING MATERIALS

When asbestos is suspected to be present in building materials, it is important to have

the materials tested by a qualified laboratory. Visual inspection alone is not enough to

identify the presence of asbestos. However, such testing may not be warranted if the

material is in good condition. Should this be the case, it is best to leave it in place. If the

material is damaged, or will be disturbed during normal household activities or remodeling,

it should be tested.

If in doubt about the presence of asbestos in certain areas, have the building materials

or insulation sampled and analyzed by a trained and qualified professional. In most cases, it

is much better to have a qualified professional take samples for testing since he or she

knows what to look for and how to correctly take samples. If done incorrectly, sampling

can cause an increased release of airborne fibers in an area that, in turn, will increase the

risk to human health. In fact, if done incorrectly, sampling can be more hazardous than

leaving the material alone. It is generally unwise for home or building owners to attempt to

repair or remove asbestos if the damage is severe. However, small repairs on pipe or duct

insulation can be made with paint or duct tape.

MANAGING ASBESTOS PROBLEMS

If the asbestos material is in good shape and will not be disturbed, do nothing! If it is

a problem, there are two types of corrections which are 1) repair or 2) removal. Repair

usually involves either sealing or covering asbestos material. Sealing involves treating the

material with a sealant that either binds the asbestos fibers together or coats the material so

fibers are not released. Pipe, furnace, and boiler insulation can sometimes be repaired this

way. Sealing should be done only by a professional trained to handle asbestos safely.

Covering involves placing something over or around the material that contains

asbestos to prevent release of fibers. Exposed insulated piping may be covered with a

protective wrap or jacket. With any type of repair, the asbestos remains in place. Repair is

usually cheaper than removal, but it may make later removal of asbestos, if necessary, more

difficult and costly. Repairs can either be major or minor.

Removal of asbestos containing materials is usually the most expensive method of

treating asbestos problems. Unless required by state or local regulations, removal should be

the last option considered in most situations. This is because removal poses the greatest risk

of fiber release. However, removal may be required when remodeling or making major

changes to your home that will disturb asbestos material. Also, removal may be called for if

asbestos material is damaged extensively and cannot be otherwise repaired. Removal is

complex and must be done only by a certified and insured asbestos professional. Improper

removal may actually increase the health risk to homeowners and their families.

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ASBESTOS PROFESSIONALS

Asbestos professionals are trained in handling asbestos material. The type of

professional depends on the type of product and what needs to be done to correct a problem.

You may hire a general asbestos contractor or, in some cases, a professional trained to

handle specific products containing asbestos.

Asbestos professionals can conduct home inspections, take samples of suspected

material, assess its condition, and advise about what corrections are needed and who is

qualified to make these corrections. Once again, material in good condition need not be

sampled unless it is likely to be disturbed. Professional correction or abatement contractors

repair or remove asbestos materials.

Some firms offer combinations of testing, assessment, and correction. A professional

hired to assess the need for corrective action, however, should not be connected with an

asbestos-correction firm. It is better to use two different t firms so there is no conflict of

interest. Services vary from one area to another around the country.

ASBESTOS TESTING

The method most generally used to determine if a material contains asbestos, and to

what degree, is referred to as bulk sampling. In this method, the inspector wets the material

that is to be sampled. He or she then takes a small core of, or scrapes a sample of, the

suspect material. The core or sample is then sent to a laboratory for analysis. If a suspect

material is labeled with a manufacturer's name or product number, a certified inspector can

look up the material in a product identification list to determine the amount and type of

asbestos present.

Asbestos-containing material (ACM) is defined by the EPA as any material or

product that contains more than one percent asbestos. Some states regulate smaller

percentages of asbestos containing material.

Real estate licensees should advise clients, who have a problem that requires the

services of an asbestos professional, to check the professional's credentials carefully.

Advise them to hire professionals who are trained, experienced, reputable, and accredited -

especially if accreditation is required by state or local laws. Before hiring a professional,

clients should ask for references from previous clients. Also, clients should be advised that

they should get cost estimates from several professionals since the charges may vary.

FORMALDEHYDE

Formaldehyde is an important industrial chemical used to make other chemicals,

building materials, and household products. It is one of the large family of chemical

compounds called volatile organic compounds (VOCs). The term volatile means that the

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compounds vaporize, that is, become a gas, at normal room temperatures. Formaldehyde

serves many purposes in products. It is used as a part of:

The glue or adhesive in pressed wood products such as particleboard, hardwood

plywood, and medium density fiberboard (MDF)

Preservatives in some paints, coatings, and cosmetics

The coating that provides permanent press quality to fabrics and draperies

The finish used to coat paper products

Certain insulation materials (urea-formaldehyde) foam and fiberglass insulation

Formaldehyde is released into the air by burning wood, kerosene, or natural gas, by

automobiles, and by cigarettes. Materials, in which formaldehyde was used in the

manufacturing process, can emit formaldehyde gas. In addition, formaldehyde is also a

naturally occurring substance. Formaldehyde gas can affect the quality of both indoor and

outdoor air.

HARMFUL AFFECTS OF FORMALDEHYDE

Formaldehyde is a colorless gas with a pungent odor. It can be highly irritating to the

eyes and respiratory tract. Exposure to low to moderate levels of formaldehyde in air for

even short periods of time can cause temporary burning or itching of the eyes or nose, stuffy

nose, sore or burning throat, or headaches. Breathing high levels of formaldehyde can cause

chest tightness and coughing or wheezing. High levels may also worsen asthma symptoms.

The U.S. EPA classifies formaldehyde as a probable carcinogen. This means that

there is sufficient data from animal studies, and limited data from human studies, to

conclude that formaldehyde is likely to cause cancer in humans. Regulation of carcinogens

is based on the assumption that any exposure to a carcinogen carries with it a finite risk of

developing cancer. This assumption has not been proven scientifically, but was adopted as

conservative regulatory policy to protect the health of the general public. As a consequence,

the risk is assumed to vary directly with the amount of exposure. As the exposure

decreases, the risk decreases as well.

FORMALDEHYDE LEVELS

New products, used in home building, usually will emit the highest level of

formaldehyde gas. As these products age, the level of formaldehyde being released will

lessen. New homes tend to have higher formaldehyde levels because they often contain a

large amount of new building materials which emit formaldehyde.

Formaldehyde is normally present at low levels, usually less than 0.03 (parts per

million) in both indoor and outdoor air. The outdoor air in rural areas has lower

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concentrations while the outdoor air in urban areas contains higher concentrations of

formaldehyde. Residences or offices that contain products that release formaldehyde into

the air can have formaldehyde levels of greater than 0.03 parts per million (ppm).

Formaldehyde levels in indoor air depend mainly on what is releasing the

formaldehyde (the source), the temperature, the humidity, and the air exchange rate (the rate

at which outside air replaces indoor air in a given space). Increasing the flow of outdoor air

to the inside of a home or office decreases the formaldehyde levels. Decreasing this flow of

outdoor air by sealing the residence or office increases the formaldehyde level in the indoor

air.

More formaldehyde gas is emitted from products when the temperature rises. And

conversely, less is emitted as the temperature decreases. Humidity also affects the release of

formaldehyde from products containing the chemical. The higher the humidity, the higher

the emission rate of formaldehyde. The formaldehyde levels in a residence change with the

season and from day-to day and day-to-night. Levels may be high on a hot and humid day

and low on a cool, dry day. It is important to understand these factors should the need arise

to measure the level of formaldehyde in a home or office.

SOURCES OF FORMALDEHYDE

The major sources of formaldehyde include:

Urea-Formaldehyde Form Insulation: During the 1970's, many home owners

installed this type of insulation to save energy. Many of these homes had high

levels of formaldehyde soon afterwards. Sale of urea-formaldehyde form

insulation has largely stopped. Formaldehyde released from this product

decreases rapidly after the first few months and reaches background levels in a

few years. Most experts agree that urea-formaldehyde foam insulation that was

installed 5 to 10 years ago is unlikely to still release formaldehyde.

Durable-Press Fabrics, Draperies, and Coated Paper Products: In the early

1960's, there were several reports of allergic reactions to formaldehyde from

durable-press fabrics and coated paper products. Such reports have declined in

recent years as industry has taken steps to reduce formaldehyde levels.

Draperies made of formaldehyde-treated durable press fabrics may add slightly

to indoor formaldehyde levels.

Cosmetics, Paints, Coatings, and some Wet-Strength Paper Products: The

amount of formaldehyde present in these products is small and is of slight

concern,. However, persons sensitive to formaldehyde may have allergic

reactions.

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Pressed Wood Products: Pressed wood products, especially those containing

urea-formaldehyde glues, are a significant source of formaldehyde. These

products include particleboard used in flooring, shelves, cabinets, and furniture;

plywood wall panels, and medium density fiberboard used in drawers, cabinets,

and furniture. When the surfaces and edges of these products are unlaminated

or uncoated, they have the potential to release more formaldehyde.

Manufacturers have reduced formaldehyde emissions from pressed wood

products by 80-90 percent from the levels of the early 1980's

Combustion Sources: Burning materials such as wood, kerosene, cigarettes,

and natural gas, and operating internal combustion engines (such as

automobiles), produce small quantities of formaldehyde. Combustion sources

add small amounts of formaldehyde to indoor air.

Products such as Carpets or Gypsum Board: These products do not contain

significant amounts of formaldehyde when new. They may, however, trap

formaldehyde emitted from other sources and later release the formaldehyde

into the indoor air when the temperature and humidity change.

FORMALDEHYDE TESTING

Because of its pungent odor, it may be possible to detect the presence of

formaldehyde in indoor air by simply detecting its characteristic smell. However, in most

cases, identifying the presence of formaldehyde is difficult. The reason for this is that the

symptoms of reacting to formaldehyde gas can also be produced by a wide variety of other

irritants.

The best way to determine the level of formaldehyde in indoor air is to have the

suspect indoor environment tested by a qualified environmental testing firm. And, if

accuracy is important, then a trained professional is highly recommended because of the

difficulty of obtaining good data and interpreting the results. This type of firm can be easily

found in the local yellow pages or through local or state governmental sources.

Professional testing, however, can be costly. For this reason, it is wise to establish

some reasonable suspicion that formaldehyde is present and is creating a problem before

initiating formal testing. The presence of abundant formaldehyde-containing materials

would be one indication of a problem, especially if these materials have been in place in the

home for less than one year. Do-It-Yourself Testing Kits can also be obtained through

various sources that can be used to determine the possible presence of formaldehyde. If the

decision is made to use a home-monitoring kit, it is recommended that it be able to take a 24

hour sample to make sure that the testing period represents changes in temperature, heat,

and humidity over the testing period.

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REDUCING FORMALDEHYDE LEVELS

The most effective way to reduce formaldehyde levels in a home or office setting is

to find the source of the gas emissions and remove it. However, each situation is unique and

may require the use of several methods to bring the formaldehyde level to an acceptable

point. Other methods that can be used are:

Avoid the use of pressed wood products and other formaldehyde-emitting

products. Remove your exposure as much as possible by purchasing exterior-

grade products that emit less formaldehyde.

Bring large amounts of fresh air into the home. Increase ventilation by opening

doors and windows and installing exhaust fans.

Seal the surfaces of the formaldehyde-containing products that are not already

laminated or coated. You may use a vapor barrier such as some paints,

varnishes, or a layer of vinyl or polyurethane-like materials. Be sure to seal

completely, with a material that does not itself contain formaldehyde. Many

paints and coating will emit other VOCs when curing, so be sure to ventilate the

area well during and after treatment.

MOLD

Mold contamination is a rapidly growing area of environmental concern. The real

estate community is developing an awareness of the potential for human health problems,

loss of property values, and potential lawsuits that mold contamination represents. This

realization has been spurred by the rapidly escalating number of mold-related lawsuits.

Many lawyers now find that as much as 50% of the litigation they are involved in is in

relationship to mold contamination and indoor air quality.

Molds produce tiny spores that reproduce. Mold spores are very tiny and lightweight

which allows them to float through both indoor and outdoor air. When mold spores land on

a damp spot indoors, they may begin growing and digesting whatever they are growing on

in order to survive. There are molds that can grow on wood, paper, carpet, and foods.

Exposure to high spore levels can cause allergic reactions, asthma attacks, infections, and

other respiratory health problems.

MOISTURE CONTROL

When excessive moisture or water accumulates indoors, mold growth will often

occur, particularly if the moisture problem is not taken care of promptly or remains

undiscovered. There is no practical way to eliminate all mold and mold spores in the indoor

environment. Available moisture in a home allows mold to thrive and multiply. Some of

the sources of indoor moisture that could cause problems include:

Flooding

Leaky roofs, pipes, and windows

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Humidifiers

Damp easements and crawl spaces

Plumbing leaks

Steam from cooking

Backed-up sewers

Shower/baths steam and leaks

MOLD DETECTION

The general rule is that if you can see mold, or if there is an earthy or musty odor,

you can assume you have a mold problem. Areas, where previous water damage has

occurred, should be considered to be "red flag" areas. Visible mold growth may be visible

underneath materials where water has damaged surfaces or behind walls.

Testing a home or building for mold can be quite expensive and requires equipment

not available to the general public. Any extensive testing, which is generally considered to

be an area of 30-100 square feet, would probably require the services of a mold abatement

contractor. The remediation process necessitates physical contact with mold contamination

and airborne spores. It requires that appropriate safety measures be used.

MOLD CLEAN-UP PROCEDURES

It is important to remember in any mold abatement efforts, that unless the source of

moisture is removed and the contaminated area is cleaned and disinfected, mold growth is

likely to reoccur. The general steps to take are:

Identify and correct the moisture source

Clean, disinfect and dry the moldy areas

Bag and dispose any material that has moldy residues such as rags, paper,

leaves, or debris

The key to mold control is moisture control. It is important to dry water damaged

areas and items within 24-48 hours to prevent mold growth. If mold is a problem in a home,

the excess water or moisture should be disposed of and the mold should be cleaned up.

Leaky plumbing or other sources of water should be fixed. Any mold should be washed off

hard surfaces with detergent and water and dried completely. Absorbent materials, such as

ceiling tiles and carpets that become moldy should be replaced.

Indoor humidity should be reduced to 30-60% of the indoor air environment to

decrease mold growth. This can be done by

Venting bathrooms, dryers, and other moisture-generating sources to the

outside

Using all conditioners and de-humidifiers

Increasing ventilation, and

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Using exhaust fans whenever cooking, dishwashing, and cleaning

MOLD REGULATION

According to the EPA, Standards or Threshold Limit Values (TLVs) for airborne

concentrations of mold, or mold spores, have not been set. Currently, there are no EPA

regulations or standards for airborne mold contamination. However, efforts are accelerating

at both federal and state levels of government to develop guidelines and standards that will

help regulate this growing environmental hazard.

The Toxic Mold Protection Act (SB 732) was passed in California in 2001. The

purpose of this legislation is to study and potentially regulate permissible exposure limits to

mold. The state legislature has mandated that the State Department of Health Services

develop the standards to measure and quantify these permissible levels. Once these

standards have been determined, the law then requires that written mold disclosures be

given by sellers and landlords of commercial and industrial properties to the buyers and

renters of these properties. Sellers and landlords will be required to disclose whether or not

"they know of the presence of mold, both visible or invisible, or hidden, that affects the unit

or building."

MINIMIZING POTENTIAL ENVIRONMENTAL LIABILITY

CERCLA and RCRA are the two major environmental laws of concern to the real

estate community. The potential for far-reaching environmental liabilities have created a

great deal of concern in recent years on the part of sellers, buyers, and institutional lenders.

Lenders are increasingly reluctant to extend credit without environmental clearances since

they may become subject to future liability if their lien position converts to ownership upon

foreclosure.

Clean-up costs can be substantial and red tape can be extensive so informed buyers,

sellers, and lenders need to know what potential risks exist in a particular real estate

transaction. These realities have helped develop a growing awareness within this group that

one of the more effective ways to minimize their exposure to environmental liability is by

thoroughly investigating a site for the potential presence of hazardous substances before

purchasing, financing, or foreclosing on the site. This realization has lead to a new, rapidly

growing industry in the field of Environmental Site Assessments (ESA's).

Sellers, buyers, and lenders today need to know if any environmental contamination

or hazards exist currently on a piece of property that might affect the use of a property or its

market value in order to protect themselves. A thorough environmental site assessment

prior to moving forward on an any real estate transaction is a necessary part of the due

diligence required to establish the "all appropriate inquiry" requirement of an innocent

landowner's defense.

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ENVIRONMENTAL INSPECTIONS

The purpose of an environmental inspection report is to provide protection for

buyers, sellers, and lenders in a real estate transaction against the possibility of possible

environmental contamination of the subject property. In this respect, an inspection report

can be compared to a policy of title insurance. Buyers, sellers, and lenders purchase title

insurance to protect themselves in the event they acquire less than clear title to a property

they are buying or financing. In the same manner, although not insured, environmental

inspections provide as much protection as is currently possible against possible liability on

properties acquired.

Many financial institutions and federal regulators now require that inspections be

made on certain types of property such as commercial or industrial properties. The Resolu-

tion Trust Company, while in the process of liquidating the hundreds of properties they dis-

posed of in the savings and loan bailout of several years ago, required an environmental

inspection on all properties handled. Most people relate the need for environmental inspec-

tions as a requirement only to larger types of properties such as industrial or commercial

properties. On the other hand, many real estate appraisal professionals see a growing possi-

bility that a need is developing for wider use of environmental inspections for most

residential properties.

Environmental inspections are classified as Phase I, Phase II, or Phase III environ-

mental inspections. A Phase I Environmental Site Assessment is a common requirement

today for many real estate transactions. Typically, the purchaser, or the bank that is financ-

ing the purchase, will require a Phase I assessment of the property to qualify for the

CERCLA “Innocent Landowner Defense.” This action is designed to allow the owner of

contaminated property to defend against liability for hazardous substances that were put on

the property by an unrelated third party.

THE ENVIRONMENTAL ASSESSMENT ASSOCIATION

The Environmental Assessment Association (EAA) is a professional organization

dedicated to providing its members with information, education, and a professional

designation in the field of environmental inspection. EAA awards members the Certified

Environmental Inspector (CEI) and the Certified Environmental Specialist (CES)

professional designations. Its membership ranges widely from appraisers and home

inspectors to environmental engineers.

The following excerpt is reprinted from: "The Basic Guide to Performing Phase I

Environmental Site Assessments - Certificate Course" with permission from the

Environmental Assessment Association, ,Alexandria, Minnesota. The excerpted material

provides an overview of Phases I, II, and III of an Environmental Site Assessment (ESA).

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THE TRANSACTION SCREEN PROCESS

The Transaction Screen Process is a very preliminary inspection of a commercial or

residential property. It entails completing a questionnaire and conducting limited research.

For smaller properties, it may be all that is necessary to give the parties involved the

information needed to make a decision regarding environmental concerns.

The Transaction Screen Process Questionnaire involves questioning both owners and

occupants of the commercial property, a site visit of the property, and a review of readily

available government records and standard historical sources.

In some instances, a Transaction Screen Process will satisfy the environmental

inspection requirements of a loan package. It is a preliminary inspection and usually will

indicate the need for a more in-depth, Phase I inspection.

The procedures for commercial and industrial properties will generally be more

comprehensive than those for residential or smaller commercial properties. The discretion

of the person performing the assessment is important in determining how much information

should be gathered on a specific property. Communication with the client is particularly

important at this stage so that the client is aware of any applicable laws and regulations that

may affect the decision on the depth of the assessment.

PHASE I ENVIRONMENTAL INSPECTION

Phase I environmental inspections should be conducted on sites where there is reason

to believe that an environmental problem may exist or, if the transaction is large enough, to

warrant the expense of all that would be involved in the process.

Phase I environmental inspections have three distinct categories:

Pre-site evaluation through historical record review and owner/operator

questionnaires;

Site inspection through visual observation of the property; and

Submitting a written report.

HISTORICAL RECORD REVIEW

The following steps should be taken in an historical record review:

Review the use and improvements made to the site by conducting a title search,

interviewing past and present owners, neighbors, and anyone else who may

have knowledge of the history of the property such as building inspectors,

health inspectors, and assessors.

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Review records, permits, and licenses that give information of what has been

built or installed on the property. This includes building, zoning, planning

sewer, water, fire, environmental and other department records that would have

information on or have an interest in the property and neighboring properties.

An investigation of the subject property and neighboring properties with regard

to the EPA’s National Priority List or Comprehensive Environmental Response

Compensation and Liability Information System (CERCLIS) List and similar

state lists showing known locations of hazardous waste sites.

The following are suggested Federal and State Standard Environmental record

sources:

Federal NLP Site List (1 mile)

Federal CERCLIS List (.5 mile)

Federal RCRA TSD Facilities List (1 mile)

Federal RCRA Generators List (Property and adjoining property)

Federal ERNS List (Property only)

State Lists Hazardous Waste Sites

State Landfill and/or Solid Waste Disposal (.5 mile)

State Leaking UST List (.5 mile)

State Registered UST Lists (Property and adjoining property)

4. Analyze aerial photographs to determine the construction or destruction of

buildings and the existence of ponds and disposal areas on the property over

time.

5. A review of the Department of Health Services, Solid Waste Management

Board, Regional Water Quality Control Board, Air Quality Management

District, and other board’s or agency’s records whose actions may affect the

subject property and neighboring properties.

6. EAA members can order a comprehensive historical review of any property in

the United States through Association Headquarters. The report accesses

separate Federal and state data bases and provides radius maps of the property.

HOW TO OBTAIN INFORMATION ABOUT A PROPERTY

There are a number of ways to obtain environmental information about a property in

addition to direct observation. Some of these are:

Title Search - This will show the history of ownership of the property. The

EAA member should look for past owners who have operated a business that

could have used or produced hazardous materials or waste. Some residential

properties may have been developed on sites that were commercial, industrial, or

agricultural and may have soil problems from previous owners or operators.

CE DIGEST 155

Municipal Fire Depart or State Fire Marshal - This is a good source for

discovering if any action or response has been taken with regard to a property.

City - Building permits and sewer discharge permits can disclose the nature of a

business that was or is operated from a property. Some residential properties are

used for business purposes and have out-buildings that may been used to run the

business. Building permits may give a clue to the nature of the business.

County - Air pollution, sewer and septic records available from the county may

indicate environmental problems.

EPA - ID numbers, sites, air permits and other information may exist on a

property. Any past action or complaints about a property will be available.

State Agencies - All states have official departments to regulate air quality,

water, wastes, etc. These are good sources of information to determine if past

problems have existed.

Utility Companies - Utilities often have detailed records of any environmental

problems reported or observed.

Aerial Photographs - This is often the easiest way to look at surrounding

property. If it is possible to obtain older photos as well as recent photos, the

inspector will have a good idea of the types of previous and current activities on

or adjacent to the subject property. Look for the construction or destruction of

buildings and the existence of ponds or disposal areas on or near the site.

Environmental Consultants - This is an expensive way to find information and

should be used only at a client’s request. Generally, it is not a part of the Phase I

environmental inspection and is suited more to a Phase II environmental audit.

SITE INSPECTION - VISUAL OBSERVATION OF PROPERTY

An inspection entails the following the steps:

Observing the subject site and adjacent and surrounding properties within a 1/2

mile radius. Look for improvements made to the subject property with particular

attention to the use of hazardous materials in the structures or operating

equipment.

Identifying the presence or potential presence of Hazardous Wastes; Leaking

Underground or Above Ground Storage Tanks; Contaminated Drinking Water,

Soil, and Groundwater; Asbestos; UREA Formaldehyde Foam Insulation; Lead

Paint; Pesticides and Herbicides; PCB’s; Radon and Electronic magnetic Fields.

Make appropriate recommendations for further testing where applicable (Phase

II).

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SUBMITTING A FINAL WRITTEN REPORT

The Final Report should include the following: 1) Documentation to support the

analysis, opinions, and conclusions found in the report 2) A description of all the evidence

of recognized environmental conditions on the property. This includes all of your opinions

as a professional 3) An in-depth statement of your findings and conclusions and 4)

Environmental Professional’s signature

The following is a recommended outline for the contents of the final report:

Summary

Introduction

Site Description

Historical Records Review

Site Inspection Information

Findings and Conclusions

Signature of Environmental Professional

Optional appendices

PHASE II TESTING

A Phase II Environmental Testing is conducted when the client suspects a hazard

exists on the property or when the Environmental Inspector suggests further testing after

conducting a Phase I Environmental Site Assessment.

Testing and sampling can range from simple to complex. A Phase II Environmental

Assessment can entail a combination of the following field tests and activities:

Testing of underground storage tanks for content and integrity.

Soil gas analysis to identify the potential for petroleum hydrocarbons and

volatile organic compounds such as industrial solvents and dry cleaning

chemicals.

Bulk soil sampling.

Groundwater sampling if groundwater may be impacted by land activities.

Limited surface water sampling if there is a pond, lagoon, or stream on the

property.

A comprehensive review of the regional and local geology to determine the

pathways that leaked chemicals would follow in the event of a spill or leak.

A list of individual groundwater wells or subsurface bodies that may be affected

by a spill or leak.

CE DIGEST 157

A comprehensive inspection of the building for asbestos containing building

materials. This should include collecting and analyzing samples of the building

material for friable asbestos. It is strongly recommended that inspections be

performed by EPA-certified inspectors and analyses be completed according to

EPA guidelines

If no listed hazardous materials or wastes are found, an appropriate verification

should be provided.

A written report summarizing the findings.

PHASE III REMEDIATION

A Phase III Environmental Remediation (Cleanup) is the final process if Phase II

Testing identifies hazards that need to be either removed, encapsulated, or enclosed. Phase

III also manages and maintains the successful, and continued, cleanup of the property.

ENVIRONMENTAL HAZARDS

Sellers, buyers, real estate agents, and lenders can all be adversely affected should

pollutants such as asbestos, radon, lead, and other toxic materials be found on a property.

These parties may be subject to civil and criminal penalties as a result of the discovery that a

property is contaminated with hazardous waste. For this reason, it is incumbent on all real

estate licensees to build their general awareness of the nature of these hazardous materials,

and what might constitute a “red flag” condition in a property inspection.

It is not expected that real estate licensees become “experts” in the field of

environmental hazards. They are expected, however, to know the federal and state laws that

regulate environmental issues so that they can intelligently discuss environmental issues

with their clients and give them knowledgeable and sound advice. Today's real estate

clients expect their agent to be able to provide them with the resources that are available to

help the clients solve their real estate problems. In addition, a study of environmental issues

and concerns will give licensees the background they personally need to recognize potential

environmental "red flags" on properties that they are inspecting and marketing.

********************

Chapter Index

158 CE DIGEST

CHAPTER 5 - HIGHLIGHTS

LEAD - A heavy, comparatively soft, malleable metal found in rocks and soils.

1. It is a harmful, highly toxic, environmental pollutant.

2. Can be found in the air, our drinking water, the food we eat, contaminated soil deteriorating paint

and dust.

3. Sources of Lead in homes: 1) Lead-based paint; 2) Lead contaminated dust 3) Lead

contaminated soil; and 4) Drinking water.

4. Most reliable way to determine the presence of lead in a home is to test the paint. Methods used

include: 1) Paint Scrapings; 2) Chemical Spot Testing; and 3) X-Ray Florescense

5. Most likely source of lead in drinking water is found in plumbing fixtures.

RADON - A colorless, odorless, tasteless, radioactive gas that emanates from soils and rocks

1. The second leading cause of lung cancer in the U.S. today.

2. Radon Testing in Home: There are many kinds of low-cost "do-it-yourself" radon test kits

available in stores. People involved in real estate transactions may want to hire a professional

testing company to perform the test.

4. Devices used to test for radon: 1) Passive Devices - Does not need power and can be purchased in

hardware or drug stores 2) Active Devices: Need power to operate.

5. EPA recommends that testing devices be placed in the lowest level of the home suitable and also

that the device be placed in a room that is used a lot.

7. Two methods generally used to test for radon are short-term testing and long-term testing.

Short-term test is quickest and easiest. Long-term test is most accurate.

8. Radon enters home through cracks and openings in concrete slabs, crawl spaces, floor drains, and

tiny pores in hollow-wall concrete blocks.

UNDERGROUND STORAGE TANKS (USTs)1.

1. A UST system is a steel or fiberglass tank, or a combination of tanks and connected piping having

at least 10% of its volume underground.

2. Sources of Leaks: 1) Improper installation; 2) Corrosion; and 3) Spills and Overfills.

3. Pollution of drinking water is considered to be most serious problem created by leaking USTs.

4. Only way to determine if leaks, spills, or overfills have contaminated the soil around a UST is to

test.

ASBESTOS: A fibrous mineral found in residential, commercial, and industrial buildings. EPA has

classified Asbestos as a known human carcinogen.

1. Damaged asbestos may release fibers that, when inhaled can become a health hazard.

2. The "friable" means a material can be easily crushed or pulverized to a powder by hand pressure.

Friable materials have a higher potential to release fibers. Asbestos that is friable can harm human

beings.

3. If asbestos is suspected to be present in building materials it is important to have the materials

tested by a qualified laboratory. Visual inspection alone is not enough to identify the presence of

asbestos. Testing would not be necessary if material is in good condition.

4. If asbestos in the home is damaged there are two things that can be done: 1) Repair it or

2) Remove it.

5. Asbestos Testing: Method most generally .used to determine if a material contains asbestos, and

to what degree, is to test it by what is referred to as "bulk sampling." Inspector wets the material

and takes a small core of the subject material that is sent to the laboratory.

CE DIGEST 159

CHAPTER 5 - HIGHLIGHTS

FORMALDEHYDE - An important industrial chemical used to make other chemicals, building

materials, and household products.

1. It is one of a large family or chemical compounds called volatile organic compounds (VOCs)

The term volatile means that the compound can vaporize and becomes a gas.

2. Formaldehyde is a colorless gas with a pungent odor. The EPA classifies it as a possible

carcinogen.

3 More formaldehyde gas is emitted from products when the temperature rises - conversely, less it

emitted when temperature decreases.

4. The higher the humidity, the higher the emission rate of formaldehyde. Increasing the flow of

outdoor air to the inside of a home decreases the formaldehyde level

MOLD - General rule: If you can see Mold, or if there is an earth or musty odor, you can assume you

have a mold problem.

1. Mold Cleanup Procedures: 1) Identify and correct the moisture source; 2) Clean, disinfect and

dry the moldy areas; and 3) Bag and dispose any material that has moldy residue such as rags.

PHASE I ENVIRONMENTAL INSPECTION

1. Should be conducted on sites when: 1) There is reason to believe that an environmental problem

may exist 2) Transaction is large enough to warrant the expense of an inspection.

2. Phase I environmental inspection has three parts: a) Pre-site evaluation through historical

record review b) Site inspection of property c) Submitting a written report

3. Historical Record Review - Steps: a) Review the use and improvements made to the site by

conducting a title search and interviewing past and present owners and neighbors; b) Review

records, permits, and licenses that give information on what has been built or installed on property;

c) Investigate subject property and neighboring properties by checking EPA’s list showing known

locations of hazardous waste sites d) Analyze aerial photographs

SITE INSPECTION

The inspection entails observing the subject site and adjacent and surrounding properties within a 1/2

mile radius. Identify presence or potential presence of: 1) Hazardous wastes 2) Leaking

underground storage tanks 3) Contaminated drinking water, soil, and groundwater 4) Asbestos

5) UREA formaldehyde foam insulation 6) Lead paint 7) Pesticides and herbicides 8) PCB’s

9) Radon 10) Electronic Magnetic Fields

PHASE II TESTING

Conducted when client suspects a hazard exists on property or when further testing is suggested after a

Phase I inspection. Testing sampling can consist of: 1) Testing of underground storage tanks for

content; 2) Soil gas analysis to identify potential for petroleum hydrocarbons; 3) Bulk soil sampling

4) Groundwater sampling 5) Comprehensive inspection of building for asbestos containing materials.

PHASE III REMEDIATION

A Phase III Environmental Remediation (Cleanup) is the final process if Phase II

Testing identifies hazards that need to be 1) Removed 2) Encapsulated or

3) Enclosed. Phase III also manages and maintains the successful, and continued cleanup of the property.

*****************************************

Chapter Index

160 CE DIGEST

CHAPTER FIVE Review Quiz

1. Which of the following is a source of lead in the home?

a) Lead-based paint

b) Outside soil

c) Lead water pipes

d) All of the above

2. All of the following methods are used to test for lead in paint except:

a) Use a spectrometer

b) Paint scrapings

c) Chemical Spot testing

d) X-Ray florescence

3. All of the following are true statements regarding radon except:

a) Radon is a colorless, odorless, tasteless, radioactive gas

b) Radon enters homes through cracks and openings in the floor and walls

c) The EPA recommends that if annual average level of radon in a home is over 10

pCi/L that it be reduced

d) Radon levels can be measured in a home using a device known as a passive radon

detector

4. Asbestos is:

a) A type of glue used in plywood

b) A small rock used widely in landscaping

c) A mineral fiber used primarily for fire resistance and insulation

d) Used as a coolant in older air conditioners

5. Which of the following is a true statement regarding asbestos?

a) The EPA classifies asbestos as a known human carcinogen

b) If asbestos containing material is suspected to be present in a dwelling, it is usually

apparent through visual inspection

c) If asbestos containing material is damaged, it should be tested

d) Both a) and c) above

6. All of the following are true statements regarding formaldehyde levels in a home except:

a) New products used in home building usually emit the highest level of formaldehyde

gas

b) As products used in home building age, their formaldehyde emission level increases

c) Increasing the flow of outdoor air to the inside of a home decreases the

formaldehyde level

d) New home tend to have higher formaldehyde levels

CE DIGEST 161

CHAPTER FIVE Review Quiz

7. An earthy, musty odor in any specific area of a home could be an indication of:

a) Mold

b) Friable asbestos

c) Formaldehyde gas

d) Both a) and b) above

8. Which of the following might an environmental inspector do when conducting a historical

record review during a Phase I Environmental Site Assessment?

a) Interview past and present owners

b) Review records, permits, and licenses that have information on what has been built

or installed on the property

c) Review the Department of Health Services records

d) All of the above

9. Which of the following sources could an inspector use to obtain environmental information

about a property during a Phase I inspection?

a) County records

b) Utility companies

c) Aerial photographs

d) Any of the above

10. In which phase of an Environmental Site Assessment (ESA) would the environmental

inspector normally conduct testing and sampling to determine the presence of hazardous

materials?

a) Phase I

b) Phase II

c) Phase III

d) Both a) and b) above

Chapter Index

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162 CE DIGEST

CHAPTER INDEX

Contracts in General Page 1 Contracts in General Cont'd

Contracts Defined (1) Contingency Removal (28)

Parties Capable of Contracting (2) Resolving Contract Disputes (30)

Minors (2) Mediation (30)

Ratification (3) Arbitration (31)

Emancipated Minors (3) Reducing Risks in Transactions (33)

Incompetents (3) Transferring Risks (33)

Aliens & Convicts (4) CHAPTER 1 HIGHLIGHTS (35)

Mutual Consent (4) CHAPTER 1 REVIEW QUIZ (37)

A Definite Offer (4)

Acceptance of Offer (5) Agency & the Listing Contract (39) Termination of Offer (6)

Genuine Assent (8) Loyalty as a Fiduciary (39)

Fraud (8) Duties Owed to Principal (42)

Mistakes (9) Reasonable Care and Skill (43)

Duress, Menace & Undue Influence (9) Disclosure of Material Facts (44)

Lawful Object (9) Obedience, Loyalty & Confidentialty (45)

Sufficient Consideration (9) Agent's Authority (46)

Interpretation of Contracts (10) Restrictions on Authority (47)

Parol Evidence Rule (10) Ratification of Unauthorized Acts (47)

Classification of Contracts (11) Power of Attorney (48)

Manner of Creation (11) Authority to Receive Deposits (48)

Content of the Contract (12) Checks & Promissory Notes (49)

Performance (12) Escrow (50)

Legal Effect (12) Court Action for Deposit (51)

Statute of Frauds (13) Commingling (51)

Writing Required (13)\ Salesperson's Duties & Obligations (51)

Remedies (14) Agent's Duty on Contracts (53)

Real Estate Applications (14) Agent's Duty on Torts (53)

Statute of Limitations (15) Misrepresentation (54)

Performance/Discharge of Contracts (15) Fraud vs. Negligence (54)

Assignment (16) Nondisclosures (54)

Novation (16) Puffing (56)

Discharge By Agreement (16) Torts of the Principal (57)

Discharge by Law (17) Unlawful Payment of Compensation (57)

Forfeitures (18) Payment Based on Lawful Condition (58)

Real Estate Contracts (18) Compensation/Performance Requirement (58)

Contract Preparation (20) Agreements Between Brokers (59)

Common AreaS of Risk (20) Commission Rate is Negotiable (59)

Agent's Duties & Liabilities (21) Open Listings (61)

Contract Provisions (23) Effect of Termination (63)

Deposits (24) Exclusive Listings (65)

Effect of Sellers Death (24) Net Listings (67)

Contingencies (26) Broker's Commission (69)

Types of Contingencies (26) CHAPTER 2 HIGHLIGHTS (73)

Conditions in Contracts (26) CHAPTER 2 REVIEW QUIZ (75)

CE DIGEST 163

Real Estate Disclosures (77) Environmental Laws (Cont'd)

Loyalty to Fiduciary (77) Due Diligence Under CERCLA (115)

Fair and Honest Dealing (77) Resource Conservation Act (116)

Easton v. Strassburger (78) Administration of RCRA (117)

Transfer Disclosure Statement (79) Definition of Hazardous Waste (117)

Civil Code Section 1102 (80) A "Regulatory" Paper Trail (118)

Form of Disclosure Statement (81) Clean Air Act of 1970 (119)

Delivery of TDS (83) Indoor Air (121)

Liability for Errors/Omissions (84) Safe Drinking Water Act (121)

Agent's Duty (84) Toxic Substance Control Act (122)

Agency Relationship Disclosure (86) Pollution Prevention Act (123)

Compliance with Agency Disclosure (87) CHAPTER 4 KEY HIGHLIGHTS (125)

Mechanics of Disclosure Step (88) CHAPTER 4 REVIEW QUIZ (127)

Delivery to Buyer (89)

Agency Disclosure Rules (91) Environment Hazards (129) Dual Agency (91)

Perils of Dual Agency (92) Lead (130)

Natural Hazards Disclosure (94) Sources of Lead in Homes (130)

Lead-Based Paint Disclosure (95) Lead-Based Paint (131)

Safety Factors of Lead-Based Paint (96) Lead Contaminated Dust (132)

Seller's Responsibility (96) Lead Contaminated Soil (132)

Agent's Responsibilities (97) Drinking Water (132)

Structural Pest Control Report (98) Safe Levels of Lead in Water (133)

Pest Control Inspection Report (98) Reducing Lead Levels in Water (134)

Agent's Responsibilities (99) Radon (135)

Smoke Detectors (99) Harmful Effects of Radon (135)

Water Heater Bracing (100) Testing for Radon (136)

Mello-Roos Bonds and Taxes (100) Length of Radon Testing (137)

Earthquake Disclosures (100) Reducing Radon Levels (138)

Energy Conservation Retrofit (101) Sales Aspects of Radon Testing (138)

Disclosure of Deposits (101) Underground Storage Tanks (139)

Foreign Investment Tax Act (102) Regulation of USTs (140)

CHAPTER THREE HIGHLIGHTS (103) UST Red Flags (141)

CHAPTER THREE REVIEW QUIZ (105) Testing for Leaks (142)

Asbestos (142)

Environmental Laws (107) Where Asbestos Can Be Foun (143) Asbestos as a Health Hazard (143)

Impact of Environmental Laws (107) Identifying Asbestos in Material (144)

National Environmental Policy Act (108) Asbestos Testing (145)

Goals of Policy Act (109) Formaldehyde (145)

Environmental Impact Statement (109) Harmful affects of Formaldehyde (146)

Council on Environmental Quality (111) Sources of Formaldehyde (147)

Environmental Protection Agency (112) Formaldehyde Testing (148)

CERCLA (112) Mold (149)

CERCLA Liability (113) Environmental Inspections (152)

Third Party Defense (113) CHAPTER 5 HIGHLIGHTS (158)

Superfund Authorization Act (114) CHAPTER 5 REVIEW QUIZ (160)

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