REALTOR^® Risk Management and Consumer Protection ForumSteinbeck Forum Level 3
Monterey Conference Center
Monterey, California
Friday, January 19, 2007
8:00 a.m. - 11:00 a.m.


Presiding:     Irene Reinsdorf, Chairman
                        Wes Seastrom, Vice Chairman South
                        Jeff Sposito, Vice Chairman North
                        Tom Carnahan, Committee Liaison
C.A.R. Staff:   Gov Hutchinson, Assistant General Counsel, Staff Coordinator


Presentation on Current Market Risk Management IssuesBill Jansen, President of Broker Risk Management, made a presentation on current market risk management issues.  Billbegan with some general comments about the risk management climate in California concerning REALTORS®.  He first said that there are now almost the same number of attorneys (approximately 200,000) as REALTORS® in California.  Not so many years ago there were five times as many REALTORS® as attorneys.  He also noted that the Continuing Education of the Bar (the attorney education provider) offers a standard class on “Approaching an Action Against a Real Estate Broker” and actually publishes a manual on how to sue brokers.  In other words, there are a lot of attorneys in California, and many of them specialize in suing REALTORS®, so REALTORS® should be aware of what actions to avoid doing in order toavoid liability.  Bill also stated that in the current market, which is much more of a “Buyer’s market” than the previous market, the risk management issues are the same as the issues in the last Buyer’s market in the early 90’s.The first general problem area today is lender fraud or price inflation schemes that REALTORS® are accused of participating in.  Usually it is the mortgage broker who is pushing the transaction and making assurances that everyone is informed and that everything is okay.  Sometimes it will be asserted that the transaction is legitimate because the large amount of money that is being rebated to the buyer appears on the “HUD 1” and has therefore been adequately disclosed.  Bill pointed out that often the money coming back to the buyer is only found on the seller’s HUD 1, however, and the lender is not alerted. According to Bill, some warning signs that indicate that a transaction might involve mortgage fraud are the absence of a down payment, the appraiser clearly having a special relationship with the loan broker and a contractual provision calling for money to be rebated to the buyer, which is contained on an addendum.  When escrow closes, the broker’s file will usually have this addendum in it, but the mortgage broker’s file won’t because the mortgage broker does not want to have any paper trail that can connect him/her to the transaction.  Bill also noted that the FBI is cracking down on these transactions and that the crime of misleading a federal lender is a felony that can land a perpetrator in jail for three years.  He also noted that local District Attorneys and the Department of Real Estate (DRE) are investigatingthese cases aggressively.  One way to avoid a problem would be to have a seller counter a questionable offer with a provision to the effect that “acceptance is contingent on buyer providing seller, within seven days, with written approval fromthe underwriter for the funding lender for the actual price of the property in the transaction.”  Bill suggested that this language should be put on page 1 of the contract, in the financing paragraph.  Another variation of fraud is for thebuyer’s agent to get paid a large sum of money from the seller as an extra commission.  Ultimately, brokers are liable for the activities of their salespersons, so brokers should take steps to make sure that they are aware of what is going onin their offices. Bill then discussed short sales.  He said that it is very important to get a listing contract signed first before negotiating with the lender.  He also noted that many transactions result in short sales even when the salesprice is greater than the money owed the lender because once the commissions, prepayment penalties, unpaid home equity lines of credit, etc. are paid off there is less money coming into escrow than would be needed in order to pay everyone off in full.  He also noted that it is permissible to put “conditional” offers of compensation in the MLS, if the transaction is a short sale and if the condition is that the lender must approve the commission split.Bill made several other recommendations for REALTORS® when dealing with potential short sales: 1) As a buyer’s agent do not assume the listing agent necessarily understands short sales; 2) Use C.A.R. form PAA, Paragraph 5, which is a short sale addendum to the standard purchase contract; 3) Be aware of the fact that there may be unique tax consequences for the seller in a short sale, such as a tax on “relief of indebtedness”.  (Also, remember that licensees should not give specific tax advice); 4) Sometimes you will encounter a lender who wants a hardship letter from the seller, including tax returns or W-2 forms, demonstrating that the seller is actually incapable of paying off the loan, before approving the short sale; 5) Make sure that you ask the sellers “what did you put on the loan application”.  (In other words, if the sellers lied on the original loan application regarding their “stated income”, this could be held against them if they put different information on their hardshipletter); and 6) Some lenders on short sales may require sellers to commit to an unsecured loan from the lender whereby they agree to pay off the difference between the amount that the lender is receiving through escrow and the amount that is actually owed.Bill then briefly addressed the issue of non-recurring and recurring closing costs, pointing out that if these are going to be paid by the seller this should not be done outside of escrow.  He also recommended that in the contract the seller shouldnot simply agree to pay for buyer’s non-recurring closing costs but should agree to credit buyer with “up to” a certain amount, so that if the lender says it will only allow a limited amount of closing costs to be paid, the contractualprovision would allow for that.  Bill also recommended distinguishing carefully between different types of closing costs. Bill’s next discussed the fact that in this market listing contracts are expiring more often than previously.  He reminded the REALTORS® not to forget to complete the protection period provision in the listing contract, which is the clause where the seller and the listing agent agree that after the expiration of the listing, if any person on a list of names provided by the agent to the seller whom the agent has shown the property, purchases the property for a certain period of time after the expiration of the listing the agent still gets paid.  Bill recommended that agents carefully explain this provisionto the seller so the seller knows to exclude these names from any subsequent listing contract with a different agent.  Bill noted that the protection period is not cut off when the seller lists with another agent. Bill also said that one should never leave empty the blank line for how many days the protection period lasts, because that would make the entire protection period clause unenforceable. Bill then briefly discussed a few more risk management issues.  First he stated that when thesellers are completing a TDS the agent should ask the sellers if they have filled out a different transfer disclosure statement in the recent past and then compare the two to make sure they are consistent.  He also recommended that when acting as a selling agent, before working on a transaction make sure you actually have an offer of compensation.  Next, he noted that transaction logs, where brokers keep daily records of conversations and actions they have taken with respect to a particular transaction, are probably the best defense against a lawsuit. Bill concluded his remarks by briefly discussing the activities of the Defense Strategy Advisory Committee, which he is chairman of this year.  The goal of the committee is to have California be a friendlier place for errors and omissions insurers, so they will come back into the state and offer competitive rates.  He noted that the Committee maintains a list of twelve attorneys available through the C.A.R. Member Legal Services Hotline whom REALTORS® can call when they are sued and who will represent them.  These attorneys specialize in defending REALTORS® and they collaborate with each other on strategies and tactics.  Bill also said that C.A.R. now endorses “AIG” as an errors and omissions insurer and this company allows you to choose your attorney if you get sued.  In addition, AIG provides that if an agent is using RELAYTM on their transactions the deductible on that transaction will be cut in half.  Returning to the defense panel, Bill noted that they will provide seminars when asked and will also work for REALTORS® at a discounted rate.  Bill asked that any questions for him be directed to his website, which is http://www.brokerriskmanagement.com.  His email address is bill@brokerriskmanagement.com. Affiliate ReportsRay Adams from the Home Warranty Association of California of gave a brief report.    In the month of September home warranty companies who belong to the Home Warranty Association of California issued 59,000 warranty contracts and made over 80,000 service calls.  Ray said that he canbe reached at either 1-800-223-8261 or at ra@bhwc.com.Dan Rutherford of the Pest Control Operators of California then made a brief report.  In response to a question from a member as to whether pest control operatorstypically get paid hourly or on commission he responded that both payment methods are commonly used and that the consumer should always ask the pest control operator how his compensation is calculated.  Another question was whether a pest control operator needs a special endorsement in order to use Termidor, which is a very expensive and very effective product that eliminates subterranean termites, and he responded “no”.  He was also asked about the new “orange oil” termite eradication product and he stated that this product is designed to eliminate dry wood termites rather than subterranean termites and he believed that termite companies should not advertise that it is better than fumigation.  He also noted that itis a local treatment rather than a comprehensive treatment such as fumigation.  Dan invited further questions to be made to him at 626-926-1253. George Harper of the California Real Estate Inspection Association then made a report.  He noted that CREIA is now 30 years old and is the oldest home inspection trade association in the country.  He also reported that CREIA had just participated in a joint three day conference with members of the American Society of Home Inspectors, an eventthat occurs once every five years.  There are now special designations offered to home inspectors by CREIA and George invited REALTORS® to visit CREIA’s website at http://www.creia.org to look for individual inspectors and for general information.  He also reported that a one hour continuing education class for REALTORS® entitled “What You Should Know About Home Inspections”, provided by CREIA, has just been approved by the Department of Real Estate (DRE).  In response to a question he reported that most “good” home inspectors carry errors and omissions insurance even though it is not required.  Finally, he recommended that REALTORS® and their clients consider having pre-sale or pre-listing home inspections.  George concluded by noting that CREIA’s phone number is 1-800-848-7342.Regional Representatives ReportsTracey Saizan from Region 4 reported on problems with private transfer taxes and new home builder fees in her area.  Region 7 reported that in Stanislaus County rent control is becoming an issue because some mobilehome parks in the area have been purchased by out of state buyers and have raised their rents from $300 to $700 in some cases.  Region 7 requested assistance from anyone willing to provide it on ways of preventing rent control being established in that area, commenting that if it starts in mobilehome parks it could spread to other types of rental situations.  Region 9, in the Santa Clara County area, reported on problems with inexperienced, out of area agents writing offers, other agents using outdated contracts and many examples of lender fraud.  It was also noted that approximately 30% of the listings in thearea are receiving multiple offers and/or above full price offers.  Sandy Darling from Region 12, in Fresno, reported on problems with loan officers with real estate licensees acting as buyer representatives in transactions even though they do not really understand the role of a buyer’s real estate agent.  Mary Churchill from the Inland Empire commented that there is a perception that REALTORS® with errors and omissions insurance are more vulnerable to lawsuits because it is believedthey have “deeper pockets”. Chuck Knapp from Victor Valley reported on problems with identity theft and lender fraud and Region 16 reported on problems with lender fraud and a greater than normal number of lawsuits resulting directly from the slowing real estate market.  Steve Drust from Region 17 in Los Angeles reported that the City of West Hollywood is collecting illegal “for sale” signs and fining licensees $150.00 to $250.00.  Steve also commented on rent control issues and a Beverly Hills anti-graffiti ordinance.  Olga Moretti from Region 18 reported on problems with lender fraud and Region 19’s Dave Walsh reported on creative financing transactions involving cash back, as well as “bait and switch” tactics by some agents who offer their services for a low fixed fee but once they interview the client then offer a menu of services with much higher costs.  He also reported on problems with predatory lending practices victimizing seniors.  Region 23’s Richard Malooly reported on identity theft, loan fraud and problems with unlicensed assistants.  Barbara DuDeck reported that in the San Diego area agents are adapting to a new lock box company.Region 27 reported on a successful challenge in the City of Lancaster to proposed individual business licensee tax fees for agents.  It was also reported that there are problems with developer fees in that area.  Robert Blake from North San Diego County reported that one city passed an ordinance that would prohibit landlords from renting to undocumented aliens but this ordinance was withdrawn in response to a threatened injunction.  The same city is also contemplating restricting the hiring of undocumented workers whocongregate on street corners.  Region 30 reported on problems with a sign ordinance, with mortgage brokers representing buyers and doing a poor job and with potential mobilehome rent control in San Luis Obispo.  Finally, Region 32 reported on problems with lender fraud, lack of affordable housing and a potential point of sale sewage inspection ordinance.Legal UpdateC.A.R. Assistant General Counsel Gov Hutchinson gave his legal update.  He began by listing the new Legal Q & A’s that were released and put on the C.A.R. legal website since the last set of meetings.  The new Legal Q & A’s are: “Mortgage Fraud: Avoiding Price Inflation Schemes”, “Short Sales”, an updated “Do-Not-Call, Do-Not-Fax, Do-Not-Email Laws Affecting REALTORS®”, and a completely updated Q & A on “Real Estate Licensing”.  There are also revised Q & A’s now available concerning “Limited Liability Companies in California”, “Mold and Its Impact on Real Estate Transactions”, and disclosures.Gov then briefly discussed new legislation that was previously reviewed in October.  First, effective October 1, 2007, AB 2429 will eliminate the conditional salesperson’s license.  After that date the only way to get a real estate salesperson’s license in California will be to complete all of the necessary courses (Real Estate Principles, Real Estate Practices, and one additional course), pass the exam and get a license valid for four years.Effective January 1, 2007, AB 2100 increases the responsibilities of homeowners associations with respect to producing annual budgets and once-every-three-year reserve studies.  Under existing law homeownersassociations for common interest subdivisions must prepare an annual budget that includes a summary of the amount of money being held in reserve, the mechanisms by which the Board of Directors plans to fund reserves in the future and the procedures to beused to calculate the amount of reserves necessary.  Effective this year the annual budget must also include the estimated replacement cost, remaining life and remaining useful life for each major component of the property that the association is responsible for, as well as the current estimate of the amount of cash reserves that would necessary to repair or replace these major components, the current amount of cash that has been accumulated for this purpose, the ratio that the latter amount bears to the former amount and the current deficiency in reserve funding, expressed on a per unit basis.  In addition, if the Board anticipates that any special assessments will be necessary in the future in order to provide adequate reserves for the repairor replacement of a major component, the budget must include the estimated amount, commencement date and duration of the assessment.  As for the reserve study it must now include an estimate of the total annual contribution necessary to defray the cost to repair, replace, restore or maintain all the major components that have a remaining useful life of less than 30 years, after deducting the current total of reserve funds.  In addition, this study must include a reserve funding plan that indicates how the association plans to fund the annual contribution in order to meet the obligation to repair and replace all the major components.  Finally, the plan must include a schedule of the date and amount of any change in the regular assessment orany special assessments that would be needed in order to fund the plans.Effective January 1, 2007, AB 1169 established a 60 Day Notice requirement for landlords to give tenants in order to evict such tenants if the tenants have lived in the property formore than one (1) year and are currently living in the property under a periodic tenancy.  However, if the landlord has opened an escrow with a bona fide purchaser to buy the property and the purchaser intends to occupy the property as his/her principal residence for at least one full year that landlord can evict that tenant with a 30 day notice.Another change effective January 1, 2007 affects tax withholding.  Pursuant to AB 2962, a seller who is not exempt from the requirement that escrow withhold 3-1/3% of the sales price in the transaction may nevertheless opt to have escrow not withhold the full 3-1/3%, but instead may choose as an alternative to have the escrow company withhold a sum of money equal to the maximum California personal or corporate tax rate (9.3 % for individuals), multiplied by the actual estimated gain that will be recognized on the transferred property.  In other words, while some sellers are exempt from withholding (e.g. sellers selling a principal residence or sellers doing a 1031 tax deferred exchange or a sale by a corporation) under this law even sellers who are not exempt can prevent escrow from withholding 3-1/3% of the sales price if the estimated capital gains tax on the transaction that the seller expects toowe California is less than 3-1/3% of the price.  In order to be entitled to this lower withholding sellers will have to certify in writing, under penalty of perjury, what they believe their capital gains tax liability to the state will be. Finally, Gov reminded the members that effective January 1, 2007, the statute regulating reverse mortgages was amended.  Previous law required lenders to provide a disclosure notice to applicants for reverse mortgages advising them to seek financial counseling.  In contrast, effective January 1, 2007, SB 1609 prohibits lenders from even accepting an application for a reverse mortgage until the borrower certifies that he/she has already received financial counseling.  The new law also prohibitslenders from requiring that the borrower obtain an annuity as a condition for obtaining the reverse mortgage and it prohibits lenders from even offering an annuity to the borrower prior to closing the loan or the expiration of the statutory right to rescind.  Lenders are also now required to refer the borrower to a housing counseling agency and to provide them with a list of independent counselors, and if the reverse mortgage transaction is negotiated primarily in Spanish, Chinese, Korean, Vietnamese, or Tagalog, the reverse mortgage documents must also be translated into that language. Gov then reported on legislation not previously discussed.  Effective January 1, 2007 AB 2800 made some changes to some of California’s fair housingstatutes.  Previous to this year, some of California’s fair housing laws, such as those prohibiting discrimination by lenders, developers, community redevelopers, real estate licensees and owners of private clubs who provide housing accommodations based on race, skin color, gender, religion or marital status.  On the other hand, the California
Fair Housing Act and Unruh Civil Rights Act also prohibit discrimination based on national origin, ancestry, familial status, disability, source of income and sexual orientation.  Effective January 1, 2007, all of California’s fair housing laws now prohibit discrimination based on all of the above described categories.  Gov noted that REALTORS® should always remember that California case law goes even further than these statutes by prohibiting discrimination in the provision of housing accommodations that is “arbitrary” even if it is directed at a member of a group or class of persons that is not one of the “protected” classes described above.Effective January 1, 2007, AB 2624 provides that when a homeowners association levees an assessment on a delinquent owner and the delinquent assessment is over $1,800.00 or has been delinquent for over one year,the notice of sale that the association must use to initiate a non-judicial foreclosure must include a statement that the property is being sold subject to a 90 day right of redemption.SB 983 makes modifications to the Subdivision Map Act:  First, anadditional condition is required (i.e. conformity to any specific land use plan) when certain lot line adjustments for four or fewer adjoining parcels are exempt from the Map Act.  A second change increases the amount that a developer is responsibleto tenants for when a 60 day notice to evict is not provided (usually in a condo conversion).  Under previous law a subdivider must have provided at least a 60 day notice on a specified form to any current tenant or a new prospective tenant prior tofiling a tentative subdivision map for the property.  A tenant not purchasing in the subdivision was entitled to damages from moving expenses not to exceed $500.00 and $500.00 toward the first month’s rent for any failure to provide such notice.  Under the new law the amount of damages for each expense has been increased to $1,000.00. Gov then briefly described some problem areas concerning the Do-Not-Call rules.  He first noted that REALTORS® must be careful not to call someone with an advertisement or solicitation when the recipient’s number is on the Do-Not-Call list, unless an exemption applies.  The most commonly used exemptions are: 1) the caller has received written permission to call from the recipient, 2) the caller and the recipient have an established business relationship, 3) the caller and the recipient have a personal relationship, and 4) the caller is a tax exempt organization.  It is also permissible to call a for-sale-by-owner seller whose name is on the Do-Not-Call list if the caller is a buyer or representing a buyer interested in the property.  Surveys and political calls are also permitted even if the recipient is on the Do-Not-Call list.  It is also important to remember thatwhen calling individuals who are not on the Do-Not-Call list to offer them a service or product, if that individual indicates to the caller that he/she do not want to receive any more calls of that nature from the caller the caller must maintain a separate Do-Not-Call list of individuals who have specifically requested no more calls.  In addition, if, for example, one agent in a real estate company identifies a recipient who wishes to receive no more calls this information must be communicated to therest of the company.  In other words, all companies must have their own private Do-Not-Call list.Gov then reported on the latest “scam” where certain attorneys are trying to “extort” money from real estate companies.  What happens in these scenarios is that an individual contacts a real estate brokerage and asks to be placed on the company’s Do-Not-Call list and also asks the brokerage to send him/her the company’s written policy for maintaining a Do-Not-Calllist.  If this caller does not receive a copy of the policy within five days he/she threatens to sue the real estate company unless the company makes a payment to him/her of $5,000.00.  Gov noted that it is true that real estate companies, likeother companies, must maintain a written Do-Not-Call policy on the premises.  REALTORS® who do not have one can download the Q & A on the C.A.R. website entitled “Do-Not-Call” and use the sample Do-Not-Call policy contained in that document as the basis for that company’s own Do-Not-Call policy.  Gov also noted that when someone requests a copy of this policy the person is probably legally entitled to receive it.  On the other hand, there is nothing in the law that says this document must be provided within five days.  Nevertheless, Gov suggested that all brokers should make sure their personnel are trained how to respond to such calls if they receive them.  Gov also noted that if anyone receives one ofthese calls and wants to contest the claim C.A.R. can put them in contact with attorneys who can help them.Gov then discussed some cases of interest.  In Gravillis v. Coldwell Banker the facts were that a married couple purchased a home using an older version of the C.A.R. Purchase Contract.  On that document they initialed the arbitration clause.  At that time the C.A.R. arbitration clause excluded from arbitration any “action for bodily injury”.  In this instance the buyers found out that the house was uninhabitable because of structural damage caused by termites.  They alleged that the massive termite damage that came to light when a contractor they hired to remodel started work was known by the brokers and the brokers had deliberately failed to disclose it.  The wife claimed that whenever she was on the property she was required to wear a mask in order to protect herself and the baby she was carrying.  The plaintiffs also accused the brokerage of recommending an incompetent termite company and failing to discuss the termite inspection report with them.  The plaintiffs did not claim that they were physically harmed by living on the property (because they never actually moved in), but that they suffered “emotional distress” caused by the fact that the wife had to wear a mask when visiting the property and the fact that they had to borrow a large sum of money in order to pay for a complete rebuild of the property.  The wife claimed, further, that the emotional distress caused her to develop a form of diabetes.  Based on the fact that the arbitration clause was initiated by all parties, the broker moved to compel arbitration.  The plaintiffs argued that they did not have to arbitrate because their case was an action for “bodily injury”.  (They claimed that the broker’s acts had caused the diabetes, which was a physical injury.)  The trial court agreed with the plaintiffs, but the Court of Appeal reversed, ruling that this action was not one for bodily injury.  According to the court, emotional distress and diabetes allegedly caused by emotional distress are not the types of bodily injury that the parties would reasonably expect to fall within the scope of the exclusion in this contract.  The court ruled that “bodily injury” in this context means “physical” harm rather than mental or psychic harm, or even physical harm caused by mental stress.  The court noted in passing that all home purchases and all disputes are stressful, so the plaintiff’s argument carried to its logical extreme would mean that with this language in an arbitration clause, the parties would never have to arbitrate.The next case discussed, Stevenson Real Estate Services v. CB Richard Ellis Real Estate Services addressed the problem of what to do if you are a real estate licensee representing a buyer and the buyer uses a different licensee to write up a contract to purchase property thatyou identified.  In most residential situations the first agent can argue that he/she was the “procuring cause”, because the property was probably listed with a multiple listing service and under the standard rules for multiple listing services an agent is entitled to the cooperating commission if that agent “procures” the buyer, and often introducing the buyer to the property is sufficient to constitute procuring cause even if the licensee does not write up the offer. But what if the listing is not in the MLS?  In this case the client asked Stevenson to represent him in finding suitable office space to lease for its company.  After spending hundreds of hours working with the client Stevenson ultimately founda suitable property that was listed by CB Richard Ellis, a member of the American Industrial Real Estate Association (AIREA).  The parent company of the firm that was in the process of acquiring the client, however, insisted that the client use a different real estate company (“Insignia”) to negotiate on behalf of the client.  Insignia did so, and subsequently closed the transaction.  Stevenson did not get paid.  Since this was not a MLS listing Stevenson could not argue that it was the procuring cause.  Instead, Stevenson sued Insignia, alleging that the defendant “intentionally interfered” with its “prospective economic advantage”.  This cause of action requires that the plaintiff prove:1) there was an economic relationship between the plaintiff and a third party that carried a probability of future economic benefit to the plaintiff, 2) the defendant knew of this relationship,  3) the defendant’s actions were intentionally designed to disrupt that relationship, 4) the defendant’s acts actually did disrupt the relationship, 5) there was economic harm to the plaintiff proximately caused by the defendant’s actions, and 6) the defendant’s actions were “independently wrongful” beyond the fact of the interference itself.  Clearly, in this case the plaintiff could prove the first five factors in the test, but the question was whether the defendant’s actions were “independently wrongful”.  Generally, in order for an action to be considered independently wrongful it must be prohibited by some constitutional, statutory, regulatory, or case law or some other “determinable legal standard”.  In this case the plaintiff argued that even if the defendant’s conduct did not violate any law or regulation it was wrongful nevertheless because it violated the rules of the American Industrial Real Estate Association, and these rules constitute a “determinable legal standard”.  The trial court disagreed and dismissed the case but the Court of Appeal reversed and permitted the plaintiff to go to trial to prove that the conduct was independently wrongful by virtue of the fact that it violated those rules.  The defendant argued that even if the plaintiff’s argument was correct the case should still be dismissed because defendant Insignia was not even a member of AIREA.  The court responded to this argument by saying that since the listing agent was a member of AIREA, the entire transaction was subject to those rules.The issue in Pacific Shore Funding v. Lazo was what are the rights of persons who borrow money in a transaction subject to the Truth and Lending Act who never receive from the lender the mandatory disclosure notice informing them that they have a three day right of rescission.  In this case the plaintiffs negotiated to get a loan, never received the right of rescission notice but still closed the transaction.  Two yearslater the plaintiffs obtained a second loan from the same lender and used the proceeds to pay off the first loan.  Subsequently, after realizing that they never received the right of rescission notice in the first loan transaction, the plaintiffs sought to rescind that transaction and get back all of the interest paid, even though that loan had already been paid off.  The Court of Appeal ruled in favor of the plaintiffs, holding that they were entitled to a rescission of the loan because when alender makes a loan without providing a three day right of rescission notice that right of rescission extends for three years from the date of the transaction.U.P. Registry Inc. v. State of California concerned California’s “security freeze” law, which allows California consumers to prevent the dissemination of their credit reports.  The Court of Appeal held that this law violates the first Amendment to the Constitution if it is applied to someone who provides credit reports obtained from public records.Stonegate v. Stavan was a construction defect action by a homeowners association against a subcontractor.  In this case the trial court prevented the homeowner’s expert witness from testifying regarding the standard of care of a subcontractor.  The Court of Appeal reversed, holding that a subcontractor who is careless and negligent in the performance of work is in fact liable directly to the owner of the property, in addition to being liable to the general contractor. In Wright v. City of Morro Bay the Court of Appeal held that a dedicated street abutting private property belonged to the city even though the street was never opened or used for a public purpose, because the city had accepted an offer of dedication and had not abandoned the property. Code of Civil Procedure Section 410.42 renders void and unenforceable any provision in a construction contract “which purports to require any dispute between the parties to be litigated, arbitrated or otherwise determined outside the state”, if the property is located in California.  The issue in Templeton Development Corp. v. Superior Court (Dick Emard Electric, Inc.) was whether this law also nullifies a provision in such a contract that requires the parties to mediate the dispute outside California.  The California Court of Appeal held that the code provision does in fact render void such a mandatory “outside of California” mediation provision.Gov then discussed a trio of SanFrancisco cases: in Pieri v. City and County of San Francisco the Court of Appeal held that the city’s relocation assistance ordinance, which requires landlords to provide relocation assistance to all tenants when landlords remove property from therental market, was not preempted by the Ellis act (a law that permits landlords in rent control jurisdictions to exit the rental market completely).  A group of landlords had argued that this ordinance placed a prohibitive price on the right to withdraw property from the rental market.  The issue in Reilly v. City and County of San Francisco was whether when an income beneficiary of real property held in a testamentary trust died and was succeeded by another income beneficiary was there a changein ownership that would allow the property to be reassessed at its current market value for property tax purposes?  The Court of Appeal held that there was such a change of ownership because the beneficiary’s death caused a transfer of the property’s primary economic value to the successor beneficiary, who acquired a present beneficial interest in the property.  Finally, in Garber v. Levit the Court of Appeal held that San Francisco’s Proposition G, which provides that the minimum percentage of ownership required for landlords acquiring property after February 21, 1999 who wish to exercise the owner move-in provision of the rent control ordinance is 25%, superseded a city ordinance requiring a 50% interest in the property before exercise of that provision.  In other words, the Proposition superseded the city ordinance. In the case of Warren v. Merill the facts were as follows:  Warren wanted to purchase a condominium. Merill was the dual agent in the transaction.  In order to purchase the unit Warren needed a co-borrower. Merill suggested her daughter and Warren agreed.  The arrangement was that the daughter would be represented as co-owner and co-borrower in the transaction documents, and she would quitclaim the deed to Warren after close.  In fact, Warren’s name was never place on the deed at all and the daughter never quitclaimed the property back to him.  Subsequently Warren defaulted and Merill had him evicted.  Warren sued, alleging that Merrill had acquired the condominium through fraud and breached her fiduciary duty to him.  The Court of Appeal agreed, ruling that Merrill falsely claimed that she would place his name on the title if he went along with the plan involving the daughter as co-borrower. In the case of Markowitz v. Fidelity National Title plaintiffs purchased a residence from sellers who carried back a note and second trust deed.  Subsequently the plaintiff applied for a line of credit.  Thebank said that in order to obtain a line of credit the plaintiff must pay off the note in full and the trust deed must be reconveyed.  The defendant served as a sub-escrow in order to hold and exchange funds between the plaintiff and the seller.  The defendant did not confirm that a reconveyance was recorded and failed to notify the plaintiff that it was not recorded.  The sellers commenced a foreclosure action and the plaintiff sued the defendant for breach of statutory and fiduciary duty.  The court held that the defendant was not liable to the plaintiff, ruling that Civil Code Section 2941 sets forth the duties of a beneficiary and trust deed in regard to a reconveyance of a trust deed once the secured obligation is satisfied, but the beneficiary must execute and deliver to the trust deed a reconveyance request before this duty is triggered.  In this case the beneficiary never signed and delivered a request for reconveyance.  According to the court the escrow holder had noduty to remind beneficaries about their obligations.  In other words, a title company acting a sub-escrow in a residential refinance transaction did not beach a duty to the owner of the property when it failed to record a reconveyance of the trust deed. The issue in In Re: Marriage of Balcot was whether the  contract in question was voidable because it had been entered into through “duress” or “undue influence”.  The contract in this case was a document signedby a husband that transferred all of his interest in a residence and 20% of certain stock to his wife.  Before he signed this document the wife threatened him with a divorce and obstruction of his relationship with their children if he did not sign it.  In fact she “screamed” at him for at least 45 minutes prior to the signing of the contract.  In addition, there were past instances of verbal and physical abuse by her against him and he actually wrote the contract language in this document verbatim based on what she dictated to him.  Based on these circumstances the husband argued that the contract was voidable because it had been entered into by duress.  The wife argued that in order to prove duress the husband wouldhave to provide “clear and convincing” evidence.  The Court of Appeal disagreed, holding that the standard for determining who was right was “preponderance of the evidence”, and a preponderance of the evidence in this case supported the husband’s position.  The wife also argued that there should be no finding of duress because she did not commit an unlawful act, she did not subject the husband to confinement and he did not fear for his physical safety.  The court held that she was wrong because under current law such facts are not required for a finding of duress.  In this case, threatening to deny access to one’s children was enough. Finally, in Borton v. Santa Monica Rent Control Board the Court of Appeal held that the Santa Monica Rent Control Ordinance does not prevent landlords in that city from raising rents as high as they please if the tenant is not using the unit as his/her primary residence.  In this case the tenant was using theproperty as a residence but her primary residence was elsewhere.Gov concluded his update by reporting on some additional developments.  First, effective October 31, 2006, for FHA loans the law now provides that if the “For Your Protection Get aHome Inspection” form is incorporated into, or if the language on the form is stated somewhere within, an executed purchase and sale agreement, it is not necessary to provide a buyer with a separate copy of this form. Gov then reported that new seismic hazard zone maps had recently been released.  He noted that the natural hazard disclosure report that is provided in almost every transaction in California discloses to the buyer whether or not the property is located in two types of fire zones, two types of flood zones, earthquake fault zones or seismic hazard zones.  Gov noted that with respect to most of these zones the state of California is already almost completely mapped.  However, with respect to seismic hazard zones manyparts of the state have not yet been mapped and on a regular basis new maps are released.  In other words, natural hazard disclosure reports in a particular area can change at any time because of a release of new maps.  The new maps that were released cover parts of the cities of Palo Alto, Mountain View, East Palo Alto, Menlo Park, Redwood City and Morgan Hill.  Most of these areas are “low lying” regions on the bayshore or along other waterways. In the area of standard forms Gov reported that at this time C.A.R. plans to issue only one new form in 2007.  The form that is going to be released in April is called the “Agent’s Visual Inspection Disclosure” form, and it is a three page document designedto be used along with the Transfer Disclosure Statement.  Although it is not mandatory it provides many benefits.  For example, it gives agents, who are required to do a reasonably competent and diligent visual inspection of the property when they sell California real estate improved with one to four units, more room to disclose the results of their inspections than page three of the Transfer Disclosure Statement, which only gives them three lines.  A second advantage is that this three page form gives the agents two pages to write down their remarks, and divides those two pages into subsections for each region of the property.  That is to say, the agent has a few lines to remark on the living room, dining room, kitchen, first bedroom,second bedroom, third bedroom, first bathroom, etc.  Finally, the first page of the form contains useful language explaining to buyers and sellers, as well as licenses, what California law actually requires with respect to the licensee’s inspection of the property, pointing out that California law does not require the agent to inspect areas that are not reasonably accessible, areas that are off the site of the property, public records or permits or common areas of common interest subdivisions.  In addition, the form clearly expresses the limitations of an agent’s visual inspection.  For example, it makes clear that the agent will not climb onto a roof or into an attic, will not move or look behind furniture, wall hangings or floor coverings, will not operate appliances, will not measure square footage, and will not determine if the property has mold, asbestos or lead based paint. Legislative UpdateGov then reported that long time C.A.R. lobbyist Ron Kingston has resigned from C.A.R. in order to form his own lobbying company and therefore could not be present at this meeting to give his usual legislative update.  In Ron’s absence Gov provided a brief legislative update of his own.  First he pointed out thata couple of bills that were expected to pass last year never did, including the one that would have required new real estate brokers to have some experience before being able to act as a broker, and another bill that would have required a DRE license on all real estate agent business cards, flyers, or newspaper ads.  As for 2007, Gov reported that one of C.A.R.’s primary legislative goals will be to eliminate or modify the surety bond requirement for buyer’s agents on home equity sales transactions, which are transactions where an investor purchaser buys an owner occupied home in foreclosure.  REALTORS® can also expect to see some legislative activity concerning prohibiting private transfer taxes, further regulating homeowners associations, further clarifying disclosure duties regarding registered sex offenders and oversight of mortgage originators.  C.A.R. will also continue to try to raise the standards for real estate license education and prerequisites for real estate brokers.  C.A.R. will also support eliminating the tax penalty on short sales and will strive to make sure that real estate agents are not adversely affected by the new rules regarding predatory lenders. Risk Management TipsSince the theme of this first meeting of 2007 for the Realtor Risk Management and Consumer Protection Forum is risk management, Gov concluded his report by providing some of his own risk management tips. 1) In this changing real estate market REALTORS® must rememberthat buyers are less tolerant of property defects and are more likely to sue agents after close when there are problems then they would be in a market where the property has appreciated rapidly after close.  He also noted that in this market buyers are also more likely to blame real estate agents when they perceive that they have somehow either made a bad price decision or obligated themselves to a “bad loan”.2) In this market, where a greater number of properties go into foreclosure thanin the previous, hyper-charged “sellers” market, REALTORS® should be very aware of the home equity sales contract law that prohibits investors from purchasing owner occupied residential properties in foreclosure unless a certain form isused and also requires buyers’ agents in such transactions to withdraw before the offer is written.  Gov also reported that at least one judge in Riverside County has ruled that this law applies even if at the time the transaction was entered into the property was not yet in foreclosure.  In other words, according to this court, if escrow has been opened under a normal contract but then the property goes into foreclosure before closing, where the buyer is an investor and the seller still lives in the property, the parties should cancel the deal and start all over with a new purchase contract, such as C.A.R.’s Notice of Default Purchase Agreement, which gives the seller in foreclosure the required five day right of rescission. 3)  There are more short sales in this type of market than in the previous market and REALTORS® should remember that even after an offer is accepted and approved by the lender, if a new offer comes in on the property before the transaction closesthey must inform the lender of the new offer. 4)  Remember as a REALTOR® that if you lend your own money to a client in order to help that client avoid foreclosure you might be considered a “mortgage foreclosure consultant”, inwhich case you must enter into a written contract with the client providing the client with, among other things, a three day right of rescission. 5)  Mortgage fraud is still a big problem throughout the country and REALTORS® should not participate in transactions where the buyer receives large sums of money back at close of escrow that the lender is not aware of. 6)  It is very important to remember to disclose all defects of a property before selling it, including past defects that have been repaired.  In addition, material additions or changes to the property that occurred in the past must also be disclosed.  For example, material additions to landscaping may change the natural flow of water when it rains and this could impact neighbors who will then be inclined to sue. 7)  Remember that, because of their fiduciary duty, buyer’s agents have a higher responsibility and duty of care to buyers then seller’s agents do, so they must be careful to disclose to their clients which actions they are going to perform on behalf of their clients and which ones they are not.  In order to satisfy this obligation Gov strongly recommended that all agents provide the Statewide Buyer and Seller’s Advisoryform to buyers. 8)  Regarding agency law, make sure to have the seller sign the Agency Disclosure form before signing a listing, make sure that when two offices are involved in the transaction the buyer’s agent delivers an Agency Disclosure form to the seller and make sure any actual instance of dual agency is disclosed early in the transaction. 9)  Make sure that you understand clearly all the forms you use in a particular transaction, and if you do not understand a form, or ifyou are not sure you are using the right form, obtain advice from an attorney, such as one of the C.A.R. Member Legal Services Hotline lawyers. 10)  If possible, make sure you document all of your conversations, or at least all of your significant conversations, with your clients, as well as any actions you undertake on their behalf, and provide this documentation to your clients through fax or email.  It is important to establish a timeline of events in a transaction because this can be very useful if one is ever sued by an unhappy client.  In addition, all written transaction documents should be immediately transmitted to clients, and clients should acknowledge receipt of delivery of such documents. 11)  When acting as a buyers agent in a particular transaction, if you are receiving a significantly higher than normal rate of compensation this should be disclosed to the client so the client cannot accuse you of influencing them to purchase a particular property based on theagent’s interest rather than the client’s interest. 12)  Remember not to pay referral fees to unlicensed persons pursuant to a preexisting agreement unless the person has a real estate license and remember that referral fees for loan referrals can violate RESPA even if the recipient does have a real estate license. Gov concluded by providing a summary of his legal tips on disclosure:  Always disclose the facts that you know, but do not interpret those facts, do not disclose the ramifications of the facts, do not investigate the facts you disclose, do not go beyond your expertise, do not disclose regarding tax or title issues and when passing on factual information to the buyer either verify the accuracy of the facts or tell the buyer that you have not verified these facts.  In addition, while agents do not have an obligation to verify the seller’s disclosures the listing agent should at least read what the seller has disclosed and then perhaps ask the seller toprovide clarifying information, and if the seller has made a disclosure that the agent knows is clearly wrong, correct that information in writing.  Finally, the ultimate rule is “when in doubt disclose”.