California agency disclosure rules to cover commercial real estate

A new California law will expand disclosure requirements of real estate brokers.

Starting January 1, 2015, California real estate agency disclosure requirements that now apply only to residential sales and leases of more than one year will apply also to commercial sales and leases. Practically, this means that not only will licensed real estate brokers and their associates in residential transactions have to reveal in writing which side they represent, but also those agents in commercial deals will have to do the same.

In a nutshell, California real estate law now requires that a residential listing or selling agent give a very specific agency disclosure form to the seller and to potential buyers. The timing of document delivery is also set out in detail in the statutes. In almost all situations, a signed acknowledgement of disclosure form receipt must be obtained.

The disclosure form explains that a broker can represent a seller alone, a buyer alone, or both at the same time, known as dual agency. The form explains that dual agency is only legal in a real estate transaction if both the seller and the buyer understand and consent to the arrangement.

The form also sets out the legal duties and obligations of real estate brokers in each of these situations so that potential buyers or lessees and sellers or lessors understand where the agents' professional loyalties lie.

Historically, the need for such disclosures grew from concern that brokers would have conflicts of interest when they represented both sides in real estate deals. Such laws attempt to give notice to the involved parties of the brokers' loyalties and legal duties concerning disclosure and good faith. Without an understanding of the brokers' interests (including self-interests), an unsophisticated party to a transaction could walk away without the best deal that could have been negotiated should a broker have acted in bad faith.

On the flip side, such a disclosure form requirement also protects a real estate broker from later being accused of not having been up front about potential conflicts of interest, since it was all set out in black and white.

As of January 1, 2015, these requirements will also apply to commercial real estate sales and commercial leases at least one year long. The legislative reports issued while the bill was being debated reveal that the original reasoning behind only requiring such disclosure forms in residential situations was that commercial parties were considered more "sophisticated."

However, the legislators considered that in fact commercial parties entering into leases, purchases or sales are not necessarily business savvy in matters of real estate, nor do they always have equal bargaining power with real estate brokers who may represent large commercial property companies. The example given in one of the legislative reports of disparity in bargaining power is that of a small business owner who leases an office from a large, sophisticated commercial landlord.

The bill was officially supported by organizations representing merchants and small businesses and was opposed by the California Association of Realtors. It passed both houses of the California legislature with very few votes against it.

It is important to remember, however, that whether a sale or lease is being considered in 2014 before the expansion of disclosure requirements to commercial brokers or after the new law takes effect, anyone party to such a transaction would be wise to obtain legal counsel from an experienced California real estate attorney. Legal counsel can assist a buyer, lessee, seller or lessor with meeting legal requirements in the transaction; reviewing and drafting official documents; negotiating with the other side; advising about pros and cons of a particular deal; and more.

Keywords: California, agency, disclosure, commercial real estate, residential, sale, lease, agent, form, dual agency, conflict of interest, notice, bill, sophisticated