STATE OF CALIFORNIA Real Estate Bulletin, Spring 2023

This article is a summary update of the spring bulletin 2023, Vol. 82, No. 2, by the Commissioner of the California Department of Real Estate, on pre-license education requirements, advertising, Common Interest Development rules, and Broker supervision.

Changes to Pre-License Education Course Requirements Take EffectJanuary 1, 2024

On September 23, 2022, Governor Gavin Newsom signed Senate Bill 1495 (SB 1495), which makes changes to the course content required of the real estate practice course. These new requirements apply to individuals who submit an application to take the real estate salesperson or broker examination starting on or after January 1, 2024.

Currently, all applicants for the salesperson or broker examination must complete a three semester or four quarter unit equivalent course in real estate practice as part of the requirements to qualify for the examination. Beginning January 1, 2024, all applicants for the real estate salesperson or broker examination will need to complete a revised statutory/pre-license course in real estate practice, containing the following content:

• A component on implicit bias, including education regarding the impact of implicit bias, explicit bias, and systemic bias on consumers, the historical and social impacts of those biases, and actionable steps students can take to recognize and address their own implicit biases; and
• A component on federal and state fair housing laws as those laws apply to the practice of real estate. The fair housing component shall include an interactive participatory component, during which the applicant shall role play as both a consumer and real estate professional
  Individuals who had previously qualified for licensure, and their license and associated renewal rights have subsequently expired, will need to complete another real estate practice course that is SB 1495 compliant should they submit a new exam application on or after January 1, 2024.
  Also, individuals who take the current pre-license course, but wait until after January 1, 2024 to apply for their exam, will first have to complete the revised pre-license course.
  Learn more about the new SB 1495 requirements, and search for approved statutory/pre-license courses in the “Examinees” section
  on the DRE website.

Unfortunately, first time buyers are often targets for fraud or are not prepared to make key decisions with significant financial ramifications. That is why it is imperative that DRE equip consumers with robust information on the home-buying process. There are a number of “how to” guides out there, from both industry and governmental sources, but there is a crucial need to update, enhance, and amplify that information. To respond to that challenge, DRE is launching a communications campaign to assist first time buyers: “First Home California”
First Home California will feature a wide range of information for consumers. The content will cover topics from how to select an agent and understanding mortgages, to disclosures and what to expect at closing. DRE will supplement the digital content on our website with live virtual presentations, including an opportunity for questions and answers. We look forward to helping Californians prepare to purchase their first home.
As I have indicated in other columns, I firmly believe that the most effective consumer protection takes place when DRE educates before we regulate. Conducting investigations, preparing for disciplinary hearings, etc. is very expensive and time consuming. The public is best protected if DRE can educate consumers and partner with the profession to prevent violations before they might occur.
Prevention will continue to be our strategic approach to serve the public, as it is how DRE can best protect consumers and is also how we can maximize our resources. It is our hope that investing in educating potential homebuyers, we can help demystify the complex process, help them avoid costly mistakes, and open the door to home ownership.

COMMISSIONER’S UPDATE

According to California Real Estate Law, are each of the following statements about advertising true or false?

1. Advertising must always include the broker’s real estate license number.
2. Even though a broker hires a third party company to create and handle advertising, the broker is responsible
   for advertising violations caused by the hired company.
3. A person who advertises that they only provide referral services still needs a real estate license.
4. A broker is not responsible for the advertising of their affiliated salespersons or broker-associates.
5. DRE publishes Real Estate Advertising Guidelines as a guide for licensees on the laws applicable to advertising
   and first point of contact solicitation materials.

Living in a Common Interest Development

What is a common interest development (CID)?

A CID is descriptive not only of a certain type of real estate and form of home ownership, but also of a lifestyle that has become more and more common to the American way of life. To understand the concept, it is important to know that there is no one structural type, architectural style, or standard size for CIDs. They come in a variety of types and styles, such as single-family detached houses, two-story townhouses, garden-style units with shared “party walls,” and apartment-like, multistory high rises. 

In California, there are tens of thousands of CIDs that range in size from a simple two-unit development to a large complex having thousands of homes, many commonly owned facilities, and multiple associations under the auspices of one overall master association. 

However, despite the wide range of differences that may exist among CIDs, all CIDs are similar in that they allow individual owners the use of common property and facilities and provide for a system of self-governance through an association of the homeowners within the CID. The most common type of association of homeowners is the nonprofit mutual benefit corporation. This is a corporation in which the members of the corporation vote for a board of directors that run the affairs of the corporation. However, some associations, usually the older ones are unincorporated associations. In many ways, unincorporated associations are treated the same as mutual benefit corporations under California law.

Does a property owner have to join the association?

Membership in the association(s) is automatic. When a person buys a lot, home, townhouse, or condominium in a common interest development, he/she automatically becomes a member of the association(s).

What are Covenants, Conditions and Restrictions (CC&Rs)?

The Declaration of the Covenants, Conditions and Restrictions, or CC&Rs, contains the ground rules for the operation of the association. This governing document identifies the association’s common area and responsibilities, explains the obligation of the association to collect assessments, as well as the obligation of the owners to pay assessments. It also states that the association may sue owners for violations of the rules or failure to pay assessments, and explains what happens if there is any destruction of property in the development as a result of fire or earthquake. The CC&Rs will also state the duties and obligations of the association to its members, insurance requirements, and architectural control issues.

How are the CC&Rs enforced?

California laws allow that either the association or an owner in a common interest development may file a lawsuit asking the court to enforce the CC&Rs. The law currently requires, with some exceptions, that either the owner or the association must offer to engage in some form of alternative dispute resolution process before filing a lawsuit. You may wish to consult with an attorney who specializes in this type of law if you are faced with or contemplating an enforcement matter.

Does DRE assist with the enforcement of the bylaws and CC&Rs?

CIDs are subject to the Davis-Stirling Common Interest Development Act (California Civil Code sections 4000 et seq.). This Act is intended to provide homeowners with a system of self-government and dispute resolution. As part of the required public report application processes needed before homes are offered for sale to the public, DRE reviews the legal framework of new CIDs to ensure they comply with the Subdivided Lands Law. Once sales begin, DRE’s jurisdiction is limited to the subdivider’s obligations under the public report, which does not include intervention in association disputes. Presently, there is no State or local agency that directly regulates associations or their members.

Who is in charge of the association?

The homeowners are in charge of the association. Often, homeowners will elect a board of directors to operate the association and preserve, enhance, and protect the value of the CID, but the board answers to the homeowners. 

It should be noted that it is not unusual for the board to contract with a professional management company to run the day- to-day affairs of the association. Ultimately, however, it is the board that is responsible for the oversight of the homeowner association.

How does the association pay its bills?

Each association has a budget that is prepared based on the common area obligations of the CID, and distributed to all members. The budget determines how much money the association is going to need to operate for the following year. The association has the right to bill members for their fair share of the budgeted amount. This billing is known as an assessment, which may be paid via monthly invoices, coupons supplied by the association, or some alternative method. Ideally, the association collects sufficient money through these assessments and pays the bills for the services and goods contemplated in the budget. 

If the assessments collected are insufficient to pay the bills, the board of directors is allowed to levy what is known as a special assessment. Without member approval, the total of special assessments in any fiscal year cannot exceed 5% of the gross budgeted expenses for that year. By paying the fair share of the obligations of the association, through the budget and assessment process, all property owners are proportionally paying for the current and long-term maintenance obligations of the association. 

Can owners rent to someone else?

Some CIDs restrict the number of units that may be rented by owners. Some CC&Rs require that a rental agreement acknowledge that the tenancy is subject to all of the rules and regulations of the association. Some associations’ rules and regulations also require that a property owner provide the association with a copy of the rental agreement. In most associations, the CC&Rs state that the owner of the property being rented is responsible for the conduct of the tenant. Naturally, it is in the best interest of all parties to prevent problem situations between tenants and owners of other units. If a tenant does damage to the common area or creates a nuisance (e.g., loud music or pet problems), the disturbance could become the property owner’s problem and the association may fine them.

What are a property owner’s individual responsibilities for living in a CID?

Primarily, a property owner is responsible for paying assessments on-time and abiding by the CC&Rs and all other rules and regulations that exist for community harmony.

What are a property owner’s individual rights for living in a CID?

A property owner’s individual rights when living in a CID are based upon the laws of California and the documents you signed at the time of purchase. Prior to making a purchase, it is advisable that a potential owner thoroughly review the CC&Rs and any other governing documents applicable to the CID (California Civil Code section 4150). The potential owner also may wish to attend a board meeting and obtain copies of minutes from previous board meetings. The CID should be able to demonstrate that it has adequate insurance coverage, a solvent budget, and a sufficient reserve account.

Generally, the rights of owners include:

• The right to participate in meetings of the board of directors and to be heard

• The right to enter into dialogue with your association board of directors with regard to any problem perceived in the development

• The right, with some exceptions, to utilize an alternative dispute resolution process, if a dispute arises between the property owner and the association prior to the involvement of the court system. 

Helping Your Client Understand an Architect’s Role

By the California Architects Board

Increasingly, real estate agents are assisting clients with construction projects and other services that can help when either buying or selling property. Because such construction may involve working with an architect, it’s important that real estate agents understand the legal parameters and scope of an architect’s license.

California law defines the practice of architecture as the planning of sites and the design, in the whole or in part, of buildings or groups of buildings and structures. This can include projects such as adding a second story to a house or increasing a house’s footprint. Anyone who uses the title “architect” (or any term confusingly similar), or advertises to provide architectural services in California, must be licensed by the California Architects Board (CAB). A license can be easily checked on the CAB website. 

When considering hiring an architect, please be aware that some structures do not require the services of a licensed architect. Non-architects can design single-family dwellings of wood frame construction not more than two stories and basement in height. CAB has a helpful Design Limitations Chart of various project types and the relevant design limitations for architects, civil engineers, and structural engineers. The charts also includes information about the types of buildings that unlicensed individuals can design, unless the local building department deems that doing so would involve an undue risk to health, safety, and welfare.

CAB has publications and videos with tips about hiring an architect that may be helpful for you and your clients. 

• Consumers Guide to Hiring an Architect

• 10 Tips for Hiring an Architect (English)

• 10 Tips for Hiring an Architect (Spanish)

Additionally, CAB has a video that provides important information for those interested in building an accessory dwelling unit (ADU) on their property. 

If you have any questions related to architects and their scope of practice, please contact CAB at 916-574-7220 or [email protected].

What should a property owner do if he or she decided to sell the home?

The property owner may wish to contact a real estate professional, the board of directors, the professional management company (if the CID has one), and/or an escrow company for assistance with the many details involved with selling a home. There are a number of documents that an individual owner is legally required to provide to a prospective purchaser of a unit in a CID. 

The property owner will want to make sure that the buyer is aware of the rules and regulations of the association as well as the assessment obligation so there is not a problem or misunderstanding that could jeopardize the sale of the home. Until the sales transaction is completed and title is transferred, the owner of record is responsible for all assessments and fines unless otherwise stated in the sales and purchase agreement. This includes new assessments approved during the sale and purchase that become due while the sale is pending.

Conclusion

A successful and viable CID is generally one in which homeowners assume an active role, not only by attending association meetings, voting and paying dues on time, but also by running for elected offices, serving on committees and participating in group activities. While governing documents help establish a foundation, involved owners build the CID and make it a community. 

Broker Supervision Requirements under California Real Estate Law

What is broker supervision?

Broker supervision is the phrase most often used when describing the broker’s responsibilities for supervising the activities of the broker’s affiliated salespersons and broker-associates and monitoring their real estate-related activities. 

In California, salespersons must affiliate with a broker when engaging in “licensed” real estate activities, and brokers who have affiliated salespersons and/or broker-associates must supervise them.

These requirements maximize protections for real estate consumers against fraud, misrepresentation, and negligence. Broker supervision is defined in the Real Estate Law at Business & Professions (B&P) Code sections 10159.2 and 10177(h) and in the California Code of Regulations at Title 10, Chapter 6, section 2725.

The following presents some sections of the B&P and Regulations that relate to the supervision requirement.

Broker’s Obligation to Supervise 

A licensed real estate broker must supervise the real estate licensees who are affiliated with the broker. This is true for both corporate brokers and for “sole proprietor” brokers, and there are no exceptions to this law. Moreover, it is never acceptable for an unlicensed individual to supervise a licensed real estate salesperson or broker-associate, or to conduct licensed acts.

Enacted in 1955, B&P §10177(h) authorizes DRE to take disciplinary action against: 

1. Any broker who fails to exercise “reasonable supervision” over the affiliated licensees practicing under their license; and 

2. Any designated broker-officer of a corporation who fails to exercise reasonable supervision and control of the activities of the corporation for which a real estate license is required

A broker’s failure to provide adequate supervision can lead to disastrous consequences not only for the affected consumers, but also for the broker’s future as a real estate licensee.

In exercising reasonable supervision over the activities of their affiliated licensees, Regulation 2725 requires that brokers establish policies, rules, procedures and systems to review, oversee, inspect and manage:

1. Transactions requiring a real estate license;

2. Documents that may have a material effect upon the rights or obligations of a party to the transaction;

3. Filing, storage, and maintenance of such documents;

4. Handling of trust funds;

5. Advertising of any service for which a license is required;

6. Familiarizing affiliated licensees with the requirements of federal and state laws relating to the prohibitions against discrimination;

7. Regular and consistent reports of licensed activities of affiliated licensees;

The form and extent of such policies, rules, procedures, and systems must take into consideration the number of affiliated licensees and the number and location of branch offices. In other words, a responsible broker should keep track of who is working for the company, what the license status is of affiliated licensees, and out of which office they are working. 

A broker also must have systems in place to monitor its overall policies, rules, procedures, and systems. Brokers may use the services of other brokers and salespersons to assist in administering these supervisory policies and procedures, so long as the broker does not relinquish overall responsibility for supervision of the acts of persons licensed to the broker. 

Assignment of Supervisory Authority

For real estate corporations, B&P §10159.2 sets forth the primary broker supervision requirement in which the designated licensed broker is responsible for exercising sufficient supervision and control over their affiliated licensees and employees necessary to achieve full compliance with the Real Estate Law.

Where there are other corporate officers who hold broker licenses and wish to act in a supervisory capacity, they may do so providing that the corporation enacts a corresponding corporate resolution, and the resolution is promptly filed with DRE. Per B&P §10164, designated broker-officers of a corporation and “sole proprietor” brokers may appoint another person who is a licensed real estate broker or salesperson as a branch office or division manager who will

1. Take and have responsibility for the oversight and supervision of day-to-day operations of licensed activities in the branch or division real estate office, and:

2. Be subject to potential sanctions and discipline from DRE for failure to properly supervise the licensed activities of licensees and the clerical staff employed in the branch office or division. 

If such an appointment is made, the broker must notify DRE in writing at the time of the appointment. The broker also must notify DRE in writing when an appointment is terminated. 

Ultimately, however, it remains the corporation’s designated broker-officer or responsible broker’s responsibility to ensure that only qualified personnel are allowed to supervise the sales force and to ensure that the brokerage operates in compliance with the Real Estate law.

What happens, for example, if a real estate salesperson, who is being supervised by an officer or branch or division manager other than the designated officer, does something wrong which is within the scope of their affiliation? 

Depending on the facts and circumstances and the nature of the violation, the designated broker-officer may still be responsible along with the officer or licensee to whom supervision was delegated.

Broker Supervision in Advertising

Commissioner’s Regulation 2725(e) specifies that broker supervision includes the establishment of policies, rules, procedures, and systems to review, oversee, inspect, and manage advertising of any service for which a license is required. 

Answering the following questions can help brokers to determine if there is reasonable supervision over the advertising of affiliate licensees: 

• Does the broker have brokerage or brand advertising standards and requirements? 

• Are affiliate licensees provided information or resources that can help them prepare advertising? 

• Who reviews and approves the advertising of affiliate licensees before it is published, printed, or distributed?

• If an unlicensed employee prepares the advertising, is it done under the direction of a licensee and subject to broker supervision?

• Does the broker have systems in place to ensure sufficient advertising review and approval?

• How often does the broker, or designated manager, spot check their affiliate licensees’ advertising materials? 

• Are all affiliate licensees properly licensed under the broker?

• Are all fictitious business names listed on the broker’s public license information on DRE’s website?

• If compliance issues are found, what action does the broker take to correct the advertising?

• What happens if an affiliate licensee violates the broker’s policy, rules, or procedures?

• Do the broker’s policies, rules, and procedures include the preceding bullet points?

While the list above is not comprehensive, considering answers to these questions can help ensure that brokers appropriately supervise affiliate licensees who advertise their services. 

For additional information, see DRE’s Real Estate Advertising Guidelines. 

Ensuring License Requirements are Met

Any person, individual or corporation, who engages in the business of, or advertises as, a real estate broker or a real estate salesperson must first get a real estate license from DRE. It is therefore incumbent upon brokers to hire licensed persons, and ensure that only affiliates who are licensed perform activities requiring a real estate license.

It is the responsible brokers and/or the designated broker-officers of corporations who are responsible for ensuring that affiliates are properly licensed and that unlicensed employees do not perform activities requiring a real estate license. In this way, responsible brokers ensure that the sales force is licensed and has the basic requisite knowledge, skills, experience, and character to represent members of the public in real estate transactions. 

Because corporations are “persons” under the California Real Estate Law, corporations may get real estate broker licenses. However, a licensed corporate broker may act only through a designated corporate officer who is a licensed broker. 

B&P §10211 requires that the corporation designate a supervising broker in its application for a real estate license. If there is no licensed officer designated as the supervising broker for the corporation, the corporation cannot perform licensed activities. 

A designated broker-officer of a corporation is, while so affiliated, licensed only to act for and on behalf of the corporation as an officer. However, a designated broker-officer also may hold a separate license through which they may act as an individual broker. 

A corporate licensee engaging in the real estate business when there is no designated broker-officer is acting in an unlicensed capacity. This may subject the corporation to DRE discipline, as well as to criminal penalties.

In addition, in order to be licensed by DRE and to do business as a corporate real estate broker, the corporation must be in good standing with other agencies in the State of California, such as the Secretary of State’s Office. If a corporation, for example, has its corporate status suspended or revoked, it is no longer a corporation in good standing. The designated broker-officer of a corporation is responsible for ensuring compliance with this provision of the state’s Real Estate Law. 

Among the express administrative duties of supervision is the requirement that the salesperson license, or broker license if acting as a broker-associate, must reflect the current responsible broker. In addition, brokers must notify DRE when hiring or terminating an affiliated licensee. 

Brokers must maintain written agreements between the broker and each affiliated licensee. The agreements must address the broker’s supervision of licensed activities. 

Brokers must have and maintain a definite place of business in California where licenses are displayed and where consultations with clients take place. 

To be lawful, fictitious business names and the location of branch offices also must be on record with DRE. In addition, alternative business names (doing business with a fictitious business name, or “dba”) and the location of branch offices must be on record with DRE. 

In the case of a corporate broker, it is the duty of the designated broker to ensure compliance with these rules. 

These latter examples of administrative duties are part of the more general duties of supervision of an individual broker’s affiliates and employees or the responsible broker’s duty to supervise the acts of a licensed corporation and its employees and agents. 

Final Thoughts

Ensuring that all affiliated licensees act with the utmost honesty and integrity and adhere to their duties as fiduciaries is an inherent part of the responsible broker’s responsibility. The decision to serve as a responsible broker, either of a sole proprietorship or of a corporate brokerage, should not be taken lightly. If any violations occur in the name of the corporation, the designated broker may suffer the consequences.

Future editions of the Real Estate Bulletin will include an expanded look at these supervision requirements.