Lawful Object +13California · Real Estate · English

A contract's consideration and object must both be lawful in formation and operation. If a single object is unlawful in whole or part, or performance is impossible, the contract is void. With several distinct objects, the contract is valid as to lawful objects. The law generally lends no aid to parties in an illegal contract.

• ✓Both consideration and object must be lawful
• ✓A contract with a single unlawful object is void
• ✓Neither party can enforce an executory illegal contract or rescind an executed one

Unlicensed brokers or contractors cannot enforce their contracts. Restraints on business are generally void (except goodwill non-compete in a limited area/time). Persons cannot avoid liability for their own fraud/negligence by contract. Usurious interest above constitutional limits voids the interest portion. Brokers must comply with the Real Estate Law.

• ✓Unlicensed brokers and contractors cannot enforce their contracts
• ✓Contracts avoiding liability for one's own fraud or negligence are void
• ✓Usurious interest above constitutional limits makes the interest portion void
• ✓Restraints on engaging in business are generally void except limited goodwill non-competes

A liquidated damages clause specifies a fixed damage amount for breach and is presumed valid unless proven unreasonable at contract formation. It is void for retail consumer purchases/rentals and residential leases. Special rules apply to residential real property purchases and certain government construction contracts.

• ✓Liquidated damages clauses are presumed valid unless proven unreasonable at contract formation
• ✓Such clauses are void for consumer retail purchases and residential dwelling leases
• ✓Special rules apply to residential real property purchase contracts

Under Civil Code § 2355, agency ordinarily terminates by expiration of term, extinction of subject, death of the agent, agent's renunciation, or incapacity of the agent to act.

• ✓Civil Code § 2355 lists five ways an agency ordinarily terminates
• ✓Termination methods include expiration, extinction of subject, agent's death, renunciation, or incapacity

A principal has an absolute power to revoke the agency at any time unless coupled with an interest, but may be liable for breach if revoking without good cause. Recorded agency instruments require written, acknowledged, recorded revocation.

• ✓A principal has absolute power to revoke unless the agency is coupled with an interest
• ✓Revocation of a recorded agency must be in writing, acknowledged, and recorded
• ✓A broker's right to earn a commission is NOT an interest that precludes revocation

Revocation may give the broker a right to damages or compensation under the listing. Withdrawal of property from market before listing expiration is a de facto revocation that may support a commission claim.

• ✓Blank v. Borden: withdrawal clause in an exclusive listing is not an unenforceable penalty
• ✓Withdrawal from market before expiration is a de facto revocation supporting a commission claim
• ✓Exclusive listings without a definite termination date are unenforceable and grounds for discipline (B&P § 10176(f))

Notice must be given to third parties when agency terminates by expiration, extinction, or agent's death/incapacity/renunciation. If terminated by principal's death, incapacity, or revocation, it is effective against third persons even without notice.

• ✓Former agent remains ostensible agent to third persons without notice (§ 2355 terminations)
• ✓Termination by principal's death/incapacity/revocation is effective without notice to third parties
• ✓§ 2356 contains an apparent contradiction regarding contracts by third persons without actual knowledge

The Civil Code proscribes various acts relative to real property sales contracts. A real property sales contract (also called a contract of sale or land installment contract) is defined as an agreement to convey title to land upon satisfaction of specified conditions, which does not require conveyance within one year of formation.

• ✓A real property sales contract is defined under CC 2985
• ✓It is an agreement to convey title upon satisfaction of specified conditions
• ✓It does not require conveyance within one year of contract formation

The Civil Code lists prohibited seller acts under contracts of sale. These protect buyers under installment land contracts by restricting encumbrances and requiring proper application of payments received.

• ✓A seller cannot encumber land beyond the present contract balance without buyer consent under an unrecorded contract (CC 2985.2)
• ✓A seller must apply buyer payments to obligations secured by the land, not other purposes (CC 2985.3)
• ✓A seller must hold in trust and properly apply pro rata tax and insurance payments received from the buyer (CC 2985.4)

On satisfaction of a mortgage without power of sale, the mortgagee must record a certificate of discharge within 30 days. For a deed of trust, the beneficiary delivers documents to the trustee, who must record a full reconveyance within 21 calendar days of receiving all necessary documents and fees.

• ✓Mortgagee must record discharge within 30 days of satisfaction (Civil Code 2941)
• ✓Trustee must record reconveyance within 21 calendar days of receiving documents
• ✓Copy of reconveyance delivered to beneficiary/servicing agent if known

Failure to comply with Civil Code 2941 makes the violator liable for damages plus a $500 forfeiture. Willful violation is a misdemeanor ($50-$400 fine or up to 6 months jail). Reconveyance service fees are capped at $45 plus official fees and cannot be charged more than 60 days before satisfaction.

• ✓Violation of 2941 forfeits $500 plus damages
• ✓Willful violation is a misdemeanor (Civil Code 2941.5)
• ✓Reconveyance fee capped at $45 plus official fees

If reconveyance is not recorded within 21 days of receipt or within 75 calendar days of payoff, a title insurance company may prepare and record a release, deemed equivalent to reconveyance. The title company must mail intent to the parties at least 10 days prior.

• ✓Title company may record release within 75 days if reconveyance not issued
• ✓Release deemed equivalent to reconveyance when recorded
• ✓Title company must mail 10-day advance notice to parties

State law requirements inconsistent with TILA Chapters 1-4 are preempted by federal law to the extent of the inconsistency, and preemption extends to Regulation Z. A state law is inconsistent if it requires disclosures/actions that contradict federal law, uses the same term for a different meaning/amount, or uses a different term for the same item.

• ✓Inconsistent state law is preempted to the extent of the inconsistency (12 CFR 226.28)
• ✓State law is contradictory if it uses the same term for a different amount/meaning or a different term for the same item
• ✓Preemption extends to Regulation Z

Where a state law gives longer time to submit a notice than Reg Z allows and the Reg Z period has expired, borrowers must receive a notice that reliance on the longer state time may result in loss of important federal rights preserved by acting more promptly under federal law.

• ✓Borrowers must be notified that relying on longer state timeframes may cause loss of federal rights
• ✓A creditor, state, or interested party may request the FRB to determine inconsistency
• ✓After FRB finds a state law inconsistent, creditors may not use the inconsistent term/form or take contradictory action

If the FRB finds a state-required disclosure substantially the same in meaning as a federal disclosure (except finance charge, APR, or high-cost mortgage disclosures under 226.32), the state disclosure may be used in lieu of the federal one. A state may apply to the FRB to exempt a class of transactions if the state law is substantially similar (or, for credit billing, offers greater protection) and there is adequate enforcement.

• ✓Equivalent state disclosures may substitute for federal ones except finance charge, APR, and 226.32 high-cost disclosures
• ✓State exemption requires substantially similar law and adequate enforcement provision (226.29)
• ✓For credit billing, state law must afford greater borrower protection to qualify

A small multi-family dwelling generally contains two to four living units. Examples include a double bungalow or duplex, triple bungalow or triplex, small courts or numerous houses on a lot, and a four unit or fourplex.

• ✓Small multi-family dwelling contains two to four living units
• ✓Includes duplex, triplex, fourplex, and small courts

Three categories of residential property exist: owner-occupied single family homes (primary concern is amenities of ownership; cost is secondary; pride of location and design matter), small multi-family/rented single family (bought for combination of ownership amenities and income, tax benefits, and to offset costs like taxes, insurance, maintenance, and mortgage), and large income-producing multi-family dwellings (above 10-15 units, bought primarily for income stream, net/spendable income most important, amenities have little influence, and buyers seek an inflation hedge, appreciation, and tax benefits).

• ✓Owner-occupied single family buyers prioritize amenities and pride of ownership over cost
• ✓Small multi-family buyers weigh both ownership amenities and income/tax benefits
• ✓Large multi-family (above 10-15 units) buyers focus primarily on net/spendable income

Small multi-family units are appraised approximately the same as single family homes with sufficient rental data for an income approach. Cost, depreciation, and land value are calculated the same as single family homes. Small units normally use monthly gross multipliers rather than income capitalization. The sales comparison approach differs by placing less emphasis on pride of ownership/amenities, refining units of comparison (per unit or per room), and considering renter appeal.

• ✓Small units are normally appraised using monthly gross multipliers, not income capitalization
• ✓Cost factors, depreciation, and land value are calculated the same as single family homes
• ✓Sales comparison can be refined to per-unit or per-room basis

Tenants value distance from employment centers, public transportation, distance to good shopping, parks and recreation, distance from nuisances, rent levels, pride of ownership, and adequate off-street parking. Owners consider police/fire protection and rubbish collection, area vacancy rates, amount of taxes, and possible rent control ordinances.

• ✓Tenants value location factors, rent levels, and adequate off-street parking
• ✓Owners consider vacancy rates, taxes, and possible rent control ordinances

To establish a rental schedule, the property manager must do a thorough neighborhood analysis by surveying rents of comparable buildings. Rent levels are generally based on scarcity and comparability of values. The manager must know the building thoroughly, assess its values objectively, then survey competing buildings and analyze many neighborhood and economic factors.

• ✓Rent levels are established based on scarcity and comparability of values
• ✓A market survey of rents for comparable buildings is required
• ✓Analysis must include neighborhood character, economic level, transportation, industries, population trends, and housing market conditions
• ✓The goal is a rent schedule bringing maximum income consistent with good economics

Licensees should be familiar with: architectural styles; per-square-foot costs by quality; window types and mechanisms; floor materials and cost/durability; exterior surface materials; heating/cooling systems; insulation standards for windows, roof, walls, underfloor; termite/dry rot/fungus prevention; roof pitches and materials (distinguishing hip vs. gable roofs and fire-retardant requirements); window coverings for sun/water intrusion; floor plans and room layouts; approved plumbing materials (PVC, copper, galvanized); approved electrical materials and overload-protection devices; soil conditions (fill, slide, expansive soil, drainage); and restrictions running with the property.

• ✓Licensees should recognize architectural styles, roof types (hip vs. gable), and fire-retardant roof requirements
• ✓Approved plumbing materials include PVC, copper, and galvanized; electrical systems need overload-protection devices
• ✓Soil conditions (filled ground, slides, expansive soil, drainage) can jeopardize structural integrity

The details of construction methods, special installations, and material price/quality are generally outside the licensee's role. However, licensees should be familiar with general areas of home construction. Answers to key questions vary from community to community and even within a community.

• ✓Detailed construction methods and material quality are generally outside the licensee's role
• ✓Licensees should still be familiar with general construction concepts
• ✓Construction answers vary between and within communities

Under Business and Professions Code Section 10131.6(c), a mobilehome is a transportable structure in one or more sections designed to contain not more than two dwelling units, used with or without a foundation.

• ✓Defined in B&P Code Section 10131.6(c)
• ✓Designed for not more than two dwelling units
• ✓Does not include recreational vehicles, commercial coaches, or factory-built housing

Modular is a construction system involving on-site assembly of mass-produced component parts (modules). A prefabricated house is manufactured and sometimes partly assembled before delivery to the building site.

• ✓Modular involves on-site assembly of mass-produced modules
• ✓Prefabricated house is manufactured before delivery to the site

A 2007 U.S. Supreme Court decision affected acquisition of state-licensed firms by federal depository institutions.

• ✓Watters v. Wachovia Bank (April 17, 2007) held subsidiaries of federally licensed depository institutions did not require state licensing
• ✓This abrogated part of California AG opinion 84-903 (October 1985) regarding state licensure exemptions
• ✓AG opinions still require separate licensing of entities that fund/make loans, purchase notes, or service loans

Consolidation among licensees may create affiliated business relationships requiring disclosure.

• ✓Business relationships require acknowledgment and disclosure of Affiliated Business Arrangements (ABAs)
• ✓Federal and state re-regulation may force small firms to merge or become subsidiaries/affiliates of depository institutions

To be enforceable, an agreement for the sale of real property must ordinarily be in writing signed by the party to be charged. An agreement for the sale of personal property must be in writing if the amount or value exceeds $500.

• ✓Real property sale agreements must be in writing signed by the party to be charged
• ✓Personal property sale agreements must be in writing if value exceeds $500

An agreement for the sale of real property must ordinarily be in writing signed by the party to be charged. An agreement for personal property must be in writing if the value exceeds $500.

• ✓Real property sale agreements must be in writing signed by the party to be charged
• ✓Personal property agreements must be in writing if value exceeds $500

The laws of the situs (location) state generally govern transfer of title to real property, while commercial sales of personal property are subject to federal and state laws. The state provides a system for recording documents affecting title or interest in real property. Tax laws often distinguish between real and personal property.

• ✓Situs state laws govern real property title transfer
• ✓The state provides a recording system for real property title documents
• ✓Tax laws distinguish between real and personal property

The laws of the situs state generally govern transfer of title to real property, while commercial sales of personal property are subject to federal and state laws. The state provides a system for recording documents affecting title to real property, and tax laws often distinguish between real and personal property.

• ✓Laws of the situs (location) state govern transfer of real property title
• ✓Commercial personal property sales are subject to federal and state laws
• ✓The state provides a recording system for documents affecting real property title
• ✓Tax laws distinguish between real and personal property

An officer taking an acknowledgment should not have a direct financial interest in the transaction. A recorded instrument disclosing such conflict does not impart constructive notice. An officer cannot acknowledge his own signing, a mortgage naming himself as mortgagee, or a deed naming himself as grantee. A notary who is one of several grantors may acknowledge the OTHER grantors' signing but not his own.

• ✓An interested officer's acknowledgment does not impart constructive notice
• ✓An officer cannot acknowledge a document naming himself as grantee, mortgagee, or principal
• ✓A co-grantor notary may acknowledge others' signatures but not his own
• ✓Government Code Sections 822 and 8224.1 (effective Jan 1, 1978) prohibit notaries with direct financial interest from acting

A California notary public must keep an official seal showing the notary's name, State Seal, 'Notary Public,' the county where bond and oath are filed, and commission expiration date, plus the commission number and manufacturer ID. The seal must be photographically reproducible. Notaries must keep one active sequential journal of all acts, kept locked and under exclusive control. (Government Code Section 8206)

• ✓The notary seal must be photographically reproducible, making the rubber stamp nearly universal
• ✓The journal must be sequential, active one at a time, and kept locked under exclusive control
• ✓The journal records date, time, type of act, instrument character, signatures, evidence of identity, and fee

If the document to be notarized is a deed, quitclaim deed, deed of trust affecting real property, or a power of attorney, the notary must require the signer to place a right thumbprint in the journal. Government Code Section 8206 specifies alternatives if the right thumbprint is not possible.

• ✓A right thumbprint is required in the journal for deeds, quitclaim deeds, deeds of trust, and powers of attorney
• ✓Government Code Section 8206 provides alternatives when the right thumbprint is not possible

As a contract, a lease requires: (1) mutual assent (offer and acceptance), (2) mutuality of obligation (no unrestricted right to withdraw), (3) legal capacity (excludes minors, unsound mind, those deprived of civil rights), and (4) lawful object. Lease provisions violating public policy (e.g., waiving tenant procedural rights or security deposit rights) are void.

• ✓A valid lease requires mutual assent, mutuality of obligation, legal capacity, and lawful object
• ✓Provisions waiving tenant procedural or security deposit rights are void against public policy
• ✓Minors and persons of unsound mind lack capacity to contract

Executory (yet-to-be-performed) provisions may not be orally modified - they must be modified in writing signed by all parties. Fully performed obligations may be modified as executed modifications. When a lease is negotiated in Spanish for a residential unit, it must be written in Spanish.

• ✓Executory lease provisions must be modified in writing signed by all parties
• ✓A residential lease negotiated in Spanish must be written in Spanish

A lease must generally be executed, delivered, and accepted to be enforceable. A lease signed and delivered by the landlord is enforceable by the tenant even if the tenant fails to sign. If the tenant takes possession or pays rent without signing, acceptance is presumed. However, the lease must be fully executed before the landlord can enforce special contractual covenants (e.g., a covenant to repair).

• ✓A landlord-signed lease is enforceable by the tenant even without the tenant's signature
• ✓Tenant taking possession or paying rent presumes acceptance
• ✓Special contractual covenants require full execution to be enforceable against the tenant

A lease or memorandum may be recorded in the county where the premises are located. An unrecorded lease is still enforceable between parties and against anyone with notice of the tenancy. If a lease exceeds one year, is not recorded, and possession does not give notice, the tenancy becomes subordinate to a bona fide purchaser.

• ✓A lease or memorandum may be recorded in the county where premises are located
• ✓Unrecorded leases are enforceable against parties with notice of the tenancy
• ✓An unrecorded lease over one year without notice becomes subordinate to a bona fide purchaser

As the principal's agent, the broker owes utmost care, integrity, honesty, loyalty, and confidentiality. Toward the other principal, the broker owes reasonable skill and care, honest and fair dealing, good faith, and disclosure of material facts.

• ✓Broker owes fiduciary duties (utmost care, loyalty, confidentiality) to the principal
• ✓Broker owes reasonable care, honesty, fairness, and material fact disclosure to the other party
• ✓Duty to disclose covers facts materially affecting value, desirability, or intended use of property

A seller and seller's agent need not explain the legal effect of property disclosures. However, the agent of the principal to whom disclosures are made must 'explain' the significance and 'counsel' the principal to make informed decisions.

• ✓Sweat v. Hollister: seller's agent need not explain legal effect of disclosures to the other party
• ✓The buyer's/principal's agent must explain and counsel about disclosures (Field v. Century 21; Salahutdin)
• ✓Counseling includes conducting or recommending inquiry

Civil Code § 2079.13 establishes an agency disclosure format for residential property of 1-4 units, including sales or leases longer than one year. Statutory forms must be used containing the full text of § 2079.16.

• ✓Applies to residential property of 1-4 dwelling units, and leases longer than one year
• ✓'Sale' includes exchange or a real property sales contract (Civil Code § 2985)
• ✓Disclosure form must contain the entire text of Civil Code § 2079.16

The listing broker must deliver the form to the seller before entering into the listing. The selling broker must deliver to the seller before presenting the offer and to the buyer before the offer is signed. 'As soon as practical' means at the time the listing is signed.

• ✓Listing broker delivers to seller before entering the listing agreement (Civil Code § 2079.14)
• ✓Selling broker delivers to buyer as soon as practical before signing the offer to buy
• ✓'As soon as practical' means at the time the listing broker obtains the seller's signature (Huijers v. DeMarrais)
• ✓If offer not prepared by selling broker, form delivered to buyer no later than next business day after receiving the offer

The broker must obtain a receipt from the principal (unless delivered by certified mail). If a party refuses to sign, the broker must set forth, sign, and date a written declaration of the refusal. Agency confirmation may be no later than the purchase agreement.

• ✓Civil Code § 2079.15: obtain receipt; if refused, execute a written declaration of the facts of refusal
• ✓Three alternatives: listing agent (seller), selling agent (buyer), or dual agent (both)
• ✓Disclosure and consent create a rebuttable presumption of the actual agency relationships (Huijers v. DeMarrais)

Civil Code § 2079.13 et seq. imposes limitations: a listing broker who is also the selling broker is a dual agent; compensation does not determine who the principal is; a dual agent cannot disclose price flexibility without written consent; and a listing broker may sell to an unrepresented buyer without becoming a dual agent.

• ✓Civil Code § 2079.18: a listing broker who is also selling broker is a dual agent, not buyer-only
• ✓Civil Code § 2079.19: payment of compensation does not determine who the principal is
• ✓Civil Code § 2079.21: dual agent may not disclose seller's willingness to take less or buyer's willingness to pay more without written consent
• ✓Civil Code § 2079.22: listing broker may sell to an unrepresented buyer without becoming a dual agent

While Civil Code § 2079.13 applies only to 1-4 residential units, B&P Code § 10176(d) imposes dual agency disclosure in all real property and real property secured transactions. 'Knowledge or consent' must be read conjunctively.

• ✓B&P Code § 10176(d): a licensee may not represent more than one party without knowledge AND consent of both
• ✓§ 10176(d) applies to all transactions, not just 1-4 residential units
• ✓Civil Code § 2079.17 requires agency relationship/changes in writing consented to by all principals

An agency can result from the conduct of the parties without an express agreement. A listing broker must avoid unwittingly becoming the buyer's agent. Undisclosed dual agency may result in discipline, loss of commission, and rescission.

• ✓Civil Code §§ 2300, 2307, 2308: agency can arise from conduct of the parties
• ✓Negotiating on behalf of or advocating the buyer's interest likely creates buyer agency
• ✓Undisclosed dual agency may subject the broker to discipline and the principals to rescission (B&P § 10176(a),(d))

Dual agency arises where the listing broker becomes the agent of the buyer too. A broker may represent all principals only with knowledge and consent of all. When two licensees of the same broker represent opposing parties, the broker is a dual agent.

• ✓Dual agent may only act with knowledge and consent of all principals (B&P §§ 10176(a),(d), 10177.6)
• ✓Civil Code § 2079.21: dual agent cannot negotiate price/terms beyond presenting offers without written consent
• ✓Civil Code § 2079.13(b): two licensees of the same broker representing opposing parties = broker is dual agent
• ✓Undisclosed dual agency permits rescission without proof of injury (Culver v. Jaoudi; Glenn v. Rice)

A principal may authorize the broker to appoint a subagent, creating a direct relationship between the principal and subagent. Without such authority, the cooperating broker becomes the agent of the listing broker. Subagency imputes liability under respondeat superior.

• ✓Civil Code § 2351: broker appointed with principal's authority becomes subagent of the principal
• ✓Civil Code § 2350: broker appointed without principal's consent becomes agent of the listing broker
• ✓Johnston v. Seargeants: seller held liable for cooperating subagent's fraud even without knowledge
• ✓Common industry practice now avoids subagency (Civil Code § 2079.19)

Agents may delegate certain duties unless forbidden by the principal. However, a broker has a nondelegable duty to arrive at a value conclusion for a private trust deed investor. The original agent remains liable for delegated work.

• ✓Civil Code § 2349 limits delegable powers: mechanical acts, tasks the agent cannot do alone, customary/authorized delegation
• ✓Barry v. Raskov: broker liable for negligence of the appraiser (nondelegable value duty)
• ✓B&P § 10232.6: broker may delegate value estimation to a licensed/certified appraiser
• ✓Respondeat superior holds a broker liable for foreseeable negligent/intentional acts of licensees

Commercial and loan-transaction agents must also prepare and deliver agency disclosure statements and obtain informed consent. Failure may forfeit commission and permit rescission.

• ✓Commercial/loan agents must deliver agency disclosure statements and obtain informed consent
• ✓Failure to obtain informed consent may forfeit the commission and allow rescission (Culver v. Jaoudi)
• ✓An undisclosed dual agent's contract for compensation is unenforceable regardless of actual fairness