Questions and Answers - Trust Fund Requirements +18California · Real Estate · English

Security deposits on rental units managed for others are trust funds, controlled and disbursed at the property owner's instruction. However, deposits on broker-owned rentals are received as principal, not agent, and are not trust funds.

• ✓Tenant security deposits on managed property are trust funds controlled at the owner's instruction
• ✓Money received on the broker's own property is received as a principal and should NOT be placed in the trust account

Good practice requires waiting until a deposited check clears before issuing a refund trust check. Deposit receipts—including those rejected by the seller—must be kept for three years.

• ✓Wait until a customer's deposited check clears before issuing a trust refund check (good business practice)
• ✓Deposit receipts must be maintained for three years, including receipts signed only by the buyer and rejected by the seller
• ✓No records are required for checks made payable directly to escrow and handed directly to the escrow clerk (funds not passing through broker's hands)

All trust funds may be placed in one trust account if separate records are properly maintained and the account is non-interest-bearing, though separate accounts for property management and sales are suggested.

• ✓One trust account may hold both property management and sales deposits if separate records are properly maintained
• ✓The combined account must not be interest-bearing
• ✓Separate accounts are suggested but not required

Division 6 of the UCC governs bulk sales. A bulk sale is a sale, not in the ordinary course of the seller's business, of more than half of the seller's inventory and equipment measured by value. The buyer must give public notice to creditors by recording notice with the County Recorder, publishing in a newspaper, and mailing to the county tax collector—all at least 12 business days before consummation or auction commencement.

• ✓A bulk sale is a sale, not in the ordinary course of business, of more than half the seller's inventory and equipment by value
• ✓Notice must be recorded, published, and mailed to the county tax collector at least 12 business days before the sale or auction
• ✓Notice must state the seller/buyer names and addresses, other business names used in the last three years, property location/description, and consummation date
• ✓Notice must state whether the sale is subject to UCC Section 6106.2 (consideration $2,000,000 or less, substantially all cash)

Where a bulk sale notice provides for escrow, the transferee must deposit the full purchase price or consideration with the escrow holder. If the seller disputes a filed creditor's claim, the escrow holder withholds the amount and notifies the creditor, who has 25 days from mailing to attach the funds. If deposited funds are insufficient to pay all claims, the escrow holder must delay closing and distribute per statutory priorities. Escrow may not pay fees and commissions before closing.

• ✓Transferee must deposit the full purchase price/consideration with the escrow holder
• ✓A disputed creditor has 25 days from mailing of notice to attach withheld funds, or the funds are paid to seller/other creditors
• ✓If funds are insufficient, escrow holder must delay closing and distribute in strict compliance with statutory priorities
• ✓Escrow may not make any payments for fees and commissions prior to closing

The bulk transfer law's purpose is to afford creditors an opportunity to satisfy claims before the owner sells the assets and vanishes. When statutory filing and publication requirements are not met, the buyer is liable to creditors with valid pre-transfer claims. Creditors must act within one year of transfer of possession, or within one year after discovery if the transfer was concealed. In an auction, the auctioneer is responsible for notice and becomes personally liable if requirements are not met.

• ✓Noncompliance makes the buyer liable to creditors with valid claims based on pre-transfer events
• ✓Creditors must take action within one year of transfer of possession, or within one year of discovery if concealed
• ✓In an auction sale, the auctioneer is responsible for notice and becomes personally liable for noncompliance
• ✓Division 6 does not apply to certain transfers (security interests, assignments for creditors, court-supervised sales, exempt property)

Division 9 of the UCC governs secured transactions in personal property and fixtures, superseding statutes on chattel mortgages, conditional sales, and similar devices. It applies to any transaction intended to create a security interest in personal property but not to real property security transactions. A financing statement (Form UCC-1) is filed with the Secretary of State to perfect security interests, with local county recorder filing only for specific transactions.

• ✓Division 9 applies to any transaction intended to create a security interest in personal property
• ✓Division 9 does not apply to real property security transactions (though a note secured by real property pledged to secure another note is covered)
• ✓A financing statement (Form UCC-1) is filed with the Secretary of State to perfect security interests
• ✓Local filing in the county recorder's office is permitted only for specific types of transactions

Real Property Loan Law is Article 7 of Chapter 3 of the Real Estate Law, requiring a licensee negotiating real property loans within a specified range to give the borrower a statement disclosing costs and terms and limiting expenses and charges.

• ✓Found in Article 7 of Chapter 3 of the Real Estate Law
• ✓Requires disclosure of loan costs and terms to the borrower
• ✓Limits the amount of expenses and charges a borrower may pay

Prepayment allows loan payments larger than specified in the note. A prepayment penalty is charged if the borrower pays off the outstanding balance before maturity, along with late charges.

• ✓Prepayment allows larger-than-specified payments
• ✓Prepayment penalty applies to early payoff before maturity
• ✓Penalty also covers late charges for late payments

Undue influence is the use of a fiduciary or confidential relationship to obtain a fraudulent or unfair advantage over another's weakness of mind, distress, or necessity.

• ✓Involves misuse of a fiduciary or confidential relationship
• ✓Takes unfair advantage of weakness, distress, or necessity

Nominal interest rates are the percentage of interest stated in loan documents. This is distinguished from actual yield or effective cost of borrowing.

• ✓Nominal interest rate is the rate stated in loan documents
• ✓Simple interest is computed only on the principal, unlike compound interest

The owner of every multi-unit dwelling (or agent signing on their behalf) must disclose the name and address of each person authorized to manage and to receive process, notices, and demands. For oral agreements, on written demand the owner must provide a current written statement. This requirement binds successor owners/managers. If the agent fails to comply, that person is deemed the owner's agent for service of process and performing obligations. Notice may be posted in elevators (or two conspicuous places if none).

• ✓Owners of multi-unit dwellings must disclose the manager/agent for service of notices
• ✓On written demand under oral agreements, a current written statement must be furnished
• ✓Failure to comply makes the signing agent the owner's agent for service and obligations

Manufactured homes are factory-built to the HUD Code on or after June 15, 1976. Mobile homes were built before the HUD Code ('pre-HUD Code' or 'trailer' homes). A recorded HCD Form 433A confirms attachment to an approved foundation, making the unit real property.

• ✓Manufactured homes built to HUD Code on/after June 15, 1976
• ✓Mobile homes = pre-HUD Code (before June 15, 1976)
• ✓Recorded HCD Form 433A converts a manufactured home to real property
• ✓Sales Comparison Approach is often the most applicable for these properties

Appraising a single-family residence requires neighborhood analysis of: type of occupants (income, age, owner vs. non-owner occupancy), type of improvement (mixture of uses, age, price range, conformity), neighborhood trend (detrimental factors, transition, life cycle stage), and changes in land use.

• ✓Analyze type of occupants, improvements, neighborhood trend, and land use changes
• ✓Consider conformity and the neighborhood life cycle stage
• ✓Check for transition from owner-occupied to tenant occupancy

Eminent domain lets government take private property for public use, requiring just compensation. Not all value-reducing regulation is a taking.

• ✓The U.S. and California Constitutions require just compensation for a taking
• ✓Zoning/health regulations reducing value are usually not takings and require no compensation
• ✓Regulation denying all economically beneficial or productive use constitutes a taking requiring compensation
• ✓Fair market value is generally held to be just compensation

Negotiations usually precede formal condemnation. Inverse condemnation suits arise when public works damage property or the government delays serving process.

• ✓If the government abandons a condemnation action, the owner may recover legal expenses including attorney, appraisal, and expert fees
• ✓Inverse condemnation may result from public work damage to property
• ✓Inverse condemnation may also result if a public entity fails to diligently serve complaint and summons within 6 months
• ✓The government can take property within weeks by depositing an estimated price and obtaining a court order

Condemning part of a parcel may reduce the remainder's value, requiring severance damage compensation. Special benefits, not general, offset severance damages.

• ✓The government must normally compensate for severance damage to a remaining parcel
• ✓General benefits (like a highway benefiting all users) are not an offset against severance damages
• ✓Special benefits/increases in value may be an offset against severance damages

Selection of an escrow holder may not be critical to the principals. Historically brokers played a large role in choosing the escrow, but federal and state regulators have increasingly moved to minimize the broker's influence. Buyers and sellers have the right to compare escrow holders, services, and charges and to negotiate among themselves where escrow is held. Principals may also assert independent control over preparation of the escrow instructions.

• ✓Regulators have moved to minimize the broker's influence in selecting the escrow holder
• ✓Buyers and sellers have the right to compare escrow holders, services, and charges
• ✓Principals may assert independent control over the preparation of escrow instructions

As of January 2005, California generally conforms to the Internal Revenue Code, but continuing differences exist because California does not always adopt all federal changes.

• ✓California generally conforms to the Internal Revenue Code (as of Jan 2005)
• ✓Not all federal tax changes are adopted by California - differences remain
• ✓Refer to www.ftb.ca.gov and search 'conformity' for details

Civil Code Section 2995 prohibits any real estate developer (a person/entity owning real property improved with single-family dwellings offered for sale to the public) from requiring, as a condition of transfer of a single-family residence, that escrow services be provided by an escrow entity in which the developer has a 'financial interest.' 'Financial interest' means ownership or control of 5 percent or more of the escrow entity. A violating developer is liable for damages of $250 or three times the escrow charge, whichever is greater, plus attorney's fees and costs. Any waiver is against public policy and void.

• ✓Civil Code Section 2995 bars a developer from requiring escrow with an entity in which it has a financial interest
• ✓'Financial interest' means ownership or control of 5 percent or more of the escrow entity
• ✓A violating developer is liable for $250 or three times the escrow charge, whichever is greater, plus attorney's fees; waivers are void

Effective May 20, 2009, this federal law requires foreclosing owners to give tenants at least a 90-day notice to vacate before eviction, nationwide. A tenant under a lease made before the foreclosure notice may remain until the lease ends, unless the buyer will occupy it as a primary residence (then a 90-day notice applies). Section 8 housing assistance contracts provide additional protection.

• ✓The federal Act requires at least 90 days' notice to vacate after foreclosure
• ✓Pre-foreclosure lease tenants may stay until lease end unless buyer will owner-occupy
• ✓Section 8 and local rent control may provide even greater protection

Historically California required only 30 days' notice to vacate (3 days for non-payment). SB 1137 (2008, urgency measure) gives tenants at least 60 days after foreclosure before being asked to vacate, with a sunset of January 1, 2013.

• ✓SB 1137 requires at least 60 days' notice to vacate after foreclosure
• ✓SB 1137 was set to sunset on January 1, 2013

Effective January 1, 2011, SB 1149 requires that tenants in foreclosed homes be given notice of their rights via a cover sheet attached to any eviction notice served within one year of a foreclosure sale. It also protects rental history by prohibiting release of court records in foreclosure-related evictions unless the landlord prevails.

• ✓SB 1149 requires a rights cover sheet on eviction notices within one year of foreclosure
• ✓Court records in foreclosure evictions are sealed unless the landlord prevails

The California Department of Consumer Affairs annually publishes 'California Tenants, A Guide to Residential Tenants' and Landlords' Rights and Responsibilities,' downloadable at www.dca.ca.gov.

• ✓The DCA publishes an annual California Tenants guide
• ✓The guide is available at the Department of Consumer Affairs website

The Sales and Use Tax Law applies to transfer of a retail business selling tangible personal property. In the sale of a business or stock of goods, the buyer must hold back enough of the selling price to cover outstanding tax liability. Successor's liability extends to taxes incurred by the current or any former owner. The buyer is released from withholding if he obtains a certificate (clearance receipt) from the Board of Equalization stating no taxes, interest, or penalties are due.

• ✓Buyer must hold back enough of the selling price to cover outstanding tax liability
• ✓Successor's liability extends to taxes incurred by the operation of the business by current or any former owner
• ✓Buyer is released from withholding by obtaining a Board of Equalization certificate that no taxes/interest/penalties are due
• ✓Successor's liability is enforced by service of a notice of successor liability, which may be petitioned for reconsideration

When arranging loans secured by real property, licensees must not misrepresent that a lender or note purchaser exists to induce use of services, misrepresent a borrower's ability to repay, or falsely represent lien priority. They must disclose known information about a borrower's identity, income, credit, and ability to meet obligations.

• ✓Must not falsely represent an existing willing lender or note purchaser to induce borrower use of services
• ✓Must disclose the borrower's identity, occupation, income, and credit data to prospective lenders
• ✓Must not misrepresent lien priority (first, second, or third deed of trust) to a prospective lender

A licensee receiving an advance fee from a borrower to obtain a loan must account to the borrower for its disposition. Licensees cannot knowingly underestimate probable closing costs to induce a borrower or lender into the transaction, nor misrepresent that a service is free when it is covered by a fee.

• ✓A licensee must account to the borrower for the disposition of an advance fee
• ✓Must not knowingly underestimate closing costs to induce a loan transaction
• ✓Must not misrepresent that a specific service is free when covered by a transaction fee

The Commissioner has authority to adopt regulations to aid administration and enforcement of the Real Estate Law and Subdivided Lands Law. The Regulations of the Real Estate Commissioner have the force and effect of law itself, and licensees should have thorough knowledge of them.

• ✓The Commissioner may adopt regulations to enforce the Real Estate Law and Subdivided Lands Law
• ✓The Regulations of the Real Estate Commissioner have the force and effect of law

Water rights are limited to reasonable beneficial use. Rules differ for water in defined channels versus surface water not in a channel.

• ✓Water rights do not exceed the amount reasonably required for beneficial use
• ✓A defined channel is any natural watercourse, even if dry part of the year
• ✓A landowner may not obstruct or direct water flowing in a defined channel (a flood control district may permit diversion)
• ✓A landowner above may not divert or concentrate surface waters onto the landowner below by artificial structures

Water users may organize a mutual water company for water supply; stock is usually appurtenant to land and cannot be sold separately.

• ✓Must file articles of incorporation with the Secretary of State
• ✓Stock is usually made appurtenant to the land and cannot be sold separately
• ✓No cash dividends are declared, but assessments may be levied if revenue is insufficient
• ✓If supplying a subdivision, the public report application must include Corporations Code Section 14312 information

The Porter-Cologne Act establishes water quality boards controlling effluent discharge. Interstate subdividers should contact HUD's OILSR.

• ✓The Porter-Cologne Act establishes a State Water Resources Control Board and nine regional boards
• ✓The act controls discharge of effluents affecting water quality, including septic tanks and underground storage tank spills
• ✓Subdividers of large interstate subdivisions should contact HUD's Office of Interstate Land Sales Registration (OILSR)

The Unruh Civil Rights Act (Civil Code Section 51 et seq.) declares all persons free and equal and entitled to full and equal accommodations in all business establishments regardless of sex, race, color, religion, ancestry, national origin, or disability. It applies to all real estate activities. Civil Code Section 52 provides remedies up to three times actual damages but no less than $1,000, plus attorney's fees.

• ✓The Unruh Act guarantees full and equal accommodations in all business establishments
• ✓It applies to all real estate activities including brokerage and rentals
• ✓Section 52 remedies: up to three times actual damages, minimum $1,000, plus attorney's fees

The Fair Employment and Housing Act (Government Code Section 12900 et seq.) prohibits housing discrimination based on race, color, religion, sex, sexual orientation, marital status, national origin, ancestry, age, familial status, source of income, or disability. Complaints go to the Department of Fair Employment and Housing. The Commission may order remedies including a civil penalty up to $10,000.

• ✓FEHA prohibits housing discrimination on numerous protected bases including source of income and disability
• ✓Complaints are handled administratively by the Department of Fair Employment and Housing
• ✓The Commission may order a civil penalty to the complainant up to $10,000 plus actual damages

The Federal Fair Housing Act (Title VIII of the Civil Rights Act of 1968) prohibits discrimination in housing sales and rentals and is paramount where applicable. It exempts rental of rooms/units in dwellings of four or fewer living quarters where the owner occupies one unit. Licensees violate the law even without intent if the result is discrimination. It covers blockbusting and steering.

• ✓The Federal Fair Housing Act is paramount wherever applicable and applies to most housing transactions
• ✓Exemption: rental of rooms/units in four-or-fewer-unit dwellings where the owner occupies one unit
• ✓Licensees violate the law even without intent if the result is proscribed discrimination

State and federal laws combine so that no one may refuse to sell, lease, or rent based on prohibited classifications, and no licensee may do so regardless of the principal's direction. If a principal seeks a discriminatory listing restriction, the licensee must refuse to accept the listing.

• ✓A licensee must refuse a listing that a principal seeks to restrict on prohibited classifications
• ✓No licensee may discriminate regardless of the principal's direction
• ✓Licensees must not accept restrictive listings or publish discriminatory advertisements

Civil Code Section 51.2 prohibits age discrimination in housing, but Section 51.3 allows senior citizen housing. A 'senior citizen' is 62 or older, or 55+ in a senior citizen housing development (35+ dwelling units). A qualified permanent resident (spouse, cohabitant, or supporter) may be 45+. The Unruh Act does not apply to mobilehome developments.

• ✓A senior citizen is 62+ or 55+ in a senior housing development of at least 35 dwelling units
• ✓A qualified permanent resident (spouse/cohabitant/supporter) has a lower age limit of 45
• ✓The Unruh Act does not apply to mobilehome developments

The Housing Financial Discrimination Act of 1977 (Holden Act) prohibits discriminatory lending based on neighborhood conditions (redlining) unless necessary to avoid unsafe business practice. Violations can result in a fine up to $1,000. Effective January 2000, providers of governing documents/deeds must include a statement about the illegality of discriminatory restrictions.

• ✓The Holden Act prohibits discriminatory lending based on neighborhood/geographic conditions (redlining)
• ✓Holden Act violations can result in a fine of up to $1,000
• ✓Since 2000, providers of deeds/governing documents must note discriminatory restrictions are illegal and removable

An applicant for license transfer must post the premises with a notice of application. Local officials and private parties may protest, and a license cannot be transferred while a valid protest is pending or on appeal, or if disciplinary action is pending against the transferor. Before filing the transfer application, the applicant and current licensee must file a notice of intended transfer with the county recorder and establish an escrow. Escrow may not release consideration before ABC approves the transfer.

• ✓Applicant for transfer must post the premises with a notice of application to sell alcoholic beverages
• ✓A license cannot be transferred while a valid protest is pending or on appeal
• ✓Before filing the transfer application, a notice of intended transfer must be filed with the county recorder and an escrow established
• ✓Escrow may not release any consideration before the ABC approves the license transfer; business transfer occurs simultaneously with license transfer
• ✓No one should invest on the assumption that an alcoholic beverage license will be transferred

Under the Alcoholic Beverage Control Act (Division 9 of the B&P Code), the Department of Alcoholic Beverage Control (ABC) issues licenses to qualified persons, partnerships, and corporations at approved locations. ABC may deny/suspend/revoke for good cause and may refuse a license for violations, disqualifying criminal records, or concealed arrests. Locations near schools, churches, or playgrounds, or with over-concentration, may be disapproved. Investigations take about 45-60 days, and a license must be placed in use within 30 days of issuance.

• ✓ABC issues alcoholic beverage licenses under the Alcoholic Beverage Control Act (Division 9 of the B&P Code)
• ✓Locations near schools, churches, or public playgrounds, or with over-concentration of licenses, may be disapproved
• ✓Most ABC application investigations take approximately 45-60 days
• ✓A license must be placed in use within 30 days of issuance; ABC holds it in safekeeping up to 6 months if premises are under construction

Licensees are encouraged to use the Business Purchase Agreement and Joint Escrow Instructions (C.A.R. Form BPA), similar to the Residential Purchase Agreement (RPA-CA) but with language unique to business sales. It addresses payment of purchase price (including notes secured by business assets with UCC-1 filing), assets transferred (all except cash/equivalents and excluded assets), liabilities transferred, inventory verification, seller disclosures, and consulting/training provisions.

• ✓C.A.R. Form BPA is the Business Purchase Agreement and Joint Escrow Instructions
• ✓Buyer typically purchases all business assets except cash/cash equivalents and denoted excluded assets
• ✓Buyer is not purchasing business liabilities other than those specifically noted
• ✓Seller loans are evidenced by a note with a security agreement covering all business assets and a UCC-1 filed with the Secretary of State
• ✓If checked for inventory, seller typically has 7 days to provide an inventory list and buyer may confirm up to 5 days before close

The BPA contains contingencies for agreement not to compete, lease assignment/new lease, purchase of real property (requiring a separate agreement such as C.A.R. Form CPA), transfer/obtaining of licenses, franchise acceptance, and bulk transfer compliance. Regarding agency, Civil Code 2079 does not apply to business opportunity sales, but B&P Code Section 10176(d) prohibits representing more than one party without knowledge or consent of all parties; the form provides a confirmation of the elected agency.

• ✓Sale can be contingent on non-compete, lease, real property purchase, license transfer, franchise acceptance, and bulk transfer compliance
• ✓Purchase of real property requires a separate agreement such as the Commercial Property Purchase Agreement (C.A.R. Form CPA)
• ✓Civil Code 2079 agency provisions do not apply to a business opportunity sale
• ✓B&P Code Section 10176(d) prohibits representing more than one party without the knowledge or consent of all parties

In transactions secured with the personal property of a business, the UCC-1 must be filed with the Secretary of State. Just as a deed of trust secures a note in real property loans, a filed UCC-1 gives notice of a lien in the business's personal property. The UCC-1 is only a notice, not an agreement, and must be accompanied by a promissory note and a security agreement covering all business assets to fully protect the lender.

• ✓The UCC-1 must be filed with the Secretary of State to give notice of a lien in the business's personal property
• ✓A UCC-1 is only a notice, not an agreement
• ✓To fully protect the lender, the UCC-1 must be accompanied by a promissory note and a security agreement covering all business assets

When selling subdivided property, the broker must furnish the prospective buyer a copy of the subdivision public report, obtain a receipt, and give the buyer an opportunity to read it before making an offer. The broker must handle deposit/purchase money per law and provide required governing documents before an offer and to each purchaser before transfer.

• ✓The broker must furnish the public report, obtain a receipt, and allow reading before an offer
• ✓The broker must handle deposit or purchase money in accordance with the law
• ✓The broker must make CC&Rs, articles, bylaws, and other governing documents available before an offer

DRE publishes educational materials including the Reference Book, the Real Estate Law book (containing the Real Estate Law, Subdivided Lands Law, and Regulations), the quarterly Real Estate Bulletin, the free Instructions to License Applicants pamphlet, and consumer brochures and subdivision guides.

• ✓The Real Estate Law book contains the Real Estate Law, Subdivided Lands Law, and Commissioner's Regulations
• ✓The quarterly Real Estate Bulletin keeps licensees informed of current practices
• ✓Instructions to License Applicants is a free pamphlet available at district offices and online

The Recovery Account is a fund of last resort for a member of the public with a final civil judgment or criminal restitution order against a licensee based on intentional fraud or conversion of trust funds, who cannot satisfy the judgment. The licensee must have been properly licensed performing licensed acts. Application must be filed within one year of the judgment becoming final.

• ✓The Recovery Account covers judgments based on intentional fraud or conversion of trust funds
• ✓The licensee must have been properly licensed and performing acts requiring a license
• ✓The application must be filed within one year of the judgment/restitution order becoming final

DRE has 15 days to notify the applicant of deficiencies and 90 days after the application is substantially complete to pay, compromise, or deny. Denied applicants have six months to appeal. If payment is made, the judgment debtor's license is automatically suspended until repaid with interest. Section 10474 sets maximum liability per transaction/licensee.

• ✓DRE has 15 days for deficiency notice and 90 days to pay/compromise/deny after substantial completion
• ✓If payment is made, the licensee's license is automatically suspended until repaid with interest
• ✓Section 10474 sets the maximum liability of the Recovery Account per transaction/licensee