BROKER RISK MANAGEMENT
RISK MANAGEMENT TIP
QUESTION: I am a real estate broker with a number of salespersons licensed under my broker’s license. Some of the agents do not timely turn in their transaction files. What does the Department of Real Estate (“DRE”) require and what are the risks of failing to retain a transaction file?
ANSWER: DRE regulations require that agents and brokers retain a transaction file for a minimum of three years from the close of escrow on the transaction. (Litigation counsel recommends retaining files for at least seven years.) A transaction file must include all purchase contract and listing-related documents, disclosure-related documents, inspection reports, emails between the parties regarding the transaction, and all texts which substantively relate to the transaction or the property. Therefore, agents are required by law to provide brokers with all the documents making up the transaction file on an ongoing basis during the course of the transaction.
Brokers are required by DRE regulations to supervise real estate agents as a transaction progresses. Brokers cannot supervise real estate agents unless the agents provide the brokers with all the documents in a timely manner as the transaction progresses. At a minimum, agents should provide contract documents, including listing agreements and purchase agreements, immediately upon execution by their clients. Agents should provide disclosure documents as soon as practicable upon receipt. Emails and texts should be provided to brokers during the course of the transaction on an ongoing and regular basis.
Consider the following situations:
SITUATION NO. 1: Agent does not provide broker with emails regarding a transaction. The buyer of the property filed a complaint with the DRE. The broker provided the transaction file, but did not have the agent’s emails. The DRE specifically requested the emails. The agent was not able to provide a complete set of the emails. The DRE knew that emails were missing because the DRE obtained copies of emails from the other agent. The DRE fined the agent $2,000 for failing to maintain the file.
SITUATION NO. 2: Agent provides advice to a buyer but does not provide the emails containing the advice to the broker for review and supervision. Therefore, the broker was not aware that the agent had provided the buyer with the advice. The buyer subsequently filed a complaint with the DRE arising out of the advice which is alleged to be erroneous. Because the email was not in the file and the broker was not aware of it, the broker was not held responsible by the DRE for the advice. However, the agent had to retain separate counsel to represent the agent in the DRE investigation and the agent’s license was sanctioned for improper advice given to the buyer.
SITUATION NO. 3: After the close of escrow, buyer asks agent to draft some documents relating to the property. The agent does so, but does not tell the broker nor does the agent provide the broker with copies of the documents. The buyer subsequently sues the agent for negligent drafting of the documents. The broker is not responsible for the agent’s poor advice and the agent is forced to retain separate counsel to defend her. The settlement demand to the agent is $750,000.
PRACTICE TIPS:
- Agents should submit all documents regarding a property or transaction for which they are undertaking licensed activities to the broker in a timely manner and as soon as reasonably practicable.
- Agents should submit to their broker the following transaction documents: all contract and listing-related documents; all disclosure-related documents; all communications with all parties; all notes regarding the transaction; all inspection reports; all correspondence regarding the transaction; all emails regarding the property or transaction; and all substantive texts regarding the transaction or property.
- Agents need to ensure they are in communication with their broker or manager, so the broker has a reasonable opportunity to supervise the agent and the transaction.
- The agency relationship and fiduciary duty of an agent terminate upon the close of escrow and therefore agents should not be drafting notices or documents for a client after the close of escrow.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.