BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Last week, Broker Risk Management (“BRM”) issued a tip addressing updates and answering questions regarding legal issues arising out of the Los Angeles fires. Since that time, BRM and its clients have dealt with a number of additional issues addressed herein.
The Department of Real Estate has now issued two public notices, one on January 15, 2025 and another on January 17, 2025. Attached to this tip is a copy of the January 17, 2025 Public Notice reminding agents that unsolicited offers to buy properties under fair market value in the Los Angeles area which have been affected by the fires is a violation of the law and will be prosecuted. (BRM previously issued a Broker Alert regarding the Governor’s Executive Order pertaining to this issue.)
1. QUESTION: I am an agent assisting landlords and tenants in facilitating leases in the Los Angeles area. I understand that a landlord cannot seek rent in excess of 10% over the fair market rental value or it violates Penal Code §396. However, if a tenant wants to pay more than the fair market value, can a tenant waive the statutory protection?
RESPONSE: It is highly unlikely that tenants can waive the protections in Penal Code §396. That law makes it a crime for anyone to participate in increasing the cost of housing or household goods for a minimum of 30 days after a disaster has been designated. In addition, the California Attorney General recently issued a consumer alert reminding landlords in the state that rental bidding wars resulting in unlawful price increases are prohibited under Penal Code section 396 when a state of emergency has been declared. Violators are subject to criminal prosecution that can result in a one-year imprisonment and/or a fine of up to $10,000.
Therefore, landlords in Los Angeles may not demand, negotiate, or contract for rent in excess of 10% of the fair market rental value of the property. That statute was enacted to protect vulnerable victims of the fire who are desperate to seek shelter. Nowhere in the statute does it provide that it can be waived. As previously reported, after the Sonoma fires, the Sonoma District Attorney’s Office prosecuted landlords and agents involved in facilitating leases at greater than 10% of the fair rental value of the properties. Given the vigilance of those prosecutions, which later led to Department of Real Estate accusations, a tenant’s waiver of those rights would likely be unpersuasive to the District Attorney’s Office or the Department of Real Estate. It is recommended that agents refrain from participating in any transactions whereby a landlord is demanding more than 10% of the fair rental value of the property.
2. QUESTION: I would like to assist the victims of the fires in offering my services in drafting leases at no cost. What are the risks?
RESPONSE: Before undertaking this work, it is recommended that you speak with your broker or manager. Your broker or manager needs to check with your errors and omissions insurance company as several companies are now refusing to cover claims where the agent was not compensated. If you negotiate a lease and you are not compensated, you need to confirm you have insurance in case one of the parties asserts a claim. Another significant risk is that you are negotiating a lease without compensation, but accepting the risk of liability affiliated with that lease. Agents need to be particularly cautious because Los Angeles has stringent tenant protection and rent control laws. Therefore, there is heightened liability affiliated with negotiating leases in the Los Angeles area.
3. QUESTION: I represent a seller whose home burned down in the Los Angeles fires. The sellers asked if they still had to pay their mortgage. Do they?
ANSWER: Yes. The promissory note between the borrower/owner and the lender provides that the borrower is borrowing funds secured against the property. If the property burns, the debt is not terminated. However, most lenders require that owners facilitate property insurance for the benefit of the owner and the borrower. When the insurance company pays out the proceeds, they will generally pay it to the lender and owner jointly. Keep in mind that the lender did not purchase the property; the buyer purchased the property using the lender’s money. Therefore, the owners are not excused if the property burns.
PRACTICE TIPS:
- It is recommended that agents refrain from negotiating the purchase of any properties in the Los Angeles fire areas at less than fair market value as of January 6, 2025 (before the fires started).
- It is recommended that agents refrain from participating in the leasing of any property at more than 10% of the fair market rental value of the property. Otherwise, agents risk criminal prosecution and a DRE investigation.
- If agents are going to assist tenants in facilitating leases in the Los Angeles area for no compensation, agents must confirm with their manager or broker that they are permitted to do so given the significant risks of liability and potential loss of insurance.
- Because of the Public Notices from the Governor and the DRE, and because of the statewide Rent Cap and Just Cause Eviction laws, as well as the LA area strict rent control ordinances, no agent should offer any advice as to what a seller, buyer, landlord or tenant can or should do in these situations. Instead, advise your clients in writing to:
A. Review the public notices from the California Governor and the DRE; and,
B. Consult with a qualified LOCAL landlord/tenant attorney for answers to any questions.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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.