BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
The fires in Los Angeles have been devastating. In addition to incredible personal losses, the fire is affecting the real estate market and existing transactions. Broker Risk Management (“BRM”) has received a number of requests for a tip addressing legal issues arising out of the fire.
This week, the Governor issued an Executive Order prohibiting an offer to an owner of real property in the following zip codes that are is less than the fair market value of that property as of January 6, 2025: 90019; 90041; 90049; 90066; 90272; 90202; 91001; 91040; 91104; 91106; 91107; 93535 and 93536. The Executive Order expires in 90 days.
The California Department of Real Estate has stated that it will prosecute violations of the Governor’s Order.
The following addresses several questions and answers BRM has received in this regard.
QUESTION: I am a listing agent. We are currently in escrow to sell the property. The house has now burned to the ground. What is the legal effect of this?
ANSWER: Civil Code §1662 governs the handling of a purchase and sale contract when a property is destroyed or materially changed before the close of escrow. However, that Civil Code section defers to a purchase and sale agreement. The California Association of Realtors’ Residential Purchase Agreement (“RPA”) provides that the property must be transferred by the seller to the buyer upon the close of escrow in the same condition that the property was in when the purchase and sale contract was executed. (See Para. 7.b.) Therefore, because the home no longer exists, assuming the RPA was used, the buyer cannot be compelled to purchase the property, escrow will be canceled, and the buyer’s deposit returned to the buyer. The seller will need to submit an insurance claim and address the losses.
QUESTION: I am listing a condominium for sale. Part of the condominium complex was destroyed in the fire, but not the condominium I am listing. How do I proceed?
ANSWER: The seller needs to consult with counsel to address the impact of the fire on the condominium you are listing. Likely, there could be significant losses for the homeowners’ association which could affect the value of the condominium. In addition, you will need to evaluate the impact of the disclosure relating to the fire on the value of the property. While the property probably can be sold, you will need to address whether the value has declined, disclosure obligations and whether any losses of the HOA may be attributed to the Property. Those losses to the HOA will be in the form of special assessments.
QUESTION: Because of the LA fires, a lot of people are looking for leases. Landlords are looking for an opportunity to profit and are vastly increasing rental values. What are the legal implications of an agent participating in negotiating or facilitating these leases?
RESPONSE: Penal Code §396 prohibits the increase of any costs such as housing, hotels, and household goods beyond 10% of their fair market value for 30 days after a tragedy such as the Los Angeles fires. (The 30 days runs from January 7, 2025, the date the Governor declared a State of Emergency.) Therefore, agents should not participate in any leases where a landlord is demanding in excess of 10% of the fair market rental value of the property. Please note that after the Sonoma fires, the Sonoma District Attorney’s office prosecuted property owners and real estate agents for participating in this practice in violation of Penal Code §396. Those prosecutions also led to Department of Real Estate investigations and accusations. Therefore, agents are discouraged from participating in these transactions.
PRACTICE TIPS:
- If you have an escrow and the property is damaged, refer your clients to an attorney, but if the damage is material, it is likely that the buyer can cancel the transaction and receive their money back.
- Do not write offers for less than the fair market value of a property in the zip codes set forth in the Governor’s Executive Order.
- Do not participate in any price gouging activities by any property owner where a property owner is demanding rent in excess of 10% above the fair market rental value. If the Los Angeles District Attorney prosecutes these claims, it could not only lead to criminal charges and fines, but could affect your real estate license.
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