COURTSIDE NEWSLETTER

TO: MEMBERS AND AFFILIATES OF THE ASSOCIATION OF REALTORS®

FROM: JOHN V. GIARDINELLI and SYLVIA J. SIMMONS, ASSOCIATION COUNSEL

Looking ahead to 2007 and beyond, there are many new laws going into effect that may impact real estate professionals and how they work. We will summarize those laws for you and review our “Case of the Month” involving claims for emotional distress and diabetes caused by a broker’s failure to disclose inhabitable condition of the property.

NEW LAWS

Denial, Suspension or Revocation of License

The Legislature has found that the public interest is served by protecting the validity and distinction of private sector special practice designations against unauthorized use, especially in the areas of real estate sale, mortgage finance, and real estate rental and management activities. Effective on January 1, 2007, existing law that authorizes the Real Estate Commissioner to discipline persons for willful misuse of trade names, including “REALTOR®”, will be strengthened. Under the new California Business and Professions Code section 10177, any persons who knowingly authorize, direct, connive at or aid in the publication, advertisement or distribution of any material false statement or representation concerning a designation or a certification, including trade organization membership, may have their licenses revoked, suspended or denied by the Real Estate Commissioner. This includes false statements about the individual’s special certifications or membership in a trade association (i.e., use of the trademark “REALTOR®” by one who is not a member of a REALTOR® association).

Notice to Terminate Tenancy:

The 60-day notice to terminate residential leases is back! Effective January 1, 2007, a new section is added to the California Civil Code. Landlords will have to give most month-to-month residential tenants a 60‑day notice to vacate. An exception allowing a 30‑day notice applies if the tenant has been in the property for less than a year. Also excepted are properties that are sold if the sale meets all six requirements stated in the new Civil Code 1946.1(d), which are:

1. The rental unit is separate from title to any other dwelling.

2. The owner has contracted to sell the rental unit to a bona fide purchaser for value and is in escrow with a licensed escrow agent or licensed real estate broker.

3. The purchaser is a natural person or persons.

4. The notice is given no more than 120 days after escrow is established.

5. Notice was not previously given to the tenant pursuant to this section.

6. The purchaser in good faith intends to reside in the property for at least one full year after termination of the tenancy.

Leases for a fixed term are not affected. Tenants are free to give a shorter 30‑day notice to the landlord.

And, you guessed it! There will be a new C.A.R. form for the 60‑day notice. This new law will sunset (as did the prior 60‑day notice law) after three years.

Tax Withholding at Close of Escrow

Starting on January 1, 2007, Sellers will have an alternative to the withholding for income tax purposes of a flat 3.33% of the sale price. They may elect instead to withhold an estimate of the seller’s tax liability calculated by multiplying the recognized capital gain by the highest state tax rate for individual taxpayers, regardless of the taxpayer’s actual tax bracket. The seller must certify the amount to be withheld in writing under penalty of perjury.

Reverse Mortgage Disclosures

With the “graying of America,” reverse mortgages are becoming more popular. Starting on January 1, 2007, the disclosure notice is modified and certain additional protections for consumers established in SB1609 will go into effect. Companies providing reverse mortgages will be prohibited from certain self-serving dealing activities, will be required to provide additional disclosures, and must provide a translation of the contract to the language in which it was primarily negotiated. Lenders and mortgage brokers must comply with the following DO’s and DON’Ts:

DO’s

1. Refer the borrower to housing counseling agency.

2. Lender provides a list of independent loan counselors.

3. Contract translated into language primarily negotiated in.

DON’Ts

1. Require the purchase of an annuity as condition for the reverse mortgage.

2. Offer an annuity or refer the borrower to another for an annuity prior to loan closing or before the end of the Buyer’s right to rescind.

3. Accept a full application for a reverse mortgage before the borrower receives housing counseling,

HOA Reserves

As of the first of January 2007, homeowner associations will have to meet two new requirements. First, the HOA must provide its members with an operating budget that includes the following additional information:

1. any deficiency in reserve funding on a per unit basis;

2. any decision (including a justification) for deferring or not undertaking the repair or replacement of any major component with a remaining life of 30 years or less; and

3. any outstanding loans of more than one year made by the association.

Second, the tri-annual reserve study that all HOA’s must conduct must include a reserve funding plan showing how the HOA intends to fund its obligation to repair or replace major components with a remaining life of 30 years or less.

Additional new requirements will be placed on HOA’s starting on January 1, 2009, to provide a summary of the reserve funding plan to all members.

Death of a Salesman Conditional License

Later in 2007, another new law will take effect. As of October 1, 2007, the conditional salesperson license will be eliminated. The new law removes the option for a conditional license for all applications starting October 1, 2007. Applicants for a salesperson license will be required to complete three real estate classes before applying for the real estate salespersons exam. The exception for attorneys and those qualified to take the broker exam remain in place.

Driving While on the Phone

Real estate professionals have less than two years to prepare for the new law regulating cell phone use while driving. Effective July 1, 2008, California will become the fourth state to require motorists to use only hands-free listening and talking phones while driving. There are some exceptions for private property and use for emergency purposes. Violators will be fined $20 for the first infraction and $50 for each subsequent infraction. The infraction will not be considered a violation point for DMV purposes, and thus should not affect auto insurance. However, California employers should take notice and be concerned. An employee who causes an accident while using a non-hands free cell phone may be presumed to be liable for any injuries or damage that results. If the driver’s employer requires the use of the cell phone as part of the employee’s job, their employer may also be held responsible for the accident. Cell phones can expand the geographic and substantive scope of employees’ jobs by enabling employees to work just about any where and any time. An employer who allows or requires employees to work in their cars, via cell phones, may expand the scope of the employee’s job and create liability for whatever happens while the employee is driving. Although there have not been any California court cases on this issue to date, a Virginia case found the employer vicariously liable for the death of a young child who was hit by an employee who was making cell phone calls on the way home from work.

Employers should take steps to establish company policies regarding cell phone use. Decisions should be made regarding how to limit job scope, and what degree of limitation is appropriate. Employers can limit job scope by establishing clear policies on when, where and how cell phones are to be used. If an established policy is violated, the employer may have some protection because the employee broke the rules. The degree of limitation can be a requirement to use only hands-free devices (with employer providing or reimbursing for the devices), requiring employees to pull off the road and park to make calls, or prohibiting all cell phone use while driving. However, strict policies that cannot be enforced may not provide protection to an employer.

This is a new area of law that we will be closely watched. Perhaps new technology will be developed before this law goes into effect that will solve some of these problems.

Discrimination

The categories of individuals protected from discrimination is expanded by SB1441. Existing law prohibits discrimination against any person in any program or activity conducted, operated, or administered by the state or by any state agency, or that is funded directly by the state, or that receives any financial assistance from the state, on the basis of race, national origin, ethnic group identification, religion, age, sex, color, or disability. The new law adds sexual orientation to the protected categories. It also defines “sex” and “sexual orientation” as having the same meaning as under the Fair Employment and Housing Act, and expands the definition of discrimination to include a perception that a person has any of the listed characteristics or is associated with a person who has or is perceived to have any of the listed characteristics.

Sexual Harassment Training

AB 2095 clarifies that the required mandatory sexual harassment prevention training of supervisors applies to supervisors physically located in California.

Minimum Wage and Overtime Pay

AB 1835 takes effect on January 1, 2007, increasing the California minimum hourly wage to $7.50 per hour. It will go up again on January 1, 2008 to $8.00 per hour. The increased minimum wage means that the minimum salary to qualify as a salaried employee exempt from the wage and hour laws (not entitled to overtime pay) will also go up. Employers should review their salaried exempt employees’ duties and salaries to confirm that they are properly classified as exempt. If there is any question whether an employee is entitled to exemption, qualified legal counsel should be consulted to avoid claims for unpaid wages and the very stiff penalties and interest that would be assessed.

The enactment of AB 2095 permits reporting of overtime hours on the same payroll date as the hours are paid when overtime is paid in the payroll period subsequent to the one in which it is earned.

CASE OF THE MONTH

The C.A.R. standard form Residential Purchase Agreement (“RPA”) contains an arbitration clause that, if initialed by both buyer and seller, requires the arbitration of disputes arising out of the agreement or any resulting transaction, except that “an action for bodily injury” is excluded from arbitration. The question before the Los Angeles Superior Court in Gravillis v. Coldwell Banker Residential Brokerage Company, was whether emotional distress and diabetes caused by emotional distress are bodily injuries that are excluded from arbitration. The trial court said yes, but the Court of Appeal said no.

Mr. Gravillis and his pregnant wife purchased a home pursuant to an RPA. They were represented by Coldwell Banker Residential Brokerage and two of its employees. Mrs. Gravillis participated in the negotiations, home inspection and purchase of the property. After close, the buyers discovered that the home had extensive structural damage and was uninhabitable. The Brokers failed to disclose “known material facts and defects” about the property, including (1) termite infestation that rendered the home uninhabitable, (2) earthquake damage that made the home structurally unsound, (3) water intrusion damages, and (4) cosmetic repairs that concealed the structural damage. The Brokers also failed to discuss with the buyers the termite inspection report that would have put them on notice of the damage, and further were negligent in recommending the company that conducted the termite inspection. Had proper disclosures been made, the buyers would not have purchased the property.

After they bought the home, the Gravillises hired a contractor to remodel the residence before they moved in. While working on the property, the contractor discovered that it had suffered severe termite damage. The Gravillises went on a Disney cruise with their young child and expected to return to a completed home. Instead, they returned to a home that had been taken down to the frame and because it was completely obliterated by termite damage which had been cosmetically concealed.

After discovery of the true condition of the property, Mrs. Gravillis, who was pregnant, was advised that she should wear a mask and special clothing to protect herself and her unborn child from exposure to dry rot, fungus, and other hazardous substances while on the property. This advice caused both buyers to suffer severe emotional distress, worry, depression, anxiety and fear. Mrs. Gravillis was so upset that she developed gestational diabetes. The Gravillises sued the Brokers for breach of fiduciary duty, negligence, and breach of the duty to be honest and truthful for failure to disclose material facts about the condition of the property; and for violation of the California unfair competition law for their practice of selecting home inspectors and pest control companies that would minimize disclosure of property defects in exchange for future business. The gist of the Gravillises’ action was that nondisclosure of termite damage prior to execution of the RPA is an item expressly covered by the RPA’s arbitration clause.

The Brokers filed a motion to compel arbitration, which the Gravillises opposed on the ground that they were seeking damages for bodily injury within the meaning of the arbitration exclusion. The Court initially granted the broker’s motion, but denied it on reconsideration two months later, concluding that the homeowners’ claims fell under the category of bodily injury. The Appeal Court disagreed:

“[A] party to a home purchase agreement would not reasonably expect that, as used in the agreement, ‘bodily injury’ would include diabetes caused by emotional distress which, in turn, is caused by learning about termite damage. More likely, the parties would expect ‘bodily injury’ to mean physical conditions—a bruise, cut, fracture, or concussion—caused directly by a falling beam, a collapsing wall, a cracked floor, or a broken fixture.”

The Court of Appeal ruled that emotional distress claims do not qualify as a “bodily injury” within the meaning of an arbitration exclusion in a residential purchase agreement.

“[I]f emotional distress were considered a bodily injury, the arbitration exclusion in the Agreement could apply in virtually every dispute, rendering the arbitration provision a nullity.”

If you would like to see certain questions answered or topics you would like to see explored in this monthly column, please feel free to e‑mail your questions or comments. All opinions expressed are those of the writers and may not reflect the Association’s point of view. Specific legal issues should be addressed to your attorney. The information contained in this Newsletter is general in nature.

John V. Giardinelli and Sylvia J. Simmons, Attorneys at Law

GIARDINELLI, DUKE & SIMMONS, LLP
31594 Railroad Canyon Road
Canyon Lake, California 92587
Telephone: (951) 244-1856
e-mail: office@gdslaw.org; sylvia@gdslaw.org