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Managing Property Without Your Broker’s Knowledge

By David Hamerslough

Over the last nine months, I have represented five brokers who have received a complaint from a consumer regarding property management activities on the part of one of the broker’s agents. In each instance, the broker had no knowledge that the agent was conducting property management activities, and in all but one instance, none of the brokers conducted property management as part of their business. The complaints came from tenants, property owners/landlords, and the California Department of Fair Housing.

Why these situations arose (and whether they signify a trend) is unclear, but the issue has apparently caught the attention of CalBRE. On September 1, 2015, the Commissioner issued a licensee alert indicating that the BRE “has taken notice of – and will take appropriate disciplinary action against – the unlawful practice of some real estate salespersons who act, conduct themselves, and advertise as ‘independent’ real estate professionals.” The alert goes on to state that “CalBRE has received a number of reports of salespersons who are conducting property management businesses without any broker affiliation or supervision. Such activity is a crime.”

To my knowledge, none of the claims that I am handling have resulted in an administrative claim with the BRE. I can tell you that I have not discussed the issue with the BRE. While many of you have heard me jokingly say during a seminar that I could solve all your real estate problems if you anointed me the Tsar of Real Estate, Commissioner Bell is as close as anyone can be to being the real Tsar of Real Estate in California. Therefore, when his alert was brought to my attention, and specifically his statement about the unauthorized practice of property management, I thought about some of the legal and practical consequences I have been dealing with in the context of the claims I am currently handling.

First, the alert states that it is “a warning” to those licensees who provide real estate services for which a license is required without being affiliated with and supervised by a broker. Real estate salespersons must work under the license of a responsible broker in order to engage in licensed activities. In most instances, property management for the benefit of a consumer is such an activity. Providing services that require a license without the knowledge, authorization, and supervision of your responsible broker is a crime, according to the BRE, and certainly can lead to administrative disciplinary action as well as expose the agent to liability in a civil lawsuit.

On a more practical level, each of the claims I am handling has resulted in not one but two sets of attorneys’ fees. I have been retained to represent the broker in each instance, but because the property management activity has been conducted without the broker’s knowledge and authorization, the sales agents involved have had to retain their own attorneys, at their expense. This is due, in part, to the concept of ratification. Were the broker to retain the same attorney as the sales associate, such joint representation would be evidence of ratification by the broker of the agent’s conduct. In each instance, the broker I am representing is demanding that the sales associate reimburse the broker for the attorneys’ fees and costs that the broker has incurred as a result of the agent’s conduct. In most of my cases, there has not been any insurance coverage, because property management activities are not normally undertaken by brokerages, and therefore they are not an activity for which a premium has been paid and coverage has been provided.

Depending upon the facts and the transaction documents, claims for attorneys’ fees may arise between the consumer/tenant and the property owner/landlord. Those claims typically result in a demand by the property owner/landlord for reimbursement of not only their attorneys’ fees and costs but also any attorneys’ fees and costs they are required to pay to the consumer/tenant. This claim then becomes an additional claim in dispute between the broker and sales associate. Language in any policy and procedure manual as well as the independent contractor agreement between the broker and the agent may also have an impact on these claims of indemnification. These same issues exist with respect to any money damages or other liability that is imposed as a result of any such claim.

Other practical realities include the time spent responding to such claims. Termination of the sales associate’s employment by the broker is another potential by-product of any unauthorized and unsupervised activities for which a license is required. Finally, some of the outcomes of these claims have resulted in a requirement of continuing education courses.

In conclusion, if the financial costs and time outlays are not sufficient to discourage this type of conduct, the Commissioner’s puts all of us on notice that this type of activity has become a priority of the BRE. If that is true, then preserving your license and livelihood are significant considerations that should be evaluated if you are considering engaging in this conduct. No one transaction is worth all of these risks. If presented with the opportunity to conduct property management, or any other activity for which a license is required, and you are not qualified or authorized to do so, take the time to become qualified, notify your broker and get him or her involved, or refer the business to someone who is qualified and licensed to handle it.