I was recently asked to speak at one of the local real estate associations about restrictions on real estate agents when assisting clients with repairs to property or preparing the property for sale. It is a very interesting topic because it is a very common issue for real estate agents and has some potentially dangerous consequences. Unfortunately, there is no clear answer as to how much liability agents might have, so this blog is intended to explain the law and the possible repercussions of agents acting as contractors, and provide some guidelines to stay out of trouble.
This issue can arise either in representing sellers or buyers. Sellers want you to help them fix up the property to stage it, buyers want you to get the property into move-in condition. Oftentimes, a client may provide a real estate agent with what amounts to a punch-list of items (fix door, replace roof tiles, fix cabinets, replace screens, fix toilet). So, the question is, can you help them?
Under Business and Professions Code 7026 et seq., virtually every person (including an individual, a firm, corporation, co-partnership, etc.) who performs, or offers to perform, construction work in California must be licensed during the performance of the work, unless exempt from the licensing requirements. This rule applies to any person acting in the capacity of a contractor, including subcontractors or specialty contractors, and, under certain situations, may apply to material or equipment suppliers, consultants to owner-builders, and more, including even architects and engineers.
Pursuant to the Contractors’ License Law, the term “contractor” is synonymous with “builder,” and includes “any person who undertakes to or offers to undertake to, . . . , or submits a bid to, or does (himself or herself or by or through others), construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, . . . or other structure, project, development or improvement….” The definition of a “contractor” also includes:
- persons who maintain and service air-conditioning, heat and refrigeration equipment
- Any person engaged in tree removal or pruning, stump removal, limb cabling or guying must obtain a contractor’s license. The license requirement does not apply to a nurseryperson who, in the normal course of work, prunes
- Any person who installs or contracts for the installation of carpet that is attached to the structure must be licensed
The point is, the definition of contractor is very broad.
So, why is this important for real estate agents? Because it can potentially result in you losing your commission or getting in trouble with CalBRE.
In California unlicensed contractors are not entitled to payment for any work for which a contractors’ license was required. In most cases the agent is probably not looking for payment for acting as a contractor. But what about the fee for acting as a real estate agent? Does a real estate agent’s fee get wrapped into “any act or contract” for which a contractor’s license is required?
California courts have held that if an individual was unlicensed for any portion of a project for which a license was required, he/she cannot collect for any part of the job. In other words, if a court were to find that a real estate agent acted as a contractor as part of their services under the real estate agency contract, the court could order that the agent is not entitled to collect any part of the money owed under that contract. NOTE – I could not find any published cases where this happened. This likely means that this issue has never been litigated in the appellate court before (rather than it has not previously been raised or litigated at all), and thus there is no current precedent on the issue.
The law does contain an exception to the contractor licensing laws for real estate brokers. The law states that a licensed real estate broker is exempt from the Contractors’ License Law if acting within the capacity of his or her real estate license. However, a licensed real estate broker or property manager cannot act in the capacity of a contractor within the meaning of the Contractors’ License Law without the appropriate contractor’s license. Therefore, a licensed real estate broker or property manager should not assume that his or her license includes engaging in “contractor” activities without the appropriate contractor’s license.
There are some other limited exceptions, including work for less than $500.00 or routine maintenance, but I still advise you to be very careful in taking on any responsibilities that could be considered to be work requiring a contractors’ license, and consult your attorney before taking it on.
In light of the above, the biggest take-aways I can offer to agents are:
- Never contract directly with a contractor/sub-contractor/repairmen etc. Let the owner do it.
- Never directly pay the contractor/sub-contractor/repairmen
- Do not oversee projects
- Have your clients contact the contractor/sub-contractor/repairmen directly themselves
We understand real estate agents want to do the most they can for their clients, but the above guidelines will assist in staying out of trouble when assisting clients doing home improvements. This article is not intended to suggest that agents cannot assist your clients in the improvement process and provide them options of contractors to use, but instead urges caution to ensure agents understand there are limits to what they can do under the law.
If you have any questions about deal estate agent duties, please do not hesitate to contact Brewer Offord & Pedersen LLP at (650) 327-2900 or on the web at www.BrewerFirm.com.