Open Menu Primary Menu Toggle Search Shopping Cart My Account CONTACT US Latest News WEDNESDAY, NOVEMBER 10 ARTICLES Undisclosed Compensation, i.e., “Hidden Profit” and California Real Estate Licensees Jozef Magyar, Esq. November 2021 A violation seen during California Department of Real Estate (“DRE”) audits is undisclosed compensation, also referred to as “hidden profit.” California real estate licensees are required to fully disclose to their clients all compensation received or expected to be received by the licensee from the clients, vendors, tenants, buyers, and other third parties relating to the licensed activity. Examples of compensation or benefits received may include: Rebates paid to a property management company by a maintenance company; Analyzed trust account benefits and company credit card rewards; If prospective tenants pay application fees, and if those application fees include compensation for processing the application (in addition to the hard costs for credit or background checks), and if the property manager retains those fees; Property management company markups on vendor costs. Real estate licensees who fail to comply may be exposed to disciplinary action by the DRE. They may also find themselves defending against a claim made by their client. To add to the importance this is the recent case of Center for Healthcare Education and Research, Inc. v. International Congress for Joint Reconstruction, Inc., (2020) 57 Cal. App. 5th 1108, where the Fourth District Court of Appeal found disgorgement of secret profits appropriate when a fiduciary fails to properly disclose, even if the principal suffered no monetary harm. Thus, it is crucial to always disclose all earnings or benefits. KTS can assist with language disclosing compensation for your property management agreements to ensure compliance. Additional Resources: KTS offers Proactive Audit Services for DRE compliance. A description of the services is available at KTS Proactive Audit Services. For additional information or assistance, contact Jozef Magyar at (800) 864-6611 or jozef.magyar@kts-law.com. Kimball, Tirey & St. John LLP is a full service real estate law firm representing residential and commercial property owners and managers. This article is for general information purposes only. While KTS provides clients with information on legislative changes, our courtesy notifications are not meant to be exhaustive and do not take the place of legislative services or membership in trade associations. Our legal alerts are provided on selected topics and should not be relied upon as a complete report of all new changes of local, state, and federal laws affecting property owners and managers. Laws may have changed since this article was published. Before acting, be sure to receive legal advice from our office. For contact information, please visit our website: www.kts-law.com. For past Legal Alerts, Questions & Answers, and Legal Articles, please consult the resource section of our website. © 2021 Kimball, Tirey and St. John LLP Jozef Magyar DOWNLOAD PDF Back Legal Alerts United States Supreme Court Vacates Stay of U.S. District Court Decision, Thereby Invalidating CDC Eviction Moratorium Eviction Moratoria for Commercial Tenancies in San Diego County Commercial Eviction Moratoria Extensions Authorized in California Through September 30, 2021 Categories ANNOUNCEMENTS ARTICLES LEGAL ALERTS QUESTIONS & ANSWERS Authors Craig McMahon Charles Scott Cynthia Stelzer Eli Gordon Jamie Sternberg Leanne Barbat Lynn Dover Patrick O'Laughlin Richard Brown Robert Thorn Shawn Bankson Susan Lein Ted Kimball Kimball Tirey & St. John LLP EDUCATION START A CASE RESOURCES PRACTICE AREAS ATTORNEYS ABOUT NEWS PRIVACY POLICY Copyright © 2021 Kimball Tirey & St. John LLP