Laws of Agency, Disclosures, and Fair Housing
Agency is the single largest content area on the California salesperson exam, and for good reason: everything a licensee does flows from the agency relationship and the duties it creates. This chapter covers how agency arises, the fiduciary duties owed to a principal, the mandatory disclosures California law layers on top of every residential sale, the federal and state fair-housing laws that govern how licensees treat the public, and the Department of Real Estate's licensing and discipline authority. Master the OLD CAR duties and the California-specific disclosures, because they anchor a quarter of the exam.
Agency Relationships and Fiduciary Duties
An agency relationship exists when one person, the agent, is authorized to act on behalf of another, the principal, in dealings with third parties. In real estate, the broker is the agent; a salesperson is the agent of their employing broker and owes the broker's clients the same duties the broker owes. The person represented is the principal or client; a person the agent deals with but does not represent is a customer, owed honesty and fair dealing but not fiduciary loyalty. The agent owes the principal fiduciary duties — the highest duties the law imposes. A common memory device is OLD CAR: Obedience to lawful instructions, Loyalty (putting the principal's interests above the agent's own), Disclosure of all material facts, Confidentiality of the principal's private information, Accounting for all funds and property, and Reasonable care and diligence. Loyalty and disclosure are the most tested: an agent may never secretly profit, may never represent an undisclosed adverse interest, and must reveal anything that could affect the principal's decision. Agency is usually created by an express agreement, most often a written listing agreement. In California, a written and signed listing is required to enforce a claim for a commission, because the agreement falls under the statute of frauds. Agency can also arise by implication from the parties' conduct, by ratification (approving an act after the fact), or by estoppel. Dual agency — representing both buyer and seller in the same transaction — is legal in California only with the informed, written consent of both principals. A dual agent occupies a delicate position: they may not disclose to one party the confidential negotiating information of the other, such as the seller's lowest acceptable price or the buyer's highest offer. Failing to obtain written consent, or breaching confidentiality, exposes the licensee to liability and DRE discipline. Understanding who the client is, and what is owed to whom, is the foundation of every agency question.
Required Disclosures
California imposes an extensive set of mandatory disclosures on the sale of residential property, and the exam expects you to know each one's trigger and timing. The overarching principle is that a seller and the seller's agent must disclose known material facts affecting the value or desirability of the property. The Real Estate Transfer Disclosure Statement (TDS) is required in the sale of one-to-four residential units. On it, the seller discloses the known condition of the property — systems, appliances, defects, and problems — and the agent adds observations from a visual inspection. The TDS cannot be waived in a covered transaction. The Natural Hazard Disclosure Statement tells the buyer whether the property sits in a designated flood, fire, seismic, or other hazard zone. The agency disclosure regime requires that the licensee provide the statutory "Disclosure Regarding Real Estate Agency Relationship" form and that the agency relationship be disclosed, elected, and confirmed. This must happen before the principal signs the purchase agreement, so the parties know who represents whom. Several other disclosures recur on the exam. Sellers must deliver the Megan's Law database notice (the statutory paragraph directing buyers to the sex-offender registry) but are not required to research individual offenders. For any home built before 1978, federal law requires disclosure of known lead-based paint and hazards and delivery of the EPA pamphlet, with a ten-day inspection opportunity. Depending on the property, disclosures may also be required for Mello-Roos special tax districts, a private transfer fee, an ordered point-of-sale retrofit (smoke and carbon-monoxide detectors, water heater strapping), and a death on the property within the past three years. Because these requirements change and new ones are added, always verify the current disclosure package with the California Department of Real Estate and the standard forms in use.
Fair Housing Law
Fair-housing law forbids discrimination in the sale, rental, financing, and advertising of housing, and it operates at both the federal and California levels. Because the penalties are severe and the topic is heavily tested, licensees must know the protected classes and the prohibited practices. The federal Fair Housing Act (Title VIII of the Civil Rights Act of 1968, as amended) protects seven classes: race, color, religion, sex, national origin, disability, and familial status (families with children under 18). California's Fair Employment and Housing Act (FEHA) goes further, adding classes such as marital status, sexual orientation, gender identity and expression, ancestry, source of income, age, genetic information, immigration status, and more (Cal. Gov. Code § 12900 et seq., housing provisions at §§ 12955 et seq.; the statutory short title carries no possessive; checked 2026-09-09). Because California's list is broader and expands over time, verify the current protected classes with the state's Civil Rights Department. The law bans specific practices. Steering is directing buyers toward or away from neighborhoods based on a protected class. Blockbusting (panic selling) is inducing owners to sell by suggesting that people of a particular class are moving in. Redlining is a lender's refusal to lend, or lending on worse terms, in certain areas based on protected characteristics. Advertising may not state or imply any preference, limitation, or discrimination based on a protected class. Two California statutes reinforce these protections. The Unruh Civil Rights Act bars business establishments — including real estate brokerages — from arbitrary discrimination against customers. The Rumford Fair Housing Act prohibits discrimination in housing specifically. For persons with disabilities, housing providers must allow reasonable accommodations in rules and policies and permit reasonable modifications to the premises; a no-pets policy must yield to a legitimate service or assistance animal. There are narrow, genuine exemptions (such as certain owner-occupied housing under federal law), but the safest professional practice is to treat every client and customer identically and to document objective, non-discriminatory reasons for every decision.
DRE Licensing Law
The California Department of Real Estate (DRE) licenses and regulates real estate salespersons and brokers under the Real Estate Law found in the Business and Professions Code. The agency is headed by the Real Estate Commissioner, who is appointed by the Governor and charged with enforcing the law and adopting regulations (the Commissioner's Regulations) to protect the public. A license is required for anyone who, for compensation, performs acts such as selling, buying, leasing, or negotiating real property or a business opportunity for another. To obtain a salesperson license, an applicant must generally be at least 18 years old, complete the required pre-license college-level courses (Real Estate Principles, Real Estate Practice, and an approved elective), pass the state examination, submit fingerprints for a background check, and — most importantly — be employed and supervised by a licensed broker. A salesperson may never operate independently or receive compensation directly from anyone other than their employing broker. Verify current education hours, fees, and renewal continuing-education requirements with the DRE, as they are periodically updated. The broker occupies the responsible position: a broker may work independently, employ salespersons, hold client trust funds, and is accountable for the acts of licensees under their supervision. The distinction between the broker's and salesperson's authority underlies many exam questions. The Commissioner has broad enforcement power. Upon a complaint or investigation, the Commissioner may hold a hearing and suspend or revoke a license, or bar an applicant, for violations such as fraud, misrepresentation, commingling of trust funds, or conduct warranting denial. The Real Estate Recovery Account can compensate members of the public who obtain a judgment against a licensee for fraud and cannot collect. Separately, antitrust law prohibits competing brokerages from fixing commission rates or dividing markets; commissions are always negotiable and must never be set by agreement among competitors.
Duty to Inspect and Disclose
Beyond the seller's own disclosures, California imposes an independent duty on the listing agent to investigate and disclose the condition of residential property. This duty grew out of the landmark case Easton v. Strassburger and was later codified. Under it, the listing agent of one-to-four residential units must conduct a reasonably competent and diligent visual inspection of the reasonably and normally accessible areas of the property and disclose to prospective buyers any material defects the inspection reveals. The agent is not required to inspect inaccessible areas, public records, or areas off the site, but must report red flags that a competent inspection would catch. The line between lawful salesmanship and unlawful misrepresentation is a frequent exam theme. Puffing — a statement of opinion or exaggerated sales talk, such as "this is the best view in town" — is generally not actionable, because a reasonable buyer understands it as opinion. A false statement of material fact, however, is misrepresentation. Misrepresentation may be intentional (fraud) or negligent, and even innocent misrepresentation of a material fact can rescind a contract. Concealment — actively hiding a known defect — is treated like an affirmative false statement. Stigmatized-property rules illustrate the balance California strikes. Under the Civil Code, a death on the property that occurred more than three years before an offer generally need not be voluntarily disclosed. But an agent may not misrepresent the fact if a buyer asks directly, and a death within three years, or any fact materially affecting value, must be disclosed. Separately, a person's status regarding HIV/AIDS or a prior occupant's illness is not a required disclosure and may not be used to discriminate. The professional rule of thumb: when in doubt, disclose known material facts in writing. Silence about a known defect that a buyer could not readily discover is a classic path to liability and DRE discipline.
Last updated: September 2026
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