Everything a licensee does flows from the agency relationship. Who is the client? What is owed to them? What must be disclosed, and to whom? This chapter is the foundation of the exam and of a lawful career. Master the fiduciary duties, the California disclosure package, and the fair-housing rules, and you have covered a large share of the two heaviest content areas.
The rule: agency creates the highest duties the law imposes
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 (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, remembered by the mnemonic OLD CAR:
- Obedience — follow the principal's lawful instructions.
- Loyalty — put the principal's interests above the agent's own; no secret profit.
- Disclosure — reveal all material facts the agent knows.
- Confidentiality — protect the principal's private information (such as their lowest acceptable price) even after the deal closes.
- Accounting — account for all money and property handled.
- Reasonable care and diligence — act competently.
Agency is usually created by an express written agreement — most often a listing. In California a written, signed listing is required to enforce a commission claim, because the promise to pay a commission on the sale of real estate falls under the statute of frauds. Agency can also arise by implication (from conduct), by ratification (approving an act afterward), 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 may not disclose to one party the other's confidential negotiating information: not the seller's lowest price, not the buyer's highest offer. Undisclosed dual agency, or a breach of that confidentiality, exposes the licensee to liability and DRE discipline.
It helps to see how the pieces fit together, because the exam builds many questions on the same skeleton. First, the broker — not the salesperson — is the party who actually holds the agency; a salesperson is an agent of their broker and a "sub-agent" of the broker's client. That is why a salesperson can never sue a seller directly for a commission and can never take a fee from anyone but their employing broker. Second, a broker is usually a special agent, hired for one specific transaction with limited authority, not a general agent (like a property manager, who manages an owner's affairs on an ongoing basis) or a universal agent (with broad power of attorney). Knowing which kind of agent is described tells you how much authority the agent has to bind the principal.
Agency also carries duties to the third party — the customer — even though they are not the client. To a customer, the agent owes honesty, fair dealing, and disclosure of known material facts, but not loyalty or confidentiality. A listing agent, for example, must not lie to a buyer about the roof, but is not obligated to negotiate on the buyer's behalf. This split — full fiduciary duty to the principal, honesty to everyone — resolves a large family of questions. The moment an agent puts their own interest ahead of the principal's (a secret profit, an undisclosed relationship with the buyer, steering the client toward the agent's own listing for a bigger fee) they have breached loyalty, the most heavily tested duty.
Finally, agency can be terminated by acts of the parties (completion, mutual agreement, expiration, revocation, or the principal or agent renouncing it) or by operation of law (death or incapacity of either party, destruction of the property, or bankruptcy). An agent who is fired before the listing expires may still be liable for the principal's damages, and a principal who revokes an exclusive listing early may owe the broker. Note that an agency coupled with an interest — where the agent has an ownership stake in the subject — generally cannot be revoked by the principal at will.
The rule: California's layered disclosures
California requires a stack of disclosures on the sale of residential property. The unifying principle: a seller and the seller's agent must disclose known material facts affecting the value or desirability of the property.
- Transfer Disclosure Statement (TDS) — required on a transfer of single-family residential property (Civ. Code § 1102(a)). That phrase is a defined term, and the definition is what the exam tests. Section 1102(b) applies the definitions of the Real Estate Law, and B&P Code § 10018.08 defines "single-family residential property" as (a) real property improved with one to four dwelling units, (b) a unit in a residential stock cooperative, condominium, or planned unit development, or (c) a mobilehome or manufactured home sold through a real estate broker. So a duplex, triplex, or fourplex needs a TDS just as a detached house does; a five-unit apartment building does not. AB 892 replaced the old wording ("not less than one nor more than four dwelling units") with the defined term effective January 1, 2020; the unit count did not change. (Civ. Code § 1102 as amended by Stats. 2019, ch. 310; B&P § 10018.08 as added by Stats. 2018, ch. 285; both read on leginfo.legislature.ca.gov, 23 September 2026.) The exempt transfers are listed at Civ. Code § 1102.2. The seller discloses the known condition of the property; the agent adds observations from a visual inspection. It cannot be waived — § 1102(c) makes any waiver void.
- Agency Disclosure — the statutory "Disclosure Regarding Real Estate Agency Relationship" must be provided, and the agency relationship disclosed, elected, and confirmed before the principal signs the purchase agreement.
- Natural Hazard Disclosure Statement (NHD) — tells the buyer whether the property lies in a designated flood, fire, seismic, or other hazard zone.
- Megan's Law notice — the statutory paragraph directing buyers to the sex-offender registry; the seller need not research individual offenders.
- Lead-based paint — for any home built before 1978, federal law requires disclosure of known hazards, delivery of the EPA pamphlet, and a 10-day inspection opportunity.
- Depending on the property: Mello-Roos special-tax disclosure, death on the property within the past three years, and point-of-sale retrofit items (smoke and carbon-monoxide detectors, water-heater strapping).
Timing and the buyer's right to cancel. The seller delivers the TDS as soon as practicable before transfer of title (Civ. Code § 1102.3(a)). If it — or a material amendment — is delivered after the buyer's offer, the buyer may terminate by written notice within 3 days after delivery in person or 5 days after delivery by mail (or 5 days after electronic delivery where the parties agreed to transact electronically) (Civ. Code § 1102.3(c)).
The agency disclosure itself follows a three-step choreography the exam loves to test — disclose, elect, confirm. First, the licensee discloses the possible agency relationships by delivering the statutory "Disclosure Regarding Real Estate Agency Relationship" form (to the seller before taking the listing, and to the buyer before writing an offer). Second, the parties elect the actual relationship — seller's agent, buyer's agent, or (with consent) both. Third, the relationship is confirmed in writing in or with the purchase agreement. Civ. Code § 2079.14 fixes the deadlines: the seller’s agent delivers the form before entering into the listing agreement; the buyer’s agent delivers it as soon as practicable before execution of a buyer-broker representation agreement and execution of the buyer’s offer to purchase — and where the buyer’s agent did not prepare the offer, not later than the next business day after receiving it from the buyer. The point is that a principal must know who represents whom before they are bound, so the confirmation cannot come after the fact. Miss the timing, and even a well-intentioned licensee has violated the statute.
Three ideas make the disclosure area manageable. The first is materiality: a fact must be disclosed if a reasonable buyer would consider it important in deciding whether, or how much, to buy. A leaking roof, a cracked foundation, permit problems, boundary disputes, prior flooding, and neighborhood nuisances are all material. The second is knowledge: the seller and agent must disclose what they know (and, for the listing agent, what a reasonably competent visual inspection would reveal); they are not liable for latent defects genuinely unknown to them and undiscoverable by ordinary inspection. The third is timing: most disclosures must reach the buyer early enough to act on them — the agency disclosure before the purchase agreement is signed, the TDS and other statutory disclosures promptly, and the lead-paint materials with a 10-day inspection window. A buyer who receives a required disclosure after signing generally gains a statutory right to cancel within a set number of days of delivery, so late delivery can unravel a deal.
The TDS deserves special attention because it is the workhorse. Per Civ. Code § 1102(a) it reaches a transfer of single-family residential property by sale, exchange, real property sales contract (as defined in Civ. Code § 2985), lease with an option to purchase, any other option to purchase, or ground lease coupled with improvements; Civ. Code § 1102.2 exempts, among others, sales requiring a public report, court-ordered sales, foreclosure and trustee’s sales, transfers by a fiduciary in the administration of an estate, transfers between co-owners, spousal transfers in a dissolution, and transfers to or from a government entity. It cannot be waived in a covered sale, and "as-is" language does not excuse the duty to disclose known defects — a common misconception the exam probes. The agent's portion of the TDS reflects the Easton visual-inspection duty discussed below. Separately, the Natural Hazard Disclosure is usually prepared by a third-party expert company, and the Mello-Roos and special-assessment disclosures alert buyers to bonded debt that rides with the property. When several disclosures overlap, deliver the full package rather than guessing which single form controls.
The rule: fair housing forbids discrimination — and California's list is long
Fair-housing law bans discrimination in the sale, rental, financing, and advertising of housing.
- The federal Fair Housing Act protects seven classes: race, color, religion, sex, national origin, disability, and familial status (families with children under 18).
- California adds to that list through two different statutes, with two different lists — a distinction worth keeping straight, because an exam item can name the wrong act.
- The Fair Employment and Housing Act (FEHA), Gov. Code § 12955, covers housing specifically: race, color, religion, sex, gender, gender identity, gender expression, sexual orientation, marital status, national origin, ancestry, familial status, source of income, disability, veteran or military status, and genetic information — and, under § 12955(m), a perception that a person has any of them or is associated with someone who does.
- The Unruh Civil Rights Act, Civ. Code § 51(b), binds all business establishments (a brokerage is one) and independently names citizenship, primary language, and immigration status. Age is not in the § 51(b) list; it reaches housing through Civ. Code § 51.2, which construes § 51 to bar age discrimination in the sale or rental of housing — subject to the qualifying senior-citizen housing exception that section sets out. Both lists above are quoted from the sections as read on 23 September 2026 (Gov. Code § 12955 as amended effective January 1, 2024; Civ. Code § 51 as amended effective January 1, 2025). The Legislature adds classes from time to time, so learn the pattern — California protects far more than the federal seven — rather than treating any list as closed.
Prohibited practices include steering (directing buyers toward or away from areas by protected class), blockbusting (inducing panic selling), and redlining (a lender's refusal to lend in an area by protected characteristics). Advertising may not express any preference or limitation based on a protected class. Housing providers must allow reasonable accommodations and reasonable modifications for persons with disabilities, including legitimate service and assistance animals despite a no-pets policy. The safest professional practice is to treat every client and customer identically and to document objective, non-discriminatory reasons for every decision.
The distinction between a reasonable accommodation and a reasonable modification is worth fixing. An accommodation is a change to a rule, policy, or service — waiving a no-pets policy for a service animal, assigning a closer parking space, allowing a live-in aide. A modification is a physical change to the unit — a wheelchair ramp, grab bars, a lowered counter. Under federal law a tenant generally pays for a modification (and may have to restore the unit at move-out), while the housing provider bears the cost of an accommodation. A provider may deny a request only if it imposes an undue financial or administrative burden or fundamentally alters the housing.
Advertising rules are a frequent exam target because they are easy to violate innocently. An ad may describe the property ("four bedrooms," "wheelchair accessible") but may not describe the ideal occupant ("perfect for a young Christian couple," "no children," "adults only," "near a Korean church"). Even words that seem neutral can imply a preference. Fair-housing law does recognize narrow, genuine exemptions — for example, certain owner-occupied buildings of four units or fewer, and single-family homes sold or rented by an owner without a broker and without discriminatory advertising, may be partially exempt under the federal Act. But a licensee is virtually never exempt: the moment a real estate professional is involved, the full weight of fair-housing law applies, and the Unruh Act independently bars a brokerage from arbitrary discrimination. When in doubt, describe the property, never the person, and serve every prospect the same way.