How Should NAI Capital Handle Our Closed Deal Files?

RETENTION OF ELECTRONIC COMMUNICATIONS

Electronic Communications (EC), including emails, texts, tweets and the like, has become an indispensable tool for licensees in conveying vital information in real estate and mortgage transactions. EC is used by licensees to receive and send to various parties to the transaction copies of contracts, electronic_communications and other important documents and information. And like other documents and writings obtained or executed by a licensee in connection with a transaction for which a license is required, EC associated with licensed acts must be maintained by the broker as part of the transaction file. However, maintaining EC goes beyond ensuring compliance with record keeping requirements. It is becoming more commonplace in the Department of Real Estate's investigations that licensees are unable to produce crucial EC that contain information that would demonstrate compliance with the Real Estate Law. The purpose of this article is to remind real estate brokers of the importance of maintaining and retaining transaction records, including EC.

The Real Estate Law clearly defines what records must be maintained. Specifically, Business and Professions Code Section 10148 reads, in part:

“…A licensed real estate broker shall retain for three years copies of all listings, deposit receipts, canceled checks, trust records, and other documents executed by him or her or obtained by him or her in connection with any transactions for which a real estate broker license is required (emphasis added). The retention period shall run from the date of the closing of the transaction or from the date of the listing if the transaction is not consummated. After notice, the books, accounts, and records shall be made available for examination, inspection, and copying by the commissioner or his or her designated representative during regular business hours...”

As noted in the italicized wording above, all documents executed or obtained by a licensee in connection with licensed activity must be retained and maintained. To recognize what records must be maintained, a broker must understand what constitutes licensed activity. In general terms, licensed activity is defined as performing certain acts on behalf of another or others, for or in expectation of compensation. Those acts include (but are not limited to) the following:

Sells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity.

Leases or rents or offers to lease or rent, or places for rent, or solicits listings of places for rent, or solicits for prospective tenants, or negotiates the sale, purchase or exchanges of leases on real property, or on a business opportunity, or collects rents from real property, or improvements thereon, or from business opportunities.

Solicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity.

While the above list of "licensed acts" is not all-inclusive (see Business and Professions Code Section 10131 et. seq. for more information), it does illustrate how EC can be used in the furtherance of licensed activity. For example, EC is often employed in real property purchase and sale negotiations; as such texts, emails, tweets and the like created and sent or received by a licensee during the negotiation for the sale or purchase of the property must be maintained as part of the transaction file. Moreover, courts have found that electronically generated writings are "documents" and are discoverable under the same rules that pertain to written materials. Thus, it is the Department's position that failing to maintain EC's that are created as part of licensed activity is in violation of the record keeping provisions.

To ensure compliance in this electronic age, every licensed California real estate broker should have written office policies and procedures setting forth how EC that are created, sent or received in connection with an act for which a license is required will be maintained and made available for inspection. While a real estate broker’s failure to have policies and procedures regarding the handling and retention of EC may increase a broker's chance of disciplinary action under Business and Profession Code Section 10148 (record keeping) and Commissioner Regulation's 2725 (failure to supervise), best practices dictate that the maintaining of EC goes well beyond simple record keeping compliance. As stated earlier, EC often holds the key to proving whether a licensee disclosed a material fact or provided a required electronic_communication, and retaining and maintaining these important communications may reduce a broker's need to defend against unwarranted allegations.

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