By Jeff W. Frey, Attorney; Atkinson, Andelson, Loya, Ruud & Romo
Many public entities use real estate agents and, per the industry’s standard, agents are paid a commission representing a percentage of the final sales price. Can this regular transaction create problems for special districts? Below, we discuss Government Code Section 1090 (“Section 1090”), a broad and harsh law governing public contracts.
Section 1090 prohibits “public officials, officers, and employees” from being financially interested in contracts made by them in their official capacity. The consequences for violating Section 1090 can include fines, imprisonment, and a permanent disqualification from holding office in California. (Gov. Code § 1097.)
So how do real estate agents come into play? Over the years, the terms “public officials” and “public employees” have been interpreted to include independent contractors/consultants with advisory powers or the ability to perform duties otherwise performed by public officials or employees. (Schaefer v. Berinstein (1956) 140 Cal. App. 2d 278, 291 [“A person merely in an advisory position … is affected by the conflicts of interest rule”]; Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114, 1124-1125.) This rule regarding consultants has also been extended to corporate consultants, not just individuals. (Davis v. Fresno Unified School Dist., (2015) 237 Cal. App. 4th 261.) Real estate agents are hired to advise and assist special districts with the sale or acquisition of real property by providing expert advice on the fair market value of the property. It is this contract between the special district and the agent that likely makes the agent a “public employee” under Section 1090 (“First Contract”).
Next, ask yourself two questions. Does the employee/consultant “make” a contract in his/her official capacity (i.e., a “Second Contract”)? Is the employee/consultant financially interested in the Second Contract?
Section 1090 does not define when a consultant “makes” a contract. Case law fills that void by broadly defining the word “made” to include preliminary discussions, negotiations, compromises, reasoning, and planning. (Millbrae Assn. for Residential Survival v. City of Millbrae (1968) 262 Cal.App.2d 222, 237.) A consultant even “makes” a contract “if it is established that he had the opportunity to, and did, influence [the contract’s] execution directly or indirectly to promote his personal interests.” (People v. Sobel (1974) 40 Cal.App.3d 1046, 1052; emphasis added.)
Section 1090 also fails to define when a public employee is “financially interested” in a contract. Case law holds, however, that “the term financially interested in section 1090 cannot be interpreted in a restricted and technical manner.” (Lexin v. Superior Court (2010) 47 Cal. 4th 1050, 1075; internal quotations and citations omitted.)
Given the above, once a real estate agent executes the First Contract, he/she is likely a “public employee” under Section 1090. Then, by advising the special district on the fair market value of a property, the agent makes/influences the ultimate sales/purchase agreement between the special district and the property buyer/seller (i.e., the “Second Contract”). Finally, the real estate agent (acting as a “public employee”) will be paid from the proceeds of the Second Contract, meaning the agent is financially interested in a contract he/she “made.” In essence, Section 1090 worries that the agent would be in a position to influence the purchase price paid with public funds to his/her benefit due to the percentage fee structure. (See California Attorney General Opinion, 66 Ops.Cal.Atty.Gen. 376 (1983) [a consultant compensated via a percentage of an increase in assessed value of property, where that consultant was also involved in contracts increasing the assessed value of those properties, violated Section 1090].)
At first glance, it appears that only the real estate agent can be liable for violating Section 1090. Special districts should care, however, because there are also potential fines, imprisonment, and disqualification from public office for any individual who “willfully aids or abets” a Section 1090 violation.
So, what to do? Despite the inevitable pushback a special district will receive, one method to potentially avoid a conflict is to pay the agent a fixed fee for his/her services under the First Contract. The agent should get paid whether or not the agent sells the property. In that example, the agent would still “make” the sales/purchase agreement (the Second Contract), but he/she would not be financially interested in that contract.
Please work with legal counsel to ensure compliance with Section 1090.