In California, real estate agents and brokerages are required to maintain records of communications and documents related to real estate transactions, which may include text messages if they contain material information. These requirements are enforced by the California Department of Real Estate (DRE) under the California Business and Professions Code (BPC) and related regulations.

1. Record Retention Requirements in California

• Retention Period:

  • Under BPC § 10148a&e, real estate brokers must retain all documents and records related to transactions for a minimum of three years from the date of the transaction's closure or from the listing's agreement expiration.

• Records to Be Retained:

  • Required records include:

    • Contracts, offers, counteroffers, and listing agreements

    • Transaction-related disclosures

    • Correspondence, including electronic communications (emails and text messages) if they are material to the transaction.

2. Text Messages as Legal Records Under California Law

Under California law, real estate brokers are required to retain all records related to transactions for at least three years, as mandated by BPC § 10148(a) & (e). The statute explicitly includes correspondence, including electronic communications (emails and text messages), if they are material to the transaction.

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According to Black’s Law Dictionary (4th Edition), a record is a written account of an act or transaction, designed to serve as permanent evidence. A transaction is defined as the act of conducting business or negotiation, and an act is an affirmative expression of will or purpose.  Applying these definitions, a text message that is material to a real estate transaction constitutes a record because:

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• It is a written account of a negotiation or agreement.

• It reflects an act (expression of will or purpose) in the transaction.

• It provides permanent evidence of the matters discussed.

 

Since BPC § 10148 mandates the retention of material transaction-related records, including electronic communications, text messages meeting this criterion must be legally preserved as records under California law.

• Electronic Record Definition:

  • The DRE recognizes electronic communications as part of the "books, accounts, and records" that brokers must maintain, as long as they are related to licensed activities.

3. Methods for Archiving Text Messages

• Acceptable Archiving Practices:

  • Manual Archiving:

    • Text messages can be manually exported, saved digitally, or printed and stored with other transaction files.

  • Automated Tools:

    • Brokers can use compliance software designed to capture and archive text messages automatically for efficient record retention.

  • Centralized Recordkeeping:

    • Records, including text messages, must be securely stored and accessible for inspection by the DRE for the required retention period.

4. Oversight and Inspections

• Audit Authority:

  • The DRE has the authority to audit or inspect a brokerage's transaction records, including electronic communications, to ensure compliance.

• Broker Responsibility:

  • Brokers are ultimately responsible for ensuring that all required records, including text messages, are retained for the statutory retention period.

5. Consequences of Non-Compliance

• Regulatory Penalties:

  • Failure to retain required records, including text messages, may result in:

    • Fines

    • Disciplinary actions, including suspension or revocation of licenses

• Legal Risks:

  • Missing records could lead to legal disputes, claims of misrepresentation, or regulatory violations that increase liability for brokers and agents.

6. Best Practices for Compliance

1. Establish a Policy:

   • Create a brokerage-wide policy requiring all agents to retain material text messages related to transactions.

2. Use Technology:

   • Leverage mobile device management or archiving software to automatically capture and store text messages for the required retention period.

3. Educate Agents:

   • Train agents to identify and retain transaction-related communications, including text messages.

4. Perform Regular Audits:

   • Conduct routine checks to ensure compliance with the brokerage’s retention policy and identify gaps in recordkeeping.

Summary

In California, real estate brokers are required to retain all transaction-related records, including material text messages, for a minimum of three years under BPC § 10148. Brokers and agents should treat text messages that pertain to offers, terms, disclosures, and negotiations as part of the official transaction record. Implementing clear policies, using automated archiving solutions, and conducting regular audits can help ensure compliance with California's record-keeping requirements and minimize risks.

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E&O Risk

The risk to a brokerage concerning errors and omissions (E&O) insurance in relation to record retention of text messages and electronic communications is significant. E&O insurance generally provides protection against claims of negligence, misrepresentation, and failure to perform duties as expected. If a brokerage fails to archive important communications—including text messages—that document critical aspects of a real estate transaction, it can expose the brokerage to increased liability, and E&O insurance may not fully cover the consequences in certain situations. Here are key risks and considerations:

1. Potential for Gaps in Transaction Records:

   • If a brokerage does not properly archive text messages that contain vital transaction information (such as offers, counteroffers, client instructions, or contract amendments), it may create gaps in the documentation of a transaction. In a dispute, the absence of these records can weaken the brokerage's ability to defend itself and may lead to claims that cannot be fully supported or disproven.

   • If critical communications are missing, clients may allege that the brokerage acted negligently or misrepresented information, and E&O insurance may not cover claims if the brokerage did not follow industry standards for record-keeping.

2. Violation of Regulatory Requirements:

   • Most states have regulations that require brokers to retain all material records for specific periods. Failing to comply with these record-keeping regulations can lead to regulatory penalties and disciplinary actions by the state real estate commission.

   • E&O insurance often does not cover regulatory fines or penalties, meaning that the brokerage could be solely responsible for any costs incurred as a result of non-compliance.

3. Increased Likelihood of Claims Due to Incomplete Communication Records:

   • In the absence of complete and accessible records, brokerages may face higher risks of claims alleging failure to disclose, miscommunication, or misunderstanding of terms. This is particularly relevant in real estate transactions where documentation of all communications is critical to resolving any disputes that arise.

   • Without comprehensive records (including relevant text messages), brokerages may struggle to prove they acted appropriately, which can lead to larger settlements or judgments that may impact their E&O policy premiums or insurability.

4. Possible E&O Policy Exclusions:

   • Many E&O policies have exclusions related to "known wrongful acts" or "acts of intentional non-compliance." If a brokerage knowingly neglects to retain necessary records, or if record-keeping negligence is proven, E&O coverage may be limited or denied for claims resulting from this oversight.

   • Insurers may consider a failure to retain legally required records as an act outside the scope of covered professional services, thus potentially excluding coverage for claims related to missing documentation.

5. Impact on Policy Renewals and Premiums:

   • Repeated or severe claims arising from record-keeping issues can impact the brokerage's insurance premiums, making it more expensive to maintain E&O coverage.

   • If a pattern of poor documentation or non-compliance with record retention is identified, an E&O insurer may choose not to renew a brokerage's policy, forcing the brokerage to seek other (potentially more costly) insurance options.

6. Defensibility in Claims Situations:

   • Retaining text messages and other communications can be crucial in defending against claims. For instance, if a client claims that a certain promise or representation was made, well-kept records can help demonstrate what was actually communicated.

   • Without archived text messages, a brokerage may have to rely solely on testimony, which may not be as persuasive as contemporaneous written records in legal proceedings.

Risk Mitigation Strategies for Brokerages

To mitigate these risks, brokerages should:

• Establish a clear policy for retaining all relevant electronic communications, including text messages, emails, and digital correspondence, and ensure all agents are trained to comply.

• Invest in archiving technology that captures and stores electronic communications in a secure, accessible, and compliant manner.

• Regularly audit compliance with record-keeping policies to ensure agents are properly retaining required communications and that records are easily retrievable.

• Work closely with E&O providers to understand the requirements and best practices for documentation to ensure comprehensive coverage.

By maintaining thorough, organized records of all communications, including text messages, a brokerage can better protect itself against claims, demonstrate regulatory compliance, and strengthen its defensibility if claims arise, thereby optimizing its E&O insurance coverage and reducing the risk of adverse financial consequences.