Hawaii Real Estate Practice


    | License Law | Agency | Ownership |
    HAWAII LICENSE LAW
       Overview

      Hawaii real estate brokers and salespeople (including property managers) are regulated under Hawaii Revised Statutes (HRS)Ch. 467, Ch. 436B, and Commission Rules & Regulations. Real estate appraisers are regulated under HRS 666K. Sales licensees must be 18 years of age, complete a salesperson's course, pass a state exam (administered on a daily basis), and must work under the direct supervision of a licensed real estate broker. A broker candidate must work full-time for two years, participate in at least 10 real estate transactions and complete a 46-hour broker course in order to qualify to take the state broker's examination. All licensees need to complete 10 hours of continuing education courses every two years in order to renew their active license (renewals on December 31 of every even- numbered year).  

    For general information regarding real estate licensing and registration, go to the Hawaii Real Estate Commission Web Site

      Highlights of the License Law
         Exempt from the licensing law are:  
    • a "custodian or caretaker" who works for a single owner;  
    • an "owner," provided the owner is not in real estate development or brokerage;  
    • a receiver, personal representative, or otherwise acting under court order.   Grounds for revocation or suspension include:  
    • acting as dual agent without written consent of buyer and seller;  
    • failing to obtain written confirmation of who the broker represents;  
    • splitting fees with unlicensed person for referring business; i.e., no finder fees allowed, unless the person is a licensed broker in another state or country;  
    • failing to disclose a material fact (except AIDS).
    Highlights of the Real Estate Commission's Rules & Regulations
      Requires a physical place of business, one that conforms to local zoning. Must be a principal broker at the main office and a broker-in-charge at any branch office.  

    The Rules of Conduct require that the agent:

       
    • keep funds in a separate client trust account;  
    • disclose any interest in property being listed or sold;  
    • obtain written consent to advertise;  
    • notify the Commission if the broker is to be absent more than 14 days;  
    • immediately transmit all offers to the listing broker;  
    • disclose to a "for sale by owner" who, if anyone, the agent represents and who will pay a commission.   Under the Advertising Rules:  
    • no licensee can advertise "For Sale by Owner";  
    • agents must disclose if they are active or inactive;  
    • leasehold and fee simple property must be identified (use LH or FS);  
    • brokers operating under a franchise must have their name at least 20% the height of the franchise name and logo.
    The Uniform Professional & Vocational Licensing Act (Ch. 436B) applies to all licensed professions in Hawaii, including real estate licensees. Some of the highlights are:  
    1. Grounds for loss of license:  
      • Practicing the licensed profession while impaired by alcohol, drugs, or disability (mental or physical).  
      • Aiding and abetting or employing an unlicensed person to directly or indirectly perform activities requiring a license.  
      • Conduct or practice contrary to recognized standards of ethics for the licensed profession (e.g., NAR Code of Ethics).  
      • Failure to maintain a record or history of competency, trustworthiness, fair dealing, and financial integrity.  
    2. The failure to maintain a current and valid license prior to engaging in any activity requiring licensure is a defense to payment of the commission or fee. The penalty is a misdemeanor with a one-year jail term.  
    3. Complaints are investigated by the Regulated Industries Complaint Office (RICO).  
    4. Licenses can be suspended or revoked for five years for violation of this law as well as Chapter 467, the real estate license law.  
       

    AGENCY

      Overview
     
    The license law permits real estate brokers to represent both buyers and sellers. Some practice single agency, but many practice "consensual dual agency." Those who represent buyers typically do so under oral non-exclusive arrangements, even though there is a standard form of buyer representation agreement available. There is little or no subagency practiced.  

    Disclosure  
    Hawaii passed one of the nation's first agency disclosure laws. It basically requires two steps:
    1. oral or written disclosure of whom it is the selling broker represents early in the transaction; and
    2. written confirmation in the sales contract (or lease) that timely disclosure was given.  
    The agency disclosure requirement applies to all real estate transactions - residential, commercial, new projects, timeshares, and leases (except less than one year).  

    Dual Agency
      With proper written disclosure and consent, a Hawaii real estate broker can represent both the buyer and the seller in the same transaction. There have been several court decisions holding against the undisclosed dual agent broker and a number of disciplinary actions based on unlawful and undisclosed dual agency. The state does not provide a Dual Agency Consent form nor does the Hawaii Association of Realtors, although most brokerage firms develop their own comprehensive form.  

    Buyer Representation
      Most real estate brokers will represent the buyer although few use a written representation agreement. Unlike a dual agent, a single agency broker will represent either the buyer or the seller, never both in the same transaction. Typically, the buyer agent is paid out of the transaction by way of an authorized commission split with the listing broker. Only on rare occasions does the buyer pay the buyer agent directly.  

    Independent Contractor
      Many real estate agents work for real estate brokers as independent contractors. The fact the brokerage firm exercises some degree of control over a salesperson does not necessarily create an employer-employee relationship if the control does not exceed the scope of broker supervision required under the licensing law (Locations Inc. v. Hawaii Department of Labor, 1995). Under a 1996 amendment of the Worker's Compensation law, a broker is exempted from paying mandatory worker compensation insurance and temporary disability insurance for its independent contractors who work on a commission basis only.
     

    UNIQUE FEATURES OF HAWAII REAL PROPERTY


      Every state has its own particular characteristics of land ownership - Hawaii perhaps more than others. Here is a capsule look at some of Hawaii's unique features:
     

    Mineral Rights
      All mineral rights are reserved to the State, including controversial claims to geothermal energy rights. The Department of Land & Natural Resources does issue mining leases on a royalty basis.  

    Beachfront Property
      The Hawaii shoreline is recognized as a zone rather than a line, and the State retains title to the beach. The State has held that the boundary between public beach and private upland is the "high wash of the waves," as usually evidenced by the vegetation line. Anyone buying beachfront property should obtain a shoreline survey, and then have it certified by the State (good for one year). Most counties have a 40-foot building setback from the shoreline boundary. Also a good idea to talk to an architect about additional building limitations, including requirements for hurricane clips. Flood insurance is required.  

    Adverse Possession
      The time period for adverse possession is 20 years. Cannot claim title by adverse possession to
    1. state/county land;
    2. parcels more than five acres; and
    3. property registered in Hawaii's Land Court system. Claims must be based on a good faith belief that the occupant actually owned the property in question.  

     Dower
      Dower is the 1/3 life interest given to a wife in the property of her husband upon his death. Dower was abolished for all properties acquired after July 1, 1977. It was replaced by the surviving spouse's right of election.  

    Ownership
      Buyers can choose to own property as tenant in severalty, tenants in common, joint tenants, or tenants by the entirety (husband and wife). There is no community property law in Hawaii. Corporations require at least one Hawaii resident on the Board of Directors. Other forms of ownership include general and limited partnerships (must be registered with the Department of Commerce & Consumer Affairs); and limited liability companies, effective July 1, 1997.  

    A unique method of holding title is the Land Trust in which legal title to property is transferred to, and held by, a trustee. The effect is to convert the owner's interest from real property into personal property. This title-holding device has certain advantages

  • avoids ancillary probate of non-residents, prevents partitioning, and avoids disclosure of true owners' identity on public records.  

    Taxes
      Real property taxes are assessed by the respective counties based on 100% of market value. They are assessed on a calendar year, but are collected in two installments during the fiscal year which runs from July 1 to June 30.  

    There is a special home exemption for owner-occupied homes (including condominium units). Depending on the age of the homeowner, a set amount is deducted from the assessed value and the homeowner is taxed the balance. The landowner must apply for this exemption in the year of sale for it to take effect the following year

  • it is automatically deducted each year thereafter until the property is sold.  

    There is a 4% state general excise tax applicable to income from services (broker commissions) and investment income (ex. lease rent, interest on agreement of sale). On short term rentals under 180 days, there is an additional 5% transient accommodation tax.  

    The Hawaii Real Property Tax Act (HARPTA) requires every buyer of Hawaii real property (residential/commercial) to deduct and withhold from a NONRESIDENT seller's proceeds the amount of 5% of the sales price. This withheld money is directed to the State Department of Taxation to be applied to any Hawaii income tax due from the seller with regards to the sale of the property (not applicable to 1031 exchanges). The owner can apply for a Withholding Tax Certificate if there is a loss and no taxes are due.  

    Leasehold
      Unlike most Mainland properties, in Hawaii many residential properties were developed on a long-term leasehold basis under ground leases. Some of these properties are in prime locations and are very attractive to buyers. However, it is important to understand what a buyer receives when purchasing a leasehold property is the lease and whatever rights and obligations are contained therein.  

    The Residential Leasehold Disclosure law is designed to give a buyer a clear understanding of the terms of the lease the buyer is acquiring. Typically, at the end of the lease term the property and improvements revert to the lessor. The buyer is entitled to a 10-day right of rescission. This law applies to residential single-family property and residential condominiums.   Contracts
      Most residential transactions involve the use of a multi- page standard form called the DROA (Deposit Receipt, Offer and Acceptance). This form is published by the Hawaii Association of REALTORS (HAR) and is available for use by non-REALTORS® (for ordering information, go to http://www.hbr.com and click on "Products We Sell" - also includes the Exclusive Listing Agreement).   Typically, a real estate broker helps the buyer and seller with completing the offer and acceptance portions of the DROA contract. Although it is advisable to consult a real estate attorney prior to signing the contract, most transactions are closed through a licensed escrow company and do not involve an attorney until the final stages of closing when the conveyance document is prepared.  
    Here are some key contract issues:  

    1. DROA typically provides for a modest earnest money deposit from the buyer, although this is not required by law.  
    2. Real estate contracts must be in writing (Statute of Frauds).  
    3. Contracts with minors (under 18) are voidable.  
    4. Statute of Limitations for contract actions is six years.  
    5. If seller rejects the offer, the broker must give a copy to the buyer.  
    6. Any changes by the seller to the offer is a counter-offer (there is a standard HAR counter-offer form to use in this event).  
    7. There is no general right of rescission although the buyer often has a right to rescind under condominium, subdivision, and timesharing laws and under special disclosure laws (leasehold, lead, property condition).  
    8. Buyer and seller can check a box electing arbitration in the event of disputes.  
    9. Real estate contracts, including options, may be assigned unless specifically prohibited in the contract.  
    10. Contracts in amounts less than $25,000 need to be written in clear understandable language under Hawaii's Plain Language Law (ex. listing agreement).  

      Condominium Development
        Hawaii was the first state to pass a condominium law in the early 1960s, originally called the Horizontal Property Regime (HPR) and now the Condominium Property Regime (CPR). This form of individual ownership quickly became more popular than the real estate co-operative ownership of multi-unit residential buildings.  

      Because of the scarcity of land, high-rise condominium buildings are plentiful. Some are located on leasehold land, thus creating unusual ownership interests, such as a fee simple interest in the apartment subject, however, to a 65-year ground lease. And, if the purchaser buys the unit from a seller under an agreement of sale (the seller keeps legal title and the buyer receives equitable title), you can see the importance of using a real estate attorney to explain the rights and interests of all the parties to the transaction.  

      The Condominium Property Regime (HRS 514A) covers the creation, sale and management of condominiums. For an introduction to condominium development and project registration, go to http://www.hawaii.gov/hirec/condo/cpr.htm.  

      Some condominium projects are managed better than others. To assure that there is enough money in the maintenance reserve to cover future replacement and repairs, the CPR has strict requirements for association budgets and replacement reserves. For a series of questions and answers about condominium association budgets and reserves go to http://www.hawaii.gov/hirec/condo/reserves.htm. And, for copies of the informative Hawaii Condominium Bulletin (in Adobe Acrobat PDF format), go to http://www.cba.hawaii.edu/rec/cbull.htm.  

      Financing
        Hawaii is a lien-theory state, whereby the lender (mortgagee) makes the loan, while the borrower (mortgagor) gives the lender a promissory note secured by a mortgage on the property. Deeds of trust are not used to create liens on Hawaii property.  

      In addition to the full array of conventional financing instruments, Hawaii has popularized the use of the installment contract for deed called the "agreement of sale." This form of seller carryback financing is automatically used rather than a wraparound mortgage or a deed "subject to" a mortgage. While popular in the '70s and '80s, the agreement of sale has not been used that often in the 1990s because of the availability of conventional financing. There is a HAR form Agreement of Sale Addendum to the DROA.  

      Some highlights of agreement of sale are:  

      1. Equitable and insurable title pass to the vendee, while the vendor retains legal title as security for full payment.  
      2. Buyer typically pays enough to cover tax/insurance/ seller's underlying mortgage payments; but the vendor remains primarily liable for those expenses.  
      3. Upon default, vendor typically has to file suit similar to a foreclosure action (i.e., cancellation is not automatic).  
      4. Standard to set up a collection agency account and split the costs
      5. important to make sure the agreement of sale balance remains the same or more than the balance of the underlying mortgage.  
      6. At satisfaction the vendor will set up an escrow to pay off the underlying mortgage and record a warranty deed in satisfaction. There is no need to pay a second conveyance tax for this transfer.


              Usury
        The general rule is that personal loans can not exceed 12% simple interest. If they do, the penalty is that the lender forfeits all right to interest and can only collect the principal amount due. Some exemptions to the usury rule are purchase money mortgages and agreements of sale.  

      Two special mortgage loan programs are Hula Mae loans for first-time buyers and Employee Retirement System loans for ERS members of the State and County governments. These loans are structured at attractive rates but contain unique restrictions and conditions.  

      Foreclosure
        In the event of default, the lender's primary remedy is a statutory foreclosure process. At any time up to the foreclosure sale following a public auction, the defaulting borrower has the right of redemption upon full payment of the debt. After the sale, there is statutory right of redemption (there is a one- year redemption after a tax sale).  

      Landlord and Tenant
        Hawaii's Residential Landlord-Tenant Code revised the common law of landlord/tenant by changing the relationship from one based on the law of conveyance to one primarily based on contract. The Code sets forth in detail the rights, obligations, and remedies of both landlord and tenant. The State of Hawaii Office of Consumer Protection publishes an excellent Handbook explaining the Code in plain language. They also maintain a Landlord-Tenant Hotline at 808-586-2634 (Oahu) and 1-800-513-8886 (Neighbor Islands).   Some of the highlights of the Code are:  

      • An absentee landlord must designate an agent, who must reside on the same island as the property.  
      • Landlord cannot collect more than the first month's rent, plus the security deposit (which can't exceed one month's rent).  
      • Landlord must return the security deposit, less any authorized retained portion verified in writing, not more than 14 days after termination of the lease.  
      • Leases may be assigned or sublet.  
      • Landlord may notify a delinquent tenant in writing that unless payment is made within five business days, the rental agreement will be terminated.  
      • In a month-to-month tenancy the landlord must give a 45-day notice to terminate if the landlord wishes to terminate the tenancy. Once the tenant finds a place and moves out, the tenant is entitled to a prorated refund of rent.  
      • A month-to-month tenant must give a 28-day notice to terminate.  
      • The Code does not apply to occupancy under a sales contract or agreement of sale.  
      • Landlord must give tenant 120 days notice prior to demolition of building or conversion to condominium.  


      Disclosure
        The law requires that real estate agents disclose to consumers material facts in every real estate transaction. Disputes often arise over what is a material fact. In some cases a specific state law addresses what must be disclosed.  

      Seller Disclosure Law - HRS Ch. 508D requires sellers in residential real estate transactions to disclose material facts about property condition. Buyers are afforded a right of rescission in the event they do not approve the disclosure statement prepared by the seller in good faith using due care.

      Megan's Law - A 1997 law requiring convicted sex offenders to register with the state attorney general. While real estate agents are not required to search the public records to see if there are sex offenders in the neighborhood, agents should inform the buyer that this kind of information is available in case the buyer is interested. Chick here for a copy of Hawaii's version of Megan's Law.  

      Agency Disclosure - HRS Ch. 467 requires that the real estate broker disclose whom it is the selling broker represents in every real estate transaction (except leases less than one year in duration).

      Leasehold Disclosure - In any sale of residential leasehold property (single-family or condominium), the seller must give the buyer a copy of the original lease and a plain language summary of the lease. The buyer has a 10-day right of rescission. Check here of a complete version of both laws.  

      Encroachment - Sellers must disclose any encroachment affecting the subject property. A 1997 law clarifies the fact that minor boundary discrepancies may not create an encroachment issue. This law was designed to eliminate the need for complicated agreements when the residential property improvement is located less than 6 inches over the boundary (3 inches if commercial property).

      HARPTA - The seller must disclose if they are a nonresident of Hawaii, in which case the buyer should direct escrow to withhold 5% of the sales proceeds to cover possible taxes owed to the State Department of Taxation (similar to the 10% federal rule if the seller is a foreign person).