Real Estate Brokerage Commission Indemnification

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					                                                         Modern Real Estate Practice in Texas, 12th Edition
                                                                                       Instructor’s Manual


     Chapter 5: Real Estate Brokerage and the Law of
                          Legacy

LEARNING OBJECTIVES

Upon completion of this chapter, the student should be able to:

           •   Describe the law of agency and name the parties to an agency relationship.

           •   Describe the minimum service standards for an agent under Texas law.

           •   List the four broker agency positions prescribed in the License Act and define
               them.

           •   Describe the creation and termination of agency relationships in the practice of
               real estate.

           •   Differentiate between the seller as principal and the buyer as principal.

           •   List and describe the agent's responsibilities to the principal and to customers.

           •   List and describe the principal's responsibilities to the agent.

           •   Describe the intermediary concept.

           •   Differentiate between independent contractor status and employee status and
               explain the ramifications of each.

           •   Outline the requirements establishing the broker's right to a commission.

           •   Enumerate the most common violations of antitrust laws by real estate agents,
               describe their implications for day-to-day brokerage activities, and state the
               penalties for violating them.

           •   List at least four major provisions of the Texas Deceptive Trade Practices Act,
               describe an agent’s defenses in a DTPA lawsuit, and the maximum recovery
               awarded to a consumer injured under the act.
                                               Modern Real Estate Practice in Texas, 12th Edition
                                                                             Instructor’s Manual

LECTURE OUTLINE

    I.    Brokerage—the business of bringing sellers and buyers together in the
          marketplace

    II.   The Law of agency

          A.    Parties
                1.      Principal (client)
                2.      Agent
                3.      Customer
                4.      Subagent

          B.    Minimum service standards
                1.    Requires a broker who represents a party or who lists real property
                      under an exclusive agreement to
                      a.     Inform the party of material information related to the
                             transaction, including the receipt of an offer by the broker
                      b.     Answer the party’s questions and
                      c.     Present any offer to or from the party
                2.    Prohibits a broker who represents a party from telling another
                      broker to negotiate directly with the broker’s client
                3.    Requires a license holder operating under a power of attorney or a
                      property management agreement to be a party to the lease or sale
                4.    Permits
                      a.     An inquiry to an employee of a builder or developer about
                             contract terms or forms if the person does not have
                             authority to bind the employer to the contract
                      b.     The delivery of an offer to a party if the party’s broker
                             consents to the delivery and a copy of the offer is sent to
                             the party’s broker

          C.    Types of agency
                1.     General agency
                       a.     Empowered to represent the principal in a broad range of
                              matters
                       b.     May bind the principal to any contracts within the scope of
                              the agent's authority
                       c.     Broker/salesperson relationship
                       d.     Property owner/property manager relationship
                2.     Special agency
                       a.     Authorized in one specific act or business transaction
                                      Modern Real Estate Practice in Texas, 12th Edition
                                                                    Instructor’s Manual

            b.      Cannot enter into contract on behalf of principal
            c.      Broker/seller relationship (through listing agreement) or
                    broker/buyer relationship (through buyer representation
                    agreement)
D.   Creation of agency—created at the broker level
     1.     Express agency—generally by written listing contract; may be a
            contract with a buyer to locate a specific type of property as well
            as with a seller to find a buyer
     2.     Implied agency—implied by the actions of the parties rather than a
            contract they signed
     3.     Agency by ratification—after-the-fact acceptance; seller's
            acceptance of a purchase contract for a property that has not been
            listed
     4.     Primary ingredients in creation of agency
            a.      Delegation of authority by the principal
            b.      Acceptance of authority by the agent
            c.      Reliance on the agent by the principal
            d.      Control of the agent by the principal

E.   Termination of agency
     1.    Death or incapacity of either party
     2.    Destruction or condemnation of the property
     3.    Expiration of the term of the agency
     4.    Mutual agreement of the parties
     5.    Renunciation by the agent or revocation by the principal (e.g.,
           principal can revoke for reasons of undisclosed dual agency)
     6.    Bankruptcy of the owner if title transferred to receiver
     7.    Completion or fulfillment of the purpose for which the agency was
           created

F.   Agent's responsibilities to principal
     1.     Specified by law
     2.     Fiduciary relationship
     3.     Duties (see Fig. 5.1, text); COALD
            a.     Care
            b.     Obedience
            c.     Accounting
            d.     Loyalty
            e.     Disclosure

G.   Principal's responsibilities to agent; CIIA
     1.     Compensation
                                             Modern Real Estate Practice in Texas, 12th Edition
                                                                           Instructor’s Manual

             2.     Information
             3.     Indemnification
             4.     Availability

       H.    Agent's responsibilities to customers
             1.     Reasonable care and skill
             2.     Honest and fair dealing
             3.     Disclosure of known material facts about the property
             4.     Statements of fact must be accurate (misrepresentation not
                    permitted)
             5.     Statements of opinion permitted if qualified—puffing
             6.     Avoid statements that may involve fraud
                    a.     Concealment
                    b.     Nondisclosure
                    c.     Intentional misstatement of a material fact for the purpose
                           of harming or taking advantage of another person
             7.     Reveal known latent (hidden) defects and factors that might
                    adversely affect the subject property (landfill, toxic dump, or
                    otherwise stigmatized)
             8.     Penalties for violation
                    a.     Suit for damages (Deceptive Trade Practices Act and Fraud
                           in Real Estate Act to be discussed later in this chapter)
                    b.     Revocation or suspension of license
                    c.     Rescission of the sale

       I.    Errors and omissions (malpractice) insurance—generally covers liabilities
             for errors, mistakes, and negligence; does not cover intentional acts

III.   Agency positions and disclosure

       A.    Written statement required at first substantive dialogue with a seller,
             buyer, landlord, or tenant prospect
             1.      Explains seller representation, subagency, buyer representation,
                     and intermediary position
             2.      Does not require signatures, dates, or licensee names
             3.      May be printed in any format using at least 10-point type
             4.      Not required if (a) the proposed transaction is for a residential
                     lease for not more than one year and no sale is being considered or
                     (b) the licensee meets with a party represented by another licensee
             5.      Written statement not required at an open house if no substantive
                     discussion occurs or at a meeting after parties have signed a
                     contract; but disclosure of agency is required at an open house
                                     Modern Real Estate Practice in Texas, 12th Edition
                                                                   Instructor’s Manual



B.   Broker agency positions (see Figure 5.1)
     1.     Seller's agent
            a.      Lists the property for sale or lease and represents the
                    owner, usually through a written listing agreement
            b.      Must place the owner's interests first
            c.      Must disclose to the owner any material information known
                    to the agent
     2.     Subagent
            a.      Represents the owner in cooperation with the listing broker
            b.      Has the same responsibilities to the seller as the seller's
                    agent
            c.      Is not sponsored by or associated with the listing broker
     3.     Buyer's agent
            a.      Represents the buyer, usually through a written buyer
                    representation agreement (see Figure 5.2)
            b.      Must place the buyer's interests first
            c.      Must disclose to the buyer any material information known
                    to the agent
     4.     Intermediary
            a.      Employed to negotiate a transaction between the parties
                    and for that purpose may be an agent of the parties to the
                    transaction
            b.      Must agree to act as an intermediary if the broker agrees to
                    represent both a buyer and a seller in a transaction.
            c.      Must obtain the written consent of each party, stating who
                    will pay the broker and setting forth the broker's
                    obligations as an intermediary
            d.      Required to treat each party honestly and fairly and to
                    comply with the License Act
            e.      May not disclose that the owner will accept a lower price
            f.      May not disclose that the buyer will pay a greater price
            g.      May not disclose confidential information unless required
                    by law to do so
            h.      An intermediary broker may not give advice or opinion, but
                    an appointed licensee may give advice or opinion (if not
                    disclosing confidential information)
            i.      A broker may not serve as an appointed licensee

C.   A party may choose to have no representation (hopefully, only for the
     consumer who feels competent to function without representation)
                                             Modern Real Estate Practice in Texas, 12th Edition
                                                                           Instructor’s Manual

      D.     Payment of a fee to a broker does not establish representation

      E.     Representation of a party must be disclosed
             1.    Orally or in writing
             2.    On first contact with another party to the transaction or
             3.    On first contact with another licensee who represents another party
                   to the transaction
             4.    Brokers may want this disclosure in writing as an affirmative
                   defense against charges of fraud or deceptive trade practice

      F.     Texas Real Estate License Act provides for suspension or revocation of a
             license for "failing to make clear, to all parties to a transaction, which
             party he is acting for..."

IV.   Nature of the real estate brokerage business

      A.     Broker-salesperson relationships
             1.     Salesperson is responsible only to the employing broker
             2.     Broker is responsible for supervising and is liable for acts of
                    salespersons
             3.     All activities must be performed in broker's name
             4.     Compensation to the salesperson must be paid through the
                    sponsoring broker or the broker under whom the salesperson was
                    licensed at the time the compensation was earned

      B.     Independent contractor versus employee status (see Table 5.1)
             1.     Either contract should be written
             2.     Liability for withholding income taxes and Social Security taxes
             3.     Degree of broker's control

      C.     Three conditions are required to meet IRS independent contractor status
             1.     The individual must have a current real estate license
             2.     He or she must have a written contract with the broker stating that
                    "The salesperson will not be treated as an employee with respect to
                    the service performed by such salesperson as a real estate agent for
                    federal tax purposes"
             3.     Payment to the salesperson must be based on performance, not the
                    number of hours worked

      D.     Broker's compensation
             1.     Usually a percentage of total involved, but may be a specified sum
             2.     Entitlement arises when:
                              Modern Real Estate Practice in Texas, 12th Edition
                                                            Instructor’s Manual

     a.      Broker has executed or fulfilled duties under listing
             contract (produced a buyer who is ready, willing, and able
             to buy) even though the transaction may not close
     b.      Broker was the procuring cause of sale
     c.      TRELA requirements: Broker or salesperson must prove
             that he
             (1)      held a valid real estate broker's or salesperson's
                      license
             (2)      had a written memorandum for a commission
             (3)      advised the buyer in writing to obtain a title policy
                      or to have the abstract examined by an attorney of
                      the buyer's choice
3.   Amount to be paid is negotiable with seller
4.   If a broker intends to receive a commission, fee, or rebate from
     someone other than the broker’s client, the broker must first obtain
     the consent of his client
5.   If an agent is to receive a fee for referring a service provider who
     is being paid by a party the agent does not represent, the agent
     must get permission from that party to receive the fee
6.   Sharing a commission
     a.      Prohibition in TRELA against a licensee’s paying a
             commission or fee to a person who is not licensed as a
             salesperson or broker

            Facts: The License Act states:

            Subsection 1101.005(1): “The provisions of this Act shall
            not apply to any of the following persons and
            transactions...(1) an attorney licensed in any state”

            Subsection 1101.651(a): A licensed broker may not pay a
            commission to or otherwise compensate a person directly
            or indirectly for performing an act of a broker unless the
            person is:
                    (1) a license holder; or
                    (2) a real estate broker licensed in another state who
                        does not conduct in this state any of the
                        negotiations for which the commission or other
                        compensation is paid

            Subsection 1101.806(b): A person may not maintain an
            action to collect compensation for an act as a broker or
                      Modern Real Estate Practice in Texas, 12th Edition
                                                    Instructor’s Manual

     salesperson that is performed in this state unless the person
     alleges and proves that the person was:
             (1) a license holder at the time the act was
                 commenced; or
             (2) an attorney licensed in any state

     The Rule 535.31 states:

     A licensed attorney is exempt from the requirements of the
     Texas Occupations Code, Chapter 1101 (the Act), but
     cannot sponsor salespersons or serve as the designated
     officer or manager of a licensed corporation or limited
     liability company unless the attorney is also licensed as a
     real estate broker. This provision is not a waiver of the
     standards of eligibility and qualification elsewhere
     established in the Act.

     Summary Analysis:

     An attorney could perform activities designated in the
     TRELA for brokers without violating the TRELA. He
     could list, sell, manage property for another, and get a
     commission or fee from the principal. According to Mark
     Moseley at TREC, there is even a case holding that the
     attorney is not subject to the Subsection 1101.806(b)
     requirement of having a written memorandum for payment
     of a commission.

     However, if an attorney sold a property that was listed by a
     licensed agent, the attorney would not be eligible for
     payment of a fee from the listing broker because the
     TRELA does not allow fee splitting with anyone who is not
     licensed under the Act. The attorney would have to
     negotiate for a commission from the principal.

b.   Valuable consideration includes, but is not limited to,
     money, gifts of merchandise having a retail value greater
     than $50, rent bonuses, and discounts. A cash payment of
     any amount is a violation.

c.   A portion of the commission may be rebated to the
     principal if the payment is strictly a rebate and is not made
                                      Modern Real Estate Practice in Texas, 12th Edition
                                                                    Instructor’s Manual

                    for a real estate service (such as a referral). A rebate may
                    be in any form (e.g., cash, gift certificates, appliances, or
                    frequent flyer certificates) (according to a TREC
                    Enforcement Q&A).

            d.      H.B. 1052, 1999, permits a broker or appraiser to file a lien
                    on commercial real estate for commissions earned but not
                    yet paid—if the commission exceeds $2,500 and the right
                    to a lien was disclosed in the fee agreement

     5.     Salesperson's compensation
            a.     Negotiable with broker
            b.     Should be specified in broker-agent agreement

E.   Antitrust laws
     1.     Brokers must not conspire to fix prices
     2.     Brokers may not boycott competitors by refusing to do business
            with them because of their brokerage practices (e.g., discount
            brokers)
     3.     Brokers may not divide the market so as to allocate clients or
            customers
     4.     Penalties for violation (maximum)
            a.      $100,000 fine ($1 million for corporations)
            b.      Three years in prison
            c.      Triple damages plus attorney's fees and court costs in a
                    civil suit

F.   Texas Deceptive Trade Practices—Consumer Protection Act
     1.    Caveat emptor no longer applies
     2.    Laundry list of 23 "false, misleading, or deceptive acts or practices
           in the advertising, offering for sale, selling, or leasing of real or
           personal property"
     3.    Presence of fraud does not have to be proved; innocent
           misrepresentation is actionable in court ("as is" sale—broker may
           still be liable)
     4.    Consumer may waive rights to bring suit under the DTPA under
           certain conditions, among them representation by legal counsel
     5.    Defenses
           a.       Transmittal of written information prepared by others, with
                    no reason for the broker to believe the information was
                    false
           b.       "Reasonable offer of settlement"
                              Modern Real Estate Practice in Texas, 12th Edition
                                                            Instructor’s Manual

     c.     Impossibility for the broker to know the information was
            false
6.   Penalties for violation
     a.     Unknowingly committed: Limited to economic damages
     b.     Knowingly committed: Economic damages (in some cases
            up to 3×) plus damages for mental anguish
     c.     Intentionally and knowingly: Economic and mental
            anguish damages may be trebled
     d.     Civil penalties: up to $20,000 per violation, with an
            additional penalty of up to $250,000 for deceptive acts that
            target the elderly

            “In a suit filed under this section (the DTPA), each
            consumer who prevails may obtain:
            (1) the amount of economic damages found by the trier of
                fact. If the trier of fact finds that the conduct of the
                defendant was committed knowingly, the consumer
                may also recover damages for mental anguish, as found
                by the trier of fact, and the trier of fact may award not
                more than three times the amount of economic
                damages; or if the trier of fact finds the conduct was
                committed intentionally, the consumer may recover
                damages for mental anguish, as found by the trier of
                fact, and the trier of fact may award not more than three
                times the amount of damages for mental anguish and
                economic damages.”

7.   1995 License Act revision protects parties to a contract and
     licensees from liability for misrepresentation or concealment of
     material facts by each other or by a subagent unless the party or
     licensee knew of the falsity or concealment – it did not diminish
     the broker’s liability for the acts of salespeople

8.   2003 tort reform

     a.     A defendant who is only marginally at fault will be liable to
            the consumer for that defendant’s percentage of
            responsibility
     b.     Additionally, a defendant may be jointly and severally
            responsible for all damages if
            (1)    the defendant’s percentage of responsibility is
                   greater than 50 percent or
                                                         Modern Real Estate Practice in Texas, 12th Edition
                                                                                       Instructor’s Manual

                                       (2)     the defendant, with specific intent to do harm to
                                               others, acted with another to engage in a third
                                               degree or higher felony

                G.     Fraud in Real Estate and Stock Transactions Statute
                       1.     Any person who stands to gain financially from a transaction is
                              assumed to have knowledge of all aspects of the transaction
                       2.     Covers innocent misrepresentation
                       3.     Broker who makes a false or misleading representation may be
                              liable under this statute as well as the DTPA and the Texas Real
                              Estate License Act


STUDENT WORKSHEET

1.   What type of agency defines a broker-agent relationship?

2.   What type of agency defines a broker-seller relationship?

3.   List the five (5) legal responsibilities an agent has to a principal and give an example of
     each.
     a.
     b.
     c.
     d.
     e.

4.   List the four (4) duties that a principal has to an agent and give an example of each.
     a.
     b.
     c.
     d.

5.   Compare and contrast puffing, misrepresentation, and fraud.

6.   Describe the four (4) statutory positions that a broker may take:
     a. seller's agent
     b. buyer's agent
     c. subagent
     d. intermediary
                                                         Modern Real Estate Practice in Texas, 12th Edition
                                                                                       Instructor’s Manual

7.   When is a licensee required to furnish a party in a real estate transaction a written statement
     that gives information concerning seller representation, buyer representation, subagency,
     and the intermediary position?

8.   Compare and contrast working as an independent contractor against working as an employee
     in a real estate sales office.

9.   To be entitled to a sales commission in Texas, a broker must be able to prove that
     a.
     b.
     c.

10. Give an example of acceptable practice, behavior, or statement for each of the three most
    common antitrust violations in real estate.
    a. price fixing
    b. boycotting competitors
    c. allocation of customers or markets

11. List at least four (4) false, misleading, or deceptive acts or practices as defined by the Texas
    Deceptive Trade Practices-Consumer Protection Act (DTPA).
    a.
    b.
    c.
    d.

12. Does a consumer have to prove fraud for a licensee to be found guilty of violating the
    DTPA?

13. If an agent does not know that a seller has misrepresented or concealed information, is the
    agent liable?

14. If a broker does not know that his agent has misrepresented or concealed information, is the
    broker liable?


DISCUSSION QUESTIONS

        1.     When would you use the services of a broker? (Answers should include when
               purchasing insurance, stocks and bonds, and real estate. Students may also
               mention commodities, lumber, cattle, grain, precious metals, and mortgage
               securities. The broker acts merely as a go-between and does not own the object
               being sold.)
                                                      Modern Real Estate Practice in Texas, 12th Edition
                                                                                    Instructor’s Manual



       2.     How often do you use the services of an agent? (Do not overlook the spouse who
              acts for the marriage, a partner who acts for the partnership, etc.)

       3.     If there were no agency disclosure made, in most transactions who would the
              buyer believe represents him or her? Why is this so? What are the consequences
              of not clarifying the role of the agent who shows homes to the buyer?

       4.     Compare the obligations of the agent to the principal to those of the principal to
              the agent.

       5.     Role play presenting the "written statement" of agency positions to a seller or
              buyer prospect; role play giving the disclosure of party representation to another
              party or an agent representing another party.

       6.     What do you see as the advantages and disadvantages to the buyer for having a
              buyer's agent? an intermediary? to the seller for having a seller's agent? an
              intermediary?

       7.     What do you see as the advantages and disadvantages to the broker of seller
              representation? subagency? buyer representation? acting as an intermediary?

       8.     Discuss any recent news reports involving a violation of antitrust.

       9.     What types of statements might a broker make that would lead to possible
              "innocent misrepresentation" under the DTPA?


REFERENCES

Fambrough, Judon. “Breach of Fiduciary Duty.” Tierra Grande, July 2000.

Fambrough, Judon. “‘As Is’ Sale.” Tierra Grande, July 2000.

Fambrough, Judon. “Procuring Cause and Earning a Commission.” Tierra Grande, October
2000.

Ford, James. “Perspectives on Buyer Agency.” Tierra Grande, April 2005.

Hofmann, Jenifer V. “When Bad Things Happen to Good Properties.” Tierra Grande, April
1999.
                                                     Modern Real Estate Practice in Texas, 12th Edition
                                                                                   Instructor’s Manual

House Bill 4 (2003). Amends Civil Practice and Remedies Code (tort reform).

House Bill 1212 (2003). Amends Section 17.47, Business & Commerce Code (changes in civil
awards for DTPA violations).

“Responsibility for Sales Associate’s Error.” Texas Realtor, December 1998.

Senate Bill 1212 (2003). Amending the Deceptive Trade Practices-Consumer Protection Act.
Effective September 1, 2003.

Stern, Jerrold J. “A Notation a Day Keeps the Auditor at Bay.” Tierra Grande, January 2004.

Texas Real Estate Commission. "Information for Brokers and Salesmen Regarding Use of
Unlicensed Assistants in Real Estate Sales." Advisor, Volume 5, No. 2, 1994.

Texas Real Estate Commission. “More Questions About Intermediary.” Advisor, Vol. 7, No. 1,
1996.

Texas Real Estate Commission. “TREC Adopts Rule Clarifying Referral Fees.” Advisor,
February 2000.

Walker, Ronald J. "Independent Contractor Status Tested in Court." Texas Realtor, July 1995.

Wilson, Reid C. “Broker Duties.” Tierra Grande, April 2004.

Wilson, Reid C. “Collecting Commissions in Commercial Transactions.” Tierra Grande, October
2004.

				
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