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.