Broker Responsibility. May 2012

Transcription

1 Broker Responsibility May 2012

2 Chapter 1 - Introduction Purpose The purpose of this course is to address the regulatory aspects of the management, operation and supervision of a real estate brokerage firm in Texas. The course provides an understanding and working knowledge of the law of agency, planning and organization of business entities, requirements for written policies and procedures, records retention and control, advertising, recruitment and training of agents, and a case study of a hypothetical complaint filed with Texas Real Estate Commission (TREC). The Real Estate License Act (the Act) is Chapter 1101 of the Texas Occupations (TX. Occ. Code; the TREC Rules are part of 22 TAC Chapter 535 (TREC Rules). Who Must Take This Course? Section of the TREC Rules requires a broker who sponsors salespersons, a designated broker of a business entity, and a licensee who is a delegated supervisor of one or more licensees (for six months or more during the supervisor s current license period), to complete this 6-hour broker responsibility course to renew a license. Any licensee may take this course, which counts for six hours of MCE elective credit. Additionally, a sponsoring broker may, by policy, require certain licensees and employees to take this course. Definitions Almost any act related to buying, selling, or leasing real estate by a licensee, when performed for another, and for or in expectation of valuable consideration, constitutes the practice of brokerage, TX. Occ. Code When a brokerage function is performed, the licensee becomes someone s agent. If the function is performed for the licensee s own account, that action does not fall under the definition of brokerage. However, TREC may discipline licensees who buy, sell or lease property for their own account under certain circumstances TX. Occ. Code (a). Section of the Act defines the following: Person An individual, partnership, corporation, limited liability company, or other legal entity, including a state agency or governmental subdivision. Business Entity (Entity) Any entity as defined by Business Organizations Code 1.002, Business Organizations Code (corporation, LLC, partnership, etc.). Real Estate Any interest in real property, including a leasehold, located inside or outside Texas. Real Estate Broker A person who, for another person and for a fee, commission, or other valuable consideration, or with the expectation of receiving a commission or other valuable consideration from another person sells, exchanges, purchases, or leases real estate; offers to sell, exchange, purchase, or lease real estate; negotiates or attempts to negotiate the listing, sale, exchange, purchase, or lease of real estate; lists or offers, attempts, or agrees to list real estate for sale, lease, or exchange;

3 auctions or offers, attempts or agrees to auction real estate; deals in options on real estate, including buying, selling, or offering to buy or sell options on real estate; aids, offers or attempts to aid in locating or obtaining real estate for purchase or lease; procures or assists in procuring a prospect to effect the sale, exchange or lease of real estate; controls the acceptance or deposit of rent from a resident of a single family residential real property unit; or provides a written analysis, opinion, or conclusion relating to the estimated price of real property if the analysis, opinion, or conclusion o is not referred to as an appraisal; o is provided in the ordinary course of the person s business; and o is related to the actual or potential management, acquisition, disposition, or encumbrance of an interest in real property. Real Estate Broker also includes a person who is employed by or for an owner of real estate to sell any portion of the real estate; or engages in the business of charging an advanced fee or contracting to collect a fee under a contract that requires the person primarily to promote the sale of real estate by listing the real estate in a publication primarily used for listing real estate; or referring information about the real estate to brokers. Designated Broker An individual holding an active Texas real estate broker license designated by a business entity licensed by TREC to act on the entity s behalf, TREC Rules (5). The designated broker must be an officer of a corporation, a manager of a limited liability company, or a general partner of a partnership. Salesperson A person who is associated with a licensed broker for the purpose of performing real estate brokerage.

4 Chapter 2 Authority, Competency, Training, Selection, and Recruitment Scope of Licensee s Authority Broker s Responsibility A broker is required to advise a sponsored salesperson of the scope of the salesperson s authorized activities under the Act. Unless such scope is limited or revoked in writing, a broker is responsible for the authorized acts of the broker s salespersons, but the broker is not required to supervise the salespersons directly. If a broker permits a sponsored salesperson to conduct activities beyond the scope explicitly authorized by the broker, those too, will be deemed to be authorized acts for which the broker is responsible. TREC Rules 535.2(a). Establish Competency Standards A sponsoring broker should create competency standards for supervised licensees. Examples of competency standards might be education or experience in residential, commercial, farm and ranch, leasing, property management, short sales and foreclosures, international selling and listing, or geographical limitations. These competency standards may be communicated in office policies, part of independent contractor agreements, or other means. Competency Considerations Is a new licensee fully trained and capable of assisting the seller of a high rise office building in downtown Dallas? If not, what skills and knowledge are needed to practice real estate in this area? Should a sponsoring broker assist a new licensee in completing residential contracts? Does the sponsoring broker have licensees unfamiliar with Texas landlord/tenant laws performing residential leasing or taking lease listings? Should a licensee understand cash crops and mineral rights in order to perform farm and ranch sales? Licensee s Competency A sponsoring broker must maintain written policies and procedures to ensure that a sponsored salesperson is competent to conduct authorized activities. The sponsoring broker also must assure that each sponsored salesperson receives educational instruction that the broker may deem necessary to obtain and maintain competency in the scope of the salesperson s practice, TREC Rules (i). These requirements simply mean that a broker, in addition to establishing the scope of the sponsored salesperson s authorized activities, must make sure that a salesperson is competent to conduct authorized activities and that the salesperson receives necessary educational instruction to achieve that goal. While competency is often achieved through actual transactional experience, the sponsoring broker may determine there is a need for additional training. For example, a new salesperson wanting to engage in property management might need additional education in that area of real estate. 4

5 Background Checks A sponsoring broker may find it prudent to require a background check policy for all employees with access to the office, both employees of the sponsoring broker and any employees of the broker s salespersons. A broker may wish to consult with an attorney on the implementation of such a requirement, including but not limited to the creation of the proper authorizations to obtain background checks, the type of service that will perform any background checks, the interpretation of any background reports, and the criteria to use when basing decisions on information in the background reports. Recruiting Licensees from Other Brokerages There is no provision in the Act or the TREC Rules prohibiting a broker from offering to sponsor a licensee whose license is active with another sponsoring broker. Custom and courtesy within certain market areas may be taken into account, but they do not necessarily govern recruitment. Any questionable recruitment practice by a broker should be discussed with the broker s attorney for the purpose of avoiding allegations of interference with contractual relationships. Generally, however, recruitment of a salesperson by a broker is not regulated. 5

6 Chapter 3 - Agency Law of Agency The changing provisions of the Act, as well as generally accepted provisions for employment contracts, have underscored the technicalities of the law as they apply to real estate brokerage. In addition to the Act, the law of agency governs the relationship between clients and brokers. The Act specifically states that a broker who represents a party to a real estate transaction acts as that party s agent, TX. Occ. Code Historically, the broker was hired by the seller (landlord) to assist him or her in marketing the property. However, buyer brokerage, tenant representation, and intermediary relationships have added different dimensions (duties and obligations) to the relationship between the broker and client. Creation of the Agency Relationship In many agency relationships, one can be deemed to be an agent of a principal through written or verbal authority. Receiving a Commission While one broker may initially think that the broker s principal is responsible to pay the broker his or her commission or fee, the Act permits a broker to receive compensation from the other party s principal, the other broker, or from more than one party as long as all parties are aware of and consent to the compensation arrangement. Timing of Agency Relationship An agency relationship arises when both the principal and agent have consented to the establishment of the agency relationship. This can occur when a written agreement is signed such as a listing or buyer representation agreement, but it can also arise before any written agreements are signed through oral agreements or by the actions of the broker and principal (by implication). For example, the broker and principal may act in ways that establish that the broker was performing services for the principal and that the principal received those services. For example, if a broker learns confidences during the time the broker is attempting to obtain a listing, it is possible that the broker may be bound to keep that information confidential. Types of Agency Agency relationships may be classified according to the authority given to the agent representing the principal or to the agent s authority represented by the principal to a third party; for example, agency by actual authority, agency by ostensible authority, and agency by ratification. Agency by Actual Authority Agency by actual authority exists where the agent is employed by the principal by either an express or oral contract. This type of agency generally outlines in detail what authority the agent has to act on behalf of and to bind the principal. When this is specifically given to an agent either in writing or verbally, it is considered to be express authority. Along with express authority there is often created a certain amount of implied authority. Implied authority is the right to perform certain acts on behalf of the principal even if the acts are not specified in the contract. This authority may arise from custom in the industry, common usage, or conduct of the parties (an inference or implication as to the agent s right to act). Examples of implied authority might be a listing agreement not specifying the broker has a right to place advertising signage, 6

7 hours for showing the property, or means of advertising a property for sale. If such authority is not set out in the listing agreement, such authority may be implied to the agent because of common custom and usage in the industry, especially when the agreement only generally outlines the broker s responsibilities or authority. Agency by Ostensible Authority Agency by ostensible authority is one that exists because the principal intentionally or negligently causes a third party to believe that another was his or her agent, even though that agent may not actually be employed by the principal. If the third party reasonably believes that the agent is employed by the principal, the principal may be bound by the act of his or her agent. It is important to remember that an agent possessing ostensible authority has no express authority. If, however, the principal cloaks the agent with the appearance of authority, or negligently gives the agent the appearance of authority by failing to exercise proper control, the agency relationship arises. Declarations of the agent alone are not sufficient, and ostensible authority arises only by the acts of the principal that create the apparent authority. Creation of agency through this type of conduct has also been called an agency by estoppel or agency by apparent authority. Notwithstanding the existence of a listing agreement, an agency by ostensible authority can create an agency relationship between a purchaser and the listing broker that can create confusion. Of course, a licensee has an obligation to make it clear to the parties whom the broker represents in the transaction. Agency by Ratification An agency by ratification is an agency that is affirmed after the fact. For instance, if an agent secures a contract on behalf of the principal and the principal subsequently agrees to the terms of the contract, it is likely that a court would hold that the agency relationship was created as of the time the initial negotiation was transacted. That agency relationship was then ratified by the action of the parties (when the principal signed and acted under the contract). The critical factor in determining whether a principal has ratified an unauthorized act by his or her agent is the principal s knowledge of the transaction and actions in light of such knowledge. If the principal fails to repudiate the acts of her or her agent, that failure or the acceptance of the benefits of the agent s acts is evidence of agency by ratification. Agency Liabilities One of the significant factors in any agency relationship is the liability that the agent or the principal may create for the other. Some of the more common theories under which real estate licensees in Texas are sued by one or more parties to a transaction include alleged liability for misrepresentations (as to a property s condition, size, amenities, features, encumbrances, etc.), failing to fulfill the terms of an agreement (breach of contract), general negligence, slandering title, failure to disclose known defects, failing to inform the client of property s appreciation in value, engaging in conduct that constitutes real estate fraud, and expressions of opinion. 7

8 When a buyer sues a seller (for example, over an issue concerning a defect in the property), it is common for the broker to also be named in the suit. This may occur even if the broker has no knowledge of the alleged defect. The seller s failure to make the disclosure may create liability for the agent. The reverse may be true, as well; for example, the broker s actions may create liability for the broker s principal. The Act provides that a party is not liable for misrepresentation or concealment of material fact made by a license holder in a real estate transaction unless the party knows of the falsity of the misrepresentation or concealment and failed to disclose knowledge of the falsity of the misrepresentation or concealment. Note, however, that the new provisions do not diminish the broker s liability for his or her own acts or the acts or admissions of the broker s supervised licensees. Additionally, expressions of opinion by real estate licensees are generally not actionable, provided that the opinion was not negligently provided and that a reasonable person would understand the statement to be an opinion. The practice of always quoting one s source for information when a broker conveys information to someone provides affirmative defenses in some cases and can reduce confusion and potential liability. Special Agency Agency relationships may also be classified as special agency relationships and general agency relationships. The relationship between a listing broker and the principal is normally deemed to be special agency (as is the relationship between a buyer and the buyer s broker and the relationship between a tenant and the tenant s broker). In a special agency, the agent does not have the authority to bind the principal. The broker s responsibility is limited to the specific matters for which he or she was hired (for example, marketing the property and other duties listed in the agreement). In practice, the principal has little, if any, control over the conduct of the agent. Therefore, any misrepresentations or other wrongful acts by the broker will result in the broker being liable for them rather than the principal. So, in a special agency relationship, the principal is not responsible for the acts of his or her agent. General Agency In a general agency relationship the principal is always responsible for the acts of his or her agent as long as that agent is acting within the scope of his or her duties. A general agency relationship exists between the salesperson and the sponsoring broker. The salesperson is the agent of the sponsoring broker, and acts for the broker when performing services for the principal. The general agency relationship gives a wide scope of authority to the salesperson (for example, the salesperson can bind his broker to contracts such as listing or other representation agreements). In the general agency situation, if the salesperson makes a misrepresentation to the purchaser, the sponsoring broker is responsible for that act, and the third party may sue the sponsoring broker or the salesperson or both. This may be particularly harsh when an agency has been created by ostensible authority or ratification (the principal might have an agent and not know it!). The principal may be responsible for those acts regardless of how the agency was created. General agency relationships do not typically exist between a broker and the broker s principal. It may be possible that a court could find that a special agency relationship has been converted into a general agency relationship. This may occur in a situation in which a seller benefits from fraud, or the seller knew of fraud and did not reject the benefits of that fraud, the seller may be jointly and severally liable for misrepresentations made by his or her real estate agent. Duties of the Agent to the Principal The agent acts in the capacity of a fiduciary. That is, there is a duty of trust, confidence, and honest business dealing that is owed to the principal. There may be communications between the principal and agent that could not be disclosed without breaching that fiduciary relationship. An example would be a principal who chooses to list a house for $100,000 but informs the broker that 8

9 $80,000 would be accepted from a qualified purchaser who offers good terms. The agent is, of course, under a fiduciary capacity not to disclose anything that would be adverse to the interest of the principal. The agent will want to clarify which information, if any, may be communicated to others concerning the seller s willingness to accept less than the asking price. Specific Disclosure Issues Sales Information A sensitive issue exists as to whether or not a licensee may disclose sales price or other terms of the sale to others after a closing. While this information may be considered or identified as confidential in a contract, the Act provides that a licensee, or notfor-profit real estate board, may provide information about real property sales prices or terms of the sale for purposes of facilitating, selling, leasing, financing, or appraising real property. Any entity providing this information is not liable to any other person as a result of providing the information, unless this disclosure is specifically prohibited by statute. TX. Occ. Code HIV Issues Several decades ago, there was concern whether or not a broker should disclose whether a previous occupant in a property had AIDS or HIV-related viruses. Fair housing laws now make it clear that a person with AIDS or an HIV-related virus is considered to have a disability and belongs to a protected class such that the information may not be disclosed. Section of the Act provides that the broker has no duty to make inquiry or disclosure about whether a previous occupant had or may have had AIDS or an HIVrelated illness. Death Under the Act, a real estate licensee has no duty to inquire about, disclose, or make representations concerning a death on the property that was a result of suicide, natural causes, or accidents unrelated to the condition of the property. Questions still arise as to whether a broker needs to or should disclose a death that occurred as a result of murder, condition of premises, or unnatural causes. Sex Offender Registration Section (e) of the Code of Criminal Procedure provides that a person s broker, salesperson, or other agent or representative in a residential real estate transaction does not have a duty to make a disclosure to a prospective buyer or lessee about registered sex offenders. Representing a Buyer. It is probably prudent for a licensee to be cautious about disclosing any information about sex offenders whether the licensee is an exclusive buyer s agent or an agent appointed to represent a buyer in an intermediary relationship. The Texas Department of Public Safety maintains a registered sex-offender database, which is available at Considering that buyers and sellers may have different criteria and preferences concerning such matters, it may be prudent to refer the parties to the database. Duties Owed the Principal Generally, a real estate broker, as an agent, owes his or her principal the duty of performance, loyalty, reasonable care, and an accounting for all monies received with regard to the transaction. Performance Performance indicates that the broker will use best efforts and diligence to market the property on behalf of the principal and to obey the principal s instructions as to asking price, condition of the property, and marketing practices. The duty means nothing 9

10 more than doing the job, which is obtaining for the principal the highest price then obtainable and known to the broker. Corresponding duties apply for the buyer s broker or the landlord s broker or the tenant s broker. Loyalty The duty of loyalty is a sensitive subject for real estate agents. How can a broker represent a seller to get the highest price for the house when also representing a purchaser trying to get the best buy for the same house? The Act provides that the conflict created by the in-house sales is resolved by the intermediary relationship as defined by the Act and by following the procedures outlined in the Act. Loyalty also implies the duty not to advance the broker s own interest in profit to the detriment of the principal and is the essence of the agent s fiduciary responsibility. Full Disclosure The duty of loyalty also includes the broker s duty of full disclosure to the principal. In addition to the obligations listed above under the Act, the TREC Rules require that the licensee convey all known information that would affect the principal s decision to accept or reject offers and to keep the principal informed of all applicable, significant information, TREC Rules A broker who places his own interest ahead of the client s interest may face breach of fiduciary allegation for failing to disclose material information to the principal. For instance, if the real estate appreciates in value and the broker buys the property during the listing period while failing to disclose that appreciation in value, a potential liability has been created for the broker. An example of nondisclosure is the flip sale. In this transaction, the broker may be liable if the broker acquires the property from his or her principal and sells it for a higher price to a prospective purchaser on the same day or soon thereafter. A broker must also disclose if the agent owns an interest in the entity that is the purchaser. TREC Rules require written disclosure by the licensee engaging in a real estate transaction on his or her own behalf. A broker is considered to be acting on his own behalf if he or she is a named party to the transaction or is working on the behalf of the business entity in which the licensee is more than a 10 percent owner, or is working on behalf of his or her spouse, parent, or child, TREC Rules (b). Reasonable Care The duty of reasonable care generally implies the broker s competence and expertise. The broker has a duty to disclose knowledge and material facts concerning a property and cannot become a party to any fraud or misrepresentation likely to affect the sound judgment of the principal. The broker may not give legal interpretations of the documents involved in a transaction. To give legal interpretations of an instrument is practicing law without a license and is specifically prohibited, TREC Rules Standards of conduct concerning reasonable care can be found in the Act, TREC Rules, and in customary practice in the industry. For example, is it customary and reasonable for a listing broker to obtain some information concerning a prospective buyer s financial ability to complete a proposed real estate transaction? Should a listing broker advise his or her client about changes in values during a listing period? What types of questions should a buyer s broker suggest that the buyer ask about the property and the history of the property? Accounting The duty of accounting requires that any money accepted in trust for another or on behalf of another must be promptly remitted to the person or deposited in a trust or escrow account according to the terms of an agreement. Such funds may not be commingled with the broker s or agent s own funds, TX. Occ. Code (b)(10) and (11). The duty of accounting also prohibits 10

11 a broker or salesperson from accepting an undisclosed commission, rebate, or profit on expenditures. TX. Occ. Code (b)(13). Duties of the Principal to the Agent Similar to the above duties, there are also certain duties that the principal owes to his agent. While these duties are not as concrete nor so distinctly spelled out by state statutes, the duties are important in determining the rights of the agent when the principal fails to live up to obligations created by the agency relationship. These duties are performance, compensation, reimbursement, and indemnification. Performance Performance is normally considered to be an agent s obligation; however, the principal is expected do whatever can be done reasonably to accomplish the purpose of the agency. Compensation Compensation is normally specified in the listing agreement or employment contract. Although the receipt of compensation is usually contingent on the closing of the sale or lease, in most real estate transactions the agent has earned his or her fee when he or she has produced a ready, willing and able buyer (usually evidenced by the signing of the purchase contract or lease). The earned fee is usually payable only upon the closing of the transaction. Nonetheless, compensation arrangements are negotiable and can take several forms. Reimbursement Reimbursement implies that the principal must reimburse the agent for expenses made on the principal s behalf. This does not mean that the principal has to reimburse the agent for the costs of advertising, entertainment, and other costs of doing business. An example of reimbursable expenses may include the situation involving an absentee landlord or seller if the agent is required to perform minor repairs and incur other small expenses in order to keep the property in good condition. When these expenses are made in good faith and within the scope of the agent s authority, the agent is entitled to reimbursement from the principal for funds expended on the principal s behalf. To avoid confusion and disputes, reimbursable expenses are usually authorized or identified in the agreement that creates the agency relationship. Indemnification Indemnification is becoming more important for the agent. This duty arises when the agent suffers a loss through no fault of his or her own while performing duties on behalf of the principal. An example is a broker making an innocent misrepresentation in performing acts on behalf of the principal. As previously discussed, the agent is almost always liable if the agent makes a misrepresentation to a third party. However, if the broker relied on a representation made by the principal, the agent may be reimbursed for losses because of the principal s misrepresentation. This often includes concealed defects and representation regarding the quality and condition of the property. 11

12 Duties to Third Parties Although the broker has a duty to act on his or her principal s behalf and only in the best interest of that principal, the broker has a duty of care to third persons by using fair and honest business practices. The agent cannot be a part of any fraud on behalf of the principal, and if a case arises where the principal asks the agent to lie or misrepresent certain material defects, the broker should refuse to engage in any such acts. A broker is liable to third parties for misrepresentations, particularly for failure to disclose certain material defects that may affect the buyer s good judgment and sound business practice. Section of the Act requires at least 3 affirmative disclosures a broker must make to a third party under certain circumstances. These are significant defects in the condition of the property under TX. Occ. Code (b)(3) and (4), advising a purchaser to have the abstract of title covering the real estate examined under TX. Occ. Code (b)(29), and making clear to the parties of the transaction which party the broker is working for under TX. Occ. Code (b)(7). Additionally, all licensees, when engaging in a real estate transaction in their own behalf, are obligated to inform any person with whom they deal that they are licensed (broker or salesperson) and shall not use their expertise to the disadvantage of a person with whom they deal, TREC Rules If a broker or agent receives a request for a copy of document from a person who signed the document, the licensee is obliged under TX. Occ. Code (b)(28) to provide the requested document. Buyer Brokerage A broker who represents a buyer may do so either under an oral understanding or under a written buyer representation agreement. Obviously, the written buyer representation agreement resolves a number of questions that may arise. Compensation Because it is common for listing brokers to offer to compensate buyer brokers or cooperating brokers for procuring buyers, it should be clear that the person who pays the commission is not necessarily the principal for the broker receiving the compensation. A broker can represent either party and be paid by either party, or both parties, provided that all commissions are disclosed. If a listing broker refuses to offer compensation, the buyer s broker would have to look to the purchaser or some other source for compensation. A cooperating broker does not have an agreement with a seller and therefore cannot sue the seller for a commission. Fee for Services and Rebates A fee for services is when compensation is based on services performed. This type or arrangement may be attractive to buyers who prefer to do their own research, obtain their own financing, and may not need any actual help until execution of the contract for sale or going to closing. Sellers, too, may choose to pay a lower fee to the listing broker if the broker provides a more limited range of services. Rebates of commission to principals do not violate the Act. Minimal Level of Services What if a broker refuses to perform any services, but expects to split the commission? For instance, a broker can access the MLS system to split the commission, rebate part of that commission back to the buyer and perform no services, leaving the listing broker with all the responsibility (and liability) in handling the transaction. The Texas Legislature has addressed this situation by requiring a 12

13 minimum level of service under the Act. These new minimum requirements provide that a broker who represents a party or who lists real property under an exclusive agreement must inform the party of material information relating to the transaction, including the receipt of an offer by the broker, answer the party s questions, and present an offer to or from the party. Dual Agency The Act provides a broker must agree to act as an intermediary if the broker agrees to represent in the transaction (1) a buyer or tenant; and (2) a seller or a landlord. This eliminates dual agency, and creates a duty for the broker who represents both parties to get written consent from each party to act as an intermediary in the transaction, which also must contain a written consent of the parties concerning the source of any expected compensation to the broker. Intermediaries An intermediary is defined under the Act as a broker who is employed to negotiate a transaction between the parties and for the purpose may be an agent to the parties to the transaction. A real estate broker who acts as an intermediary between the parties may not disclose to the buyer or tenant that the seller or landlord will accept a price less than the asking price unless otherwise instructed in a separate writing by the seller or landlord; may not disclose to the seller or landlord that the buyer or tenant will pay a price greater than the price submitted in a written offer to the seller or landlord unless otherwise instructed in a separate writing by the buyer or tenant; may not disclose any confidential information or any other information parties specifically instruct the real estate broker in writing not to disclose unless otherwise instructed in a separate writing by the prospective party or required to disclose such information by the ACT or a court order, or if the information materially relates to the condition of the property; shall treat all parties to the transaction honestly, TX. Occ. Code ; and must comply with the Act, TX. Occ. Code The statute provides that a real estate broker may act as an intermediary between the parties if the real estate broker obtains written consent from each party to the transaction for the real estate broker to act as an intermediary in the transaction, and written consent of the parties state the source of any expected compensation to the real estate broker. A written employment agreement, which also authorizes the real estate broker to act as an intermediary, is sufficient to establish written consent if the written agreement sets forth, in conspicuous bold or underlined print, the real estate broker s obligations. If a real estate broker obtains the consent of the parties to act as an intermediary, the broker may appoint, by providing written notice to the parties, one or more licensees associated with the broker to communicate with and carry out instructions of one party, as well as one or more other licensees associated with the broker to communicate with and carry out instructions of the other party as long as the parties consent and authorize the broker to make the appointment, which is presumably done in the listing agreement. 13

14 Property Management Responsibilities Different problems arise if a broker is acting as a manager of real estate, rather than simply as a broker in a sales transaction. Duties to owners and third parties in this situation relate to service contracts for services to be performed on a particular project, as well as to properly maintaining the property such that no one suffers any injury caused by the broker s negligence in maintaining the property. The problem of management liability may also occur when the property management company, or broker, does not want to become obligated for the payment of the expenses of a project. However, vendors and suppliers who perform many of the services must know whom they should pursue in the event they are not paid. The fundamentals of principal and agent again apply, and the liabilities can be summarized as follows: When an agent (broker) acts on behalf of a principal who is known to the service company performing the work, and the agent is acting within the scope of his or her authority, the principal is liable, and the agent will not ordinarily be personally liable to the third party. If the agent exercises ostensible (apparent) authority that he or she does not have, and the third party reasonably relied on such representation, an agency will be presumed, and the principal is still liable, rather than the agent. The principal may also ratify an agent s acts after they have been performed (even if they were wrongfully performed by the agent) and become liable for the agent s acts. However, if the agent was not acting within his or her scope of authority, the principal has a cause of action against the agent to recover any losses. If the broker discloses the fact that he or she is an agent but does not disclose the identity of the principal, the broker will generally be considered personally liable on the agreement. It logically follows that the third party is advancing services only on the agent s good name and promise to pay, even though the third party knows that the broker is acting as an agent. A third party performing services should not expect to be paid by a principal when he or she does not know who that principal is or anything about that principal s ability to pay. If the third party subsequently discovers the identity of the principal, both the principal and the agent may be liable to that third party. If the principal is undisclosed, and the agency is also undisclosed, the agent is liable to third parties for all acts that he or she performs, as if they were the principal s. The agent is always liable for his or her torts or contracts if the agent commits an act constituting deceit or misrepresentation. Even if the third party sues the principal and recovers, the agent would still be liable to the principal. Termination of Agency Once it has been determined that an agency agreement exists, it can be terminated by acts of the parties or by operation of law. Termination by Acts of the Parties Termination of an agency agreement by acts of the parties can be accomplished by either party or by both parties. If both parties agree to terminate the agency agreement, it is simple to agree to the termination by mutual consent. The termination can also be accomplished by completion of the agency objective (i.e., the property being sold) or by expiration of the stipulated length of time as set out in the listing agreement or agency contract. Termination by One Party Termination of the contract by one of the parties tends to be more complicated. A principal may unilaterally revoke the agency or listing agreement at any time if there is cause to do so, but may be exposed to contractual liability if he or she is in default under the agreement. If there is no cause to terminate the brokerage service agreement, the broker will likely have the right to recover the amount of compensation due under the agreement or the reasonable value of services and reimbursement for expenses. 14

15 Conversely, the agent may be able to renounce the contract if the agent feels that the principal is not helping to complete the agency objective. The agent may be liable for damages if there is no just cause to terminate the contract. In both cases, what is just cause is a fact question that has to be determined by a jury. Termination by Operation of Law Termination of the agency relationship by operation of law occurs upon the death of either the principal or the agent, insanity of either party, or change of law. Since the agency contract is a contract for personal services and is often purely unilateral, the death of either party terminates the obligations of either party. This can always be modified, however, if the broker is a corporation, the seller is a corporation, or either are entities rather than natural persons (i.e., a trust or limited partnership). Similarly, insanity of either party limits the contractual capacity of either party to the point that the principal-agent relationship cannot be completed. Determinations and definitions of sanity are difficult to determine. If a change of law, supervening illegality, makes a contract become illegal, any contract that is illegal is void. An excellent example of this arose recently. The listing broker earned a substantial commission by negotiating the sale of several savings and loans. While the transaction was pending, however, Congress made the payment of commissions to brokers for this type of sale illegal. The broker was then denied the commission because of supervening illegality. It was legal initially, but it became illegal during the pendency of the transaction. Once the confidential relationship is established, it cannot just be disregarded or ignored. If the agent takes advantage of the principal because of insider information, or if the agent advises someone else to do so, the fiduciary duty has been breached. Therefore, even if the agency terminates, the fiduciary duty may not end. For instance, a broker cannot become a principal on the same transaction and shed fiduciary obligations. The agency relationship is presumed to continue once it is established. The agency liabilities may continue far beyond the termination of the agency relationship. 15

16 Chapter 4 Organizational Structure Many licensees have utilized legal entities for their practices. The primary benefits of legal entities commonly selected by licensees are liability protection of the individual licensee and pass-through tax status (no double taxation). The selection of the appropriate entity for a particular licensee should be made after careful consideration and consultation with legal and accounting advisors. This discussion is not intended to replace that process, but to provide information for licensees to understand different types of legal entities. If a licensee establishes a legal entity, the entity must be licensed in order to be paid commissions. The legal entity must designate an individual broker who will be responsible for the actions of the legal entity as a licensee. The designated broker must be an officer of the corporation, a manager of the limited liability company, or a general partner of the partnership. If the designated broker owns less that 10 percent of the legal entity, the legal entity must obtain and maintain errors and omissions insurance of at least $1 million. Assumed Name A legal entity may have one legal name and do business under another assumed name. If a legal entity elects to do business under an assumed name, the licensee should file the assumed name with the Secretary of State and the local county clerk. TREC Rules require licensees using an assumed name to file the name with TREC; licensees may use the TREC DBA form (Appendix A). Types of Legal Entities Corporation A corporation is chartered by the State of Texas through the filing of articles of incorporation with the Secretary of State (now known as a certificate of formation). Corporations have the designation inc or corp after their names. For-profit corporations are owned by shareholders whose ownership interest is evidenced by shares, usually in paper form. The governance of a corporation is vested in its board of directors, established in the articles of incorporation and then annually elected pursuant to the terms of the corporation s bylaws. The corporation is operated by officers, including a president, secretary and treasurer. Internal governance is structured in bylaws adopted initially by the board of directors. Bylaws can be modified by the shareholders in accordance with the amendment provisions in the bylaws. The shareholders may govern the relationship between themselves in a shareholder agreement. Neither the bylaws nor the shareholder agreement are filed with the Secretary of State (or elsewhere). An individual broker who is an officer must be the designated broker for a corporation that seeks to hold a corporate real estate broker s license. One type of corporation is the Subchapter S corporation, which is named after a section in the Internal Revenue Code. This type of special corporation is simply a typical corporation that makes a special election with the IRS. The special election results in no taxation at the corporation level. Instead, all income is allocated to the stockholders and included in their tax return. 16

17 Regular corporations (known as C corporations ) pay income taxes at the corporate level. When distributions are made to shareholders, the shareholders include the distribution in their taxable income. Partnership Another longstanding legal entity is the partnership. This broad category has several types, but for this discussion only general and limited partnerships will be discussed. All partnerships are associations of two or more individuals or entities, which share profits and losses in a business transaction. General Partnership The general partnership is simple, but does not limit liability. All partners of a general partnership have full liability for all partnership debts. No written agreement is required, although it is highly recommended. Due to the lack of liability limitation, general partnerships have not been in broad use in the real estate industry. Limited Partnership Limited partnerships have been the primary vehicle used in the real estate industry. A limited partnership is created by filing with the Secretary of State and has the designation LP or LLLP, as appropriate, after its name. The partners execute a limited partnership agreement, which is not filed with the Secretary of State, to set forth the rights and duties of the general partner and the limited partners. There is never taxation of partnerships at the entity level. Instead, all income is allocated to the partners (as provided in the limited partnership agreement). Limited partnerships are owned by both limited and general partners (usually only one general partner). The general partner has unlimited liability for the obligations of the partnership but also has the power to manage the limited partnership. General partners are usually set up as legal entities themselves, to limit liability, but such limited partnerships may not be licensed due to the requirement that the designated responsible broker must be an individual. Limited partners have limited liability, rights to profits, and such approval rights over important decisions by the partnership as are provided in the limited partnership agreement. However, a limited partner may not manage the affairs of the partnership without losing limited liability. One type of limited partnership is the limited liability limited partnership, often utilized by professional firms, such as lawyers and accountants. For a partnership to be licensed, an individual broker who is a general partner must be the designated broker. By being an individual general partner, the designated licensee is personally liable for all obligations of the partnership. Limited Liability Company The majority of legal entities created today are limited liability companies (LLC). An LLC is created by filing articles of organization with the Secretary of State. The LLC is intended to merge the best aspects of the corporation and the limited partnership. With limited liability, pass-through tax status, and no requirement for a general partner, it is designed to simplify business entities and provide maximum flexibility. The owners of a limited liability company are members. The LLC may be managed by a manager or by the members without a manager. The manager does not have liability for the LLC s obligations, therefore the manager may (unlike in a Limited Partnership) be an individual. There is no board of directors, instead the members control the manager through a company agreement, which is very similar in form and function to a Limited Partnership Agreement. Limited liability companies have become common in the real estate industry. A limited liability company will have the designation LLC after its name. For a limited liability company to be licensed, an individual broker, who is a manager, must be the designated broker. 17

18 Sole Proprietorship A sole proprietorship is a single individual who is engaging in business without a formal organization. The sole proprietorship may be conducted under an assumed name. There is no additional requirement to license a sole proprietorship other than the license for the individual owner. The sole proprietor is personally liable for business obligations. 18

19 Chapter 5 Operational Policies and Procedures Need for Agency Policy Scope of Authorization Section of the TREC Rules requires brokers to maintain written policies and procedures addressing a variety of matters, including the relationship between the broker and agents sponsored by or associated with the broker, competency of agents, compensation issues, maintenance of trust accounts, and maintenance of business records in general. Errors and Omissions Policy An errors and omissions policy (E & O policy) is a contract between the insurance company and the broker/licensee; therefore, each policy should be scrutinized to determine coverage issues and duties of the insured. Most E &O policies require timely and full disclosure of potential claims. Brokers/licensees should create a written risk management policy that includes broker safety, client safety, cell phone use, checklists for office personnel, listing and contract files, copyright and license obligations; and other risk management issues the broker deems necessary. Unlicensed Assistants Real estate licensees often use unlicensed personnel for assistance in conducting their real estate brokerage activities. Care must be taken to ensure that the unlicensed person does not conduct any of the activities for which real estate licensure is required. The following are activities which may and may not be legally conducted by unlicensed persons. Sections (a) and of the Act establish that it is a crime for an unlicensed person to engage in activity for which a real estate license is required. The licensee who employs an unlicensed person might be criminally charged for the crime, as well. In addition, TREC may take disciplinary action against a licensee who pays or associates with an unlicensed person who engages in activities that require a real estate license. Authority for this disciplinary action is set out in the Act (b)(11) and (26). For these reasons, it is important to distinguish between those activities that require a real estate license and those that do not. Section (1)(a) of the Act sets forth a list of activities that require licensure. The real estate brokerage activities must be for another person or entity. The activities must also be for a fee or something of value, or with the intention of collecting a fee or something of value. Direct Activities by Unlicensed Assistants The list of activities requiring licensure may be summarized and placed in 2 categories (this is a summary only and not all inclusive). First are those activities in which a person directly helps another buy, sell, or lease real property. These activities, such as negotiating a listing agreement with a property owner, spending the afternoon with a couple showing houses for sale, or negotiating 19

20 a contract to buy or lease real property, obviously require licensure if done for a fee or something of value. These direct activities are seldom the subject of debate or controversy. Indirect Activities by Unlicensed Assistants FAQs The second category of activities might be referred to as "indirect" activities and are more troublesome. Section (a)(viii) of the Act requires licensure of those persons who procure or assist in procuring prospects to buy, sell, or lease property. Section (a)(ix) of the Act requires licensure of those persons who procure or assist in procuring properties to be bought, sold, or leased. If the words assist in are read broadly enough, virtually everyone working in a real estate office would need a license. Common sense dictates, however, that many activities that do not require licensure can be legally conducted in a real estate brokerage. Sometimes there may be only a thin line between activities that require licensure and activities that do not. The foregoing general TREC Rules and the following discussion of factual situations may help licensees accurately draw this line. 1. May an unlicensed person, identified as such, make calls to determine whether a person is interested in buying or selling property, or has property they wish to sell, and if so, make an appointment for a licensed agent to talk to them? No. Often referred to as telemarketing, any such activities conducted in Texas must be conducted by a licensee. In Tex. Atty. Gen. Op. H-1271 (1978), the attorney general concluded that a license is required. Also, 535.4(e) of the TREC Rules makes clear that all solicitation work must be conducted by licensees. 2. May an unlicensed person sit in on an open house? Yes, but care must be taken that the unlicensed person does not "show" the house to prospective purchasers. Section 535.4(c) of the TREC Rules makes clear that only licensed agents are allowed to show properties. On the other hand, 535.5(h) of the TREC Rules also specifically allows a broker to hire an unlicensed person to serve as a hostess, attendant, or custodian" at homes offered for sale by the broker. TREC Rules do not define these terms, and such a hostess should be limited to welcoming the visitors. The hostess may register the guests and refer inquiries to a licensee. Clearly, the hostess must not point out features of the home or neighborhood to visitors; however, as is the case with secretaries and receptionists discussed below, the hostess may distribute a flyer or brochure that describes the property. 3. May unlicensed assistants set appointments to show a listing? Yes. Under the general TREC Rules stated above, it is permissible for an assistant to call a homeowner and schedule an appointment for the broker to bring a potential buyer to see the home. If the broker then becomes tied up on other matters, can the unlicensed assistant drive the purchaser to the listing and let them in the home? Again, yes, but extreme care must be taken that the assistant does not engage in showing the property. The assistant should identify himself as an unlicensed assistant and explain the assistant s limited role. Any questions that arise regarding the property or the purchase of the property must be referred to a licensee. 4. May the unlicensed assistant place for sale signs; open a property or accompany inspectors; place newspaper advertisements as directed by the broker? Yes, subject to the following guidelines. Section 535.5(g) of the TREC Rules provides that answering the telephone and acts of a secretarial nature do not require licensure. Clerical employees need not be licensed so long as they do not engage in solicitation and do not hold themselves out as licensed agents. Further, an unlicensed clerical or secretarial employee, identified to callers as such, may confirm information concerning the size, price and terms of property advertised. Taken together, this means that an unlicensed person may, after identifying himself or herself as an unlicensed person, confirm information previously advertised to callers or persons dropping by. The unlicensed person should not give information 20