New law alters relationships among brokers, buyers and sellers

Summer 2005
By Robert J. Moriarty Jr. and David Murphy

The existing statute, G.L.c. 112, Registration of Certain Professions and Occupations, has been amended by St. 2004, Chapter 149, Section 156 by inserting G.L.c. 112, §87AAA13/4 (the “Act”).

Real estate brokers and salespersons are required to disclose the nature of the relationship and related fiduciary duties,if any, to purchasers and sellers through disclosure forms issued by the Massachusetts Board of Real Estate Brokers and Salespersons (the “Board”).

Additional disclosures may be required as the transaction progresses. The Board has issued regulations interpreting this law and forms to implement the required disclosures, both of which may be found on the website of the Board of Registration of Real Estate Brokers and Salespersons (www.mass.gov/dpl/boards/re).

In the wake of the Act, there will be a number of different types of possible relationships between real estate professionals and their clients or customers, some the traditional agency concepts with which we are all familiar and some new concepts that are not entirely familiar.

The Act was passed as an outside budget item and did not have public hearings or opportunity for amendments prior to its enactment. It will take some time before we are able to understand all the implications of the new relationships for our clients. The basic forms of the relationships permitted under the Act are set forth herein.

Traditional agency

The traditional concept for the sale of real estate has typically been one in which all brokers or salespersons involved in the transaction represent the seller, and the buyer is not represented, even though buyers have often mistakenly believed that the agent was also “representing” them. Under this form of representation the agent owes the seller the duties of loyalty, full disclosure, confidentiality, to account for funds, reasonable care and obedience to lawful instruction.

This form of agency began to change in the late 1980s when the concept of the “Buyer Broker” became into use. Under this theory, the buyer agent’s obligation was to the buyer only and that person did not have the traditional obligations to the seller.

There have always been theoretical issues with respect to payment of commission to a buyer broker by the seller and whether that raised potential conflict issues, but those issues have always been resolved and today the buyer broker is an accepted form of agency. The buyer broker owes the same duties to a buyer that a traditional broker owes to the seller.

These forms of agency, either seller or buyer, also have extended to the brokerage firms themselves. Under this traditional office policy, the fiduciary obligations of the broker to the seller or purchaser that it represents extend to the entire firm. If a broker or salesperson was engaged as a seller broker or as a buyer broker, then everyone in that firm will represent the seller or the buyer, only.

Under the Act, brokers and salespersons may continue to use the traditional form of agency in which the agent represents only the seller or the purchaser and does not represent the other party.

Dual agency

Brokers and agents have always struggled with the dilemma of representation of a seller and a purchaser in the same transaction. It is not possible to provide the type of loyalty and duty owed to a principal when the two parties have such diametrically opposed purposes in the same transaction.

This situation typically occurs when a broker represents a seller of a particular

property and then a buyer with whom someone else in the same office is working, or possibly someone who is not represented, expresses an interest in that property. This may also occur where a single broker represents both purchaser and seller or where different brokers may have brought the seller and the purchaser to the firm.

The Act has provided at least two possible outcomes for this situation. Under §87AAA13/4(b), a real estate broker or salesperson may act as a dual agent who represents both the purchasers and sellers. This requires a full written disclosure of the nature of the representation and the informed written consent of both the prospective purchasers and sellers to the dual agency.

Under the Board’s regulations, a dual agent shall become neutral with regard to any conflicting interests of the purchaser and the seller. The dual agent does not have to fully satisfy the duty of loyalty, full disclosure, reasonable care, and obedience to lawful instruction, but shall have the duty of confidentiality of material information and the duty to account for funds.

Under some circumstances this may be an effective solution, but often it does not work for a brokerage firm. Sellers are often not pleased to be told that the person or agency with whom they are working to sell their home, and to whom they are to pay a substantial commission, are suddenly not working on their behalf but rather are now working as a neutral without the traditional duties of an agent to his principal.

It does not inspire confidence in sellers and can result in disputes and future lost business in a business that relies so much on word of mouth and customer satisfaction for future listings. The same issues confront a buyer broker when he or she must inform the buyer that they are no longer representing the buyer, but will now be neutral in the transaction.

Designated agency

A possible solution, particularly for larger brokerage houses to this dilemma is contained in the Act. Under §87AAA13/4(c), a brokerage firm may adopt what is termed a “designated agency policy.” Under this policy, a licensee employed by the brokerage firm may act as the designated agent who represents the sellerin a particular transaction.

A different licensee in the office may then be designated as the designated agent for the purchaser in the same transaction.

If designated agents affiliated with the same brokerage firm represent a purchaser and seller in a transaction, the appointing broker or agency shall be a dualagent and neutral as to any conflicting interest of the seller and the purchaser but will continue to owe the seller and purchaser the duties of confidentiality of material information and to account for funds.

Under this circumstance, the brokerage firm and all other brokers and salespersons engaged by it will also be dual agents with only the responsibilities of a dual agent to the seller or purchaser as set forth above.

This requires a full written disclosure and informed written consent by both the seller and the purchaser. The designated agent will owe the seller the duties of loyalty, full disclosure, confidentiality, to account for funds, reasonable care and obedience to lawful instruction.

All other real estate brokers or salespersons affiliated with the appointing real estate brokerage firm will not represent the seller nor will they have any other duties to that seller, and may potentially represent one or more potential purchasers for a particular property. A designated agent has an affirmative obligation to disclose known material defects in the property.

One interesting aspect of the designated agency is what appears to be an attempt to modify the traditional measures of consent in an agency context. The Act states there shall be a conclusive presumption that a purchaser or seller has consented to a designated agency relationship if he has signed a disclosure form that substantially contains the descriptions required by the law no later than the date the purchaser makes or submits an offer to purchase the property, or that a purchase and sale agreement is executed, whichever occurs first.

This is a dramatic shift in the burden of proof in the event of a dispute. Under existing rules of agency, the agent would have the burden of proving that there was proper disclosure and informed consent.

The Act appears to take the issue of consent out of dispute by providing that execution of the form is conclusive. Several commentators have pointed to this as a significant issue for consumers and one that is likely to result in litigation.

This type of relationship would appear to be the one that most brokerage firms will choose to implement. It permits the brokerage office to provide representation to a seller and a purchaser in the same office, while at the same time maintaining at least the façade that the office is fully representing the party, and not just as a neutral in a dual agency.

Sub-agency

Sub-agencies are recognized by implication under the Act. Section 87AAA 13/4(e) of the Act provides that no real estate broker or salesperson shall enter into or offer any sub-agency relationship agreement with another real estate broker or salesperson when marketing a property for sale without informing the seller about vicarious liability and obtaining the written consent of the seller.

The seller or purchaser must be informed that the secondary or subagent’s actions may subject the seller or purchaser to vicarious liability and consent must be in writing.

Facilitator

Section 87AAA13/4(f) of the Act creates a new concept in stating that a real estate broker or salesperson may render services as a “facilitator.” The facilitator does not represent either the purchaser or seller and does not act in an agency capacity.

A real estate professional will have no fiduciary responsibility if there is no formal agency relationship.

The Board’s regulations state that a facilitator has a duty to present all real property honestly and accurately, disclosing all known material defects and accounting for funds. The facilitator does not have a duty of confidentiality with regard to any information received by the purchaser or seller.

This is not a concept that has ever been previously recognized in Massachusetts. It is not well defined in the Act and appears on its face to be contrary to any notion of protection of consumers.

This new provision sanctions the ability of a person to act in a transaction without duty, obligation, or responsibility to either the seller or to the purchaser in a transaction other than the base duty set forth above. This is a concept that has been rejected in many other states when considered and has been rejected by the National Association of Realtors.

Timing of disclosures

A real estate broker or salesperson must present a disclosure at the first personal meeting with a purchaser or seller to discuss a specific property. No disclosure is required at an open house. The real estate professional must disclose the kind of relationship the firm offers.

The broker must also provide proper disclosures at each point through the transaction at which the relationship may change. If, for example, an office is initially representing a prospective purchaser as a buyer broker, and that client expresses an interest in a property listed by the same agent or office, then an additional disclosure is required since the broker would then be either a dual agent, or would become a designated buyer agent and the office would be a dual agent. It will be interesting to watch the practices develop in brokerage houses to handle these required disclosures and the timing required.

Summary

It will take a period of time for the issues associated with the new relationships created by the Act to be worked out. The implementation of the Act poses concerns for consumers, particularly the designated broker concept.

The Act erodes the designated agent’s common law duty to sufficiently inform the client by providing that the signed disclosure form is a “conclusive presumption” that the client has consented to the designated agency relationship. Consumers need to be more aware of the nature of the representation provided by a broker. The consumer can no longer assume that everyone in an office is working for them.

On the other hand, however, the Act has helped to provide more specificity as to the relationships and what they involve. The Act will require moredisclosures that provide more opportunity for sellers and purchasers to understand exactly who represents them and the nature of that representation.