New Brokerage Rules May Prove Troublesome

BY SCOTT B. OSBORN
Graham & Dunn

In seeking to avoid liability for representing both buyers and sellers, Washington's real estate brokerage industry negotiated legislation which, while authorizing dual agency, may on balance prove troublesome to the industry.

The Washington Agency Reform Act became effective Jan. 1, 1997, allowing salespersons in the same office to represent buyers and sellers in the same transaction. But it also imposes non-waivable duties to clients, eliminating brokers' ability to control their client relationships through contract.

Anyone dealing with the brokerage community in 1997 will recognize the changes mandated by the Act from the pamphlet required to be distributed. The pamphlet describes the broker duties, including the duty to exercise reasonable skill and care, to communicate all offers, to deal honestly and in good faith, and to disclose material facts known by the agent which are either not apparent or not readily apparent.

Washington's brokerage industry actively sought the Agency Reform Act, which was passed in March 1996, after class action lawsuits for commission refunds were filed by clients of large

Is protection worth imposing new duties on the industry?

brokerages in the Midwest. The suits arose from situations in which agents of the same broker represented both the buyer and seller in the same transaction, allegedly violating the duty of loyalty.

Fearing that similar suits might be brought in Washington state, brokers here worked with various interested parties, including the Washington State Bar Association, to create legislation that would protect Washington brokers from similar suits.

While Washington courts have not been unduly harsh in imposing liability on the brokerage community, there are problem areas. The law of agency often imposes liability on one broker because of the wrongful conduct of another broker. Salespersons who believed they represented the buyer can be surprised to find that they may be liable for misrepresentations by the seller's agent and vice versa.

Changes in the brokerage practice, as well as the industry's perception that it is viewed as a "deep-pocket" in disputes between buyers and sellers, also precipitated the Agency Reform Act. Consolidation has significantly changed the industry. Today, there are far fewer brokers than 10 years ago, and the brokers are larger with many more offices.

While these changes benefit the public through better access to information and better service, fewer brokers increased the potential for conflicts of interest. Agents from different offices of the same brokerage compete over properties, which are often listed through multiple listing services. Several salespersons from the same broker can become involved in a transaction: a broker with whom the property is listed; a salesperson representing a potential buyer; and salespersons representing the seller.

The Agency Reform Act follows on the heels of the Real Estate Disclosure Act of 1994, which requires specific written disclosures by the seller of residential property about the condition of the property. Both Acts were promoted by the brokerage community as means of insulating brokers from claims that the industry feels should be between buyers and sellers.

But is the statutory protection for dual agency in the Agency Reform Act worth the imposition of non-waivable obligations? Some observers feel that the industry has converted a benign judicial climate into mandated duties that, on balance, will be detrimental to the industry.

These duties, and the Act, apply to all persons who must obtain a real estate broker or sales license. This includes not only brokers handling real estate sales, but also agents who handle leases, some property management functions and sales of business opportunities.

Some of the other significant provisions of the Act include:

• All salespersons are the buyer's agent unless other written arrangements are made, such as a written listing agreement with the seller.

• Salespersons cannot be liable for failing to inform purchasers that the property was a site of a murder, suicide, violent sexual assault or used for illegal drug activity.

• The seller of property is not liable for acts or omissions of the seller's agent unless the seller somehow participated.

• Sellers and buyers are not deemed to know what their respective brokers know. This so-called "imputed knowledge" has also been eliminated between agents and subagents.

The Act did not change the basic regulatory system applicable to brokers. Brokers continue to be licensed by the Washington Department of Licensing. Salespersons who work for brokers are also licensed and every licensed salesperson must "hang" their license, or be affiliated, with a broker. Brokers are responsible for supervising salespersons.

The Act does not address some on-going problems for salespersons, including liability for drafting real estate agreements. Filling in form real estate agreements has been held to be the practice of law. The Washington Supreme Court has authorized this activity in limited situations by licensed salespersons, but the standard of care is that of a practicing attorney. Brokers can be exposed to legal malpractice or unauthorized practice of law claims if documents vary from clients' instructions or brokers exceed court-imposed limits on what documents they may prepare.

Additionally, conflicts of interest and confidentiality will remain troublesome for brokers. Recently, a broker was found to have violated the Washington Consumer Protection Act because he failed to take adequate precautions to protect information about a prospective sale. A disappointed buyer claimed another agent in the broker's office had access to the pending offer and used that information to make a competing bid on the property.

The Act will focus more attention on the conduct of brokers and salespersons, if for no other reason than the distribution of the disclosure pamphlet reminding buyers and sellers of the responsibility of their agents. The brokerage industry hopes that the Act contains enough additional protections from liability to overcome increased public sensitivity to the salesperson's duties to the client.

Scott Osborne is a shareholder in the Real Estate & Commercial Finance Group of Seattle-based law firm Graham & Dunn.