Be Afraid! Your Misuse of the Transaction Brokerage Relationship
By CAR’s General Counsel Scott Peterson
Over the previous year, the Division of Real Estate has undertaken an exhaustive, line-by-line review of all existing Commission Rules and Regulations (“Commission Rules”) for Colorado licensees. The Commission Rules (Rules A-K) comprise Chapter 2 of the Real Estate Commission Manual (which each of you, I am certain, have sitting immediately available on your desk). In conjunction with Colorado license law statutes, the Commission Rules provide the framework of regulation for all Colorado licensees including, of course, every Colorado REALTOR®.
In reviewing the Commission Rules, the Division of Real Estate engaged a broad, statewide cross-section of industry stakeholders for input on revisions, clarifications, eliminations and supplements to the existing rules. The final result of the rule review and all of the proposed Commission Rules (available here) will be considered by the Commissioners at their meeting on August 5,2019. If approved, the newly-constituted rules would become effective January 1, 2020. While the bulk of the proposed changes are innocuous, I believe the significantly modified structure is substantially clearer and more legible. I would like all of you to have a look at the proposed changes via the link above.
One of the important substantive changes being proposed is to the current Rule E-40. The current version of Rule E-40 reads:
“A broker shall not enter into a brokerage relationship with one
party as an agent and the other party as a transaction broker. A broker who
works with both the buyer and seller in the same real estate transaction may do
(1) a Transaction-Broker for both buyer and seller;
(2) a single agent for the seller, treating the buyer as a customer; or
(3) a single agent for the buyer, treating the seller as a customer.
These options shall be disclosed and made a part of the agreement between the parties to the listing contract, right to buy contract or tenant contract, whichever is appropriate.”
Based on the existing Rule, the Transaction Brokerage (“TB”) relationship is ONLY available to a licensee who is offering Uniform Duties to BOTH the buyer AND the seller in a transaction. This is regardless of the other party already having an existing brokerage relationship with another REALTOR®! In other words, if you are working with a buyer in a transaction as a TB (a very common scenario), and the seller is represented by their own agent or TB (even more common), Rule E-40 says that you, as the buyer’s TB, own identical (Uniform) duties to BOTH the buyer AND the seller. Think about the outrageous implications of the current rule!
Under the current version of Rule E-40, a REALTOR®, as the buyer’s TB, has a Commission Rule responsibility to “keep the [already represented] Seller informed as to the transaction;” and to “present all offers to the [already represented] Seller,” and to “advise the [already represented] Seller regarding the transaction,” and to “advise the [already represented] Seller to seek legal counsel.” Absolute nonsense! Moreover, imagine the reciprocal: If you are representing a seller as the listing broker and the buyer’s TB has the temerity to offer those Uniform Duties to YOUR CLIENT! I would spend my life sitting in Ethics hearings (Article 16) and the Division would be flooded with E-13 (Sign Crossing) complaints! The current interpretation of the statute simply makes no rational sense and, more importantly, EVERY SINGLE REALTOR® IS DOING IT WRONG!
In order to address the overly narrow interpretation of the current Commission Rule E-40, the industry stakeholders have proposed an interpretation that is substantially more consistent with both common practice and common sense. Proposed Rule 6.7 (which would become the new “E-40”) would read:
“Brokers or Teams working with Consumers on Both Sides of the Same Transaction. Neither Brokers nor Teams may enter into a Brokerage Relationship with one Consumer as a Single Agent and the other Consumer as a Single Agent or Transaction-Broker in the same transaction. If properly disclosed, in writing (e.g. Listing Contracts), the Broker or Team that works with both Consumers in the same real estate transaction may do so as:
A. A Transaction-Broker for both Consumers to the transaction;
B. A Transaction-Broker for one Consumer in the transaction and treating the other Consumer as a Customer; or
C. A Single Agent for one Consumer and treating the other Consumer as a Customer.”
Under the new proposed rule, a REALTOR® would only owe appropriate (Uniform and/or Fiduciary) Duties to a party with whom they actually have a brokerage relationship. Go figure! In other words, a REALTOR® working with a buyer as a TB would only owe Uniform Duties to the buyer (unless they also establish a TB relationship with the seller). This rule change is entirely consistent with well established practice and, importantly, avoids the issue of Article 16 violations and sign crossing.
Perhaps most importantly, the proposed rule change benefits consumers. There are many, many scenarios when a consumer explicitly DOES NOT WANT a brokerage relationship with any REALTOR®. Maybe the consumer is a home builder, a sophisticated investor, an institutional/commercial owner, or an adamant “do-it-yourself-er?” Under the current rule, a TB relationship is, quite simply, FORCED on that unwilling consumer. Under the proposed rule, an unwilling consumer would not have a brokerage relationship forced on them.
Quite simply, this proposed rule change benefits both REALTORS® and consumers. It acknowledges the current (very common) practice and prevents REALTORS® from unwittingly violating Commission Rules in typical TB relationship scenarios. Unfortunately, the change is likely to face some opposition as the Commissioners consider the rule’s adoption. Hopefully, the Commissioners will adopt the proposed rule as currently drafted so that REALTORS® finally have an appropriate interpretation of their brokerage relationship obligations!
Check the Fall Edition of the Colorado REALTOR® Magazine for an update on the Commission’s decision on this rule change and an article on “Why I Hate the Transaction Brokerage Relationship!”
For this article and more, please see CAR’s July 2019 Colorado REALTOR® Magazine by clicking here.