Brokers and salespersons are faced with many complexities in today’s real estate transactions. At times situations unfold that could develop into a lawsuit or at least have the potential for a lawsuit. While there is no guarantee that a broker or salesperson will not be sued, there are steps that all real estate licensees can take to reduce their risk and exposure to liability.

Unauthorized practice of law
In the licensee’s everyday practice, it is important to be aware of situations which may constitute the unauthorized practice of law. Perhaps one question to ask would be, "Am I drafting this document for my own benefit or someone else’s benefit?" For instance, if licensees choose to draft their own listing agreements rather than have their attorney do it, the licensees could do this under the general rule that persons may do legal work on their own behalf. In other words, persons have a right to represent themselves.

Following are several examples in which unauthorized practice of law issues may arise: Suppose a seller comes to the licensee with a question about the interpretation of a particular clause in a purchase contract.

The seller may be asking the licensee for legal advice. The licensee can explain generally what that provision in the contract is intended to cover. However, the licensee should not give an opinion as to whether that provision is adequate for seller’s situation or draft contract language to fit the needs of the seller. This would constitute the practice of law on behalf of another.

The licensee should also be careful when requesting preparation of a deed and "green sheet" on behalf of a client. Decisions will need to be made such as how a party is going to take title or what exceptions to include in the deed. These decisions should be made by the parties. This does not mean the licensee cannot assist the client in making connections with an attorney. Also, the licensee should not be recommending that the parties do not need an attorney in the transaction. If a problem develops, that type of recommendation can result in liability for the licensee.

Another pitfall to avoid arises with the advent of the Residential Real Property Disclosure Act, which requires the seller to complete and deliver a statutory disclosure form to prospective buyers. The licensee should not assist the seller in completing the information on the form, or interpreting the language of the form. Completing the form is the seller’s responsibility under the law and providing advice as to what the language of the form means may constitute the unauthorized practice of law. Why should the licensee assume the risk of completing the form or interpreting the language of the form when the statute does not require the licensee to do either?

One helpful analogy is as follows: If there were a question as to the electrical systems in a house, the licensee would recommend review by an expert on electrical systems. Likewise, if a legal issue arises, licensees should refer their clients to an expert on legal matters. Licensees always assume unnecessary risk when they act as an expert in an area or field in which they do not have the necessary expertise.

Continuing education courses are an excellent way to stay up to speed on statutory or regulatory changes. Good professionals will want to do everything possible to continue learning and adapting for the betterment of their clients and customers.

Additionally, the NAR Code of Ethics provides guidance to REALTORS® in their day-to-day conduct of business. Being familiar with the Code of Ethics and abiding by its provisions will help the REALTOR® avoid the appearance of impropriety and conduct that can expose the REALTOR® to liability.

Beware undisclosed dual agency
Under the new Article 4 of the License Law governing Brokerage Relations, a licensee may represent clients on both sides of the transaction with disclosure and the informed written consent of both clients. This situation arises when listing agents are selling their own listings (i.e. agent represents both seller and buyer).

Licensees who wish to act as dual agents need to follow these five steps:

1. Check your office policy to determine whether it provides for dual agency and any special conditions set forth in establishing the dual agency.
2. Provide the dual agency disclosure form to your clients at the time they enter into a brokerage agreement with your company.
3. Make sure that you have obtained the signatures of your clients on the dual agency disclosure form before actually showing the property to your buyer client.
4. Limit your activities on behalf of your clients as set forth in the disclosure form.
5. Obtain the signatures of the parties on a confirmation of dual agency form or make sure that similar language is incorporated in the contract to purchase and is initialed by the parties.

Finally, the dual agency disclosure form should include the statutory language so the licensees can avail themselves of the statutory presumption that there was full and formal consent to the dual agency.

Another potential problem under the new agency law may arise when a licensee seeks to treat a consumer not as a client, but really more than a customer. The licensee might even draw up a document itemizing those things the licensee will do for this consumer. The document might try to limit the licensee’s liability to the consumer. When operating under Article 4 as a buyer’s agent of seller’s agent, the licensee or the courts can look to Article 4 itself to determine the statutory duties of the licensee. The danger, if the licensee has an agreement to act in a capacity other than as provided in Article 4, is that it is entirely possible a court would took to common law fiduciary duties to define the licensee’s responsibilities to the consumer. Remember, under the provisions of Article 4 subagency is effectively dead. In order to have a seller subagency situation, the licensee working with the buyer must have an agreement with the listing agent and the buyer as well as the seller’s permission. As a result, if a licensee attempts to create a subagency situation without the agreement of the requisite parties, the licensee may only be creating an undisclosed dual agency situation.

Handling complaints
In order to reduce the broker’s potential exposure to liability, it is important for the broker to establish a policy and procedure for handling complaints. More likely than not, if a small complaint is not addressed, it will only create a bigger problem. In the event someone is unsatisfied with a licensee’s service, the licensee should document the nature of the complaint. In addition, the licensee should document any responses to the complainant. This memorandum should be explained and given to the licensee’s broker or other person designated by the broker to handle complaints. Together they can work on possible solutions to the problem. It is important to follow up with a person who lodges a complaint. Assure the complainant that the licensee is working toward a resolution of the problem and that the broker will keep the complainant informed as the situation progresses.

Follow a written office policy
Every broker, even one-person offices, should establish an office policy. Once established, licensees in the office should familiarize themselves with it and follow it.

An office policy should be in writing. A written policy accomplishes two things: it allows office licensees to refer to it time and again for guidance, and second, if litigation arises, the broker will have written proof of the office standards and policies and the fact that all licensees were aware of those standards and policies.

An office policy should cover a wide array of the licensee’s and the broker’s activities, including the initial contact with consumers, entering into agency or customer relationships, documents that should be used, disclosures that should be made, compliance with fair housing laws and other similar items.

In establishing a policy, a broker should stop and think about different scenarios and situations that have arisen in the past or that could arise in the future. A policy should be put in writing dealing with how the broker would like these situations handled. Addressing how problems and situations should be handled before they actually arise gives the broker the time to reflect and think through the ramifications of the recommended actions and to train the salespeople on how to handle these situations before being faced with the problem.

In its Agency Compliance Manual, IAR has provided example office agency policies that brokers can utilize in forming their own office specific policies.

Document business decisions
When a broker makes a decision regarding the business of the office, document the reasons for those decisions. Make sure that the reasons for the decision are proper business reasons and do not constitute unethical or other improper reasons.

One common example of the importance of documenting business decisions is to help avoid the appearance of antitrust type activities. For example, brokers have contacted IAR regarding the propriety of singling out a specific competitor and treating this competitor differently from the way the broker treats or deals with other competitors. The broker may decide that the cooperating compensation offered by the competitor makes it financially inefficient to work with that competitor, and therefore, the broker wants to change the offer of compensation as to that one competitor but yet not change the usual offer of compensation made to other offices via the MLS. In this situation, a broker can send a letter to the specific competitor and indicate any special terms of compensation and indicate that the offer through the MLS does not apply to the competitor.

However, if a broker takes such an action, facts and business reasons should be documented that demonstrate why change was needed and demonstrate clearly that the change is based upon legitimate business concerns.

Additionally, if a broker or particular licensee wishes to no longer be involved in transactions with another particular licensee, the decision should be based upon legitimate business reasons that should be documented. For instance, if you do not want to work with another licensee because you are concerned about how that licensee conducts his or her business and how it might expose you to liability, you should be able to document what it is that has given you reason for concern and why you believe it is best not to cooperate with this particular licensee.

In the area of employment decisions ‘ documentation is a necessity. Where a broker feels he must terminate an employee or licensee, the broker should be able to document legitimate business or personal reasons for the termination. The same is true when making decisions whether or not to hire a particular person. The key to successfully defending a charge of unlawful termination is having an adequate paper trail of legitimate reasons for the termination.

Adopting the suggestions discussed in this article will help the broker and licensee in their goal of risk reduction. Perhaps the best suggestion is to think before you act or speak. Oftentimes in the real estate profession, deals and events unfold at a rapid pace and demand rapid action and response. However, every minute you spend preparing to avoid trouble in the first place saves you many times that which you will spend in trying to extricate yourself from trouble once it occurs.

Illinois REALTOR, 1995