Illinois REALTOR®: Legal Ease

April 2011

Property Management Q&A Heat Up the Hotline

Plus, do agency disclosure requirements apply in rental/lease transactions?

By Elizabeth A. Urbance, Legal Hotline Attorney for IAR; Associate, Sorling, Northrup, Hanna, Cullen & Cochran, Ltd.

Listed below are some common questions regarding the application of the Illinois Real Estate License Act of 2000 (the Act) to property management activities.

Do I need a real estate license to engage in property management activities? A: Generally speaking, yes. To some extent this will depend upon the facts. So you must analyze whether the management activities include any of those licensed activities listed under the Section 1-10 definition of “Broker” in the Act. Then are you engaged in licensed activities for another and for compensation? If the answer to these questions is yes, then you need a real estate license sponsored by a sponsoring broker to engage in these activities. Some examples of licensed activities include showing property for rent/lease, holding and/or collecting security deposits, collecting rent/lease payments on behalf of the property owner, negotiating leases etc.

If you are engaged in activities like the ones just described, you are doing them for an owner other than yourself (you don’t own the property being managed in your own name) and you are being compensated for this, then you need to do them through your sponsoring brokerage company just like you would for any sales brokerage activities. Your advertising would be done in the name of your sponsoring broker and all of the advertising regulations from the Act apply to your “rental brokerage” (property management) activities. In addition, any compensation that you receive in exchange for “rental brokerage” must be paid through your sponsoring brokerage company just like in sales brokerage situations.

I am a real estate licensee sponsored by a sponsoring brokerage company and I have a rental/property management business where I manage properties for others on my own. Is this legal? A: On these facts, no. The question indicates that you are not the owner of the property under management and if we assume that by rental/property management you mean showing rental properties, collecting rents, negotiating/signing up leases and holding security deposits then you must be doing these activities under the supervision of your sponsoring brokerage company. Payment of your compensation should be going through your sponsoring brokerage company. Any advertising must be done in the name of your sponsoring brokerage company. And, all of the requirements of the Act for your real estate licensed activities apply to you. Specifically, Section 10-20(a) requires all licensees to work for only one sponsoring broker. Based on the facts in the question, you are really working for two different sponsoring brokers, the one who is actually on record as sponsoring your license, and yourself as to the property management activities.

Keep in mind that your sponsoring brokerage company may need to decide whether or not he/she/it wants to be in the property management business. If
so, you may be fine to bring all these activities into your current sponsoring brokerage company. If not, you may have some decisions to make about these aspects of your real estate brokerage business.

Could I have an ownership interest in a licensed property management company but be sponsored by another sponsoring brokerage company? A: Generally speaking yes, but you really need to consider this question in two parts; ownership and then sponsorship of your real estate license. If you currently are a broker licensee, you could own up to 100 percent of one or more licensed real estate brokerage companies (whether the companies are engaged in sales brokerage, rental brokerage/property management or some combination thereof). Each of these companies would need its own unique managing broker. You could derive benefits from your ownership in the other licensed real estate brokerage companies through your dividend or profit distributions. If you are a licensed salesperson, you could own up to 49 percent of a licensed brokerage company and if there are other licensed salespersons who have ownership in the company, your combined ownership could not exceed 49 percent. Note that this limiting provision will disappear on May 1, 2012 as the salesperson category of licensure is phased out.*

On the other hand, if you are a practicing real estate licensee, your real estate license can only be sponsored by one sponsoring real estate brokerage company. (Section 10-20(a) of the Act). This means that all of your real estate brokerage activities, whether they involve sales brokerage or rental brokerage/property management, must be performed through the brokerage company that sponsors your license. This is true whether you are an owner in the brokerage company that sponsors your real estate license or not.  

Do agency disclosure requirements apply in rental/lease transactions; and does it matter whether the transaction is residential or commercial? A: Yes, agency disclosure requirements apply to both residential and commercial rental/lease transactions. For instance, when a prospective tenant comes into your office seeking help in renting an apartment, you should make the required agency disclosures. If you are the listing agent for the property owner, will you then be a disclosed dual agent or do you represent the owner only?  If you proceed as a dual agent you must make the required disclosures and get the informed consent of both the owner and the tenant before you act as a dual agent. Then both parties must confirm their consent no later than the signing of the lease.

On the other hand, if you will be representing the owner only and the tenant is not represented by another agent you should give the tenant a Notice of No Agency and treat the tenant as a customer because you represent your owner client. The Notice of No Agency should be given to the tenant at a time before the tenant would be sharing confidential (i.e. financial) information with you. If you incorporate this type of language into your rental application forms, make sure the “no agency” disclosure is at the very beginning of that form. The Illinois Association of REALTORS® has agency disclosure forms available that are specifically designed for these situations. Go to www.illinoisrealtor.org, sign on as a member and go to Free Forms and Downloads. 

Breakout Text: 

License Law Transition Period Begins May 1

Get answers to your questions about the steps to take, proficiency exams and more at www.IARlicenselaw.org

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