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Wisconsin REALTORŪ
February 2002
Volume 18, Number 5
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Legal Matters |
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REALTORSŪ Should Be on the Watch for Moldy Conditions
By Debbi Conrad
NAR's Government Affairs Department has published a white paper on toxic mold, entitled "Mold in the Home: How it Affects
REALTORSŪ," which can be found at www.realtor.org/gapublic.nsf/pages/moldpapers. The following two paragraphs are a quotation from that paper:
"Although it is not prudent for licensees to opine on the cause of unusual property conditions they may have observed, the conditions that licensees would normally note in the course of a visual inspection may include some conditions that may also lead to mold problems. Examples of such conditions are obvious water stains, such as on carpets or walls, strong or musty odors, leaky roofs or windows, plumbing leaks, overflow from sinks and sewers, or even visible mold growth. A licensee should not speculate whether or not these conditions may in fact indicate a mold problem, however, since licensees are generally untrained in such matters. As in any transaction sellers should be encouraged to disclose any actual knowledge they may have of mold problems on their properties, subject to any state disclosure requirements. Most sellers will not know if their properties have mold problems. If the seller is aware of a mold problem, the seller may elect to ask a competent expert to determine the extent of mold present and to recommend any corrective actions required."
"To the extent publications or materials discussing mold are available from local, state or Federal health or other agencies, licensees may also find it to be a prudent and helpful service to provide such information to clients and customers. Such information should be provided in response to a buyer's expression of concern about mold. As usual, when a licensee notes red flags indicating the possibility of latent property defects, the buyer should also be advised, in writing, that it may be prudent for him or her to contact a qualified expert to inspect the property and determine the nature of any problems and what options for remediation exist ... Armed with this information, the buyer can make an informed decision regarding the purchase of a home that has or may have mold concerns."
To put this in Wisconsin license law terms, Wisconsin licensees should inspect properties and disclose material adverse facts and information suggesting the possibility of material adverse facts, but should never give opinions about the presence, extent or toxicity of any suspected mold. If buyers want to test for mold, members may use the mold testing contingencies in Legal Update 01.07 or develop their own contingency for this purpose. It is critical to remember, however, that testing for mold is not something that can be done under the inspection contingency. Buyers who want to test for mold must have proper authorization from the sellers.
Sellers should disclose any known mold problems on item C15 of the RECR: "I am aware of a defect caused by unsafe concentrations of, or unsafe conditions relating to, radon, radium in water supplies, lead in paint, lead in soil, lead in water supplies or plumbing system or other potentially toxic substances on the premises." A new item D.1.c. also is being added to the WRA's RECR forms. That new item will state, "I am aware of the presence of unsafe levels of mold, or roof, basement, window or plumbing leaks, or overflow from sinks, bathtubs or sewers, or other water or moisture intrusions or conditions that might initiate the growth of unsafe levels of mold." These updated RECR forms should be available on Zip Forms and in hard copies in March.
As far as information to give to buyers and sellers, Wisconsin unfortunately does not as yet have a good informational brochure available. The Environmental Protection Agency and the Centers for Disease Control have some good information - check for information on the newly updated WRA Mold Resource Page:
www.wra.org/Resources/resource_pages/Mold_resources.htm. Some states like California and Minnesota have very good brochures and articles. A good sample of these can be found at California Indoor Air Quality Program: Infosheets and Related Links:
http://www.cal-iaq.org/iaqsheet.htm#Mold.
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Unearned Transaction Fees Under RESPA
The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974 to give consumers clear, advance notice of the costs they would incur in their real estate transactions, and to protect them from excessive, unnecessarily high fees caused by abusive practices. Everyone benefits when customers are given advance notice of their costs and protect consumers from abusive providers who charge them with phantom fees without providing any goods or services.
The unearned fee rule under Section 8(b) of RESPA states, "Splitting charges. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed." This rule was recently interpreted in Real Estate Settlement Procedures Act Statement of Policy 2001-1: Clarification of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, and Guidance Concerning Unearned Fees Under Section 8(b); Final Rule (the Statement). This statement has caused concern among members regarding whether they may include administrative or transaction fees in their commission structures.
HUD states that it always has interpreted Section 8(b) as prohibiting any person from giving or accepting any unearned fees, i.e., charges or payments for real estate settlement services when no goods or facilities have been provided or no services have been performed. Unearned fees occur in, but are not limited to, cases where: (1) two or more persons split a fee for settlement services, any portion of which is unearned; (2) one settlement service provider marks up the cost of the services performed or goods provided by another settlement service provider without providing additional actual, necessary, and distinct services, goods or facilities to justify the additional charge; or (3) one settlement service provider charges the consumer a fee where no, nominal or duplicative work is done, or the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed.
Notwithstanding HUD's regulations and interpretations, the Court of Appeals for the Seventh Circuit held, in Echevarria v. Chicago Title and Trust Co., 256 F.3d 623 (7th Cir. 2001), that Section 8(b) was not violated where a title company, without performing any additional services, charged the plaintiffs more than the recorder's office's actual recording fee and retained the difference. The Court concluded that the title company did not violate RESPA because the additional charge was not split with the recorder's office or a third party.
The good news is that Wisconsin is within the Seventh Circuit so this decision is precedent for Wisconsin brokers. If you are a Wisconsin broker and you charge an administrative or transaction fee, the Seventh Circuit's decision should protect you in court actions as long as you do not split your fee with a third party. However, that does not necessarily protect you from HUD's scrutiny and HUD will not automatically let you off the hook just because you are not splitting the fee.
HUD does not prohibit administrative or transaction fees, but requires that actual goods or services be provided at a reasonable charge. Until the differences between the courts and HUD are resolved, brokers must proceed with caution with respect to any administration or transaction fee charged to their clients.
- Avoid charging additional fees for goods and services that were previously provided and included in the base commission fee. It may give the appearance that you are charging an excessive fee for a service that was previously provided.
- Putting special labels on those fees, such as "transaction fees" or administrative fees" will certainly call unwanted attention to them. Label fees as accurately as possible and provide the client with a clear description of what the fee entails.
- Make sure that the fee is fully disclosed to the client prior to the client entering into the agency relationship. The DRL requires that any administrative or other fees be disclosed to the client in writing before the client executes the listing contract or buyer agency agreement.
- Make sure the fee is for actual services that are actually provided
- Make sure that those services are reasonably priced. RESPA is not a rate-setting statute, but it is prudent to avoid excessive fees or profits.
For a copy of HUD's RESPA Policy Statement 2001-1 regarding lender payments to mortgage brokers and unearned fees, go to
www.hudclips.org/sub_nonhud/cgi/pdf/26321.pdf.
A new NAR guide that explains HUD's RESPA Statement of Policy on Unearned Fees is available online. NAR asked a well known RESPA expert to develop this guide that details what the new HUD statement means to real estate brokers about the legality of charging fees, such as transaction fees.
To access the guide, "Real Estate Transaction Fees: To 8(b) or not 8(b), That is the Question," go to
www.realtor.org/realtororg.nsf/pages/respasec8b?opendocument.
Laurie Janik, General Counsel of the National Association of
REALTORSŪ, also addressed this topic in the January 2002 edition of the
REALTORŪ Magazine: www.realtormag.com/RMODaily.nsf/All/B415A9DA7.
The statement also discusses the issue of yield spread premiums and other lender payments to brokers. For background material see the article in the December 2000 edition of the Wisconsin
REALTORŪ at www.wra.org/legal/wr_articles/wr1200_legal.htm#lm4.
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Best of the Legal Hotline
By Debbie Conrad & Tracy
Rucka
The following questions were recently asked of the Legal Hotline:
| Q. Water softener that is not owned by the seller. The seller never stated if the water softener was owned or rented, and the listing agent did not ask. The property was listed, an offer was written with same agent, and the water softener was not mentioned. The closing is today and the agent just found out that water softener is rented. Who is liable? |
| A. The terms of the WB-11 Residential Offer to Purchase provide that water softeners are fixtures (see lines 124-129). Once it is determined that a water softer is rented, the question is whether the parties, on their own, will agree to amend the terms of offer, or whether the brokers involved in the transaction will assist in fashioning an agreement that is acceptable to the parties.
There is no one person who is liable, per se, for the way the offer to purchase was drafted. Both the buyer and seller agreed to the terms of the offer that in bold notes that the terms of the offer should address rented water softener units. Brokers should be drafting the offer pursuant to the facts and circumstances in the transaction and the parties' intent. If it is determined that the terms of the offer are not appropriate, the parties, in cooperation with the brokers, may agree to amend the offer, or be referred to legal counsel for advice on their rights and obligations in the transaction.
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| Q. A buyer who is ordering a home inspection is asking the inspector to take a mold sample if any mold is observed. However, the buyer did not make the offer contingent upon a mold test. The buyer said that if a sample is taken and it tests positive for mold, his intention is not to get out of the offer. The seller has not given the inspector permission to take a sample. If the seller authorizes this and it does test positive for mold, does the buyer have an out? |
| A. The seller should give any permission for mold sampling in writing, if that is what the seller decides to do. Giving permission for the sampling, however, is not the same thing as incorporating a mold-testing contingency into the offer, nor does it automatically plug the mold sample results into the existing inspection contingency. If the sample tests positive for mold, there will be no guidance in the offer directing what will happen next. It cannot be included in a notice of defects under the inspection contingency.
One possible result may be that one of the parties decides to rescind the offer on the grounds of a mutual mistake. When both parties are mistaken as to a basic factual assumption on which the contract was made and the mistake has a material effect on their performances, the contract is voidable by the party adversely affected. Under this theory, both parties must have been mistaken. The mistake must be based upon a past or present fact, in this case, the presence of the mold.
If the parties do not wish to rescind the offer, the parties may negotiate a resolution using amendments to the offer. One party may propose an amendment to the other party; the other party can agree to the proposal and accept it, counter it by proposing a different amendment, or reject it and do nothing. Neither party is obligated to agree to any amendment. The buyer could end up contractually obligated to purchase a home with known mold problems and without any obligation on the part of the seller to participate in any remediation. The buyer risks this result if he tests for mold without any mold testing contingency.
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| Q. The listing broker is being told by a co-broke that now that home inspectors are licensed, it is not necessary for the agent to be at the home inspection. Is the listing agent required to be present for the home inspection? |
| A. There is no right or wrong answer to this question. Each broker/company should, however, consider the pros and cons and then establish company policies concerning whether home inspectors and other professionals on site should or should not be accompanied by a licensee. Brokers may need to alter the listing contract or add additional language to the listing to make it consistent with office policy and/or the wishes of individual sellers.
Historically many brokers and sellers have assumed that it is the listing broker's job to protect the seller's home and its contents during open houses and showings. This is presumed to include providing security - allowing only those authorized to enter - and protecting the seller's furnishings and valuables from thieves, small children, clumsy buyers, and careless inspectors.
However, the listing contract speaks to the contrary and shifts most, if not all, of this responsibility to the seller. Brokers have no duty pursuant to the listing contract to escort appraisers or home inspectors at the listed property. Lines 110-117 of the WB-1 residential listing contract states
"Open House and Showing Responsibilities: Seller is aware that there is a potential risk of injury, damage and/or theft involving persons attending an 'individual showing' or an 'open house.' Seller accepts responsibility for preparing the Property to minimize the likelihood of injury, damage and/or loss of personal property. Seller agrees to hold Broker harmless for any losses or liability resulting from personal injury, property damage, or theft occurring during 'individual showings' or 'open houses' other than those caused by Broker's negligence or intentional wrongdoing. Seller acknowledges that individual showings may be conducted by licensees other than Broker, that appraisers and inspectors may conduct appraisals and inspections without being accompanied by Broker ..."
It may be prudent, however, for licensees to consider that appraisers and inspectors may take buyers with them when they conduct their respective jobs, even though there is no specific authorization in the offer for buyers to go on these inspections.
As far as agents who do accompany home inspectors, there are dangers of potential liability coming from different directions. If the agent starts assisting or supervising the home inspector, the agent could face possible liability for negligence for a defect that is missed, as was the case in the
REALTORŪ Magazine article entitled "Pass the baton. Do your job and let inspectors do theirs" at
www.realtormag.com/rmomag.NSF/pages/lawyoufeb02?OpenDocument.
An agent accompanying an inspector could also face problems if the home inspector oversteps his or her authorization and, for example, engages in sampling for radon or mold tests. The agent has responsibility to stop any unauthorized procedures. On the other hand, if the agent is not there, then nobody is on site to monitor the inspector - the fact that they must be registered does not eliminate the possibility that an inspector might overstep his or her authority. One way to control the scope of the inspector's activity is to have the buyer who hires the inspector enter into a contract that specifically sets the parameters of the inspection. See
Legal Update 99.10.
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| Q. When is the seller required to give the primary buyer a bump notice? |
| A. The seller is not required to give a bump notice if he or she wants to continue the transaction with the primary buyer. It is within the seller's discretion to decide whether to trigger the bump clause in the first offer if the secondary offer is accepted. The seller may not only decide whether to trigger the bump, but also when to do so. Note that there is no time limit given in the contingency. This means the seller is free to wait before giving the first buyers notice. He or she may wish to wait for the secondary buyer, for example, to sell his or her own property or obtain financing, before bumping the first offer.
If, on the other hand, the seller wants the possibility of elevating the secondary offer into primary position, the seller will have to give the primary buyer the bump notice. The seller may deliver the notice with a cancellation agreement and mutual release to determine whether the primary buyer elects to waive the contingency or make the offer null and void. The seller may elevate the secondary offer once he or she receive the signed Cancellation Agreement Mutual Release when the primary buyer elects not to waive the home sale contingency.
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| Q. Validity of an offer after the closing date. The accepted offer has a Jan. 4 closing date (which has passed), and the buyer has proposed extending the closing date until Jan. 11. The seller has not signed anything extending the date. In the meantime, the seller has accepted a secondary offer that is for significantly more money. Does seller have a contractual obligation to the first buyer since the closing date has passed? Can the seller make the secondary offer primary by giving notice? |
| A. The seller may give the first buyer a notice of termination based upon the buyer's failure to timely close, if time was of the essence. This should be accompanied by a CAMR. If the CAMR is signed by all parties and delivered, the seller may elevate the secondary offer. If the CAMR is not signed, the seller may see an attorney for a legal opinion as to the status of the contract.
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| Q. How can a broker avoid dual agency situations? |
| A. The broker can exclude company listings from all buyer agency agreements entered into by an agent of that company.
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| Q. Re: A buyer who wants to back out of a contract. |
| A. The agent working with the buyer will have to make timely written disclosure of the material adverse fact if there is evidence that the buyer does not intend to meet his obligations under the terms of the contract. The agent may point out the terms and conditions of the offer to purchase to the buyer. The parties have a duty of good faith and due diligence to meet the terms and conditions of the offer. If the parties cannot meet the terms of the offer or negotiate a cancellation agreement and mutual release, they should review the default provisions of the offer. The parties may confer with their respective attorneys for advice in determining the most beneficial course of action.
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Code of Ethics 2002 Changes
by Tracy Rucka
Highlights from the Code of Ethics and Arbitration Manual 2002 include: two new Standards of Practice and two amended Standards of Practice, two new Case Interpretations, and extended updates and amendments to other Case Interpretations. In addition, administratively, local associations are now required to offer mediation services to members and their clients.
Professional Standards Training for members interested in learning more about recent NAR changes will be held at the WRA on Feb. 5, 2002. Professional Standards Training this year will focus on recent changes to the Code of Ethics and procuring cause. Mediation training will be offered on Feb. 5 as well. These sessions are open to all
REALTORSŪ for a fee. Registration is mandatory as space is limited. E-mail
dmcnelly@wra.org.
New Standards of Practice
Standard of Practice 1-14
Fees for preparing appraisals or other valuations shall not be contingent upon the amount of the appraisal of valuation. (Adopted 1/02)
Standard of Practice 11-14
The competency required by Article 11 relates to services contracted for between
REALTORSŪ and their clients or customers; the duties expressly imposed by the Code of Ethics; and the duties imposed by law or regulation. (Adopted 1/02)
Amended Standards of Practice
Standard of Practice 16-18
REALTORSŪ shall not use information obtained from listing brokers though offers to cooperate made though multiple listing services or though other offers of cooperation to refer listing brokers' clients to other brokers or to create buyer/tenant relationships with listing brokers' clients, unless such use is authorized by listing brokers. (Amended 1/02)
Standard of Practice 3-4
REALTORSŪ, acting as listing brokers, have an affirmative obligation to disclose the existence of dual or variable rate commission arrangements (i.e., listings where one amount of commission is payable if the listing broker's firm is the procuring cause of sale/lease and a different amount of commission is payable if the sale/lease results through the efforts of the seller/landlord or a cooperating broker). The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers and shall, in response to inquiries from cooperating brokers, disclose the differential that would result in a cooperative transaction or in a sale/lease that results through the efforts of the seller/landlord. If the cooperating broker is a buyer/tenant representative, the buyer/tenant representative must disclose such information to their client before the client makes an offer to purchase or lease. (Amended 1/02)
Full text of the Code of Ethics, in English as well as foreign languages (Chinese, English, Korean, Spanish, Tagalog, and Vietnamese) is available at
www.realtor.org/mempolweb.nsf/pages/code.
New Case Interpretation
Case Interpretations have been developed by the National Association of
REALTORSŪ to assist REALTORSŪ to understand ethical obligations created by the Code of Ethics. Additionally they may be used as a reference to assist members of review panels, hearing panels and board of directors in administering professional standards.
Article 12: REALTORSŪ shall be careful at all times to present a true picture in their advertising and representations to the public.
REALTORSŪ shall also ensure that their professional status (e.g., broker, appraiser, property manager, etc.) or status as
REALTORSŪ is clearly identifiable in any such advertising. (Amended 1/93)
Case #12-17: Use of Deceptive Domain Name/URL ("Uniform Resource Locator") (Adopted May, 2001.)
REALTORŪ X, a principal broker in the firm XYZ, was technologically savvy and constantly looking for ways to use the Internet to promote his firm and drive additional traffic to his Web site.
Being an early adapter to the Internet, he had registered, but not used, domain names that incorporated or played on the names of many of his competitors and their firms, including ABC,
REALTORSŪ.
REALTORŪ X and his information technology staff concluded that one way to drive traffic to the firm's Web site would be to take advantage of the search engines commonly used by potential buyers and sellers. They realized that when potential buyers or sellers searched on key words like "real estate,"
"REALTORSŪ" or similar words, lists of domain names would appear, and that when consumers searched the Internet for ABC
REALTORSŪ, one of the domain names that might appear would be REALTORŪ X's domain name,
abcREALTORS.com.
REALTORŪ X decided to take advantage of the domain names that he had previously registered and pointed several that used the names of his competitors, including "abcREALTORS.com," to his site.
In a matter of days, REALTORŪ X learned that he had been charged with a violation of Article 12 of the Code of Ethics by
REALTORŪ A, the owner of ABC REALTORSŪ, alleging that his (REALTORŪ X's) use of the domain name "abcREALTORS.com" presented a false picture to potential buyers and sellers and others on the Internet.
At the hearing, REALTORŪ X defended himself indicating that, in his opinion, use of a domain name was not advertising or a "representation" to the public but simply a convenient way for Internet users to find relevant Web sites. Moreover, "When Websurfers reach my home page, there is no question that it is my site since I clearly show XYZ's name and our status as
REALTORSŪ," he continued. "These complaints are just a lot of sour grapes from dinosaurs who aren't keeping up and who don't realize that on the Internet it's 'every man for himself.' "
The Hearing Panel disagreed with REALTORŪ X's justification, indicating that while his use of a domain name that employed another firm's name might not be precluded by law or regulation, it did not comply with the Code's higher duty to present a "true picture."
REALTORŪ X was found in violation of Article 12, presenting an untrue picture in his representation to the public.
The remainder of Case Interpretations can be found in The Code of Ethics and Arbitration Manual which may be viewed in its entirety at www.realtor.org/CEAM.nsf.
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