The following questions concerning commercial transactions were recently asked of the Legal Hotline.

Confidentiality agreements

The agent is preparing to list a “business opportunity without real estate.” The agent has seen statements like the following for other business listings. “Buyers must be pre-approved and agree to sign a confidentiality waiver prior to receiving P&L’s, etc.” Where is there access to such a confidentially waiver?

There is no pre-prepared or standard confidentiality agreement for use by real estate licensees. The drafting of such an agreement would be the practice of law and should be accomplished by counsel representing the seller in the transaction. Because each business and related transaction is unique, the seller may ask private legal counsel to draft an agreement that meets the privacy needs of the seller given his or her specific situation. Likewise, it would be inappropriate for an agent to copy a confidentiality agreement from another transaction.

Offers of compensation

A cooperating agent worked a deal on a listed property. The cooperating agent had a conversation with the listing broker who said he would “work with the agent.” Is there commission due the cooperating agent?

In an MLS transaction, entitlement to compensation is determined by the cooperating broker’s performance as procuring cause of the sale or lease. Procuring cause is the standard of performance to earn a commission in an MLS transaction. However, in many commercial transactions, the brokers or the properties are not in the MLS. Therefore it must be determined if the listing broker offered compensation to the cooperating broker.

The listing broker’s statement agreeing to work with the cooperating agent may only reflect an offer of cooperation and does not automatically include an offer of compensation. The listing broker has no statutory obligation to pay commission to a cooperating agent. An offer of compensation may be made verbally or in writing. A conversation about commission may create a contract to pay; however, if the agreement is not documented in writing, the cooperating broker will have to prove the existence of the agreement if the listing broker refuses to pay. In addition, the amount of compensation or the standard of performance may be an issue if the agreement is not reduced to writing.

Compensation agreement

What information should be contained in an offer of compensation?

The basic elements of a compensation agreement would answer the following questions: How much is the compensation, who are the parties to the agreement, what is the standard of performance that must be met to earn the compensation, and when will payment be made? A conversation can create a contract, but written documentation is always best. For more information about non-MLS compensation agreements, see Legal Update 01.02, “Getting Paid Outside the MLS,” at www.wra.org/LU0201.

Weatherization

The building being rented to a business includes one apartment. Is rental weatherization required?

The application of rental weatherization to a mixed-use commercial building is determined based upon the proportion of floor area occupied by rental residential premises. If less than 50 percent of the total floor area of the building is occupied by residential units, then just the residential units (and not the whole building) must be brought into compliance with the rental weatherization code. More information on the rental weatherization program is available online at commerce.wi.gov/SB/SB-RentalWeatherizationProgram.html.

Broker lien law

What are a commercial broker’s rights to file a lien for commission?

The good news is brokers engaged in commercial transactions are able to use the statutory broker lien law to protect their interests in commissions. The bad news is the requirements to perfect the broker lien are somewhat involved. Also, there are different timelines for giving notices and recording and delivering documentation to perfect commission liens, depending on whether the commercial transaction involves sales, a buyer agency, a lease listing or a property management situation. Forms are available in Wisconsin REALTORS^® Association zipForms^®, including a Notice of Intent to Claim Broker Lien, the Notice of Broker Lien Satisfaction of Lien and a Waiver of Broker Lien Rights. Extended examples of “how to” use the lien in commercial law are available in Legal Update 98.09, “Using the Commercial Lien & Lease Listing Forms,” at www.wra.org/LU9809.

Commercial real estate condition report

Is a Real Estate Condition Report necessary in commercial transactions?

Wis. Admin. Code § RL 24.07(1)(b) requires listing brokers to inspect the property before listing, make inquires of the seller about the condition of the property, and ask the seller to provide a written response to the licensee’s inquiry. The broker is to ask about the condition of the structure, mechanical systems and other relevant aspects of the property. The WRA’s Real Estate Condition Report (RECR) C form has been designed to assist commercial brokers to meet the Administrative Code requirements. If the seller refuses to complete a report, the broker may ask the seller to document the refusal on a copy of the report to show the broker’s compliance with § RL 24.07(1)(b). If a seller refuses to complete an RECR, the seller will still have to make property condition representations in the offer to purchase.

Wis. Admin. Code § RL 24.07 also requires licensees to disclose material adverse fact if a seller’s RECR is inaccurate or incomplete. A sample material adverse fact disclosure letter is available in the April 2007 Broker Supervision Newsletter at www.wra.org/BSNApr07.

Securities transactions

An agent sold a restaurant/bar and a WB-16 Business Offer to Purchase was executed. Now the parties have changed their minds and the ownership interests in the LLC that owns the real estate and business will be transferred instead. The broker is getting paid for the real estate sale, but what about the LLC interests that are being assigned to the buyer? Can the broker participate in this?

A license to act as a real estate broker or salesperson includes the right to buy and sell businesses but does not necessarily entitle the licensee to negotiate a transaction where the transfer will be the assignment of LLC ownership interests under Wis. Stat. § 183.0704. Such transactions may come within the scope of the securities laws if LLC management is vested in one or more managers, and a separate securities broker-dealer license may be necessary. However, Wis. Stat. § 551.02(3)(f) provides that a broker-dealer license is not required of a real estate broker whose transactions in securities are isolated transactions incidental to his or her real estate business.

The licensee should not become involved in the business sale if he or she is not experienced and competent to do so unless the licensee engages the assistance of someone who is experienced and competent. Any person engaged to provide such assistance must be identified along with his or her contribution. (Wis. Adm. Code § RL 24.03.) In any event, the licensee should also work with the seller’s attorney and the buyer’s attorney who will document the assignment of the LLC interest and LLC membership for the new owner along with other aspects of the sale of the business.

Environmental assessment reports

What is a Phase I Environmental Assessment?

A Phase I Environmental Assessment is an assessment of a site to identify all potential or known areas of environmental contamination. This assessment may include, but is not limited to, reviewing records, interviewing persons and conducting inspections of the site. See Pages 2-4 of Legal Update 95.10 for further discussion of Phase I Environmental Assessments.

What is a Phase II Environmental Assessment?

A Phase II Environmental Assessment is an assessment conducted to physically confirm the presence or absence of environmental contamination in all potential or known areas identified in the Phase I Assessment. The Phase II Assessment does not determine the nature and extent of contamination. This assessment may include, but is not limited to, field sampling of media, laboratory analysis of samples and visual confirmation of environmental contamination of the site.

Tracy Rucka is a Staff Attorney for the WRA.