This second installment of the “Day-to-Day Code Matters” series looks at how the Code of Ethics and Standards of Practice apply to referrals, cooperative commissions and activity by REALTORS® in their personal transactions. Part I of this article appeared in the January 2009 issue of Wisconsin Real Estate Magazine.
The Code Applies
When representing buyers, sellers, landlords or tenants, Article 1 of the Code of Ethics sets forth the obligation of REALTORS® to pledge to protect and promote the interest of their clients. This obligation to clients, per Article 1, is coupled with the commitment to treat all parties honestly. Standard of Practice 1-1 states that REALTORS®, when acting as principals in real estate transactions, remain obligated by the duties imposed by the Code of Ethics.
Disclose Professional Status
The theme of disclosure occurs throughout the Code. Articles 1, 3, 4, 5 and 12 capture various aspects of disclosure. When REALTORS® buy or sell property for themselves, their immediate family, their firm, or a member of their firm, written disclosure is required. Written disclosure of your true position and professional status is based in Article 4 as well as Wisconsin license law. When purchasing, disclose to the owner or the owner’s agent or broker, and when selling, disclose to the purchaser or the purchaser’s representative. The written disclosure may be contained in an offer. In the interest of full disclosure, the licensee also may wish to write in the offer that he or she is a licensed real estate agent/broker purchasing in the property for personal use/investment/speculation/resale, as the case may be.
Standard of Practice 3-7 gives more standards regarding the transparency of a REALTOR®’s position and interest, providing that REALTOR® A, when seeking information from REALTOR® B concerning a listed property, REALTOR® A shall disclose REALTOR® A’s status, whether the interest is personal or on behalf of a consumer, and if a consumer, the type of agency representation. The obligation mirrors the Wis. Admin. Code § RL 24.05(5) rule, which requires licensee principals engaged in a real estate or business opportunity transaction to disclose their license status and intent to act in the transaction as a principal at the earliest of the following: (1) first contact with the other party or an agent representing the other party where information regarding the other party or the transaction is being exchanged, or (2) a showing of the property or any other negotiation with the seller or the listing broker.
Article 12 applies to REALTOR® sellers. Generally thought of as the advertising article, Article 12 requires REALTORS® to ensure that their status as a real estate professional is readily apparent in their advertising, marketing and other representations. The rules for advertising under Wisconsin law and the REALTOR® Code of Ethics apply to online advertising just as they do to advertising in other media. Article 12 of the Code states: “REALTORS® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations. REALTORS® shall ensure that their status as real estate professionals is readily apparent in their advertising, marketing, and other representations, and that the recipients of all real estate communications are, or have been, notified that those communications are from a real estate professional.” This Article was changed, effective January 1, 2008, to establish that the obligation to disclose one’s status as a real estate professional goes beyond just advertising and applies to all real estate communications, including electronic communications. More detailed information about recent changes to the Code of Ethics and Article 12 can be found in the article "The Best of the Legal Hotline: Real Estate Practice in the Electronic Age" in the January 2008 edition of Wisconsin Real Estate Magazine at www.wra.org/WREM/Jan08/ElectronicAge.
Electronic communications
Standard of Practice 1-2 was modified two years ago to emphasize that the duties of the Code encompass all real estate-related activities and transactions conducted in person, electronically or by any other means. The rule of thumb is to assure recipients of all real estate communications are, or have been, notified that those communications are from a real estate professional. One frequent question relates to postings on Craigslist. Whether advertising a specific property or brokerage services, the REALTOR® must disclose that he or she is a real estate professional. This is coupled with Wisconsin license law, which requires advertising to be in the name of the employing broker. For additional discussion about electronic communications, please see the December 2007 Broker Supervision Newsletter, “Know What Your Agents Are Doing — Online,” at www.wra.org/bsnDec07.
Article 5 sums up REALTOR® disclosure as follows, “REALTORS® shall not undertake to provide professional services concerning a property or its value where they have a present or contemplated interest unless such interest is specifically disclosed to all affected parties.” Failure to properly disclose a REALTORS®’s interest may result in a violation of the Code of Ethics. Because the law and Code contain similar disclosure duties, a violation could also result in discipline by the Department of Regulation and Licensing.
Disclosure of referrals
Clients and customers may ask REALTORS®, either listing or selling agents, to refer them to contractors, home inspectors, lenders, title companies and other real estate settlement service providers. Although this may be beneficial to the consumer to have such a recommendation, this practice could lead to licensee liability if the referral is not handled properly. Depending on the referral, the Code of Ethics, license law and Real Estate Settlement Procedures Act (RESPA) compliance is required. According to the Code and Standard of Practice 6-1, REALTORS® shall not recommend or suggest to a client or a customer the use of services of another organization or business entity in which they have a direct interest without disclosing such interest at the time of the recommendation or suggestion. In addition, brokers must avoid illegal referral fees and assure RESPA compliance. Any business, financial, or personal company or agent affiliations with service providers should be disclosed when the referral is made. In addition, when giving a referral, a real estate settlement service provider who has an affiliated business arrangement is required by RESPA to give the federally required affiliated business arrangement disclosure form. More information about referrals, including RESPA compliance, is available in the May 2007 Legal Update, “Referrals to Service Providers,” online at www.wra.org/LU0705.
Get it in writing
REALTORS®, when working with buyers, sellers, landlords or tenants, must assure that transaction documents reflect what is occurring in their agency relationships as well as the underlying transactions. Beginning with the creation of agency relationships, listing contracts and buyer agency agreements must be in writing. Amendments must also appear in writing. Article 9 of the Code of Ethics provides that for the protection of all parties, REALTORS® shall assure whenever possible that all agreements related to real estate transactions including, but not limited to, listing and representation agreements, purchase contracts and leases are in writing in clear and understandable language expressing the specific terms, conditions, obligations and commitments of the parties. Moreover, the Code, as well as license law, requires that a copy of each agreement be furnished to each party to such agreements upon their signing or initialing it.
Because REALTORS® sometimes assist or enable a client or customer to establish a contractual relationship electronically, Standard of Practice 9-2 requires REALTORS® to make reasonable efforts to explain the nature and disclose the specific terms of the contractual relationship being established prior to it being agreed to by a contracting party. The obligation to explain the nature of the relationship and the terms of the contractual agreement are the same whether working in the presence of the consumer or via electronic means.
The offer
The obligations of the Code of Ethics correspond to the Wisconsin statutory requirements to create enforceable contracts. For the purchase of real property, Wis. Stat. § 706.02 provides formal requisites to create a valid real estate conveyance document. The offer to purchase must identify the parties and the property; it must also contain material terms, be signed and delivered. Given the predominance of Real Estate Owned (REO) transactions and short sales in the market, some sellers are unwilling or unable to sign and deliver an offer within the time allowed for binding acceptance. In cases where an offer has expired before written acceptance and delivery occurs, a REALTOR® may draft counter-offers to continue negotiations between the buyer and seller. According to Standard or Practice 9-1, REALTORS® shall use reasonable care to insure documents are kept current through the use of written extensions and amendments. The significance is highlighted in REO transactions given that REO sellers are notorious for refusing to sign contracts and causing delay. The broker must be vigilant to comply with license law and the Code and not engage in the unlicensed practice of law.
Unlicensed practice of law
Brokers shall not engage in the unlicensed practice of law. When providing brokerage services, licensees can use approved forms only when an agency relationship exists Wis. Admin. Code § RL 16.05(3) and the DRL’s interpretation thereof originated decades ago from the concern that broker completion of conveyance forms constituted the practice of law. This was discussed in the State v. Dinger case. In Dinger, the court found that such overlapping into the sphere of the legal profession could only occur when such activities are incidental to the broker’s trade or business. An agent may not enter into an agency agreement just to draft a contract or legal document for the parties. Any drafting must be incidental to the practice of real estate.
Article 13 mirrors Chapter RL 16 and provides that REALTORS® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it. If the client or customer asks the broker to give a legal opinion about the status of a contract or a certain set of facts, or otherwise engage in the practice of law, the consumer must be referred to legal counsel. More information about the unlicensed practice of law is available in the article, "Defining the Practice of Law" in the August 2007 issue of Wisconsin Real Estate Magazine at www.wra.org/WREM/Aug07/PracticeOfLaw.
Tracy Rucka is a Staff Attorney for the WRA.