Today’s Real Estate Antitrust Cases and the Offer of Compensation…

Today’s Real Estate Antitrust Cases and the Offer of Compensation…

Agency Disclosure in the late 1980s is the force that created the MLS Offer of Compensation as the MLS Compensation Vehicle. Prior to that. all Subscribers and Participants of an MLS had an Agency Duty to the Seller, and Buyers were not aware of this fact. This arrangement required only one contract with a principal to a real estate transaction (the seller), and the rules of and participation in an MLS by REALTORS and real estate licensees.

Background:

I passed my California real estate sales license exam in 1974. I then got my California Brokers License in 1975, selling as a “broker associate” for a large brokerage firm in San Diego.

At that time, we were taught in the pre license courses, as well as in the sales training courses taught by brokerage firms, that the seller was our “client” and the buyer was our “customer.” As a matter of fact, we were warned not to refer to buyers as “clients” (any of you remember this?) as it may be misleading to buyers.

If you asked most sales licensees at that time, they were aware that they worked for and had a “fiduciary duty” to the seller and not to the buyer, but no one (or very few) were sure why this was the case.
The reason was that the NAR MLS Model Rules created MLSs as a “unilateral offer of sub agency. Everyone represented and was an agent of the seller. This was accepted fact in 1974. The “MLS Compensation Vehicle” was the Unilateral Offer of Sub Agency.

About the same time, there was a case against Forrest E. Olsen (which later became Coldwell Banker), where a buyer “believed” that a sales licensee (actually, that licensee’s broker…Forrest E. Olsen) was representing the buyer as an agent on an “inhouse” listing…not because it was stated anywhere or in any document…but because of the actions and statements of the sales associate created and Ostensible/Apparent Agency. The buyer was led to believe that they were being “represented” by an “agent” and did not understand that the broker was “representing” the seller as an agent.

The buyer won the case and it was then recommended by most attorneys I had contact with in California at the time, and by CAR as well if my memory serves me, that when preparing a contract for a buyer on an inhouse (as opposed to an “outhouse” listing 🙂, that it would be “safer” to be a disclosed dual agent (which was and still is allowed under California Real Estate Law) rather than risk being found by a court of law, after the transaction closes, to be an undisclosed dual agent (divided agency), where the damages could be very large in a rapidly appreciating real estate market (and also resulted in disgorging of commission).

So on any inhouse sale, we included in the contract words to the effect:

“Buyer understands that sales associate and sales associates’ broker represent both the buyer and seller agent in this transaction as a dual agent.”

Are you with me so far???

Good, because this is where it gets confusing 🙂

History of Agency Disclosure and the push to outlaw dual agency

Getting agency disclosure legislation enacted in California was about a 12-year process. There was some serious talk of outlawing dual agency in the 1970s (pushed by the Consumer Federation of America, which is an advocate for the current antitrust cases) and three legislative proposals began their way through the legislative process. One of the three proposals would have made dual agency a criminal offense. The California Association Realtors worked closely with consumer lobbying groups and legislators. Over the next eight years the CAR and legislators developed a compromise bill.

The compromise did not outlaw dual agency, which was a very common, and some would say disclosed practice (and others would say undisclosed).

The compromise legislation required California real estate licensees to disclose agency relationships in residential transactions. The reasoning was, that if buyers and sellers truly understood the options available to them, they would choose the representation that was in their own best interests.

So, in 1986 the California legislature passed the agency disclosure law unanimously. The legislature granted the real estate industry a grace period until the beginning of 1988 to prepare to implement the disclosure law.

The California legislature mandated that persons selling residential real estate must give agency disclosure information to the parties involved in real estate transactions. This information must include the possible agency relationship that the real estate firms involved in the transaction may have with their clients. Interestingly, the language of the law was a bit confusing. The agent representing the seller was referred to as the Listing Agent. The agent representing the buyer was referred to as the Selling Agent. The three types of representation were:

Representing the Seller Exclusively.
Representing the Buyer Exclusively.
Representing the Buyer and the Seller as a Dual Agent.

When the agency law took effect the real estate business was in a definite upswing and a sellers’ market. Licensees busy scrambling to market properties did not have time to worry about agency — they were too busy making money!

Unfortunately, even today few people in the real estate industry understand agency disclosure.

Prior to 1989 and for a few years thereafter, an MLS operating under NAR’s Model MLS Rules was (among other things…but this was primary) a “unilateral offer of sub agency.” Everyone worked for, was the agent of, the seller. By virtue of the MLS. It was unilateral and automatic.

The only way a “cooperating broker” MLS subscriber (the MLS member…the participating broker) could get out of being a sub agent was to “refute the unilateral offer of sub agency.”

Attorneys I have discussed this with over the years (including extensive conversations with Alex Creel of the California Association of REALTORS Legal Staff during 1986-88 when the California Agency Disclosure Requirement was being enacted…and with my partner, Mr. Agency himself, John Reilly, many times over the years, had no consensus as to how “refuting the unilateral offer of sub agency” could be accomplished. Besides, why would one want to be anything but a sub agent…that was the way it was always done.

Then, in 1988, the California Agency Disclosure Requirement placed California REALTORS in danger of making disclosures that they were “representing the buyer exclusively” while at the same time they were already agents of the seller because of the NAR MLS Model Rules, with not even the slightest clue that “refuting the unilateral offer of sub agency” was even required…and even if they knew it was required, no one could tell them how to do it.

It was obvious to those of us who were students of this issue that something had to be done with the NAR Model Rules. As I recall, NAR was reluctant at first to change the MLS Model Rules. CAR then created and adopted what was referred to as the CAR Model Rules, which changed an MLS from a “unilateral offer of sub agency” to a “unilateral offer of compensation, sub agency optional.”

The “Offer of Compensation” being challenged today was at the time of its creation in the 1990s, considered an improvement over the “Offer of Subagency” by many. It was a change enacted to protect consumers and practitioners. It allowed for the continuation of the practice of only needing a contract with one principal to a transaction, and “membership in an MLS, to get all parties working to create a marketplace for listings, paid for their efforts.

A handful of us advocated at the time, for a two-contract system, a contract with the buyer as well as with the seller. That system may soon be upon us.

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