Designated Agency Legislation Terribly Flawed – Part Nine

I just came upon some awesome historical presentations about how flawed the designated agency legislation was when it was proposed and passed in the late 1990’s.  These come from a not-for-profit consumer organization that is no longer in existence but shows just how convoluted this legislation was then and still is today.  The organization was known as Real Estate Agents for Real Agency (REAFRA).  It consisted of both buyer and seller agents who were concerned about how large real estate companies in Massachusetts were able to dominate the actions of their association and legislators to do their bidding to their benefit.  The legislation that passed still benefits only large real estate companies in Massachusetts and continues to harm small real estate companies as well as real estate consumers.  I will continue to post numerous articles and postings from their original website as these issues brought up nearly twenty years ago are still at the heart of the problems consumers are facing today.  This is part Nine of Nine.  Tom Wemett

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Numerous attorneys weighed in on the legislation as well:

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Designated Agency – A Legal Opinion

This summary is excerpted material from a 1999 Essay entitled “The Disintegrating Erosion of Particular Exceptions” by Professor of Law Charles E. Rounds, Jr. of Suffolk University Law School. Professor Rounds teaches Fiduciary Relations (Agency & Trusts) and is recognized as an expert on common law fiduciary issues.

His Essay highlighted the inherent conflicts of practicing dual agency and designated agency in any real estate office setting. Undivided loyalty and strict confidentiality, as well as meaningful informed consent (all uncompromising elements of common law agency) are disingenuously blurred in “designated agency ” legislation.

Designated agency is an attempt to erode the common law notion of undivided loyalty as the cornerstone fiduciary duty owed by an agent to his/her principal.

The law recognizes that “no man can serve two masters”. No agent can give to each of two principals his undivided allegiance, advice and counsel.

Professor Rounds highlights several problems associated with designated agency:

– How does a real estate office prevent the transfer of confidential information with office policies and procedures alone?

– Isn’t the appointing/designating broker a dual agent with duties owed to both parties?

– Can true informed consent be given to both parties in designated agency when both clients are unrepresented by independent counsel at the time of their consent?

– How can a State Realtor Association lobby for legislation that would undermine the protections that the common law of agency affords to principals?

– Won’t confusion reign in a setting whereby real estate offices attempt to represent both sides in every real estate transaction?

“It should not be necessary to resort to a 93A action to sort out the conflicts inherent in the designated agency movement. There is more than enough ammunition lurking in the common law of agency. No amount of dual agency legislation can totally eclipse the common law.” (Quoting Professor Rounds)

Some large real estate firms are already offering mortgages, insurance products and moving services, and many firms offer financial advising and home inspections as well.

Now those same firms want the ability to be both the buyer’s agent and seller’s agent for the same property, encroaching further upon the prohibited common law notion against agent self-dealing.

“A fiduciary who benefits in a transaction with the person for whom he is a fiduciary bears the burden of establishing that the transaction did not violate his obligation.”

See Cleary v. Cleary, 427 Mass 286, 692 N.E. 2d 955 (1998)

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RE: An Act Clarifying the Duties of Real Estate Brokers

In response to similar legislative attempts in 1997, Attorney Frederick G. Barry provided the evaluation below. Fred Barry is a practicing attorney in Milton and Cape Cod, an educator of real estate agents, and an Adjunct Professor of Law at the Massachusetts School of Law.

RE: AN ACT CLARIFYING THE DUTIES OF REAL ESTATE BROKERS

1) On December 4, 1996, the General Court of the Commonwealth of Massachusetts was asked to lend its authority to the enactment of a lengthy amendment to Section 87PP of Chapter 112 of the Massachusetts General Laws. The title of this act implies that its purpose is merely to clarify the duties of real estate brokers. To the uninitiated, this legislation appears at worst innocuous, and at best both harmless and helpful.

2) Who could quarrel in principle with the “clarification of duties” of real estate brokers, given the ever-increasing complexity of their business and the likelihood of liability for the brokers and their companies when duties are breached?

3) Such important legislation however, which affects virtually all consumers of real estate services cannot and should not be enacted by the uninitiated. It is of great importance that the wise and honorable members of our General Court understand the anti consumer nature of this proposed legislation, and the unspoken agendas of its proponents.

4) The ancient and once honorable principle of caveat emptor warned consumers in earlier times to approach each transaction warily. Before science and technology left most of us behind, accumulated wisdom and experience along with careful observation were sufficient to weigh the value of the deal. Consumers and merchants “played” on a level field,

5). The law of agency, which this act would abrogate, has been evolving for several hundred years and has become particularly important in the 20th century. Professional “agents” provide and typically sell their services to amateur “clients” who are consumers of complicated products or services. Our laws place the agents in positions of trust with carefully defined “fiduciary” duties. In carrying out these duties it is said that the agent “represents” the client. In this context “representing” is not a lay term, but a legal term. When an agent accepts the trust of a client he is promising to focus exclusively on the beat interests of the client. He must put those interests even before his own. It may be helpful to visualize the attorney/client relationship to fully understand agency.

6) It should not be surprising to our legislators that attorneys and judges find the notion of dual agency incomprehensible, perhaps even laughable. And yet, dual agency in one form or other is precisely what this act promotes. By abrogating common law and redefining agency large real estate companies could entice both buying and selling consumers of real estate with promises of full service agency. Buyers seeking the lowest possible price on favorable terms would be promised loyalty by a company, which simultaneously promised loyalty to sellers who were seeking the highest possible price on favorable terms.

7) Consider the dilemma of the consumer of real estate services. He is attracted by the image, stature and general high profile of a large real estate company. Assuming quite logically that success breeds success he is confident that this company can serve him best whether he wishes to buy or sell or both. He is assured in solemn terms that he will receive the most professional “representation” available. It will be easy to conclude that he has come to the right place. If he is a buyer he will be assured of the company’s large market share of listed properties. If he is a seller he will be assured that the company has a history of attracting the most qualified buyers. A few astute consumers may at this point begin to wonder how both buyers and sellers can be fully “represented” by one company. Most however will move blissfully through the purchase and sale process, being carefully directed to in house listings or in house buyers. Should a match be made there will likely be in house financing and in house counsel available. With luck, all shopping will be in “the company store”.

8) All’s well that ends well … or is it? Did the sellers really understand that the process would favor the company’s own buyers? Did the buyers understand that regardless of their needs, an incentive laden structure would push them toward in house listings? Did either party understand that when they signed that “consent to dual agency” form, they lost the company’s loyalty? Did they know that they were no longer “represented” by a fiduciary? Did they realize that without such an agent there would be no professional guidance?

9) The professional guidance, which was expected by both parties when they chose the company, has been legally extracted from the process. The company is now not only permitted, but required by contract to omit further professional guidance and advice. The parties now float freely and at times blindly, through the purchase and sale process agents and the company, with no further obligation to provide professional guidance and advice, are immune from liability should either party stumble into a bad deal.

10) This proposed legislation is openly and blatantly anti-consumer. Why then would the National Association of Realtors or the Massachusetts Association of Realtors promote such a law? Most simply, these are trade organizations. They exist for the benefit of their members, not for the benefit of consumers. This proposed law is wholly self serving. It is intended to protect their members from liability by drastically reducing their obligations to the consumers who rely on thou.

11) The proponents of this proposed legislation suggest that it is common to override common law … and they are right. The process of replacing common law with statutory law has been going on for about 200 years. We no longer rely on common law definitions for traditional felonies like murder and rape. Modern statutory law gives us new definitions and new penalties. The problem with this proposal is that it seeks to change the common law definition of agency only as it relates to real estate agents. All other agents would remain full fiduciaries. If the state and national real estate trade associations wish to reduce the legal responsibilities of real estate agents they should re label them as real estate clerks. People who agree contractually to pay for professional advice, counsel, and service should not later be asked to waive that right for the convenience of a company which wishes to be compensated by both sides of the deal.

12) It has been pointed out that lawyers can represent both sides of a legal controversy. This is true, but it can be done only when both parties give their fully informed consent to this dual representation. Attorneys are very reluctant to engage in such a practice because they know that to represent both is to represent neither properly. They know that to proceed would involve great personal risk. They realize that many of the possible consequences of proceeding with dual agency are not practically foreseeable at the moment of consent. They also know that judges may be disinclined to enforce any consent given without full knowledge of its consequences. As a result, dual agency goes virtually unpracticed by attorneys.

13) Another section of this proposed law would allow the principals, or owners, of real estate companies to appoint full fiduciary opponents from within the company’s ranks, one agent for the buyer and one agent for the seller, while at the same time removing themselves from potential liability for negligence. What a wonderful world for owners. “If you have a problem, sue my agents. Even though I own the clients I’m not responsible for their fair treatment.”

14) It may be useful to focus on the critical issue which prompts this legislative effort i.e. the preservation of the in house sale. First, we must recognize that the in house sale is one of the “support columns” of the real estate industry. Accordingly, it must be protected and it can be protected without sacrificing consumer protection. The solution is not complicated. This proposal should be withdrawn, and future legislative and educational energy should be focused upon the training and education of brokers, which would enable them to provide full fiduciary services to those who need them. They must understand client loyalty and all of the implications of full fiduciary services. They should also understand that many buyers can and will prefer to fend for themselves. These buyers with personal knowledge of the market and the process are quite content to forego undivided client loyalty and remain well-informed “customers”. These buyers prefer to be unencumbered by agency contracts. They prefer to be free to deal with multiple listing companies in the hopes of finding pre MLS listings.

15) With many buyers content to remain customers, the companies, which wish to do in house sales, must train their agents to give these buyers the quality of informational services which will earn their patronage. And so, there will be peace in the valley. Sellers will get real undiluted agency representation by the listing companies. Buyers who wish the protective services of a full service agent will seek the assistance of buyer agent specialists, and independent buyers who are content with customer status will work with traditional companies or directly with “FSBO” sellers.

          

Frederick G. Barry Jr. Esq.
Adjunct Professor of Law

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Conflict of Laws

An Opinion by Stephen H. Perry, Esq

The following excerpt is a citation from MA General Laws pertaining to real estate Brokers.

It is VERY CLEAR from the plain language of this Licensing Statute that Brokers are responsible for and MUST oversee and supervise all of their salesman’s transactions. Therefore, it is very significant that, in order for a Broker to follow the Licensing Statute to the letter, the Broker must risk being sued for insider trading on EVERY DEAL in his office that involves himself (the Broker) as an agent of a client adverse to one of his associate salesman’s client (under the proposed Designated Agency law).

In other words, if the Broker has a seller listing and his new salesman “Joe” has a buyer client that wants to make an offer on the Broker’s listing, the Broker is compelled by the Licensing Statute herein to supervise and approve the actions of Joe. However, if the Broker assists Joe (as this Statute demands), he is violating his fiduciary duty of undivided loyalty to his client (the listing seller) under the Common Law of Agency.

It is a legal “catch 22” that no disclosure or consent form can cure!

A real estate consumer can not give prior consent to forego a protection that the Licensing Statute provides with no ambiguous language and with a mandate that all salesmen and their clients or customers be represented by one Broker only. The Broker is trapped in the middle, despite the proposed law’s language about remaining “neutral”! The Licensing Statute, however, does not mention neutrality.

Ignore Joe and Joe’s client, and the Broker risks being sued under the Licensing Statute herein, for failure to properly supervise and oversee or approve the negotiation of his salesman. CH 93A big time with no real defense! Assist and supervise young Joe and the Broker risks fiduciary violations to his seller/client and BOTH parties may sue the Broker for Insider Trading, because the Common Law will presume an agency relationship between Joe and his statutory, supervisory Broker {who is also receiving both sides of the commission}, no matter what MAR’s new Designated Agency law says.

Significantly, MAR’s proposed Designated Agency statute says that Brokers must adhere to the Licensing Law provision of a supervisory role. Well, the ONLY way that Brokers can “legally” and safely do that is to NOT actively participate in the listing and selling of real estate. Supervise, manage and appoint or designate other agents only, OR only hire licensed Brokers. PERIOD.

Therefore, small and mid-sized offices with active, top producing DR/Brokers, who also have inexperienced salesmen/licensee’s (of which there are thousands currently working in MA) are in a bit of a legal jam. No clear path for a Broker to avoid this inherent conflict.

{Please see the two Statutes cited below.} NOTE: * = my emphasis added.


REGISTRATION OF REAL ESTATE BROKERS AND SALESMEN – MGL

Chapter 112: Section 87RR License; completion of transactions; fee or commission; action for compensation Section 87RR. Except as otherwise provided, no person shall engage in the business of or act as a broker or salesman directly or indirectly, either temporarily or as an incident to any other transaction, or otherwise, unless he is licensed.* No salesman may conduct or operate his own real estate business nor act except as the representative of a real estate broker who *shall be responsible for the salesman and* who must approve the negotiation and completion by the salesman of any transaction or agreement which results or is intended to result in the sale, exchange, purchase, renting or leasing of any real estate or in a loan secured or to be secured by mortgage or other encumbrance upon real estate. No salesman shall be affiliated with more than one broker at the same time nor shall any salesman be entitled to any fee, commission or other valuable consideration or solicit or accept the same from any person except his licensed broker in connection with any such agreement or transaction. A salesman may be affiliated with a broker either as an employee or as an independent contractor *but shall be under such supervision of said broker as to ensure compliance with this section and said broker shall be responsible with the salesman for any violation of section eighty-seven AAA committed by said salesman.*


Proposed Designated Agency statute (MAR):

“A real estate broker who appoints designated agents shall continue to have the administrative and supervisory duties and responsibilities set forth in section 87RR of this chapter. The designating broker shall be neutral as to any conflicting interests of the buyer and seller and shall not reveal material confidential information about either party without consent from that party.”

 

 

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