Designated Brokerage: Colorado Real Estate Agency Law Evolves Again

• Publication year: 2003
• Pages: 11

32 Colo.Law. 11 Colorado Lawyer 2003.

2003, March, Pg. 11. Designated Brokerage: Colorado Real Estate Agency Law Evolves Again

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Vol. 32, No. 3, Pg. 11

The Colorado Lawyer
March 2003
Vol. 32, No. 3 [Page 11]

Articles

Designated Brokerage: Colorado Real Estate Agency Law Evolves Again
by J. Marcus Painter, Brian R. Leone

J. Marcus Painter is a partner in the Real Estate and Corporate Practice Group at the law firm of Holland &amp Hart, LLP, in Boulder, Colorado - (303) 473-2700. He served as Chair of the CBA Real Estate Section during the drafting of S.B. 196 and assisted with negotiations for modifications to the statutory language. Brian R. Leone is an associate with the law firm of Myatt Brandes & Gast, PC, in Fort Collins, Colorado - (970) 482-4846 - and practices in the areas of business and commercial litigation, real estate construction law, and appellate proceedings

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The authors wish to thank Mike Gorham, outgoing director of the Colorado Division of Real Estate, for his invaluable assistance in the review of this article.

This article examines the significant modifications to Colorado's real estate brokerage relationships statute brought about by the adoption of "Designated Brokerage" under Senate Bill 02-196. The legislation profoundly impacts agency relationships, vicarious liability, office policies, standardized real estate forms, and other matters affecting real estate brokers and the lawyers who work with them.

A major paradigm shift appeared in the area of real estate brokerage law on January 1, 2003, when Colorado Senate Bill 02-196 ("S.B. 196") went into effect. The new legislation brings the concept of "Designated Brokerage" to Colorado, and serves to refine the relationships between real estate licensees and the consumers of their services. As with earlier work by the General Assembly in the area of real estate brokerage, the new provisions abrogate portions of the common law of agency in favor of a framework believed to more closely approximate the actual expectations of participants in real estate transactions.

The changes should be of interest to a cross-section of Colorado practitioners, particularly those whose clients are, or will interact with, Colorado real estate licensees or the buyers (tenants) or sellers (landlords) who work with such licensees in real estate transactions.1

This article examines the Designated Brokerage framework and other changes adopted by S.B. 196 against the backdrop of historical practice in Colorado. In addition, the article addresses a number of practical issues and potential questions under the new framework.

COLORADO'S PRE-DESIGNATED
BROKERAGE EXPERIENCE

Colorado's treatment of real estate brokerage relationships before the enactment of S.B. 196 can be divided into two distinct periods. Prior to 1993, the state went through a lengthy, and at times troublesome, period in which brokerage relationships were governed largely by the common law. Then, in 1993, new brokerage relationships legislation was adopted,2 and the non-agency concept of transaction brokerage was introduced, resolving certain of the troublesome issues. Now, in another leap forward in brokerage law, Colorado has attempted to further refine and clarify real estate relationships through the adoption of the concept of "Designated Brokerage." A brief overview of the historical context should help explain both the impetus for, and ultimate significance of, the newly adopted Designated Brokerage provisions.

The Common Law Era

The Colorado statutory provisions governing real estate professionals originally covered only licensing and regulation.3 No legislated framework existed to provide guidance to real estate licensees and the public regarding the creation of agency relationships.4 As a result, the courts analyzed real estate brokerage under the common law of agency, and ruled on the existence and scope of fiduciary relationships on a case-by-case basis.5 A real estate professional became an "agent" when he or she acted for and on behalf of a party to a transaction under conditions the courts considered sufficient to establish fiduciary obligations.6

The courts nevertheless struggled at times to ascertain when and with whom a licensee had established an agency relationship. This was particularly evident following the Colorado Court of Appeals' 1983 decision in Velten v. Robertson7 and its 1985 decision in Little v. Rohauer.8 In each case, the court concluded that a real estate licensee had become an agent and fiduciary of both the buyers and sellers in the same transaction.9 Thus, the licensees in each case abruptly found themselves in violation of fiduciary duties of loyalty and disclosure owing to both parties.10 The buyers and sellers in the transactions also found their rights impacted in ways they did not specifically intend or anticipate.11 This type of scenario, characterized by accidental, undisclosed dual agency, was labeled "agency by surprise" by legal commentators.12

Such unintended agency created problems on a number of levels. Velten stood for the proposition that a licensee could become a dual agent, even while trying in good faith to act as a buyer's representative. The ruling caused concern over whether it would ever be possible for a

real estate licensee to exclusively represent the purchaser in a Colorado transaction.13 Further, the Court of Appeals' analysis in both Velten and Little ran counter to the consensus view among members of the real estate brokerage community, who, by and large, believed at the time that both listing and selling licensees generally worked under the "Multiple Listing Service" ("MLS") system as agents and subagents of the seller.14 Finally, the relative ease by which a licensee (particularly one acting as a "selling agent" - a licensee working with a buyer) could stumble into an undisclosed dual agency situation appeared to threaten the efficacy of the MLS framework as it was then interpreted by the real estate industry and its governing bodies.15

The state's experience with recurring "agency by surprise" was relatively short-lived. The Colorado Supreme Court granted certiorari in Little, consolidated the appeal with another dispute working its way through the courts, and in 1987, released its companion opinions in Stortroen v. Beneficial Finance and Rohauer v. Little.16 In the unanimous opinions, the Supreme Court concluded that all licensees in the MLS system (as then practiced and understood), including licensees working with buyers, stood as the presumptive agents or subagents of the seller in a transaction,17 regardless of the conduct of the licensees or private expectations of the parties. This presumption effectively could be overcome only if the parties executed a written buyers' agency agreement.18 These key holdings seemingly eliminated the problem of "agency by surprise" in the residential MLS context.19

However, Stortroen and Rohauer arguably fell short of resolving the uncertainty and confusion in the industry. For sellers, the notion that every salesperson who obtained the seller's MLS listing and showed the property became a subagent presented some unique difficulties under the common law of agency. Subagents, utterly unknown to the seller, could bind that seller to legal obligations and to knowledge of material matters, and could create vicarious liability for the actions of these remote subagents.20

On the other side of the transaction, the idea that agents working with buyers were presumptive subagents of the seller clashed with the expectations, often justified, of many purchasers who typically developed a fairly confidential rapport with the salesperson. This was especially true as the licensee working with the buyers located listings; drove or rode with the purchasers to property showings; helped purchasers to prepare offers and contracts; and assisted with other issues, such as financing, inspections, and title commitments. Many purchasers came to believe that their licensee was an ally when, in truth, the licensee was an agent of and ultimately duty-bound to the seller under the principles announced by Stortroen and Rohauer.21

This purely case-by-case approach to real estate brokerage also failed to supply meaningful guidance to consumers and real estate professionals as to the specific duties and obligations that attached once a licensee assumed a fiduciary role. The common law of agency is itself quite extensive and has developed numerous rules governing the nature, extent, and implications of an agent's fiduciary obligations. As one respected commentator recently observed, "[t]he Restatement (Second) of Agency devotes over twenty sections to the topic, covering over eighty pages, with numerous illustrations of the fiduciary principle at work."22 However, in the real estate brokerage context, this may have been precisely the problem: the sheer breadth and generalized nature of the common-law framework arguably made it difficult for transaction participants to understand precisely what they could expect of one another in the various discreet, but recurring, factual situations arising out of real estate sales.

The 1993 Brokerage
Relationships Act

Against this backdrop,23 the Colorado General Assembly enacted a revolutionary piece of legislation during its 1993 legislative session. The new 1993 Brokerage Relationships Act (S.B. 93-223) ("1993 Act")24 identified specifically each of the possible brokerage relationships outlined the obligations and limitations associated with each role; imposed important requirements regarding disclosure on real estate professionals; and adopted as its focal point a new,...