Kansas Bar Journals
68 J. Kan. Bar Assn. May, 36 (1999).
BROKERAGE RELATIONSHIPS IN REAL ESTATE TRANSACTION ACT
Journal of the Kansas Bar AssociationMay, 1999BROKERAGE RELATIONSHIPS IN REAL ESTATE TRANSACTION ACTVernon L. Jarboe [FNa1]Copyright (c) 1999 by the Kansas Bar Association; Vernon L. Jarboe
I. History and background
At least anecdotally, the real estate profession began with that man about town known as the local deal maker. He knew which properties were available for sale, keeping these addresses on a list in his vest pocket. He became so renowned for his list that anyone desiring to sell property sought the deal maker out to have his name and property information added to the list, a who's who of property owners, so to speak. In short order, people interested in purchasing properties approached the real estate man to ask if he had anything on his list that might meet their needs. From this list, held close to his chest, came the concept of "listing" property for sale. As the real estate business became licensed, the process of listing a property became more formalized. Kansas has licensed this activity since 1947. [FN1]
Although real estate brokers at this developmental stage of the business saw themselves as "facilitators" assisting both buyer and seller, the legal moniker was that of "agent." Along with the concept of an agent came the rules and principles of agency law. In trying to cubbyhole the type of transaction involved, the law did not assign brokers of real estate a niche consistent with how they actually acted.
The common law principles of agency require undivided loyalty, fiduciary responsibility, implied duties along with duties expressly agreed to by the real estate broker and consumer. [FN2] Because the law recognized real estate brokers as "agents," the common law brought with it agency by implication.
In the trade, a brokerage company that takes a listing and an agent, who meets with a seller, negotiates the listing and signs the listing contract with a seller on behalf of the broker, are collectively referred to as the listing agent. Sometimes phrases such as "listing company," "listing broker," or "listing firm" will also appear. On the other side of the transaction, a salesperson who finds a buyer is referred to as a selling agent. Each selling agent also works for a broker who would then be the "selling broker" or "selling company." Sometimes the listing company and selling company are the same, in which event the salespeople involved are simply the listing agent and selling agent.
Historically, most of the real estate business, at least in metropolitan areas, has revolved around the multiple listing service. [FN3] The multiple list is a contractual relationship in which brokers offer a portion of the listing commission to any company selling listed property. The availability of listings is typically described in print or electronic media to all brokers belonging to the multi-list service. An extremely unusual working environment evolves from this cooperative effort by brokers to share listings for their mutual benefit and the mutual benefit of sellers and buyers. Ironically, brokers, theoretically in competition with one another, work hard to sell another broker's listing, in effect selling the competitor's inventory. Even more preposterous is the situation of buyers working with a broker to find property. These buyers spend a lot of time working with a broker, who is actually employed by and working for a seller they do not know.
However, most consumers and brokers failed to understand the law and its implications for them. A 1980s national study by the Federal Trade Commission found 70 percent of consumers did not know that the real estate broker was working for the seller. [FN4] The average consumer's contact with a real estate broker during the purchase of real estate was not with the listing agent but rather with some other salesperson. The salesperson probably worked for a different real estate firm. Typical buyers spend hours with the selling agent, look at seven to 12 properties listed by several different companies, rely on the selling agent to show them the "best deals," and never meet the listing agent. Is it any wonder buyers were generally unaware that the selling agent worked for the seller? Even sellers, who were directly consuming the broker's services, did not recognize the selling agent as working for them.
Most real estate brokers, on the other hand, had long been taught that they worked for the seller because the seller paid their fee. [FN5] Few questioned the fact that brokerage fees were included in the total purchase price paid by the buyer. Yet lenders, title companies, lawyers and others who closed real estate transactions traditionally placed brokerage fees on the seller's side of the closing statement.
Just as consumers of real estate brokerage services were confused, so also were real estate brokers. Often selling agents lost sight of the fact they were working for the seller and started looking out for the interests of the buyer even though, as far as lawyers were concerned, legal responsibility flowed to the seller. [FN6] Many other brokers, especially in rural markets, continued to act as and see themselves as facilitators of real estate transactions even though the license law did not condone facilitation as a legal role. [FN7]
In George v. Bolen Williams, [FN8] the Kansas court recognized a real estate broker might become a buyer's agent through the simple process of delegation by the principal (a proposed buyer in this case) and acceptance of delegation by the broker. Thus, even without a written agreement, brokers could become the common law agent of a consumer. The duties of common law agency did not dovetail with the self-perceived responsibilities a real estate broker brought to the table, but, for the most part, the business rolled along with little liability until more recent times.
Because of confusion exhibited by consumers and real estate licensees alike, the Real Estate Broker and Salespersons License Act [FN9] was amended in 1989 to require real estate salespeople orally to disclose to buyers, basically, the following:
"I work for the seller. I do not work for you. Anything you tell me, I will pass on to the seller."
This oral or written disclosure had to be given early on while helping the consumer and confirmed in the sales contract. [FN10]
Oral disclosure continued to be permitted by law until Jan. 1, 1996, when the Brokerage Relationships in Real Estate Transactions Act (BRRETA) became effective. This new law was passed by the 1995 session of the
Legislature. [FN11] It required written disclosure to consumers of agency relationships. [FN12] Real estate licensees were required to present this written disclosure to buyers and sellers, explain it and, acquire signatures. [FN13] The form actually adopted by the Kansas Real Estate Commission (KREC), called the Disclosure of Alternative Agency Relationships form (affectionately known as DAAR), caused much consternation in the industry.
The DAAR was intended as purely a disclosure form. The signature required of consumers merely acknowledged their receipt. However, the form looked so much like a contract that many consumers distrusted it, and many licensees did not understand it. Immediately after BRRETA's effective date, efforts were made in the 1996 legislative session to amend the law. [FN14] Eventually, the 1996 Legislature exempted commercial transactions from this new law, [FN15] made the DAAR signature optional, and ordered the Kansas Real Estate Commission to study BRRETA over the next year and then propose revisions to the 1997 Legislature.
A task force appointed by KREC proposed, KREC approved, and the Legislature then adopted "BRRETA II." [FN16] BRRETA II retained the primary elements of BRRETA I, but also approved several significant changes. BRRETA I had brought in statutory agency, had defined obligations for defect disclosure and had brought in written agency disclosure. BRRETA II repealed dual agency, implemented the transaction broker concept and placed commercial transactions under BRRETA.
For simplicity, this article will not discuss the differences between the two laws but rather will focus on BRRETA II, effective since Oct. 1, 1997, and how it changed the common law. The new law places specific requirements upon licensees as to when and how they disclose the various agency relationships available in Kansas, gives greater choice for their own agency selection, and defines the responsibility of real estate licensees with respect to defect disclosure. The new law clearly replaces the common law in regard to the principal agent relationship and non-agency relationship between consumers and real estate licensees. [FN17] The Senate Committee on Judiciary made specific reference to Board of Neosho County Commissioners v. Central Air Conditioning Co. Inc. [FN18] and to K.S.A. 77-109 to find that the common law in this area will remain only where BRRETA is silent. [FN19]
II. Disclosure of material facts
The traditional common law approach to disclosure was based on the theory of caveat emptor. The phrase "Caveat emptor, qui ignorarea non debuit quod jus alienum emit," which translated means "let the buyer beware, who ought not be ignorant of the amount and nature of the interest which he is about to buy," [FN20] was once considered to be the...