Legal Disputes Between Real Estate Agents and Clients

Episode-021-Website
Posted in

In this podcast, I will discuss what I tend to see in buyer representation agreements, the legal obligations created by buyer representation agreements, and the areas where I have seen disputes arise in connection with buyer representation agreements.

This podcast is sponsored by TimelyContract.com, Real Estate Property Lawyers providing Better Information for Real Estate Transactions.  Visit www.timelycontract.com to learn more about the transactional real estate legal services offered through Timely Contract and their network of online experienced real estate attorneys.

Episode Trascript

With so many people moving to Idaho, the real estate market here has never been busier. With that comes greatly increased activity for real estate agents— and unfortunately, many more opportunities for disputes between agents and clients. In the past couple of years of my law practice, I have noticed a significant uptick in the frequency of legal disputes between real estate agents and clients. 

Like other business transactions, the relations between a real estate agent and a client are often – but not always – controlled by a written contract. That contract may be called by different names. But in this area, the contract between someone buying real estate and their real estate agent is typically called a “buyer representation agreement.” In this podcast, I will discuss what I tend to see in buyer representation agreements, the legal obligations created by buyer representation agreements, and the areas where I have seen disputes arise in connection with buyer representation agreements.

For starters: what exactly is a buyer representation agreement? Put simply, the buyer representation agreement is a contract between a person seeking to buy property and a licensed real estate agent. As an aside, real estate agents are licensed in each State in which they practice. In addition to the State licensing boards, there are also associations of realtors at the local, state, and national levels. Someone who is referred to as a “Realtor” is a member of one or more such associations. These associations have their own codes of ethics and rules that are separate from the requirements that State law gives to real estate agents.

Under a buyer representation agreement, a real estate agent agrees to represent someone seeking to buy property and the person seeking to buy property agrees to be represented by the agent. For purposes of Idaho law, this Agreement creates a “client” relationship. A buyer representation agreement is set for a specific period of time. For example, the buyer representation agreement might be in force for six months after the date of signing. Technically, the parties to the buyer representation agreement are usually the buyer and the real estate brokerage (i.e., the company the agent works for).

The agent usually signs the agreement on behalf of the brokerage.

So, what are the implications of the buyer representation agreement being in force? There is a fair amount of legal detail involved here. I will try not to get too far into the weeds. Essentially, once the buyer representation agreement is in force the client is bound to the brokerage for the time period of the agreement. And the brokerage is obligated to the client to fulfill its duties both under the agreement and under State law. As compensation, the brokerage typically receives half of the commission on the sale – and the commission is usually 6% of the sale price. In theory, the buyer does not pay anything out-of-pocket for the real estate agents services, since the commission usually comes out of the sale price and therefore is effectively paid by the seller.

For the buyer to be contractually bound to the brokerage essentially boils down to this: under most buyer representation agreements, if the buyer purchases property during the time period of the agreement, the buyer will owe the brokerage a commission – sometimes, even if the buyer purchases the property without using the brokerage’s services. In buyer representation agreements I have seen in Idaho, a buyer’s obligation to pay the brokerage or commission even if the buyer closes a property using a different brokerage or on their own is called a “cancellation fee.” 

However, not all buyer representation agreements I have seen have a cancellation fee. For example, another buyer representation agreement that is the subject of a lawsuit I have worked on does not have a cancellation fee, but says that the buyer must pay the brokerage a commission if the buyer enters into a purchase while the agreement is in force, terminates the agreement early for purposes of avoiding a commission, or if within 120 days of the termination date of the agreement, the buyer enters a purchase of any property that was shown or offered to the buyer – or brought to the buyers attention – while the agreement was in force. The terms can be complex, and are worth a careful review.

Although most relationships between a client and a real estate agent go fairly smoothly, disagreements or conflicts between a buyer and an agent are common enough that any person looking to hire an agent to buy property is well advised to look carefully at what the proposed representation agreement says about how the buyer can terminate the agreement and what the consequences are for doing so. I have seen multiple lawsuits arise where the situation is basically someone wanted to buy property, hired a real estate agent, did not feel the agent was doing a good enough job and therefore fire the agent, bought property with a different agent during the timeframe of the original agreement, and got sued by the original agent for the amount of the commission. 

The last thing anyone wants when they are moving to a new State is to be handed a lawsuit shortly after settling down into their new home. Two of the key ways that someone can avoid this regrettable circumstance are to make sure they hire an agent with good experience and with whom they get along well, and also to make sure they have fully read and understood the language of any representation agreement they are asked to sign. 

Unfortunately for buyers, the buyer representation agreement tends to be based on a form produced by the association of realtors. The language of a buyer representation agreement is usually not subject to much negotiation. In my experience, it is more of a “take it or leave it” transaction. That underscores the importance for buyers of reviewing the agreement upfront and researching which real estate agents they are going to work with to assure a smooth transaction.

Now what are the obligations of real estate agents and brokerages under a buyer representation agreement? As I mentioned, under Idaho law the signing of a buyer representation agreement makes the buyer a “client” of the brokerage. That “client” status creates obligations of the Brokerage under Idaho law. 

Under the Idaho Code, these obligations include the following: to perform the terms of the written agreement with the client – i.e. the buyer representation agreement — to exercise reasonable skill and care, to be available to the client to receive and timely present all written offers and counter offers, to promote the best interest of the client in good faith, honesty, and fair dealing which under the law includes but is not limited to disclosing to the client all adverse material facts actually known or which reasonably should have been known by the agent, seeking a property for purchase at a price and under terms and conditions that are acceptable to the buyer and assisting in negotiation, and when appropriate, advising the buyer to get professional inspections of the property or to seek appropriate tax legal or other professional advice. 

It is important for buyers to understand that a real estate agent is typically not required to inspect a property themselves or to make any warranties about the quality of the property or the property’s fitness for whatever purposes the buyer might have. In Idaho, real estate transactions run on the “buyer beware” principle. The onus is on the buyer to have the necessary work done to inspect and evaluate the property to see if it is suitable for the buyer – including such tasks as surveying, engineering, and legal valuations of matters such as title or zoning.

That said, if the real estate agent actually knows or reasonably should know an “adverse material fact“ about a property, that agent then has a statutory obligation in Idaho to disclose that adverse material fact to the buyer. For example, if the agent knows of a defect in the title or a zoning condition that would defeat the buyer’s purpose in purchasing the property, the agent will be required by the Idaho Code to disclose such facts to the buyer. Along with disputes over how to terminate an agent, this is the most common area of dispute I have seen in my practice regarding real estate agents. 

Buyers should keep in mind, however, that just because there is an adverse material fact about the property does not necessarily mean that the agent knew about it or even that they reasonably should have known about it. Again, the default principle under Idaho laws that the agent does not have the requirement to affirmatively act to find things out about the property. But if a buyer has concrete, provable facts about what the agent knew or reasonably should have known about a property, the buyer may have a viable claim that the agent failed to meet his or her obligations.

I hope this has been a helpful summary of the general background about what buyer representation agreements do, what obligations they impose, and some of the hot areas for disputes. There are a number of other aspects to buyer representation agreements that depending on the situation buyers will want to be aware of. At Macomber Law, we are experienced and well-versed in reading and explaining these agreements to people who are considering buying property up here in Idaho. We would be happy to help with any questions that you may have.