Agency Highlights: 4Q 2019

The agency cases located this quarter predominantly address the scope of real estate brokerage services. Agency issues were identified in eleven cases.

1. Gainey v. MINOO, LLC, No. 02-19-00171-CV, 2019 WL 6768128 (Tex. App., December 12, 2019)

Agents are third-party beneficiaries of real estate purchase agreements and are able to compel arbitration.

The buyer’s agent entered into a Commercial Earnest Money Contract for the purchase of a shopping center (“the Purchase Agreement”). At the time of contracting, the largest tenant in the shopping center was a liquor store. About a year after the closing of the purchase, the liquor store vacated its space in the shopping center. The buyer had predicated the value of the shopping center on the liquor store’s continued presence and had “relied on the statements and assurances made that the liquor store would not be vacating the Tenant Space in deciding to purchase such Property.” Following the liquor store’s decision to vacate the shopping center, the buyer sued the seller's real estate agents (“the agents”) under the fraud provision of the Texas Business Commerce Code. The buyer claimed that the agents failed to disclose information that the liquor store had entered into a lease at another shopping center, and had begun the process of obtaining approval from governmental agencies to move and to acquire another liquor license for its new location. The buyer further contended that its own agent did not have the authority to sign on its behalf. The sellers agents moved to compel arbitration even though neither they nor the buyer had signed the agreement containing the arbitration clause.

The appellate court determined that the buyer acknowledged that the party that had signed the agreement containing the arbitration clause was its agent. The buyer, as principal, was bound to the agreement by the acts of its agent. Therefore, the agents were third-party beneficiaries of the agreement containing the arbitration clause and were thus able to compel arbitration of the buyer's claim against them. The appellate court reversed the trial court's order denying the agent's motion to compel arbitration and the case was remanded to the trial court and ordered stayed[1] pending completion of arbitration.
 
 [1] A “stay” provides a temporary halt to judicial proceedings.

2. Grove v. Franke, No. 09-18-00119-CV, 2019 WL 5243152 (Tex. App., October 17, 2019)

The present condition clause negates the reliance element of seller's claim against the agents as a matter of law.

A seller listed his log home for sale and completed a Texas Association of Realtors Seller's Disclosure Notice (“the Notice”). The Notice did not identify any issues with wood rot or wood destroying insects. The seller entered into a contract with a potential buyer who subsequently had the property inspected. According to the buyer, the inspection uncovered extensive wood rot and damage from wood destroying insects. The seller offered the buyer a $50,000 price reduction based upon these findings. Ultimately, the buyer terminated the contract. Following the unsuccessful sale, the seller hired a contractor to replace a number of logs. The quote from the contractor noted that additional logs would need to be replaced “in due time.” The seller did not amend the notice. After modifications to the property were made, the same buyer and seller executed a Texas Real Estate Commission (TREC) earnest money contract for the purchase of the property. The buyer purchased a $100 option that gave him the opportunity to terminate the contract within a set period of time. The buyer then hired his own inspector to inspect the log home and prepare a report. The inspector identified several other significant problems with the property, including electrical issues, potential roofing issues, and issues with the foundation. Notably, this inspector admitted he never examined a log home prior to inspecting this property. The seller had a separate termite inspection performed on the property and the inspector did not identify any active wood destroying insects. Based on the inspection report, the buyer and the real estate agent representing him sought monetary concessions from the seller.

The TREC contract signed by the parties contained the following options: “(1) Buyer accepts the property in its present condition, or (2) Buyer accepts the property in its present condition provided seller, at seller's expense, shall complete the following specific repairs and treatments.” The parties chose the first option. After occupying the property, buyer experienced multiple problems, many of which his inspector had identified and listed in the report prior to purchase. The buyer then sued the seller, the seller's wife, and the seller's real estate agents. The buyer's action against the agents was based on a claim of statutory fraud in a real estate transaction.[3] The appellate court determined that the present condition clause negated the reliance element of the seller's claim against the agents as a matter of law. Because the seller failed to submit any evidence to create a genuine issue of material fact regarding the enforceability of the clause, the appellate court affirmed that the trial court’s order granted summary judgment in favor of the agents.

[3] Buyer asserted additional causes of action against the Sellers, including common law fraud, breach of contract, violation of the Texas Deceptive Trade Practices Act, and negligent misrepresentation.

3. Gonzales v. Silverhawk, Inc., No. C083810, 2019 WL 7046708 (Cal. App, December 23, 2019)

Buyers have an independent duty to exercise reasonable care to protect themselves.

A buyer signed a contract to purchase a gas station, convenience store, and car wash for $1.8 million from seller. The contract provided for a six-month due diligence period. Virk, a licensed real estate broker, represented the seller and the buyers. The buyer, Kamal, the president of Silverhawk, Inc., assigned his interest in the property to Silverhawk. In September 2005, Kamal initialed every page of the escrow instruction and signed on behalf of Silverhawk, Inc. He acknowledged that an independent investigation had been made and further acknowledged an opportunity to “inspect all the equipment, furniture, fixtures, electricity, plumbing, drainage, heating & cooling system prior to the close of escrow . . . ” The buyer provided $605,408.40 in cash. The buyer also executed a second promissory note for $607,820, which would be lent to the buyer by the seller. Nine years later, on May 1, 2015, Silverhawk, Inc. failed to make the monthly payment on the loan from the seller. Silverhawk also failed to make any subsequent payments. On June 15, 2015, the seller filed suit against the buyers and Silverhawk to enforce the terms of the promissory note and also sought judicial foreclosure against the property. The buyers filed a second amended cross-complaint against Virk and the seller for fraudulent concealment, alleging that the buyers were told by a real estate broker that “the business was purchased in 2005 at a grossly inflated price.” The buyers’ complaint alleged that Kamal was not provided an opportunity to read the escrow instructions. Additionally, they alleged that Virk did not advise them to get an appraisal or to independently investigate the business.

The appellate court noted that a fiduciary relationship can mitigate the usual duty of diligence. However, the buyers still had an independent duty to exercise reasonable care to protect themselves. “Nothing . . . relieves a buyer or prospective buyer of the duty to exercise reasonable care to protect himself or herself, including those facts which are known to or within the diligent attention and observation of the buyer or prospective buyer.” Additionally, the presence of a dual agent would not eliminate the buyers' duty to independently investigate the value of the business, given that the price was central to their decision to purchase the business. The purchase and loan agreements instructed the buyers to conduct an investigation in the purchase and loan documents, and Kamal initialed each page of the documents, indicating that he understood this directive. The appellate court found there were no facts alleged to show that the buyer or real estate agent concealed the facts of the allegedly fraudulent misrepresentation of the value of the business. Accordingly, the appellate court affirmed the district court dismissal of the case.[3]

[3] The contract provided that a non-prevailing party in a legal proceeding relating to the contract is obligated to pay fees. As the non-prevailing party, the buyer was obligated to pay the fees as ordered by the trial court. The Court of Appeals affirmed the trial court’s judgment awarding attorney’s fees to the agents.

Statutes and Regulations ⁵

Illinois

A new definition of “team” was added to the Real Estate License Act of 2000. The new definition provides that a team is “any 2 or more licensees who work together to provide real estate brokerage services, represent themselves to the public as being part of a team or group, are identified by a team name that is different than their sponsoring broker’s name, and together are supervised by the same managing broker and sponsored by the same sponsoring broker. ‘Team’ does not mean a separately organized, incorporated, or legal entity.”[6] The amended statute[7] further states that team names in advertising “may not contain inherently misleading terms, such as ‘company’, ‘realty’, ‘real estate’, ‘agency’, ‘associates’, ‘brokers’, ‘properties’, or ‘property’”. Additionally, “in advertising that includes the sponsoring broker’s name and a team name or individual broker’s name, the sponsoring broker’s business name shall be at least equal in size or larger than the team name or that of the individual.”[8]

Sponsoring brokers in Illinois may now permit one or more of their sponsored licensees to act as dual agents in the same transaction. The licensee must obtain the informed written consent of all clients, per the amended dual agency statute.[9]

Another amended statute[10] now provides that the Exclusive Brokerage Agreements must be in writing.

The Illinois Realtors issued a Legal News article that details the recent updates to legal forms. The article notes that new language for brokerage agreements includes language relating to a seller’s use of surveillance (both audio and video), a client’s consent to being contacted by their broker by phone, email, or fax, and updating the list of protected classes to include gender identity.[11] 

Ohio

The Ohio Division of Real Estate amended its regulations to provide that name identification in a licensee’s advertising may consist only of the name of the person, partnership, corporation, limited liability company, limited liability partnership or association.[12] A licensee may advertise using a first name other than the name on his or her license, or advertise with the licensee’s maiden name, provided that the preferred first name or the maiden name is not misleading and is registered with the Division.[13]

The amendment to the advertising regulation also added a new section stating: “[t]he name of the brokerage shall be displayed at least in equal prominence with the name of the salesperson in all advertising, including internet websites, that are within the ownership or direct control of the licensee or the brokerage with which the licensee is affiliated. A licensee shall not be considered to have violated this rule if the terms of use or the format of a website or other advertising medium not owned or controlled by the licensee does not allow the licensee to control or direct the size and prominence of the brokerage and salesperson’s names.”[14]

In addition, a licensee shall not advertise or alter information regarding the listing of any property “unless the licensee has first secured written permission  of the owner or owner’s authorized agent and fully discloses in the advertisement the name of the listing brokerage, in the same or larger size type as  sed to describe the property…”[15]

[5] This fourth quarter update reviews legislative activity from the following jurisdictions: California, Washington D.C., Illinois, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, and Wisconsin.
[6] 225 Ill. Comp. Stat. § 454/5-10 (2019)
[7] Id.
[8] Id.
[9] 225 Ill. Comp. Stat. § 454/15-45 (2019)
[10] 225 Ill. Comp. Stat. § 454/15-75 (2019)
[11] Illinois Realtors, Legal News, Legal Forms Fully Updated, January 2019.
[12] Ohio Admin. Code 1301:5-1-02 (2019)
[13] Id.
[14] Id.
[15] Id.