Window to the Law: Avoiding Unlicensed Practice of Law

Window to the Law: Avoiding Unlicensed Practice of Law

Feb 28, 2018
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Learn important risk management strategies to help real estate licensees avoid the unlicensed practice of law. 

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Window to the Law: Avoiding Unlicensed Practice of Law: Transcript 

Article 13 of NAR’s Code of Ethics prohibits the unauthorized practice of law and requires members to recommend legal counsel when the interests of any party to the transaction require it. But the unauthorized practice of law isn’t just a Code of Ethics issue - state laws also prohibit the unauthorized practice of law. 

The policy reasons behind this prohibition are clear. In order to practice law, an individual must graduate from law school, pass the state bar exam, and obtain a license to practice law from the state.  These stringent requirements ensure that only people with the sufficient knowledge and skills may represent the public in legal matters. Real estate licensees that engage in the unauthorized practice of law may face substantial fines or revocation or even suspension of their real estate license.

So how can you avoid the unauthorized practice of law? 
First, know what the unauthorized practice of law means in your state. Definitions vary from state to state depending on statutes, rules and regulations, as well as court decisions. Some states even have specific statutes governing what actions real estate agents may undertake during transactions. Be sure familiarize with yourself with your state’s specific rules and regulations, but generally speaking, most states prevent non-lawyers from preparing legal instruments and providing legal advice.  
Most real estate professionals use forms agreements in their day-to-day business, including purchase agreement forms. Because real estate laws vary significantly from state to state, the forms are state specific. Do not draft your own forms. Instead, use the forms provided by your state and local associations.  Most associations provide these forms as a membership benefit, so be sure to take advantage of this service. 
Depending on your state, even minor modifications to a form agreement may constitute the unauthorized practice of law. For example, courts in New York have held that real estate professionals may not modify a real estate sales agreement in any way that requires the exercise of legal expertise, while Ohio case law allows real estate professionals to complete the “blanks” of a form purchase or lease contract but prohibits the drafting of lengthy contingencies or addendums. Real estate professionals should stick to only filling in non-legal, factual provisions of the agreement, such as names, dates, location, and party descriptions. If your client is asking for an addendum or contingency, refer them to their attorney to draft appropriate language. In some cases, a broker may have legal counsel draft frequently requested clauses or provisions, and make the form language available to their agents. 
Keep in mind that striking provisions from a form agreement may also constitute the unauthorized practice of law. A 2017 case from Wyoming focused on such an allegation against a real estate professional. In the Wyoming case, a computer store hired a real estate company to broker the sale of the computer store’s assets to a third party. The agent handling the transaction used the state association’s forms but removed those sections pertaining to the sale of real estate. Wyoming’s Committee for the Unauthorized Practice of Law found the changes were significant enough to constitute the unauthorized practice of law, and the court approved and adopted the committee’s report.  

Numerous states have found that preparing legal documents for a fee constitutes the unauthorized practice of law, so real estate professionals should not charge a fee for preparing documents in a real estate transaction.  For example, a 1955 case in Michigan held that it is permissible for real estate professionals to fill out forms if doing so was merely incidental to the real estate transaction and a separate fee was not charged. 
As transactions become more complex, purchasers and buyers often ask their trusted real estate professional to interpret contract provisions or provide other legal advice, for example, if a dispute arises. Don’t oblige your clients because doing so will likely constitute the unauthorized practice of law in your state. Instead, comply with your obligations under the Code of Ethics and encourage your client to consult an attorney. 
These risk management strategies will help you avoid the unauthorized practice of law. 
Thanks for watching this month’s episode of Window to the Law. 

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Each week, NAR Leadership and industry experts share tips and updates on the real estate industry during this unprecedented time.
Window to the Law is a monthly video series focusing on a legal topic of interest. Not just for legal professionals, Window to the Law covers topics applicable to legal compliance for real estate professionals, brokerages, and REALTOR® associations.
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