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Wisconsin REALTOR®
October 2001
Volume 18, Number 1
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Best of the Legal Hotline
By Debbie Conrad & Tracy
Rucka
The following questions were recently asked of the Legal Hotline:
| Q. Re: Whether or not a co-broke commission was earned. One broker had a listing and another broker submitted an offer. The seller countered with respect to the financing contingency deadline and the disposition of the earnest money if the closing did not occur on time. The buyer rejected that counter and countered back, assuring the funds were there and that everything was in place. |
| A. The selling broker is claiming that his co-broke commission has been earned because he produced a ready, willing and able buyer. This is not an MLS-listed property, there are no policy letters between these brokers, and no other compensation agreement other than a gentlemen’s agreement that commission is split 50-50 if a property is sold.
Listing brokers are obligated to pay commission based upon either an MLS offer of compensation, a compensation agreement, or a policy letter. If the property were listed on the MLS, the listing broker would be obligated to pay the MLS offer of compensation to the broker who procured the buyer in a successful transaction, i.e., a closed sale. However, MLS standards and procuring cause analysis apply only in MLS listings or when those standards have been specifically adopted in a policy letter or compensation agreement.
A broker’s compensation agreement should identify the property, name the parties and the brokers, state the amount of the commission or fee to be paid by the listing broker to the cooperating broker, indicate when the commission or fee will be paid, and state what must be done to earn it. There is no automatic “flow-through” application of the listing contract standards to the relationship between the listing broker and the selling broker. Whatever the standard for earning a commission might be, it must be clearly identified. The commission or fee might be earned, for example, if the cooperating broker (a) is procuring cause per MLS standards, (b) “procures the buyer” as defined in the listing contract, or (c) brings in an offer that successfully closes. Compensation agreements should be in writing and signed by the brokers to avoid commission disputes.
The selling broker in the described scenario arguably has no basis for an action against the listing broker because there simply is no compensation agreement or standards. The selling broker also has no cause of action against the seller because there is no contract between the seller and the selling broker - there is no contractual privity.
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| Q. How many letters of denial are necessary for a buyer to receive earnest money back? |
| A. The buyer is obligated to proceed with due diligence and in good faith (see line 104, WB-11) in pursuing the described financing. Unless the financing contingency is restricted to a specific lender, the buyer often needs to try to obtain the financing from more than one lender.
In Jorgensen v. Katz (Ct. App. 1996, No. 95-0850, unpublished), the Court of Appeals noted that there is no Wisconsin case which defines the efforts required by real estate buyers to satisfy the financing contingency. The sellers suggested that the duty to use good faith requires the buyers to apply for financing upon the terms that are specified in the financing contingency. The court, however, declined to adopt such a rule given the contract language that permits buyers to apply for financing upon other terms that are acceptable to them. Instead, the court found that the determination of whether a buyer has exercised good faith in trying to obtain financing must be a case-by-case determination. For a complete summary of this case, see
 Legal Update
96.10.
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| Q. A seller’s listing expired, but the seller could not meet with the listing broker until two days later. The seller signed an extension amendment that continues the listing contract from the expiration date until November. Is this a binding contract, or does the listing broker need a new listing contract signed? |
| A. Unlike an offer to purchase that has gone past the date set for closing, a listing contract cannot be extended after expiration by a simple amendment. The key difference is that the extension following the expiration of a listing is a new contract. The safest way to create this new listing is to complete a new listing contract. It may be possible to incorporate the old contract into a shorter form (perhaps a listing amendment) and recite the new consideration given by each party, the new dates, and other new terms. However, the risks of using any form other than a new listing contract are significant. The most prudent practice is to complete a new listing contract.
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| Q. A listing broker recently received a pre-approval letter from a lender. It does not say that it is a "loan commitment" and it does not refer to the property the buyers are purchasing or to the type of financing. How should the broker proceed with this lender to obtain an actual loan approval commitment letter? |
| A. According to the terms of the offer, the buyer may satisfy the financing contingency by timely delivering any loan commitment that represents financing satisfactory to the buyer. The term “loan commitment” is not defined in the offer, so it may be difficult to determine whether the pre-approval letter is a loan commitment. Arguably, an approval letter that does not say that it is a loan commitment and that does not include the property information or financing terms is not a loan commitment. The parties should review the terms of the offer and consult with their attorneys about the effect of the pre-approval letter that was submitted. If it is determined that the approval letter is not a loan commitment, the buyer may work with the lender to obtain a loan commitment.
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| Q. A broker has an exclusive agency listing with a seller. Another agent in the MLS has a buyer and is negotiating directly with the seller in hopes of getting a higher commission. This buyer was procured through the listing broker, not through the seller. The seller is a developer who has a broker’s license, but he did not list the property with his company. Is this legal? |
| A. In an exclusive agency listing, the property is listed with only one listing broker, but the seller retains the right to sell the property by him or herself without owing a commission to the broker. The exact characteristics of this relationship will depend upon how the listing is drafted.
When a listing broker modifies the WB-1 Exclusive Right to Sell residential listing contract to create an exclusive agency listing, he or she typically will strike the phrase “right to sell” in the title to the form and on line 1 and inset the word “agency” in its place. The words “by seller” are stricken from line 55 in the Commission section, and the broker writes in a statement in the Additional Provisions section to the effect that “the Broker’s commission is not earned under lines 51-54 if the purchaser is procured by the Seller.” The broker drafts the offer and other necessary paperwork and closes the transaction. The only difference is that the broker is providing these services for free because the seller found the buyer.
To avoid this outcome, the listing broker may wish to draft an exclusive agency listing contract as before, but add that any buyers found by the seller are exclusions, thus releasing the broker from the obligation to provide brokerage services for free. The parties then could work with their attorneys on the offer.
Alternatively, the broker may wish to draft the listing to provide that he or she will be paid a reduced commission instead of no commission if the seller finds a buyer. This would be an exclusive agency, variable rate listing contract.
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| Q. Does a pre-approval letter that was submitted at the time of the offer negate the financing contingency? |
| A. In a case where buyer wishes to use a pre-approval letter as evidence of their potential to obtain financing, the pre-approval letter may be submitted to the seller along with the offer. To avoid any ambiguity, it should be stated in the additional provisions section that the approval letter is not a loan commitment.
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| Q. Can earnest money that is paid after acceptance be placed in the subagent’s trust account? |
| A. Pursuant to lines 248-251 of the WB-11 Residential Offer To Purchase, unless otherwise agreed, all earnest money shall be paid to and held in the trust account of the listing broker if the property is listed. A subagent who receives earnest money from the buyer should promptly document receipt of the funds and forward it to the listing broker for deposit in the listing broker’s trust account.
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| Q. Can real estate licensees sell buildings without any real estate? |
| A. The sale of a building, without an accompanying interest in real estate, would not fall under the definition of brokerage services which would require real estate licensure. Because this service would be independent of real estate practice, the caller will have to work with the broker owner to determine whether this is a service that the company wants to undertake. In making the decision, the caller may consider liabilities and costs which may be incurred. The caller may consider contacting the errors and omissions insurance carrier to determine if this activity would be subject to coverage. If the caller and the broker decide to undertake the transaction, legal counsel may be consulted to draft contracts for services, and the agreement between the buyer and seller, as approved real estate forms are arguably inappropriate for personal property transactions. The caller may also consult counsel regarding disclosure issues, i.e. lead based paint disclosure. Finally, the caller may refer the seller to local municipalities, the Department of Transportation and the building mover to determine whether the building may be moved, under what conditions and at what costs.
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On-Line
Publications
Home Inspection Pointers
If a buyer is given a home inspection report that is more than two years old or if the report was for a transaction that failed, make sure that the buyer understands that the home inspector will not be liable to the new buyer. Wis. Stat. § 440.977(2) provides, “A home inspector is not liable to a person for damages that arise from an act or omission relating to a home inspection that he or she conducts if that person is not a party to the transaction for which the home inspection is conducted.”
Generally it is best for the buyer to have his or her own home inspection done:
- Everyone is certain that the information is current
- The buyer can benefit from touring the home with the inspector, seeing the features and problems pointed out by the home inspector, and hearing whatever home maintenance tips the inspector might provide
- The home inspector is clearly liable to the buyer for any errors or omissions
Parties who hire home inspectors to inspect condominium properties or mixed use properties with both residential and other units should be careful to carefully delineate what will be included in the inspection. A written contract spelling out what units and what common areas and components will be inspected and in what manner is best. Keep in mind that home inspectors attempting to inspect common areas are sometimes told to leave the premises, so be sure that any permission needed to complete the inspection is obtained in advance.
Hotline Question & Answer
Re: Rights of home inspector to give buyers terms that they should write on their contract before the inspector has seen the property. One home inspector has been telling buyers to not give sellers the right to cure in their inspection contingencies.
The practice of home inspectors is regulated in Wis. Stat. §§ 440.970 - 440.975. A home inspector cannot, in writing or verbally, comment on the marketability or value of a property, or whether the property should be purchased. There is no authorization for a home inspector to draft offer to purchase language or give legal advice. Making suggestions to the buyer about language for the offer to purchase is a role reserved to attorneys and licensees -- the described home inspector is apparently practicing law and/or real estate brokerage without a license.
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Publications
Soldiers’ and Sailors’ Civil Relief Act
In this time of national tragedy, numerous reservists and members of the National Guard may be called to active duty and others may enter active duty. As these individuals serve in defense of our country, the Soldiers’ and Sailors’ Civil Relief Act of 1940 (SSCRA) affords them and their dependents protection with respect to their civilian obligations. SSCRA postpones or suspends certain civil obligations to enable active service members to devote full attention to duty and to account for the diminished income that many may encounter during military service. The protection begins on the date of entering active duty and ends within 30 to 90 days after discharge from active duty.
SSCRA provides the active military various protections with regard to their installment contracts, mortgage foreclosures, civil court proceedings, health and life insurance, income taxes, and execution of court judgments, attachments and garnishments. Most notable for REALTORS® and their clients, however, are the protections with respect to the termination of leases, rent, and maximum interest rates.
Termination of Leases
An active service member may terminate a residential, professional, business, or agricultural lease if the following two conditions are met:
- The lease was entered into by the service member before he or she started active duty; and
- The service member or his or her dependents have occupied the leased premises for residential, professional, business, or agricultural purposes.
To terminate a lease, the service member must deliver written notice to the landlord after the service member’s call to active duty or receipt of orders for active duty. For month-to-month rentals, the termination notice operates in a manner similar to the way a 28-day notice works under Wisconsin law. The notice is effective 30 days after the date on which the next rental payment is due, following the date that the notice of termination is delivered. For example, if the rent is due on the first day of the month, and a termination notice is mailed on Oct. 1, then the next rental payment is due and payable on Nov. 1. The effective date of the lease termination is thirty days after that date - on Dec. 1.
For all other leases, the lease termination is effective on the last day of the month following the month in which the written notice is delivered. For example, if proper notice of termination is given on Sept. 20, the effective date of termination would be Oct. 31.
The service member is required to pay rent through the effective day of the lease termination. If rent has been paid in advance, the landlord must prorate and refund the unearned portion. Security deposits must be returned to the service member upon termination of the lease.
Rent
Landlords cannot, without court permission, evict the dependents of an active service member from rented housing where the rent does not exceed $1,200 per month. The court may delay such proceedings for up to three months.
Maximum Rate of Interest
If a service member incurred a loan or obligation with an interest rate over six percent prior to entering active service, the service member can make written application to the lender and not be obligated to pay interest in excess of six percent per annum during the service member’s active military service. The protection is not available, however, if a court finds that the service member’s ability to pay was not been materially affected.
The SSCRA is found in Title 50, Appendix, United States Code, §§501-593. The following are some of the many Web sites containing additional information about the
SSCRA:
http://usmilitary.about.com/cs/sscra/
http://www.defenselink.mil/specials/Relief_Act/
http://www.uscg.mil/hq/mcpocg/1geninfo/sscra.htm
http://www.carreonandassociates.com/soldiersact.html
http://usmilitary.about.com/library/milinfo/sscra/blsscra.htm
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Publications
License Law Committee Seeks Your Input
The 2001-2002 WRA License Law Committee will hold its first meeting at 1p.m. on Oct. 12, 2001 at the WRA headquarters in Madison. With a new year comes the opportunity to explore new ideas. A revised WRA Addendum A, a review of agency disclosure procedures, and a rewrite of broker supervision rules are all on the current agenda. The committee would love to receive your input on these and other issues, particularly with regard to contract language in addendum A. If you have language to share, please
e-mail, fax or mail it to Rick Staff at the WRA.
Fax (608) 242-2265.
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REALTOR® Note: Branch Office Managers
The recent Budget Bill contained a provision removing the statutory requirement in Wis. Stat. § 452.12(3)(b) for branch office managers. The following provision has been deleted: "If a broker maintains any branch offices in this state, each branch office must be under the direct full-time supervision of a broker. The broker maintaining the branch office shall be responsible for the acts and conduct of all brokers, salespersons and time-share salespersons employed at the branch office."
All REALTORS®, however, must remember that the statute continues to provide that "Each broker is responsible for the acts of any broker, salesperson or time-share salesperson employed by the broker." Branch officer managers provide a time-honored method of supervising the agents working in a branch office. Brokers should confer with their attorneys and implement some other procedures to ensure sufficient supervision, guidance and communication before eliminating any branch office managers presently in place. The DRL will be developing new broker supervision rules which will address some of these concerns.
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