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A New Year, a New Law

Effective January 1, 2011, an amendment to Section 443 of the New York State Real Property Law will significantly change the way brokers selling co-ops and condos in New York disclose their agency relationships with their clients. Although the law of agency, which governs the relationship between brokers and their principals, has not changed, there is now an obligation to disclose the agency relationship in writing and to obtain written consent of both seller and buyer when dual agency exists. Since co-ops and condos were previously excluded from written disclosure requirements, many brokers are dealing with these concepts for the first time.

Let's Start with the Basics

A broker has three possible agency relationships with a prospective principal:

  • the broker can act as agent for the seller;
  • the broker can act as agent for the buyer; or
  • the broker can act as "dual agent" for both seller and buyer.

Since a broker, as "agent for a principal," has an absolute duty of loyalty to that principal, when dual agency is created by the broker acting as agent for both seller and buyer, the loyalty owed by the agent to the principal is diminished, as the broker then has a duty of loyalty to both the seller and the buyer. It is for this reason that many believe (including myself) that dual agency is not in the best interests of the parties. Nevertheless, since there's now a legal obligation to disclose agency relationships, and since dual agency can't be avoided in a number of situations, it's important for brokers to understand the basics of how and when the disclosure should occur.

The First Substantive Contact

Brokers must accept the fact that there is a new administrative detail that must be attended to at the commencement of a broker's relationship with a seller (that is, when a listing agreement is signed, assuming an exclusive) or with a potential buyer (when the broker starts the process of showing that potential buyer various apartments). As the statute requires, once that relationship is created with the principal it must be disclosed to the other party when the first "substantive contact" occurs, by completing and delivering the revised form available on the New York State website and from REBNY to its members.

When Does that First Substantive Contact Occur?

Here's the first slippery step on the slippery slope. Until there is litigation and the courts determine, as a matter of law, when the "first substantive contact" is deemed to occur, no one really knows when that moment has arrived. So until the courts tell us otherwise, here are two rules to follow that should ratchet down the stress level of making that determination:

First:

As soon as a broker is directed, engaged or retained in any way by either a seller or a buyer to act for that party, the agency relationship has been created and the appropriate disclosure form should be signed.

Thereafter:

At the first material communication with the other party (whether by email, telephone or open house interaction) the broker's relationship with his or her principal should be disclosed.

But is Signing and Delivering the Form Sufficient to Satisfy the Disclosure Obligation?

A resounding "no" is the appropriate answer. It is essential for brokers to understand that there are two prongs to the disclosure obligation. Yes, there is an obligation to obtain the written consent of the principal, but more importantly, before any paperwork gets signed, the principal must understand the nature of the agency relationship that the principal is entering into with the agent. As required by the statute, it is the broker's responsibility to insure that the principal has "informed consent." The same is true with the disclosure obligation to other parties. It's all well and good to announce that you're the seller's agent, unless the party you're announcing to doesn't really know what you're talking about.

How to Insure that the Parties Understand the Agency Relationships

Again, we're out on the moors in the fog, but there are steps that can and should be taken to give the broker confidence that he or she has acted in a commercially reasonable manner to explain the agency relationships to both seller and buyer.

  • Use the Form: The disclosure form itself defines each agency relationship in relatively clear terms and the broker should review the narrative on the form with the principal before the form is signed and thereafter when the form is distributed.
  • Use Your Website: As REBNY is now requiring execution of the forms prior to use of a Virtual Office Website, a tab should be created on the broker's VOW which includes the applicable forms, a discussion of agency relationships and a method for execution of the forms. Links to industry and government resources and other materials that address these issues should also be considered.
  • Use a Cover Letter: Consider preparing a cover letter, in which the principal acknowledges that he or she has read and understands the nature of the agency relationship;
  • Use an Attorney: Ultimately, every seller and buyer will have legal representation in connection with the transaction. A broker who is not comfortable explaining the complexities of the agency relationships, could advise the prospective client to have the form reviewed by his or her attorney prior to signing. Is this necessary in every transaction... no. But as the complexity of the agency relationships increase, a broker should consider informed consent to include review of the disclosure by the principal's attorney before the form is signed.

The Minefield Known as Advance Consent

We live in a world of mega-companies and real estate brokerage is no exception. With co-op and condo transactions, it is often the case that the same large brokerage firm has an agent on each side of the transaction. Despite the so-called firewall within the firm and each agent's undivided loyalty to each party, once the same firm is on both sides of the transaction, dual agency occurs...period. So if you are taking a "customer" around to various open houses and your fellow agent has the exclusive on a particular apartment, dual agency is deemed to occur when the first substantive contact is made with the other broker.

The Lobbying Logic of Advance Consent

So the industry lobby decided that it would be a good idea to allow brokers to obtain "advance consent" to dual agency, primarily for those situations when the same brokerage firm is on the both sides of the transaction. An agent can ask his or her customer to agree to advance consent "with a designated agent," so that the dual agency relationship is consented to in advance when a broker goes to an open house with an agent from the same firm. The broker not only has to explain the nature of dual agency, but also has the obligation to explain "advance" dual agency. Yes, it's very confusing, both substantively and logistically. I don't think we can fashion a "one size fits all" rule as to when advance consent should be obtained, but we can set out a few metrics to consider when a relationship with a seller or buyer commences:

  • First and foremost, when a broker has an exclusive, the seller should be asked to give advance consent, to accommodate the possibility of a direct buyer making an offer on the apartment.
  • Secondly, before beginning the process of schlepping the buyer around to apartments, the customer should be asked to consent to advance dual agency with a designated agent, as the likelihood of going to a listing with the same firm on both sides is expected.

But if you're just not sure what to do, consider the following Rule of Thumb:

When in doubt as to whether you are acting as a dual agent, disclose, discuss and obtain written consent to act as dual agent.

About that Uncooperative Seller or Buyer...

There is a ripcord available when a seller or buyer refuses to sign the required disclosure form. The broker should prepare the statutory "Affirmation" indicating that the party was asked to sign the form and refused. That being said, once a party refuses to acknowledge the broker's role in the transaction, all bets are off on what might develop down the road. For this reason, getting the forms signed up front is the broker's best protection.

Residential Reality: Think Rubik's Cube

There are many twists and turns and many combinations that can create a principal-agent relationship, as well as the more complicated dual agency relationship. So consider this the beginning of the conversation. Brokers should consult counsel as well as look to industry organizations (that were instrumental in implementing these changes) for assistance and guidance in figuring out the appropriate course of conduct as the process evolves over time. Now is the time to ask your questions and to clarify disclosure obligations, as the broker is now charged with the duty to obtain what might be the elusive informed consent of both seller and buyer in every co-op and condo transaction.

 

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