MODULE ONE: REAL ESTATE ETHICS AND STANDARDS OF CONDUCT

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1 VA CE 24 Cr-hrs Module One MODULE ONE: REAL ESTATE ETHICS AND STANDARDS OF CONDUCT Learning Objectives: After completing this Module, students should be able to: Understand the scope of the VA Real Estate Board s disciplinary authority Identify the grounds upon which VA licensees may be disciplined Be familiar with recent disciplinary cases issued by the VA Real Estate Board Be familiar with the NAR Code of Ethics VIRGINIA REAL ESTATE LICENSEE DISCIPLINARY AUTHORITY Each licensed real estate broker and salesperson (licensees) must follow the standards of conduct developed by the Virginia Real Estate Board (Board). These standards apply to all licensees, whether inactive or active. Committing any of the acts or violations discussed in this section is grounds for disciplinary action. Procedures Virginia law and Board rules impose minimum procedures that must be followed before a licensee may be punished. These procedures describe how an action can be initiated, and impose safeguards intended to achieve a fair result. Complaints The Board may investigate any licensee based on a written complaint or by its own motion. Anyone having a complaint against a licensee may file it with the Board. However, the Board will only investigate those complaints within the scope of its authority. The Board will refer any matters referred to it that are outside its authority to the proper regulatory agency, or to a court of competent jurisdiction. Investigation If the Board decides to investigate the complaint, it must notify the named licensee and that licensee s principal broker. All licensees must respond to any Board inquiry within 21 days of notification. An agent of the Enforcement Bureau of the DPOR will interview the claimant, the respondent, and witnesses, then report the facts to the Board. The Board will then review the report and dismiss the case if it feels there is no violation. Enforcement If the Board believes there is a violation, the respondent may either admit guilt and settle the matter through a consent order, or request an Informal Fact Finding Conference (IFFC). An IFFC is similar to a trial. Following a consent order, or if a licensee is found guilty at an IFFC, the Board may impose a monetary penalty of up to $2,500 per violation and may also suspend, revoke, or deny renewal of the respondent s license. The Board does not have jurisdiction over unlicensed individuals. However, the Virginia Attorney General has authority to prosecute any person who engages in real estate sales or brokerage without a license, in violation of the law. Review The Board s final decision is subject to review by the Virginia Court of Appeals and higher courts. But, there are two instances where the Board s decision is not subject to an appeal or a hearing as follows: If a licensee does not pay the assessment to the Transaction Recovery Fund, his or her license will be suspended automatically; and If a payment is made from the Transaction Recovery Fund, the license of the respondent will be revoked automatically. 1

2 Module One VA CE 24 Cr-hrs Grounds for Disciplinary Action The Board has broad authority to discipline licensees who violate the License Law, rules, and regulations. This authority includes the power to impose monetary penalties (fines), and to suspend or revoke a licensee s license. This authority may be levied not only against licensees who violate the law, rules, or regulations, but it may also be applied to those who cooperated with others in violating the law, rules, or regulations. This part presents the licensee s primary obligations to the Board, which can result in disciplinary action if violated. Disclosures: Disclosure of Licensee s Interest A licensee must disclose, in writing, that they are a licensed salesperson or broker to any potential buyer when acquiring or disposing of any interest in real property for: Himself or herself; Members of his or her immediate family; Members of his or her firm; or Any entity in which he or she has an ownership interest. This requirement applies to all licensees, whether active or inactive. Disclosure of Brokerage Relationship Licensees who fail to promptly disclose who they represent to interested parties may be disciplined by the Board regardless of whether the licensee is acting in a personal capacity or in the capacity of a real estate licensee. Disclosure of Agency Licensees who fail to properly disclose dual and designated agency relationships may be disciplined by the Board. Financial Records Licensees may be disciplined for failing to maintain, or timely produce, records to the Board. Licensees must maintain records of all real estate transactions they participated in for a three year period, even if a broker may have gone out of business. The Board may extend this time if the licensee can show extenuating circumstances. The principal broker is primarily liable for escrow accounts, although the supervising broker or any other licensee with escrow account authority may be disciplined for commingling, conversion, borrowing against accounts, and failing to report escrow account violations to the Board. Board Inquiries Licensees may be disciplined for failing to respond to a Board inquiry. Licensees must respond within 21 days to any inquiry by the Board, other than a records request which is due within 10 days. Prohibited Acts Licensees may be disciplined for being unworthy or incompetent. Prohibited acts under the license law include the following actions and inactions: Furnishing substantially inaccurate or incomplete information to the board in obtaining, renewing, reinstating, or maintaining a license. You may not obtain a license by false or fraudulent representation. You may not allow another person to take the license examination on your behalf or falsify your examination or license application. Holding more than one license as a real estate broker or salesperson in Virginia except as permitted by the licensing law and regulations. The regulations provide that only brokers may hold more than one Virginia license. As a currently licensed real estate salesperson, sitting for the licensing examination for a salesperson s license. Once you become a licensed salesperson, you may not take the salesperson s examination again. However, when you qualify, you may sit for the broker s examination. As a currently licensed real estate broker, sitting for a real estate licensing examination. Once you become a licensed broker, you may not take the salesperson s or broker s examination again. Signing an experience verification form without direct supervision or actual knowledge of the licensee's activities, or unreasonably refusing to sign an experience verification form. Having been convicted or found guilty of a crime regardless of the manner of adjudication in any jurisdiction of the United States. Any plea of nolo contendere is considered a conviction. Failing to inform the Board. Licensees must inform the Board in writing within 30 days that they plead guilty or nolo contendere, or were 2

3 VA CE 24 Cr-hrs Module One convicted or found guilty of a crime. Licensees must also, within 30 days, inform the Board if their license was suspended, revoked, or surrendered in connection with a disciplinary action, or if they were even involved in a disciplinary action, in any jurisdiction. Violating Fair Housing Laws. Licensees may be disciplined if a court or an administrative body determines that they violated the Virginia Fair Housing Act, or the Fair Housing Laws of any jurisdiction of the United States including: Title VIII of the Civil Rights Act of 1968, or the Civil Rights Act of However, the Board cannot discipline a licensee if there is an appeal pending. If you practice in other jurisdictions, become familiar with local laws. Failing to safeguard the public interest. Licensees must be mindful to safeguard the interests of the public. Engaging in improper, fraudulent, or dishonest conduct. The purpose of the License Law is to protect the public. Always act with that in mind! Conflict of Interest Licensees may be disciplined for creating impermissible conflicts of interest. For example, it is a conflict of interest for a licensee to be active with a real estate broker other than the licensee s principal broker, unless the principal broker consents in writing. This applies to brokers concurrently licensed in Virginia (having more than one Virginia real estate license), or to persons licensed in another jurisdiction under a different broker. Acting for more than one client in a transaction (dual agency) without first obtaining the written consent of all clients is also an illegal conflict of interest. Dual agency is not illegal so long as the principals to the transaction consent to it in writing only undisclosed dual agency is illegal. Finally, a salesperson or associate broker may not enter into a brokerage agreement directly with a seller, buyer, landlord or tenant. Only an employing broker may enter into an agreement directly with the client. Improper Commissions Licensees may be disciplined for receiving an improper brokerage commission. For example, a salesperson or associate broker may only receive compensation from his or her employing broker (the broker whose name appears on the license), and only if their license is active. Referral Fees The licensee cannot accept a referral fee for surveys, termite inspections, appraisals, or other services unless the fee is acknowledged by the principals in writing. The written consent must be received prior to the time of ordering or contracting for the services. Net Listing Making a listing contract or lease which provides for a net return to the seller/lessor, leaving the licensee free to sell or lease the property at any price he can obtain in excess of the net price named by the seller/ lessor is illegal. Improper Dealing Licensees may be disciplined for improperly dealing with clients and customers. Licensees must always deal with clients and customers honestly and fairly. Doing so not only protects the public, but also promotes the integrity of the profession. The following are some examples of improper dealing, which may be subject to discipline: Listing Property: Only the true owner (or his authorized agent) can authorize property to be listed for sale or lease, and only the true owner can determine the terms of sale or lease. This authority usually takes the form of a listing agreement. Remember, the terms of the sale or lease include much more than the asking price of the property. Signage: Any sign directing the public to a property For Sale or For Rent may only be placed on private property with the owner s permission. The owner usually provides permission to place a For Sale or For Rent sign in the written listing agreement. Advertising: The broker s name (as it is publically known) must be included in all advertisements for sale, rent, or lease that appear in any format or medium. Misrepresentation/Omission Licensees may be disciplined for making misrepresentations and omissions related to real estate transactions. Examples of prohibited misrepresentations and omissions include the following: Using bait and switch tactics. Usually, this occurs where one does not have the intent to sell 3

4 Module One VA CE 24 Cr-hrs or rent at the price or terms advertised, but instead intends to lure buyers at the advertised price only to pitch a higher price in person. Failing to disclose all material adverse facts. Licensees must timely disclose all material adverse facts pertaining to the physical condition of the property which are actually known by the licensee. Failing to timely present all offers and counteroffers to the client. Remember, the decision to accept or reject any offer or counteroffer always rests with the client. And, offers and counteroffers must be presented to the client even after they have accepted another offer. Disclosing a client s confidential information. Licensees must not disclose a client s confidential information if it relates to a transaction, and if it was obtained while representing that client. Remember, this becomes more difficult when acting as a dual agent because dual representatives must maintain the confidentiality of both parties to the transaction. This is not true of designated representatives. Failing to include complete terms and conditions. Licensees must include the complete terms and conditions of a real estate transaction in any lease or offer to purchase. Failing to identify everyone holding a deposit. The licensee must include this information in any application, lease, or offer to purchase. The offer must also include information as to who is holding any earnest money deposit. Knowingly making any material misrepresentation. This includes willfully misstating the value of land, property, or security in order to influence a lender, and changing or substituting any terms or conditions after contract ratification. Making false statements. Licensees must not make false statements themselves, or through agents, salespersons, advertising, or other means. Delivery of Instruments Licensees may be disciplined for failing to timely deliver instruments. As soon as practical, any person who signs a document must receive an exact and legible copy of the document. Once another party has signed the same document, another copy (which contains both signatures) must be provided to the original signers. This applies to listings, leases, offers to purchase, counteroffers, addenda, ratified agreements, and other documentation required by the agreement. You must notify all parties to an agreement, in writing, of any material change that occurred after the original signing. Even changes you may consider to be minor, such as a change in the closing date or location, must be communicated in writing. At the time the transaction is consummated, all parties must receive a complete, accurate, and legible copy of all documents pertaining to the transaction. this includes a complete and accurate statement of receipts and disbursements of monies received by the licensee. If a settlement agent is conducting the closing, this responsibility shifts to the settlement agent. Finally, upon request, you must return any documentation in your possession to its rightful owner unless there is a legitimate reason not to do so. Broker s Responsibility for Acts of Licensees and Employees Generally, the principal broker, supervising broker, or both may not be disciplined for the wrongful acts of their subordinates. However, either the principal or supervising broker may be disciplined if it appears that they knew or should have known of an unlawful act or violation and failed to take reasonable action under the circumstances to remedy it. Effect of Broker Disciplinary Action on Subordinate Licensees If the principal broker or sole proprietor has his or her license revoked, suspended, or denied renewal, the Board will automatically order that the licenses of all active individuals associated with the affected firm be returned until the Board receives a request from another sole proprietor or principal broker to reissue them. VIRGINIA REAL ESTATE LICENSEE DISCIPLINARY CASES **Names of all involved parties have been changed in the following cases. Ordinary Care Background On August 2, 2011, DPOR s Compliance and Investigations Division received a written complaint from a salesperson regarding Mary Martin ( Martin ). On May 24, 2010, Martin, as buyer s agent submit- 4

5 VA CE 24 Cr-hrs Module One ted a sales contract, on behalf of the purchaser, to the Secretary of Housing and Urban Development ( HUD ). Premier Realty represented the buyer, with Martin as the buyer s agent. Attached to the offer was a copy of a personal check, in the amount of $1,700, from the buyer as the earnest money deposit ( EMD ) for Property X. On June 18, 2010, the sales contract was ratified. A term of the sales contract specified, Buyer has paid $1,700 as earnest money to be applied to the purchase price. The earnest money deposit shall be held by Jackson Title Company. On June 4, 2010, the buyer remitted a cashier s check, in the amount of $1,700 to Jackson Title Company as EMD for Property X. On or about July 27, 2010, the buyer advised Martin that the purchaser wanted to cancel the sales contract, as she was unable to purchase the property due to a death in her immediate family. On July 27, 2010, Martin submitted a Release of Sales Contract and Deposit for Property X to HUD, which specified the entire EMD was to be disbursed to the buyer. The Release was signed by the buyer and Martin; however, it was never signed by the seller or the broker for the listing firm. Facts On August 3, 2010, Martin submitted an offer, on behalf of the buyer, to a listing agent for the purchase of Property Y. Attached to the offer was a copy of a $1,700 casher s check, dated June 4, 2010, made payable to Jackson Title Company. The check listed the buyer as the Remitter. On August 6, 2010, the buyer and sellers for Property Y entered into a sales contract. A term of the Property Y sales contract specified, Buyer has delivered a deposit to Jackson Title Company of $1,700 check.... On August 25, 2010, the listing agent for Property Y sent an to the title company which asked for confirmation that it was holding an EMD for the buyer. The title company subsequently advised the listing agent that it was in receipt of the EMD. On or about August 27, 2010, Martin was advised by the buyer that she was unable to obtain financing for the purchase of Property Y. Martin subsequently sent an to the listing agent which advised the listing agent that the sales contract is withdrawn by purchaser... On August 27, 2010, the listing agent sent a Release of Sales Contract and Deposit to Martin. The Release specified the EMD was to be released to the sellers. The buyer refused to agree to the terms of the Property Y Release as written. On May 5, 2011, the Release was ratified by all parties. According to the terms of the release, $850 was to be released to the sellers and $850 was to be released to the buyer. On or about May 5, 2011, Martin submitted a copy of the Release to the title company. On May 9, 2011, Jackson Title Company sent a letter to the listing agent which advised that they were in receipt of a copy of the Property Y Release; however, Jackson Title Company had never been in receipt of an EMD for Property Y. The letter further advised the listing agent that on June 8, 2010, the title company received an EMD, in the amount of $1,700 from the buyer for Property X, which was subsequently released to HUD on February 11, Martin claimed that in August 2010, she advised the buyer that a new EMD was required for Property Y, as the EMD for Property X had not been released by the title company. Martin further claimed that the title company sent her a copy of the $1,700 cashier s check as verification of the EMD for Property Y. Rules The Board charged Martin with a violation of A.4, Failure to Exercise Ordinary Care. Holding Martin failed to exercise ordinary care when she failed to ensure that the buyer delivered the EMD for Property Y to the title company. Penalty Martin was penalized $750 for the violation and $150 in Board costs. In addition, Martin was ordered to complete 6 hours of continuing education. Dishonest Conduct Background On July 8, 2011, DPOR s Compliance and Investigations Division received a written complaint from the sellers regarding Michael Walker ( Walker ). On May 24, 2011, the sellers entered into a exclusive right-to-sell agreement with Maple Properties for the sale of a property in Midlothian Virginia. Walker placed a lockbox on the property and advertised the subject property in a multiple listing service. 5

6 Module One VA CE 24 Cr-hrs Facts On or about June 8, 2011, Walker, who at the time was with Campbell Real Estate called the listing agent and requested to view the subject property on June 9, On or about June 9, 2011, Walker went to the subject property alone and entered the subject property by lockbox. On October 6, 2011, Walker stated that he was looking for a house that his parents could purchase and that walker could occupy. Walker stated that, while inside the property, he opened a cabinet in the kitchen and saw several pill bottles that included two bottles of Oxycodone prescription pain medication dating back to 2004 or Walker assumed that the pills would be thrown away by the owners, so he took two pill bottles and left the property. Sometime, after Walker viewed the property on June 9, 2011, the owner reported to the listing agent that it appeared someone had rummaged through the medicine cabinet in the kitchen. Sometime later, Walker called the listing agent and arranged to view the subject property a second time on July 3, Prior to Walker s second visit to the property, the listing agent went to the property and took a photograph of the prescription pill bottles arranged in a row on the top shelf of the kitchen cabinet. On July 3, 2011, Walker arrived at the subject property alone and used the lockbox to enter the subject property. Walker stated that he looked in the same medicine cabinet in the kitchen and took another medicine bottle containing Oxycodone pills. After Walker left the property, the listing agent went back inside the property and observed that two pill bottles were missing from the medicine cabinet. The listing agent took a photograph of the cabinet showing that two pill bottles were missing from the top row of the shelf after Walker s visit. Sometime later, Walker called the listing agent and left a voice mail message admitting that he had made a selfish mistake by removing the medication from the subject property. Rules The Board charged Walker with violating 18 VAC , Improper, Fraudulent, or Dishonest Conduct. Holding Walker s actions of entering a house listed for sale by another agent on the pretense of viewing the house for possible purchase, and then removing prescription medication belonging to the owners from the house. Walker took advantage of his position as a licensee of the Board to steal from members of the public. Walker s actions are engaging in improper, fraudulent, or dishonest conduct in violation of 18 VAC Penalty The Board revoked Walker s license as they felt he lacked the character required to be a licensee of the Board. Improper Conduct Background On February 28, 2012, DPOR s Compliance and Investigations Division received a written complaint from the sellers regarding Alice Smith ( Smith ). On November 10, 2011, the buyers and sellers entered into a sales contract for a property in Chesterfield, VA. ABC Realty represented the buyers, with Smith as the buyer s agent. The purchase agreement was subject to third party approval and was ratified on November 10, On November 10, 2011, the buyers and sellers added a Short Sale Addendum to the sales contract, which states, in part, a typical short sale offer takes 60 days from contract ratification to bank response, home is sold as is, all inspections are for information purposes only and are to be performed/conducted by the purchaser. The agreement is contingent upon lender approval accepting the discounted loan payoff as payment in full of the mortgage loan with no deficiency judgment or collection activities against the seller. On December 15, 2011, the buyers and sellers added an Addendum to the sales contract which increased the sales price and indicated closing would take place on or about 45 days from lender approval. On February 23, 2012, the purchase transaction settled. Facts The listing agent and the selling agent verbally agreed that the buyer could connect the utilities at the property for inspection purposes. On December 28, 2011, Smith met the buyer to wait for the utility companies to arrive and entered the house through the lock box. The buyer told Smith that the utility arrival time was between 8am and 5pm, so she remained for about 20 minutes and he offered to stay at the property until the 6

7 VA CE 24 Cr-hrs Module One connections were made. Smith gave the buyer the key to the property, told him to return the key to the lock box, and showed him how to return the key to the lock box since someone had to remain at the house the entire day. The buyer agreed to notify her once the connections were made and the house was secured. Smith did not have any concerns about leaving the buyer at the property because the house was vacant and he was there to allow the utility companies access. The buyer later notified Smith that the utilities were connected, and he had locked the house, but his 4 yr. old daughter had closed the box before he could return the key; so he placed the key underneath the lock box. Smith returned to the subject property, retrieved the key, and returned it to the lock box. She also walked through the property to ensure it was secured and did not see any damages or changes to the property at the time. On December 28, 2011, the buyer went to Lowes, made one copy of the house key, and returned to the property. He did not notify Smith that he made a copy, nor did he think it a problem because he was paying for the utility connections, had assumed care of the property, it was being sold as is, and had received loan approval. He also had to do some work on the furnace and did not relay any of these actions to Smith because he did not feel them relevant. On December 29, 2011, the buyer returned to the property to allow the water company access for the water connection. He entered the property using the extra key. He did not inform Smith of this visit for the reasons stated previously. The buyer knew the house was going into foreclosure, had been vacant for almost a year, felt the sellers had no interest in the house, and since he was turning on the utilities, he was going to be the responsible party for the house. If the water leaked, or a problem arose after the utilities were turned on, the buyer needed to access the house to cover or address any problems that may have arisen. In early January 2012, the buyer began making improvements to the subject property because the house had to be deemed livable and decided to install lighting, paint touch ups, add shelving in the garage, and changed the lock leading from the house to the garage. The buyer visited the subject property periodically, at least once a week leading up to the closing, but did not notify Smith of these visits. According to the sellers, on February 11, 2012, they found that the property had been painted, lighting installed, shelving installed, the garage door lock changed, and observed the buyers belongings stored in the garage. The sellers notified the listing agent immediately of their findings and took photos. According to the listing agent, in February 2012, he contacted Smith to advise that the sellers found the interior had been changed, a door lock changed, and items stored in the garage belonging to the buyers. Smith asked the buyer what he did to the property; he admitted to installing lighting, painting, changing the garage door lock, storing items in the property garage, and making an extra key without her knowledge. The buyer also admitted that he returned to the property to check on his belongings even after Smith told him not to return without authorization. In February 2012, Walton reiterated to stay away and asked that the buyer return the key, which he agreed to do. On February 12, 2012, he returned the key to Walton. On February 17, 2012, the buyers and sellers entered into a Possession by Purchaser Agreement, drafted by Smith, which states that the buyer shall have possession of the garage only to be used for storage and can only access the property with Smith, via scheduled appt. Buyer to conduct a walk-thru on 2/17 to ascertain no damage has occurred. Seller to remove all signs and leave the garage door opened prior to 2/17. On February 23, 2012, settlement took place. Rules The Board charged Smith with violating 18 VAC , Unworthiness and Incompetence. Holding Smith s actions of giving her client a key to access the subject property and leaving her client at the subject property unattended, which allowed her client to make a copy of the key, make changes to the subject property, and store their belongings in the garage without a written agreement signed by all parties to the transaction constitute failing to act as a salesperson in a manner as to safeguard the interests on the public. Penalty Smith was penalized $1,500 for the violation and $150 in Board costs. In addition, Smith was ordered to complete 3 hours of continuing education. 7

8 Module One VA CE 24 Cr-hrs Misrepresentation Background On December 14, 2012, DPOR s Compliance and Investigations Division received a written complaint from a seller, regarding John Dowe ( Dowe ). On March 21, 2012, the buyer and seller entered into a sales contract for a property located in Centreville, VA. XYZ Realty represented the seller. Realty, Inc. represented the buyer, with Dowe as the buyer s agent. The sales price was $230,000. On March 19, 2012, the buyer and seller added a Short Sale Contingency Addendum to the sales contract, which stated that the seller must provide the buyer with written evidence of the lender s approval. After approximately seven months of negotiations, the bank gave approval for a sales price of $233,000. Facts The sales contract stated, in part: The buyer has delivered a $10,000 deposit to Realty, Inc. The deposit will be placed in an escrow account after Date of Ratification in compliance with the laws and regulations of the appropriate jurisdiction. On or about March 20, 2012, the buyer provided Dowe with a copy of an Earnest Money Deposit ( EMD ) check for $10,000 as the deposit for the property. Dowe said he repeatedly asked the buyer for the actual EMD check, but the buyer never produced it. The buyer was in India on business on or about March 21, 2012, until December 1, Dowe noted that contact with his client was both limited and difficult during this time and the buyer was not available to provide Dowe with the actual EMD check. Dowe did not turn in the ratified contract because he did not have the physical EMD check. Dowe believed the buyer would follow through and give him the EMD check, at which time Dowe intended to turn in both the ratified Contract and EMD to his principal broker. Dowe admitted he never told the listing agent about the EMD situation. The Contract did not include an addendum to indicate a change in the terms of the handling of the EMD for the property. In addition, Dowe stated the seller s lender made a counter on October 9, The lender had accepted the contract price, but was asking for a $12,000 cash contribution. Dowe spoke with the buyer on or about October 9, 2012 about the lender s counter.the buyer told Dowe that the lender s counter was not acceptable. The buyer was undecided about how to proceed with the transaction because he did not want to pay more than the price on the Contract. On Dowe s behalf, the listing agent negotiated back and forth with the lender. According to the listing agent, Dowe kept insisting he and his client would settle. The title company prepared a Settlement Statement (HUD-1) with a settlement date of November 30, Settlement did not occur. Dowe stated that after they got bank approval, the bank said closing had to occur by November 30, The buyer was still in India and the soonest he could return was December 1, Dowe tried to get Power of Attorney from the title company, but they would not allow this. Dowe admitted he never told the listing agent about the EMD situation or that the buyer would be out of the country and would not be back in time for settlement. Dowe did not advise the listing agent that the EMD had never been collected, that the buyer had rejected the lender s counter, and that the buyer would be unavailable for the November 30, 2012 settlement. Realty, Inc s Policies and Procedures Manual stated: All deposit checks must be turned into the office within 24 hours of ratification along with the complete sales contract and check list. On or about December 5, 2012, XYZ Realty contacted Dowe s principal broker and reported that the transaction had failed to settle. He checked his records and discovered that Dowe failed to submit the ratified Contract or EMD for the subject property. In his written statement dated April 8, 2013, the principal broker said he met with Dowe regarding the EMD violations and office policies. Dowe told his broker that the property was a short sale transaction; therefore, the EMD would be delivered upon the listing agent s production of the short sale approval letter. The broker confirmed that Dowe failed to submit the ratified Contract or EMD for the property. The principal broker was unaware of the transaction from March 21, 2012 until approximately December 5, Rules The Board charged Dowe with violating the following rules: 18 VAC , Misrepresentation; 18 VAC , Improper Delivery of Instruments; 18 VAC , Unworthiness and Incompetence. 8

9 VA CE 24 Cr-hrs Module One Holding Count 1. Dowe materially misrepresented that the EMD had been delivered to the escrow agent according to the terms of the Contract, in violation of Board Regulation 18 VAC Count 2. Dowe failed to provide to all principals to the transaction written notice of the material changes to the transaction, in violation of Board Regulation 18 VAC Count 3. Dowe s action of failing to submit the ratified Contract to his broker is failing to act as a salesperson in such a manner as to safeguard the interests of the public in violation of Board Regulation 18 VAC When an EMD is not received, the seller is at an increased risk. The seller may elect to proceed with the transaction as is, negotiate alternative terms, or terminate the transaction. Regardless of which decision is made, it is the decision for the seller, not Dowe who was representing the buyer. Dowe materially misrepresented for over nine months that the EMD had been delivered to the escrow agent, in violation of 18 VAC The Board s regulations require licensees to provide written notice to all principals of the transaction when a material change occurs. Dowe admitted in the record that he did not advise the listing agent that the EMD had never been collected and that his client, the purchaser, would not be available for settlement. These changes are material and should have been immediately communicated in writing to all principals. The seller could have agreed to change the contract terms or the settlement date. By failing to report material changes, Dowe again made the decision for the seller, who was not his client. Dowe s actions are a violation of 18 VAC Throughout this transaction, Dowe s actions created a number of issues which require the oversight of his principal broker, but Dowe intentionally left his principal broker in the dark. Dowe failed to submit the ratified Contract to his principal broker. Further, Dowe allowed negotiations to go on for over nine months knowing that the seller and listing agent were under the impression that the EMD had been received as stated in the Contract when in fact it had not. The transaction failed to go to settlement due to the purchaser backing out. The seller was entitled to the EMD. Since no EMD had been collected, the seller had no EMD to retain and thus was financially harmed. Dowe s actions are failing to act as a salesperson in such a manner as to safeguard the interests of the public, a violation of 18 VAC Penalty The Board imposed the following monetary penalties. Count 1: 18 VAC , $1,000 Count 2: 18 VAC , $1,000 Count 3: 18 VAC , $1,500 In addition, Dowe was ordered to complete 6 hours of continuing education for violation of 18 VAC and 18 VAC (Counts 1 and 2). Dowe s license was also placed on probation for 2 years, with his broker providing quarterly reports of his compliance, for violation of 18 VAC (Count 3). CODE OF ETHICS AND STANDARDS OF PRACTICE OF THE NATIONAL ASSOCIATION OF REALTORS EFFECTIVE JANUARY 1, 2015 Where the word REALTORS is used in this Code and Preamble, it shall be deemed to include REALTOR-ASSOCIATE s. While the Code of Ethics establishes obligations that may be higher than those mandated by law, in any instance where the Code of Ethics and the law conflict, the obligations of the law must take precedence. Preamble Under all is the land. Upon its wise utilization and widely allocated ownership depend the survival and growth of free institutions and of our civilization. REALTORS should recognize that the interests of the nation and its citizens require the highest and best use of the land and the widest distribution of land ownership. They require the creation of adequate housing, the building of functioning cities, the development of productive industries and farms, and the preservation of a healthful environment. 9

10 Module One VA CE 24 Cr-hrs Such interests impose obligations beyond those of ordinary commerce. They impose grave social responsibility and a patriotic duty to which REALTORS should dedicate themselves, and for which they should be diligent in preparing themselves. REALTORS, therefore, are zealous to maintain and improve the standards of their calling and share with their fellow REALTORS a common responsibility for its integrity and honor. In recognition and appreciation of their obligations to clients, customers, the public, and each other, REALTORS continuously strive to become and remain informed on issues affecting real estate and, as knowledgeable professionals, they willingly share the fruit of their experience and study with others. They identify and take steps, through enforcement of this Code of Ethics and by assisting appropriate regulatory bodies, to eliminate practices which may damage the public or which might discredit or bring dishonor to the real estate profession. REALTORS having direct personal knowledge of conduct that may violate the Code of Ethics involving misappropriation of client or customer funds or property, willful discrimination, or fraud resulting in substantial economic harm, bring such matters to the attention of the appropriate Board or Association of REALTORS. (Amended 1/00) Realizing that cooperation with other real estate professionals promotes the best interests of those who utilize their services, REALTORS urge exclusive representation of clients; do not attempt to gain any unfair advantage over their competitors; and they refrain from making unsolicited comments about other practitioners. In instances where their opinion is sought, or where REALTORS believe that comment is necessary, their opinion is offered in an objective, professional manner, uninfluenced by any personal motivation or potential advantage or gain. The term REALTOR has come to connote competency, fairness, and high integrity resulting from adherence to a lofty ideal of moral conduct in business relations. No inducement of profit and no instruction from clients ever can justify departure from this ideal. In the interpretation of this obligation, REALTORS can take no safer guide than that which has been handed down through the centuries, embodied in the Golden Rule, Whatsoever ye would that others should do to you, do ye even so to them. Accepting this standard as their own, REALTORS pledge to observe its spirit in all of their activities whether conducted personally, through associates or others, or via technological means, and to conduct their business in accordance with the tenets set forth below. (Amended 1/07) DUTIES TO CLIENTS AND CUSTOMERS Article 1 When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS pledge themselves to protect and promote the interests of their client. This obligation to the client is primary, but it does not relieve REALTORS of their obligation to treat all parties honestly. When serving a buyer, seller, landlord, tenant or other party in a non-agency capacity, REALTORS remain obligated to treat all parties honestly. (Amended 1/01) Standard of Practice 1-1 REALTORS, when acting as principals in a real estate transaction, remain obligated by the duties imposed by the Code of Ethics. (Amended 1/93) Standard of Practice 1-2 The duties imposed by the Code of Ethics encompass all real estate-related activities and transactions whether conducted in person, electronically, or through any other means. The duties the Code of Ethics imposes are applicable whether REALTORS are acting as agents or in legally recognized non-agency capacities except that any duty imposed exclusively on agents by law or regulation shall not be imposed by this Code of Ethics on REALTORS acting in non-agency capacities. As used in this Code of Ethics, client means the person(s) or entity(ies) with whom a REALTOR or a REALTOR s firm has an agency or legally recognized non-agency relationship; customer means a party to a real estate transaction who receives information, services, or benefits but has no contractual relationship with the REALTOR or the REALTOR s firm; prospect means a purchaser, seller, tenant, or landlord who is not subject to a representation relationship with the REALTOR or REALTOR s firm; agent means a real estate licensee (including brokers and sales associates) 10

11 VA CE 24 Cr-hrs Module One acting in an agency relationship as defined by state law or regulation; and broker means a real estate licensee (including brokers and sales associates) acting as an agent or in a legally recognized nonagency capacity. (Adopted 1/95, Amended 1/07) Standard of Practice 1-3 REALTORS, in attempting to secure a listing, shall not deliberately mislead the owner as to market value. Standard of Practice 1-4 REALTORS, when seeking to become a buyer/ tenant representative, shall not mislead buyers or tenants as to savings or other benefits that might be realized through use of the REALTOR s services. (Amended 1/93) Standard of Practice 1-5 REALTORS may represent the seller/landlord and buyer/tenant in the same transaction only after full disclosure to and with informed consent of both parties. (Adopted 1/93) Standard of Practice 1-6 REALTORS shall submit offers and counter-offers objectively and as quickly as possible. (Adopted 1/93, Amended 1/95) Standard of Practice 1-7 When acting as listing brokers, REALTORS shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. REALTORS shall not be obligated to continue to market the property after an offer has been accepted by the seller/landlord. REALTORS shall recommend that sellers/landlords obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract or lease. (Amended 1/93) Standard of Practice 1-8 REALTORS, acting as agents or brokers of buyers/ tenants, shall submit to buyers/tenants all offers and counter-offers until acceptance but have no obligation to continue to show properties to their clients after an offer has been accepted unless otherwise agreed in writing. REALTORS, acting as agents or brokers of buyers/tenants, shall recommend that buyers/ tenants obtain the advice of legal counsel if there is a question as to whether a pre-existing contract has been terminated. (Adopted 1/93, Amended 1/99) Standard of Practice 1-9 The obligation of REALTORS to preserve confidential information (as defined by state law) provided by their clients in the course of any agency relationship or non-agency relationship recognized by law continues after termination of agency relationships or any non-agency relationships recognized by law. REALTORS shall not knowingly, during or following the termination of professional relationships with their clients: 1. reveal confidential information of clients; or 2. use confidential information of clients to the disadvantage of clients; or 3. use confidential information of clients for the REALTOR s advantage or the advantage of third parties unless: a. clients consent after full disclosure; or b. REALTORS are required by court order; or c. it is the intention of a client to commit a crime and the information is necessary to prevent the crime; or d. it is necessary to defend a REALTOR or the REALTOR s employees or associates against an accusation of wrongful conduct. Information concerning latent material defects is not considered confidential information under this Code of Ethics. (Adopted 1/93, Amended 1/01) Standard of Practice 1-10 REALTORS shall, consistent with the terms and conditions of their real estate licensure and their property management agreement, competently manage the property of clients with due regard for the rights, safety and health of tenants and others lawfully on the premises. (Adopted 1/95, Amended 1/00) Standard of Practice 1-11 REALTORS who are employed to maintain or manage a client s property shall exercise due diligence and make reasonable efforts to protect it against reasonably foreseeable contingencies and losses. (Adopted 1/95) 11

12 Module One VA CE 24 Cr-hrs Standard of Practice 1-12 When entering into listing contracts, REALTORS must advise sellers/landlords of: 1. the REALTOR s company policies regarding cooperation and the amount(s) of any compensation that will be offered to subagents, buyer/tenant agents, and/or brokers acting in legally recognized nonagency capacities; 2. the fact that buyer/tenant agents or brokers, even if compensated by listing brokers, or by sellers/landlords may represent the interests of buyers/tenants; and 3. any potential for listing brokers to act as disclosed dual agents, e.g. buyer/tenant agents. (Adopted 1/93, Renumbered 1/98, zamended 1/03) Standard of Practice 1-13 When entering into buyer/tenant agreements, REALTORS must advise potential clients of: 1. the REALTOR s company policies regarding cooperation; 2. the amount of compensation to be paid by the client; 3. the potential for additional or offsetting compensation from other brokers, from the seller or landlord, or from other parties; 4. any potential for the buyer/tenant representative to act as a disclosed dual agent, e.g. listing broker, subagent, landlord s agent, etc., and 5. the possibility that sellers or sellers representatives may not treat the existence, terms, or conditions of offers as confidential unless confidentiality is required by law, regulation, or by any confidentiality agreement between the parties. (Adopted 1/93, Renumbered 1/98, Amended 1/06) Standard of Practice 1-14 Fees for preparing appraisals or other valuations shall not be contingent upon the amount of the appraisal or valuation. (Adopted 1/02) Standard of Practice 1-15 REALTORS, in response to inquiries from buyers or cooperating brokers shall, with the sellers approval, disclose the existence of offers on the property. Where disclosure is authorized, REALTORS shall also disclose, if asked, whether offers were obtained by the listing licensee, another licensee in the listing firm, or by a cooperating broker. (Adopted 1/03, Amended 1/09) Standard of Practice 1-16 REALTORS shall not use, or permit or enable others to use, listed or managed property on terms or conditions other than those authorized by the owner or seller. (Adopted 1/12) Article 2 REALTORS shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction. REALTORS shall not, however, be obligated to discover latent defects in the property, to advise on matters outside the scope of their real estate license, or to disclose facts which are confidential under the scope of agency or non-agency relationships as defined by state law. (Amended 1/00) Standard of Practice 2-1 REALTORS shall only be obligated to discover and disclose adverse factors reasonably apparent to someone with expertise in those areas required by their real estate licensing authority. Article 2 does not impose upon the REALTOR the obligation of expertise in other professional or technical disciplines. (Amended 1/96) Standard of Practice 2-2 (Renumbered as Standard of Practice /98) Standard of Practice 2-3 (Renumbered as Standard of Practice /98) Standard of Practice 2-4 REALTORS shall not be parties to the naming of a false consideration in any document, unless it be the naming of an obviously nominal consideration. Standard of Practice 2-5 Factors defined as non-material by law or regulation or which are expressly referenced in law or regulation as not being subject to disclosure are considered not pertinent for purposes of Article 2. (Adopted 1/93) 12

13 VA CE 24 Cr-hrs Module One Article 3 REALTORS shall cooperate with other brokers except when cooperation is not in the client s best interest. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker. (Amended 1/95) Standard of Practice 3-1 REALTORS, acting as exclusive agents or brokers of sellers/ landlords, establish the terms and conditions of offers to cooperate. Unless expressly indicated in offers to cooperate, cooperating brokers may not assume that the offer of cooperation includes an offer of compensation. Terms of compensation, if any, shall be ascertained by cooperating brokers before beginning efforts to accept the offer of cooperation. (Amended 1/99) Standard of Practice 3-2 Any change in compensation offered for cooperative services must be communicated to the other REALTOR prior to the time that REALTOR submits an offer to purchase/lease the property. After a REALTOR has submitted an offer to purchase or lease property, the listing broker may not attempt to unilaterally modify the offered compensation with respect to that cooperative transaction. (Amended 1/14) Standard of Practice 3-3 Standard of Practice 3-2 does not preclude the listing broker and cooperating broker from entering into an agreement to change cooperative compensation. (Adopted 1/94) Standard of Practice 3-4 REALTORS, acting as listing brokers, have an affirmative obligation to disclose the existence of dual or variable rate commission arrangements (i.e., listings where one amount of commission is payable if the listing broker s firm is the procuring cause of sale/lease and a different amount of commission is payable if the sale/lease results through the efforts of the seller/ landlord or a cooperating broker). The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers and shall, in response to inquiries from cooperating brokers, disclose the differential that would result in a cooperative transaction or in a sale/lease that results through the efforts of the seller/ landlord. If the cooperating broker is a buyer/tenant representative, the buyer/tenant representative must disclose such information to their client before the client makes an offer to purchase or lease. (Amended 1/02) Standard of Practice 3-5 It is the obligation of subagents to promptly disclose all pertinent facts to the principal s agent prior to as well as after a purchase or lease agreement is executed. (Amended 1/93) Standard of Practice 3-6 REALTORS shall disclose the existence of accepted offers, including offers with unresolved contingencies, to any broker seeking cooperation. (Adopted 5/86, Amended 1/04) Standard of Practice 3-7 When seeking information from another REALTOR concerning property under a management or listing agreement, REALTORS shall disclose their REALTOR status and whether their interest is personal or on behalf of a client and, if on behalf of a client, their relationship with the client. (Amended 1/11) Standard of Practice 3-8 REALTORS shall not misrepresent the availability of access to show or inspect a listed property. (Amended 11/87) Standard of Practice 3-9 REALTORS shall not provide access to listed property on terms other than those established by the owner or the listing broker. (Adopted 1/10) Standard of Practice 3-10 The duty to cooperate established in Article 3 relates to the obligation to share information on listed property, and to make property available to other brokers for showing to prospective purchasers/tenants when it is in the best interests of sellers/landlords. (Adopted 1/11) Article 4 REALTORS shall not acquire an interest in or buy or present offers from themselves, any member of their immediate families, their firms or any member thereof, or any entities in which they have any ownership interest, any real property without 13

14 Module One VA CE 24 Cr-hrs making their true position known to the owner or the owner s agent or broker. In selling property they own, or in which they have any interest, REALTORS shall reveal their ownership or interest in writing to the purchaser or the purchaser s representative. (Amended 1/00) Standard of Practice 4-1 For the protection of all parties, the disclosures required by Article 4 shall be in writing and provided by REALTORS prior to the signing of any contract. (Adopted 2/86) Article 5 REALTORS shall not undertake to provide professional services concerning a property or its value where they have a present or contemplated interest unless such interest is specifically disclosed to all affected parties. Article 6 REALTORS shall not accept any commission, rebate, or profit on expenditures made for their client, without the client s knowledge and consent. When recommending real estate products or services (e.g., homeowner s insurance, warranty programs, mortgage financing, title insurance, etc.), REALTORS shall disclose to the client or customer to whom the recommendation is made any financial benefits or fees, other than real estate referral fees, the REALTOR or REALTOR s firm may receive as a direct result of such recommendation. (Amended 1/99) Standard of Practice 6-1 REALTORS shall not recommend or suggest to a client or a customer the use of services of another organization or business entity in which they have a direct interest without disclosing such interest at the time of the recommendation or suggestion. (Amended 5/88) Article 7 In a transaction, REALTORS shall not accept compensation from more than one party, even if permitted by law, without disclosure to all parties and the informed consent of the REALTOR s client or clients. (Amended 1/93) Article 8 REALTORS shall keep in a special account in an appropriate financial institution, separated from their own funds, monies coming into their possession in trust for other persons, such as escrows, trust funds, clients monies, and other like items. Article 9 REALTORS, for the protection of all parties, shall assure whenever possible that all agreements related to real estate transactions including, but not limited to, listing and representation agreements, purchase contracts, and leases are in writing in clear and understandable language expressing the specific terms, conditions, obligations and commitments of the parties. A copy of each agreement shall be furnished to each party to such agreements upon their signing or initialing. (Amended 1/04) Standard of Practice 9-1 For the protection of all parties, REALTORS shall use reasonable care to ensure that documents pertaining to the purchase, sale, or lease of real estate are kept current through the use of written extensions or amendments. (Amended 1/93) Standard of Practice 9-2 When assisting or enabling a client or customer in establishing a contractual relationship (e.g., listing and representation agreements, purchase agreements, leases, etc.) electronically, REALTORS shall make reasonable efforts to explain the nature and disclose the specific terms of the contractual relationship being established prior to it being agreed to by a contracting party. (Adopted 1/07) DUTIES TO THE PUBLIC Article 10 REALTORS shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. REALTORS shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. (Amended 1/14) 14

15 VA CE 24 Cr-hrs Module One REALTORS, in their real estate employment practices, shall not discriminate against any person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. (Amended 1/14) Standard of Practice 10-1 When involved in the sale or lease of a residence, REALTORS shall not volunteer information regarding the racial, religious or ethnic composition of any neighborhood nor shall they engage in any activity which may result in panic selling, however, REALTORS may provide other demographic information. (Adopted 1/94, Amended 1/06) Standard of Practice 10-2 When not involved in the sale or lease of a residence, REALTORS may provide demographic information related to a property, transaction or professional assignment to a party if such demographic information is (a) deemed by the REALTOR to be needed to assist with or complete, in a manner consistent with Article 10, a real estate transaction or professional assignment and (b) is obtained or derived from a recognized, reliable, independent, and impartial source. The source of such information and any additions, deletions, modifications, interpretations, or other changes shall be disclosed in reasonable detail. (Adopted 1/05, Renumbered 1/06) Standard of Practice 10-3 REALTORS shall not print, display or circulate any statement or advertisement with respect to selling or renting of a property that indicates any preference, limitations or discrimination based on race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. (Adopted 1/94, Renumbered 1/05 and 1/06, Amended 1/14) Standard of Practice 10-4 As used in Article 10 real estate employment practices relates to employees and independent contractors providing real estate-related services and the administrative and clerical staff directly supporting those individuals. (Adopted 1/00, Renumbered 1/05) Article 11 The services which REALTORS provide to their clients and customers shall conform to the standards of practice and competence which are reasonably expected in the specific real estate disciplines in which they engage; specifically, residential real estate brokerage, real property management, commercial and industrial real estate brokerage, land brokerage, real estate appraisal, real estate counseling, real estate syndication, real estate auction, and international real estate. REALTORS shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client. Any persons engaged to provide such assistance shall be so identified to the client and their contribution to the assignment should be set forth. (Amended 1/10) Standard of Practice 11-1 When REALTORS prepare opinions of real property value or price they must: 1. be knowledgeable about the type of property being valued, 2. have access to the information and resources necessary to formulate an accurate opinion, and 3. be familiar with the area where the subject property is located unless lack of any of these is disclosed to the party requesting the opinion in advance. When an opinion of value or price is prepared other than in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer, the opinion shall include the following unless the party requesting the opinion requires a specific type of report or different data set: 1. identification of the subject property 2. date prepared 3. defined value or price 4. limiting conditions, including statements of purpose(s) and intended user(s) 5. any present or contemplated interest, including the possibility of representing the seller/landlord or buyers/tenants 6. basis for the opinion, including applicable market data 15

16 Module One VA CE 24 Cr-hrs 7. if the opinion is not an appraisal, a statement to that effect 8. disclosure of whether and when a physical inspection of the property s exterior was conducted 9. disclosure of whether and when a physical inspection of the property s interior was conducted 10. disclosure of whether the REALTOR has any conflicts of interest (Amended 1/14) Standard of Practice 11-2 The obligations of the Code of Ethics in respect of real estate disciplines other than appraisal shall be interpreted and applied in accordance with the standards of competence and practice which clients and the public reasonably require to protect their rights and interests considering the complexity of the transaction, the availability of expert assistance, and, where the REALTOR is an agent or subagent, the obligations of a fiduciary. (Adopted 1/95) Standard of Practice 11-3 When REALTORS provide consultive services to clients which involve advice or counsel for a fee (not a commission), such advice shall be rendered in an objective manner and the fee shall not be contingent on the substance of the advice or counsel given. If brokerage or transaction services are to be provided in addition to consultive services, a separate compensation may be paid with prior agreement between the client and REALTOR. (Adopted 1/96) Standard of Practice 11-4 The competency required by Article 11 relates to services contracted for between REALTORS and their clients or customers; the duties expressly imposed by the Code of Ethics; and the duties imposed by law or regulation. (Adopted 1/02) Article 12 REALTORS shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations. REALTORS shall ensure that their status as real estate professionals is readily apparent in their advertising, marketing, and other representations, and that the recipients of all real estate communications are, or have been, notified that those communications are from a real estate professional. (Amended 1/08) Standard of Practice 12-1 REALTORS may use the term free and similar terms in their advertising and in other representations provided that all terms governing availability of the offered product or service are clearly disclosed at the same time. (Amended 1/97) Standard of Practice 12-2 REALTORS may represent their services as free or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the REALTOR to obtain a benefit from a third party is clearly disclosed at the same time. (Amended 1/97) Standard of Practice 12-3 The offering of premiums, prizes, merchandise discounts or other inducements to list, sell, purchase, or lease is not, in itself, unethical even if receipt of the benefit is contingent on listing, selling, purchasing, or leasing through the REALTOR making the offer. However, REALTORS must exercise care and candor in any such advertising or other public or private representations so that any party interested in receiving or otherwise benefiting from the REALTOR s offer will have clear, thorough, advance understanding of all the terms and conditions of the offer. The offering of any inducements to do business is subject to the limitations and restrictions of state law and the ethical obligations established by any applicable Standard of Practice. (Amended 1/95) Standard of Practice 12-4 REALTORS shall not offer for sale/lease or advertise property without authority. When acting as listing brokers or as subagents, REALTORS shall not quote a price different from that agreed upon with the seller/landlord. (Amended 1/93) Standard of Practice 12-5 REALTORS shall not advertise nor permit any person employed by or affiliated with them to advertise real estate services or listed property in any medium (e.g., electronically, print, radio, television, etc.) without disclosing the name of that REALTOR s firm in a reasonable and readily apparent manner. This Standard of Practice acknowledges that disclosing the name of the firm may not be practical in electronic displays of limited information (e.g. thumbnails, text messages, tweets, etc.). Such displays are exempt from the disclosure requirement established 16

17 VA CE 24 Cr-hrs Module One in the Standard of Practice, but only when linked to a display that includes all required disclosures. (Adopted 11/86, Amended 1/11) Standard of Practice 12-6 REALTORS, when advertising unlisted real property for sale/lease in which they have an ownership interest, shall disclose their status as both owners/landlords and as REALTORS or real estate licensees. (Amended 1/93) Standard of Practice 12-7 Only REALTORS who participated in the transaction as the listing broker or cooperating broker (selling broker) may claim to have sold the property. Prior to closing, a cooperating broker may post a sold sign only with the consent of the listing broker. (Amended 1/96) Standard of Practice 12-8 The obligation to present a true picture in representations to the public includes information presented, provided, or displayed on REALTORS websites. REALTORS shall use reasonable efforts to ensure that information on their websites is current. When it becomes apparent that information on a REALTOR s website is no longer current or accurate, REALTORS shall promptly take corrective action. (Adopted 1/07) Standard of Practice 12-9 REALTOR firm websites shall disclose the firm s name and state(s) of licensure in a reasonable and readily apparent manner. Websites of REALTORS and non-member licensees affiliated with a REALTOR firm shall disclose the firm s name and that REALTOR s or non-member licensee s state(s) of licensure in a reasonable and readily apparent manner. (Adopted 1/07) Standard of Practice REALTORS obligation to present a true picture in their advertising and representations to the public includes Internet content posted, and the URLs and domain names they use, and prohibits REALTORS from: 1. engaging in deceptive or unauthorized framing of real estate brokerage websites; 2. manipulating (e.g., presenting content developed by others) listing and other content in any way that produces a deceptive or misleading result; 3. deceptively using metatags, keywords or other devices/methods to direct, drive, or divert Internet traffic; or 4. presenting content developed by others without either attribution or without permission, or 5. to otherwise mislead consumers. (Adopted 1/07, Amended 1/13) Standard of Practice REALTORS intending to share or sell consumer information gathered via the Internet shall disclose that possibility in a reasonable and readily apparent manner. (Adopted 1/07) Standard of Practice REALTORS shall not: 1. use URLs or domain names that present less than a true picture, or 2. register URLs or domain names which, if used, would present less than a true picture. (Adopted 1/08) Standard of Practice The obligation to present a true picture in advertising, marketing, and representations allows REALTORS to use and display only professional designations, certifications, and other credentials to which they are legitimately entitled. (Adopted 1/08) Article 13 REALTORS shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it. Article 14 If charged with unethical practice or asked to present evidence or to cooperate in any other way, in any professional standards proceeding or investigation, REALTORS shall place all pertinent facts before the proper tribunals of the Member Board or affiliated institute, society, or council in which membership is held and shall take no action to disrupt or obstruct such processes. (Amended 1/99) 17

18 Module One VA CE 24 Cr-hrs Standard of Practice 14-1 REALTORS shall not be subject to disciplinary proceedings in more than one Board of REALTORS or affiliated institute, society or council in which they hold membership with respect to alleged violations of the Code of Ethics relating to the same transaction or event. (Amended 1/95) Standard of Practice 14-2 REALTORS shall not make any unauthorized disclosure or dissemination of the allegations, findings, or decision developed in connection with an ethics hearing or appeal or in connection with an arbitration hearing or procedural review. (Amended 1/92) Standard of Practice 14-3 REALTORS shall not obstruct the Board s investigative or professional standards proceedings by instituting or threatening to institute actions for libel, slander or defamation against any party to a professional standards proceeding or their witnesses based on the filing of an arbitration request, an ethics complaint, or testimony given before any tribunal. (Adopted 11/87, Amended 1/99) Standard of Practice 14-4 REALTORS shall not intentionally impede the Board s investigative or disciplinary proceedings by filing multiple ethics complaints based on the same event or transaction. (Adopted 11/88) DUTIES TO REALTORS Article 15 REALTORS shall not knowingly or recklessly make false or misleading statements about other real estate professionals, their businesses, or their business practices. (Amended 1/12) Standard of Practice 15-1 REALTORS shall not knowingly or recklessly file false or unfounded ethics complaints. (Adopted 1/00) Standard of Practice 15-2 The obligation to refrain from making false or misleading statements about other real estate professionals, their businesses and their business practices includes the duty to not knowingly or recklessly publish, repeat, retransmit, or republish false or misleading statements made by others. This duty applies whether false or misleading statements are repeated in person, in writing, by technological means (e.g., the Internet), or by any other means. (Amended 1/12) Standard of Practice 15-3 The obligation to refrain from making false or misleading statements about other real estate professionals, their businesses, and their business practices includes the duty to publish a clarification about or to remove statements made by others on electronic media the REALTOR controls once the REALTOR knows the statement is false or misleading. (Amended 1/12) Article 16 REALTORS shall not engage in any practice or take any action inconsistent with exclusive representation or exclusive brokerage relationship agreements that other REALTORS have with clients. (Amended 1/04) Standard of Practice 16-1 Article 16 is not intended to prohibit aggressive or innovative business practices which are otherwise ethical and does not prohibit disagreements with other REALTORS involving commission, fees, compensation or other forms of payment or expenses. (Adopted 1/93, Amended 1/95) Standard of Practice 16-2 Article 16 does not preclude REALTORS from making general announcements to prospects describing their services and the terms of their availability even though some recipients may have entered into agency agreements or other exclusive relationships with another REALTOR. A general telephone canvass, general mailing or distribution addressed to all prospects in a given geographical area or in a given profession, business, club, or organization, or other classification or group is deemed general for purposes of this standard. (Amended 1/04) Article 16 is intended to recognize as unethical two basic types of solicitations: First, telephone or personal solicitations of property owners who have been identified by a real estate sign, multiple listing compilation, or other information service as having exclusively listed their property with another REALTOR, and 18

19 VA CE 24 Cr-hrs Module One Second, mail or other forms of written solicitations of prospects whose properties are exclusively listed with another REALTOR when such solicitations are not part of a general mailing but are directed specifically to property owners identified through compilations of current listings, for sale or for rent signs, or other sources of information required by Article 3 and Multiple Listing Service rules to be made available to other REALTORS under offers of subagency or cooperation. (Amended 1/04) Standard of Practice 16-3 Article 16 does not preclude REALTORS from contacting the client of another broker for the purpose of offering to provide, or entering into a contract to provide, a different type of real estate service unrelated to the type of service currently being provided (e.g., property management as opposed to brokerage) or from offering the same type of service for property not subject to other brokers exclusive agreements. However, information received through a Multiple Listing Service or any other offer of cooperation may not be used to target clients of other REALTORS to whom such offers to provide services may be made. (Amended 1/04) Standard of Practice 16-4 REALTORS shall not solicit a listing which is currently listed exclusively with another broker. However, if the listing broker, when asked by the REALTOR, refuses to disclose the expiration date and nature of such listing; i.e., an exclusive right to sell, an exclusive agency, open listing, or other form of contractual agreement between the listing broker and the client, the REALTOR may contact the owner to secure such information and may discuss the terms upon which the REALTOR might take a future listing or, alternatively, may take a listing to become effective upon expiration of any existing exclusive listing. (Amended 1/94) Standard of Practice 16-5 REALTORS shall not solicit buyer/tenant agreements from buyers/ tenants who are subject to exclusive buyer/tenant agreements. However, if asked by a REALTOR, the broker refuses to disclose the expiration date of the exclusive buyer/tenant agreement, the REALTOR may contact the buyer/ tenant to secure such information and may discuss the terms upon which the REALTOR might enter into a future buyer/tenant agreement or, alternatively, may enter into a buyer/tenant agreement to become effective upon the expiration of any existing exclusive buyer/tenant agreement. (Adopted 1/94, Amended 1/98) Standard of Practice 16-6 When REALTORS are contacted by the client of another REALTOR regarding the creation of an exclusive relationship to provide the same type of service, and REALTORS have not directly or indirectly initiated such discussions, they may discuss the terms upon which they might enter into a future agreement or, alternatively, may enter into an agreement which becomes effective upon expiration of any existing exclusive agreement. (Amended 1/98) Standard of Practice 16-7 The fact that a prospect has retained a REALTOR as an exclusive representative or exclusive broker in one or more past transactions does not preclude other REALTORS from seeking such prospect s future business. (Amended 1/04) Standard of Practice 16-8 The fact that an exclusive agreement has been entered into with a REALTOR shall not preclude or inhibit any other REALTOR from entering into a similar agreement after the expiration of the prior agreement. (Amended 1/98) Standard of Practice 16-9 REALTORS, prior to entering into a representation agreement, have an affirmative obligation to make reasonable efforts to determine whether the prospect is subject to a current, valid exclusive agreement to provide the same type of real estate service. (Amended 1/04) Standard of Practice REALTORS, acting as buyer or tenant representatives or brokers, shall disclose that relationship to the seller/ landlord s representative or broker at first contact and shall provide written confirmation of that disclosure to the seller/landlord s representative or broker not later than execution of a purchase agreement or lease. (Amended 1/04) 19

20 Module One VA CE 24 Cr-hrs Standard of Practice On unlisted property, REALTORS acting as buyer/ tenant representatives or brokers shall disclose that relationship to the seller/landlord at first contact for that buyer/tenant and shall provide written confirmation of such disclosure to the seller/landlord not later than execution of any purchase or lease agreement. (Amended 1/04) REALTORS shall make any request for anticipated compensation from the seller/ landlord at first contact. (Amended 1/98) Standard of Practice REALTORS, acting as representatives or brokers of sellers/landlords or as subagents of listing brokers, shall disclose that relationship to buyers/tenants as soon as practicable and shall provide written confirmation of such disclosure to buyers/tenants not later than execution of any purchase or lease agreement. (Amended 1/04) Standard of Practice All dealings concerning property exclusively listed, or with buyer/tenants who are subject to an exclusive agreement shall be carried on with the client s representative or broker, and not with the client, except with the consent of the client s representative or broker or except where such dealings are initiated by the client. Before providing substantive services (such as writing a purchase offer or presenting a CMA) to prospects, REALTORS shall ask prospects whether they are a party to any exclusive representation agreement. REALTORS shall not knowingly provide substantive services concerning a prospective transaction to prospects who are parties to exclusive representation agreements, except with the consent of the prospects exclusive representatives or at the direction of prospects. (Adopted 1/93, Amended 1/04) Standard of Practice REALTORS are free to enter into contractual relationships or to negotiate with sellers/ landlords, buyers/tenants or others who are not subject to an exclusive agreement but shall not knowingly obligate them to pay more than one commission except with their informed consent. (Amended 1/98) Standard of Practice In cooperative transactions REALTORS shall compensate cooperating REALTORS (principal brokers) and shall not compensate nor offer to compensate, directly or indirectly, any of the sales licensees employed by or affiliated with other REALTORS without the prior express knowledge and consent of the cooperating broker. Standard of Practice REALTORS, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker s offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/ lease contingent on the listing broker s agreement to modify the offer of compensation. (Amended 1/04) Standard of Practice REALTORS, acting as subagents or as buyer/ tenant representatives or brokers, shall not attempt to extend a listing broker s offer of cooperation and/or compensation to other brokers without the consent of the listing broker. (Amended 1/04) Standard of Practice REALTORS shall not use information obtained from listing brokers through offers to cooperate made through multiple listing services or through other offers of cooperation to refer listing brokers clients to other brokers or to create buyer/tenant relationships with listing brokers clients, unless such use is authorized by listing brokers. (Amended 1/02) Standard of Practice Signs giving notice of property for sale, rent, lease, or exchange shall not be placed on property without consent of the seller/landlord. (Amended 1/93) Standard of Practice REALTORS, prior to or after their relationship with their current firm is terminated, shall not induce clients of their current firm to cancel exclusive contractual agreements between the client and that firm. This does not preclude REALTORS (principals) from establishing agreements with their associated licensees governing assignability of exclusive agreements. (Adopted 1/98, Amended 1/10) 20

21 VA CE 24 Cr-hrs Module One Article 17 In the event of contractual disputes or specific noncontractual disputes as defined in Standard of Practice 17-4 between REALTORS (principals) associated with different firms, arising out of their relationship as REALTORS, the REALTORS shall mediate the dispute if the Board requires its members to mediate. If the dispute is not resolved through mediation, or if mediation is not required, REALTORS shall submit the dispute to arbitration in accordance with the policies of their Board rather than litigate the matter. In the event clients of REALTORS wish to mediate or arbitrate contractual disputes arising out of real estate transactions, REALTORS shall mediate or arbitrate those disputes in accordance with the policies of the Board, provided the clients agree to be bound by any resulting agreement or award. The obligation to participate in mediation or arbitration contemplated by this Article includes the obligation of REALTORS (principals) to cause their firms to mediate or arbitrate and be bound by any resulting agreement or award. (Amended 1/12) Standard of Practice 17-1 The filing of litigation and refusal to withdraw from it by REALTORS in an arbitrable matter constitutes a refusal to arbitrate. (Adopted 2/86) Standard of Practice 17-2 Article 17 does not require REALTORS to mediate in those circumstances when all parties to the dispute advise the Board in writing that they choose not to mediate through the Board s facilities. The fact that all parties decline to participate in mediation does not relieve REALTORS of the duty to arbitrate. Article 17 does not require REALTORS to arbitrate in those circumstances when all parties to the dispute advise the Board in writing that they choose not to arbitrate before the Board. (Amended 1/12) Standard of Practice 17-3 REALTORS, when acting solely as principals in a real estate transaction, are not obligated to arbitrate disputes with other REALTORS absent a specific written agreement to the contrary. (Adopted 1/96) Standard of Practice 17-4 Specific non-contractual disputes that are subject to arbitration pursuant to Article 17 are: 1. Where a listing broker has compensated a cooperating broker and another cooperating broker subsequently claims to be the procuring cause of the sale or lease. In such cases the complainant may name the first cooperating broker as respondent and arbitration may proceed without the listing broker being named as a respondent. When arbitration occurs between two (or more) cooperating brokers and where the listing broker is not a party, the amount in dispute and the amount of any potential resulting award is limited to the amount paid to the respondent by the listing broker and any amount credited or paid to a party to the transaction at the direction of the respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97, Amended 1/07) 2. Where a buyer or tenant representative is compensated by the seller or landlord, and not by the listing broker, and the listing broker, as a result, reduces the commission owed by the seller or landlord and, subsequent to such actions, another cooperating broker claims to be the procuring cause of sale or lease. In such cases the complainant may name the first cooperating broker as respondent and arbitration may proceed without the listing broker being named as a respondent. When arbitration occurs between two (or more) cooperating brokers and where the listing broker is not a party, the amount in dispute and the amount of any potential resulting award is limited to the amount paid to the respondent by the seller or landlord and any amount credited or paid to a party to the transaction at the direction of the respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker 21

22 Module One VA CE 24 Cr-hrs may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97, Amended 1/07) 3. Where a buyer or tenant representative is compensated by the buyer or tenant and, as a result, the listing broker reduces the commission owed by the seller or landlord and, subsequent to such actions, another cooperating broker claims to be the procuring cause of sale or lease. In such cases the complainant may name the first cooperating broker as respondent and arbitration may proceed without the listing broker being named as a respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97) 4. Where two or more listing brokers claim entitlement to compensation pursuant to open listings with a seller or landlord who agrees to participate in arbitration (or who requests arbitration) and who agrees to be bound by the decision. In cases where one of the listing brokers has been compensated by the seller or landlord, the other listing broker, as complainant, may name the first listing broker as respondent and arbitration may proceed between the brokers. (Adopted 1/97) 5. Where a buyer or tenant representative is compensated by the seller or landlord, and not by the listing broker, and the listing broker, as a result, reduces the commission owed by the seller or landlord and, subsequent to such actions, claims to be the procuring cause of sale or lease. In such cases arbitration shall be between the listing broker and the buyer or tenant representative and the amount in dispute is limited to the amount of the reduction of commission to which the listing broker agreed. (Adopted 1/05) Standard of Practice 17-5 The obligation to arbitrate established in Article 17 includes disputes between REALTORS (principals) in different states in instances where, absent an established inter association arbitration agreement, the REALTOR (principal) requesting arbitration agrees to submit to the jurisdiction of, travel to, participate in, and be bound by any resulting award rendered in arbitration conducted by the respondent(s) REALTOR s association, in instances where the respondent(s) REALTOR s association determines that an arbitrable issue exists. (Adopted 1/07) The Code of Ethics was adopted in Amended at the Annual Convention in 1924, 1928, 1950, 1951, 1952, 1955, 1956, 1961, 1962, 1974, 1982, 1986, 1987, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, and Explanatory Notes The reader should be aware of the following policies which have been approved by the Board of Directors of the National Association: In filing a charge of an alleged violation of the Code of Ethics by a REALTOR, the charge must read as an alleged violation of one or more Articles of the Code. Standards of Practice may be cited in support of the charge. The Standards of Practice serve to clarify the ethical obligations imposed by the various Articles and supplement, and do not substitute for, the Case Interpretations in Interpretations of the Code of Ethics. Modifications to existing Standards of Practice and additional new Standards of Practice are approved from time to time. Readers are cautioned to ensure that the most recent publications are utilized. 22

23 VA CE 24 Cr-hrs Module Two Learning Objectives: MODULE TWO: REAL ESTATE CONTRACTS UPDATE After completing this Module, students should be able to: Identify the basic elements of a contract Understand oral, express, and implied contracts Understand when contracts must be performed and when they need not be performed Identify how contract obligations can cease CONTRACTS UPDATE A contract is a legally enforceable agreement between competent parties who agree to perform, or refrain from performing, certain acts or omissions. A legally enforceable contract represents the exact meeting of the minds (the agreement) of the parties involved. Real estate is a business of contracts listing contracts, sales contracts (sales contracts), option contracts, leasing contracts, development contracts, installment sales contracts, and financing contracts to name a few. ELEMENTS OF A VALID CONTRACT In addition to elements specific to certain real estate contracts, such as a clear description of the subject property, there are three basic elements to any enforceable contract as follows: an offer and acceptance, consideration (exchange of promises to perform), and lack of any defenses that otherwise cancel a contract or prevent it from being formed. These elements are intended to ensure there is an understanding, or a meeting of the minds between all parties. Offer and Acceptance An offer is a promise from one party that he or she is willing to enter into a binding agreement with another party. When you make an offer to someone, you give them the power to create a contract should they accept your offer. Unless otherwise specified by its terms, an offer may be accepted by any reasonable manner--a party may accept an offer through a face to face conversation, or a party may accept an offer through formal written documents. An offer may also be accepted by mailing it to the offeror. Where acceptance is properly made by mail, the law states that the acceptance becomes effective when it is deposited into a mailbox, and not when it is received by the offeror. Other forms of acceptance do not become binding on the offeror until they are actually received. Remember that an offer is not a contract, but an invitation to enter into a contract. However, making an offer should not be taken lightly, as it could be accepted, which will impose duties and obligations on the party making it. So, for those offers that one does not want to be bound by, the question often arises, how can I terminate my offer? First and foremost, an offeror (the one making the offer) may withdraw his offer at any time prior to its acceptance by the offeree (the one receiving the offer). Also, offers are terminated if the offeree rejects it or makes a counteroffer, in which case the roles are reversed and the previous offeree now becomes the offeror with respect to the new offer. Thus, offers may be terminated in several ways, including: Acceptance: The offer terminates but a contract results. Rejection: The party to whom the offer was made (offeree) may reject at any time prior to acceptance (unless the offer expires after a specified period of time). 23

24 Module Two VA CE 24 Cr-hrs Counteroffer: By making a counteroffer, the initial offer is terminated and replaced by a new offer. The offeree then becomes the offeror. Revocation: The offeror may withdraw the offer at any time prior to acceptance, unless for example, the offer is contained in a valid option contract. Lapse of time: Some offers terminate automatically if they are not accepted by a deadline established by the parties. Death or insanity: The death or insanity of either party prior to acceptance will terminate an offer. Consideration For a contract to be legally binding, an offer and an acceptance must be supported by consideration. Consideration is a legal term of art that has a long history of interpretation and discourse in contract law. But today, consideration is understood to broadly exist where parties bargain with one another to exchange promises. Through this bargaining process, the parties agree, or promise, to do or not to do something like deliver title in exchange for payment. What it is that the parties agree to do or not to do is the essence of consideration? For example, in a real estate transaction, the buyer makes an offer to buy property that the seller accepts. Dissecting this exchange of promises we find consideration the seller promises to do something (deliver the deed to the property at a specified time to the buyer), and the buyer promises to do something (pay a specified sum of money for that deed). Conversely, if a seller promised to merely give his property to another as a gift, the seller s one-sided promise would lack consideration and could be unenforceable. This is true because there was no bargained for exchange of promises between the two parties, or no consideration (only the seller is promising to do something). We do not intend to communicate that one cannot give their property away they can! However, if one promises to give it away but changes her mind, the promise could be unenforceable. Defenses Even where there is an offer and acceptance that is supported by consideration, there may not be a valid or enforceable contract. Certain defenses may exist that prevent a contract from being formed in the first place. Other defenses permit a party to escape liability from the contract, even though the contract is valid. In either case these two types of defenses result in either a contract being void (a theory that the contract was never properly formed) or voidable (a theory that 24 a contract is valid but fairness dictates that one may get out of the contract if he proves the defense). The important distinction between contracts that are void and contracts that are voidable is as follows: void contracts are never binding and voidable contracts are binding unless or until a party successfully asserts a relevant defense. Common defenses which render a contract void or voidable include: incompetency, misrepresentation, mistake, illegality, and duress. Incompetency. Generally, courts assume people are competent to enter into contracts with one another. However, some people are legally unable to contract because they lack capacity. As a result, their contracts are void. People that entirely lack capacity to contract include those that are legally insane. Others have only a limited capacity to enter into contracts. These contracts are voidable, which means that one must take steps to avoid responsibility for the contract. Both minors and intoxicated persons are examples of those with a limited capacity to contract. Those who are adjudicated incompetent or insane by a court have no capacity to contract, and may never be a party to a legally binding contract. This is logical because legally incompetent individuals cannot be expected to understand the terms of a contract. Therefore, a legally incompetent person cannot agree because an agreement requires understanding. However, if a legally incompetent person is judged to have been lucid or temporarily of sound mind at the time he entered into the contract, then the contract remains valid (even where the person returns to insanity after signing the contract). Finally, a person who is actually insane, but has not been declared insane by a court possesses a limited capacity to contract. His contracts are therefore voidable and not void. Minors, (those under 18 years of age in most states), have a limited capacity to contract. Therefore, their contracts are generally voidable. This means that a minor may enter into a contract, but he may escape liability for the contract if he subsequently rejects it. For example: if a minor enters into a contract to buy a car, the minor will not be obligated under the contract to buy the car because he is not competent to contract. The contract is voidable on behalf of the minor. However, if the minor wants to buy the car, the seller is bound by the terms of the contract and must sell. However, contracts with minors for necessities such as food or clothing are neither void nor voidable, and the minor will be held to such contracts.

25 VA CE 24 Cr-hrs Module Two Persons who were intoxicated at the time of the contract also have a limited capacity to contract. Such contracts may be voidable by the intoxicated person if they act promptly. If they do not act promptly to cancel the contract, their inaction will be taken as agreement, and the contract will be valid. If there is any dispute regarding one s competency, it must be settled in court. Fraud. Fraud is any form of deceit by which one party intentionally attempts to gain an unfair advantage over another. The key to determining whether an action is fraudulent is whether or not it was intentional. If the deceit was not intentional it is not fraud, but may be an instance of misrepresentation (discussed below). Fraud includes intentionally making false statements and/or intentionally concealing material facts about a property. Fraud may result in damage awards by a court, and either a void or voidable contract depending upon the circumstances. If a party to a contract is induced to sign the contract because of fraudulent statements or facts, then the contract is voidable by the injured party. For example: Sam Jones, who runs his business out of his home, signs a contract to buy a particular house because the seller pledges that local ordinances will allow his home business. Later Sam finds that this is not true, and that the seller knew it was not true. The seller is guilty of fraud and the contract is voidable by Sam. However, if a person has no knowledge or intention of becoming a party to a contract, yet is tricked into signing one, then a meeting of the minds never occurred and the contract is void (as if it never existed). For example: Sara Jones is contacted by a salesperson from the Heavenly Habitat subdivision and told that she has just won a two-bedroom house. Sara loves the house and when she is asked to sign a letter of endorsement for the subdivision, she does so gladly. Later, Sara finds out that rather than actually winning a house, she has merely won a chance to win a house. Furthermore, the letter of endorsement she signed is actually a contract to buy a house if and when she fails to win one. Because Sara never intended to enter into a contract, and because she was intentionally deceived, the contract is void. Misrepresentation. Misrepresentation is a false statement or a concealment of a material fact. Unlike fraud, misrepresentations may be innocent and unintentional. However, even unintentional misrepresentation may be sufficient to render a contract void or voidable depending upon the circumstances and magnitude of the misrepresentation. A primary consideration is whether or not the person who misrepresented the material fact should have known better. The question of unintentional misrepresentation is further complicated by the fact that different people are expected to have different levels of knowledge on a particular subject. For example: consider the representation, This house is really built well, and the foundation is particularly solid. A year later the house settles so badly that extensive repairs are needed to correct the problem. Whether someone has made a misrepresentation turns on who made the original statement: (1) If a seller made the statement, he or she would not likely be liable if at the time the statement was made the foundation appeared to be in good shape sellers are not expected to have special knowledge about construction; (2) If a salesperson made this statement he or she may be liable for damages and could have their license suspended or revoked, even if the misrepresentation was innocent, if a court concludes that they should have known about the faulty foundation or should have found out about the faulty foundation, before making the statement; (3) However, if the developer made this statement he would certainly be liable for misrepresentation or even fraud if his misrepresentation was intentional. Contrast puffing with misrepresentation and fraud. Puffing is a harmless statement of exaggeration that a reasonable person would be expected to recognize, such as: This is the most beautiful house in the city, and You will never find a buy like this again. Puffing is not misrepresentation or fraud because it is a statement of personal opinion. However, the lines between puffing, misrepresentation, and fraud can be blurry so use caution! Estoppel. Estoppel is a legal doctrine that stops, or prevents, a person from cancelling a contract due to certain deficiencies with the essential elements. Generally, estoppel arises where a party to a contract is aware that the other party is relying on them to perform as agreed, even though there may be deficiencies that otherwise prevent a valid contract from being formed (such as a lack of consideration or failure to obtain the agreement in writing). Where a party so relies and suffers some harm as a result, a court may apply the doctrine of estoppel. For example, your employer tells you that he will pay you a pension when you retire. Relying upon this statement, you retire at an age where obtaining new employment is difficult because you are expecting that pension income. Even though there may be no consideration in this example (arguably, only the 25

26 Module Two VA CE 24 Cr-hrs employer agreed to do something, which renders this a one-sided agreement see the discussion on consideration above), courts may enforce the agreement as a contract to prevent an unequitable result (your reliance on your employer s promise put you in a worse situation). Mistake. A mistake is an error or misunderstanding. Contracts are voidable if based on a mutual, unintentional, material mistake. For example: a subdivision developer and a buyer sign a sales contract on a lot in the subdivision. Later, it turns out that the developer honestly thought they were contracting for Lot A and the buyer honestly thought they were contracting for Lot B. If the two can resolve their differences, fine. But if not, the contract is voidable by either party because there was no meeting of the minds. Note that this mistake is: 1) mutual (both mistakenly mis-identified the property); 2) unintentional; and 3) material (specifying the correct piece of property is at the heart of the contract). Ignorance of the law and poor judgment are not valid reasons for claiming a mistake of fact. For example: Bob the blaster runs a blasting and excavation company. Bob signs a contract to purchase property located on the main drag of Acme City. Bob intends to use his new business location to test his blasting equipment before rolling it out in the field. After signing the contract, Bob discovers that blasting activities are illegal within the city limits of Acme. Assuming no fraud or misrepresentation by the seller, Bob s ignorance of the law does NOT result in either a void or voidable contract, and is NOT an example of mistake. Illegality. Courts cannot be called upon to enforce contracts that require one to break the law. For example, murder contracts, or contracts to purchase illegal goods or services are void and unenforceable. Duress. Duress exists where one is coerced into entering a contract by physical or threatening behavior. Such gun to the head behavior does not result in a meeting of the minds. Therefore, such contracts are void from their inception and no action need be taken to render them so. METHODS OF FORMATION Contracts, whether for real estate or other matters, may be created by formal adoption of express terms, as well as by terms which may be implied. Contracts may also obligate one or more persons to perform a task, depending upon whether it was created unilaterally or bilaterally. In this part we briefly discuss these and other basic methods of contract formation. Oral A contract does not always need to be in writing the basic elements of contract formation can be satisfied orally. However, oral contracts may be more difficult to prove in the event the parties turn to a court for enforcement. Contracts for the sale of land must be written and cannot be oral. This is true due to a legal rule called the statute of frauds (to be discussed below). Express or Implied Any contract may contain express or implied terms. An express contract is one in which all terms and conditions are specified and agreed to in writing, orally, or both. An implied contract contains terms that have not been expressly stated or reduced to writing. Instead, implied contracts contain terms that may be inferred from the nature of the transaction or the conduct of the parties. Implied contracts, therefore, are created by the content and actions of the parties. Implied terms in a contract can be the source of dispute it is best to reduce all terms of an agreement to writing. In the event of a dispute, courts may or may not rule that a term or condition is implied. Poorly drafted contracts, or contracts that leave something to subsequent agreement, often lead to litigation. Courts may determine that implied terms were actually a part of the preliminary negotiations rather than the contract itself. Unilateral or Bilateral Contracts may be unilateral (obligating only one party to act) or bilateral (obligating both parties to act). A contract is unilateral when one party promises to perform without first receiving a promise to perform from the other party. Technically, you could describe the promise or obligation in a unilateral contract as only a unilateral offer because there is no meeting of the minds until the second party decides to perform or to accept. Much more common, especially in real estate transactions, is the bilateral contract. A contract is bilateral when both parties make promises of performance. That is, one party makes a promise in terms of an offer, and the other party makes a promises 26

27 VA CE 24 Cr-hrs Module Two in terms of an acceptance of that offer. For example: bilateral real estate-related contracts include: (1) a real estate sales contract where the buyer promises to buy and the seller promises to sell; and (2) certain listing contracts signed by both seller and broker, where the seller promises to pay, and the broker also promises to do certain things such as advertise the property and use his best efforts to sell it. PERFORMANCE OBLIGATIONS Once a valid contract arises (offer, acceptance, consideration, lack of defenses), which may be an express, implied, unilateral, or bilateral contract in nature, the obligation to do (or perform) what was agreed to may be controlled by additional factors. These additional factors that may govern one s obligation to perform include: whether the contract is executory, whether the contract may be transferred or assigned to a person other than an original party to the agreement, and whether the contract contains various conditions or restrictions. Here we discuss these basic contract characteristics of performance under two headings: when must the parties perform, and who may perform? WHEN MUST THE PARTIES PERFORM? Executory or Executed A contract is executory when one or both parties has not yet performed. An example would be a sales contract where a seller has pledged to sell, and a buyer pledged to buy, but neither has yet performed. A contract is executed when there is nothing left to do by either party both have fully performed. Conditions Contracts may contain various conditions, or contingencies. A condition is an event which may not be certain to occur, but must occur before performance under a contract is due. For example: conditions that parties may impose include the following: (1) a lessee may operate the leased premises as a restaurant provided that he first obtains the necessary parking variance; (2) a buyer agrees to buy the property contingent upon his obtaining the necessary financing. Conditions are often indicated by words such as if, when, unless, or provided. If a condition fails to occur, the parties are usually not entitled to damages because conditions are merely limitations they do not create obligations. A condition can be almost any event and may be left to either party to execute. For example, a homeowner may condition payment for painting his house upon his satisfaction with the paint job. Also, an insurance company may condition payment of a claim upon the claimant furnishing proof of the loss. In these examples there is a valid contract, but one or another party is not obligated to perform unless or until the condition or conditions are satisfied. Questions of Time If specific times have not been stated for performance, the law will imply that a reasonable time was intended. Reasonable is what may be fairly allowed and required considering the nature of the act to be performed. When parties specify a definite time and further agree that time is of the essence, the parties will be held exactly to the time period specified. Restrictions There are private restrictions and public restrictions that apply to property. Private covenants, conditions, and restrictions (sometimes abbreviated as CCR s) may be imposed on the use of real property by owners or developers. These include restrictive covenants written into real property instruments such as deeds, leases, and condominium declarations. Some restrictions may enhance property values by promoting a certain uniformity. Residential restrictive covenants commonly address lot size, types of architecture or building materials that can be used, and items such as whether or not outside clotheslines are permitted. Illegal restrictive covenants, such as those that violate fair housing laws, are void and unenforceable. Buyers who discover illegal covenants in documents may choose to buy, ignoring the illegal covenant, or they may choose to insist on the removal of the illegal covenant prior to purchase. Buyers are usually not within their right to completely void the contract, but they can prevent the transfer of title until the illegal restriction is removed. Public restrictions on the private use of property are usually accomplished by way of zoning ordinances. 27

28 Module Two VA CE 24 Cr-hrs WHO MAY PERFORM? Sometimes the parties to a contract agree to permit third persons to carry out performance obligations. Assignable or Non-Assignable An assignment is the transfer of the right, title, or interest of one person ( assignor ) to another ( assignee ). Some contracts may be assigned to another person and some may not. Whether a contract is assignable depends upon the subject of the contract, and whether or not the parties, despite the subject, have specifically agreed to forbid assignment. For example, contracts for a personal service, such as a contract for a specific real estate agent to sell your property are not assignable. However, most other real estate contracts, such as mortgage contracts, trust deeds, contracts for sale, lease contracts, and options are assignable, unless the parties agree otherwise in the contract. Power of Attorney A power of attorney is a legal, written document in which one person appoints another to be his attorney-in-fact, authorizing him to act on his behalf. The death of either party automatically revokes the power of attorney because it is a personal authorization. Thus, when an attorney-infact is conveying property on behalf of a grantor, proof is usually required that the grantor is alive at the time of the signing. ENFORCEMENT OF CONTRACTS A valid contract can be oral or written so long as it contains the essential elements (offer, acceptance, consideration, and lack of defenses). But do not assume that all valid contracts are enforceable. In fact, courts will refuse to enforce some valid contracts. For example, most real estate contracts must be in writing in order for courts to enforce them. Also, if you delay in filing a law suit to enforce a valid contract, courts may refuse to hear it. Below we discuss validly formed but unenforceable contracts. Statute of Frauds The Statute of Frauds refers to state laws that require certain contracts to be in writing in order to be enforceable. The Statute of Frauds requires that all real estate contracts involving the sale of land, or the transfer of any ownership interest in land, be in writing and be signed in order to be enforceable. As a result, courts may not enforce oral land sales contracts even if they are valid (that is, even if they contain the essential contract elements). All real estate leases for more than one year must also be in writing and signed in order to be enforceable. However, oral real estate leases for a period of one year or less are enforceable and need not be written. The concept of estoppel discussed above may override the statute of frauds and render an oral contract for the sale of land enforceable. However, estoppel applies only in limited circumstances where one unfairly relies on another s promise and suffers harm as a result. Statutes of Limitations Now, we will address the end of a contract, or that point when there are no additional duties and the contract terminates. When parties have fully performed their obligations under a contract, the contract is discharged and the obligations terminate because all conditions have been satisfied. Full performance is the ideal way to terminate a contract. However, there are other ways to terminate a contract as discussed below. Death of Parties Existing contracts for the sale of land survive the death of either party. In such cases, the estate of a deceased party must complete the real estate transaction. However, the death of either party terminates an offer that has not been accepted because offers are not yet contracts. But unlike real estate sales contracts, a personal service contract such as a listing agreement, does not survive the death of either party. CONTRACT TERMINATION Now we will address the end of a contract, or that point when there are no additional duties and the contract terminates. When parties have fully performed their obligations under a contract, the contract is discharged and the obligations terminate because all conditions have been satisfied. Full performance is the ideal way to terminate a contract. However there are other ways to terminate a contract as discussed below. 28

29 VA CE 24 Cr-hrs Module Two Rescission/Cancellation Agreements Rescission or cancellation agreements refer to agreed upon remedies in a contract that allow parties to terminate the contract, and return to their original position, under specified conditions. It is not necessary to prove that money damages were suffered in order to rescind a contract. Under some laws, purchasers may rescind a contract for any reason whatsoever for a limited time. These rescission periods usually from 3 to 10 days and are commonly referred to as a cooling off periods. The Federal Truth-in-Lending Act, for example, guarantees a rescission period in some financial transactions, as do most state timeshare and condominium laws. Novation Novation refers to the situation where the parties agree to substitute a new agreement in part or in full for an old one. By novation, the old agreement is terminated and ceases to bind the parties. Instead, the parties are bound by the new agreement. For example, a buyer may agree to buy property subject to the existing mortgage. In this case, the mortgage company terminates the mortgage agreement with the seller and institutes it instead with the buyer who takes over the seller s responsibilities. Assignment As discussed above, an assignment is the transfer of the right, title, or interest of one person (assignor) to another (assignee). In such cases, the assignee becomes primarily liable, and the assignor remains secondarily liable. This means that in the event of a breach, the non-breaching party must first seek damages from the party that is primarily liable. The non-breaching party can only pursue action against the party that is secondarily liable if he is unable to obtain relief from the party that is primarily liable However, an assignment accompanied by novation could eliminate any secondary liability. Impossibility A party may be excused from performing under an otherwise binding contract where she can no longer legally perform as she agreed. Examples include situations where two parties agree to close on a house within a specified period of time. However, prior to closing, the house is destroyed by fire. In such cases, even though there is a valid sales contract in place, the buyer is no longer required to complete closing because it is impossible for the seller to perform (produce the home). Breach of Contract A breach of contract occurs where either party fails to perform as agreed in the contract without any recognized legal excuse. A breach may occur where the failure to perform involves only a minor defect, regardless of whether it is intentional. Where there is a breach of contract, the non-breaching party may terminate the contract and seek a remedy for the breach. Remedies for breach of contract may consist of monetary damages or an action for specific performance. Monetary damages are limited either to an amount specifically agreed upon (so called liquidated damages provisions), such as earnest money or accumulated payments, or to a monetary loss that a party actually suffers due to the breach. For example, if a builder agrees to build a home for $100,000, and the home will only cost $90,000 to construct, the builder s monetary damages would only be $10,000 or the amount of profit he would have made from building the house. Specific performance is a court ordered remedy that forces the breaching party to perform as she agreed to in the contract (to sell the property for the agreed price, for example). Specific performance is a common remedy in real estate because each piece of real estate is unique such that monetary damages may never suffice to remedy the breach. Partial Performance. The parties may mutually agree that only partially performing as agreed to in the contract is sufficient to discharge the contract without breaching it. This good enough approach is acceptable only where both parties agree. Substantial Performance. That a party substantially performed may be grounds to require payment as agreed to in the contract. This commonly applies in the construction context. This doctrine protects people such as builders that complete their performance with only minor defects. While the general rule would declare that the builder is in breach of the contract, which would allow the buyer to terminate the contract, the doctrine of substantial performance would still require payment less the cost of any defects. 29

30 Module Three VA CE 24 Cr-hrs Learning Objectives: MODULE THREE: REAL ESTATE AGENCY UPDATES After completing this Module, students should be able to: Understand VA agency law Understand the licensee s VA agency duties to customers and clients Identify how VA brokerage relationships begin and are terminated Identify specific VA agency disclosures that must be made to various parties REAL ESTATE AGENCY UPDATE Virginia replaced the common law of agency with legislation that governs agency relationships in Virginia. The principal broker is responsible for ensuring compliance with Virginia agency obligations, which includes keeping records of specified agency disclosures and following various duties owed to clients and customers. However, both the principal broker and any salesperson or associate broker may be disciplined for violating Virginia Agency Law. A Virginia agency relationship begins when a client engages a licensee. An agency terminates when the parties complete the objectives of the representation, or mutually agree to terminate the relationship. The relationship may also terminate where a party defaults or the client refuses to consent to a disclosed dual representation. Virginia licensees may provide brokerage services as a Standard Agent, an Independent Contractor, or a Limited Service Agent. Who is a Standard Agent in Virginia? According to Virginia Law, a Standard Agent is a licensee who acts for or represents a client in an agency relationship. A standard agent is subject to all the agency duties and disclosures imposed by the Virginia License Law and regulations, as well as any additional duties that the licensee and client agree to in the brokerage agreement. Who is an Independent Contractor in Virginia? According to Virginia Law, licensees may act as independent contractors (non-agent) if so stated in the brokerage agreement. A licensee acting as an independent contractor is not subject to the fiduciary duties identified in the License Law, but is subject to other agency and non-agency disclosures and limitations on the brokerage relationship. Like the standard agent, an independent contractor is also subject to any additional duties the licensee and client agree to in the brokerage agreement. Who is a Limited Service Agent in Virginia? According to Virginia Law, a limited service agent is a licensee who acts for or represents a client with respect to real property containing from one to four residential units, pursuant to a brokerage agreement that provides that the limited service agent will not provide one or more of the duties required of standard agents. A limited service agent is limited to the obligations identified in the brokerage agreement and must provide the client, at the time of entering the brokerage agreement, copies of any and all disclosures required by federal, state, or local law. 30

31 VA CE 24 Cr-hrs Module Three Limited Service Agency Disclosures Establishing Minimum Level of Service Brokers may only establish a limited service agency with clients by so stating in the brokerage agreement, and obtaining the client s written consent. The limited service agent must disclose the following in the brokerage agreement: That the licensee is acting as a limited service agent A list of the specific services that the licensee will provide to the client A list of the specific duties required of a standard agent that the limited service agent will NOT provide to the client. These initial disclosures must be conspicuous and printed either in bold lettering or all capitals, and must be underlined or in a separate box. The Virginia Legislature suggests the following language to include with these initial disclosures: BY ENTERING INTO THIS BROKER AGE AGREEMENT, THE UNDERSIGNED DO HEREBY ACKNOWLEDGE THEIR INFORMED CONSENT TO THE LIM ITED SERVICE AGENT BY THE LICENSEE AND DO FURTHER ACKNOWLEDGE THAT NEITHER THE OTHER PARTY TO THE TRANSACTION NOR ANY REAL ESTATE LICENSEE REPRESENTING THE OTHER PARTY IS UNDER ANY LEGAL OBLIGATION TO ASSIST THE UNDERSIGNED WITH THE PERFORMANCE OF ANY DUTIES AND RESPONSIBILITIES OF THE UNDER SIGNED NOT PERFORMED BY THE LIM ITED SERVICE AGENT. Standard Agent s Duties to Clients and Customers Virginia Law imposes specific obligations and duties on all standard agents with regard to: sellers, landlords, and tenants that stan dard agents represent in the sale or rental of property (seller clients and landlord/ tenant clients); prospective buyers of property listed with a standard agent that the standard agent does not represent (buyer customer); and buyers that standard agents do represent in the location and purchase of property (buyer clients). Standard Agent s Duties to Seller Clients Virginia Law imposes specific obligations and duties on all standard agents who represent seller clients. These more specific tasks are not required of Limited Service Agents or Independent Contractors, unless the parties agree otherwise in the listing agreement. Standard agents representing seller clients must: o Perform in accordance with the terms of the brokerage agreement o Promote the interests of the seller by: Conducting marketing activities on behalf of the seller in accordance with the brokerage agreement. In so doing, the licensee shall seek a sale at the price and terms agreed upon in the brokerage agreement or at a price and terms acceptable to the seller; however, the licensee shall not be obligated to seek additional offers to purchase the property while the property is subject to a contract of sale, unless agreed to as part of the brokerage agreement or as the contract of sale so provides; Assisting in the drafting and negotiating of offers and counteroffers, amendments, and addenda to the real estate contract and in establishing strategies for accomplishing the seller s objectives; Receiving and presenting, in a timely manner, written offers and counteroffers to and from the seller and purchasers, even when the property is already subject to a contract of sale; and Providing reasonable assistance to the seller to satisfy the seller s contract obligations and to facilitate settlement of the purchase contract. o Maintain confidentiality of all personal and financial information received from the client during the brokerage relationship and any other information that the client requests during the brokerage relationship be maintained confidential, unless otherwise provided by law or the seller consents in writing to the release of such information; o Exercise ordinary care; o Account in a timely manner for all money and property received by the licensee in which the seller has or may have an interest; 31

32 Module Three VA CE 24 Cr-hrs o Disclose to the seller material facts related to the property or concerning the transaction of which the licensee has actual knowledge; and o Comply with all requirements of this article, all applicable fair housing statutes and regulations, and all other applicable statutes and regulations which are not in conflict with this article. A licensee does not breach any duty or obligation owed to the seller by showing alternative properties to prospective buyers, whether as clients or customers, or by representing other sellers who have other properties for sale. Standard Agent s Duties to Prospective Buyer Customers (Non-Clients) Virginia Law imposes specific obligations and duties on all standard agents. Standard agents owe buyer/ customers (non-clients) the following duties: o Treat all prospective buyers honestly and shall not knowingly give them false information. o Disclose in writing to prospective buyers all material adverse facts pertaining to the physical condition of the property which are actually known by the licensee. This limitation on the licensee s duty does not in any way limit the provisions of the Virginia Residential Property Disclosure Act ( et seq.). The term physical condition of the property shall refer to the physical condition of the land and any improvements thereon, and shall not refer to: matters outside the boundaries of the land or relating to adjacent or other properties in proximity thereto; matters relating to governmental land use regulations, and; matters relating to highways or public streets o Unless prohibited by law or the brokerage agreement, the licensee may provide assistance to a buyer or potential buyer by performing ministerial acts. Performing such ministerial acts that are not inconsistent with the licensee s fiduciary duties shall not be construed to violate the licensee s brokerage agreement with the seller unless expressly prohibited by the terms of the brokerage agreement, nor shall performing such ministerial acts be construed to form a brokerage relationship with such buyer or potential buyer. o Disclose brokerage relationships pursuant to the provisions of License Law Standard Agent s Duties to Buyer Clients Virginia Law imposes specific obligations and duties on all standard agents who represent buyer clients. These more specific tasks are not required of Limited Service Agents or Independent Contractors, unless the parties agree otherwise in the brokerage agreement. Standard agents representing buyer/clients must: o Perform in accordance with the terms of the brokerage agreement; o Promote the interests of the buyer by: Seeking a property of a type acceptable to the buyer and at a price and on terms acceptable to the buyer; however, the licensee shall not be obligated to seek other properties for the buyer while the buyer is a party to a contract to purchase property unless agreed to as part of the brokerage relationship; Assisting in the drafting and negotiating of offers and counteroffers, amendments, and addenda to the real estate contract and in establishing strategies for accomplishing the buyer s objectives; Receiving and presenting in a timely manner all written offers or counteroffers to and from the buyer and seller, even when the buyer is already a party to a contract to purchase property; and Providing reasonable assistance to the buyer to satisfy the buyer s contract obligations and to facilitate settlement of the purchase contract. o Maintain confidentiality of all personal and financial information received from the client during the brokerage relationship and any other information that the client requests during the brokerage relationship be maintained confidential unless otherwise provided by law or the buyer consents in writing to the release of such information o Exercise ordinary care; o Account in a timely manner for all money and property received by the licensee in which the buyer has or may have an interest; 32

33 VA CE 24 Cr-hrs Module Three o Disclose to the buyer material facts related to the property or concerning the transaction of which the licensee has actual knowledge; and o Comply with all requirements of this article, all applicable fair housing statutes and regulations, and all other applicable statutes and regulations which are not in conflict with this article. A licensee does not breach any duty or obligation to the buyer by showing properties in which the buyer is interested to other prospective buyers, whether as clients or customers, by representing other buyers looking at the same or other properties, or by representing sellers relative to other properties. Standard Agent s Duties to Prospective Seller Customers (Non-Clients) Virginia Law imposes specific obligations and duties on all standard agents. Standard agents owe seller customers (non-clients) the following duties: o Treat all prospective sellers honestly and shall not knowingly give them false information. o In the case of a residential transaction, a licensee engaged by a buyer shall disclose to a seller whether or not the buyer intends to occupy the property as a principal residence. The buyer s expressions of such intent in the contract of sale shall satisfy this requirement and no cause of action shall arise against any licensee for the disclosure or any inaccuracy in such disclosure, or the nondisclosure of the buyer in this regard. o Unless prohibited by law or the brokerage agreement, the licensee may provide assistance to the seller, or prospective seller, by performing ministerial acts. Performing such ministerial acts that are not inconsistent with the licensee s fiduciary duties shall not be construed to violate the licensee s brokerage agreement with the buyer unless expressly prohibited by the terms of the brokerage agreement, nor shall performing such ministerial acts be construed to form a brokerage relationship with such seller. o Disclose brokerage relationships pursuant to the provisions of License Law Standard Agent s Duties to Landlord Clients Virginia Law imposes specific obligations and duties on all standard agents who represent landlord clients. These more specific tasks are not required of Limited Service Agents or Independent Contractors, unless the parties agree otherwise in the listing agreement. Standard agents representing landlord/ clients must: o Perform in accordance with the terms of the brokerage agreement; o Promote the interests of the landlord by: Conducting marketing activities on behalf of the landlord pursuant to the brokerage agreement with the landlord. In so doing, the licensee shall seek a tenant at the price rent and terms agreed in the brokerage agreement or at a price rent and terms acceptable to the landlord; however, the licensee shall not be obligated to seek additional offers to lease the property while the property is subject to a lease or a letter of intent to lease under which the tenant has not yet taken possession, unless agreed as part of the brokerage agreement, or unless the lease or the letter of intent to lease so provides; Assisting the landlord in drafting and negotiating leases and letters of intent to lease, and presenting in a timely manner all written leasing offers or counteroffers to and from the landlord and tenant, even when the property is already subject to a lease or a letter of intent to lease; and Providing reasonable assistance to the landlord to finalize the lease agreement. o Maintain confidentiality of all personal and financial information received from the client during the brokerage relationship and any other information that the client requests during the brokerage relationship be maintained confidential, unless otherwise provided by law or the landlord consents in writing to the release of such information; o Exercise ordinary care; o Account in a timely manner for all money and property received by the licensee in which the landlord has or may have an interest; 33

34 Module Three VA CE 24 Cr-hrs o Disclose to the landlord material facts related to the property or concerning the transaction of which the licensee has actual knowledge; and o Comply with all requirements of this article, fair housing statutes and regulations, and all other applicable statutes and regulations which are not in conflict with this article. A licensee engaged by a landlord does not breach any duty or obligation owed to the landlord by showing alternative properties to prospective tenants, whether as clients or customers, or by representing other landlords who have other properties for lease. Standard Agent s Duties to Tenant Customers (Non-Clients) Virginia Law imposes specific obligations and duties on all standard agents. Standard agents owe duties to any tenant customers (non-clients) as follows: o Treat all prospective tenants honestly and shall not knowingly give them false information. o Disclose in writing to prospective tenants all material adverse facts pertaining to the physical condition of the property which are actually known by the licensee. Nothing in this section shall limit the right of a prospective tenant to inspect the physical condition of the property. As used in this section, the term physical condition of the property shall refer to the physical condition of the land and any improvements thereon, and shall not refer to: matters outside the boundaries of the land or relating to adjacent or other properties in proximity thereto matters relating to governmental land use regulations matters relating to highways or public streets. o Unless prohibited by law or the brokerage agreement, the licensee may provide assistance to a tenant, or potential tenant, by performing ministerial acts. Performing such ministerial acts that are not inconsistent with the licensee s fiduciary duties shall not be construed to violate the licensee s brokerage relationship with the landlord unless expressly prohibited by the terms of the brokerage agreement, nor shall performing such ministerial acts be construed to form a brokerage relationship with such tenant or potential tenant. o Disclose brokerage relationships pursuant to the provisions of License Law Standard Agent s Duties to Tenant Clients Virginia Law imposes specific obligations and duties on all standard agents who represent tenant clients. These more specific tasks are not required of Limited Service Agents or Independent Contractors, unless the parties agree otherwise in the brokerage agreement. Standard agents representing tenant/clients must: o Perform in accordance with the terms of the brokerage agreement; o Promote the interests of the tenant by: Seeking a lease at a price rent and with terms acceptable to the tenant; however, the licensee shall not be obligated to seek other properties for the tenant while the tenant is a party to a lease or a letter of intent to lease exists under which the tenant has not yet taken possession, unless agreed to as part of the brokerage relationship, or unless the lease or the letter of intent to lease so provides; Assisting in the drafting and negotiating of leases, letters of intent to lease, and rental applications, and presenting, in a timely fashion, all written offers or counteroffers to and from the tenant and landlord, even when the tenant is already a party to a lease or a letter of intent to lease; and Providing reasonable assistance to the tenant to finalize the lease agreement. o Maintain confidentiality of all personal and financial information received from the client during the brokerage relationship and any other information that the client requests during the brokerage relationship be maintained confidential unless otherwise provided by law or the tenant consents in writing to the release of such information; o Exercise ordinary care; o Account in a timely manner for all money and property received by the licensee in which the tenant has or may have an interest; o Disclose to the tenant material facts related to the property or concerning the transaction of 34

35 VA CE 24 Cr-hrs Module Three which the licensee has actual knowledge; and o Comply with all requirements of this article, fair housing statutes and regulations, and all other applicable statutes and regulations which are not in conflict with this article. A licensee engaged by a tenant does not breach any duty or obligation to the tenant by showing properties in which the tenant is interested to other prospective tenants, whether as clients or customers, by representing other tenants looking for the same or other properties to lease, or by representing landlords relative to other properties. Standard Agent s Duties to Landlord Customers (Non-Clients) Virginia Law imposes specific obligations and duties on all standard agents. Standard agents owe landlord/ customers (non-clients) the following duties: o Treat all prospective landlords honestly and shall not knowingly give them false information. o A licensee engaged by a tenant in a real estate transaction may provide assistance to the landlord or prospective landlord by performing ministerial acts. Performing such ministerial acts that are not inconsistent with the licensee s fiduciary duties shall not be construed to violate the licensee s brokerage relationship with the tenant unless expressly prohibited by the terms of the brokerage agreement, nor shall performing such ministerial acts be construed to form a brokerage relationship with the landlord or prospective landlord. o Disclose brokerage relationships pursuant to the provisions of License Law Limitations on Liability No cause of action shall arise against any licensee for revealing information as required by Virginia License Law or other applicable laws. In addition, a licensee shall not be liable to a buyer, seller, landlord, or tenant for providing false information if that false information was: (i) provided to the licensee by the licensee s client; (ii) obtained from a governmental entity (either by a primary or secondary source); or (iii) obtained from a person licensed, certified, or registered to provide professional services in the Commonwealth, and the licensee did not: o Have actual knowledge that the information was false or o Act in reckless disregard of the truth. MANDATED DISCLOSURES Virginia Law requires that limited service agents, along with standard agents and independent contractors, make certain disclosures to clients and customers regarding the relationship with clients and customers, and other matters. These disclosures include: o The client with whom the licensee has a brokerage relationship o That a licensee desires a dual or designated agency relationship o That a licensee has an interest in the transaction o The rights and obligations of the client under the Virginia Residential Property Disclosure Act o If the client is selling a condominium, the rights and obligations of the client to deliver to the purchasers, or to receive as purchaser, the condominium resale certificate; and o If the client is selling a property subject to the Property Owners Association Act, the rights and obligations of the client to deliver to the purchasers, or to receive as purchaser, the association disclosure packet. Disclosure of Brokerage Relationship Licensees must disclose who they represent to specified parties. Brokerage relationship disclosures may be given in combination with other disclosures or provided with other information, such as in a lease. If provided with other information, the disclosure must be conspicuous, printed in bold lettering, all capitals, underlined, or within a separate box. The timing, substance, and triggers of brokerage relationship disclosures are presented below. Before creating an agency relationship, licensees must disclose the type of agency proposed, the method of compensation, and whether a broker will share compensation with another broker who represents another party in the same transaction. A licensee must also disclose any brokerage relationship that the licensee has with another party to the transaction to a prospective customer (buyer, 35

36 Module Three VA CE 24 Cr-hrs seller, landlord, or tenant). Only discussions that are substantive conversations about a specific property trigger disclosure to the non-client/customer. Furthermore, only non-clients (buyers, sellers, landlords, tenants) that are not represented by another licensee trigger the disclosure. Disclosures may be oral when triggered (qualified discussion with a non-client), and must be written before specific real estate assistance (if any) is provided. If specific real estate assistance is provided, then the disclosure may be made in a standard format described in VA law or along with other disclosures, as long as it is conspicuous (bold font, all capitals, underlined, or in a box). However, this disclosure does not apply to lessors or lessees in single or multifamily residential units for terms of less than two (2) months. If a licensee s relationship with a client or customer changes after the initial written disclosures described above, the licensee must disclose such material changes in writing to all clients and customers already involved in the transaction. Disclosure of a Dual Agency/Dual Representation Dual agency and dual representation are legal in Virginia, so long as it is properly disclosed to all parties in writing. Dual agency describes the situation where the same licensee has an agency relationship with both the buyer and the seller in a single transaction. Dual representation describes the situation where the same licensee is acting as an independent contractor for both the buyer and the seller in a single transaction. However, licensees must be careful that their words and actions do not mislead a customer into believing he is being represented by the licensee. Otherwise, a licensee could inadvertently create a dual agency without proper disclosure. Disclosure must indicate that unless otherwise required by law, the licensee cannot reveal any personal or financial information received from one party during the brokerage relationship to the other party (client need not request secrecy), and that the licensee cannot reveal any other information that a party requests to remain confidential during the brokerage relationship (client must request secrecy). Disclosure must be written and may be presented in a standard format described by VA Law, but may not be included in a purchase agreement, lease, or any other document related to the transaction. Written consent and disclosure may also count as a disclosure of brokerage relationship (discussed above). Clients must consent to dual agency/representation and acknowledge disclosure by their signatures. Licensees may terminate an existing agency or nonagency relationship (without liability) if the client refuses to consent to dual agency/representation. A licensee may withdraw, without liability, from representing a client who refuses to consent to a disclosed dual agency/representation. The licensee s withdrawal would terminate the brokerage relationship with the client, but would not prevent the licensee from continuing to represent the other client in the transaction, or limit the licensee from representing the client in other transactions. Disclosure of Designated Agency/ Designated Representation Two Virginia licensees working for the same principal or broker may represent different clients in the same transaction. This arrangement is referred to as designated agency/representation. Similar to dual agency/ representation, a designated agent is acting under an agency relationship, while a designated representative may only act as an independent contractor. Such arrangements require a written disclosure to the parties. The disclosure must indicate that a designated agent/representative may not represent more than one client in a particular real estate transaction. Further, a designated agent/representative may not disclose personal, financial, or confidential information received from the client during the brokerage relationship to anyone other than his supervising broker, unless otherwise provided for by law or the client consents in writing. The broker who is supervising licensees in designated representation is also a dual agent or representative. Dual agents/representatives must remain neutral, and must maintain the confidences of all clients to the transaction. Licensees may make designated agency/representation disclosures in combination with other disclosures or provided with other information. If the designated agency/representation disclosure is provided with other information, the disclosure must be conspicuous, printed in bold lettering, all capitals, underlined, or within a separate box. Licensees may terminate an existing agency or non-agency relationship (without liability) if the client refuses to consent to a disclosed designated agency/representation. The 36

37 VA CE 24 Cr-hrs Module Three licensee s withdrawal would terminate the brokerage relationship with the client, but would not prevent the licensee from representing the other client in the transaction, or limit the licensee from representing the client in other transactions. Disclosure of Licensee s Interest Even if there is no advertisement, licensees who are interested parties to a real estate transaction must disclose (in writing) the fact that they are licensed real estate professionals to the other party to the transaction. Virginia imposes this requirement to prevent licensees from unfairly taking advantage of a less sophisticated buyer, seller, or lessor. Situations where a licensee is an interested party include, but are not limited to the following. o Same Transaction: A licensee is an interested party that must make disclosure where the licensee is a party to a real estate transaction. o Attempting to Acquire Property: A licensee is an interested party that must make disclosure when the licensee is acquiring or attempting to acquire property by lease or purchase o Assisting Family: A licensee is an interested party that must make disclosure where the licensee is assisting any family member to purchase or lease property. o Business Interest: A licensee is an interested party that must make disclosure where the licensee s firm or business is attempting to purchase or lease property. Disclosure Record Keeping The principal broker must keep complete disclosure records at the main place of business for a period of three (3) years from the fully executed purchase contract or date of presentation to a party. This retention period applies whether or not the disclosure is acknowledged in writing. MLS Agency Disclosures MLS providers may require disclosure of the nature of the agency representation as follows: No licensee representing a buyer or tenant shall be deemed to have a brokerage relation ship with a seller, landlord or other licensee solely by reason of using a common source information company. However, nothing contained in this article shall be construed to prevent a common source information company from requiring, as a condition of participation in or use of such common source information, that licensees providing information through such company disclose the nature of the brokerage relationship with the client, including, but not limited to, whether the licensee is acting as (i) an independent contractor, (ii) a limited service agent, or (iii) a standard agent as provided in the brokerage agreement. A common source information company may, but shall not be obligated to, require disclosure of a standard agency rela tionship, and may adopt rules providing that absent any disclosure, a licensee providing information through such company may be assumed to be acting as a standard agent. A common source information company shall have the right, but not the obligation, to make information about the nature of brokerage re lationships available to its participants and to settlement service it provides including, without limitation, title insurance companies, lenders, and settlement agents. LIMITS ON VA AGENCY LIABILITY Virginia agency law limits the liability of licensees and clients under certain circumstances. Many of these limitations on liability are a departure from the common law. Generally, licensees and their clients are presumed to possess actual knowledge of information only. That is, there is no presumption that a client is aware of a fact merely because the licensee is aware of the same fact. For example, both clients and licensees are presumed to possess actual knowledge and information only knowledge or information among or between clients and licensees is not imputed to one or the other party. Other more specific limitations on liability are presented below. Client Liability Under Virginia agency law, clients are presumably unaware and therefore not liable for the following: Virginia licensees are not liable for providing false information if the information was (i) provided to the licensee by his client; (ii) obtained from a governmental entity (either by a primary or secondary source); or (iii) obtained from a person licensed, certified, or registered to provide professional services in the Commonwealth, and the licensee did not have actual knowledge of the falsity or act in 37

38 Module Three VA CE 24 Cr-hrs reckless disregard for the truth. Virginia licensees are also not liable for revealing information as required by law, even if doing so would otherwise violate a fiduciary duty. Licensee Liability Under Virginia Agency Law, licensees have limited liability as follows: Virginia licensees are not liable for providing false information if the information was (i) provided to the licensee by his client; (ii) obtained from a governmental entity (either by a primary or secondary source); or (iii) obtained from a person licensed, certified, or registered to provide professional services in the Commonwealth, and the licensee did not have actual knowledge of the falsity or act in reckless disregard for the truth. Virginia licensees are also not liable for revealing information as required by law, even if doing so would otherwise violate a fiduciary duty. Broker to Broker Liability In some cases, a broker may hire another broker to assist the first broker s client. Virginia law also limits the first broker s liability for misdeeds of the second broker for the following acts: The first broker is not liable for a misrepresentation made by the second broker, unless the first broker knew or should have known of the second broker s misrepresentation and failed to take reasonable steps to correct it in a timely manner; and the first broker is not liable for the negligence, gross negligence or intentional acts of the assisting broker or assisting broker s licensee. additional compensation, provides such other party information relative to the transaction or undertakes to assist such other party in securing a contract or with such party s obligations thereunder, shall not incur liability for such actions except in the case of gross negligence or willful misconduct. A licensee does not create a brokerage relationship by providing such assistance or information to the other party to the transaction. A licensee dealing with a client of a limited service agent may enter into an agreement with that party for payment of a fee for services performed or information provided by that licensee. Such payment shall not create a brokerage relationship; however, the licensee providing such services or information for a fee shall be held to the ordinary standard of care in the provision of such services or information. Exceptions Virginia agency law does not limit the liability between or among clients and licensees in all matters involving unlawful discriminatory housing practices. Also, it does not affect a person s right to rescind a real estate transaction or limit client misconduct as follows: o Virginia real estate agency law does not limit the liability of a client for misrepresentation, negligence, gross negligence, or intentional wrongful acts in connection with a real estate transaction. o Virginia real estate agency also does not limit the liability of a licensee for misrepresentation, negligence, gross negligence or intentional acts in connection with a real estate transaction. Limited Service Agency Liability Under Virginia Agency Law, limited service agents have limited liability to customers as follows: A licensee engaged by one client to a transaction and dealing with an unrepresented party or with a party represented by a limited service agent and who, without 38

39 VA CE 24 Cr-hrs Module Three GUIDANCE DOCUMENT ON NECESSITY FOR BROKERAGE AGREEMENTS 39

40 Module Three VA CE 24 Cr-hrs 40

41 VA CE 24 Cr-hrs Module Three 41

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