NY broker collects commission from amended listing agreement By Anthony Gatto, Esq., NYSAR Legal Counsel

Transcription

1 New York State Association of REALTORS LEGALLINES A risk management tool for New York s REALTORS NY broker collects commission from amended listing agreement By Anthony Gatto, Esq., NYSAR Legal Counsel SECOND QUARTER 2012 Vaak Properties, LLC (Vaak) was the owner of property located at 1135 Boynton Ave., Bronx, NY and enlisted Sioni & Partners, LLC (Sioni) to act as the exclusive listing broker for the property. Upon procuring a purchaser for the property, Vaak refused to pay Sioni the agreed upon commission. Vaak and Sioni entered into an exclusive right to sell (ERTS) agreement and agreed the property should be listed for $6.6 million. The ERTS stated that Sioni would be entitled to a commission of 3 percent if Sioni was able to produce a purchaser at the agreed upon price. In the event the seller accepted an offer for less than $6.6 million, the commission would be negotiated. The ERTS was valid for three months and expired on September 4, During the term of the ERTS, Sioni procured a purchaser whose offer of $6 million was accepted by Vaak. Since the accepted price was less than the $6.6 million recited in the ERTS, Sioni and Vaak entered into an amended commission agreement on September 2, The amended commission agreement stated that Sioni was to receive a commission of $160,000 if and when title closes. Vaak and Sioni signed the agreement, however, Vaak handwrote the phrase subject to attorney modifications and approval above the signature line. On September 3, 2010, Sioni and the purchaser entered into a contract for sale of the property. In the contract, it specifically identifies Sioni as the procuring cause of the sale and such commissions shall be paid to Sioni pursuant to a separate commission agreement. New York News On December 10, 2010 Vaak wrote to Sioni that their attorney approved a $100,000 commission rather than the $160,000 contained in the amended commission agreement. Prior to the closing, Sioni made several attempts to remedy the matter,but was unsuccessful. Sioni initiated a lawsuit for the commission agreed upon in the amended commission agreement on or about December 28, The transaction closed on January 21, 2011, and Sioni again made several attempts to collect the full commission. Despite all the attempts, Vaak did not pay Sioni any commission after the closing. In the lawsuit that followed, Vaak,claiming that Sioni failed to prove they were the procuring cause, did not attend three meetings that took place after the purchase price was agreed upon; and the See Amended listing agreement, page 2 DOS asserts Broker Price Opinions must be done through brokerage By Anthony Gatto, Esq., NYSAR Legal Counsel Ever since the article Only a licensed broker can perform BPOs and property management appeared in the November/December issue of New York State REALTOR magazine, NYSAR has received a large number of inquiries from members disagreeing with NYSAR s opinion without something directly on point from the New York State Department of State (DOS). As a result of this, NYSAR requested that DOS issue a formal opinion regarding Broker Price Opinions (BPOs). On May 11, 2012, DOS issued such an opinion, a copy of the opinion is provided below: I am in receipt of your inquiry regarding broker price opinions (hereinafter referred to as BPO ) and whether a real estate salesperson or associated broker may prepare same independent of the broker with whom they are associated. Pursuant to Real Property Law 442- a, No real estate salesperson shall receive or demand compensation of any kind from any person, other than a duly licensed real estate broker with whom he associated, for any service rendered or work done by such salesperson in the appraising (of) real estate. While appraisal is not defined by Article 12-A of the Real Property Law, it is defined by Executive Law 160-a(2). Pursuant to said statute, appraisal means analysis, opinion or conclusion relating to the value of identified real estate. Real estate licensees regularly prepare BPOs in furtherance of listing property for sale or providing a real estate client with a value estimate for real estate. While the phrase broker price opinion is not expressly stated in Real Property Law 442-a, the service is the functional equivalent of an appraisal. Accordingly, real estate salespersons and associate brokers may not receive or demand compensation from anyone other than their representative broker for preparing a BPO. It should also be noted that all fees collected for conducting a BPO should be paid directly to the brokerage. Brokerages are prohibited from assigning fees directly to a licensee. In other words, a broker may not give permission for a fee to be made payable directly to a licensee.

2 PAGE 2 Hawaiian court rules broker adequetely disclosed tree frog noise In March 2012, a Hawaiian appellate court considered whether a broker made adequate disclosures to a buyer and also whether there was a duty to disclose offsite adverse social conditions to the buyer. In May 2005, James Clay and James Singleton submitted an offer to purchase a lot of undeveloped land. Later, the two individuals assigned their interests in the property to Brinkwood Land Equities, Ltd. (buyer), an entity the two formed to complete the purchase. The agreement gave the buyer the option to purchase the property by September 1, 2005, with $75,000 due at that time. If the buyer failed to complete the transaction, the seller could retain the buyer s deposit as liquidated damages. The buyer s representatives testified that they had become interested in the property based on the description of its views and its reported sounds of waterfalls. The property s owner, Geraldine Randall (seller), accepted the buyer s offer. The seller was represented in the transaction by Kelly Moran of Hilo Brokers, Ltd. (brokerage). The seller added a number of addenda to the contract, including an National Case as-is addendum and also a Caribbean tree frog pest alert addendum (tree frog addendum), and Seller s Property Condition Disclosure Form. The tree frog addendum advised the buyer about the presence of Coqui frogs in the area, and informed them to visit the property at night to see if the frog noise would pose a problem. In August 2005, the buyer canceled the escrow for the property. However, the buyer continued to express interest in the property and visited the property with a representative of the brokerage in September At that time, the buyer became aware of how loud the tree frog noise was and also that the property was located in an area allegedly used by drug dealers and prostitutes. In 2007, the buyer filed a lawsuit alleging that the seller and the brokerage had misrepresented the property in its materials, as the ads had represented that one could hear a waterfall on the property when instead all one could hear was the sound of dying and tortured animals [i.e., the tree frogs] and also the neighborhood allegedly had social problems. The trial court entered judgment in favor of the brokerage and the seller, and the buyer appealed. The Intermediate Court of Appeals of Hawaii affirmed the lower court s ruling. First, the court looked at whether the tree frog noise had been adequately disclosed. The seller had included the tree frog addendum as part of the contract, and this addendum had advised the buyer to visit the property See Tree frog noise page 6 NYSAR offers a variety of legal resources at NYSAR.com. Amended listing agreement continued from page 1 only thing Sioni brought about was the purchase price. The court reviewed all the facts of the case including Vaak s testimony, the sales contract, the amended commission agreement and the testimony of the purchaser. The court pointed out that the sales contract and the amended commission agreement both contained language that expressly names Sioni as the procuring cause of the sale. The purchaser also stated that the purchase of the property was a direct result of Sioni s efforts. The court found that Sioni not only called the property to the purchaser s attention, but also provided information about the pro perty to the purchaser, arranged for the purchaser to visit the property and brought about the ultimate purchase price. The court found that Sioni was entitled to the commission without the need to prove it was the procuring cause of the sale since a broker with an exclusive right to sell agreement entitles the broker to a commission whether or not the broker played a part in the negotiations. The court found that Sioni was entitled to the $160,000 agreed to in the amended commission agreement. The court did not address the validity of the handwritten attorney approval included in the amended commission agreement. Sioni & Partners, LLC, v Vaak Properties, LLC, 2012 NY Slip Op 1560 (1 st Dept). See Antitrust allegations, page 4 Visit the Legal section for the Brokers Reference Manual and Legal Compendium.

3 PAGE 3 NYSAR Legal Hotline call report first quarter 2012 HOTLINE ISSUES COMMISSION 7% 12% LICENSE LAW FAIR HOUSING 16% 10% CONTRACT DISCLOSURE 4% 2% AGENCY DOS 2% 3% 2% 4% 10% 12% 16% REFERRALS ARBITRATION CODE OF ETHICS BOARD/ASSOCIATION MLS OTHER HOTLINE ISSUE ISSUES COMMISSION % LICENSE LAW % FAIR HOUSING 19 2% CONTRACT % DISCLOSURE % AGENCY % DOS 44 4% REFERRALS 16 2% ARBITRATION 29 3% CODE OF ETHICS 23 2% BOARD/ASSOCIATION 45 4% MLS % OTHER HOTLINE ISSUES 70 7% TOTAL ISSUES 1012 Average length of call: 7 minutes Average calls per day:20 The NYSAR Legal Hotline is available to members by calling Monday through Thursday from 9 a.m. to 1 p.m.

4 PAGE 4 St. Paul landlords file lawsuit against city for violating Fair Housing Act A federal appellate court recently allowed a jury to consider allegations that a municipality s enforcement of its housing code had a disproportionate effect on racial minorities in violation of the federal Fair Housing Act (act). The City of St. Paul, Minnesota (city) decided to aggressively enforce its housing code (code) against rental housing after it made the determination that it had a preference for owner-occupied housing over rental housing. The city claimed that this policy was designed to improve the quality of housing within the community; landlords and tenants alleged that the city s actions had increased the cost of rental housing and disproportionally affected low-income tenants generally, and in particular racial minorities. The city raised its inspection standards and enforcement, including requiring landlords to obtain compliance certifications. A group of landlords with low-income tenants (landlords) filed a lawsuit alleging various civil rights claims against the city, including violations of the act. The trial court dismissed the lawsuit, finding that the code was race neutral and there was no evidence of a discriminatory intent by the city in enforcing the code. The landlords appealed. The United States Court of Appeals for the Eighth Circuit reversed the trial court, ruling that the enforcement of the code could potentially have a disparate impact on racial minorities and so sent the case back to the trial court. The FHA prohibits discrimination in the sale or leasing of housing on the basis of race, religion, sex, familial status or national origin. While there was no direct evidence demonstrating discrimination, the evidence suggested that the city s enforcement did have a greater impact on minorities. African Americans made up approximately 10 percent of the city s population, but were approximately 60 percent of those on the waiting list for low-income housing and Section 8 vouchers. The court considered the landlords disparate impact allegations. A disparate impact claim does not require a showing of a discriminatory intent. Instead, it simply requires a showing that the policy or practice had disparate impact on a protected class. If the government shows that the action was justified, then the challenger will need to show that there was an alternative method of enforcement, which would not have resulted in this unbalanced impact. In this case, the landlords had shown that the city s targeted enforcement had a disproportionate impact upon a protected class, racial minorities. The trial court had ruled that the city s laws were racially neutral and there was no evidence that the city s enforcement had a discriminatory intent. Therefore, the landlords needed to demonstrate an alternative enforcement method which would not have resulted in the disproportionate impact. The landlords had brought forth evidence of a program where community groups worked with problem landlords, and that this program had resulted in greater code compliance and lower costs for landlords. Because the trial court had not considered whether this alternative method would have alleviated the disparate impact of the city s current enforcement program, the case was sent back to the trial court for further proceedings. Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010). Editor s Note: The Supreme Court of the United States had accepted certiorari of this case in order to resolve a circuit split on how courts should treat disparate impact claims and also whether disparate impact claims are cognizable under the act. Currently, disparate claims are considered in three different ways by courts across the country. In the interim, the United States Department of Housing and Urban Development has issued a policy statement recognizing disparate impact claims under the act. While the case was pending before the court, the city withdrew its appeal and so the court will not hear this case. Reprinted with permission from The Letter of the Law, National Association of REALTORS. New York State Association of REALTORS Listen. Call. Learn NYSAR Radio Get answers to your legal questions. Visit NYSAR.com for air times and details.

5 PAGE 5 Supreme court rules fee split required for RESPA violation Resolving a circuit split in the manner urged by the National Association of REALTORS, the Supreme Court ruled that RESPA requires a fee split of a settlement-service fee for a 2607(b) violation. In a case involving mortgage lending but which has direct application to real estate brokerage, the Supreme Court of the United States has determined that a violation of 2607(b) of the Real Estate Settlement Procedures Act (RESPA) only occurs when a split of a settlement-service fee paid by a DOS publishes fourth quarter ALJ decisions consumer to a real estate settlement-service provider is split with a third party. RESPA 2607(b) states that [n]o person shall give and no person shall receive any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service [involving] a federally related mortgage loan. Real estate settlement services are defined as covering all services connected to a real estate settlement including National Case real estate brokerage services. Three married couples (collectively, consumers) received mortgage loans from Quicken Loans, Inc. (lender). The consumers filed three separate lawsuits against the lender, alleging that the lender had charged fees for which no services were provided and therefore the fees, violated RESPA. One such charge was labeled a loan processing fee, while another charge was a loan discount fee, even though it was alleged the lender had not provided a discount. The consumers did not allege that the lender had split any of these fees with a third party. The Department of State, Division of Licensing Services (DOS) receives complaints about real estate licensees. The DOS investigates the complaints and if they are found to have merit, a licensee may be subject to a hearing before an administrative law judge (ALJ) to determine whether the licensee violated any law, rule, regulation or other duty expected of a licensee. The following citations refer to DOS decisions before an administrative law judge. Each decision provides a brief description regarding the subject matter of the violation(s) being heard before the administrative law judge. NYSAR is providing this information to REALTORS in an effort to better educate our members as to what constitutes a violation, and how to avoid having a complaint filed against you. Full copies of the decisions are available in the Legal Resources section of NYSAR.com via the court and DOS decisions link. 1st quarter DOS decisions 2 DOS 12 improper rental, unearned commission, failure to cooperate with DOS 3 DOS 12 misstatement on application, fraud, failure to pay judgment 56 DOS 12 denial of license 60 DOS 12 misstatement on application, denial of license 62 DOS 12 failure to provide copies of agency disclosure to clients, failure to retain said copies 63 DOS 12 commingling of escrow funds 64 DOS 12 misstatement on application, denial of license 124 DOS 12 continuing education 128 DOS 12 unlicensed broker, failure to maintain escrow, advertising 142 DOS 12 denial of license 153 DOS 12 demand and collection of improper commissions 154 DOS 12 denial of license 156 DOS 12 failure to pay a judgment 158 DOS 12 failure to satisfy judgment, failure to notify DOS of change of address 168 DOS 12 failure to complete 75-hour salesperson course 169 DOS 12 commingling escrow funds, unlicensed agent, failure to satisfy judgment The lender argued that because it had not split its fees with any third parties, there was no RESPA violation. The consumers asserted that a 2001 policy statement issued by the United States Department of Housing and Urban Development (HUD) prohibited the collection of unearned fees for real estate settlement services and, therefore, any of the lender s charges where no services were provided violated RESPA. After the lawsuits were consolidated in federal court, the lower courts ruled in favor of the lender and the consumers appealed. The court affirmed the rulings of the lower court, resolving a split among federal circuit courts of appeal. Previously, some circuits had required a fee split with a third party in order for there to be a 2607(b) violation, while others had followed the HUD policy statement and prohibited unearned fees, even when a settlement-service fee was not split with a third party. The court rejected HUD s policy statement and ruled that a 2607(b) violation requires the payment of a portion of a settlementservice fee by the party collecting the fee to a third party who performed no services in exchange for the fee. Looking at the plain language of 2607(b), the court found that this section unambiguously covers a settlement-service provider s splitting a fee See RESPA violation, page 6

6 PAGE 6 RESPA violation continued from page 5 with one or more other persons; it cannot be understood to reach a single provider s retention of an unearned fee. Further, the court stated that the language used by Congress in drafting 2607(b) describes two separate exchanges, where one party receives a settlement fee and then pays a portion of the fee to a third party. Without such payment to a third party, the court determined that there is no violation of 2607(b). The court found the consumer s arguments unpersuasive. First, the court declined to defer to HUD s RESPA policy statement because HUD s interpretation was inconsistent with the plain language of the statute. The court also rejected the argument that the consumers were the ones making the prohibited payments when they paid settlement service providers unearned fees, as Congress could not have intended to make consumers potentially criminally liable when it banned both the payment and acceptance of certain types of payments. Finally, the court also stated that 2607(a) and 2607(b) contain separate prohibitions, rejecting the consumers argument that the two sections must be read in conjunction with each other to ban unearned fees. Section 2607(a) broadly bans kickback arrangements in exchange for referrals of real estate settlement services, whereas 2607(b) covers arrangements dividing specific settlement service payments between two parties. Thus, the court affirmed the rulings of the lower courts. NAR filed an amicus curiae brief, arguing that a violation of 2607(b) occurs only when a real estate settlement service provider pays a portion of a settlement service fee to a third party who performs no services in exchange for the fee. Suits alleging a violation of Section 8(b) of RESPA have been brought against real estate brokerages that charge consumers a flat fee in addition to a percentage-based commission. The first such suit, decided in 2009 in the case of Busby v. JRHBW National Case Realty, Inc. d/b/a Realty South, sent shock waves through the brokerage community. In that case the court found that a fully disclosed administrative brokerage commission paid by a buyer violated Section 8(b) of RESPA because it was not sufficiently related to any specific service performed for the buyer s benefit and could not be justified by the entire array of services provided to the buyer. In essence, the court found that a price increase violated RESPA merely because it was imposed as a flat fee added to a percentage-based commission as opposed to the brokerage simply charging a higher percentage-based commission. In spite of the fact that the ruling defied logic and was contrary to the language of the statute, other cases alleging the same violation soon followed, with equally troubling results. Tree frog noise continued from page 2 at night to determine if there was a tree frog problem. There was also additional evidence that the buyer was aware of the tree frogs on the property. Therefore, the court ruled that the seller and the brokerage had adequately alerted the buyer to the possible presence of tree frogs and so affirmed the trial court s ruling. Next, the court considered whether the seller had a duty to disclose certain offsite social conditions, namely the alleged presence of prostitutes and drug dealers. In Hawaii, a seller has a duty to identify all known defects on the property that would likely affect the value of the property. However, the social conditions that the buyer was complaining about were off-site conditions and not part of the property itself. Finding nothing in Hawaiian law that required a seller to disclose these off-site conditions, the court affirmed the trial court s ruling in favor of the seller and the brokerage. Brinkwood Land Equities, Ltd. v. Hilo Brokers, Ltd., No , 2012 WL (Haw. Ct. App. Mar. 14, 2012). [This is a Today, in light of the unanimous Supreme Court ruling, such fees do not violate Section 8(b) of RESPA unless the broker who is paid the fee splits it and pays a portion of it to a third person outside of the brokerage firm who provides no services in exchange for the fee. Today s decision has no impact on any state laws that prohibit charging an administrative fee. Likewise, the decision does not in any way alter RESPA s prohibition against the payment by a broker of anything of value in return for t he referral of business to the brokerage. Editor s Note: Reprinted with permission from The Letter of the Law, National Association of REALTORS. citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information]. Editor s Note: Reprinted with permission from The Letter of the Law, National Association of REALTORS. Sign up for the Broker Involvement Program today! realtors/brokers/