The Increasing Focus On Consumer Protection In Real Estate: Who Does The Broker Represent?

Article 12-A, Section 443 of New York’s Real Estate License Law describes a fundamental responsibility of real estate agents to the public. Although the law went into effect in 1991, it continues to perplex real estate professionals who strive to be in compliance. According to Michael Kelly, Director of Government Affairs for the New York State Association of Realtors, “If you ask NYSAR’s staff attorneys to identify the most misunderstood and confusing part of real estate law, the answer would unequivocally be agency representation.” In an attempt to address the subject, Anthony Gatto, Esq., NYSAR’s Director of Legal Services informed me that NYSAR has made the following recommendation to the Department of State: “NYSAR respectfully suggests requiring for every licensee that needs to take continuing education, one hour of agency every two years. New licensees will be required to take two hours of agency during their initial two year license term.” (Author’s Note: The license law education requirements for salesperson and broker licensing include agency disclosure. The NYSAR proposal applies to continuing education.)

So why is compliance with this section of the license law so critical? Well, first let me say that the Department of State may fine, revoke or suspend the license of a real estate agent who has not complied with the law. In addition, courts have refused to allow a broker to receive a commission if they cannot demonstrate compliance with the law. Section 443 applies to properties of fewer than five units for sale or rent, and condominiums and cooperative housing regardless of the number of units. For all other types of properties, section 175.7 of the License Law requires a real estate agent to make it clear to the consumer which party the agent is representing. The concerns of the DOS, the legislature and the courts as well as NYSAR, have nothing to do with who pays the commission, as many real estate agents and most consumers believe. It has to do with the real estate agent’s responsibilities to the parties to the transaction. If the broker is representing the seller, the broker has a fiduciary responsibility to the seller. The broker has to place the interests of the seller above those of the buyer as well as the broker, except as otherwise required by law. For example, the broker may not follow instructions of the seller that would violate Fair Housing Laws. The broker has the duty of fair and honest dealing towards the buyer, which does not include disclosing confidential information about the buyer that could affect the seller’s opportunity to get the best price for the property; for instance, telling the buyer that they are anxious to sell. If the broker is representing the buyer, then the real estate agent’s fiduciary responsibilities are to the buyer.

The law requires that the capacity in which the agent will be operating be disclosed and explained to the consumer, and that they provide their informed, written, consent. I would emphasize the word, “informed.” So if you as a prospective seller, buyer, landlord or tenant are not presented with an agency disclosure form at the point of “first substantive contact” with the agent, ask why? The agent should not encourage you to sign the form without fully explaining it to you and receiving your written consent. There are many possible scenarios that the law is structured to address. For example, what if the wishes of the seller or buyer or the circumstances require that both be represented by the broker rather than act in the sole interests of one party (Single Agency?) The law defines this as Dual Agency, requiring knowledge and written consent of both parties. There are also circumstances whereby a broker could designate one agent to represent the seller and another to represent the buyer. This is known as Dual Agency with Designated agents. This usually applies to “in-house” listings.” Another aspect of the law applies to broker’s agents. In my experience with realtors and the public, this is often the most misunderstood aspect of agency disclosure. The intent is to provide the principal, seller or buyer, with all of the benefits to be derived from engaging one broker as their exclusive agent, while requiring cooperation with all other agents without the potential vicarious liability for the actions of those other agents.

The laws of agency also apply to landlord tenant situations. If the law seems complex and confusing, as was pointed out by Mr. Kelly of NYSAR, they are, but that doesn’t excuse non-compliance.