All of you can attest to the fact that the amount of paperwork involved in a real estate transaction has steadily increased over the years. The same is true in connection with the real estate brokerage end of the transaction. Some of this paperwork involves disclosures that are required to be made either by a variety of laws or by common law. There are many questions that members have regarding their obligation to disclose as seen by the members response to the August Legal Webinar presented by the Illinois Association of REALTORS®.
These questions often revolve around which disclosures are required for which line of business, such as residential or commercial. Another set of questions deals with which disclosures are required in sale transactions and which disclosures are required in rental or lease transactions. There are also questions dealing with stigmas related to real estate or what constitutes a latent material defect. This article is intended to address some of these questions so as to allow you to better adapt your office policies to the disclosures required by law and to educate your sponsored licensees accordingly.
#1: Disclosures Required by the Real Estate License Act
The first set of disclosures discussed in this article deal with disclosures which are required by the Real Estate License Act of 2000 (“Act”). The disclosures required by the Act are generally required both in residential real estate brokerage transactions as well as commercial real estate brokerage transactions. In addition, certain of those disclosures will apply exclusively to property management.
Perhaps the most common type of disclosure required under the Act is the agency disclosure. Agency disclosure is required to be made at the point in time when you first begin to work with a person or entity as your client. The agency disclosure would include an indication of who will act as the designated agent on behalf of the client.
Typically the listing agreements will include the notice of agency, including the indication of who will act as designated agent. If you are working with a buyer as a client you will need to give them a notice of agency. This can be handled through a Buyer‘s Representation Agreement or, if there is no Buyer’s Representation Agreement by Terms and Conditions of Buyer’s Representation or by a simple notice of agency to your buyer’s client. All of these forms are available through the Illinois Association of REALTORS®, http://www.illinoisrealtor.org/downloads.
Notice of agency is also required in commercial, leasehold and rental brokerage situations. Again there would be a variety of ways in which you could provide the notice of agency. This could be through a Property Management Agreement, if disclosing agency to the owner, or in a Listing for Rent Agreement with the owner. If you are representing a prospective tenant in a residential or commercial transaction you could provide a simple notice of agency to the prospective tenant or include it in an agreement to represent the prospective tenant. The bottom line is that if you are working with a person or entity as a client you need to provide them with a notice of agency in all real estate brokerage situations.
On the flip side to the notice of agency, you will find that there will be times it will be necessary to provide a notice of no agency. One example of this would be if you are exclusively representing the owner of rental units but have contact with prospective tenants. Another example would be if you are representing a buyer and locate a property that is for sale by owner and arrange for a showing of the property but you will only continue to work for the buyer. Notice of no agency needs to be given to that party with whom you have contact but whom you are not representing. This would be true unless the other party is already represented by another licensee. In a property management situation you will find times when the notice of no agency is printed at or near the top of an application that a prospective tenant would complete in an effort to rent a unit. A similar type of disclosure not often used is a notice of ministerial acts.
Also related to a notice of agency is the requirement to disclose the possibility of dual agency if a designated agent may potentially act as a dual agent. Article 15 of the Act requires the designated agent to obtain a signed dual agency disclosure form from both parties who will be represented by the same designated agent prior to acting as a dual agent. In addition to the disclosure prior to beginning to act as a dual agent there must be an additional disclosure made; usually in the form of the contract signed by the parties, in which the parties would acknowledge that the designated agent acted as a dual agent. The rationale behind this is that in the dual agency situation the parties need to be fully informed of the fact that the designated agent is acting as a dual agent and consent to that activity. Article 15 provides a presumption that the parties have full and informed consent if the statutory form is used for the initial disclosure and that firm as well as the additional consent is signed at the times provided for in the Act. This presumption of full and informed consent is significant if an issue ever arises in regards to whether there was an undisclosed dual agency on the part of a designated agent.
In addition, the dual agency disclosure is one that should be made in rental transactions if the designated agent intends to act as a dual agent of the owner as well as the prospective tenant. Once again, the disclosure should be made at a point where a signed acknowledgement is received prior to the designated agent acting as a dual agent and then a follow-up consent should be signed either within the body of a lease or on a separate consent to dual agency at the time of signing of the lease. The dual agency disclosure requirement also applies to commercial transactions.
Article 15 of the Act also provides that a disclosure needs to be given by a designated agent to two or more buyers that they may represent when contemporaneous offers are being made for the same property. Once again this would apply both in a lease situation and in a purchase transaction. The policy behind this is that if a designated agent is representing two or more prospective buyers or tenants interested in making an offer on the same property at about the same time, then those prospective buyers or tenants have a right to know that the designated agent is involved in both offers. The parties can then choose to continue to work with the designated agent or they can ask for other representation.
Another disclosure required by the Act is the disclosure of compensation. Section 10-10 of the Act provides that a licensee should disclose to the client the sponsoring broker’s compensation and policy with regard to cooperating with brokers who represent other parties in a transaction. The Code of Ethics indicates that the amount of compensation to a cooperating broker needs to be disclosed. There is no indication in the Act that the disclosure of the broker’s policy with regard to cooperating with other brokers needs to be in writing. The licensee is also required to disclose to their client all sources of compensation in the transaction that will be received by a licensee from a third party. The policy behind this disclosure is that the client is entitled to know when the licensee who is representing them is receiving compensation from a third party in connection with the transaction.
Another disclosure required by the Act is the requirement to disclose if the licensee has an interest in a transaction. Specifically, Section 10-27 of the Act provides that “(E)ach licensee shall disclose, in writing, his or her status as a licensee to all parties in a transaction when the licensee is selling, leasing, or purchasing any interest, direct or indirect, in the real estate that is the subject of the transaction.” This disclosure is not just applicable to residential brokerage transactions but also impacts the commercial brokerage businesses as well.
Perhaps one of the most problematic disclosures for licensees stems from Section 15-25 of the Act. This Section provides that a licensee “engaged by a seller client shall timely disclose to customers who are prospective buyers all latent material adverse facts relating to the physical condition of the property that are actually known by the licensee and could not be discovered by reasonably diligent inspection of the property by the customer.” The troublesome part is trying to determine what are “latent material adverse facts” that “could not be discovered by reasonably diligent inspection of the property by the customer.” There is no bright line test for a licensee to use in analyzing this question. Rather, an evaluation of the facts in each particular case needs to be undertaken. Also, when representing a seller in a transaction the licensee needs to talk with their seller client concerning issues dealing with potential disclosures to prospective buyers. Remember, the language of this section specifies that this disclosure requirement of the Act only applies in purchase and sale transactions and not in lease transactions. Common law may require the disclosures in lease transactions, depending on the facts, but this statutory provision does not apply in that situation. Also, the Act provides some protection to a licensee who discloses material adverse facts about the physical condition of the property to a prospective buyer as such information is not viewed as confidential under the Act.
The licensee also needs to be cognizant of the fact that they may need to prove at some point in the future that the required disclosure was made. Thus, it becomes important to document the disclosure in some manner, even if that is simply a memo to the file or an e-mail to the file indicating that on this particular date the licensee made a particular disclosure to a client or customer. This will help to answer any questions in the future from the Illinois Department of Financial and Professional Regulation or in litigation as to whether the required disclosures were made.
#2: Disclosures not in the Real Estate License Act
There are also additional statutorily required disclosures that fall outside of the Act. Most of these required disclosures relate strictly to residential property. Perhaps the most common of these is the Residential Real Property Disclosure Act and the seller disclosure form provided for by that statute.
The seller disclosure form is a form that needs to be completed by the owner of residential property that is to be sold in a transaction that is not otherwise exempt. This disclosure must be made even if the owner of the property does not occupy the property. Specifically, the first question on the form asks the owner who is completing the form if they have occupied the residence in the last 12 months. If that answer is “no” it provides an indication to the prospective buyer as to the owner’s knowledge as to the other conditions disclosed on the form. The Residential Real Property Disclosure form is not required in lease transactions. The key for licensees in this disclosure is to make sure the owner is aware of the form and their obligation but that the licensee should not be answering the questions on the form.
Another disclosure that must be made under federal law is the lead paint disclosure. This is a disclosure which is required for pre-1978 housing, this includes residences in a sale or lease transactions.
Another type of disclosure required is a radon disclosure. The radon disclosure is required in most residential sale transactions and in some residential rental transactions. The major exception for sale transactions is if the residential unit is on the third floor of a building or above. In addition, the radon disclosure applies to residential properties containing four or less units. In rental transactions, the radon disclosure does not need to be made unless there has been a radon test showing the existence of a radon hazard which has not been remediated. Once there has been a test showing that there is a radon hazard then remediation by the party that occupies the unit or by the owner would mitigate against any future radon disclosure.
The benefit of these property disclosures to the licensee is that the licensee is not actually required to make the disclosure. It is the owner of the property that would be making the disclosure in each of these situations. However, on the lead-based paint disclosure form there is a line for the licensee to sign indicating that the seller or landlord has been advised of their responsibility to make the disclosure. Since the owners are to be making the disclosures in each of these situations, the licensee should not be advising the owner in regards to what should be disclosed. If the owner has questions concerning what should be disclosed, the owner should be referred to their advisor, probably an attorney, to seek advice regarding what particular issues need to be disclosed.
One additional item that you need to be cautious about is making written disclosures electronically. Federal law requires that if there are statutory or regulatory provisions requiring written disclosures that those disclosures cannot be made electronically without first receiving permission from the party receiving the disclosure. Thus, for example, a notice of agency should not be given electronically without permission from the party receiving the notice. The reason for this is that a notice of agency is statutorily required and thus under federal law cannot be made electronically without permission from the party receiving that notice.
I would highly recommend to those with specific questions that you listen to the legal webinar for August that is posted on the Illinois Association of REALTORS® website. There were a number of specific questions answered during that webinar. Another alternative would be to e-mail the IAR Legal Hotline or to call the Hotline to seek information regarding particular disclosure requirements or to discuss particular situations.