Legal questions raised in a competitive housing market

Legal questions raised in a competitive housing market

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The low inventory of available residential housing across the state has created a competitive market in the residential real estate industry. The majority of calls to Illinois REALTORS® Legal Hotline center around issues generated by low inventory, competitive multiple offer situations and stiff competition for qualified buyers. 

Escalation Clauses

I am a Seller’s agent in a multiple-offer situation, and we have received more than one offer with escalation clauses. How do I advise my seller?

An escalation clause in a real estate contract is a clause that a buyer uses to say: “I will pay X price for this home, but if the seller receives another offer that’s higher than mine, I’m willing to increase my offer to a capped price of Y,” or even, “I will pay X above the highest offer presented by another buyer.”

From a legal perspective, escalation clauses add confusion to transactions and can make things more difficult.

Escalation clauses should be reviewed by legal counsel for opinions on how clauses may impact transactions. (Buyer’s agents must not draft escalation clauses. The drafting should be done by the buyer’s legal counsel.) This is particularly true if you are dealing with multiple offers and more than one escalation clause.

While the use of escalation clauses has exploded in this tight market, they can be problematic for several reasons: 

  • Escalation clauses can create a false sense of security for buyers who feel the clauses guarantee that they will have the highest offers.
  • Capped prices can lead sellers to expect buyers to pay certain amounts for properties because buyers have “shown their cards.”
  • Escalation clauses could push buyers far above what they may be willing or able to pay.
  • Competing buyers become upset because their “next highest” offers are shown to sellers to determine the “escalated” prices and they lose out on properties.

Consider three ways to avoid issues with escalation clauses: 

  • Educate sellers on the problematic nature of escalation clauses at the time of listing.
  • Educate sellers that they can tell all buyers they will not accept offers with escalation clauses and will only consider offers with exact dollar amounts and clear terms.
  • Advise sellers and buyers that their respective attorneys should be consulted on all legal issues.

Procuring Cause

I have shown the same buyers multiple properties in my area during the last several months. Last week, they used an agent from another brokerage to make an offer on one of the homes we visited during an open house. I believe that I am the procuring cause in the transaction because I introduced them to the property. Shouldn’t I be entitled to the offer of cooperating compensation?

Procuring cause is one of the hottest questions on the hotline due to a shortage of properties on the market and fewer commissions available.

The National Association of REALTORS® (NAR) “Code of Ethics and Arbitration Manual,” generally defines procuring cause as the agent who originated the chain of events, without abandonment (agent leaving client) or estrangement (client leaving agent), that leads to the successful sale with that buyer.

Licensees with procuring cause questions should keep the following in mind:

There is no bright line rule to help determine who is the procuring cause. Illinois REALTORS® Legal Hotline will not offer an opinion on which party is the procuring cause.

Illinois REALTORS® Ombudsman Program is an excellent resource for members with potential procuring cause disputes and could be a useful alternative before filing for arbitration or mediation.

A final resolution to a procuring cause dispute may require arbitration by a panel that would consider all the facts and circumstances to determine who best fits the definition of procuring cause. NAR produced a 17-question “Arbitration Worksheet” that lists pertinent questions for the panel to consider.

It is important to recognize that introduction to the property is only one factor that would be considered during arbitration for procuring cause claims.

Although Illinois REALTORS® Legal Hotline won’t offer a legal opinion on which party is a procuring cause, one of the first questions asked of members is whether they have exclusive brokerage agreements with the buyers. This document contractually binds buyer clients to the brokerage company and their designated agents. This agreement is the best protection buyers’ agents can put into place to protect themselves from having buyer clients “poached” by other brokerages. For more information on the benefits of buyer brokerage agreements see: bit.ly/IR_ProcuringCause.

Multiple Offers

I am a listing agent. My seller clients accepted a full-price offer on their home, and the contract is still in the attorney review period. They have now received a higher cash offer and they have asked me to cancel the first contract and accept the new offer. May I do that?

Maybe. Believe it or not, this is a frequent scenario in the current market. There are many sellers willing to terminate or even breach contracts in favor of a higher offer and run the risk of having the buyer on the first contract file suit for specific performance on the new contract. In these situations, DIRECT YOUR CLIENTS TO THEIR OWN ATTORNEYS.

REALTORS® must not offer their clients legal advice on the terminability of a sales contract. As a licensee, you can educate your sellers on the possibility that buyers may try to enforce contracts through lawsuits. You can point out that legal fees associated with defending such actions may outweigh any benefits attached to accepting higher offers. However, only their attorneys can provide them with the specific legal advice that they need to decide whether to terminate contracts, even if they breach contract terms.

Property Management

I am a licensee sponsored by ABC REALTY, LTD. I have been approached by a local housing provider to serve as their property manager “on the side” of my real estate business. Is this permitted?

No, not on these facts. Section 10-20 of the Real Estate License Act (RELA) provides that licensees must only perform “licensed activities” for one sponsoring broker. “Licensed activities” are included at Section 1-10 of RELA under the definition of “Broker.” If a licensee is doing licensed activities for another and for compensation, they are working within the scope of their real estate license.

The following is the list of activities taken from the definition of Broker under RELA: 

  1. …rents or leases real estate.
  2. Offers to…rent or lease real estate.
  3. Negotiates, offers, attempts or agrees to negotiate the…rental or leasing of real estate.
  4. Lists, offers, attempts or agrees to list real estate for…lease….
  5. Supervises the collection, offer, attempt or agreement to collect rent for the use of real estate.
  6. Advertises or represents himself or herself as being engaged in the business of… renting or leasing real estate.
  7. Assists or directs in procuring or referring of leads or prospects, intended to result in the…lease or rental of real estate.
  8. Assists or directs in the negotiation of any transaction intended to result in the…lease or rental of real estate.
  9. …leases or offers for…lease real estate at auction.

In some cases, REALTORS® ask if they can manage properties they own. That depends upon the ownership interest. Licensees who are 100 percent owners of property or own property jointly with their spouse can manage those properties outside of the work that they do for their sponsoring brokers. They do need to comply with the requirements under RELA and make appropriate advertising disclosures that the property is broker owned. However, if licensees have partial ownership interests in properties to be managed they could:

  1. Have another brokerage manage the properties;
  2. Manage “partially” owned properties as brokers (disclosing broker ownership) through their current sponsoring brokerage, assuming their sponsoring brokers want to be in this type of business, but everything including payment must flow through the sponsoring broker.
  3. Own a separate licensed company to manage this and other properties, with a separate designated managing broker and a separate set of licensees sponsored by this company. In other words, licensees might be “owners” in the management companies but won’t be sponsored by these companies. This is true assuming licensees want to stay with their current sponsoring brokerages.

It is highly recommended that legal counsel be consulted to do this properly.



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