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The Company You Keep

By Grant Harpold, HAR Legal Counsel

A lawsuit involving a local residential transaction was the subject of a recent Houston Court of Appeals decision supporting the conduct of a broker and its agents. The case is important because it affirms the practices that most of you are aware of or should have in place. These practices are especially important when the transaction involves the brokerage company’s own listing, the property is owned by one of its own agents and wherein the buyer is also represented by the same company.

Owner/Agent Transaction?
Let’s take a look at how the brokerage company found favor with the court relative to its acting as a corporate broker and with respect to the conduct of its agents. First, a few background facts. As previously mentioned, the house for sale was owned by an agent in the listing broker’s company. The company had a policy that disallowed the owner from also being the salesperson on the listing, so in conjunction with a properly executed intermediary notice, another salesperson with the listing company was assigned to the listing. A Seller’s Disclosure Notice was provided by the seller, with the key information being that there was no knowledge of termite damage in need of repair. The buyer, also represented by the listing brokerage company, did have a termite inspection before closing, which report revealed nothing significant. After closing, and in the course of remodeling, there was substantial termite damage found, so much so that the buyer was forced to move out. A lawsuit was filed, and, during the course of discovery, the company produced a previous Seller’s Disclosure Notice it received when the home was purchased which showed previous termite treatment but no damage in need of repair.

Importance of an Independent Contractor Agreement
As might be expected, the old disclosure statement was used at trial to suggest a material non-disclosure by the listing side of the transaction. Additionally, it was argued that the seller was acting as the agent as opposed to the assigned agent on the listing side, and thus the acts or knowledge of the seller should be pinned on the listing company. The court, however, was able to separate the acts of the seller from those of the listing company. How? The listing company had an independent contractor agreement in place with the seller, who, as stated earlier, was also a licensed agent with the company. The way in which the buyer tried to put liability on the listing company was to show that at all times the seller was actually acting on behalf of the company as a salesperson in the transaction. The independent contractor agreement essentially saved the company from liability, because the court found that the seller’s conduct was that of a seller and not that of a real estate agent, at least as to how those duties were defined in the independent contractor agreement. The court said that the only way to connect the seller and company was if the seller’s conduct was within the confines of the independent contractor agreement, i.e., acting as a licensed agent and not as a seller. So, whatever the seller did or said was on behalf of the seller and not on behalf of another, which is fundamental to acting as a real estate agent (whether under an independent contractor agreement or the Real Estate License Act itself).

No Knowledge No Liability
The explosive issue of whether the content of an old Seller’s Disclosure Notice (in this case seven years old) tucked away somewhere in a company file would impute “knowledge” to a brokerage company was side-stepped by the court and not directly addressed. Instead, the court fell back to a familiar theme: knowledge is key. Here, there was no evidence that any of the agents knew about the unrepaired termite damage, whether in an old disclosure statement or not, and thus no liability.

If Corporate, Be Licensed
The court addressed another important issue, and that is the buyer’s attempt to hold the designated broker for the listing company personally liable even though the corporate entity was licensed, too. The court, in following the Real Estate License Act, held that the designated agent for the listing company, a licensed broker, could not be personally liable for the conduct of the salespersons or agents associated with the licensed corporate entity. This is good news for licensed brokerage companies.

Practice Points
The brokerage company in this case had its paperwork in order. Is yours? Be sure that:

  • a property owned by an agent within the office or company is assigned to another salesperson for listing;
  • an independent contractor agreement is executed between brokerage company and each salesperson; and
  • if operating as a company, be licensed and designate one of the managing officers of the company who is also a licensed broker as the agent of record.

Lastly, knowledge is still critical. Meaning disclose known defects with a property.

Grant Harpold serves as HAR Legal Counsel and is a shareholder with the law firm of Vincent Lopez Serefino Jenevein, P.C. in it’s Houston Office.

 

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