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How to Breach a Listing Agreement Without Even Trying
Oliver Frascona, a real estate attorney in Boulder, Colo., and author of The Paper Trail (Real Estate Law Books, Inc.), shares these tips for avoiding contract breaches.
Q: What are the main forms of contract breach in real estate?
Frascona: In real estate, contract breaches can occur in the property listing agreement between the broker and the seller or in the sales contract between the buyer and the seller.
Q: How might a broker breach a listing agreement?
Frascona: A broker or sales associate could violate a listing agreement by failing to advertise a property as agreed. By keeping a listing in-house, even for a short while, instead of placing it with the MLS or refusing to work with a cooperating agent, a broker isn't fulfilling the fiduciary responsibility to the seller. This is the most common breach of a listing agreement.
Another typical breach occurs when a listing agent discloses confidential information about the seller—a divorce, financial problems, and the like. It may be unintentional, arising from a simple conversation between two sales associates, but it is still a breach of fiduciary duty because it benefits the buyer and creates an undisclosed dual agency.
Even delaying the presentation of an offer could breach a broker's fiduciary duty under the listing agreement.
Q: What about seller breaches in the listing agreement?
Frascona: The most common breach on the seller's side is misrepresenting the facts about the property to the broker. A seller could also violate the listing agreement by interfering with the broker's ability to show the property or refusing to pay the broker's earned commission.
Q: Are brokers liable for the breaches of their sales associates?
Frascona: Yes. The activities of a sales associate are attributable to the broker or owner. There is a huge downside risk to breaching one's fiduciary duty, even if it was unintentional and even if no damage was done to the seller. The minimum penalty is loss of full commission. Some companies have had to pay multimillion-dollar penalties. Make sure your people understand their fiduciary duties under the listing agreement.
Confusing Contract Verbiage
These are words that can easily infer something that the parties didn't really intend. When you see one in a contract, stop and read it carefully to be sure that the word correctly expresses the intent.
· As is
· Approve
· Best
· Certify
· Ensure
· Inspect
· Never
· Required
· Timely
Adapted from Reduce Your Risks to Professional Liability Claims in Real Estate, Leland M. Kraft, Jr., Apollo Publications, 1991
How to Handle Escrow Funds Safely
Escrow fund mishandling is a common violation of state real estate license laws, according to real estate commissions in states with large numbers of practitioners. Jeff Jefferson, chief financial examiner at the Colorado Division of Real Estate, offers these suggestions for avoiding liability as a result of improper handling of escrow funds.
- Don't give one individual too much responsibility over the handling of escrow accounts. A single individual shouldn't be making deposits, writing checks, and reconciling accounts. It's an undue burden as well as making it too easy to misappropriate funds.
TIP: For added protection, be sure those handling escrow funds are licensed or bonded.
- Keep scrupulous records. Reconcile accounts monthly to catch errors early.
- Don't disburse money or use your share of the escrow funds until closing. Keep those funds separate from your operating funds. Never “borrow” escrow funds or a commission on a transaction that hasn't yet closed.
- Don't use escrow funds to settle disputes. Brokers in Colorado are required to hold escrow funds until disputes are settled. Check the requirements in your area.
- Consider contracting with title companies or law firms to handle escrows. Although larger companies may prefer to retain control of trust account funds, many smaller brokers are using outside services.
