2015-2016 Commercial Core Course

Handout Student’s Guide

Developed by the Tennessee Real Estate Educational Foundation (TREEF)

in cooperation with the Tennessee Association of REALTORS® (TAR)

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Course Introduction and Learning Objectives Course Overview The 2015-2016 Commercial Core Course provides students with a comprehensive review of several risk reduction topics affecting Tennessee brokers and licensees. The course addresses the most recent changes to the rules and regulations of the Tennessee Real Estate Commission, a variety of legal pitfalls for commercial REALTORS, agency and ethics issues, as well as common contract problems in commercial practice. Students are provided with guidelines for limiting liability in daily practice by avoiding common mistakes and properly using attorney- approved forms.

Although the topics covered in this course were determined by the Real Estate Commission, we’ve made every effort to customize this course for commercial practitioners to the extent possible!

Learning Objectives Upon completion of this course, students will be able to:

• Explain the requirements of the revised TREC Rules. • Describe how to properly disclose issues related to property condition and environmental

hazards. • Explain what is and isn’t allowed under the rules and regulations governing gifts, prizes

and rebates. • Identify the supervisory responsibilities of a managing broker and corresponding liability. • Describe common problems and issues with commercial contracts and Leases – including

Net, Triple Net, Gross, and Modified Gross. • Accurately describe the provisions of Tennessee’s agency law as applied to commercial

real estate and explain commonly used agency relationships and their implications. • Identify the ethical demands in Tennessee agency law and TREC Rules and describe the

penalties for violations.

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A Pre-Test – Just To See What We Do & Don’t Know 1. E & O Guidelines are important because;

a. Even the best agents who do everything by the book can get sued. b. E & O insurance protects all parties from liabilities created by errors and

omissions in a real estate transaction. c. Because the law says they are d. All of the above (Correct)

2. Failure to adhere to TREC Rules can:

a. Create serious misunderstandings between agents and brokers b. Result in lost clients and wasted time c. Result in fines, penalties and loss of license (Correct) d. None of the above

3. Since mold, lead based paint and asbestos only affect residential buyers there is really no

need for the commercial practitioner to be concerned with it. a. True b. False (Correct)

4. In Commercial real estate when an agent leaves for another broker;

a. They can just move the listings with them. b. They cannot take their listings without the Broker’s permission. (Correct) c. The listings are the Broker’s, period! d. None of the above

5. The Civil Rights Act of 1866 prohibits all racial discrimination in the sale or rental of

property. a. True (Correct) b. False

6. REALTORS® shall not deny equal professional services to any person for reasons of: a. Race, color, religion, sex, b. Handicap, familial status, national origin, or sexual orientation c. Both a & b (Correct) d. None of the above

7. You can give a gift to a non-licensed person if you provide which of the following?

a. Accurate specifications of the gift, prize, or other valuable consideration offered; b. Fair market value and the time and place of delivery c. Any requirements which must be satisfied by the prospective purchaser or lessor d. All of the above. (Correct)

8. If you prefer, rather than go through all the hoops above, you can just give cash to non-

licensees. a. True b. False (Correct)

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9. Since Brokers and Affiliate-Brokers are licensed professionals there is really no need to require on site supervision in a real estate office.

a. True b. False (Correct)

10. Strict office policy has a tendency to cause confusion and resentment in a professional

setting because; a. It forces compliance to another’s will unfairly b. It fails to recognize the brilliance in an individual’s ability to organize and run

their own business c. Both a & b d. None of the above (Correct)

11. Which of the following are not required in a commercial contract?

a. Full and correct address b. Legal description of the property being sold c. Full legal names of all parties to the contract d. None of the above (Correct)

12. Which of the following reasons are acceptable for a missed contractual deadline?

a. “We don’t do it like that around here!” b. “No one pays attention to that.” c. “No one else does it.” d. None of the above. (Correct)

13. An agency relationship in TN can be created by the virtue of a licensees actions, behavior

or statements. a. True b. False (Correct)

14. A licensee’s delivery of a written disclosure or confirmation of agency status :

a. Does make the licensee an agent of the party b. Does not make the licensee an agent of the party (Correct) c. Does not allow the licensee to act as a facilitator d. Both a & c

15. When you are under an exclusive listing agreement with your client which of the

following duties are exclusive to that client? a. Confidentiality b. Reasonable skill and care c. Honesty and good faith d. Loyalty (Correct)

16. State Law contains specific requirements for your dealings with other professionals.

a. True b. False (Correct)

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Lesson 1: TREC Rules Why is it important to understand TREC Rules? All licensees in the state of Tennessee must adhere to TREC Rules. Failure to do so can result in fines, penalties and even loss of license.

Are TREC Rules the same as Tennessee law? TREC Rules are promulgated to provide more detailed guidelines for the day-to-day activities of licensees. They’re authorized by and consistent with the requirements of Tennessee law. The Tennessee Real Estate Commission enforces both the license law and rules. Remember that, as a licensee, you are responsible for adhering to both the law and TREC Rules.

What should I do if I don’t understand a certain requirement of TREC Rules? You can always contact TREC for clarification. Their website provides a link to frequently asked questions: http://tn.gov/commerce/section/real-estate-commission and you can reach them by phone (toll free) at 1-800-342-4031.

In addition, as a member of the Tennessee Association of REALTORS®, you may always email TAR’s Legal Hotline attorneys for clarification on any legal or ethical issues at hotline@tarnet.com. Always put Hot Line Question in the subject line of the email and include (in the email) your full name, firm name, broker’s name, and local association.

REDLINE OF REVISED TREC RULES

KEY: Black text - existing rule Red text - Rules effective October 18, 2015 Rule 1260-1-.18. Duplicate or Confusingly Similar Firm Names. (1) In order to protect the public from confusion regarding licensed real estate firms, the Tennessee Real Estate Commission reserves the right to refuse to issue a new firm license in a name that is the same or confusingly similar to another firm already issued. (2) The Commission staff shall review all applications for a firm name to determine whether the name is the same or confusingly similar to the name of another firm licensed with the Commission. If a name is rejected, the applicant will be notified. If the applicant does not agree with the decision, he or she may appeal to the Executive Director. Upon notification of an appeal, the Executive Director will either approve or reject the name and notify the applicant. (3) The applicant may then appeal, in writing, the Executive Director's decision to the Commission. The Commission's decision will be final. (4) The Commission assumes that the applicant has researched any legal restriction regarding the use of a proposed firm name. The Commission will not attempt to determine ownership, trademark, copyright or the validity of any other legal means to protect a name.

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TREC Rule 1260-1-.19. Appearances Before the Commission for the Purpose of Obtaining a License. Any applicant for licensure appearing before the Commission for the purpose of obtaining a license must also ensure the presence of his or her principal broker (or intended principal broker). No such appearance for the purpose of obtaining a license will be heard without the presence of that principal broker. TREC Rule 1260-1-.20. Military Applicants. (1) An applicant for licensure meeting the requirements of T.C.A. § 4-3-1304(d)(1) may:

(a) Be issued a license upon application and payment of all fees required for the issuance of a regular license of the same type if, in the opinion of the Commission, the requirements for licensure of such other state are substantially equivalent to that required in Tennessee; or

(b) Be issued a temporary permit as described herein if the Commission determines that

the applicant's license does not meet the requirements for substantial equivalency, but that the applicant could perform additional acts, including - but not limited to - education, training, or experience, in order to meet the requirements for the license to be substantially equivalent. In that case, the Commission may issue a temporary permit upon application and payment of all fees required for issuance of a regular license of the same type which shall allow such person to perform services as if fully licensed for a set period of time that is determined to be sufficient by the Commission for the applicant to complete such requirements.

1. After completing those additional requirements and providing the

Commission with sufficient proof thereof as may be required, a full license shall be issued to the applicant with an issuance date of the date of the original issuance of the temporary permit and an expiration date as if the full license had been issued at that time.

2. A temporary permit shall be issued for a period of less than the length of a

renewal cycle for a full license. 3. A temporary permit shall expire upon the date set by the Commission and

shall not be subject to renewal except through the timely completion of the requirements for substantial equivalency as required by the Commission or by an extension of time granted for good cause by the Commission.

4. Should an extension to a temporary permit cause the permit to be in effect

longer than the renewal cycle of a full license, then the holder of the temporary permit shall file a renewal application with such documentation and fees, including completion of continuing education, as are required by the Commission for all other renewals of a full license of the same type.

(2) Military education, training, or experience completed by a person described at T.C.A. § 4-3-1304(d)(1)(B)(ii)(a)-(c) shall be accepted toward the qualifications, in whole or in part, to

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receive any license issued by the Commission under the Division of Regulatory Boards if such military education, training or experience is determined by the Commission to be substantially equivalent to the education, training, or experience required for the issuance of such license. (3) Renewal:

(a) Any license who is a member of the national guard or a reserve component of the armed forces of the United States called to active duty whose license expires during the period of activation shall be eligible to be renewed upon the licensee being released from active duty without:

1. Payment of late fees or other penalties; 2. Obtaining continuing education credits when:

(i) Circumstances associated with the person's military duty prevented

the obtaining of continuing education credits and a waiver request has been submitted to the Commission; or

(ii) The person performs the licensed occupation as part of such person's

military duties and provides documentation sufficient to demonstrate such to the Commission.

3. Performing any other similar act typically required for the renewal of a

license.

(b) The license shall be eligible for renewal pursuant to this subsection for six (6) months from the person's release from active duty.

(c) Any person renewing under this paragraph shall provide the Commission such

supporting documentation evidencing activation as may be required by the Commission prior to renewal of any license pursuant to this paragraph.

TREC Rule 1260-1-.21. Reinstatement of an Expired License of a Broker, Affiliate Broker, Time-Share Salesperson, or Acquisition. (1) Expired License Due to Health Issues or Medical Problems:

(a) If a licensee fails to renew a license within sixty (60) days after expiration of the license because of personal or family health issues, and, as a result, wishes to request a medical waiver from the Commission, that licensee must:

1. Provide a signed doctor's statement attesting to the nature and length of the

illness; and 2. Submit a statement explaining the lapse, which must be signed by the person

seeking reinstatement.

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(b) If the Commission grants the medical waiver request, then renewal fees must be paid and all other conditions for licensure must be met, but late penalty fees will not be assessed.

(c) Information submitted will become public record unless otherwise prohibited by

law. (2) Expired License due to Failure to Comply with Prerequisite to Licensure:

(a) Renewal of License Within Sixty (60) Days of Expiration: If a licensee fails to comply with any prerequisite or condition to licensure or renewal and/or fails to pay a renewal fee before the expiration of the license but provides proof of compliance with all prerequisites or conditions for licensure, including payment of renewal fee, within sixty (60) days after the expiration date of the license, that licensee shall only be required to pay a penalty fee of fifty dollars ($50.00) per thirty (30) day period, or portion thereof, from the time the license expired without the requirement of any further obligations.

(b) Reinstatement After Sixty (60) Days of Expiration: If a licensee fails to timely pay a

renewal fee or comply with any prerequisite or condition to licensure or renewal and/or fails to pay a renewal fee within sixty (60) days after the expiration date of the license, that licensee must sign a Reinstatement Order agreeing to comply with the following requirements and complete each of the following requirements in order to obtain license reinstatement:

1. Provide proof of compliance with all prerequisite or conditions for licensure,

including payment of renewal fee; and 2. Payment of Penalties in Accordance with the Following Schedule:

(i) For a license expired more than sixty (60) days, but within one

hundred twenty (120) days, pay a penalty fee of fifty dollars ($50.00) per thirty day period, or portion thereof, from the time the license expired; or

(ii) For a licensee expired for more than one hundred twenty (12) days

but within one (1) year, pay, in addition to the penalty fee described in subpart (i), a penalty fee of one hundred dollars ($100.00) per thirty (30) day period, or portion thereof, beginning on the one hundred twenty-first (121st) day; and

3. Other Condition: Attend one (1) entire regularly scheduled meeting of the

Commission within one hundred eighty (180) days of the date of executing the Reinstatement Order.

4. Penalty fees will begin accruing on the first (1st) day following the license

expiration date and will be assessed every thirty (30) days, or portion thereof, at the above rates. Penalty fees accrue until a Reinstatement Order is signed, proof of compliance with all prerequisites or conditions for

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licensure is received, and the renewal fee and all prescribed penalty fees are paid.

5. A reinstated license will be issued back to the original expiry date upon

satisfaction of all requirements, including timely attending one (1) entire regularly scheduled Commission meeting.

(3) License Expired for More than One (1) Year: If a license is expired for more than one (1) year, then that individual must reapply for licensure, meet current education requirements, and pass all required examinations. TREC Rule 1260-2-.02. Termination of Affiliation. (1) Any licensee or principal broker wishing to terminate the licensee's affiliation with a firm shall submit to the Commission a completed Transfer, Release and Change of Status Form (TREC Form 1). The form must be faxed, mailed, or e-mailed to the Commission to be effective. The principal broker's supervisory responsibility for the future acts of the licensee shall terminate upon the Commission's receipt of the release form. The principal broker shall retain a copy of the executed form. (2) Within ten (10) days after the date of release, the licensee shall complete the required administrative measures for either change of affiliation or retirement. The licensee shall not engage in any activities defined in § 62-13-102 until a change of affiliation is received by the Commission. (3) With regard to firm transfer requests which are completed online, the Commission recognizes the transfer of an affiliated licensee to a new firm as having been completed at the time that said transfer request is completed online and the transfer confirmation is printed only if the following conditions are met:

(a) Prior to the submission of the online transfer request, the principal broker who is receiving the affiliated licensee into his or her firm has verified that the affiliated licensee has an active Tennessee license and current errors and omissions insurance; and

(b) A completed and signed TREC Form 1 is received by the Commission within five

(5) business days of the date of the online transfer request. If the completed and signed TREC Form 1 is not received by the Commission within five (5) business days of the online submission, then the transfer shall not be considered by the Commission to be a valid transfer and the affiliated licensee will be placed into broker release status.

(34) When a licensee terminates his affiliation with a firm, he shall neither take nor use any property listings or buyer representation agreements secured through the firm, unless specifically authorized by the principal broker in writing. (45) Upon demand by a licensee for his release from a firm, it shall be promptly granted by the principal broker and the principal broker shall return the license to the licensee. If the licensee

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cannot be located then the principal broker may return the license to the Commission. (56) If the principal broker is deceased or physically unable to sign the release, or refuses to sign a release, the licensee requesting termination of affiliation must submit to the Commission a notarized Affidavit for Release. (67) If the affiliated licensee is deceased or physically unable to sign a release, or refuses to sign a release, the principal broker requesting termination of affiliation must submit to the Commission a completed TREC Form 1. (78) The Commission will not intervene in the settlement of debts, loans, draws, or commission disputes between firms, brokers and/or affiliates. TREC Rule 1260-2-.09. Deposits and Earnest Money Managing Escrow or Trustee Accounts (1) Definitions: for purposes of this rule, the following definitions are applicable:

(a) "Commingling" is defined as the act of a licensee maintaining funds belonging to others in the same bank account that contains his or her personal or business funds.

(b) "Trust money" is defined as either of the following:

1. Money belonging to others received by a licensee who is acting as an agent

or facilitator in a real estate transaction; or 2. Any money held by a licensee who acts as the temporary custodian of funds

belonging to others. (2) Each broker shall maintain a separate escrow or trustee account for the purpose of holding any funds trust money which may be received in his fiduciary capacity as deposits, earnest money, or the like. Rental deposits must be held in a separate account. (23) An affiliated broker shall pay over to the broker with whom he is affiliated under contract all trust deposits and earnest money immediately upon receipt. (34) Principal brokers are responsible at all times for deposits and earnest trust money accepted by them or their affiliated brokers, in accordance with the terms of the contract. (45) Where a contract authorizes a principal broker to place trust money funds in an escrow or trustee account, the principal broker shall clearly specify in the contract:

(a) the terms and conditions for disbursement of the trust money such funds; and

(b) the name and address of the person or firm who will actually hold the trust money such funds.

(56) Where a contract authorizes an individual or entity other than either principal broker to hold trust money such funds in an escrow or trustee account, the principal broker will be relieved of

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responsibility for the trust money funds upon receipt of the trust money funds by the specified escrow agent. (67) A principal broker may properly disburse trust money funds from an escrow account:

(a) upon a reasonable interpretation of the contract which authorizes him to hold the trust money such funds;

(b) upon securing a written agreement which is signed by all parties having such an

interest in such and is separate from the contract which authorizes him to hold the trust moneysuch funds;

(c) at the closing of the transaction; (d) upon the rejection of an offer to purchase, sell, rent, lease, exchange or option real

estate; (e) upon the withdrawal of an offer not yet accepted to purchase, sell, rent, lease,

exchange or option real estate; (f) upon filing of an interpleader action in a court of competent jurisdiction; or (g) upon the order of a court of competent jurisdiction.

(78) Trust money Funds in escrow or trustee accounts shall be disbursed in a proper manner without unreasonable delay. (9) Absent a demonstration of a compelling reason, earnest money Funds should shall be disbursed, or interpleaded, or turned over to an attorney with instructions to interplead the funds within twenty-one (21) calendar days from the date of receipt of a written request for disbursement of earnest money. (810) No postdated check shall be accepted for payment of trust money, unless otherwise provided in the offer. (911) Earnest Trust money shall be deposited into an escrow or trustee account promptly upon acceptance of the offer, unless the offer contains a statement such as "Trust Earnest money to be deposited by:". (12) In addition the escrow or trustee account referenced in paragraph (2), all trust money received and held which relates to the lease of property must be held in one (1) or more separate escrow or trustee accounts. (13) Commingling of funds contained within firm accounts is expressly prohibited. (14) Interest-bearing escrow or trustee accounts are neither required nor prohibited by the Commission. If utilized, however, the following provisions shall be observed:

(a) At the time of contract execution, the licensee shall disclose to the payor that his or

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her deposit will be placed in an interest-bearing escrow or trustee account, and the licensee and the payor shall execute a written agreement indicating the manner of disposition of any interest earned;

(b) As a depositor of the trust money, the licensee does not own the trust money or

interest earned thereon until properly dispersed to the licensee; and (c) The licensee shall keep a detailed and accurate accounting of the precise sum of the

interest earned for each separate deposit. TREC Rule 1260-2-.12 Advertising (1) All advertising, regardless of its nature and the medium in which it appears, which promotes either a licensee or the sale or lease of real property, shall conform to the requirements of this rule. The term "advertising," for purposes of this rule, in addition to traditional print, radio, and television advertising, also includes, but is not limited to, sources of communication available to the public such as signs, flyers, letterheads, e-mail signatures, websites, social media communications, and video or audio recordings transmitted through internet or broadcast streaming. Advertising does not include promotional materials that advertise a licensee such as hats, pens, notepads, t-shirts, name tags, business cards, and the sponsorship of charitable and community events. (2) For purposes of this rule, the term "firm name" shall mean either of the following:

(a) The entire name of the real estate firm as licensed with the Commission; or (b) The d/b/a name, if applicable, of the real estate firm as licensed with the

Commission. (23) General Principals.

(a) No licensee shall advertise to sell, purchase, exchange, rent, or lease property in a manner indicating that the licensee is not engaged in the real estate business.

(b) All advertising shall be under the direct supervision of the principal broker and shall

list the firm name and telephone number as listed on file with the Commission. With regard to the size and visibility of the firm name and firm telephone number, all of the following shall apply:

1. The firm name must be the most prominent name featured within the

advertising, whether it be by print or other media; and 2. The firm's telephone number shall be the same size or larger than the

telephone number of any individual licensee or group of licensees.

(c) Any advertising which refers to an individual licensee must list that individual licensee's name as licensed with the Commission.

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(cd) No licensee shall post a sign in any location advertising property for sale, purchase, exchange, rent or lease, without written authorization from the owner of the advertised property or the owner's agent.

(de) No licensee shall advertise property listed by another licensee without written

authorization from the property owner. Written authorization must be evidenced by a statement on the listing agreement or any other written statement signed by the owner.

(ef) No licensee shall advertise in a false, misleading, or deceptive manner. False,

misleading, and/or deceptive advertising includes, but is not limited to, the following:

1. Any licensee advertising that includes only the franchise name without

including the firm name; 2. Licensees who hold themselves out as a team, group, or similar entity within

a firm who advertise themselves utilizing terms such as "Real Estate," "Real Estate Brokerage," "Realty," "Company," "Corporation," "LLC," "Corp.," "Inc.," "Associates," or similar terms that would lead the public to believe that those licensees are offering real estate brokerage services independent of the firm and principal broker;

3. Any webpage that contains a link to an unlicensed entity's website where

said entity is engaged in activities which require licensure by the Commission.

(34) Advertising for Franchise or Cooperative Advertising Groups

(a) Any licensee using a franchise trade name or advertising as a member of a cooperative group shall clearly and unmistakably indicate in the advertisement his name, broker or firm name and firm telephone number (all as registered with the Tennessee Real Estate Commission) adjacent to any specific properties advertised for sale or lease in any media.

(b) Any licensee using a franchise trade name or advertising as a member of a

cooperative group, when advertising other than specific properties for sale or lease, shall cause the following legend to appear in the advertisement in a manner reasonably calculated to attract the attention of the public: "Each [Franchise Trade Name or Cooperative Group] Office is Independently Owned and Operated."

(c) Any licensee using a franchise trade name on business cards, contracts, or other

documents relating to real estate transaction shall clearly and unmistakably indicate thereon:

1. his name and firm telephone number (as registered with the Commission);

and 2. the fact that his office is independently owned and operated.

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(45) Internet Advertising: In addition to all other advertising guidelines within this rule, the following requirements shall also apply with respect to internet advertising by licensees, including, but not limited to, social media:

(a) The listing firm name and firm telephone number listed on file with the Commission must conspicuously appear on each page of the website.

(b) Each page of website which displays listings from an outside database of available

properties must include a statement that some or all onf the listings may not belong to the firm whose website is being visited.

(c) Listing information must be kept current and accurate. This requirement shall apply

to "First Generation" advertising as it is placed by the licensee and does not refer to such advertising that may be syndicated or aggregated advertising of the original by third parties outside of the licensee's control and ability to monitor.

(6) Guarantees, Claims and Offers

(a) Unsubstantiated selling claims and misleading statements or inferences are strictly

prohibited. (b) Any offer, guaranty, warranty or the like, made to induce an individual to enter into

an agency relationship or contract, must be made in writing and must disclose all pertinent details on the face of such offer or advertisement.

TREC Rule 1260-2-.39 Commissions Earned by Affiliated Licensees. (1) The commissions earned by an affiliated licensee while working under a principal broker can still be paid after one (1) or more of the following circumstances occur:

(a) the affiliated licensee transfers to a new broker; (b) the affiliated licensee retires his or her license; (c) the affiliated licensee is in broker release status; (d) the affiliated licensee allows his or her license to expire; or (de) the death of the affiliated licensee.

TREC Rule 1260-2-.40. Electronic Records (1) Pursuant to T.C.A. § 62-13-312(b)(6), real estate licensees must preserve records relating to any real estate transaction for three (3) years following the consummation of said real estate transaction. Real estate licensees may utilize electronic recordkeeping methods and comply with this requirement, provided that the following conditions are met:

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(a) All documents required to be retained must be readily accessible in an organized format providing ease in document identification within twenty-four (24) hours of any request for inspection by representatives of the Commission.

(b) In order to ensure proper document retention, the principal broker of all real estate

firms which use electronic recordkeeping methods must develop and utilize a retention schedule that safeguards the security, authenticity, and accuracy of the records for the entire required retention period and that also provides for the use of technology and hardware that ensures the accessibility of records in a readable format.

TREC Rule 1260-2-.41. Licensees Who Hold Themselves out as a Team, Group, or Similar Entity within a Firm. (1) Licensees who hold themselves out as a team, group, or similar entity within a firm must be affiliated with the same licensed firm and shall not establish a physical location for said team, group, or similar entity within a firm that is separate from the physical location of record of the firm with which they are affiliated. (2) No licensees who hold themselves out as a team, group, or similar entity within a firm shall receive compensation from anyone other than their principal broker for the performance of any acts specified in T.C.A. Title 62, Chapter 13. (3) The principal broker shall not delegate his or her supervisory responsibilities to any licensees who hold themselves out as a team, group, or similar entity within a firm, as the principal broker remains ultimately responsible for oversight of all licensees within the principal broker's firm. (4) No licensees who hold themselves out as a team, group, or similar entity within a firm shall represent themselves as a separate entity from the licensed firm. (5) No licensees who hold themselves out as a team, group, or similar entity within a firm shall designate members as designated firm agents, as this remains a responsibility of the licensed firm's principal broker.

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Discuss: If you decide to go to another brokerage, what steps must you take?

• Speak with your principal broker • Submit to the Commission a completed Transfer, Release and Change of Status

Form (TREC Form 1) • Within ten (10) days after the date of release, complete the required administrative

measures for either change of affiliation or retirement How should you handle any active listings?

• Active listings remain with the principal broker unless otherwise agreed upon. • You should discuss with the principal broker about how they would like you to handle

this situation. Ask if you can, as a courtesy, send the clients a short note informing them of the change. You can also arrange to introduce them to the licensee who will be taking over the listing. Make sure they know to contact the principal broker with any questions or concerns in the interim. Do not in any way influence the clients to try to terminate their listing agreement with the firm.

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Trust Money Scenarios 1. You’re the listing agent for the property. An unrepresented buyer wants to make an offer

but asks if they can postdate the check for the trust money three days. What can/should you do? A postdated check for trust money should not be accepted without the express written consent of the seller. If the seller does agree, this should be specified in the offer.

2. You’re the listing agent for the property, which is under contract with a buyer. The buyer’s agent notifies you five days after the date of contract and says the buyer has changed their mind and wants to cancel the contract. The buyer would like their trust money deposit returned. What are the options for how to handle this? What happens if the seller refuses? Form RF481 (can be used in commercial) should be used to guide the disbursement of trust money deposits. If the buyer doesn’t have a valid reason for cancelling the contract, they will likely forfeit the trust money. Under Tennessee law, the funds may be disbursed pursuant to a written agreement signed by both parties. If a dispute cannot be resolved, the broker may interplead the funds or may make a reasonable interpretation of the contract. The decision on which approach to take for the disbursement of funds is up to the principal broker of the firm holding the funds.

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Advertising Rules Review

Is It or Is It NOT Advertising? Review the activities below. Circle the items that are considered advertising activities according to Rule 1260-02-12 (when carried out by a real estate licensee) and cross-out items that are not advertising activities under this rule. Remember, advertising activities under this rule are any activity that promotes the sale or lease of real property.

• An Internet posting announcing that an apartment is available for rent. (Advertising

Activity) • A Tweet stating that an office building is for sale. (Advertising Activity) • A newspaper ad for a roommate. (Not if done by a consumer, only if advertised as a

lease by a licensee.) • A Craigslist ad for a house swap. (Not if done by a consumer, only if advertised as a

lease by a licensee.) Instructors: Reveal which were considered advertising activities under Rule 1260-02-12 and explain why. Note: TREC Rules govern the activities of licensees, not consumers advertising their private homes or apartments. Fair Housing laws would still apply to these “private” ads.

Fact or Fiction?

1. The real estate agent does not need to consult with his/her principal broker about advertising decisions as long as s/her lists the firm’s name and telephone number on the advertisement. (Fiction)

2. A licensee needs written authorization from the property owner to advertise a property listed by another licensee. (Fact)

General Principles

To drive traffic to a newly listed home, Joe (licensee) advertises that the first 5 guests to arrive at the open house will win a free big screen TV. In actuality, he plans to tell arriving guests that the winners have already arrived to pick up their prizes. Is this advertising in a false, misleading, or deceptive manner? (YES!!!)

Create an Advertisement On a separate sheet of paper, create a print advertisement for the cooperative advertising group, Realtors United. Also design a business card that you will use when you are conducting business under Realtors United. Make sure that the ad and the business card incorporates the required elements from “Advertising for Franchise or Cooperative Advertising Groups.”

➢ MUST list the licensee’s name and firm telephone number (as registered with the Commission) as well as the broker’s or firm’s name, if applicable

➢ The fact that the office is independently owned and operated.

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MOST VIOLATED LAW OR RULES: In Order of Number of Complaints Failure to timely complete required education Failure to maintain Errors and Omissions insurance Advertising violation (Agent’s name larger than the firm name) Failure to adequately supervise activities of affiliates Failure to report to a complaint filed with the Commission Failing, within a reasonable time, to account for or to remit moneys belonging to others Making substantial and willful misrepresentation Failing to adequately supervise advertising activities of affiliates Engaging in unlicensed activity Failure to timely complete administrative measures An affiliate’s acceptance of a commission from someone other than the broker with whom they are affiliated Failure to be loyal to the interests of the client Failure to timely disburse or interplead earnest money Violation of the gifts and prizes rule Failure to complete and obtain a signed written disclosure of agency status form When a licensee terminates his/her affiliation with a firm, he/she shall neither take nor use any property listings secured through the firm Failure to disclose adverse facts of which the licensee has actual notice or knowledge Failure to make a personal interest disclosure Failing to furnish a copy of a listing, sale, lease or other contract relevant to a real estate transaction to all signatories of the contract at the time of execution Conducting business with an expired real estate firm license Failure to Timely Complete Education

Quick Review: Guarantees, Claims and Offers 1.

2.

Is the following claim allowed? “I CAN SELL ANY PROPERTY FOR ANY PRICE.” (No. It is an unsubstantiated claim.) If a guaranty or warranty is used to encourage a prospect to buy a property, what must

be made in writing? (The face of offer or advertisement must state all the pertinent details of the guaranty or warranty.)

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Need to Verify Your Education?

Enter your license number + Click Real Estate Broker/Affil/TS + Search + Detail Box Principal Brokers of Licensees Who Fail to Maintain E & O Insurance: A Principal Broker failing to insure that all licensees affiliated with the Broker shall constitute failing to adequately supervise the activities of a licensed affiliate broker. And Not Everything Is Covered By E&O… Many agents who represent a builder who is a spouse, fail to realize that they have no coverage for this. This is a hard lesson when claims need to be filed and agents are told they are on their own. FYI: This also requires a personal interest disclosure and owner agent rider on the sign. Any property where an agent owns 10% or more must have the above. If an agency decides to begin offering property management, you should contact your E&O carrier to determine whether the services you offer are covered under your current policy or whether an additional rider would be required to protect you. Others exclusions discovered by the class. Errors and Omissions Coverage Implications When Listing or Selling Your Own Property- Prepared by Rice Insurance Services Company, LLC June 19, 2013 The TREC’s group policy now automatically included an endorsement that makes the policy to apply to the sale or listing of the licensee’s primary residence with certain conditions. Additionally, licensees who purchase insurance through the TREC’s group policy can also

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purchase an optional endorsement that make the policy apply to the sale or listing of residential property owned by the licensee: the licensee’s spouse; or a entity, corporation, partnership or trust owned or controlled by the licensee or his/her spouse with certain conditions. The full statement from Rice Insurance Services Company, LLC, can be found in the Appendices in the back of the booklet on pages 5-6. An Affiliate’s Acceptance of a Commission from Someone Other than the Broker with Who They Are Affiliated Example 1: An affiliate licensee advertises “$1,000 Bonus to the Selling Agent”. Is this language in an advertisement legal or illegal? You as a licensee sell the advertised property, who will receive the $1,000 and how will you get paid? Example 2: You are part of a team where all team members are under the Team Leader. The Team Leader assigns you a buyer and you make the sale. When the sale closes and the commission check comes into the Broker, how will the agent’s portion of the sale be distributed? Failing to Furnish a Copy of a Listing, Sale, Lease or other Contract Relevant to a Real Estate Transaction to all Signatories of the Contract at the Time of Execution. Example 1: Buyers Jane and John listed their house with Agent Mark of XYZ REALTORS. After several weeks of showings but no feedback from Agent Mark, buyers Jane and John began to wonder if Agent Mark was putting his best effort in marketing their home. So they talked to a friend who had just sold their home and the friend asked, “When does your listing expire?” Jane responds that she doesn’t know. The friend asked her to check her listing agreement that they signed. Jane says she never got a copy of the listing agreement. What do you see that Agent Mark did wrong, if anything? Example 2: Agent Brittany writes an offer for her buyers after multiple discussions on the offering price. Agent Brittany leaves to present the offer to the listing agent without leaving a copy with her buyers. What issues do you see with Agent Brittany leaving without giving her buyers a copy of the offer?

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AG Opinion – Exemptions to licensure On March 6, 2104 the Office of the Attorney General issued Opinion No. 14-27 concerning questions about Exemptions from the Real Estate Broker License Act.

1. Does the exemption from licensure under the Tennessee Real Estate Broker License Act of 1973 provided to “corporation, foreign or domestic” in Tenn. Code Ann. 62-13-104(a)(1)(F) apply to a limited liability company?

Answer: Since the statute does not mention LLC’s, it does not apply to LLCs.

2. If an individual who is a member of an entity (Corp) that qualifies for the exemption under Tenn. Code Ann. 62-13-104(a)(1)(F) has the primary responsibility of performing activities on behalf of such entity for which a license is otherwise required under Tenn. Code Ann. 62-13-102(4)(A) or (B), does it matter for purposes of the exemption whether the individual’s compensation is dependent upon or directly related to the value of the real estate as to which the actions are performed?

Answer: As long as the person has the authority to the things occasionally and not as a regular part of the job, the person would be exempt.

3. If an individual performs activities for which a license is required under Tenn. Code Ann. 62-13-102(4)(A) or (B) on behalf of an entity that qualifies for the exemption under Tenn. Code Ann. 62-13-104(a091)(F) but not perform such activities as a vocation does the exemption apply to that person if his or her compensation is based on a distribution of profits to the owners of the entity from the in the entity or some other calculation not directly related to the sale or rental of the property.

Answer: If the person is paid a salary, then they would be exempt. 2. If the person is paid from company profits, then they would be paid based upon the transaction and would not be exempt.

Fingerprint THE GENERAL ASSEMBLY OF THE STATE OF TENNESSEE amended TAC Section 62-13-303 – Qualifications – Prerequisites for Licensing Effective January 1, 2014 by adding the following: Section 1. (l) (1) The commission shall require all applicants for initial licensure issued under this chapter on or after January 1, 2014, to submit a complete and legible set of fingerprints on a form prescribed by the commission or in such electronic format as the commission may require to the commission or to the Tennessee Bureau of Investigation for the purpose of obtaining a criminal background check from the Tennessee Bureau of Investigation and the Federal Bureau of Investigation.

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(2) The commission shall refuse to issue a license to an applicant for initial licensure who does not comply with subdivision

(3) The commission shall conduct a criminal background check of each applicant Rule 1260-01-17 Fingerprinting 1. Any initial applicant who is required to submit a complete and legible set of fingerprints for the purpose of obtaining a criminal background check pursuant to T.C.A. § 62-13-303 shall submit said fingerprints in an electronic format. The full content of T.C.A. § 62-13-303 and Rule 1260-01-.17 can be found in the Appendices.

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TREC Rules: Skills Assessment 1. Under the new TREC Rules, when a licensee terminates their affiliation with a broker, they

a) May take their listings with them. b) May never take their listings with them. c) May not take any listings with them unless specifically authorized by the principal

broker. (Correct) 2. An affiliate broker shall turn over all earnest money deposits received to the principal broker

a) Immediately upon receipt. (Correct) b) Within three business days. c) Within five days.

3. Where a contract authorizes a broker to place funds in an escrow or trustee account, the

broker is not required to specify the name and address of the person who will actually hold the funds in the contract.

a) True b) False (Correct)

4. A postdated check may be accepted for earnest money if it’s provided for in the offer.

a) True (Correct) b) False

5. Which of the following is NOT a way brokers may disperse funds from earnest money

deposits? Upon: a) Securing a written agreement signed by all parties. b) Rejection or withdrawal of an offer not yet accepted. c) Securing a written request from one of the parties. (Correct) d) A reasonable interpretation of the contract.

6. All advertising must be under the direct supervision of the principal broker and must list the

firm name and telephone number. a) True (Correct) b) False

7. When advertising properties on the Internet, the listing firm name and telephone number

must appear a) On the front (or “Home”) page of the website. b) On every page of the website. (Correct) c) On the Contact page of the website.

8. An individually licensed agent doing business under an LLC can receive her commissions in

the name of her LLC. a) True b) False (Correct)

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Lesson 2: Property Condition Disclosures The vast majority of legal claims against real estate salespeople involve allegations of misrepresentation, negligence, or fraud. Nearly 70 percent of all claims against real estate professionals are a result of misrepresentations that could have been prevented by proper disclosure, according to the NATIONAL ASSOCIATION OF REALTORS®. By 2000, NAR found that approximately 30 states had laws requiring sellers to complete a property disclosure form. Tennessee is one of them [see TAR Form F16]…although use of the form is required only in residential transactions involving the transfer of a property with four or fewer units. Tennessee also has a disclosure that may be required on certain rental commercial property under certain circumstances.

Pursuant to Tenn. Code Ann. §66-7-108(a):

At the request of a prospective tenant, the owner of commercial or industrial real property where the commercial property space is one thousand five hundred square feet (1,500 sq. ft.) or less, and the industrial real property is five thousand square feet (5,000 sq. ft.) or less, shall furnish to such prospective tenant a signed disclosure statement detailing the extent to which such real property is understood by the owner to be in compliance with local and state fire, plumbing, and electrical codes for a building of the type under construction. If, at the time such disclosure is made, an item of information required to be disclosed is unknown or not available to the owner, the owner may state that such information is unknown.

TAR provides form F51 for this purpose, Commercial/Industrial Real Property Disclosure.

NONE OF THE INFORMATION contained at 66-5-201 APPLIES TO COMMERCIAL PROPERTY. It is only applicable to residential property of 1-4 units.

What YOU Must Disclose Under TN Law: (Only applies to residential property)

62-13-403. Duty owed to all parties.—A licensee who provides real estate services in a real estate transaction shall owe all parties to such transaction the following duties, except as provided otherwise by 62-13-405:

Disclose to each party to the transaction any adverse facts of which licensee has actual notice of knowledge. (Adverse facts means conditions or occurrences generally recognized by competent licensees that have negative impact on the value of the real estate, significantly reduce the structural integrity of improvements to real property or present a significant health risk to occupants of the property.)

HOWEVER, pursuant to Tenn. Code Ann.§ 62-13-405(e):

Real estate transactions involving the transfer or lease of commercial properties, the transfer of property by public auction, the transfer of residential properties of more than four (4) units, or the lease or rental of residential properties shall not be subject to the disclosure requirements of §§ 62-13-403, 62-13-404, and this section.

Nevertheless, Article 2 of the NAR Code of Ethics states:

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REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction. REALTORS® shall not, however, be obligated to discover latent defects in the property, to advise on matters outside the scope of their real estate license, or to disclose facts which are confidential under the scope of agency or non-agency relationships as defined by state law.

Standard of Practice 2-1: REALTORS® shall only be obligated to discover and disclose adverse factors reasonably apparent to someone with expertise in those areas required by their real estate licensing authority. Article 2 does not impose upon the REALTOR® the obligation of expertise in other professional or technical disciplines.

Standard of Practice 2-5: Factors defined as “non-material” by law or regulation or which are expressly referenced in law or regulation as not being subject to disclosure are considered not “pertinent” for purposes of Article 2.

Disclosure Examples What are your disclosure obligations, if any, in the following scenarios? Remember that they may be required to be disclosed under the Code, but not under TN law.

1. Your seller client tells you the roof of the building had a bad leak the previous year.

The leak was fixed and the damaged wood was all replaced and/or repaired. They haven’t had any trouble with it since. The previous problem should be disclosed, as well as the repairs. This will protect your seller against future claims.

2. You show a property to your buyer client. It’s on the market again after being sold to

the current owner only a year before. Last year, when it was listed for the previous owner, you showed it to another buyer. During that buyer’s inspection, some damage to the foundation was discovered. You must disclose this to your client and you should assist them in obtaining a thorough inspection from a licensed inspector if they’re interested in purchasing the property.

3. Your seller client tells you their property is in excellent condition but you notice some

water spots on the ceiling. If you see it, you should ask about it. Once you have actual knowledge of a potential problem, you may have an obligation to disclose pursuant to Article 2 of the Code of Ethics.

4. Your seller client fails to tell you about existing termite damage to an area of the

flooring. You don’t notice it because a rug covers the area when you view the space. You do not have a duty to perform an “inspection” of the property. If you didn’t know about it and didn’t have any reason to suspect a problem, you would likely not be held liable for your seller’s failure to disclose the issue.

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Mold & Other Hazards, Damage by Acts of Nature, and Flood Plain Information

Information regarding mold, damages by acts of nature, and flood plains is often important in regard to property condition disclosure. The following facts concerning mold, acts of nature, and flood plains are helpful for licensees to know and understand when disclosing such information.

MOLD

What is mold? Molds are forms of fungi found all year round both indoors and outdoors. Outdoors, molds live in the soil, on plants, and on dead or decaying matter. Another common term for mold is mildew. Mold growth is encouraged by warm and humid conditions, although it can grow during cold weather. There are thousands of species of mold and they can be any color. Many times, mold can be detected by a musty odor. Most fungi, including molds, produce microscopic cells called “spores” that spread easily through the air. Live spores act like seeds, forming new mold growths (colonies) with the right conditions. All of us are exposed to fungal spores daily in the air we breathe.

How does mold get into a house or building? Most, if not all, of the mold found indoors comes from outdoor sources. It needs moisture to grow and becomes a problem only where there is water damage, high humidity, or dampness. Common sources of indoor moisture that cause mold problems include flooding, roof and plumbing leaks, damp basements or crawl spaces, or any moisture condensation on cold surfaces. Bathroom showers and steam from cooking may also create problems if not well ventilated. How can I prevent mold growth? Controlling excess moisture is the key to preventing and stopping indoor mold growth. Keeping susceptible areas in the home clean and dry is very important. Ventilate or use exhaust fans (vented to the outdoors) to remove moisture where it accumulates, particularly in bathrooms, kitchens, and laundry areas. Clothes dryers should be vented to the outside. Repair water leaks promptly, and either dry out and clean or replace water-damaged materials. Materials that stay wet for more than 48 hours are likely to produce mold growth. Lowering humidity indoors helps prevent condensation problems. To lower humidity during humid weather, use air conditioners and dehumidifiers. Proper exterior wall insulation helps prevent condensation from forming inside during cold weather. Can mold be toxic? Some molds produce toxic substances called mycotoxins. Airborne mycotoxins have not been shown to cause health problems for occupants in residential or commercial buildings. The health effects of breathing mycotoxins are not well understood and are currently under study. In rare cases, high or chronic airborne exposures, typically associated with certain occupations like agricultural work, have been associated with illnesses. More is known about the health effects of consuming moldy foods or feed containing mycotoxins than about the effects of breathing mycotoxins.

What is “black mold”? The news media often refer to “black mold” or “toxic black mold.” It is usually associated with

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Stachybotrys chartarum, a type of greenish-black mold commonly associated with heavy water damage. Not all molds that appear to be black are Stachybotrys. The known health effects from exposure to Stachybotrys are similar to other common molds, but have been inconclusively associated with more severe health effects in some people.

Why are we concerned about mold? Small amounts of mold growth in workplaces or homes (such as mildew on a shower curtain) are not a major concern. But no mold should be allowed to grow and multiply indoors. Large quantities of mold growth may cause nuisance odors and health problems for some people. In addition, mold can damage building materials, finishes, and furnishings and, in some cases, cause structural damage to wood. How do molds affect people? Most people have no reaction when exposed to molds. Allergic reactions, similar to common pollen or animal allergies, and irritation are the most common health effects for individuals sensitive to molds. Flu-like symptoms and skin rash may occur. Molds may also aggravate asthma. In rare cases, fungal infections from building-associated molds may occur in people with serious immune disease. Most symptoms are temporary and eliminated by correcting the mold problem.

Who is affected by exposure to mold? There is a wide variability in how people are affected by mold exposure. People who may be affected more severely and quickly than others include: Infants and children, Elderly people, Pregnant women, Individuals with respiratory conditions or allergies and asthma, Persons with weakened immune systems (for example, chemotherapy patients, organ or bone marrow transplant recipients, and people with HIV infections or autoimmune diseases). Those with special health concerns should consult their doctor if they are concerned about mold exposure. Symptoms that may seem to occur from mold exposure may be due to other causes, such as bacterial or viral infections or other allergies. What should I do if I see or smell mold in my home? The most important step is to identify and fix the moisture sources causing mold growth. For small mold problems, use detergent and water to wash mold off hard surfaces, and dry completely. Replace moldy porous or absorbent materials (such as ceiling tiles, wall- board, and carpeting). If you do not see mold growth but notice a musty odor, mold may be growing behind water-damaged materials, such as walls, carpeting, or wallpaper. Persons cleaning mold should wear gloves, eye protection, and a dust mask or respirator to protect against breathing airborne spores (an N95 dust mask or respirator may be purchased in hardware stores). If you have health concerns, you should consult your doctor before doing any mold cleanup.

Should I test my home for mold? Probably not. Looking for evidence of water damage and visible mold growth should be your first step. Testing for mold is expensive, and you should have a clear reason for doing so. In addition, there are no standards for “acceptable” levels of mold in the indoor environment. When testing is done, it is usually to compare the levels and types of mold spores found inside the home with those found outdoors. If you know you have a mold problem, it is more important to spend time and resources getting rid of the mold and solving the moisture problem causing the moldy conditions.

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Who do I call to deal with extensive mold growth in a building? A professional experienced in mold evaluation and remediation, such as an industrial hygienist, may need to be hired to address extensive mold growth in a building. It is important to correct large mold problems as soon as possible by first fixing the source of the moisture problem and removing contaminated materials, then cleaning the surfaces, and finally drying the area completely. If you use outside contractors or professionals, make sure they have experience cleaning up mold. Check their references, and have them follow the recommendations and guidelines given in the information resources at the end of this brochure.

[SOURCE: The Facts About Mold, American Industrial Hygiene Association (AIHA)]

Case Study: Mold

Your friends Sheila and Mike ask you to list their commercial office space. Mike’s business went under a year ago and the couple really needs a quick sale to unload the property. When walking through the property with them, you notice a funny odor in a rear storage closet. Upon further inspection, you discover a significant amount of mold on one of the walls of the closet. They had no idea it was there, as it had been stacked with boxes. What are their options? They can have the mold removed, making sure the actual source of moisture is identified and repaired. Or, they can disclose the problem to potential buyers (and probably offer a price concession in lieu of repairs).

Now, assuming Sheila and Mike have the mold removed and the area thoroughly cleaned before listing the property. Must the problem be disclosed to potential buyers? What factors might affect if and/or how this is disclosed? The problem and repairs should still be disclosed to potential buyers. This is especially significant for certain types of toxic mold and how significant the problem was causing the moisture. However, this is decision should be made by the sellers. This constitutes legal advice. If the sellers have questions about what should be disclosed, they should speak with their own attorney. However, commercial REALTORS® may be required to disclose this information pursuant to Article 2 of the Code of Ethics.

Discussion: Mold In what situations might buyers be more concerned with the possibility of mold? (Intended use of property, planned improvements)

What is the biggest concern for most buyers and sellers when mold is discovered? (Finding the source! Mold indicates the presence of moisture. Even small amounts of non-toxic mold can be a sign of a much bigger problem if the source is not identified.)

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OTHER COMMON PROPERTY HAZARDS

Lead-Based Paint The use of significant quantities of lead in paint was banned in the United States in 1978, but more than 30 million older U.S. homes contain lead-based paint. The ingestion of lead can cause severe brain damage, particularly in children. Lead-based paint isn’t hazardous when it is intact, but is hazardous when the paint is decaying, flaking, or peeling off the walls. Lead dust generated from friction on windows, doors, and stairs also creates a hazard.

Federal law • Requires sellers and their agents to disclose known lead-based paint and lead-based paint

hazards within a home to the actual buyers, but not to everyone that views the property. This disclosure is required to be in writing and must either be included in any contract to purchase or any lease or as an attachment. There are specific requirements in the federal law which must be included in these disclosures.

• Requires sellers to give buyers copies of any reports of lead-paint testing or inspections. • Does not require that any property be tested for the presence of lead paint. • Requires sellers of homes completed before 1978 (with a few exceptions such as housing

built for the elderly) to give buyers a government-approved pamphlet, “Protect Your Family From Lead in Home.”

• Grants buyers a 10-day period in which to conduct a lead-based paint inspection at their own expense, although no testing or removal of lead-based paint is required by the law. The estimates for lead-based paint testing costs provided by HUD are approximately $400 for a 2,000 square-foot single-family home.

• This rule is applicable in any contract for the purchase of any real property in which a party agrees to purchase an interest in real property on which there is situated one or more residential dwellings used or occupied, or that is intended to be used or occupied as the home or residence of one or more people. There are some exclusions to this, but this could mean that these disclosures would have to be made in commercial transactions involving the purchase of apartment buildings, etc.

For the Broker To help your sales associates comply with lead-based paint regulation, consider purchasing copies of NAR’s Lead-Based Paint Reference Guide. (At the REALTOR.org Store, use the search function to bring up the title.) For more information on lead paint, search by keywords “lead paint” at REALTOR® Magazine Online and at REALTOR.org’s Law and Policy supersearch.

Discuss: What specific risks are addressed by a written LBP Disclosure?

• Regulatory sanctions • Possible criminal penalties

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Can a LBP Disclosure be completed in a commercial transaction? While the LBP Disclosure is only required in residential transactions, nothing prohibits you from using it in a commercial transaction, especially if there’s reason to believe the property might contain lead-based paint.

In what types of commercial transactions might lead-based paint be a concern? Where the property will be used for residential dwellings, i.e. an apartment complex. Also, where a facility will be used as a daycare, this is a significant concern. If you represent buyers in a commercial transaction who plan to use a property to provide care or services for young children, you should encourage them to have the property tested for lead-based paint.

Megan’s Law Megan Kanka was a seven-year-old girl who was raped and murdered in 1994 by a convicted sex offender living in her neighborhood. As a result of her death, the federal government and the 50 state governments have enacted regulations that require convicted sex offenders to register an address with state law enforcement and mandates this information be disseminated to protect the public.

• Licensees in Tennessee do NOT have an affirmative duty to research whether or not a convicted sex offender lives in a particular neighborhood or area.

• If a client is concerned about crime in an area or whether a sex offender lives nearby,

your clients may be told where on state websites they can obtain information on crime statistics or convicted sex offenders in a specific area. The Tennessee Bureau of Investigation’s sex offender registry can be accessed at: http://www.tbi.state.tn.us/sorint/SOMainpg.aspx

Quick Review 1. Your buyer client asks you if a specific neighborhood is “safe” and whether any

known sex offenders live nearby. You tell them the neighborhood is extremely safe and you’re sure no sex offenders live in the immediate vicinity. Is this an okay response? Why or why not? You should never make blanket statements not supported by fact. Such a statement could be interpreted as a “guarantee” of the safety of a neighborhood, something of which no one can ever be completely sure. Instead, you should provide your buyer with information about where to make inquiries if this is a concern for them, such as a local law enforcement office.

2. Your seller client tells you a registered sex offender recently moved down the street.

Do you have a duty to disclose this to potential buyers? Because the seller has disclosed it and you now have knowledge of it – if a buyer asks you directly, you should tell them honestly what you know.

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Asbestos Asbestos was used as insulation and soundproofing material and in tile flooring in buildings throughout the 1970s. Its manufacture was declared illegal in 1978, but products in inventories at that time continued to be installed in homes and buildings until the early 1980s.

• Asbestos presents a health risk only when asbestos fibers or dust are released into the air, according the U.S. Environmental Protection Agency.

• The presence of asbestos can’t be ascertained by a visual inspection, but possible sources of asbestos in a home or building may be identified visually.

• Unless it is deteriorating, asbestos presents less danger if it’s left undisturbed. • Sellers are required to disclose the known presence of asbestos, but aren’t required to test.

TIP: Common types of asbestos you are likely to encounter are a granular, cement-like plaster on walls and ceilings, a fluffy material sprayed onto ceilings or walls as a fire retardant, and felt, fibrous paper, or cement-like coatings on pipes or boilers for insulation.

Radon Radon is a colorless, odorless, naturally occurring gas that can enter any home or building through tiny cracks in the foundation. Ironically, well-insulated homes or buildings are more likely to have radon problems. Radon is a lung carcinogen and may contribute to lung cancer deaths, especially among cigarette smokers.

• Radon is naturally occurring and has been found in all states. • Testing is the only way to determine whether a home or building has elevated levels of

radon. • Radon testing is not required but is recommended by the EPA’s Homebuyers and Sellers

Guide to Radon. • The EPA recommends that repairs be made to reduce radon if levels exceed four

picocuries per liter of air.

You represent buyers of a commercial building. A thorough inspection has revealed asbestos in an area of the building where the buyers were planning renovations. What are their options?

Once an estimate is obtained for removing the asbestos, the buyers may negotiate with the sellers for repairs or request a price reduction. If an agreement can’t be reached, the buyers may cancel the contract or opt to proceed with the transaction. Buyers should consult with their attorney if they have questions about whether they can legally terminate the contract.

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The EPA provides detailed information concerning radon for buyers and sellers of residential property. The information can be accessed at: www.epa.gov/radon/realestate.html.

How do you test for radon? Buyers should be advised to have the test completed during the inspection period. If buyers have specific concerns regarding the possible presence of radon (i.e. it was detected in neighboring homes or buildings), specific language should be included in the purchase agreement specifying how and when the testing will be conducted and by whom.

Is the presence of radon common in Tennessee?

The last testing by the EPA did identify radon as a threat to Tennessee homeowners. The EPA provides a map that categorizes the risk by county of the presence of radon. You can access this map at: http://www.epa.gov/radon/states/tennessee.html.

The map is provided for informational purposes only. It is not a definitive indicator of the presence or absence of radon. Consumers should not rely on the information provided as a substitute for radon testing.

Where can buyers find a certified professional to test for radon? The two organizations offering radon testing and mitigation certification are the National Environmental Health Association (NEHA) and the National Radon Safety Board (NRSB). Both maintain Websites where consumers can search for a certified inspector:

NEHA: www.radongas.org and NRSB: www.nrsb.org On residential property, the Tennessee Residential Property Condition Disclosure (F16) specifically asks sellers whether they are aware of the presence of radon. In commercial property, sellers should speak with their own legal counsel concerning whether they have an obligation to disclose the presence of radon in the event that they have discovered it or have reason to believe it is present. However, commercial REALTORS® may be required to disclose this information pursuant to Article 2 of the Code of Ethics.

If radon is detected, the problem can be remediated for a reasonable cost.

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The Special Case of Stigmatized Properties The NATIONAL ASSOCIATION OF REALTORS defines stigmatized property as: “a property that has been psychologically impacted by an event which occurred, or was suspected to have occurred, on the property, such event being one that has no physical impact of any kind.”

In other words, when dealing with a stigmatized property, real estate agents are not dealing with facts about physical characteristics -- they are dealing with the fears of a potential purchaser. The most common events associated with stigmatized property are murders, suicides and criminal activity. Stigmatized property also includes property in which a current or former occupant has been infected with HIV or diagnosed with AIDS.

HOT LINE QUESTION: I am entering into an exclusive listing agreement for a property where a child lived and either had an accident or suffered an act of violence (the jury hasn’t reached a verdict). The child died at the hospital from said act or accident, and I need to know whether or not I have to disclose this fact to potential buyers.

HOT LINE ANSWER: Pursuant to Tenn. Code Ann. 66-5-207 (applicable to residential property), an owner or agent is NOT required to volunteer this type of information. Pursuant to this statute:

“Notwithstanding any of the provisions of this part, or any other statute or regulation, no cause of action shall arise against an owner or a real estate licensee for failure to disclose that an occupant of the subject real property, whether or not such real property is subject to this part, was afflicted with human immunodeficiency virus (HIV) or other disease which has been determined by medical evidence to be highly unlikely to be transmitted through the occupancy of a dwelling place, or that the real property was the site of: 1. An act or occurrence which had no effect on the physical structure of the real property, its physical environment or the improvements located thereon; 2. A homicide, felony or suicide.”

HOWEVER, if you are asked directly about whether a homicide (murder) or suicide occurred in the home, you must be honest and answer the question truthfully. We would recommend advising your client that under the Broker’s Act if you are asked about the death, you must answer honestly. If you do not answer truthfully, then you can be held liable for

Quick Review: True or False

1. Sellers are required to have the property tested for radon. (F)

2. Buyers should be advised that the presence of radon is rare and they shouldn’t worry about having a property tested. (F)

3. If a property is tested and radon is detected, this doesn’t have to be disclosed

to buyers unless they specifically ask. (F)

4. If buyers wish to have a property tested for radon, language should be included in the offer stating how and when the testing will be performed and at whose expense. (T)

misrepresentation. [SOURCE: TAR’s Legal & Ethics Hot Line Attorneys]

CONCLUSION: Remember, property stigmas are emotional issues that need to be handled carefully. To reduce the legal risks in this area, it is essential that real estate agents:

• Understand the issues associated with stigmatized property, • Know pertinent federal and state law, and • Know how to evaluate facts and make informed decisions about disclosure.

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Penalties for Failure To Disclose 62-13-312. Discipline—Refusal, revocation or suspension of license—Downgrading of licenses—Automatic revocation.—(a) The commission may, upon its own motion, and shall, upon the verified complaint in writing of any person setting forth a cause of action under this section, ascertain the facts and, if warranted, hold a hearing for reprimand, or for the suspension or revocation of a license. (b) The commission shall have power to refuse a license for cause or to suspend or revoke a license where it has been obtained by false representation, or by fraudulent act or conduct, or where a licensee, in performing or attempting to perform any of the actions mentioned herein, is found guilty of:

(1) Making any substantial and willful misrepresentation; … (3) Pursuing a continued and flagrant course of misrepresentation or making of

false promises through affiliate brokers, other persons, or any medium of advertising, or otherwise;

Case Study: Stigmatized Properties Mary is interested in buying a small storefront space. Joe is a listing agent for a storefront space in which the owner was killed in a robbery a few months ago. The owner’s widow has decided to sell the space and has asked Joe not to tell prospective buyers about the murder. Mary meets with Joe to view the property. She asks Joe why the seller is selling. How should Joe respond? Joe should tell Mary the seller is selling for personal reasons. If pressed, he should make Mary aware that the seller has requested her reasons for selling be kept confidential, but (with the seller’s permission) can add that she is not selling due to any problems related to condition of the property. When viewing the property a second time, Mary speaks with a neighboring business owner who tells her about the murder. She asks Joe directly about it. What should he say? Joe must answer honestly if asked directly. He could say that it had no effect on the physical condition of the property and that the seller asked to keep it confidential for personal reasons.

Quick Review 1. What is the penalty for making a willful misrepresentation?

Suspension or revocation of license by TREC, discipline from the local board under the Code of Ethics, lawsuit in court

2. Is a licensee liable if they direct the sellers to misrepresent something instead of doing it themselves? Yes

Disclosure for Commercial Property under Tennessee law

• There is only one commercial disclosure which may be required under Tennessee law. This disclosure is for certain commercial rental property. Pursuant to Tenn. Code Ann. § 66-7-108(a),

At the request of a prospective tenant, the owner of commercial or industrial real property where the commercial property space is one thousand five hundred square feet (1,500 sq. ft.) or less, and the industrial real property is five thousand square feet (5,000 sq. ft.) or less, shall furnish to such prospective tenant a signed disclosure statement detailing the extent to which such real property is understood by the owner to be in compliance with local and state fire, plumbing, and electrical codes for a building of the type under construction. If, at the time such disclosure is made, an item of information required to be disclosed is unknown or not available to the owner, the owner may state that such information is unknown.

TAR provides form F51, the Commercial/Industrial Real Property Disclosure, for this purpose.

A Liability Glossary • Fraud. Conduct that is intentionally deceptive. This could occur when someone makes

statements that they know are false. It can also occur when someone has a duty to disclose a known fact or condition and fails to do so.

• Intentional misrepresentation. Making a false statement which you either know is

false, believe not to be true or is made recklessly. This is very similar to fraud.””“”

• Innocent misrepresentation. Making an affirmative statement without knowing whether the statement is true or without any knowledge of a factual basis for the statement.

• Negligent misrepresentation. Making a statement that, while not intentionally wrong, is

nonetheless mistaken due to lack of care in ascertaining or confirming the accuracy of the statement or in communicating the information.

• Negligence. Failure to use reasonable care to discover and disclose property defects. This

duty, which goes beyond disclosure of known information, isn’t imposed in all states and has been explicitly rejected in several states. In any case, liability for negligence doesn’t extend beyond discovery of defects that a real estate professional in the local area ordinarily would be expected to recognize and understand.

TIP: A cooperating agent may rely on the disclosures provided by the listing agent, unless there’s obvious evidence information is incorrect.

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Advice for Avoiding Liability: Risk-Reduction Tips

• Be sure sellers understand the serious legal pitfalls of withholding material information about the property from prospective buyers.

• Never make statements that predict the future—”This property is sure to appreciate.” “You will never have any water problems here.” You open yourself up to charges of misrepresentation if your prediction is wrong.

• When in doubt as to whether a disclosure is required, go ahead and reveal whatever you know.

• When in doubt about anything concerning the property, say, “I don’t know.” Then investigate until you do.

• It is prudent to recommend that buyers consider an inspection by an expert who is skilled in evaluating and diagnosing any specific property conditions that are of particular concern. Examples of such experts include a lead- based-paint or asbestos-testing company, a soil or structural engineer, or an architect.

• If the buyer declines your advice to obtain a recommended inspection or evaluation, make a note of that decision in your file, and send the buyer a note documenting the event.

• Recommend a thorough property inspection. • Another “line of defense” is a warranty purchased by or on behalf of the

buyer. These policies are a form of inexpensive insurance that can protect the buyer and you if the buyer finds undetected or unknown defects after the sale closes and takes legal action. —Some of the ideas in this section were adapted from “Just Say ‘I Don’t Know,’” by Robert N. Bass, Today’s Buyers’ Rep, March 1998. Mr. Bass, a Phoenix, Arizona broker defense attorney, can be reached at Robert@BassLawFirm.com.

TIP: No one expects you to know everything. Real estate professionals aren’t expected to know about “latent defects,” defects that aren’t apparent without in-depth inspection.

TIP: Keeping written notes of telephone and in-person conversations with sellers and potential purchasers about facts of the sale is a great way to reduce the potential liability for misrepresentation. If a question arises, you won’t have to count on your memory.

TIP: To protect yourself against possible misrepresentation, ask sellers for written documentation on the age of fixtures. If you haven’t seen written backup, tell buyers that the facts you are giving them were provided to you by the seller.

Discussion:

What is your role in the inspection process?

You should always recommend a buyer obtain a property inspection. ’Inspections may bring up issues which were not disclosed which may have a serious impact on whether the buyers want to purchase the property. Therefore, it makes sense for buyers to take this step to ensure they’re making a sound investment. While you can provide the buyer with a list of licensed inspectors, buyers should deal with the inspectors directly. You should never put yourself in the position of acting as a “middleman” between the buyer and their inspector.

How can you avoid risks are associated with the inspection process?

Never undertake to “inspect” a property yourself. If a buyer has concerns related to the condition of a property, you should direct them to a licensed professional who can answer their questions. Be careful not to offer professional advice beyond the scope of your expertise. Doing so may result in unnecessary liability for you and your broker.

As a listing agent, decide with the seller early on whether they expect you to be present during inspections of the property. Sellers may have concerns related to security or potential damage to the property; if you won’t be present during the inspection(s), make sure the seller understands this beforehand. If you are going to be present, you should not necessarily be in the same room and/or area as the inspector as he may disclose information out loud during the inspection which may then be required to be disclosed under Article 2 of the Code of Ethics.

Never interpret items contained in an inspection report. If a buyer needs clarification, they should address their questions directly to the inspector.

What specific items should buyers be advised to inspect?

Buyers should be advised to obtain a thorough inspection of items that are especially costly to repair. Common examples include: Common examples include: Roof, Heating/Air Conditioning systems, Structural issues, Septic systems (if present), Plumbing, Electrical systems

What is the timetable for the buyer obtaining needed inspections?

The timetable will depend on the specific wording contained in the purchase agreement. Inspection contingencies should be clearly spelled out in as much detail as possible.

Any time repairs are negotiated between the parties or extensions are agreed upon, the contract should be amended to reflect the changes. Any separate agreement between the parties, even in writing, may not alter the duties of the parties as required under the original purchase agreement. If either party has questions concerning the enforceability of any provision contained in the purchase agreement or related addenda or amendments, they should be referred to a competent attorney. You should not undertake to provide information to clients that may be construed as legal advice.

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Lesson 3: Property Management Property Management has now become a new sideline in a lot of firms, especially for listings that simply haven’t sold in a long time. A TAR Hot Line Inquiry… QUESTION: I want to start a residential property management division in my company and I’m trying to find the necessary forms, etc., so that I can begin. Where should I look? ANSWER: Property management is very different than regular residential sales. You must be aware of specific laws concerning property management, such as Tennessee’s Landlord and Tenant Act that only applies in certain counties. These counties are Anderson, Blount, Bradley, Davidson, Hamilton, Knox, Madison, Maury, Montgomery, Rutherford, Sevier, Shelby, Sullivan, Sumner, Washington, and Wilson. We strongly recommend that, before you begin doing property management, you take some classes in order to educate yourself about the laws in Tennessee concerning rental property. Furthermore, you will need to contact your E & O carrier to ensure that you have proper coverage. You may not have coverage for property management under your current policy. An Additional rider for your insurance can be purchased for $50.00 a year. B. Common Issues and Challenges… 1. People not knowing if the Landlord & Tenant Act applies to their area and not knowing what it is or how to work with it. One agent was adding a page to her agreements that waived the tenant’s right of eviction process, meaning she could just go put their stuff out when they did not pay – or at least thought she could until challenged! 2. The first and most important thing for a property manager and owner to have is the Management Agreement. The agreement creates the general agency relationship between the owner and the property manager; it defines the duties and responsibilities of each party. The agreement should cover all the duties and responsibilities of the property manager and the owner including who is responsible for handling setting up and paying for any repairs as needed. 3. Proper handling of security deposits under requirements of the Landlord & Tenant Act.

The act specifies how security deposits are handled when received and upon move out. This includes written documentation of damages and a security deposit statement. Many agents turn over security deposits to owners directly who do not perform proper move outs, or the agent does not, which leads to litigation of security deposits.

TCA 66-28-301 (a)

All landlords of residential property requiring security deposits prior to occupancy are

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required to deposit all tenants' security deposits in an account used only for that purpose, in any bank or other lending institution subject to regulation by the state of Tennessee or any agency of the United States government.

4. The Property Manager should generate monthly reports showing income and expenses for

each property. The Property Agreement should address the monthly reports and a schedule for payments to the Owner. This is one of the biggest complaints from owners especially concerning receipt of moneys due.

5. Owners who can’t afford or are unwilling to maintain their property.

When representing owners, repair items must be dealt with quickly and the property must be kept in the condition the tenant expected. However many owners do not want to make repairs to their property to save money. Again, this is something that should be agreed upon in the Management Agreement.

6. Owners who want to screen tenants with the agent. This often leads to discriminating

practices. All tenants should be screened by a third party and approved or disapproved systematically based on credit worthiness and income to rent ratios only. Often owners want to know about children, ethnicity, or other irrelevant characteristics that can easily lead to discriminatory practices.

7. The worst thing from a legal standpoint is eviction of a tenant. The collection of monies

owed from either rent due or damages done by the tenant is difficult and sometimes requires legal action.

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Lesson 4: Advertising Issues

Advertising as a Team (Licensees who hold themselves out as group or similar entity within a firm): A HOT LINE QUESTION: “I am trying to find the section in the Official Manual of The Tennessee Real Estate Commission that deals with teams within a Real Estate company. Could you tell me where to find it? ANSWER: Teams are allowed in Tennessee. HOWEVER, TREC does not currently have any specific rules governing how they operate. That being said, there are some guidelines they follow in regulating teams. In advertising, it is important that the advertising not be misleading. Therefore, the team name should not give the impression that the team is a stand-alone real estate company. In addition, the firm name and telephone number must also appear on any advertising. Although it is not technically required, we would recommend including the team members’ names on the advertising to make things easier on the public. The NAR Code of Ethics also prohibits misleading advertising under Article 12. Example of a Violation: An agent with a “wrapped” car. The wrap has his “team name” featured on the wrap as well as a cell phone number. The agent’s company name is nowhere to be found on the SUV wrap, nor is the company office phone number. Internet Advertising What information must be displayed on internet websites? a. Agent’s name and phone number b. Company name and phone c. Current and accurate information d. Statement that some of the listings may not belong to the firm e. All of the above (Correct) 1260-02-.12 (4) Advertising and COE SP 12-8 through 12-13 addresses all of the above issues of internet advertising False, misleading or deceptive advertising

1. Radio Radio commercials from real estate licensees that do not include their firm names, numbers and (when applicable) franchise information.

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2. Craigslist Craigslist is full of errors. Firm name and telephone numbers are always missing. Standard of Practice 12-10 (2) manipulating (e.g. presenting content developed by others) listing and other content in any way that produces a deceptive or misleading result presenting content developed by others without either attribution or without permission, or to otherwise mislead consumers.

3. Ad Offers & Guarantees

Ads that state “I can sell your property in 120 days or I will buy it for cash” –without the proper disclaimers on the face of the ads A Service Guarantee that stated the client either was satisfied or “I will give them their money back.”

4. Pointer Signs Real estate pointer signs without any info on them – For example just a generic franchise pointer sign. The current policy reiterated stating that generic signs would be in compliance, however, signs displaying the firm name, must also contain the firm phone number. Pointer signs with only the agent’s name or the name is larger than the smallest font in the Company name would not be in compliance.

5. Signs and Billboards

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If these signs were in Tennessee, would they be legal or not?

Advertising Interpretation – July 2013 the Commissioners interpreted TCA 62-13-310 (b) “Licensees may not post signs on any property advertising themselves as real estate agents unless the firm’s name appears therein letters the same size or larger than those spelling out the name of the licensee” as the agent name cannot be any larger than the smallest font of the company name on any sign which is on property (including billboards). This includes signs advertising agents, but not specific property. What problems do you see with this sign if it was advertising a company and agent in Tennessee?

As mentioned above, the agent’s name cannot be larger than the smallest font in the company.

6. “Car Wraps” Vinyl on cars or car wraps without the required info 7. Web Pages Lots of web pages with the requirements of the COE (Standard of Practice 12-9) to disclose the firm’s name and the state(s) in which the agent is licensed so many violations of no office name and/or phone number on internet sites or web marketing. Craigslist, Zillow, Trulia often feature violations of this. The phone number must be the OFFICE number of where the license hangs their license.

8. Violations of Regulation Z “New construction” houses in developments advertising specific interest rates for loans without disclosing an APR or the required Regulation Z (Truth in Lending) details…

Gifts, Prizes, Rebates What Is Allowed and What Isn’t? According to Tenn. Code Ann. 62-13-302(b), “A real estate licensee shall not give or pay cash rebates, cash gifts or cash prizes in conjunction with any real estate transaction. As part of the Tennessee Real Estate Commission’s general rulemaking authority the commission may regulate the practices of real estate licensees in regard to gifts, prizes or rebates that are not otherwise prohibited by law.” Any refund or rebate of all or part of the commission to a buyer or seller would fall into this category. However, you can agree to reduce your commission.

You can give non-licensees a gift in order to induce them to do business with you. Please note that the gift must be as an inducement for THEM (not their friends, family members, etc., which would make it a referral fee) to do business with you. If you wish to proceed in doing this, you will have to follow the gifts and prizes rule. This falls under TREC Rule 1260-2-.33. It states:

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Pursuant to the statute above, this gift CANNOT take the form of cash. You may give gift cards, but they cannot be convertible into cash. In addition, you cannot offer to pay closing costs for your client.

One final word of caution. TREC recently published new rules. TREC Rule 1260-2-.12 has a paragraph which applies to any advertising of offers of gifts or prizes. It states:

(5) Guarantees, Claims and Offers

• Unsubstantiated selling claims and misleading statements or inferences are strictly prohibited.

• An offer, guaranty, warranty or the like, made to induce an individual to enter into an agency relationship or contract, must be made in writing and must disclose all pertinent details on the face of such offer or advertisement.

Therefore, if you are advertising your gift, you will need to disclose all the pertinent details in the ad itself.

(1) A licensee may offer a gift, prize, or other valuable consideration as an inducement to the purchase, listing, or lease of real estate only if the offer is made:

(a) Under the sponsorship and with the approval of the firm with whom the licensee is affiliated; and

(b) In writing, signed by the licensee, with disclosure of all pertinent details, including but not limited to:

1. accurate specifications of the gift, prize, or other valuable consideration offered;

2. fair market value;

3. the time and place of delivery; and

4. any requirements which must be satisfied by the prospective purchaser or lessor.

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Exercise: Free Gift

Your broker wants to offer a $1000 flat-screen LCD television as an incentive to attract new buyer-clients to the firm. She asks you to draft a paragraph explaining the offer, including all terms necessary to ensure compliance with the TREC Rule. Using the space below, draft an offer that would comply with these requirements.

Compliance:

1. Accurate specifications of the gift, prize, or other valuable consideration offered;

2. Fair market value;

3. The time and place of delivery; and

4. Any requirements which must be satisfied by the prospective purchaser or lessor

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Lesson 5: Principal Broker’s Supervision & Liability

PROTECT YOURSELF Listing brokers can be liable if salespeople fail to properly disclose information.

• Be certain that all listing packages include a property disclosure form, IF such a form is required by law.

• Refuse to accept a listing agreement unless it is accompanied by a signed disclosure form, IF a property disclosure form is required.

• Train salespeople in interpreting and explaining the disclosure form and their rights and obligations under the law. However, agents should never determine for a seller whether something should be disclosed.

• Ensure that a copy of the property disclosure form is delivered to buyers, if required in your state.

• Purchase copies of NAR’s Property Disclosure Pocket Guide for your sales associates. (At the NAR Store Browser, use the search function to bring up the title.)

1260-2-.01 SUPERVISION OF AFFILIATE BROKERS.

(1) No licensee shall engage in any real estate activity in any office unless there is a principal broker who devotes his full time to the management of such office. (2) No principal broker shall engage a licensee (other than as a property manager) who lives more than fifty (50) miles by a straight line calculation from the firm office, unless the principal broker demonstrates in writing to the Tennessee Real Estate Commission’s satisfaction that the distance involved is not unreasonable and that adequate supervision can be provided. For purposes of this rule, a property manager is defined as a licensee who engages exclusively in leasing and otherwise managing rental properties. (3) A licensee may be engaged only by a principal broker who is:

(a) engaged primarily in the real estate business; and (b) accessible during normal daytime working hours.

Discussion As a broker, what do you do in your office to ensure your agents aren’t incurring unnecessary liability? Examples: Clear Policies, Training sessions, Supervision, Consistent Office Agency policy As an agent, what do you do to assist your broker in limiting their liability (and yours)? Make sure you’re aware of and follow the existing office agency policy (and ALL office policies). When you encounter a problem or unusual situation, make sure to communicate with your broker and work together to find the right solution. Always use good documentation practices and keep files up to date. Respond to clients and customers promptly. Instructors, feel free to add additional ideas…

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Offices

Rule 1260-02-.03 Offices

a. Unlicensed Branch Office

One of the violations discussed under Section 1 TREC Rules, Regulations and Updates was operating an unlicensed Branch Office. Can you name some examples of an Unlicensed Branch Office? 1. 2. 1260-02-.03 OFFICES. (a) For purposes of T. C. A. §62-13-309(d), a licensee is deemed to maintain a “branch” if the licensee:

1. Advertises the office in any manner for the purpose of attracting the public;

2. Has a mail drop at the office which is registered with and served by the United States Postal Service; or

3. Invites or solicits telephone calls to the office (by such means as advertising or listing in a telephone directory).

Can you name some examples of offices that are exempt from the requirement for a branch office license? 1. 2. Model Homes and Modular Units. A model home may be utilized in a subdivision or on a commercial lot and a modular unit may be utilized in subdivisions which are under construction for purposes of soliciting business and will not be required to be licensed as a branch office as long as the model home or modular unit meets the following requirements:

1. The model home or modular unit location and/or telephone number is only advertised in conjunction with advertising the main firm office and such advertising complies with the statutes, rules and regulations of the Commission; 2. The model home or modular unit does not have a mail drop; 3. The model home or modular unit is not the sole sales office for the firm; 4. The model home or modular unit is not utilized to allow unlicensed activity by individuals in performing any of the acts requiring licensure under T. C. A. §62-13-101, et seq.; and 5. The principal broker of the main firm office shall adequately supervise licensees operating from model homes or modular units as required by T. C. A. §62-13-312 and any rules promulgated thereunder.

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b. Advertising

One of the multiple violations previously discussed was the failure of the Broker to adequately supervise the advertising activities of their affiliates. T.C.A. § 62-13-312. DISCIPLINE – REFUSAL, REVOCATION OR SUSPENSION OF LICENSE – DOWNGRADING OF LICENSEE

(15)In the case of a licensee, failing to exercise adequate supervision over the activities of any licensed affiliate brokers within the scope of this chapter; 1260-02-.12 ADVERTISING. (1) All advertising, regardless of its nature and the medium in which it appears, which promotes the sale or lease of real property, shall conform to the requirements of this rule. (2) General Principles (b) All advertising shall be under the direct supervision of the principal broker and shall list the firm name and telephone number. c. Trust Money/Security/Trust Deposit

There were two multiple violations related to Earnest Money: 1. Failing, within a reasonable time to account for or to remit moneys belonging to others. 2. Failure to timely disburse or interplead earnest money.

A real estate company has the required separate Earnest Money Account for the purpose of holding any funds which may be received as deposits. The company also has a property management company. How many separate accounts to handle deposits must the company have? Two. There should be an account for the earnest money for the real estate transactions and a separate account for any security deposits for the property management company. If any of the security deposits for the property management company are considered last month rent, then another separate account may be required. 1260-02-09 (1). Can the earnest money account be in an interest bearing account and if so are there any guidelines? Interest bearing accounts are neither required nor prohibited. If used,

1. The licensee shall disclose that the deposit will be placed in an interest bearing account; 2. As depositor, the licensee does not own the funds or interest earned thereon until properly disbursed to the licensee; 3. The licensee and payor shall execute a written agreement indicating the manner of disposition of interest earned; and 4. The licensee shall keep a detailed and accurate accounting of the precise sum of the interest earned for each separate deposit.

Commission Policy Statement 2012-CPS-004

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Is there a timeline on disbursing the earnest money? 1260-02-09 (7) states: Funds in escrow or trustee accounts shall be disbursed in a proper manner without unreasonable delay. Funds should be disbursed or interplead within twenty-one (21) calendar days from the date of receipt of a written request for disbursement of earnest money.

d. New Mandatory Real Estate Firm Audit

Under the new Mandatory Broker Audit the first Audit Forms went out by mail in May, 2014 to approximately 200 Principal Brokers. Audit form responses are to be returned completed with supporting documentation within 30 days of date of audit cover letter. TREC will have an auditor on site to look over audits. The plans are to ultimately send out 400 Mandatory Broker Audit packages each month. Audit Form cover letters advise the principal broker that failure to return the completed Audit Form, with all attachments/exhibits in the proper time frame shall result in disciplinary action by the Commission including civil penalties of up to $1,000.00 per violation and that along with the civil penalty the Audit Form must be completed. (Source: TREC Meeting Minutes June & July 2014) HOT LINE: Agent Has Established an LLC? QUESTION: If an agent has established an LLC, do we make their commission checks payable to the LLC or to the agent? ANSWER: It’s been a while since we last addressed this issue. An agent can only be paid by their broker. Therefore, an individual licensee that has “incorporated” or “LLC’ed” himself CANNOT be paid a commission through the company. The individual holds the license, not the company. The only time that a company can hold a license is if it is a firm license. A company cannot be issued an individual license. Furthermore, pursuant to Tenn. Code Ann. 62-13-302(a): “It is unlawful for any licensed broker to employ or compensate any person who is not a licensed broker or a licensed affiliate broker for any of the acts regulated by this chapter. A licensed nonresident broker may pay a commission to a licensed broker or another state if such nonresident broker does not conduct in this state any of the negotiations for which a commission is paid.” In addition, Tenn. Code Ann. 62-13-312(b)(11) states that an agent can be disciplined for: “Accepting a commission or any valuable consideration by an affiliate broker for the performance of any acts specified in this chapter, from any person, except the licensed real estate broker with whom the licensee is affiliated” An agent can only be paid in the name of their license – whether it is a firm license or their individual license.[SOURCE: TAR's Legal & Ethics Hot Line Attorneys]

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Lesson 6: Common Problems & Issues with Commercial Contracts and Leases

Basic Terms Contained in the Commercial Purchase and Sale Agreement • In commercial transactions, interested buyers may complete a Commercial Letter of

Intent (Purchase) (CF402). This does NOT constitute a binding offer or agreement between the parties.

• Buyers should review the Commercial Purchase and Sale Agreement (CF401)

before making an offer – otherwise they cannot make an informed decision!

• Be sure to use the full and correct address and legal description of the property. Exhibit A to Commercial Purchase and Sale Agreement (CF501) should be used to include the full legal description of the property. It’s a good idea to pull the deed to ensure a full accurate legal description of the property is used as it appears in the county’s Register of Deeds

• ALL parties must be listed by their full, legal names on the offer.

• Boilerplate (pre-printed) language in the Commercial Purchase and Sale Agreement

(CF401) establishes basic terms. If this must be altered, use the same verbiage included in the preprinted portion whenever possible, referencing the specific line number(s), only changing what is absolutely necessary! Section 17 of the Purchase and Sale Agreement (CF401) should be used to include special stipulations ONLY if the issue is not addressed by another TAR form.

Timelines, Deadlines and Stipulations

• For deadlines in the CF401, the clock starts to run from the day following the date of offer acceptance (a.k.a. the contract date, the binding agreement date) unless otherwise specified.

• All days in the CF401 are calendar days (NOT business days), ending at 11:59 p.m.

Start counting from the day after the binding agreement date.

Note: The CF401 actually states the term day(s) used throughout this Agreement shall be deemed to be calendar day(s) ending at 11:59 p.m. local time unless otherwise specified in this Agreement. Local time is to be determined by the location of the Property. All references to time are deemed to be local time. In the event a performance deadline, other than the Closing Date, Day of Possession ), and Offer Expiration date, occurs on a Saturday, Sunday or legal holiday, the performance deadline shall be extended to the next following business day. In calculating any time period under this

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Agreement, the commencement day shall be the day following the initial date (e.g. Binding Agreement Date).

Example: The Buyer specifies 15 days to complete all inspections. So, if the binding agreement date is Thursday, October 1st, then Friday is Day 1, Saturday is Day 2, Sunday is Day 3, Monday is Day 4 and so on. That means the Buyer needs to have completed inspections before 11:59 p.m. on Friday, October 16th.

Note: Discuss how deadlines are affected if the accepted offer is delivered and/or received after the date noted on the contract – i.e., the seller accepts and notes October 22nd as the date of acceptance but the contract is not delivered until the 23rd.

(The TAR CF401 defines when the Binding Agreement Date will be: This instrument shall become a “Binding Agreement” on the date (“Binding Agreement Date”) the last offeror, or licensee of last offeror receives notice of offeree’s acceptance. Notice of acceptance of the final approval was provided on day of , at (time) by (Name). If the date is filled in by the last offeror or their licensee, delivery the day after may cause the date to be that date.)

• If it’s in the contract, it must be done by the date specified. Failing to meet deadlines

may constitute a breach – “we don’t do it like that in my area,” “no one pays attention to that,” and “no one else does it” are all WRONG answers, none of which will hold up in court or make your breaching client resent you any less.

• It’s a good idea to use a checklist of the compliance dates in the Agreement. Filling it out

as soon as an offer is accepted can help you stay on top of dates and timelines.

• It is imperative to discuss the pre-printed deadlines in the CF401 with buyer clients BEFORE submitting an offer. If, for any reason, they will be unable to meet a required pre-printed deadline, this should be noted clearly BEFORE an offer is made or counteroffer is submitted. For seller clients, you must discuss pre-printed deadlines and filled in dates. If, for any reason, they will be unable to meet a required date or deadline, this should be noted clearly in a counteroffer.

• Failure to meet a contractual deadline may result in a breach of contract, forfeiture of

earnest money, unenforceable performance and, in some cases, liability for civil damages.

• You must be aware of your client’s options in the case of the other party’s failure to meet

a specific deadline, perform a required action and/or deliver a required notice.

• Appraisal Issues • Finance Issues • Loan Obligations • Earnest Money Issues

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• Closing Issues • Title Issues • Inspection Issues • Risk of Loss • Survey Issues • Flood Issues • Restrictions • Others…

• When a preprinted deadline needs to be changed, you should first check to see if the issue is

addressed by another TAR form. If not, the EXACT verbiage should be copied with only the number of days for performance changed. By altering the verbiage within the attorney-approved CF401, you could end up making the party’s performance unenforceable.

• The preprinted portions of the Purchase and Sale Agreement (CF401) have been approved

by the TAR forms committee and an attorney. Do NOT try to reinvent the wheel! • Handwritten provisions prevail! When you write something in the special stipulations section,

it should be consistent with the rest of the Agreement (CF401). Whenever possible, use the same verbiage included in the preprinted portion, referencing the specific line number(s), only changing what is absolutely necessary!

• NEVER include phrases such as TBD, actual costs, negotiable, etc. – these phrases are your

enemies and should be avoided at all costs! Always be as specific as possible, especially when it comes to dates, amounts and actions required of either party.

• The Special Stipulations Library (CF707) exists to assist you in addressing items in this

section. HOWEVER, if you’re using the special stipulations section to write in a contingency, there is likely another more appropriate TAR form.

• The special stipulations section can be appropriately used to make simple changes to a

preprinted item, such as a required deadline, if the line number is referenced and exact verbiage reprinted, with only the number of days changed.

• The special stipulations section should NEVER be used to write a new contract. Repeat after

me: I am NOT an attorney, I am NOT an attorney, I am NOT an attorney…unless, of course, you actually are an attorney.

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Commercial Leases – Types & Problems What is Commercial Property? T.C.A. § 62-13-501-502 (2013) A Broker License and Affiliate Broker License as defined in T.C.A. § 62-13-102 allows a licensee to sell both Residential and Commercial Real Estate. However, the actual practices are very different. A licensee who practices mostly residential may have the opportunity to assist a buyer or a seller in a commercial transaction and should become familiar with T.C.A. §62-13-501 – 505. The best option may be for the Residential Licensee refer the buyer or seller to a Commercial Licensee and receive a referral fee. 1. What properties are considered Commercial? 62-13-501 (2) (A) “Commercial Real Estate” means any real estate other than: (i) Real estate containing one (1) to four (4) residential units; or (ii) Real estate on which no buildings or structures are located and is zoned for no more than one (1) to four (4) family residential units; (B) Single family residential units such as condominiums, town houses or homes in a subdivision when sold, leased or otherwise conveyed on a unit-by-unit basis even though these units may be a part of a larger building or parcel of real estate containing more than four (4) residential units; 2. How is the payment of commercial commissions different than residential commissions? 62-13-501 (3) "Notice" means a notice specifically referencing an agreement entered into after October 1, 1997, to pay commissions in any brokerage contract or lease or memorandum of the foregoing, sworn to and executed by the broker, identifying the subject real estate by lot and block number or by a metes and bounds description and in the form of notice set out in this subdivision (3) and containing only the information provided for in the form, recorded as provided for in § 62-13-503(e), in the office of the register of deeds of the county in which the property is located, no less than ten (10) business days before the transfer of the commercial real estate that is the subject of the agreement. (6) "Subsequent owner" means a purchaser of commercial real estate from the owner or from a previous subsequent owner, but will not include the transferee or purchaser of commercial real estate pursuant to a sale conducted pursuant to title 67, chapter 5, part 2. 3. What happens to a Commercial commission or fee that was earned but not paid in full if the

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property is sold to a subsequent owner? 62-13-502. Enforcement of fee or commission contract against subsequent owners. A broker who, pursuant to a contract in writing entered into after October 1, 1997, has earned and is owed a fee or commission payable over time with respect to a lease or upon the exercise of an option for renewal or expansion of the lease, whether payable over time or in a lump sum, from the owner of commercial real estate pursuant to such written contract for the broker's services in connection with a lease of commercial real estate, shall have a cause of action to enforce the contract with respect to the fee or commission against a subsequent owner, to the extent the fee or commission accrues during the time the subsequent owner holds title to the commercial real estate, even though the subsequent owner is not a party to the contract, if and only if the subsequent owner has notice of the contract as provided in this part with respect to the fee before obtaining title to the commercial real estate. There shall be no prohibition against a broker giving the notice as required by this part, and any such prohibition is void and unenforceable. Net Leases Come in a Variety of Forms There are standard names in the commercial real estate industry for different sets of costs passed on to the tenant in a net lease.

Single net lease In a single net lease (sometimes shortened to Net or N), the lessee or tenant is responsible

for paying property taxes as well as the base rent. Double- and triple-net leases are more common forms of net leases because all or the majority of the expenses are passed on to the tenant.

Double net lease In a double net lease (Net-Net or NN) the lessee or tenant is responsible for property tax

and building insurance. The lessor or landlord is responsible for any expenses incurred for structural repairs and common area maintenance. “Roof and structure” is sometimes calculated as a reserve.

Triple net lease A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the

tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three “Nets”) on the property in addition to any normal fees that are expected under the agreement (rent, premises utilities, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with the repair and maintenance of any common area.

This form of lease is most frequently used for commercial freestanding buildings.

However, it has also been used in single-family residential rental real estate properties.

Bondable lease A bondable lease (also called an “absolute triple net lease”, “true triple net lease”, or a

“hell-or-high-water lease”) is the most extreme variation of a triple net lease, where the tenant carries every imaginable real estate risk related to the property. Notably, these additional risks include the obligations to rebuild after a casualty, regardless of the

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adequacy of insurance proceeds, and to pay rent after partial or full condemnation. These leases are not terminable by the tenant, nor are rent abatements permissible. The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond: hence the “hell-or-high water” moniker. An example of this type of lease would be a leaseback arrangement in which a retailer leases back the building it formerly owned and continues to run the store.

Bondable leases are typically used in so-called “credit tenant lease” deals, where the main

driver of value is not so much the real estate, but the uninterrupted cash flow from the usually investment-grade rated “credit” tenant.

CAM - Common Area Maintenance Fees

Common Area Maintenance fees are comprised of the operating expenses related to the operation of the common areas of a property and are passed through to the tenants on a pro-rata basis. Typically they include but are not limited to utilities, parking lot maintenance, janitorial (for common area bathrooms), snow removal, landscaping, management fees, exterior maintenance, roof maintenance, etc.

Gross Leases

This is a type of commercial lease where the landlord pays for the building's property taxes, insurance and maintenance. A gross lease can be modified in a number of ways to best meet the needs of a particular building's tenants (for example, a gross lease may or may not require the tenant to pay utility bills).

The opposite of a gross lease is a net lease. Under a net lease, the tenant is responsible for some of the additional costs associated with the property. There are three types of net leases: single net, double net and triple net. Under a single net lease, the tenant pays rent plus property taxes. Under a double net lease, the tenant pays rent plus property taxes and insurance. Under a triple net lease, the tenant pays for rent plus property taxes, insurance and maintenance.

Modified Gross Leases

This is a type of real estate rental agreement where the tenant pays base rent at the inception of the lease but in subsequent years pays the base plus a proportional share of some of the other costs associated with the property, such as property taxes, utilities, insurance and maintenance. For example, tenants of a property are required to pay their portion of the total heating expense of an office tower.

Modified gross leases are common in office space leasing where an office building is occupied by multiple tenants. A building where the monthly electric bill is $1000 would be split evenly between the tenants; therefore, if there are currently 10 renters of the property, they each pay $100.

Points To Remember with Leases: • As with any agreement, you must properly identify ALL parties, whether they’re

individuals, business entities powers of attorney or something else.

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• Personal property can easily become the source of a dispute. You must clearly identify which property is included. Any property included must be in working order unless otherwise specified in the agreement.

• Naming an individual occupant does not necessarily create any liability for that party. Nevertheless, all intended occupants or business entities, even if they are not named as Tenants, should be identified in the lease.

• The lease must contain specific dates constituting the entire lease term. Upon expiration of the lease, if neither party gives notice of termination, the lease automatically extends on a month-to-month basis.

• The lease amount specified in the F69 is guaranteed for the term of the lease. The landlord may increase the rent amount upon expiration of the lease term with 60 days written notice. If a security deposit is required, the tenant acknowledges they relinquish any rights to this deposit or interest earned thereon for the term of the lease. Upon expiration of the lease, the deposit will be returned to the tenant less any money owed and/or the cost of any needed repairs from damages occurring during the term of the lease.

• If improvements must be made or work must be done on the property prior to occupancy, parties should execute a separate Work Letter and incorporate it in the Lease Agreement.

• You must specify which party will be responsible for all expenses related to maintaining the property. If property owners’ association fees are owed, specify which party will be responsible for these and any related increases during the term of the lease.

• The lease should clearly identify each party’s responsibility for properly insuring the property and any personal property contained within.

Fact or Fiction: Commercial Leases 1. Property condition is usually not important to tenants leasing a property.

(Fiction)

2. You can leave the expiration date of a lease blank if a party plans to renew it indefinitely. (Fiction)

3. A landlord may increase the rent at any time during the lease as long as they

provide 30 day’s notice. (Fiction)

4. Any planned improvements to the property can be addressed later and don’t need to be included in the original lease agreement. (Fiction)

5. The lease doesn’t need to identify every occupant. (Fiction)

6. If property owner association fees increase during the term of the lease, this

increased expense is automatically the responsibility of the tenant. (Fiction)

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Common Mistakes and Misconceptions • Mistakes related to agency are unfortunately common. Agency duties in commercial

transactions are the same as those required in residential transactions. A legal agency relationship can only be created through a bilateral written agreement. Agency disclosures are not required by law in Tennessee in commercial transactions and cannot be substituted for an actual agency agreement. However, you are still required to disclose agency status under the REALTOR Code of Ethics.

• It is possible to work with an unrepresented party without establishing an agency

relationship; if you are the listing agent for a property and the buyer is unrepresented, you may still represent only the seller but you should disclose in writing to the buyer that you represent ONLY the seller and they are unrepresented in the transaction. This is not required by law as in residential transactions, but disclosure is required under the Code of Ethics.

• A Letter of Intent is NOT a legally binding agreement between the parties and should

never be drafted or interpreted to include terms meant to be legally binding. • Making simple mistakes on forms such as incorrectly identifying a party or the property

can render the entire agreement unenforceable. You MUST take care to provide full, legal descriptions of all parties and the property in question.

• ALL material terms must be addressed in writing in a legally binding agreement, whether

it’s a Lease or Purchase and Sale Agreement. Verbal agreements for the sale of real estate are not enforceable. Oral leases may not be enforceable under Tennessee law, depending upon the length of the lease. However, keep in mind Article 9 of the Code of Ethics which states:

REALTORS®, for the protection of all parties, shall assure whenever possible that all agreements related to real estate transactions including, but not limited to, listing and representation agreements, purchase contracts, and leases are in writing in clear and understandable language expressing the specific terms, conditions, obligations and commitments of the parties. A copy of each agreement shall be furnished to each party to such agreements upon their signing or initialing.

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Quick Review: Sit or Stand For the following items, remain seated if the answer is True, stand up if the answer is False.

1. Agency duties in commercial transactions are different than in residential transactions. (F)

2. All legally binding terms should be included in the Letter of Intent. (F)

3. In a commercial transaction, an agency relationship can be created or implied through the actions of both parties. (F)

4. A full, legal description of the property and all parties should be included in the contract. (T)

5. An agency disclosure is the same thing as an agency agreement. (F)

6. Incorrectly identifying the property is usually not enough to render the entire agreement unenforceable. (F)

7. Making a mistake in a lease agreement is not as big of a deal as making a mistake in a purchase agreement. (F)

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Avoid Common Claims • Always resolve problems way before closing date. Don’t wait until the last minute to

address problem issues. When people are rushed to resolve matters right before closing, they make mistakes and things get overlooked.

• Don’t try to be an expert at everything. Involve key professionals, such as attorneys,

inspectors, appraisers, lenders and surveyors when needed. Provide a list of several names or a copy of the yellow page listing, but DO NOT recommend a specific individual or firm! Keep a copy of the list you provide. See Vendor List (F36) and Broker’s Authorization to Hire Vendor (F35)

• Always execute an agency agreement as soon as possible to avoid mistakes related to

agency relationships. A consistent office agency policy should be used by ALL licensees within a firm to avoid inadvertent mistakes.

• Document conversations, recommendations and activities in a log. See Transaction Desk

Call Log. This will provide documentation of routine practices and procedures.

• Keep organized detailed records of all commercial transactions. This will enable you to recall the particulars of a transaction if necessary and will be helpful to the attorney providing you a defense.

• Question clients thoroughly to determine their needs and expectations. Carefully

document these discussions as this information can help prove your activities were in compliance with your client’s wishes.

• Brokers: have regular meetings with your licensees and keep up with their activities.

Establish guidelines and make sure everyone understands and complies with them.

• When commercial transactions are unusually complex you should always advise your client to have any and all agreements reviewed by an attorney to ensure all material terms have been addressed and to ensure the enforceability of legal agreements between the parties.

Lesson 7: TN Agency Law – Issues, Myths & Misconceptions

Things You Should Know About Agency in Tennessee:

1. An agency relationship in Tennessee is not implied or created by a licensee’s actions, behavior or even his/her statements. It cannot be created accidentally.

2. A licensee is always a facilitator by default and remains a facilitator until… a bilateral

written agency agreement has been negotiated with a consumer and signed by both parties.

3. A licensee’s delivery of a written disclosure, or confirmation of agency status, saying that

he/she is an agent… does not make the licensee an agent. [A unilateral disclosure is not a bilateral agreement.]

4. Tennessee’s agency law supersedes what is known as the common law of agency.

5. A traditional (non-designated) agency relationship obligates… everyone in the office to

an agency relationship with that buyer or seller.

6. Designated agency establishes an agency relationship between… only one real estate licensee in the office (to the exclusion of everyone else in the office, including the managing broker) and a buyer or seller. However, this does not diminish the contractual rights of the managing broker to any listing or advertising agreement between the firm and the property owner, nor does it lessen the managing broker’s responsibility to supervise their agents.

7. An office policy of designated agency from the outset – in all transactions (whether in-

house or not) – is… a common and perfectly legitimate agency office policy in Tennessee.

8. Every change in agency status during the course of working with a consumer… must be

fully disclosed to the consumer at the time status is changed and should be documented, even if the consumer gave prior consent to changes of status should they occur.

NOTE: While licensees involved in a commercial transaction are exempt from the DISCLOSURE provisions (only) in Tennessee’s agency law, they are NOT exempt from all other aspects of Tennessee’s agency law, such as the remaining duties to all parties, duties to clients, and the necessity of a written agreement for an agency relationship to be created. FURTHERMORE, if any licensee is a REALTOR®, he/she is NOT exempt from agency disclosures under the REALTOR® Code of Ethics, which makes no exemptions for commercial brokers or transactions.

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9. An agency relationship is not required in order for a licensee to receive a commission; a facilitator may usually receive a commission as easily as a buyer’s agent. [The listing agent’s payment of a commission to a selling agent compensates the selling agent for procuring a willing and able buyer, not for his/her agency representation of the buyer.]

10. Every real estate office in Tennessee should have… a written agency office policy.

11. Subagency is still legal in Tennessee but is rarely offered. In actual practice, a subagent

generally has little or no true allegiance or loyalty to the client or client’s best interests.

12. Dual agency is still legal in Tennessee (if it is fully disclosed to both parties and both parties consent to it). Disclosed dual agency, however, is rarely practiced. Most legal experts still believe… that it greatly increases legal liability for both the licensee and his/her firm and the potential for complaints to the Tennessee Real Estate Commission.

Common Myths & Misconceptions About Agency in Tennessee

MYTH #1: An agency relationship can be “implied”, created “accidentally”, or created simply by a licensee’s actions, statements, or behavior.

This may have been true in Tennessee prior to 1996, but it has not been true since then! Moreover, even if a licensee completes a written disclosure form – such as the commonly used “Confirmation of Agency Status” – the licensee does NOT become an agent. Agency law in Tennessee states that an agency relationship does not exist without a bilateral, written agency agreement between the licensee and the buyer or seller. An agency disclosure form, or confirmation of agency status, is NOT an agreement!

To represent a seller, a “bilateral, written agency agreement” would be the listing agreement: an Exclusive Right to Sell listing or an Exclusive Agency listing. [These two types of listing agreements have served as a bilateral written agreement to establish an agency relationship since 2006. Other types of listing agreements (e.g., open listings) may also establish an agency relationship with the seller, although these are not specified in the agency law itself.]

To represent a buyer, a “bilateral, written agency agreement” would be a Buyer Representation Agreement, a negotiated contract for agency representation. IF a licensee simply “declares” (to a consumer or to another licensee) that he or she represents a buyer or is a buyer’s “agent”, but has not negotiated and signed a written buyer agency agreement with that buyer, then this licensee is NOT a Buyer’s Agent. This licensee is still a Facilitator (or Transaction Broker) regardless of what he or she says; to represent himself or herself as a buyer’s agent is misrepresentation! It’s still misrepresentation even if the licensee gives somebody a disclosure form that says he/she is a buyer’s agent, but the licensee hasn’t negotiated an actual buyer representation agreement that the buyer has signed.

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MYTH #2: You can be a seller’s agent (the listing agent) and a facilitator for the buyer at the same time.

Wrong! A licensee can only wear one “agency hat” at a time in a given transaction. A licensee cannot be working as a seller’s agent for a seller whose property the licensee has listed and simultaneously represent himself/herself as a facilitator to an unrepresented buyer who might like to purchase that property! At best, this practice is deceptive and an obvious effort to gain or keep everyone’s trust without telling them the truth. A licensee has only one agency status at a time in a transaction.

If the licensee is the listing agent, for example, and a buyer approaches the licensee regarding this property, then normally the licensee would disclose to this buyer that he/she represents the seller. There is nothing in Tennessee law that prevents a seller’s agent from assisting this buyer, completing an offer to purchase for the buyer (if that’s what the buyer wants to do), presenting that offer, etc., while the licensee remains a seller’s agent ...as long as the buyer knows that the licensee represents the seller and is going to promote the seller’s best interests.

Once a licensee tells any party or prospective party to a transaction that the licensee is a facilitator, the licensee is saying, “I don’t represent anybody – seller or buyer – as an agent in this transaction!”

Quick Review How is an agency relationship created? Bilateral signed written agreement Which party (or parties) does a Facilitator represent? Neither – they can advise both but don’t have an agency relationship with either party What is your relationship with a buyer to whom you are showing properties prior to executing a Buyer Agency Agreement? The buyer is your customer

Quick Review You represent the seller as the listing agent. An unrepresented buyer wants you to draft an offer for them. Do you have to change agency status? No, you can assist the buyer without establishing an agency relationship as long as they understand you represent only the seller. Your listing agreement includes the seller’s consent to allow you to default to Facilitator status if an unrepresented buyer comes along. If this happens, do you need to notify the seller? Yes, you must notify BOTH parties of your Facilitator status.

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MYTH #3: If you’re not sure what your agency status is at the time you submit a written confirmation of agency status, then it’s probably safest to check several boxes …since one of them is sure to be correct!

Wrong! Since a licensee can only wear one agency hat at a time in a transaction, then checking more than one box on a confirmation of agency status means that only one box is correct. [We’re hoping, of course, that one of the boxes checked represents the licensee’s true agency status.] Anything else that is checked constitutes a false statement. It may be done in ignorance – which doesn’t speak well for the licensee’s professionalism – but it is still a misrepresentation of facts. Similarly, if a licensee is the only licensee in the transaction, then checking one status on the “buyer side” of the confirmation of agency status form and checking a different status on the “seller side” of that form is also incorrect and an indicator of misrepresentation.

MYTH #4: You can’t sell your own listing without changing your agency status in the transaction (to facilitator).

While this restriction may be true according to some office policies (and every licensee should be familiar with and abide by his/her office policies), nothing in Tennessee law or the REALTOR® Code of Ethics requires a change of status in this situation.

A seller’s agent can assist and even advise a prospective buyer in almost every way, throughout a transaction, to help that buyer purchase the agent’s listing …as long as the seller’s agent remains loyal to the seller and does not compromise or ever work against his/her seller-client’s best interests. The buyer, of course, needs to be told that the seller’s agent represents the seller and is bound to promote the seller’s interests.

MYTH #5: Designated agency is intended solely for in-house transactions.

Quick Review How many boxes should be checked on the confirmation of agency status? ONE – the one that correctly identifies the agent’s true status.

Quick Review Do you automatically become a Facilitator by selling your listing to an unrepresented buyer? No, you can still remain the seller’s agent and assist an unrepresented buyer. Is it okay to let an unrepresented buyer assume you represent them as long as you haven’t said it directly? No, unrepresented buyers should be clearly told you do not represent them.

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Wrong again. Before explaining why this is untrue, it’s important to understand traditional (i.e., non-designated) agency. In the absence of designated agency, any agency relationship that one person in an office establishes – with either a buyer or seller – makes every licensee in the office an agent of that buyer or seller …even if they never have any contact with, or even know the name of that buyer or seller. Unintended dual agency and rampant conflicts of interest can therefore occur. Designated agency changes this. With designated agency, the agency relationship exists solely between the licensee and his/her client, to the exclusion of all other licensees in his/her office.

Designated agency was created simply to accommodate a quite proper practice that reflects the real-world operation of most real estate transactions ...in which an individual agent (and not usually an entire office or company) functions as the advocate for his/her client, regardless of whether the other party in the transaction is represented by someone in another firm or someone in the same firm.

MYTH #6: The managing broker remains a dual agent even if the buyer and seller are each represented by different designated agents in the broker’s office.

This too is incorrect. Some other states with a designated agency provision in their laws make the managing broker of the office a dual agent in this situation. There is no national, standardized definition of designated agency. NAR, the “Internet,” and other states may choose to define it in any way they wish, but their definition is neither binding nor (in this case) applicable to Tennessee.

Quick Review: True or False? You must use designated agency for in-house listings. False! You should follow your office agency policy. If you use traditional agency as office policy at the outset of agency relationships, an agency relationship exists between you and all the clients of all members of your firm. True! Traditional agency establishes an agency relationship between a client and all the members of a firm.

Quick Review When two licensees in the same firm are representing the buyer and seller as designated agents for their respective clients, what is the status of the managing broker? The managing broker does not have an agency relationship with either client and would, for practical purposes, be considered a Facilitator (if their assistance was required to complete the transaction).

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MYTH #7: An office-wide agency policy is unnecessary. Each licensee should just select the type of agency (or non-agency) relationship that works best for him or her.

This is extremely dangerous from a legal standpoint. The possibilities for unintended misrepresentations and conflicts of interest in this situation are almost endless. Consider just one example:

Any traditional, non-designated agency relationship with a buyer or seller actually obligates everyone in the office to represent that buyer or seller, whether the other licensees in the office realize it or not. Let’s assume that one of the licensees in the office has negotiated a listing agreement as a non-designated agent. Another licensee in the office then tells a potential buyer that he/she is a facilitator in a transaction when in fact the licensee unknowingly represents the seller whose property this buyer wants to purchase. This is misrepresentation. [Even if it never gets to the point of a contract to purchase, misrepresentations of agency status can occur simply in showing properties when agency relationships are chosen at licensees’ individual discretion.]

MYTH #8: Licensees in TN are still subject to the common law of agency. Prior to 1996, the common law of agency – which embodies a set of general principles rather than specific guidance – led to both licensee confusion and even inconsistent rulings in various court cases in Tennessee. “Common law” represents the accumulation of court cases across the nation, not all of which ever agree. Since decisions in those cases have not always been consistent, clear answers to some licensee questions about agency were impossible. Tennessee’s law, however, now specifies that it “shall supersede common law to the extent common law is inconsistent with the provisions of this part.” Tenn. Code Ann. § 62-13-402(c).

Quick Review Assume your office uses traditional (non-designated) agency as office policy. You take a buyer client to view a home listed by another agent in your office. Is there a conflict? Yes! In this situation, you would represent both the buyer and the seller, presumably without either party’s knowledge.

Quick Review

In the event that common law is inconsistent with the provisions of Tennessee’s agency law (statute), which prevails? The provisions of Tennessee’s agency law (statutes) will prevail.

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Agency Self-Check Answer the following questions as a class, making sure to clearly explain the right answer.

1. There’s no real difference between traditional and designated buyer and seller agency.

(False) True False

2. Designated agency is only used for in-house transactions. True False (False – Designated agency is and can be used as office policy for all agency

relationships by agents within a company.)

3. “Facilitator” and “Transaction Broker” mean the same thing.

True (True) False

4. Traditional agency creates an agency relationship between a client and every agent within

a firm. True (True) False

5. Which of the following applies to designated agency?

a. It creates an agency relationship between the client and ALL the agents in the office.

b. It can only be used in in-house transactions. c. It requires an agent to keep clients’ information confidential from other agents in

the office. (Correct)

6. You must be either a disclosed dual agent or a facilitator to receive “both sides” of the commission in a transaction. True False (False – you could also sell your listing to an unrepresented buyer.)

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Agency Office Policy Scenarios

Scenario 1: In her office, Kay uses traditional buyer agency and designated seller agency as office policy. Is this problematic? Why or why not? This is problematic. In practice, when a new buyer signs an agency agreement, they’re legally represented by every member of the office. Listing agents in the office are being legally bound to represent every buyer signing on with any agent in the office. This presents a serious conflict of interest. In practice, this approach wouldn’t make any sense.

Scenario 2: In his office, Frank uses designated buyer agency and traditional seller agency as office policy. Is this problematic? Why or why not? This is also problematic. In Frank’s office, all agents represent all the sellers’ properties listed by the company. When a buyer signs on, the agents would be representing the seller of any in- house property shown.

Imagine if two buyer-clients of different agents in the firm both wanted to make an offer on one of the firm’s listings (listed by a third agent). First, both buyers’ agents would’ve had access to confidential information regarding the seller. Also, what might the clients think about the conflict of interest here – both competing offers are going through agents in the same firm who both also represent the seller?!?!

Scenario 3: Gerri uses Traditional Buyer and Seller Agency as office policy for all the agents in her office. Is this problematic? Why or why not? As long as all the agents in Gerri’s office are aware of the benefits and drawbacks of traditional buyer and seller agency and are making appropriate disclosures to their clients, this situation represents a legitimate office agency policy option.

Scenario 4: Tom uses Designated Buyer and Seller Agency as office policy for the agents in his company. Is this a legitimate office policy? This represents a legitimate office policy as long as ALL the agents in Tom’s office are using the policy consistently and following appropriate guidelines for this type of agency, i.e. avoiding discussion of clients’ confidential information with other agents in the office.

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Lesson 8: Ethics in Real Estate

Ethical Demands in TN Law and TREC Rules

Obeying the law…. 62-13-310. Affiliate broker relationship to broker.

(a) Whenever the contractual relationship between a broker and affiliate broker is terminated, the present broker shall immediately sign and date the change of affiliation form prescribed by the commission. The affiliate broker may act under a contract with another broker upon completion and transmittal to the commission of such form, accompanied by the fee established pursuant to § 62-13-308. Such affiliate broker shall assure that the completed form and fee are promptly transmitted, and that the affiliate broker’s license is prominently displayed in the new broker’s principal place of business.

(b) Licensees may not post signs on any property advertising themselves as real estate agents unless the firm’s name appears thereon in letters the same size or larger than those spelling out the name of the licensee.

(c) Any unlawful act or violation of any of the provisions of this chapter by any affiliate broker may not be cause for the suspension or revocation of the license of the broker with whom the affiliate broker is affiliated. [Acts 1973, ch. 181, §§ 12(c), (e), 16(b); 1981, ch. 473, §§ 10, 11; T.C.A., § 62-1324; Acts 1982, ch. 864, § 8; 1990, ch. 946, § 5.]

62-13-311. Revocation of license by court — Reinstatement.

Whenever any person, partnership, association, company, firm or corporation claiming to have been injured or damaged by the gross negligence, incompetency, fraud, dishonesty or misconduct on the part of any licensee following the calling or engaging in the business herein described, files suit upon such claim against such licensee in any court of record in this state and recovers judgment thereon, such court may as part of its judgment or decree in such cases, if it deem it a proper case in which so to do, revoke the certificate of license granted hereunder, and such certificate of license shall not be reissued to such licensee except upon the consenting vote of six (6) of the members of the commission in favor of such reissuance. [Acts 1973, ch. 181, § 15; T.C.A., § 62-1325; Acts 1982, ch. 864, § 9.]

62-13-312. Discipline — Refusal, revocation or suspension of license —

Downgrading of licenses — Automatic revocation.

(a) The commission may, upon its own motion, and shall, upon the verified complaint in writing of any person setting forth a cause of action under this section, ascertain the facts and, if warranted, hold a hearing for reprimand, or for the suspension or revocation of a license.

(b) The commission shall have power to refuse a license for cause or to suspend or revoke a license where it has been obtained by false representation, or by fraudulent act or

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conduct, or where a licensee, in performing or attempting to perform any of the acts mentioned herein, is found guilty of: (1) Making any substantial and willful misrepresentation; (2) Making any promise of a character likely to influence, persuade or induce any

person to enter into any contract or agreement when the licensee could not or did not intend to keep such promise;

(3) Pursuing a continued and flagrant course of misrepresentation or making of false promises through affiliate brokers, other persons, or any medium of advertising, or otherwise;

(4) Misleading or untruthful advertising, including use of the term ‘‘Realtor’’ by a person not authorized to do so, or using any other trade name or insignia or membership in any real estate association or organization, of which the licensee is not a member;

(5) Failing, within a reasonable time, to account for or to remit any moneys coming into the licensee’s possession which belong to others;

(6) Failing to preserve for three (3) years following its consummation records relating to any real estate transaction;

(7) Acting for more than one (1) party in a transaction without the knowledge and consent in writing of all parties for whom the licensee acts;

(8) Failing to furnish a copy of any listing, sale, lease, or other contract relevant to a real estate transaction to all signatories thereof at the time of execution;

(9) Using or promoting the use of any real estate listing agreement form, real estate sales contract form, or offer to purchase real estate form which fails to specify a definite termination date;

(10) Inducing any party to a contract, sale or lease to break such contract for the purpose of substitution in lieu thereof a new contract, where such substitution is malicious or is motivated by the personal gain of the licensee;

(11) Accepting a commission or any valuable consideration by an affiliate broker for the performance of any acts specified in this chapter, from any person, except the licensed real estate broker with whom the licensee is affiliated;

(12) Being convicted in a court of competent jurisdiction of this or any other state, or federal court, of forgery, embezzlement, obtaining money under false pretenses, bribery, larceny, extortion, conspiracy to defraud, or any crime or any similar offense or offenses, or pleading guilty or nolo contendere to any such offense or offenses;

(13) Violating any federal, state, or municipal law prohibiting discrimination in the sale or rental of real estate because of race, color, religion, sex or national origin;

(14) Violating any provision of this chapter, any rule duly promulgated and adopted thereunder, or the terms of any lawful order entered by the commis-

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sion; (15) In the case of a licensee, failing to exercise adequate supervision over the

activities of any licensed affiliate brokers within the scope of this chapter; (16) In the case of a licensee, failing within a reasonable time to complete such

administrative measures as may be required by the commission upon the transfer or termination of any affiliate broker employed by the broker;

(17) Paying or accepting, giving or charging any undisclosed commission, rebate, compensation or profit or expenditures for a principal, or in violation of this chapter;

(18) Failing to disclose to an owner the licensee’s intention or true position if the licensee, directly or indirectly through a third party, purchases for itself or acquires or intends to acquire any interest in or any option to purchase property which has been listed with the licensee’s office to sell or lease;

(19) Engaging in the unauthorized practice of law;

(20) Any conduct, whether of the same or a different character from that hereinbefore specified, which constitutes improper, fraudulent or dishonest dealing; or

(21) Violating any provision of the Tennessee Time-Share Act, compiled in title 66, chapter 32, part 1, or any rule duly promulgated thereunder.

(c) The commission may, in addition to or in lieu of any other lawful disciplinary action against a broker pursuant to this section, order that such broker be downgraded to “affiliate broker” status.

(d) The director of the division of regulatory boards or the director’s duly authorized representatives may, at all reasonable hours, examine and copy such books, accounts, documents, or records as are relevant to a determination of whether a licensee has properly maintained and disbursed funds from escrow or trustee accounts required hereunder. In case of refusal to permit the access accorded by this subsection, the director or the director’s authorized representatives may pursue the remedies provided by § 4-5- 311(b) for disobedience to any lawful agency requirement for information. Such refusal shall also constitute grounds for the commission to suspend or revoke a license.

(e) The sole purpose of this section is to provide guidelines for disciplinary actions taken by the Tennessee real estate commission against licensees found guilty of the violations listed herein.

(f) Whenever any licensee pleads guilty or is convicted of any offense enumerated in this chapter, the licensee must within sixty (60) days notify the commission of that conviction and provide the commission with certified copies of the conviction. The licensee’s license shall automatically be revoked sixty (60) days after the licensee’s conviction unless the licensee makes a written request to the commission for a hearing during that sixty-day period. Following any such hearing held pursuant to this section, the commission in its discretion may impose upon that licensee any sanction permitted by this chapter.

(g) Whenever the commission revokes or suspends the license of a salesperson, an affiliate

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broker, or a broker, then any school or instructor approval which the licensee holds shall also be revoked. Whenever a licensee surrenders a real estate license, any school or instructor approval which such licensee holds shall also be revoked. [Acts 1973, ch. 181, § 14; 1981, ch. 372, § 33; 1981, ch. 473, § 12; T.C.A., § 62-1326; Acts 1984, ch. 810, § 4; 1986, ch. 893, § 1; 1988, ch. 919, §§ 7-9; 1990, ch. 946, §§ 6, 7; 1994, ch. 595, § 1.]

Scavenger Hunt: Prohibited Acts Locate the following items in the preceding text to complete the quoted statements related to

prohibited acts.

1. Failing, within a reasonable time, to account for or to remit any _ coming into the licensee’s possession which belong to others. (moneys)

2. Engaging in the unauthorized practice of (law)

3. Using or promoting the use of any real estate listing agreement form, real estate sales

contract form, or offer to purchase real estate form which fails to specify a (definite termination date)

4. Making of false promises through affiliate brokers, other persons, or any medium of

, or otherwise (advertising)

5. Paying or accepting, giving or charging any undisclosed commission, , compensation or profit or expenditures for a principal, or in violation of this chapter (rebate)

6. Failing to preserve for years following its consummation records relating to

any real estate transaction (three)

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And your duties to customers and clients… 62-13-403. Duty owed to all parties.

A licensee who provides real estate services in a real estate transaction shall owe all parties to such transaction the following duties, except as provided otherwise by § 62-13-405, in addition to other duties specifically set forth in this chapter or the rules of the commission:

(1) Diligently exercise reasonable skill and care in providing services to all parties to the transaction;

(2) Disclose to each party to the transaction any adverse facts of which licensee has actual notice or knowledge;

(3) Maintain for each party to a transaction the confidentiality of any information obtained by a licensee prior to disclosure to all parties of a written agency or subagency agreement entered into by the licensee to represent either or both of the parties in a transaction. This duty of confidentiality extends to any information which the party would reasonably expect to be held in confidence, except for information which the party has authorized for disclosure, information required to be disclosed under this part, and information otherwise required to be disclosed pursuant to this chapter. This duty survives both the subsequent establishment of an agency relationship and the closing of the transaction;

(4) Provide services to each party to the transaction with honesty and good faith;

(5) Disclose to each party to the transaction timely and accurate information regarding market conditions that might affect such transaction only when such information is available through public records and when such information is requested by a party.

(6) Timely account for trust fund deposits and all other property received from any party to the transaction; and

(7)(A) Not engage in self-dealing nor act on behalf of licensee’s immediate family, or on behalf of any other individual, organization or business entity in which the licensee has a personal interest without prior disclosure of such interest and the timely written consent of all parties to the transaction; and

(B) Not recommend to any party to the transaction the use of services of another individual, organization or business entity in which the licensee has an interest or from whom the licensee may receive a referral fee or other compensation for the referral, other than referrals to other licensees to provide real estate services under the Tennessee Real Estate Broker License Act of 1973, without timely disclosing to the party who receives the referral, the licensee’s interest in such referral or the fact that a referral fee may be received. [Acts 1995, ch. 246, § 5; 1996, ch. 772, §§ 5, 6.]

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62-13-404. Duty owed to licensee’s client.

Any licensee who acts as an agent in a transaction regulated by the Tennessee Real Estate Broker License Act of 1973 owes to such licensee’s client in that transaction the following duties, to:

(1) Obey all lawful instructions of the client when such instructions are within the scope of the agency agreement between licensee and licensee’s client;

(2) Be loyal to the interests of the client. A licensee must place the interests of the client before all others in negotiation of a transaction and in other activities, except where such loyalty duty would violate licensee’s duties to a customer under § 62-13-402 or a licensee’s duties to another client in a dual agency; and

(3) (A) Unless the following duties are specifically and individually waived, in writing by a client, a licensee shall assist the client by:

(i) Scheduling all property showings on behalf of the client; (ii) Receiving all offers and counter offers and forwarding them promptly to the

client; (iii) Answering any questions that the client may have in negotiation of a

successful purchase agreement within the scope of the licensee’s expertise; and (iv) Advising the client as to whatever forms, procedures and steps are needed

after execution of the purchase agreement for a successful closing of the transaction.

(B) Upon waiver of any of the duties in subdivision (3)(A), a consumer shall be advised in writing by the consumer’s agent that the consumer may not expect or seek assistance from any other licensees in the transaction for the performance of the duties in subdivision (3)(A).

[Acts 1995, ch. 246, § 6; 1996, ch. 772, § 7; 2006, ch. 738, § 2.]

Scavenger Hunt: Duties Locate the following items in the preceding text to complete the quoted statements related to

duties owed to customers and clients.

1. Provide services to each party to the transaction with and good faith. (honesty)

2. Diligently exercise in providing

services to all parties to the transaction. (reasonable skill and care) 3. This duty survives both the subsequent establishment of an agency relationship and

the closing of the transaction: (confidentiality) 4. Not engage in nor act on behalf of licensee’s immediate

family…without prior disclosure of such interest and the timely written consent of all parties to the transaction. (self-dealing)

5. Disclose to each party to the transaction any of which

licensee has actual notice or knowledge. (adverse facts)

Agency Duties in Practice

Case Study: Faulty Furnace Mary Gardner listed Bruce Shepherd’s property. While the property was under contract with a buyer, the buyer’s inspection uncovered that the gas furnace was emitting unacceptable levels of carbon monoxide and needed replacement. The buyer subsequently backed out of the contract.

When Mary explained to Bruce that the situation with the furnace would have to be disclosed to other potential buyers, he flatly refused and insisted she say nothing. She then terminated the listing agreement.

Three months later, Mary happened to notice Bruce’s property was back on the market. Curious, she contacted the new listing agent, Sarah Cooper, and inquired about the furnace. When Sarah spoke with Bruce about it and discovered he had not replaced the furnace, she explained that the furnace posed a significant health risk and potential buyers would have to be told.

Bruce was extremely upset that Mary told Sarah about the furnace. He proceeded to file a complaint against Mary.

Discuss: Do you believe Mary’s actions violated the law? Why or why not? In this scenario, Mary acted correctly. Specifically, although confidentiality extends beyond an agency relationship, property defects are not considered confidential.

Agency Duties Self-Check For the following list of duties, categorize them as duties to clients or all/other parties as defined by Tennessee law and the Code.

Duties: (C=Clients, A=All Parties)

1. Honesty and good faith A 2. Reasonable skill and care A 3. Loyalty C 4. Reveal adverse facts about a property A 5. Confidentiality A 6. Obey lawful instructions C 7. Present all offers in a timely manner A 8. Protect and promote interests C 9. Execute agreements in writing A 10. Schedule property showings C 11. Answer questions to negotiate purchase agreement A 12. Disclose timely and accurate information upon request A 13. Present a true picture in advertising A 14.Not engage in self-dealing A

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Case Study: Vacancy Henry Hay lists a property for Nick Pecko, who is enlisted in the Army and has just been transferred. They agree that Henry will try to market the property aggressively and get a quick sale. A few days later, Nick proceeds to move.

After month goes by and Nick doesn’t hear anything from Henry, he makes a weekend trip to check on the property. He discovers a sign on the property that says, “Vacant – Open” and no one present. When he inquires about it, he discovers Henry left the key in a lockbox and gave anyone who called the combination, instructing them to call him back if they wanted to make an offer.

Nick is furious and files a complaint against Henry.

Discuss: Do you think Henry’s actions violated the law? Why or why not? Henry’s actions as described would likely NOT be interpreted as having fulfilled the fiduciary duty of reasonable care and diligence. His actions may constitute negligence in the eyes of a court, at the very least by failing to ensure the property remained secure. While Henry’s actions fulfill legal requirements related to minimum services, he did not fulfill his agreement to “market the property aggressively.”

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And the REALTOR® Code of Ethics … 1. The Code of Ethics is based on the concept of:

A. Let the buyer beware.

B. Let the seller beware. C. Let the public be served.

D. Let the public fend for themselves. Answer: C

2. The Code of Ethics was adopted: A. To establish standards of conduct for the industry.

B. Only as “recommendations” for proper conduct. C. In 1931.

D. Long after real estate licensing laws were in existence. Answer: A

3. The Preamble to the Code:

A. Sets out aspirational ideals that REALTORS® should strive to attain. B. Can be used as the basis for disciplinary action against a REALTOR®.

C. Requires REALTORS® to meet the standards set forth in the Preamble. D. Is a summary of all the articles included in the Code.

Answer: A

4. The Code is primarily enforced through:

A. The NATIONAL ASSOCIATION OF REALTORS®. B. State associations of REALTORS®.

C. Local associations of REALTORS®. D. None of the Above.

Answer: C

5. The two basic types of complaints that are handled by local associations are:

A. Ethics complaints and license law complaints. B. License law complaints and mediation matters.

C. Ethics complaints and requests for arbitration. D. License law complaints and requests for arbitration.

Answer: C

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6. The three committees or groups that are involved in the Code enforcement process are: A. Grievance Committee, Appeals Committee, and Board of Directors

B. Professional Standards Committee, Arbitration Committee, and Mediation Committee C. Professional Standards Committee, Mediation Committee, and Board of Directors

D. Grievance Committee, Professional Standards Committee, and Board of Directors Answer: D

7. A request for mandatory arbitration is based on: A. A monetary dispute between REALTORS® (principals) in different firms. B. A legal claim for damages between REALTORS® in different firms. C. A monetary dispute between salespersons in different firms.

D. A legal claim for damages between a salesperson and his/her broker. Answer: A

8. A request for arbitration is most commonly based on a dispute about:

A. A listing commission. B. A cooperative (selling) commission.

C. An earnest money dispute. D. A claim for damages.

Answer: B

9. The concept of procuring cause is used to decide commission disputes in arbitration cases. Which of the following statements is true about the concept of procuring cause?

A. No predetermined rules of entitlement are allowed to be used by a hearing panel. B. A hearing panel should not consider the entire course of conduct in the transaction and should decide the case on one factor. C. Whether an agent abandoned or estranged a buyer is not an important factor in determining which party will receive an award. D. Generally, a hearing panel should split an award and should not make the award all to one party or the other. Answer: A

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10. REALTORS® have an obligation to protect and promote the interests of their clients but also have an obligation to treat all parties:

A. Fairly. B. Honestly.

C. Fairly and honestly. D. Politely.

Answer: B

11. If a listing broker tells another broker, “I’ll cooperate with you,” the other broker:

A. May assume that the listing broker will pay him/her a cooperative commission.

B. May not assume that the listing broker will pay him/her a cooperative commission.

C. Has an arbitration claim against the broker if the listing broker fails to pay a cooperative commission.

D. Has a legal claim for the cooperative commission against the listing broker if the listing broker refuses to pay a cooperative commission.

Answer: B

12. A cooperating broker in a transaction may: A. Claim to have “sold” the property involved in the transaction.

B. Post a “sold” sign on the property involved in the transaction after the closing (with the buyer’s permission). C. Not claim to have “sold” the property but may state that they have “participated” or “assisted” in the transaction. D. Both A and B.

Answer: D

13. Disciplinary action in an ethics complaint may NOT include: A. A fine not to exceed $5,000.

B. A letter of reprimand. C. A requirement that the respondent attend a course of education.

D. A written apology. Answer: D

Summary Points Important points to remember:

• Tennessee law is consistent with the ethical requirements of NAR’s

REALTOR Code of Ethics.

• An agency relationship creates duties of loyalty, obedience to lawful instructions, disclosure, confidentiality, reasonable care and diligence and accounting.

• While you are required to be loyal to your client, you are also required to be

honest with all parties.

• At a minimum, Tennessee law requires you to assist your seller clients by scheduling all property showings on behalf of the seller; receiving all offers and counter offers and forwarding them to the seller; answering questions in negotiation within their expertise; and advising the seller as to which forms, procedures and steps are needed for a successful closing.

• Tennessee law requires you to make specific disclosures related to agency

relationships, terms of commission and adverse facts related to a property or transaction. However, some of these are not required of commercial real estate agents pursuant to Tenn. Code Ann. § 62-13-405. However, these same issues are covered by the Code of Ethics and may require disclosure.

• Ethical guidelines differ from state law in that they also contain strict

requirements for your dealings with other professionals. Pay special attention to these requirements as they will likely be the portion of the Code with which you are least familiar.

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CHANGES TO THE NUMBERING OF TAR FORMS The TAR Forms Committees looked at the various forms which are offered to its members and determined that they could be made a bit more user friendly. One of the main issues which members have is quickly finding the form to suit their particular needs. When TAR began providing forms to its members a little over fifteen years ago, there were far fewer forms than there are today. Early in the forms’ history, a numbering system was developed where in similar forms were grouped together in a numerical sequence, preceded with an “F”. However, over the years, new forms have been introduced and others have been deleted from the form library. As a result, the numerical sequence is no longer indicative of where a form might be found. In addition, commercial forms are located sporadically throughout the numbering system rather than being grouped together. Both the residential and the commercial forms committees decided to introduce a new numbering sequence to make using the TAR forms a bit easier for its members. There will be two different sets of forms – one for residential forms (which will include residential, lots and lands, and farms) and will begin with the letters “RF”. The other will be for commercial forms and will begin with the letters “CF”.

100 Series

New Form Name Old Number CF 101 Commercial Exclusive Seller Listing Agreement F66 CF 103 Commercial Exclusive Agency Listing Agreement F91 CF 104 Commercial Exclusive Open Listing Agreement F92 CF 121 Commercial Exclusive Leasing Agreement F67 CF 124 Commercial Open Listing Agreement (for Lease) F68 CF 151 Commercial Listing Mutual Release NEW CF 161 Agreement to Show Commercial Property NEW

200 Series

New Form Name Old Number CF 201 Commercial/Industrial Real Property Disclosure F51 CF 209 Commercial Lead Based Paint Disclosure (for Purchase) NEW

300 Series

New Form Name Old Number CF 305 Commercial Personal Interest Disclosure NEW CF 307 Commercial Referral for Service Disclosure NEW

400 Series

New Form Name Old Number CF 401 Commercial Purchase and Sale Agreement F65 CF 402 Commercial Letter of Intent (for Purchase of Property) F78 CF 421 Commercial Lease Agreement (Single Tenant) F69 CF 422 Commercial Lease Agreement (Multi-Tenant) F70 CF 423 Commercial Letter of Intent (for Lease) F79 CF 441 Commercial Sublease Agreement F72 CF442 Commercial Sublease Consent Agreement F73 CF443 Commercial Lease Guaranty F74 CF 444 Commercial Lease Termination F75 CF 461 Commercial Mutual Non-disclosure and Confidentiality F90 Agreement CF 481 Commercial Trust Money Disbursement and Release of NEW Commercial Purchase and Sale Agreement CF482 Commercial Escrow Agreement NEW CF 483 Commercial Option Agreement NEW

500 Series

New Form Name Old Number CF 501 Exhibit A to Commercial Purchase and Sale Agreement F44 (Legal Description) CF 502 Exhibit B to Commercial Purchase and Sale Agreement F52 (Due Diligence Documents) CF 503 Exhibit C to Commercial Purchase and Sale Agreement F53 (Additions to Seller's Closing Documents) CF 504 Exhibit D to Commercial Purchase and Sale Agreement F54 (Seller's Warranties and Representations) CF 507 Exhibit A to Commercial Listing_ Agreement NEW

600 Series

New Form Name Old Number CF 601 Amendment to Commercial Listing Agreement NEW CF 603 Amendment to Commercial Lease Agreement NEW CF 621 Addendum to Commercial Purchase and Sale Agreement NEW CF 623 Commercial Right to Continue to Market Property NEW Addendum CF 624 Commercial Seller's Notice to Buyer of Receipt of NEW Acceptable Offer CF 632 Commercial Lease Addendum NEW CF 651 Counter Offer to Commercial Purchase and Sale NEW Agreement

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CF 652 Counter Offer to Commercial Lease Agreement NEW CF 653 Amendment to Commercial Purchase and Sale Agreement NEW CF 657 Commercial Closing Date / Possession Date Amendment NEW CF 664 Amendment to Commercial Lease Agreement F71

700 Series

New Form Name Old Number CF 701 Commercial Referral Agreement F57 CF702 Commercial Compensation Agreement between Listing NEW and Selling Broker CF703 Commercial Lease Commission Assumption Agreement F76 CF704 Notice of Agreement to Pay Leasing Commission F11 CF 705 Release of Notice of Agreement to Pay Leasing F77 Commission on Commercial Property CF 706 Commercial Interpleader NEW CF707 Commercial Special Stipulations Language NEW CF 711 Commercial Vendor List NEW CF 715 Additional Signature Blocks for Commercial Documents NEW CF 716 Additional Signature Blocks for Commercial Purchase and NEW Sale Agreement and Counter Offers