Buyer Representation And Broker Compensation Agreements Revisited (Part 2)

by David Hamerslough

Last month’s article discussed C.A.R.’s newly released Buyer Representation and Broker Compensation Agreement (“BRBC”) and some of the issues to consider when using that form. This month’s article completes that discussion. The two articles should be read in conjunction with each other.

Broker Authority And Obligations

Paragraphs 6(A)-(D) identify the Broker’s authority to act on behalf of the Buyer and the obligations that the Broker has to the Buyer pursuant to the contract. These include locating potential properties, presenting offers, facilitating the escrow process, ordering reports and investigations, scheduling and attending meetings with professionals chosen by the Buyer, providing the Buyer with a list of professionals or vendors who may assist the Buyer in investigating and/or evaluating the Property (provided that such a request is made by the Buyer), and, if the Buyer again requests that the Broker do so, assisting the Buyer in their financing by making referrals to lenders or assisting in obtaining a loan prequalification.

Paragraph 6(B) requires the Broker to perform a reasonably competent and diligent visual inspection of the accessible areas of the Property and to disclose all facts materially affecting the value or desirability of the Property that are revealed by this inspection. Documenting this activity takes place in the TDS or in an AVID.

Paragraph 6(C) obligates the Broker to deliver or communicate to the Buyer any disclosures, materials, or information received by, in the personal possession of, or personally known to the agent signing the BRBC on behalf of the Broker. This obligation would include historical documents or knowledge based upon any prior involvement with the Property.

Buyer Obligations

Paragraphs 7(A)-(F) identify the Buyer’s obligations, which include an obligation to act in good faith with respect to those issues within the scope of the BRBC (¶ 7(A)), to provide relevant personal and financial information, including proof of funds and a preapproval/prequalification letter to the Broker within five (5) calendar days of execution of the BRBC (¶ 7(B)), to read all documents provided to Buyer and to seek desired assistance from appropriate professionals such as those referenced in the Buyer’s Investigation Advisory and the Buyer Transactional Advisory (¶ 7(C)), to pay for all reports, investigations, and meetings arranged by the Broker on Buyer’s behalf (¶ 7(D)), to notify the Broker in writing (using the C.A.R. form BMI) of any issue material to Buyer and request information on or alert the Broker to concerns regarding “any particular subject of interest or importance to Buyer” (¶ 7(E)), and indemnify, defend, and hold harmless Broker from all claims and litigation, including attorneys’ fees and costs, arising from any incorrect information supplied by the Buyer or from any material issues that Buyer fails to disclose in writing to Broker (¶ 7(F)).

Other Forms That Relate To The Broker And Buyer Obligations

C.A.R has created a new form (the Buyer Transactional Advisory or “BTA”), which is attached to the BRBC (¶ 10). Paragraph 10 also attaches a Buyer’s Investigation Advisory (“BIA”) and gives the option of attaching the Statewide Buyer And Seller Advisory (“SBSA”) and any local advisory.

The BTA reiterates the Buyer’s obligations as well as those obligations the real estate licensee will and will not perform. The BTA also refers to the BMI. The BMI is a C.A.R. form that obligates the Buyer to identify any material issues they may have with respect to the purchase of property in general or of a specific property. The BIA, the SBSA, and any local advisory that is attached identify, among other things, issues that the Buyer should evaluate with respect to any property.

Paragraph 10 does not attach the BMI, and this document is currently not bundled with the BRBC on the Zipforms platform. This is a potential issue because of the terms set forth in ¶ 7(D) described above and the potential impact on the indemnity obligation in ¶ 7(E). It will be important for the Broker to provide the Buyer with the BMI or, presumably, a comparable document(s) that allow(s) the Buyer to identify any material issues. Other examples of such comparable documents would be a buyer questionnaire or a series of emails and/or text messages. Oral communications are another means by which material issues can be identified. Irrespective of whether the BMI or some other communication is used on this subject, the better practice would be for the Broker to confirm in writing the delivery, receipt, and return of the BMI or confirm in writing that any email, text messages, and/or oral communications constitute the transmittal of the material issues.

The BMI is a form that has been in the C.A.R. library since approximately 2005 but, in my experience, has not been widely used. The language in ¶ 7(E) of the BRBC and ¶ 2 of the BMI require the Buyer to request information on, or express concerns regarding, “any particular area of interest or importance to the Buyer.” The BMI then defines this information as “Material Issues.”

One issue is whether the Buyer is going to identify Material Issues that might exist with respect to any property they purchase or to a specific property that has been identified. Another issue is the scope of Material Issues that the Buyer is obligated to identify. The language in ¶ 7(E) of the BRBC and ¶ 2 of the BMI is very broad and arguably includes any generic preferences, Buyer sensitivities, time and financial constraints, concerns over the condition of the Property, the ability to expand the Property, uses of the Property that may conflict with current zoning ordinances, concerns over school districts, mold or allergy concerns, etc.

In my experience with the BMI, I have observed, among other things, the following: (1) the Buyer has not identified any Material Issues; (2) the Buyer expresses concerns in a very general sense, such as “bedroom and bath count,” “price,” etc.; (3) the Buyer fills out a BMI at the outset of their property search but does not update the BMI once a specific property has been identified or does not update it based upon the receipt of any disclosures, reports, or other information; or (4) communications occur between the Broker and Buyer identifying Material Issues but these are not identified in the BMI.

Another issue to consider given the scope of the information requested in the BMI arises when there is a dual agency. The issue concerns where the Buyer has provided confidential information regarding their financial position, motivation, bargaining position, or other personal information that might impact the price that the Buyer was willing to pay or could afford to pay. The Broker needs to recognize this issue and attempt to prevent inadvertent disclosure of that confidential information.

Potential Impact Of ¶¶ 6 And 7 Of The BRBC, The BMI, The BTA, And Other Transaction Forms

Paragraphs 6 and 7 of the BRBC and the accompanying BMI, BTA, and BIA forms attempt to identify contractual obligations on the part of the Buyer and the Broker. The Buyer and Broker should not assume that the outcome of any dispute between them or between the seller and listing broker will be evaluated and/or decided only pursuant to the terms, conditions, and contractual obligations set forth in these documents. The outcome will always turn on, among other things, the specific facts and circumstances, the terms and conditions of all transactional documents, the knowledge, training, skill, and experience of all parties, the questions asked, and the advice and counsel that has been provided. The outcome will also turn on the application of

California law, the laws of agency (including fiduciary responsibilities), common-law negligence, and other legal theories. Each of those theories carries with it a potentially different remedy.

Attorneys’ Fees Under The BRBC

Paragraph 8 of the BRBC provides that in the event of any dispute arising out of the BRBC, the Buyer and Broker will each be responsible for paying their own attorneys’ fees and costs except as otherwise specified in ¶ 9(A). Paragraph 9(A) contains a mediation clause, which requires the Buyer and Broker to mediate any dispute or claim between them before resorting to arbitration or a court action.

Unlike the mediation clause in the C.A.R. residential listing agreement, the consequence for failing to mediate under ¶ 9(A) of the BRBC is the potential payment of attorneys’ fees by the “losing party” to the “prevailing party.” The term “losing party” is not defined and is not one that has any precise legal definition. On the other hand, the term “prevailing party” is a term that has a legal definition, albeit not always a precise one. Issues may arise based on the interpretation given to these terms, but irrespective of these issues there is now a potential for direct exposure to attorneys’ fees and costs where one does not otherwise exist under other C.A.R. forms.

There are a number of other potential concerns regarding the issue of attorneys’ fees and costs based upon the language in ¶¶ 8 and 9 as well as the provisions of ¶ 7(E) and (F). Please consult a qualified California real estate attorney to review them.

Final Comments

With regard to entity Buyers, the BRBC provides that if the box is checked and the paragraph completed, then a representative capacity signature disclosure is not required. One of the requirements is for the Legally Authorized Signer to Deliver to the Broker within three (3) days of signing evidence of the authority to act in the designated capacity. Please distinguish between documentation that demonstrates that the LAS has the authority to act in that capacity versus the fact that the entity itself has authorized the purchase of the Property. Also, the term “Deliver” was capitalized, but no definition of that term is provided in the BRBC. The BRBC does not address the subject of delivery and whether designated electronic delivery will be used and, if so, the designated means of delivery (e.g., email, text, phone, or other). My suggestion would be to address these issues in either ¶ 11 (Other Terms) or in an addendum. Please note that any addendum will need to be separately signed and dated, as ¶ 12 of the BRBC provides that it is otherwise an integrated agreement.

In conclusion, there are a number of issues that need to be considered if the C.A.R. BRBC is going to be used. My suggestion is that a real estate licensee using the BRBC take the time to familiarize themselves with the form and the potential issues before doing so.

About David Hamerslough

In his 35 years of practice, Dave Hamerslough has litigated and arbitrated residential and commercial real estate disputes on behalf of brokers and agents, buyers and sellers, and landlords and tenants. Dave also acts as a mediator and arbitrator of real estate disputes. He also teaches courses and writes articles on these subjects to brokers, agents, attorneys, and consumers.

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