What’s the minimum?
A look at the issues regarding the level of services
a seller’s broker must provide.

Occasionally, a buyer’s agent may receive instructions from a listing broker to submit offers and to negotiate directly with the seller. Is a real estate licensee prohibited from negotiating with another broker’s client? Does the buyer’s broker breach any laws or ethical duties if he negotiates directly with the seller? Does the listing agent violate any duties by giving such instructions? These are the types of questions that have recently been presented to the Texas Real Estate Commission for debate and clarification.

Exclusive agency means exclusive
Section 1101.652(b)(22), Occupations Code (the Real Estate License Act) provides that a real estate licensee faces disciplinary action if the licensee “ … negotiates or attempts to negotiate the sale, exchange, or lease of real property with an owner, landlord, buyer, or tenant with knowledge that that person is a party to an outstanding written contract that grants exclusive agency to another broker in connection with the transaction.”

There are no exceptions to §1101.652(b)(22) in the Real Estate License Act or in TREC rules. (NAR’s Code of Ethics contains a similar prohibition under Standard of Practice 16-13 but also contains an exception that dealings with a client of another broker may be carried on by a broker who does not represent the client, provided that the client’s broker consents. However, state law trumps the Code of Ethics in any conflict.)

Section 1101.652(b) of the Real Estate License Act contains 32 grounds on which TREC may revoke or suspend a license or take other disciplinary action against a licensee. The grounds include provisions such as negligence, dishonesty, fraud, discrimination, commingling, and numerous other standards of conduct. Section 1101.652(b) is the heart of the enforcement responsibilities that TREC is charged to police among its licensees. Section 1101.652(b) enumerates the standards of conduct by which all licensees are expected to conduct business. Since there are no exceptions to the standard imposed under §1101.652(b)(22), a buyer’s broker may not negotiate with a seller if the buyer’s broker knows that the seller is a party to a listing agreement that grants an exclusive agency to another broker.

What must a listing broker do?
Clearly, §1101.652(b)(22) contemplates that the listing broker will negotiate for the seller. TREC affirmed this basic standard many decades ago when it adopted a rule, known as 22 TAC §535.2(b), which states: “A real estate broker acting as an agent owes the very highest fiduciary obligation to the agent’s principal and is obliged to convey to the principal all information of which the agent has knowledge and which may affect the principal’s decision. A broker is obligated under a listing contract to negotiate the best possible transaction for the principal, the person the broker has agreed to represent.” (Emphasis added.)

The duty to negotiate under a listing contract is required not only under TREC rules but is also a contractual duty imposed on the listing broker, because it is well settled that law, existing when a contract is formed, becomes part of the contract. Valid agency rules and regulations, promulgated within the agency’s authority, have the force and effect of law.

How do you define negotiate?
The question that follows is what must the listing broker actually do in order to satisfy the obligation to negotiate the best possible transaction for the seller. Section 535.2 of TREC’s rules does not define what “negotiate the best possible transaction” means. This issue, and other related issues, is being debated before TREC. When a rule or statute does not contain a definition of a term, the common definition of that term applies. The common definition of the term negotiate is: “ … to transact business; to bargain with another respecting a purchase and sale; to conduct communications or conferences with a view to reaching a settlement or agreement. It includes not only conversation in arranging terms of a contract but also that which passes between parties or their agents in the course of or incident to the making of a contract.”

It is important to note that under a different rule (22 TAC §535.15), TREC has stated that “locating and bringing together a buyer and seller constitutes negotiations if done from within the borders of Texas.” This rule was originally adopted to establish jurisdiction by TREC over certain activities and is not an exclusive definition of negotiate. It only lists one type of activity that may constitute a negotiation. To read it as an exclusive definition might render other provisions of the Real Estate License Act and TREC rules meaningless. Actually, it requires two types of activities: locating a buyer and seller; and bringing the buyer and seller together. In order to “bring parties together,” a broker must communicate or confer with the parties or their representatives.

The purpose of bringing the parties together is for the parties to reach an agreement involving the sale or lease of real estate. Another TREC rule (22 TAC 535.16(b)) provides, in pertinent part, “When a broker accepts a listing, the broker enters into a fiduciary relationship with the principal, whereby the broker is obligated to make diligent efforts to obtain the best possible price for the principal.” This rule is a reflection of well-settled common law that provides that: a broker is usually understood to be one who is engaged by others to negotiate contracts involving real estate; he is recognized as an agent to negotiate contracts for real estate or between other persons and for which he is paid; and the relationship between a broker and his customer is that of a principal and agent with corresponding fiduciary duties. In order to fulfill his duty to negotiate (either under the common definition of negotiate or under TREC rules), the listing broker must, at a minimum, use diligence in locating an acceptable buyer; bring the parties together to reach an agreement; and communicate or confer with the parties or their representatives for the purpose of obtaining the best possible price for the seller. Clearly, in order to fulfill this obligation, the broker must be present and available to his client during negotiations.

When service becomes too limited
So, with the foregoing in mind, what is the problem? The problem arises when a listing broker instructs the buyer’s broker (through the MLS or otherwise) to negotiate directly with the seller. A few sellers may occasionally want to employ a broker who will provide only a limited amount of service (for example, limited marketing assistance or placement of the listing into MLS, but not to negotiate). Many times such services are referred to as “discount services” or “limited services.” How does a broker assist such sellers and at the same time meet his obligations under the Real Estate License Act and TREC rules? How does a buyer’s broker communicate offers from his client to a seller who has contracted with a broker not to negotiate for the seller? A close analysis of existing rules and obligations provides answers to these questions.

What is a buyer’s broker to do?
The first practical question in this analysis is from a buyer’s broker who is aware of his obligation not to negotiate with a seller who is represented by a listing broker. The question is whether he, at the instruction of the listing broker, may deliver an offer to the seller. TREC rules provide that a license is not required for the performance of secretarial, clerical, or administrative tasks (22 TAC §535.1(d)). The sole act of delivery of a document falls under the common understanding of a clerical or administrative task. Assuming that no other activity for which a license is required occurs with the delivery of the offer to a particular location, the delivery of the offer, alone, would appear not to violate the Real Estate License Act or TREC rules. Because the definition of negotiate includes not only conversations in arranging terms of contract but also that which passes between parties or their agents in the course of or incident to the making of a contract, the prudent approach seems to demand that such a delivery occur only with the consent of the listing broker, that a copy of the offer be sent to the listing broker, and that the buyer’s broker not otherwise “negotiate” with the seller when delivering the offer.

The second question is whether the buyer’s broker may ignore the request of a listing broker to present, submit, or deliver an offer directly to the seller and, instead, deliver the offer directly to the listing broker. The simple answer is yes, and in such a case the listing broker is obligated to convey to the seller that the broker has received an offer (22 TAC 535.156(a)). The buyer’s broker may be concerned about whether the listing broker will promptly communicate the offer to the seller. The listing broker’s refusal or purposeful delay to communicate receipt of the offer may violate the listing broker’s duty to act diligently with competence, trustworthiness, and integrity. A licensee must place the interest of the principal above the licensee’s own interest (22 TAC 535.156(b)), and the licensee has a duty to keep his principal informed at all times of significant information applicable to the transaction for which he is acting as the agent.

The follow-up question involves the dilemma that the buyer’s broker may face if the seller, after receiving the delivered offer, calls the buyer’s broker directly (either on his own initiative or at the instruction of the listing broker) and attempts to negotiate the offer. What is the lawful response from a buyer’s broker to a seller in such a situation? The response may vary depending on the facts of the particular situation. Most likely, the buyer’s broker will need to communicate that direct negotiations with the seller places the buyer’s broker in peril of violating §1101.652(b)(22) of the Real Estate License Act.

One possible resolution will be for the listing broker to be present during the negotiations. The buyer’s broker may suggest to the seller that the listing broker can participate in person if the negotiations are face-to-face, by conference call if negotiations are by telephone, or by receipt of copies of correspondence if negotiations are in writing. The listing broker’s presence during negotiations, alone, could fulfill the listing broker’s obligation to negotiate the best possible transaction for the seller. The listing broker simply needs to be aware of and included in the negotiations as negotiations take place. The seller retains the right to make decisions during negotiations and direct his positions during negotiations.

If the seller is unable or not willing to include the listing broker in the negotiations, the buyer’s broker might choose to suggest that the seller communicate any offer or counteroffer in writing and to provide a copy of any such offer or counteroffer to the listing broker. The buyer’s broker would then have the obligation to convey the written offer or counteroffer to the buyer. Under this approach, the buyer’s broker should not otherwise negotiate directly with the seller. Any response from the buyer or the buyer’s broker to the seller’s offer or counteroffer should also be delivered to the listing broker and the seller (assuming that the instruction from the listing broker to deliver offers to the seller remains). Alternatively, the seller may choose to dismiss his broker prior to entering into negotiations, but the buyer’s broker should not suggest that the seller dismiss his broker, as that may give rise to an interference claim. The seller’s dismissal of the listing broker may also raise some compensation questions, which this article does not address.

The key for the buyer’s broker is to make the seller aware of the buyer’s broker’s obligations and the need to respect the exclusive agency relationship between the listing broker and the seller. The buyer’s broker should not negotiate directly with the seller and should attempt to include the listing broker in all negotiations.

Recommendations to clear up the issue
The Texas Association of REALTORS® has suggested that TREC adopt a rule that it believes resolves the foregoing questions in a concise approach and clarifies the listing broker’s obligations under existing law. The association believes that its proposal does not change existing duties and responsibilities under current law and rules. Specifically, the Texas Association of REALTORS® has suggested that TREC adopt amendments to its rules in three simple parts:

First, add a definition of negotiate under 22 TAC 535.2(b), which would provide that the listing broker must, at a minimum, do three things in order to satisfy the listing broker’s obligation to negotiate:

1) Accept and present any offers and counteroffers
2) Assist the client in developing, communicating, and presenting any offer or counteroffers
3) Answer the client’s questions.

Second, add a rule that prohibits the listing broker from instructing the buyer’s broker to negotiate directly with the seller, so that the buyer’s broker does not violate §1101.652(b)(22) of the Real Estate License Act.

Finally, add a clarification in the rules that provides that the act of “delivering” of an offer is an administrative function and not a negotiation if the listing broker consents to the delivery, a copy of the offer is delivered to the listing broker, and the licensee delivering the offer engages in no other act that constitutes a negotiation when delivering the offer.

Hopefully, TREC will move soon to adopt a clarifying rule—one that permits brokers to negotiate various levels of services and, at the same time, ensures that brokers provide basic minimum services to their clients (such as answering questions, submitting offers, and receiving offers) so as not to place other brokers in peril of violating existing law. Nonetheless, it is important for all brokers to be aware of their duties and obligations to their clients and to respect the agency relationships of other brokers.

Ron Walker is director of legal affairs for the Texas Association of REALTORS®.

Legal citations for this article are available by request at texasrealtor@texasrealtors.com.

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