Friday, June 24, 2016

Understanding New Wis. Stat. s. 452.133(4m)

I have written much recently about the Chapter 452 Modernization Act.  In my last post, I introduced the Act's distinction between "firms" and "licensees" to explain real estate firm responsibility for misrepresentations made by licensees associated with that firm.  To review, buyers and sellers enter into contracts with real estate firms, such as Shorewest, First Weber, Re/Max, or EXIT.  The individual real estate agent providing services to the buyer or seller is known as a licensee - he or she is individually licensed as a Real Estate Broker or Real Estate Salesperson by the State of Wisconsin.

Wis. Stat. s. 452.133 has long spelled out the duties of real estate agents.  As of right now (most of the Chapter 452 Modernization Act does not take effect until July 1st), this section is titled "Duties of brokers."  Wis. Stat. s. 452.133(1) spells out broker duties to all parties in a transaction, while s. 452.133(2) sets forth broker duties to clients.  The word "broker" is somewhat confusing.  Wis. Stat. s. 452.01(2)(a) defines "broker" in terms of a "person," while the standard WB-1 Residential Listing Contract uses "broker" in terms of a firm with real estate agents.

At first glance, Wis. Stat. s. 452.133(1) and (2) appear to clarify that it is the firm that owes duties to parties and clients:
(1) Duties to all parties to a transaction. A firm providing brokerage services to a party to a transaction owes all of the following duties to the party:
(a) The duty to provide brokerage services honestly and fairly.
(b) The duty to provide brokerage services with reasonable skill and care.
(c) The duty to timely disclose in writing all material adverse facts that the firm knows and that the party does not know or cannot discover through reasonably vigilant observation, unless the disclosure of a material adverse fact is prohibited by law.
(d) The duty to keep confidential any information given to the firm in confidence, or any information obtained by the firm that the firm knows a reasonable person would want to be kept confidential, unless the information must be disclosed by law or the person whose interests may be adversely affected by the disclosure specifically authorizes the disclosure of particular information. The firm shall continue to keep the information confidential after the transaction is complete and after the firm is no longer providing brokerage services to the party.
(e) The duty to provide accurate information about market conditions that affect the transaction, within a reasonable time after a request for such information by the party, unless disclosure of the information is prohibited by law.
(f) The duty to safeguard trust funds and other property held as required by rules promulgated under s. 452.13 (5).
(g) When the firm is negotiating on behalf of a party, the duty to present contract proposals in an objective and unbiased manner and disclose the advantages and disadvantages of the proposals.
(2)Duties to clients. A firm providing brokerage services to a client owes the client the duties that the firm owes to a party under sub. (1) and all of the following additional duties:
(a) The duty to loyally represent the client's interests by doing all of the following:
1. Placing the client's interests ahead of the interests of the firm.
2. Placing the client's interests ahead of the interests of persons in the transaction who are not the firm's clients by not disclosing to persons in the transaction other than the firm's clients information or advice the disclosure of which is contrary to the interests of a client of the firm, unless the disclosure is required by law.
(am) The duty to provide, when requested by the client, information and advice to the client on matters that are material to the client's transaction and that are within the scope of the knowledge, skills, and training required under this chapter.
(b) The duty to disclose to the client all information known by the firm that is material to the transaction and that is not known by the client or discoverable by the client through reasonably vigilant observation, except for confidential information under sub. (1) (d) and other information the disclosure of which is prohibited by law.
(c) The duty to fulfill any obligation required by the agency agreement, and any order of the client that is within the scope of the agency agreement, that is not inconsistent with another duty that the firm has under this chapter or any other law.
(d) The duty to negotiate on behalf of the client.

OK, so licensees are responsible for their own misrepresentations, but firms are solely responsible for brokerage services?  Not exactly.  Enter brand new s. 452.133(4m):

Duties and prohibitions; application to licensees.
(a) Subject to par. (d), a firm's duties under sub. (1) extend to each licensee associated with that firm, and each licensee associated with a firm owes the same duties to a party that the firm owes to that party under sub. (1).
(b) Except as provided in s. 452.134 (3) (b) and subject to par. (d), a firm's duties under sub. (2) extend to each licensee associated with that firm, and each licensee associated with a firm owes the same duties to a client of the firm that the firm owes to that client under sub. (2).
(c)
1. Subject to par. (d), a subagent's duties under sub. (4) (a) extend to each licensee associated with that subagent, and each licensee associated with a subagent owes the same duties to a party that the subagent owes to that party under sub. (4) (a).
2. Subject to par. (d), the prohibitions that apply to a subagent under sub. (4) (b) extend to each licensee associated with that subagent, and no licensee associated with a subagent may take any action that the subagent is prohibited from taking under sub. (4) (b).
(d) The duties and prohibitions under pars. (a) to (c) extend only to a licensee providing brokerage services to a party to the transaction.

While the phrasing is rather clumsy, the gist appears to be that both real estate firms and individual licensees can be held responsible for breaching the duties owed under ss. 452.133(1) and (2).  In fact, even licensees affiliated with the firm who do not provide actual brokerage services to anyone in the transaction can still be held personally responsible if they violate confidentiality, provide inaccurate information about market conditions per a party's request, or fail to safeguard trust funds.  In sum, personal responsibility (and thus personal liability) for both real estate firms and individual licensees will apparently be the rule under Wis. Stat. s. 452.133.      

Sunday, June 5, 2016

Wis. Stat. s. 452.12(3) - Firm Responsibility For Agent Misrepresentations

In my last post, I discussed seller liability for misrepresentations made by real estate agents.  Today, I discuss firm responsibility for these misrepresentations.

In my series of posts discussing the Chapter 452 Modernization Act, I have consistently used the legally meaningless term "real estate agent" because I wanted to focus on the important changes to Chapter 452 rather than the technical distinctions between "licensees," "brokers," and "firms."  As a practical matter, buyers and sellers need to know that their listing contract or buyers' agency agreement is not with an individual real estate agent.  Buyers and sellers contract with business entities such as Shorewest REALTORS, First Weber Group, RE/MAX, and EXIT Realty.  Your individual real estate agent is an associate of the business entity that you contracted with.  That's an important distinction for buyers and sellers to bear in mind in the event that they want to terminate their contract.

The Chapter 452 Modernization Act reduces the broker or real estate firm's responsibility for the actions of its real estate agents.

Wis. Stat. s. 452.12(3) used to state the following: "Subject to s. 452.139 (3), each broker shall supervise, and is responsible for, the brokerage services provided on behalf of the broker by any broker, salesperson, or time-share salesperson who is an employee of the broker."

The new s. 452.12(3) says, "Subject to s. 452.139 (3), a firm is responsible for the brokerage services provided on behalf of the firm by a licensee associated with the firm only to the extent that the firm fails to comply with s. 452.132 and any rules promulgated under s. 452.07 (1m) with respect to that licensee."

While the old statute appeared to presume broker or firm responsibility for the acts of individual real estate agents, the new statute appears to presume the exact opposite.

The "shall supervise" language from the old statute is gone, though it has been replaced by Wis. Stat. s. 452.132:

(1) A firm shall supervise the brokerage service activities of each licensee associated with the firm, including by doing all of the following:
(a) Ensuring that a supervising broker for the firm complies with sub. (4).
(b) Providing a licensee with reasonable access to a supervising broker for the purpose of consultation regarding real estate practice issues.
(2) A firm shall do all of the following:
(a) Provide each licensee associated with the firm with a written statement of the procedures under which the firm and licensees associated with the firm must operate with respect to handling leases, agency agreements, offers to purchase, and other documents and records relating to transactions.
(b) Notify each licensee associated with the firm where a copy of the rules promulgated by the board related to the conduct, ethical practices, and responsibilities of licensees may be obtained.
(c) Before a licensee becomes associated with the firm and at the beginning of each biennial licensure period, ensure that the licensee holds a valid license.
(3) A firm shall be responsible for the custody and safety of all documents and records relating to transactions submitted to the firm as required under sub. (6) (b).
(4)
(a) A supervising broker for a firm, as determined under sub. (5), shall review all of the following prior to the closing of a transaction in accordance with par. (b):
1. All agency agreements, offers to purchase, leases, and other documents that are executed by the parties and records relating to the transaction that are used by a licensee associated with the firm and submitted to the firm as required under sub. (6) (b).
2. All trust account records relating to the transaction.
(b) The review under par. (a) shall be limited to confirming that a written disclosure statement to a customer or client has been provided by a licensee associated with the firm in accordance with s. 452.135, confirming that any applicable form approved by the board has been used and the forms have been completed by filling in the blanks in a manner consistent with the structure of the form, and communicating to the licensee any errors in how the forms were completed that are apparent on the face of the document and known to the person reviewing the document.
(5)
(a) A firm that is a licensed broker business entity shall delegate the performance of the duty to supervise licensees associated with the firm to a supervising broker who is a licensed individual broker.
(b) A firm that is not a licensed broker business entity may delegate the duty to supervise licensees associated with the firm to a supervising broker who is a licensed individual broker, but in the absence of a specific supervising broker delegation, the firm itself is deemed to be the supervising broker for that firm.
(c) A delegation under par. (a) or (b) shall be written and signed by or on behalf of the delegating firm, identify the duty delegated, and be signed by the broker to whom the delegation is made.
(d) A firm may delegate the duty to supervise licensees to more than one supervising broker.
(6)
(a) A licensee associated with a firm shall be responsible for discussing with the party with whom the licensee is working with or representing any error communicated to the licensee as provided in sub. (4) (b), and the party shall determine whether to request any changes to address the error.
(b) A licensee associated with a firm shall submit to the firm in a timely manner all agency agreements, offers to purchase, leases, and other documents that are executed by the parties and records related to the brokerage services provided on behalf of the firm and transactions that are used or received by the licensee.

In short, the Chapter 452 Modernization Act clearly tells real estate firms what they must do in order to properly supervise their licensees and avoid liability for negligent supervision.  None of these supervisory requirements appear designed to prevent misrepresentations made by individual real estate agents.

While it is tempting to cite this provision of the Chapter 452 Modernization Act as another example of how the legislature protected campaign contributors at the expense of Wisconsin homeowners, we must bear in mind that real estate agents are independent contractors.  Imposing broad supervisory requirements on real estate firms creates the risk that independent real estate agents will be treated as employees for tax and regulatory purposes.  While I continue to believe that real estate agents should be allowed to pursue wage claims against their firms for unpaid commissions, many other labor laws make absolutely no sense as applied to real estate agents, such as minimum wage laws.  The application of labor laws to independent real estate agents would deter real estate firms from using such agents, which would in turn reduce the number of real estate agents that buyers and sellers can choose from.  The risk of courts and federal agencies treating independent real estate agents as "employees" is real, see, e.g., Monell v. Boston Pads LLC, 471 Mass. 566 (2015), so I can understand why the WRA acted to preserve the independent contractor status of real estate agents through convincing the legislature to amend Wis. Stat. s. 452.12(3) and enact Wis. Stat. ss. 452.132 and 452.38.