Hotline Highlights: Best of the PAR Legal Hotline

Yesterday, PAR’s internal legal team presented a Best of the Legal Hotline webinar that covered topics including agency, cooperating compensation, the inspection contingency and the mortgage contingency.  

The webinar began with a reminder that under Pennsylvania law, all agency contracts belong to the broker. Many questions that come into the PAR Legal Hotline are about topics that are within the broker’s control and we are unable to answer. “We can address the legality or whether it might possibly violate the terms of the settlement, but at the end of the day, the contract is between the broker and the client,” said Chief Legal Officer Hank Lerner. Agents should be talking to their broker about brokerage policies on things like fees charged to clients, cooperating compensation, recovering unpaid fees and payments for in-house transactions. 

Lerner also indicated that the Legal Hotline is getting lots of calls about designated agency, and he provided a lesson on what designated agency is and how it works. The definition of a designated agent is in the Real Estate Licensing and Registration Act and refers to “one or more licensees designated by the employing broker, with the consent of the [client], to act exclusively as the agent or agents for the [client] to the exclusion of all other licensees within the broker’s employ.”

Brokers should have a policy on designated agency, so you know whether you are acting as a designated agency or not, according to Lerner. “We’re seeing this question a ton these days in regard to showing agents,” said Lerner, and the answer is the same: “The broker should have a policy on who is acting exclusively as the agent or agents for the client to the exclusion of all other licensees.” The hotline attorneys are also asked if, because of the NAR settlement, the showing agent who is working with the buyer needs a second buyer agency agreement with the buyer. Lerner reminded viewers that “the contract belongs to the broker, not the agent.” The showing agent who works for the same brokerage is covered under the broker’s contract, but agents should confirm whether they are designated agents and make appropriate changes to the contract when necessary. 

The next topic was seller concessions and cooperative compensation, covered by Associate Counsel Kacy Clouser. The hotline attorneys have noticed an uptick in the volume of questions and some confusion as to the difference between the two. Buyer brokers, in particular, noted Clouser, may not have realized that there is a difference because, at closing, the settlement company tended to handle the collection and distribution of money. “While it may not seem like a big deal,” said Clouser, “it does make a difference in terms of timing and how they are addressed in the contracts.” 

Clouser reminded members to ask the right questions when inquiring with listing agents about whether any compensation is being offered to the buyer broker so they know which form to use. Clouser explained that when using the Cooperating Broker Compensation Agreement (Form CBC), fees must be negotiated before the offer is made as opposed to being included in the offer. “This is required due to Standards of Practice 3-1 and 16-16 of the Code of Ethics, which both create a need for the CBC to be taken care of prior to the offer being made.” In terms of negotiating concessions, they can go in paragraph 3(A) of the Standard Agreement for the Sale of Real Estate (Form ASR), said Clouser.  

Next was a review of the inspection contingency timeline in Form ASR, as the hotline is seeing an influx of questions about the contingency, hinting that buyers may be starting to elect inspections again. Associate Counsel Paige Perrucci addressed the three timelines set out in Form ASR and the importance of knowing when each time period begins and ends.

“During the contingency period,” said Perrucci, “buyers must not only conduct their elected inspections but also decide whether and how to proceed based on the inspection reports.” If the buyer sends a written corrective proposal prior to the end of the contingency period, it “does not accelerate the rest of the time frames,” said Perrucci. Also, by submitting a written corrective proposal, “the parties are locked into the negotiation period for whatever timeframe they’ve agreed to,” and “at no time during the negotiation period should the buyer take actionable steps to terminate the agreement.” Only after the negotiation period ends without a mutually acceptable written agreement, Perrucci explained, can the buyer terminate the agreement. 

Perrucci went on to state that the Buyer’s Reply to Inspections (Form BRI) can be used as the written corrective proposal, while the Change in Terms Addendum (Form CTA) can be used to document the parties’ final agreement. She also noted that when the hotline attorneys receive calls about inspections that are “for informational purposes only,” the help we can provide is going to be limited due to the fact that those words can mean different things to different people, and since PAR did not write those words in Form ASR, we don’t know what they were intended to mean. If there is a problem or a question about what those words mean, the client should contact an attorney. 

Lastly, I reviewed the mortgage contingency clause of Form ASR — what it does and does not do, and what rights are given to each party under the contingency. The mistake we consistently see is “people taking the structure of the inspection contingency and applying it to the mortgage contingency.” However, they are written differently and follow different procedures. 

I reminded viewers that there are certain parts of paragraph 8 in Form ASR that are going to apply to the transaction if the buyer is getting financing at all, even if they do not elect the contingency. “Getting a mortgage and electing the contingency are not the same thing, so hopefully you aren’t telling your sellers that since the buyers waived the contingency, there won’t be a mortgage or it’s a cash deal.” 

Looking at the language of the contingency, I pointed out that it protects the buyer’s deposit if they cooperate with the mortgage process but are just unable to get financing — meaning the buyer will not be in breach of the agreement if they don’t get the loan for closing. However, the buyer’s deposit will not be protected if they terminate the agreement because they get a loan denial. In paragraph 8(F)(3), “it says explicitly that termination of the agreement by the buyer due to a mortgage denial may demonstrate bad faith by the buyer and they may end up forfeiting their deposit to the seller.” The seller, not the buyer, is the party given the right to terminate under the mortgage contingency. This is true even if the property under-appraises and the LTV is exceeded. I finished by stating, “If your buyers want the absolute right to terminate as the result of an appraisal, they must include an appraisal contingency [addendum].” 

The webinar then wrapped up with Lerner reminding members that the Legal Hotline attorneys are limited in the types of questions we can answer and services we provide. For example, questions about MLS policy should go to the MLS and we will not review your advertisement or proposed contract language. 

You can view this webinar’s recording online.