Broker Law FAQ

Question: I am the listing broker for a builder who put a property under contract with Buyer #1. Buyer #1 attempted to back out of the contract, claiming that his loan was not approved. My builder wants to keep Buyer #1’s earnest money and Buyer #1 objects. The builder would like to resell the property to Buyer #2. Can this be done while there is a dispute about the earnest money surrounding contract #1?

Answer: The dispute about the earnest money is supposed to be just that: a dispute about money. It should not affect title to real property. Buyer #1 is not claiming any interest in the property and is instead asserting that his contract has terminated. If this remains the case, then the builder can enter into a contract with Buyer #2.

However, a concern in these cases is that Buyer #1 may change his mind, or, in retaliation for not getting his earnest money back, Buyer #1 may record the contract. While the recording of the contract would be slander of title (because the buyer is not asserting an interest in the property), it happens nevertheless.

If Buyer #1 recorded his contract, this would cloud the title and hinder the builder’s ability to close with Buyer #2. Sellers have a dilemma in addressing this possibility. One solution is to place a contingency in contract #2 excusing the builder’s obligation to close if Buyer #1 clouds the title. But the insertion of such language can scare-off Buyer #2. Yet leaving the issue unaddressed and undisclosed for the second transaction also exposes the seller to risk for breach of contract, and exposes the builder and his broker to risks for failing to disclose a defect. The builder should seek legal counsel about how to strike the balance between protecting the builder from a slanderous recording of contract #1 and making the deal with Buyer #2.

Question: I am the broker of my office. One of my licensees (the “Investor”) would like to buy one of our company listings (listed by a different licensee in my office) for her own use or future resale. The Investor became interested in the property three months after my office took the listing. Can my office assist the Seller in putting this transaction together by attaching the Real Estate Commission’s Licensee Buyout Addendum to the contract?

Answer: No, the Commission’s Licensee Buyout Addendum to Contract to Buy and Sell Real Estate does not apply to this type of transaction.

Real Estate Commission Rule F-11 requires the use of the Buyout Addendum when a licensee enters into a contract to purchase a property:

(1) concurrent with the listing of such property; (2) as an inducement or to facilitate the property owner’s purchase of another property; or (3) continues to market that property on behalf of the owner under an existing listing contract.

Generally, a licensee should use the Addendum when she will continue to market the property because she is only agreeing to buy it to make the deal. If a licensee actually wants to own the property, using the addendum does not solve the conflict of interest between the Broker’s duties to the seller and the Investor’s desire to get the best deal.

In its Position on Use of “Licensee Buyout Addendum” the Commission states:

If the listing licensee or broker desires to acquire a listed property solely for personal use or future resale and not as an inducement to the owner, the licensee or broker is advised to (1) clearly sever their agency or listing relationship in writing; (2) renounce the right to any commission, fee or compensation in conjunction with acquisition of the listed property; and, (3) advise the owner to seek other assistance, representation or legal advice.

This is sound advice.

Question: I am the listing broker for a property which is under contract. The contract contains a financing contingency, but no contingency for the sale of the buyer’s existing home. Neither the buyer nor the selling broker disclosed that the buyer had an existing home to sell or that it was necessary for the buyer to sell the home in order to qualify for the financing to buy the listed property. Buyer has not sold his home and cannot qualify for the financing without a sale. Has the buyer breached the contract?

Answer: The financing contingency in the contract excuses the buyer’s obligation to close if the financing is not approved. Therefore, the buyer has not breached the contract. However, a related issue is: Has the (1) buyer or (2) selling broker breached an obligation to disclose the buyer’s need to sell the buyer’s existing home?

C.R.S. ‘ 12-61-807(2)(b)(VII) obligates the selling broker as a transaction-broker to disclose:

To any prospective seller . . . all adverse material fact actually known by the broker including but not limited to adverse material fact pertaining to the buyer’s . . . financial ability to perform the terms of the transaction . . .

The same obligation applies to buyer’s agents.

There is no precedent addressing whether this section of the statute requires a selling broker to disclose the need for a buyer to sell an existing home. However, the “conventional wisdom” is that a buyer’s need to sell an existing property is a “material fact pertaining to the buyer’s . . . financial ability to” buy the replacement residence. Therefore, if the selling broker was aware of the buyer’s need to sell the home, the seller may have a claim against the selling broker.

However, it is even less clear whether the same obligation applies to buyers. There is no precedent that Frascona, Joiner and Goodman is aware of addressing this question. The seller should be advised to seek legal counsel.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN