Written Buyer Agency Agreements Required

Effective January 1, 2024, SB 5191 amended Washington’s real estate brokerage statute (RCW 18.86).  Among the changes was a new requirement that brokers representing buyers in residential transactions enter into a written brokerage services agreement with their clients.  The agreement must provide for a set term, exclusivity (or not), and compensation payable to the broker. 

The requirement for a written agreement is an opportunity to bring clarity to the broker-client relationship.  Previously, such agreements were optional, and therefore uncommon, in residential transactions.  This absence often made it difficult to resolve disputes arising out of the relationship.  The challenge for residential buyers now is that they are generally less knowledgeable than brokers about the issues arising from the broker-client relationship.  And the standard form for such an agreement will undoubtedly be Form 41 published by the Northwest MLS, which represent brokers. 

For example, the existence of written buyer representation agreements should help clarify when and which buyer’s broker/agent is entitled to a commission.  In the absence of written agreements, the entitlement to the commission was based on the somewhat murky “procuring cause” doctrine.  Now, the entitlement depends on having a written agreement in place. 

But buyers should also be aware of other issues, including the following:

  • Dual Agency.  SB 5191 requires the agreement to state whether the client consents to his broker being a “limited dual agent”, if the buyer decides to buy property listed by his broker.  Given that residential real estate is dominated by a small number of large brokerage firms, buyers who don’t consent would face a substantially smaller pool of properties to buy because his broker would only be able to show him properties listed by other brokerage firms.  Assuming that a buyer would not want that, Form 41 includes a dual agency consent provision.  The statutory obligations of a dual broker to his client are substantially less than those of a broker representing only one party, as would be appropriate in that circumstance.
  • Exclusivity.  If the parties agree on the representation being exclusive, the buyer might want to clearly delineate the Area to be covered by the agreement.  It might be possible for the buyer to have separate exclusive agreements with different agents/brokers representing the buyer in different geographical areas.  
  • Compensation.  The agreement sets the minimum compensation payable to the buyer’s broker.  The buyer will be responsible for paying his broker to the extent the seller doesn’t.  The broker’s justification for this position is that the buyer should be willing to pay the stated compensation if the broker fulfills the buyer’s interest in buying a house.  The trickier question is what happens to the excess if the seller is offering more compensation to the buyer’s broker than the buyer is obligated to pay. 
  • Specific Obligations.  On the other hand, Form 41 is silent on the specific services to be provided by the broker for such compensation (though language could be added to the blank “Other” section).  The broker statute lists the general duties of brokers, such as a good faith and confidentiality.  But it is likely worthwhile to discuss the broker’s specific services and consider if the agreement should describe them. 
  • Term/Tail.  Buyers should be aware of a provision, common to such agreements, entitling the broker to compensation if the buyer enters into a purchase agreement within a certain period after the expiration of the agreement – if the property was shown to the buyer by broker (or in the case of nonexclusive agreements, the buyer’s broker previously made an offer on the buyer’s behalf).  This provision appropriately makes it harder for buyers to avoid the commission simply by waiting for the Term to expire.    

SB 5191 requires that the written agreement include the buyer’s acknowledgement of having received the “Law of Real Estate Agency” pamphlet, which brokers are required to provide to consumers.  This pamphlet, recently revised, summarizes Washington real estate law on matters relating to the broker-client relationship.  A good broker will make sure his client has received the pamphlet and a good client will, in fact, read it. 

Priority of Subsequent Advances Restored

Passed in 2023, HB 1420 (effective July 23, 2023) clarified that all sums secured by a mortgage or deed of trust in Washington have priority over all subsequently recorded encumbrances (except as provided by mechanics’ lien statutes, RCW 60.04), regardless of when the sums are disbursed or whether the disbursements are obligatory or optional.  This clarification is stated in a new section (RCW 61.12.190) of Washington’s foreclosure statute. 

The clarification was necessary to overrule a 2022 Washington Supreme Court case (Commencement Bank v Epic Solutions).  In that case, the court held that a similar provision, because it was set out in the mechanics’ lien statute, only applied to subsequent construction loan advances. 

Largely because the language of the provision in question does not expressly state that it applies solely to construction loans – to the contrary, it refers to “all liens, mortgages, deeds of trust, and other encumbrances” (emphasis added), real estate lenders and their attorneys have long understood that it applied to all loans secured by real estate.  The court did not seem to recognize how its holding would affect a multitude of existing loans.  Thus, a legislative fix was appropriate. 

Recording Fee Increased to Fund Racial Reparations?

In Washington state, recording fees collected by county auditors are dictated by state statute.  In 2023, Washington state enacted HB 1474, which created the “Covenant Housing Program”.   To fund this program, since January 1, 2024, counties have been required to collect an additional $100 to record a real estate document (e.g., a deed or a deed of trust).  This is roughly a 50% increase.

The funds collected are to be dedicated to funding studies that document racial barriers to homeownership and to set up programs in the Department of Commerce to provide down payment and closing cost assistance to “economically disadvantaged classes of persons identified in a covenant homeownership program study” (RCW 43.181.030).  Such classes may include classes of persons who “share . . . common characteristics such as, race, national origin, or sex.”

In fact, the stated purpose of the program is to “to address the history of housing discrimination due to racially restrictive real estate covenants in Washington state.”  The bill further states that “[g]enerations of systemic, racist, and discriminatory policies and practices have created barriers to credit and homeownership for black, indigenous, and people of color and other historically marginalized communities in Washington state.” 

The legislation does not reference the fact that in 1948 the U.S. Supreme Court invalidated such racially restrictive covenants.  Pretty much every lawyer in America covered Shelley v. Kraemer in law school.  As a result, title policies routinely disclaim coverage for violations of racial covenants (i.e., such covenants are presumed to be unenforceable).  And in 1968, the federal Fair Housing Act made it illegal to discriminate based on race, color, religion, sex, or national origin in the sale, rental or financing of housing. According to the legislature, though, that wasn’t enough. 

Buyer Agency Agreements Becoming More Prevalent?

Most brokers I’ve talked to prefer to avoid seeking a buyer agency agreement with their clients.  Such agreements generally require the buyer to pay a certain commission to his broker to the extent the seller doesn’t.  Fee arrangements are rarely an easy conversation topic and, in any case, the commission is expected to be paid by the seller and shared between the seller and buyer brokers.

But a Seattle Times article today suggests that discount listing brokers, who charge commissions well below the heretofore common 6% of the purchase price, may be forcing buyer’s brokers into seeking written agency agreements with their clients if the buyer’s brokers wants to be paid more than half of what the discount broker is charging.

While this may be a disruptive development, buyer agency agreements can be helpful.  Unlike the situation described in the article, the agreement should be presented upfront so there can be a thoughtful discussion of the terms and the buyer can evaluate the broker’s experience and knowledge.  Presumably a prospective buyer who signs an agency agreement will carefully consider who to hire and, having done so, will feel more committed to working with that broker.  And the buyer agreement should overcome a broker’s reluctance to show his client properties listed with discount brokers.  The economics for the buyer shouldn’t change much since a seller paying less than a 6% commission shouldn’t expect as high a purchase price.  On the other hand, this seems almost certain to open a discussion as to how much a buyer’s broker’s services are worth, though experienced brokers should fare relatively well.

But I’m reminded of Yogi Berra’s quip — “In theory, there’s no difference between theory and practice.  In practice, there is.”  We’ll see what happens.

 

Washington Passes New LLC Act

An entirely new statute governing limited liability companies became Washington law earlier this year.  Effective January 1, 2016, the new Act will govern new LLCs and all existing LLCs, except with respect to causes of action and rights accrued before then.  For the effort involved, the changes, as compared to the current LLC Act, appear to be fairly modest

According to the Partnership and LLC Committee of the Washington State Bar Association, which drafted the new Act, the one goal was to make it more “user-friendly”.  For example, unlike the current Act, it helpfully contains a single list of provisions that may not be overridden by an LLC operating agreement and a list of actions requiring unanimous member consent, though the latter may be modified by an operating agreement.

As for substantive changes, the new Act clarifies that an LLC may be managed by a board, similar to a corporate board.  The current Act is silent on this issue, though many existing LLCs are managed by a board.  Similarly, the committee’s summary indicates that LLC managers, including boards, will be subject to specified duties of care and loyalty under the new Act.  But the new Act permits operating agreements to modify such standards of conduct to be the minimum standards provided for under the current Act (e.g., to avoid intentional misconduct and violations of law).

The new Act also makes an LLC manager liable if a member distribution causes the LLC to become insolvent (or if the LLC is already insolvent) – and such liability may not be nullified by an operating agreement.  The current Act only makes the member receiving the distribution liable (if the member knows that the distribution causes insolvency).  The relevant provision in the new Act also provides new guidance on how and when insolvency would be determined.

It is also worth noting that the new Act expands the list of LLC records reviewable by its members to include meeting minutes, resolutions and accounting records.  And this access may not be limited by an operating agreement.

There are pitfalls, too.  Unlike the current Act, the new Act contemplates that an operating agreement may be an oral agreement, in which case the new Act’s default rules would govern.  One of those rules is that, unless the operating agreement provides otherwise, membership voting is one vote per member, irrespective of members’ percentage interest in the LLC.  Rarely is that the intention of the members.  So the ability to have an oral LLC operating agreement hardly makes it advisable.

At first blush, the new LLC Act appears to offer helpful refinements without dramatic changes.  But it is probably worthwhile for existing LLCs to review operating agreements for consistency with the new Act.

Postscript:  Along with the new Act, the legislature passed the “Hub Act”, which harmonizes statutes common to LLCs, partnerships, and corporations – for example, procedures for reserving entity names or filing organizational documents with the Secretary of State, and requirements for registered agents.  Accordingly, the statutes for all of these entities will be amended to refer to the Hub Act as to these procedures and requirements.  Presumably the Hub Act does not materially change the substance of the entity statutes, but that remains to be seen for sure.

Steinmann Case: Possession after Foreclosure – Now Even More Expensive

Foreclosure buyers thinking they got deals at the auction might want to bank a little of the savings to pay their eviction lawyers.  Last October, the Washington Supreme Court decided the case of Fannie Mae v. Steinmann:  a buyer at foreclosure cannot obtain reimbursement of his attorney’s fees from a homeowner who had to be evicted after foreclosure.  That’s because:

  • the Deed of Trust Act provision for collecting such fees does not apply because the deed of trust expired upon the foreclosure sale;
  • the eviction statute provides for attorney’s fees reimbursement only if the evicted party took possession under a lease (and homeowners take possession as owners); and
  • there is no lease, which would (should) have an attorneys’ fee reimbursement provision.

This is not the only legal trend making nonjudicial foreclosure – the generally expected remedy for loan defaults – more expensive and time-consuming.  In 2009, Washington’s deed of trust act was amended to provide for mediation between lenders and homeowners in default – a process that can add 30-60 days to the foreclosure timeline.

Nonjudicial foreclosure was intended to be a fair and expedient remedy for a loan default.  In exchange for that expedience, the lender waives its right to a deficiency if the lender receives less at foreclosure than what it is owed.  Thus the borrower can walk away free of the debt following foreclosure.  If nonjudicial foreclosure becomes too expensive and lengthy a process, lenders might give more consideration to other remedies, such as suing on the promissory note and going after the borrower’s other assets.  Hopefully, the legal loophole pointed out by the Steinmann will prompt a statutory fix.

Neighborly Acquiescence and Prescriptive Easements (and Adverse Possession)

Prescriptive easements and adverse possession are real estate law doctrines by which a party (usually a neighbor) obtains rights and title, respectively, to another’s land not by a written easement or deed arising out of a voluntary transaction, but by the claimant’s use of that land over a long period of time.  Generally speaking, that use must be – over at least ten years – open, continuous, and adverse to the landowner.  What those words mean and which party (the landowner or the claimant) must prove what is the subject of extensive and acrimonious cases – no one likes losing ownership or control of their property without having signed an easement or deed.

My friend, attorney Robert Zierman, has proposed that the adverse possession statute be amended to disallow adverse possession if the landowner can show that the claimant did not act in good faith.   As it now stands, the law does not take notice if the claimant wrongfully or in bad faith uses adverse possession to take his neighbor’s land.

In the meantime, the Washington Supreme Court recently issued an opinion – Gamboa v. Clark – that upholds the landowner’s right to his property.  In this case, the Gamboa’s claimed a prescriptive easement over a road on the Clark’s property.  After many years of sharing the road, the Clark’s had closed the road to the Gamboa’s after a dispute (over dogs and irrigation) escalated between the parties.  The Gamboa’s claim hinged on whether their use of the road was presumed to be “adverse” to the Clark’s.  If so, the Clark’s would have to prove that they gave the Gamboa’s express permission in order to defeat the claim – something they probably never did simply out of good neighborliness.

The Court instead held that the presumption lay with the Clark’s:  “an initial presumption of permissive use applies to . . . cases in which there is a reasonable inference of neighborly sufferance or acquiescence.”  Indeed this seems to be a fair result.  Why should landowners like the Clark’s be penalized for sharing use of their property with a neighbor without a written easement?  Perhaps the Gamboa’s should have appeased their neighbor a bit more, knowing they did not own the road they were using.

As for the bigger picture, this opinion makes it perilous to rely on prescriptive easement rights instead of obtaining, through negotiation, a written easement that would survive a dispute among neighbors over matters unrelated to use of the easement area.  And if this opinion leads to similar outcomes in favor of landowners in adverse possession cases, claimants could consider negotiating a boundary line adjustment with their neighbors – which is probably cheaper than taking a case to the Supreme Court.

Proposed Bill to Exempt Developers from Contractor Licensing UPDATE: Passed

In 2007, an amendment to the contractor licensing statute (RCW 18.27) imposed the requirement that a property investor who intends to renovate and sell property within a year of acquisition be licensed as a contractor – even if the investor contracts with a licensed general contractor to do the work.  This has always seemed absurd to me.  In what other profession is the client required to hold the same license as the professional?  The concern at the time was the prevalence of house flippers doing shoddy work.  Fair enough, but a developer who hires a contractor to do shoddy work would likely be liable to his buyer, if he can find one, in some fashion regardless of whether he is licensed as a contractor.

Fortunately, legislation to fix this anomaly is now pending in Olympia.  The House has unanimously passed an amended HB 1749, which will exempt from contractor licensing owners that contract with licensed contractors and that do not superintend the work.  The original House bill would allow a further exemption for carpeting and painting work performed by the owner.  A companion Senate bill (SB 5847) is scheduled for Commerce & Labor committee action later this week.

Now is a particularly good time for supporters of this bill to contact their legislative representatives!

UPDATE:  The bill passed the Senate and was signed by the Governor on April 22, 2015.  It should be effective 90 days after the close of the current legislative session.

When Landlords and Tenants Need to Protect Customers from Criminals

Owners and tenants of Washington real estate, particularly of retail property and other premises open to the public, might want to take note of a recent opinion issued by the Washington Supreme Court.  The opinion (McKown v. Simon Property) arises out of a shooting incident at the Tacoma Mall in 2005 (one of the victims suing the property owner) and, accordingly, addresses the landlord’s duty to protect “business invitees” from the criminal acts of third parties.

The Washington court reaffirmed its holding in Nivens, an earlier case holding that Washington adopts Section 344 of the law treatise known as the Restatement (Second) of Torts.  Generally speaking, this section asserts the duty of the “land possessor” (i.e., not just the owner) to take reasonable measures to warn or protect its business invitees from foreseeable physical harm caused by third parties on the land.  This is an exception to the general rule that “there is no duty to protect others from the criminal acts of third parties.”  Inviting others to transact business on your property creates a special duty.

The court seems to offer comfort to “land possessors” in stating that, if the evidence of foreseeability of criminal acts is based on prior criminal acts on the premises, the plaintiff has to show evidence of “a history of prior similar incidents on the business premises within the prior experience of the possessor of the land.”  In other words, dissimilar criminal acts or criminal acts encountered by a predecessor in title to the land does not, as a legal matter, show foreseeability.

But the Washington Supreme Court also found that “proving acts of similar violence is not the only way for a plaintiff to establish a duty as provided in the Restatement.”  This holding seems to leave open the possibility of a future court rationalizing that a landowner should be charged, on equitable grounds, with knowledge of similar incidents experienced by a prior owner shortly before the landowner takes title.   And will the court hold the line presumably drawn in McKown when the evidence of foreseeability is a history of similar incidents at a different but similar property owned by the landowner – or an affiliate of the landowner?

If anything new, this opinion strongly suggests that researching a property’s history of criminal incidences should be on the due diligence checklist of buyers and tenants.  Perhaps a buyer or tenant seeking reps and warranties about a property’s criminal history isn’t so farfetched.  But none of this replaces the necessity of good liability insurance coverage.  Time to call your insurance broker?