Q: I had been working with a Buyer for a short period of time when she told me that she was interested in a new home subdivision which happens to be in the area where we have focused our search. We visited the onsite sales office and I was asked to sign a document registering the Buyer so that my brokerage and I would be paid upon closing of the sale. After I signed the document, I read it and it said that my broker would be paid a 3% “Referral Fee” and that my brokerage would be indemnifying the Developer’s office from liability for my actions. The onsite sales manager then made it clear that I was not expected to participate at all. “We’ll take it from here,” he said. Can they do that? Isn’t the Buyer still my client? My manager said that she wanted me to create a file. I’m confused. How can I best handle this situation?
A: Your situation is quite common when it comes to new home subdivisions where the onsite sales staff wants to pay the selling brokerage a “referral fee” and then take control of the entire transaction.
This situation requires you and your broker/manager to make some choices.
Buyer’s Agents are often working with the prospective Buyer for some period of time prior to showing the Buyer the new home subdivision; an agency relationship may already exist and fiduciary duties may have been created depending upon what was said and/or what actions were performed. If the Developer’s marketing team “takes over” the Buyer and instructs the Buyer’s Agent that they have no further duties, the Buyer’s Agent is usually paid a referral fee when the deal closes. In many/most cases, the Buyer’s Broker has no file at all, or just a copy of the minimal registration document for the Buyer in order to get paid. This could be a problem if the agency relationship between the Buyer and the Buyer’s agent has not been properly terminated.
The best way to deal with Developers who want to “take over” the Buyer is to send the Developer a letter specifying that Developer is paying a referral fee only — and detailing the Developer’s requirement that the Buyers’ Agent will not be performing any of the duties and responsibilities of Buyer’s Agent in the purchase of the new home. That letter would need to be given to the Buyer so that the Buyer understands the situation and then the Agent needs to back out. See the form letter which follows this Tip.
Because there was an initial agency relationship between the Buyer and the Buyer’s Agent, as in all transactions, there should be a signed Agency Disclosure form and a signed PRBS Disclosure & Consent form which should be put into the broker file. When a Developer’s agent is taking over the transaction, the attached letter, signed by all parties, should also be put into the broker file.
However, if the Developer is insisting upon the Buyer’s Broker signing documents which are not consistent with a referral situation (i.e., Buyer Agent will be performing licensee activities in the transaction), then the Buyer’s Broker is earning a commission and needs to treat the Buyer the same as any other Buyer (e.g., the Buyer’s agent should perform all fiduciary duties including, but not limited to, preparing an AVID, recommending inspections because “new is not always perfect,” documenting efforts to secure disclosures from the Seller whether exempt or not, etc.) and the Buyer’s Agent should provide the updated New Construction Advisory, which follows this Tip.
This type of new home sale would necessarily entail the Buyer’s Agent telling the Buyer that, even though the onsite marketing team is insisting upon working directly with the Buyer, the Buyer’s Agent is available for consultation at each step of the way and that all documents provided by the Developer should be delivered to the Buyer’s Agent in a timely fashion, preferably before the Buyer signs that documentation, so that it can be reviewed to facilitate advice and consultation between the Buyer and the Buyer’s Agent.
Contractual Indemnity. Often, the Developer’s Buyer Registration form states that the Buyer’s Broker/Agent will indemnify (and often “defend”) the Developer from any liability caused by the errors or omissions of the Broker/Agent. Generally, it is not advisable to sign documents that contain contractual indemnities because, unlike common law indemnities, contractual indemnities usually carry with them an obligation to pay the Developer’s attorney’s fees in the event the Developer is the prevailing party in litigation. Also, most Broker’s E&O policies deny coverage for liability created as a result of the Broker agreeing to a contractual indemnity provision. The current reality is that neither the Developer nor their attorneys are likely to agree to strike such a provision; thus, Brokers will need to make a business decision to either walk away from the commission because of this serious, potential business risk or accept the commission with the Developer’s strings attached.
PRACTICE TIPS:
1. If a prospective Buyer is interested in purchasing a home in a subdivision with an onsite sales staff, be sure to accompany the Buyer to the first visit and register the Buyer. This is often a condition precedent to the Developer’s obligation to pay compensation to a Buyer’s Broker.
2. Read the Buyer registration form carefully before signing it. Check to see if there is any requirement to re-register the Buyer if, after the passage of time, the Buyer has yet to make an offer and remember to re-register that Buyer.
3. Be certain to ask the Developer’s sales staff if you will be allowed to continue to work with the Buyer. If the sales staff indicates you can represent the Buyer, then treat this Buyer as you would any other buyer.
4. If the Developer’s sales staff states, or has you sign, anything which indicates that you will not be representing or interacting with the Buyer, then advise your manager/broker and follow the procedures above to document the referral fee arrangement. Be sure to have all parties sign the attached letter stating that you and your brokerage will not be representing any party in the purchase of a home in that subdivision.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright 2019 Broker Risk Management 02/22/19
LETTER TO DEVELOPER FOLLOWS:
Dear (Name of Developer) :
This letter will serve to confirm that you have agreed to pay [Name of Broker]____________ (“Broker”) (specify offered percentage) per cent of the sales price on the purchase by [ Names of Buyers) ] (“Buyer”) of ( Property Address) or any other property in the ____________ Development (“Property”). By signing below, this document shall constitute irrevocable joint escrow instructions to the escrow holder to pay Broker this referral fee at the close of escrow.
This letter will also serve to confirm that although you have agreed to pay a referral fee to Broker for the introduction of Buyer to your development, you have required that no agent represent the Buyer in this transaction. In view of that requirement, it is expressly understood by the undersigned Parties that Broker will not represent the interests of either principal in this transaction. All contract and other documents created in connection with this transaction shall in no way state or imply that Broker is serving as an agent for any of the Parties in this transaction.
Please date, sign and return the enclosed copy of this letter where indicated below to evidence your understanding and acknowledgement of this agreement.
Very truly yours,
Name of Manager
cc: Buyers
ADVISORY FOLLOWS:
(BROKER NAME)
ADVISORY REGARDING CALIFORNIA’S
NEW CONSTRUCTION DEFECT LAW
BACKGROUND: A California law covering new construction defects, warranties and dispute resolution, which went into effect January 1, 2003, made significant changes in the rights and duties of home builders and buyers. The law applies to the sale of new residential units on and after January 1, 2003. Persons covered under this new law include individual owners of single-family homes, individual unit owners of attached dwellings and, in the case of common interest subdivisions, any homeowners’ association. This law is variously referred to as “SB800,” “Title 7” and the “Fix-it” law.
This new law applies to any newly-built home, or any newly-built unit in a condominium or common interest development built by a “Builder.” “Builder” is defined as a builder, developer, general contractor, contractor, or original seller, who, at the time of sale, was also in the business of selling residential units to the public for the property; or was in the business of building, developing, or constructing residential units for public purchase. Excluded from the definition of “Builder” are contractors, sub-contractors and design professionals who are not affiliated with the “Builder” other than as the contractor or design professional on the property.
WHAT THE LAW DOES: This long and complex legislation has many components, but essentially does five things:
1) It defines what constitutes construction and design defects. These are broken down into water issues, structural issues, soil issues, fire protection issues, plumbing and sewer issues, electrical issues, and other areas of construction.
2) It requires a builder to provide a minimum limited one-year warranty as to fit and finish of cabinets, mirrors, flooring, interior and exterior walls, countertops, paint finishes and trim. This limited warranty applies whether or not it is actually granted by the builder to the buyer. A builder can provide a longer or more inclusive warranty, but it cannot be less than the above.
3) It establishes statutes of limitation of varying lengths for buyers to make claims for defects, as follows:
• One Year Inter-unit noise transmission; irrigation and drainage
• Two Years Untreated wood posts, landscaping, dryer ducts
• Four Years Electrical, plumbing, sewer, untreated steel fences, exterior pathways, driveways, sidewalks, patios
• Five Years Paint, stain
• Ten Years Everything else
4) It provides a procedure for handling of construction defect claims. These procedures place detailed requirements on both sides. A builder may offer alternative dispute procedures which must be communicated to the buyer at close of escrow.
5) Finally, the new law places obligations on both builders and buyers.
Buyer’s Obligations: Buyers are obligated to follow all reasonable maintenance obligations and schedules which were communicated in writing to them by the builder and product manufacturers, as well as commonly-accepted maintenance practices. Buyers must also follow certain specified prelitigation procedures for any claims against the Builder.
Builder’s Obligations: Builders are obligated to provide the following to buyers at the time of sale:
a) Copies of all maintenance and preventative maintenance recommendations made by the builder.
b) Copies of all manufactured product maintenance, preventive maintenance, and limited warranty information.
c) A minimum one-year express written limited warranty covering all the items listed in the new law and, if adopted, an enhanced protection agreement.
d) Copies of all of the builder’s limited contractual warranties, if any.
e) The name and address of the builder’s agent for notice of claims, and the name and address of any third party with whom a builder contracts to accept claims and act on the builder’s behalf.
f) A notice signed by the seller, and recorded on title, regarding the existence of the construction defect pre-litigation and litigation procedures spelled out in the new law, as well as the fact that these procedures impact the buyer’s legal rights. This shall be initialed acknowledged by buyer and builder’s agent.
g) A copy of this new law (which starts at Civil Code Section 895).
h) Notice as to whether the builder intends to engage in an Alternative Non-adversarial Contractual Provisions as established in this new law to resolve claims, or if the builder elects to use an alternative mediation/arbitration procedure.
i) Instruction to the buyer to provide all of the above documents to any subsequent buyer
NOTE: This is a brief summary of a long and complex set of laws and may not be relied upon as legal advice by any individual nor for any specific fact situation. Builders must consult with their attorney as to their obligations and how to comply with the law. Homeowners of new residential properties, which were sold for the first time after January 1, 2003, should likewise consult their own attorney regarding warranties, and their rights in the event of a claimed defect after close of escrow.
The undersigned Sellers or Buyers acknowledge receipt of this Advisory:
_______________________ Date: ____________________
Seller
_______________________ Date: ____________________
Seller
_____________________ Date: ____________________
Buyer
_____________________ Date: ____________________
Buyer