BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Unauthorized Practice of Law:
Drafting Contract Addenda and Counter-Offers
Q: I represent a buyer who is buying an older home. I drafted and presented an offer over the weekend and, after two counter-offers, the contract was ratified.
My concern is that the listing agent and I were drafting several fairly complex paragraphs regarding work to be completed by seller prior to the close of escrow. Buyer wanted the seller to pay for the work, and seller agreed to spend $5,000 but no more and use his own licensed contractor. Buyer agreed but wanted to have the right to inspect the work with her own contractor as it was being completed. Seller agreed but wanted proof of liability insurance of the buyer’s contractor and, since the buyer and her contractor would be inspecting the work, he wanted a release of liability for the work, which I drafted. If the work exceeded $5,000, buyer and seller would split the amount provided they agreed on the bid and the work. If they disagreed, we drafted a complicated paragraph on how to come to an agreement using third party bids.
When we were ratified on Sunday night, I had a sinking feeling that my buyer should have had this complicated contract language reviewed by her attorney prior to signing. I worry that we didn’t address all of the issues and may have crossed into practicing law for the clients. However, it was Sunday and my buyer wanted to ratify the contract before another offer came in. How could I have protected my buyer and myself here?
A: Many times agents find themselves drafting complex contract agreements or clauses. While, as real estate licensees, agents are authorized to complete forms related to real estate transactions, agents are not permitted to draft legal instruments or contracts in the absence of a form.
UNAUTHORIZED PRACTICE OF LAW: The area where an agent may get into trouble is in drafting addenda and counter-offers. Also, certain types of transactions are so complex as to cause problems, such as option agreements, developable land contracts, and new construction purchase agreements for homes to be built.
There are no clear bright lines to define when an agent has crossed into the unauthorized practice of law. If an agent just sticks to the “deal points” which accurately reflect the understanding and desires of the client, the agent should be OK. But, if an agent starts drafting long and/or complex clauses, the danger is that the agent is making legal judgments and decisions in the process (liability, responsibility, waivers, breach, etc.).
The result could be a charge of the unauthorized practice of law which can be a misdemeanor (Business and Professions Code Section 6125, 6126(a)); can result in damages; and result in a license sanction, suspension or revocation. Further, there may even be a denial of coverage by the broker’s E&O insurance carrier because the agent is no longer practicing real estate at that point.
Even the NAR Code of Ethics states:
“REALTORS® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it.” Article 13
PRACTICE TIP:
1. When your client does not have time to go to an attorney to review a complex transaction document prior to signing, discuss the matter with your broker/manager, and recommend adding the following clause into the agreement prior to signing by the parties:
“This Agreement is contingent upon the review and approval by legal counsel for buyer and seller within __ days of acceptance. If either party’s attorney disapproves this Agreement, that party may cancel this Agreement by delivery of a copy of the attorney’s written statement of disapproval to the other party within the above time. If this Agreement is not cancelled within that time pursuant to this paragraph, it will be conclusively presumed that the parties have either obtained approval of legal counsel, or have specifically waived the obtaining of such approval in spite of having been advised by agents in this transaction to do so.”
2. For a broader discussion of the unauthorized practice of law see Weekly
Practice Tip: “How Not to Practice Law”
DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is 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.