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Part II in this article series on legal and tax advice clarifies the scope of a real estate licensee’s ability to provide advice of a legal and tax aspect nature to their clients while acting as an agent in a real estate transaction.

Contingency provision protection

Two basic categories of communication occur between a real estate broker and a client (his fiduciary): the delivery of facts, also known as disclosures, and the expression of an opinion on the effects of the facts disclosed, also known as advice. While any agent can complete and deliver a Transfer Disclosure Statement (TDS), it takes education and experience to offer sound advice.

Licensed brokers and agents are known to be specialists by education and experience. They often properly hold themselves out as experts with superior knowledge about a particular type of transaction, such as high-end residential properties, apartment projects, leasing of industrial buildings or land use deals, even short sales of single family residences (SFRs).

In point of fact, California real estate law requires real estate sales agents and brokers to complete college-level coursework in topics such as Legal Aspects, Financing and Real Estate Accounting. Legal- and tax-based continuing education courses are approved by the Department of Real Estate (DRE) for licensing renewal such as: Tax Aspects of Real Estate, §1031 Reinvestment Plans and all variety of coursework that covers the completion and interpretation of real estate contracts, a legal matter to be sure. [Calif. Business and Professions Code §§ 10153.2, 10170.5]

To what end has the regulatory agency of all real estate licensees required its constituents to study legal and tax aspects of real estate at the college level if only to bar them from applying the knowledge? The fact is, licensees are not barred from sharing this knowledge they have worked hard to accumulate.  In fact, they are required to share this special knowledge due to their trustee-defined agency relationship with a client, whether or not they are confronted with a direct inquiry.

Prospective buyers, aware of a specialty attributed to a seller’s agent, often ask the agent for his opinion regarding:

  • provisions in purchase agreements and trust deeds;
  • the meaning of a property disclosure received;
  • an anticipated future use or operation of the property under CC&Rs or zoning; or
  • how to sell or buy property structured for the greatest tax advantage.

Due to the knowledge possessed by an agent through special training and experience in a particular aspect of a property or type of transaction, the agent may find their opinion is properly given extra weight by a buyer. An agent’s special qualifications suddenly become reasonable justification for the buyer to rely on their opinion as an assurance that the predicted event, activity or condition will actually be experienced as stated.

When an agent holds himself out to be specially qualified and informed in the subject matter expressed in his opinion regarding future expectations, his opinion becomes a positive statement of truth on which a buyer or seller of lesser knowledge can rely. [Cohen v. S & S Construction Co. (1983) 151 CA3d 941]

Thus, an agent’s wording of his opinion needs to express that the opinion is only his belief or his thought on the matter together with the source of his information. So, when expressing an opinion on a point of law that is a matter of concern to the client, the agent needs to include a further-approval contingency in the transaction agreement calling for his client to confirm information given in the opinion.

The inclusion of such a provision is of paramount importance in light of the legal advice quandary. The Agency Law Disclosure includes boilerplate language informing the client of the fact that their broker is only qualified to offer real estate advice, but due to the ill-defined term “legal advice,” such a disclaimer is insufficient to protect a broker whose client relies on his opinion about a point of law should the legal advice turn out to be erroneous.

While the use of a further-approval contingency provision might be construed as a broker shirking his duty to offer sound advice, its effect is the opposite. A real estate broker is liberated by the inclusion of the contingency provision to now offer the full extent of his expertise with greater impunity. A client’s reliance is, by the stroke of the pen, shifted from the broker and his agent to others, or rests with the client himself.

This rule applies to all types of advice offered by a real estate broker, whether it is considered “real estate advice” or “legal advice” in the final sum. This is because a broker’s risk of liability for drawing erroneous conclusions rises and falls on the accuracy of the advice and the extent to which his client acted in reliance on the advice. Whether the advice was legal in nature is thus a moot point. A broker’s advice on a legal point must be accurate and correct, while an attorney’s opinion is a judgment call based on having first considered all the issues.  [Earp v. Nobmann (1981) 122 CA4th 270]

A broker’s risk of liability for drawing erroneous conclusions rises and falls on the accuracy of the advice . . . whether the advice was legal in nature is thus a moot point.

Selling your services short

Consider a homeowner who purchased his home during the Millennium Boom. As of 2011, the home has since plummeted in value, thus rendering his home severely underwater with a loan-to-value ratio (LTV) over 125%.

Despite the fact he has managed to retain his job through the recession and remains capable of making his mortgage payment, the homeowner no longer wishes to continue paying on such a grossly non-performing asset. He hopes to rid himself of his home and become a renter until the market regains its equilibrium.

Fearful of the legal, tax and credit score consequences of allowing his home to be sold at a foreclosure sale, the homeowner contacts a broker and inquires about his options.

The broker informs the homeowner of his short sale option.  He explains the lender will require him to first default on his mortgage payments before they will consider his qualifications for a short sale arrangement. The homeowner is further advised the lender may well not consent to a discounted payoff (the short payoff) on his default since he is fully qualified by his employment income to make payments on the loan.

He also advises the homeowner that the default required by the lender prior to consenting to a short payoff also allows the lender to foreclose and take the property – unmistakable legal advice concerning rights and obligations created by the recorded trust deed contract. Further, FICO credit scoring and credit reporting results of a default, a short sale or foreclosure sale are reviewed.

As for the lender’s acceptance of a short payoff or an underbid at a foreclosure sale, the homeowner is also advised his lender will issue him a 1099-C tax form requiring him to deal with exemptions from forgiven mortgage debt as taxable income. In other words, the homeowner’s broker offers him advice concerning his knowledge about the tax consequences of a short sale transaction. [Calif. Revenue and Taxation Code §17144.5]

The broker then informs the homeowner of his alternative legal right to exercise the put option he holds under provisions in his trust deed (read: strategic default). Upon default, the lender is forced by contract and anti-deficiency law to sell the property in exchange for full satisfaction of the amount remaining due on his purchase-assist home loan. [Calif. Code of Civil Procedure §§580b, 726; for more information on the put option, see the November 2009 first tuesday article, California homeowners: exercising your right to default.]

In reliance on the broker’s advice regarding his legal right under the put option in the deed of trust agreement, the homeowner decides to strategically default, rather than pursue a short sale.  Thus he will force his lender to foreclose and sell (resell) the property.

Has the broker in this case engaged in the unauthorized practice of law by offering his client legal advice concerning the adverse tax aspects of a short sale and by informing his client of his legal right to a put option implicit in the trust deed contract?

No! The listing broker disclosed material facts and information to his client which affected his decision to sell his property. Although the information the listing broker shared with his client was about the owner’s and lender’s legal rights and obligations, advice was given as alternatives and within the confines of a proposed real estate transaction – sale of his home by the broker – and therefore within the scope of the broker’s licensed activities.

Further, the broker did not hold himself out as an attorney, nor did he solicit employment by offering to provide legal advice in expectation of collecting a fee. Rather, he counseled a potential client in a proposed real estate transaction for the sale of the client’s home in exchange for a contingency fee on the sale of that home. In the counseling dialog necessary to meet that objective, the broker provided the client with real estate advice of a legal and tax aspect nature intrinsic to each alternative disposition activity considered, conduct well within the scope of his duties as a licensee.

Tax advice is real estate advice

In addition to the boilerplate language included in the statutory Agency Law Disclosure relieving agent’s of any duty to offer tax or legal advice, Carleton v. Tortosa is often cited as the landmark case determining the matter of a real estate broker’s responsibility to provide tax advice to his clients.

According Tortosa, a seller’s agent in a one-to-four unit residential sales transaction who delivers the mandatory Agency Law Disclosure to his seller is not liable for his client’s loss resulting from the agent’s failure to give advice known to the agent on the tax or legal aspects of the transaction. It is worth noting that agents representing clients in real estate transactions including property other than one-to-four residential units are not allowed the same freedom from liability. [Carle­ton v.Tortosa (1993) 14 CA4th 745]

In spite of Tortosa, any seller’s broker who determines the tax aspects of a sale are of concern to his client or has reason to believe the tax consequences known to the broker might affect his client’s handling of a sale, has a specific duty to disclose to his client the extent of his knowledge on the tax implications, also called a fiduciary agency duty. A prudent seller’s broker will go beyond mere tax advice and actively aid his client in the structuring of the transaction to achieve the best tax consequences possible.

What is not present in Tortosa is a ruling by the court to bar real estate agents from offering tax advice, which is typically how this case is misinterpreted. Tortosa does not inform real estate agents of what they cannot do, it clarifies what they are not obligated to do.  All this liability exclusion in SFR type sales is part of the legislated effort to establish a set of “dumb agent” rules for licensees in multiple listing service (MLS) transactions. [For more information on the “dumb agent rule,” see the May 2004 first tuesday article, The dumb agent rule.]

Information gap

The widespread fear felt by real estate agents and brokers, inculcated by the real estate trade union and perpetuated by brokerage community customs, must be extinguished. In order for real estate professionals to succeed in this post-crisis paradigm, they must liberally share all of the information they are privy to, regardless of what dumb agent rules might say about the lack of liability for failures.

Potential homebuyers, lessees and investors today are more educated in real estate matters and thus more dubious of real estate professionals than ever. Information is the most prized commodity a real estate professional can offer a client — the image of the fast-talking salesman that says nothing of substance is now wholly regarded with disdain.

The bright-line test for real estate brokers and agents who provide legal or tax advice to their clients remains dimly lit by California real estate law. However, with the inclusion of a further-approval contingency provision in the agreement as a condition to mitigate the broker’s risks, real estate brokers and agents can confidently provide their clients with the benefit of the full breadth of their acquired knowledge and experience.

Offer advice, share your opinion and close the real estate information gap by raising the bar for real estate licensee conduct and building public acceptance as the licensed professionals you are. [For more information on the real estate information gap, see the June 2011 first tuesday article, Closing the real estate information gap.]