Real estate licensees and the unauthorized practice of law

Part I in this article series on legal and tax advice addresses the misconception held by real estate professionals that they are engaging in the unauthorized practice of law when providing transaction-specific legal and tax advice to a client while acting as a licensed real estate broker or sales agent.

To advise or omit known consequences

A pervasive and insidious fear persists among California’s real estate brokerage community — the fear of the unauthorized practice of law. For real estate professionals and their clients, this fear poses a considerable barrier to proper disclosure and effective advice, greatly diminishing the quality of their services. Counterintuitively, this fear renders brokers and agents more vulnerable to claims for losses caused by their failure to advise on issues of consequence known to them but not to their clients.

Like most of the fallacious beliefs expressed in the mythology driving real estate agent conduct, the dictum to refrain from giving legal and tax advice stems from the real estate trade union’s code of ethics. What is presented as a set of guidelines for member conduct, forged in an effort to hold its members to a “higher ethical standard,” has become bastardized through a damning process of telephone game.

The trade union directive to their members to avoid the unauthorized practice of law creates a phantom threat —brokers and agents are spooked out of sharing much of their valuable knowledge and information is withheld due to a self-induced paranoia. In the worst case scenario, it is used as an excuse for agents to deliberately withhold critical information on adverse legal or tax consequences for fear of killing the deal. [For analysis on a landmark disclosure case, see the November 2010 first tuesday article, Holmes v. Summer: dilatory disclosures and the damage done.]

The brokerage community understanding of what constitutes the unauthorized practice of law has become far too restrictive, to the unnecessary detriment of their clients. The popular opinion seems to be that real estate brokers and agents are mere legal scriveners, employed to facilitate the completion of legal documents and make mandatory disclosures by rote.

However, a licensed real estate professional, with education and experience in legal and tax aspects of real estate agreements and ownership, is permitted to share their valuable knowledge when counseling a client in a real estate transaction. This is an integral part of their licensed services rendered for a fee and it represents the invaluable information that real estate clients need in order to build a sustainable real estate market in the future.

Indefinite definitions

All persons engaged in any conduct in California, private or professional, are charged with knowing the rules controlling their conduct — ignorance is not an excuse for wrongful behavior. Real estate transactions are the absolute pinnacle of this legal society, replete with rules of civil and professional conduct nurtured and developed over centuries.

For each minute aspect of any type of real estate related activity there is a rule of law establishing the resulting rights and obligations of the real estate professionals and clients involved. Without such rules of law, we would have no commercial certainty and no value could be placed on those rights and obligations to be bought and sold in an open market – the bundle of rights that brokers market daily.

But clients in real estate transactions are not always aware of the controlling real estate law, much less the consequences they may suffer which flow from the laws underpinning their transactions. California real estate brokers and their agents, however, are trained in these concepts and the application of the law to these concepts, based on professional education and experience.

Regrettably, the line in the sand between what constitutes offering legal advice for a fee and giving advice in a real estate transaction for a fee is unclear to many of California’s real estate professionals. Thus, the unauthorized practice of law myth has run amok in the real estate brokerage community.

Real estate professionals assisting and advising clients are stumbling over this makeshift line and recoiling from fear of crossing it. In the process they withhold valuable information known to them to have  potential to adversely affect their client – all due to an unfounded fear.

The real estate trade unions are partially to blame for permitting the dissemination of misinformation and irrational fear-mongering, but the fundamental misunderstanding of the law stems from the law itself.  The leading legal digest, Miller and Starr, expresses the crux of the problem thus: “the courts of California have not yet clarified the role of the real estate broker in advising clients regarding the terms of the contract, or in preparing the forms of sales contracts, as such activities relate to the unauthorized practice of law.”

Although the courts have yet to make this crucial clarification, California statute clearly defines the unauthorized practice of law as such: “Any person advertising or holding himself or herself out [emphasis added] as practicing or entitled to practice law or otherwise practicing law who is not an active member of the State Bar, or otherwise authorized pursuant to statute or court rule to practice law in this state at the time of doing so, is guilty of a misdemeanor punishable by up to one year in a county jail or by a fine of up to one thousand dollars ($1,000), or by both that fine and imprisonment.” [Business and Professions Code § 6126]

Thus it can quite easily be said, a real estate broker who is not a licensed member of the state bar should not engage in the “practice of law.” This seems to be a foregone conclusion based on the statute cited above — most real estate brokers have no intention or occasion to represent a client in a court of law, as this is obviously the realm of the licensed, practicing attorney.

But the “practice of law” by statute goes beyond the representation of another in a court of law. The definition by case law is expanded to include holding oneself out to be compensated for giving “legal advice and counsel, and the preparation of legal instruments and contracts by which legal rights are secured although such matter may or may not be pending in a court.” Isn’t this what brokers and agents also do every time they prepare a purchase agreement, note and trust deed, land sales contract, lease – an endless list of forms documenting and establishing the rights and obligations of their client? [People v. Sipper (1943) 61 CA4th 844]

Enter the nebulous and ill-defined category of conduct from which all real estate agents are barred but few can define — legal advice. The term “legal advice” has wriggled its way into the Agency Law Disclosure, listing agreements (buyer’s and seller’s) and the hallowed pages of the trade union code of ethics.

Thus, the Agency Law Disclosure is considered the final word in agency conduct as it relates to advice, legal or tax related: “A real estate agent [broker] is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.” Skirting for the moment just who is a “competent professional” for rendering advice, the sense is a real estate broker or sales agent ought not give “legal advice” or tax advice, and ought to limit their advice to the breadth of professional knowledge they are employed by the client to provide [Calif. Civil Code § 2079.16].

This begs the pivotal question, what is the difference between giving “legal advice” and giving “real estate” advice? Are they not the same in content with a difference only in wording since all client expectations in real estate transactions are based on rights and obligations imposed by law?

Is this advice legal?

The Continuing Education of the Bar (CEB) asserts that neither the courts nor the codes provide a “bright line test for the broker to determine when he or she has crossed the line from real estate to legal advice on an aspect of the transaction.”

Although the moment when real estate advice passes over into legal advice may be ill-defined, the courts have clearly determined what constitutes “legal advice” as such. It is well-recognized that anyone, from your neighbor to the clerk at your local grocers may offer legal advice and not be prosecuted for the unauthorized practice of law.

Consider a homeowner who hires a contractor to repair a fence on his property. Due to the contractor’s negligence, he damages a water line during construction and refuses to pay for the repairs. Over a shared cup of coffee, the homeowner’s neighbor advises him to sue the contractor, insisting the contractor is liable for the losses he caused.

Has the homeowner’s neighbor engaged in the unauthorized practice of law due to the legal advice he provided the homeowner?

No! The neighbor did not hold himself out as an attorney with the expectation of earning a fee for the advice he offered the homeowner. An individual can only be held liable for the unauthorized practice of law if the individual holds themselves out – solicits employment – as being licensed and qualified to offer legal advice and then does so in expectation of a fee. [U.S. v. Chen (1996) 99 F3rd 1495]

Obviously, the neighbor’s special qualifications are not at issue here, if for any other reason than the homeowner would be aware by virtue of being acquainted with him that he is not an attorney. Unless also licensed as an attorney, brokers and agents never hold themselves out as attorneys and no client can reasonably consider them authorized to practice law. However, complications seem to arise and grey areas materialize when the public is dealing with a licensed professional, such as a real estate broker or agent — an individual specifically licensed and specially qualified to provide real estate advice.

The heart of this matter lies in a client’s reliance on advice, legal in nature or otherwise. The only potential danger in a real estate professional’s giving of legal or tax advice is the possible confusion on the client’s behalf that the broker or agent is holding themselves out as an attorney or CPA.

Thus, brokers and agents need not refrain from offering advice, but rather the need arises to protect against this confusion. Enter the further-approval contingency provision.

For clarification as to the allowable scope of a real estate agent’s legal and tax advice, see Part II in this article series, Raising the bar of real estate advice.