|  Publications
Phillip C. Querin, Partner
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
Why We Use Standard Forms
[October 2004]
Introduction. Standardized
real estate forms are a Realtor’s® stock in trade. Without
them, agents would be called upon to either draft their own documents,
select the proper form from any number of over-the-counter providers,
or send their clients to attorneys each time document preparation
was required. But does the use of these forms help or hinder professional
real estate activity? Does it create greater risk? Would Realtors®
be better off with fewer forms? Shorter forms? No standardized forms
at all? While it is easy to criticize the use of pre-printed forms
and their contents, the real issue is how Realtors® would efficiently
and safely conduct business without them.
The Unlawful Practice of Law Myth. The
current statutory prohibition against the unauthorized practice
of law does not even attempt to define the “practice of law.”
While there were several efforts to do so over the years, commencing
in 1937 the Oregon legislature avoided the issue entirely by simply
saying that one could not practice law unless they were licensed
by the Oregon State Bar.1
This left to the courts the task of dealing on a case-by-case basis
with those situations where an unlicensed person engaged
in activity that was believed to constitute the “practice
of law.”
In 1962, the Oregon Supreme Court broadly defined the “practice
of law” as being “…the informed application of
legal principles to address a particular person’s individual
circumstances and needs.” State Bar v. Security Escrows,
Inc. 233 Or. 80 (1962). In that case, the Court specifically
held that “…the practice of law includes the drafting
or selection of documents and the giving of advice in regard thereto
anytime an informed or trained discretion must be exercised in the
selection or drafting of a document to meet the needs of the persons
being served.”2
(Emphasis added.)
Today, it is a common misconception that Realtors® must
use standard forms because of legal restrictions against the unlawful
practice of law by nonmembers of the Oregon State Bar. However,
ORS 9.160(3) specifically excludes real estate agents from this
prohibition so long as they are licensed by the Oregon Real Estate
Agency and “…acting in the scope of the person’s
license to arrange a real estate transaction, including the sale,
purchase, exchange, option or lease coupled with an option to purchase,
lease for a term of one year or longer or rental of real property….”
In reality, the drafting and selection of documents
and the exercise of discretion (which the Court in Security
Escrows defined as “the practice of law” back in
1962) occurs all the time when Realtors® engage in professional
real estate activity today. But the reason they have not been sued
by the Oregon State Bar for doing so is because it is perfectly
legal.3
Thus, the real reason Realtors® do not draft extensive real
estate documents is because of the legal risk that doing so could
create greater liability to them should something go wrong.
The Risk Management Safe Harbor. Oregon
law requires that all agreements to convey land must be in writing
and signed by the parties. ORS 41.580(1)(e). Oregon’s real
estate licensing laws require that Realtors® put all of the
material terms of the agreement in writing. OAR 863-0150-135(5).
Thus, not only does the agreement have to be in writing to be enforceable,
but licensees representing their clients are charged with the responsibility
of making sure this happens. This presents agents with limited alternatives:
Either get the client to an attorney to immediately draft the necessary
documents or provide them to the client. Providing standard pre-printed
real estate forms are the logical solution. In Oregon, and much
of the West Coast, Realtors® assume the responsibility of providing
the appropriate real estate form. This efficiency not only makes
the agent more valuable to the client in terms of cost, but it permits
him or her to retain more control over the timing and speed of the
transaction, since there is usually no attorney to confer with,
and in many cases, to wait on.
Moreover, in many respects, the use of standard forms provides
a “safe harbor” to Realtors®. Generally, use of
standard forms assures Realtors® of compliance with applicable
laws, rules and regulations. For example, the Real Estate Sale Agreement
expressly allows brokers to hold, undeposited, earnest money checks
until the offer is accepted or rejected. Why? Because the Oregon
licensing law requires that it be contained in the body of the sale
agreement.4
The sale agreement also gives a similar measure of protection to
the seller and buyer. For example, the standard forms for a seller’s
post-closing rent-back and buyer’s early possession, specify
that they will not exceed 90 days. Why? Because Oregon law imposes
a landlord-tenant relationship between the parties if the agreement
exceeds 90 days.5
Another important contribution made by the use of standard forms
– especially the Real Estate Sale Agreement – is that
they help reduce Realtor® liability. For example, a common source
of litigation against real estate agents involves the scope of their
responsibility to the client. The statewide Real Estate Sale Agreement
form goes a long way in explaining and allocating risk between the
seller, buyer and their respective Realtors®. For example, the
form makes it abundantly clear that the buyer – not their
agent - has the primary responsibility to have the property and
all systems thoroughly inspected before closing. It also clarifies
to the seller their legal responsibility for full disclosure to
the buyer of any material defects in the property. It warns the
buyer to have the property professionally measured or surveyed if
square footage or acreage is an important issue. Since property
condition is a common sources of dispute, by clearly allocating
risk between the seller and buyer in the sale document, the standard
form helps reduce Realtor® liability.6
Modifications to Standard Forms. Widespread
usage makes a standard form “standard.” There are many
aspects of the residential real estate transaction that most sellers
and buyers do not actually negotiate, and that most Realtors®
regard as standard form provisions. For example, there is no law
that requires sellers to pay for the title insurance policy.
Yet, in Oregon, that is considered to be the standard practice.
The same applies to the rule that the cost of escrow is shared equally
between seller and buyer. Including these types of provisions into
a pre-printed form avoids time-consuming negotiations over issues
that the local real estate industry has already decided upon and
developed into a standard of practice.
However, if a standard form is truly “standard,” then
modifications to it should be made sparingly, since variations could
be considered out of the ordinary. It is one thing for the seller
or buyer to insist upon change, but quite another if the change
is made at the direction or instruction of the Realtor®. Informed
and experienced clients are entitled to negotiate any and all of
the language currently found in the standard forms. However, Realtors®
should be more cautious. While it might be argued that giving advise
upon discretionary matters in a real estate transaction is not the
unauthorized practice of law because of the broad exception granted
to licensees under ORS 9.160(3), there is no question but that it
increases Realtor® liability exponentially. For example, the
selling agent should avoid advising the buyer to strike the “AS-IS”
clause. It is far better to make sure the buyer understands the
ramifications of the provision, than to “counsel” clients
to remove or expand it - that latter role should be left to the
attorneys. Provisions such as these are the result of a delicate
balance created by allocating seller and buyer responsibility for
the property condition. The result is a level playing field
between the parties. Eliminating or tampering with them can upset
this balance and create added liability for the Realtor® who
gives such advice. If the Realtor® senses that the client needs
legal guidance on these important issues, he or she should always
recommend that the client obtain the services of a real estate attorney.7
The standard form sale agreement contains provisions which, while
not required to be contained in the document, reflect the
current state of the law, and have been inserted to educate the
parties as much as to bind them. For example, lately there has been
talk of eliminating the seller representation provisions from the
standard sale agreement form based upon the mistaken belief that
it will reduce buyer claims against sellers and therefore indirectly
benefit Realtors®.8
However, some of the provisions in the seller representation section
– e.g. that the seller knows of no material structural defects
– reflect the current state of the common law in Oregon and
most other states. So whether that provision is present in the sale
agreement or not does not truly affect the seller’s duty
to disclose to the buyer any material structural defects in the
property. However, it has been included into the agreement to educate
the seller and underscore his/her duty of disclosure. Eliminating
this provision from the sale agreement implies to the seller that
he/she may not have a duty to disclose such defects to the buyer
– which is incorrect. There are other provisions in the seller
representation section that are commonly used in virtually all negotiated
real estate transactions, dealing with such things as smoke alarms,
hazardous substances, the type of sewage system, liens and notices
of violations of the law. Since these provisions are normally expected
to be a part of the standard residential transaction, they are not
commonly the subject of separate negotiation. Eliminating such
provisions from the sale document removes from the residential transaction
important items that in most cases, all parties and their agents
have come to expect will be a part of the bargain. Once removed,
buyer and seller agents will have the added liability that arises
if the issue arises for the first time after closing and
the Realtors® are left to explain why it was not covered during
the transaction.
Although it is not currently possible for Realtors® to unilaterally
modify the OREF9
real estate forms, can you imagine the liability to licensees if
that could be done? Agents for buyers could modify existing provisions,
making them more to their personal liking, adding some and deleting
others. Unless every change was disclosed, the seller and
listing agent would be at risk of not even knowing that the standard
form was no longer “standard.” They would have to scrutinize
and compare their form with the “standard” form. While
one agent could trust the other’s representations concerning
the presence or absence of changes, he or she could not do so without
actually verifying whether this was so. And managing brokers would
have to review and approve documents from that same “trust
but verify” perspective.
Conclusion. Recently it has been suggested
that for convenience, the statewide Sale Agreement be reduced to
a two-page form, with several addenda available to attach as needed,
depending upon the specifics of the transaction.10
Even ignoring the huge learning curve that would be necessitated
by such a change, the obvious practical difficulty is that it would
require Realtors® to have, at their fingertips, knowledge of
all available addenda and when to use them. Thus, while one form
(i.e. the sale agreement) may be shorter, the number of
forms necessary to successfully document the transaction would increase.
Risk goes up when a transaction imposes discretionary decisions
upon the Realtor®, since it is these decisions that will be
second-guessed by disgruntled clients. Thus, from a risk management
perspective, the idea of reducing a form’s length and increasing
addenda, could increase rather than decrease, Realtor®
liability.
Every form can probably be shortened somewhat, and everyone -
lawyer and layman alike - have their own personal opinion about
the use and content of forms. However, the fact remains, that standard
forms are the Realtors’® stock-in-trade. Forms, coupled
with a good agent’s ability to explain them to the client,
are what brings value to any transaction in which a Realtor®
is involved. Industry standards regarding the Oregon real estate
forms has been established by widespread usage and acceptance.
FOOTNOTES
1
ORS 9.160 (1) currently provides that …”a person may
not practice law…unless that person is an active member of
the Oregon State Bar.”
2 Today, that holding
would be regarded as substantially diluted by ORS 9.160 (4) which
gives fairly broad authority to escrow and title companies to draft
certain documents for the parties to a pending transaction.
3 This is not to suggest
that Realtors® can, with impunity, engage in unlimited activities
for which lawyers would otherwise be required (e.g. the determination
of how title should be held by multiple grantees in a transaction.)
However, in most aspects of the garden-variety real estate transaction,
there are few, if any, activities that would be regarded as the
unauthorized practice of law, if engaged in by one of the licensees.
4 OAR 863-015-0255(3).
5 ORS 90.110(2).
6 While it is true
that in today’s litigious society, Realtors® cannot make
themselves totally immune to lawsuits and arbitrations, financial
liability is much less likely to attach where the sale documents
have made it clear that the parties – not their Realtors®
- are primarily responsible for property condition.
7 Although it is self-serving
to do so, a notation in the file that the agent recommended that
the client seek legal advice, can go a long way in reducing liability,
should a dispute later arise.
8 The idea is that
if the chances of a buyer vs. seller dispute are reduced, there
will be less chance that the Realtor® will be drawn into it.
9 Oregon Real Estate
Forms, LLC – the statewide forms provider in Oregon.
10 A format for
this approach has been in existence for some time in Washington.
© Copyright 2004. Phillip C. Querin,
Davis Wright Tremaine. No part may be reproduced without the author’s
express written consent.
|
