Wisconsin Lawyer
Vol. 79, No. 6, June 2006

The "New" Chapter 452:
Defining Real Estate Broker Practice

Figures:

• Broker Disclosure to Customers
• Broker Disclosure to Clients
• Glossary
• Multiple Representation Relationships and Designated Agency
• Subagency

by Robert C. Leibsle

or the past several years, the Wisconsin Legislature and the real estate brokerage industry have worked to revise chapter 452, the state statutes regulating the practice of real estate brokers. 2005 Wisconsin Act 87 (Act 87), enacted in January 2006 and effective July 1, 2006, is the product of that effort. The revised chapter makes several significant changes in the law relating to real estate brokers and how they provide real estate services to their customers.

The current version of chapter 452 was revised several times since its creation in 1981.¹ As real estate practice has become more sophisticated, amendments have been made to clarify the role and duties of the broker, and to eliminate, or at least reduce, the confusion over a broker's responsibility in a transaction. For example, revisions enacted in 1994² expanded the broker's duties to clients and others in a transaction by requiring brokers to, among other things, provide written agency disclosure forms, which are commonly used today.

Robert C. Leibsle, Marquette 1972, is a shareholder in Godfrey, Leibsle, Blackbourn & Howarth S.C., Elkhorn, where he practices real estate, environmental, and business law, including commercial real estate development. He recently served on the Wisconsin Joint Legislative Council-Special Committee on Condominium Law Review revising Wis. Stat. ch. 703, Condominiums. He formerly served as chair of the State Bar Real Property, Probate and Trust Law Section and its real estate legal forms subcommittee. He thanks attorney Richard I. Kratz for his valuable contributions to this article.

Act 87 addresses the broker's role and responsibility to the parties in a transaction by revising the 1994 agency disclosure provisions and redefining the duties of brokers, both before and after entering into an agency agreement. The Act establishes new definitions for several types of agent/client relationships and also provides customers with several choices in the level of service they may want to receive.

It is helpful to note the distinctions among the statutory terms "client," "customer," and "party," as used throughout this article. A "client"³ is a party to a transaction who has an agency agreement with a broker for brokerage services, for example, a residential listing contract or a buyer's agency agreement. A "customer"⁴ is a party to a transaction who is provided brokerage services by a broker but who is not a client (usually, but not always, a buyer). A "party"⁵ is a person seeking to engage in a transaction, for example, a client or a customer.

Agency Disclosure: Current Law

To fully appreciate the most recent revisions, it is best to review how brokers customarily operate. In a typical scenario, a couple, out for a Sunday drive, stops at an open house. Inside they meet a selling broker for the first time. The couple has no intention of buying a house but is merely looking at what is available. The broker, of course, wants to interest them in the property, and thus provides them with a data sheet, discusses the property's attractive features, and shows them around. Afterward, the couple might drive away, never to be seen again. However, it also is possible that the couple may find the property attractive, begin to consider a potential purchase, and seek additional information to help them decide whether to pursue a deal.

Many people in similar situations do not realize that the broker in the scenario above is working for the seller as the seller's agent. To reduce confusion over the broker's role and to prevent the potential buyer from incorrectly assuming that the broker is working on the potential buyer's behalf, current law requires the broker to provide a written agency disclosure form, before providing any brokerage services. The disclosure form must identify the broker's client, state the broker's duties to the client and to a party, and contain a statement regarding confidentiality. This statutorily required form is intended to reduce customer misunderstanding over the broker's relationship and responsibilities to the various parties in the transaction.

Even at the early stage illustrated in this scenario, the broker is, under the current law, providing brokerage services. That is, among other things, the broker is negotiating or promoting a sale of real estate. Thus, in this scenario, the broker must determine at what point brokerage services are provided. To address this concern, and to prevent possible liability, the broker will routinely provide the disclosure form to the potential buyer at the first opportunity.

Agency Disclosure: New Law

Act 87 addresses the above scenario differently than does the current law. It recognizes the existence of a preliminary relationship between a broker and a potential customer. The new law no longer requires that an agency agreement be in place, or that the disclosure be delivered, before certain brokerage services can be provided. The broker may provide preliminary services, such as showing real estate, as long as the broker does not negotiate on behalf of a party. The new law recognizes that there is little danger of customer harm during this preliminary stage, because no negotiation is taking place. Consequently, Act 87 permits a broker to provide information and other relevant materials to the customer. Once negotiations begin, however, the preliminary stage ends, and the broker must then provide the customer with a written disclosure statement.

The broker, however, still owes specific duties to the customer during this preliminary stage,⁶ and may not place the broker's interests ahead of the interests of any other party or provide advice or opinions contrary to the interests of another party to the transaction.⁷ Thus, the couple, while still in a "just looking" stage, and before the "definitely interested" stage, still may receive brokerage services from the broker and the benefits of the broker's duties to all parties in a transaction. However, once the broker begins providing negotiation services to the buyer, the situation changes, and the broker is required to clarify the broker's relationship in the transaction by providing the appropriate disclosure to the buyer.⁸ In addition, if the couple determines that they would like the benefit of the additional duties owed to a client by a broker, they may elect to sign a buyer's agency agreement and become a client.

The new law requires the following disclosure (shown in Figure 1) to customers of the responsibilities and role of a broker.

When a broker first meets with a party to discuss the possibility of hiring the broker to help sell a home, the broker may provide relevant information, such as an opinion of value, or offer other services to the party in an effort to get a listing contract. Under the new law, during this preliminary stage, the broker may provide such information, including current market conditions or values of homes in the neighborhood, without a listing contract. However, the new law states that the broker may not negotiate on behalf of a party unless a party is the broker's client,⁹ that is, the party has signed an agency agreement. When the agency agreement is signed, the broker then must provide the client with a written disclosure statement,¹⁰ containing, among other things, the broker's duties to the client. Please see Figure 2.

Negotiating Under New Law: It Takes Two to Negotiate

A central element of Act 87 is a narrowed definition of the term "negotiate." The new law restates the original concept of negotiation as the broker acting as an intermediary between the parties to a transaction but adds the limitation that "providing advice or opinions on matters that are material to a transaction in which a person is engaged or intends to engage or showing a party real estate does not, in and of itself, constitute acting as an intermediary by facilitating or participating in communications between parties."¹¹ (Emphasis added.) Under this definition, negotiation is more than merely providing assistance or information to one party. Under the new law, negotiation occurs when the broker acts as an intermediary by facilitating or participating in communications between parties. In the early stage of providing brokerage services in the above scenario, the broker is providing assistance to the couple by providing information and showing the property and is only communicating with the customer (the couple). But when the broker is acting as an intermediary by facilitating or participating in communications between the potential buyer and the seller, the new law deems the broker to be negotiating. For instance, 1) meeting with a customer to discuss the structure of a proposed offer, 2) discussing acceptable terms in an offer, and 3) relaying any offer and counteroffers are all components of acting as an intermediary within the new meaning of the term "negotiate."

Multiple Representation: More than Meets the Eye

Modern real estate practice often involves brokers providing brokerage services to more than one client in the same transaction. This situation is known as multiple representation, or dual agency. For instance, a broker employed by a real estate company may have a listing contract with a client to sell the client's real estate, and another broker employed by the same real estate company may have a buyer's agency agreement with a buyer interested in purchasing the real estate. In the earlier scenario, assume that the couple has a buyer's agency agreement with a broker employed by the same real estate company that has the listing contract for the seller's property. Assume also that the seller is represented by a different broker from the same real estate company. When the couple pursues a transaction with the seller, they are represented as a client of the same real estate company as the seller. Put in the context of a law firm, this would be similar to the situation in which each of two attorneys with the same law firm represents a different client in the same transaction.

Just as ethical concerns regulate this practice in the legal profession, current real estate broker law recognizes this apparent conflict and requires the written consent of each client to continue multiple representation.¹² The current law further provides that when a broker represents more than one client in the same transaction, the broker may not place the interests of any client ahead of the interests of any other client.¹³ This effectively neutralizes the broker, meaning neither client may receive the full benefit of the brokerage services provided because the brokers cannot offer information or advice to one client if the information or advice is adverse to the interest of another client. Therefore, the client has the choice of either accepting multiple representation with reduced negotiation services or rejecting multiple representation and thereby limiting the broker's ability to fully market the property. Without consent to multiple representation, the broker cannot show the seller's property to any of the broker's buyer clients. Obviously, because the seller client does not want to limit the client's broker from finding any potential buyers, the client usually accepts the multiple representation and the limitation on negotiation services that comes with it.

In acknowledgment of the wide acceptance by clients of this type of representation and in recognition of the desire of brokers to provide full brokerage services to the client, Act 87 gives clients a third option by creating an agency relationship known as "designated agency."¹⁴ Designated agency means a multiple representation relationship in which each client receives negotiation services from a broker of the same real estate company so long as that broker is not providing negotiation services to any other client in the same transaction. For example, in the earlier scenario, if the couple (buyer) signs a buyer's agency agreement with a broker employed by the same real estate company as the selling broker, and both the buyer and the seller consent to designated agency, the couple would receive negotiation services only from their designated broker, and their broker could not provide any service to the other client (seller) in the same transaction. This form of agency relationship is similar to current multiple representation, except for one important detail. When all the clients accept designated agency, each client receives full negotiation services from separate brokers of the same real estate company. Thus, the broker may provide to the client information, opinions, and advice to assist the client, even when this places the interests of the broker's client ahead of the interests of another client in the transaction.¹⁵ Therefore, under the new law, the couple's broker can provide information or advice to the couple even if the information or advice is contrary to the interests of the seller.

Act 87 contemplates that clients in designated agency relationships will be adequately represented by the broker of a real estate company because of the broker's continuing duty of loyalty and confidentiality. As safeguards for the public, the new law creates additional disclosure provisions explaining the broker's duties to the client in a designated agency relationship, and the opportunity to elect either designated agency or multiple representation without designated agency or to reject multiple representation altogether.¹⁶ If the client consents to multiple representation but not to designated agency, the broker must, as under the current law, limit the negotiation services provided by not placing the interests of any client ahead of the interests of any other client in the transaction.¹⁷ Importantly, the client may withdraw consent to designated agency at any time. The new law provides disclosure requirements to inform clients of the responsibilities and role of a broker in multiple representation and designated agency relationships. See Figure 3.

Subagency: The Double Whammy

Subagency is the common practice of using a cooperating broker to assist the principal broker in delivering brokerage services in a transaction. As defined in the new law, a "subagent" is a broker who is engaged by another broker to provide brokerage services in a transaction, but who is not a broker employed by the same real estate company.¹⁸ A common example is when a broker (the subagent) agrees to cooperate with another broker (the principal broker) to provide brokerage services to a client of the principal broker by showing a property listed with the principal broker to a potential buyer. Subagency routinely occurs in the normal course of real estate practice. For example, assume that the couple from the earlier scenario, after seeing the "For Sale" sign, calls a broker from another real estate company to show them the property. Unless the couple signs a buyer's agency agreement, they are a customer, and the broker who shows them the property is a subagent of the listing broker, that is, of the principal broker. Whenever potential buyers are shown a property listed by a broker from another real estate company, they are dealing with a subagent, unless they have signed a buyer's agency agreement. Many areas in Wisconsin have realtor boards offering multiple listing service (MLS) agreements, whereby brokers agree to act as subagents whenever they show property listed by another real estate company to a prospective buyer who is not a client. Because the subagent is not a party to the listing agreement between the seller and the principal broker, the subagent's client is the principal broker. Therefore, the subagent owes to the principal broker's client only those duties owed to all parties to the transaction.¹⁹

Further, the subagent's role is limited; a subagent may not place the subagent's interests ahead of the interests of the principal broker's client nor provide advice or opinions to parties if the advice or opinions are contrary to the interests of the principal broker's client, unless required by law.²⁰ For example, if the subagent provides brokerage services to a client (the seller) of the principal broker by showing the property to a potential buyer, the subagent may not provide advice to the potential buyer that would be contrary to the seller's interests, even though the subagent is not considered an agent of the client. Therefore, the broker who takes the couple through the house may not offer advice to them if this would place the couple's interests ahead of the seller's. Of course, if the broker has entered into a buyer's agency agreement with the couple, the broker is an agent of the couple and not a subagent. The new law provides disclosure requirements to inform clients of the responsibilities and role of a subagent.²¹ See Figure 4.

The Rest of the Story

Act 87 further clarifies the broker's function in the real estate transaction by restating the broker's duties to all parties in a transaction and the duties owed only to a client. The new law includes the duty to negotiate on behalf of the client.²² Recognizing that business models in real estate practice involve limited-service brokers, who may not wish to provide negotiation services, the new law allows clients to waive the broker's duty to negotiate, if appropriate disclosures are given to the client.²³ These limited-service providers may offer limited listing or broker services and thereby are a viable option for clients who do not want negotiation services. Act 87 acknowledges these limited-service brokers by offering a legitimate alternative to traditional forms of broker practice by providing that the client may waive the duty to negotiate. However, to ensure that customers fully comprehend the results of waiver of the negotiation duty, specific disclosure requirements are again provided. The disclosure provisions include a statement acknowledging the broker's duty to negotiate, and a statement advising the clients that as a consequence of the client's waiver they may need the services of an attorney or other professional to fulfill the clients' goals and responsibilities in the transaction.²⁴

In an effort to simplify the law and make the disclosure easier to understand, the new law creates separate disclosure statements for customers and clients, specifies their respective contents, and explains when they must be given. The customer disclosure summarizes the broker's duties to all parties, including confidentiality responsibilities. The client disclosure contains a summary of the broker's duties to all parties as well as to clients; brief explanations of multiple representation, designated agency, and subagency; an area to indicate consent; and a statement concerning the need to seek legal or tax advice from the appropriate professional.

The remaining changes to chapter 452 include simple restatements of provisions in the law to clarify language or correct drafting errors. Additional revisions are made to clarify intended statutory broker liability concepts, including a move away from brokers' common law duties and liabilities by specifying that statutory duties supersede brokers' common law duties when the two types of duties are inconsistent.²⁵

The new law takes effect on July 1, 2006. It is expected that the disclosure provisions required in the new law will be incorporated into new agency agreement forms in early 2007. Until then, the disclosures likely will be attached as an addendum to the current agency agreements.

Conclusion

2005 Wisconsin Act 87 recognizes modern practice methods in real estate services and attempts to regulate them, while facilitating the broker's effort to deliver efficient services to meet the demands of the consumer. The provisions of the new law:

• address agency and disclosure duties and when they must be given;
• define multiple representation relationships and the broker's duties under this form of representation;
• create and define designated agency relationships and the duties and disclosure requirements under this relationship;
• define subagency and the broker's duties and relationship to clients in this form of representation;
• incorporate plain language disclosures for customers and clients to provide a better understanding of the role and responsibilities of the broker in the real estate transaction; and
• provide clear and consistent language throughout the chapter.

Endnotes

Wisconsin Lawyer