Oregon Broker Duties Regarding the Use of Experts. ORS 696.805(3)(e) and 696.810(3)(e) both state that one of a licensee’s duties is to “To advise the [seller or buyer, respectively] to seek expert advice on matters related to the transaction that are beyond the agent’s expertise….”
A prohibitive corollary of this is found in Oregon Administrative Rule 863-015-0155 (Attorney’s Advice):
A real estate licensee must not discourage any party to a real estate transaction from seeking the advice of an attorney concerning any matter involving real estate activity in which such licensee is involved.
So when confronted with a problem in a transaction, when should a broker suggest that the client contact an attorney? Or to put a finer point on the question, what if the broker knows the answer to the problem? Can or should he/she inform the client? Is doing so, is this engaging in the “unlawful practice of law”?
The Unlawful Practice of Law in Oregon (“UPL”). ORS 9.160(1) (Bar membership required to practice law) provides:
Except as provided in this section, a person may not practice law in this state, or represent that the person is qualified to practice law in this state, unless the person is an active member of the Oregon State Bar.
In most cases, the unlawful practice of law revolves around two types of prohibited conduct:
- The selection and/or drafting of legal forms where the provider, rather than the consumer, makes the decision on selection and content; and
- The rendering of legal advice, i.e. applying the law to a particular set of facts unique to the consumer.
Oregon Case Law. In Oregon State Bar v. Smith, 149 Or App 171, 942 P2d 793 (1997), Sup Ct review denied.,[1] the Oregon Court of Appeals rejected the defendant’s constitutional free speech defense, and held that a determination as to whether one is engaged in the unlawful (i.e. unlicensed) practice of law is very fact-specific, and incapable of a single “one-size-fits-all” definition. The Court of Appeals held:
We cannot, and will not, purport to derive an omnibus definition of “practice of law” from Johnston[2], Security Escrows[3], Miller[4], and Gilchrist[5]. Indeed, Security Escrows cautions that a determination of unauthorized practice may depend on case-specific circumstances. 233 Or. at 85-89, 377 P.2d 334. Nevertheless, regardless of any uncertainty at the margins, certain core criteria are well settled. Most significantly, for present purposes, the “practice of law” means the exercise of professional judgment in applying legal principles to address another person’s individualized needs through analysis, advice, or other assistance. (Emphasis added.)
After prohibiting the act of practicing law without a license in ORS 9.160(1), the remainder of the statute lists permissible exceptions, including Subsection (3):
An individual licensed under ORS 696.022 (Licensing system for real estate brokers and property managers) acting in the scope of the individuals 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, is not engaged in the practice of law in this state in violation of subsection (1) of this section. (Emphasis added.)
The Conundrum. So, the Oregon statutory law forbids the practice of law without a license[6], but excludes real estate licensees “…acting in the scope of the individual’s license….”
OK, let’s take a look at how ORS 696.010(14) defines “professional real estate activity”:
(14) “Professional real estate activity” means any of the following actions, when engaged in for another and for compensation or with the intention or in the expectation or upon the promise of receiving or collecting compensation, by any person who:
(a) Sells, exchanges, purchases, rents or leases real estate;
(b) Offers to sell, exchange, purchase, rent or lease real estate;
(c) Negotiates, offers, attempts or agrees to negotiate the sale, exchange, purchase, rental or leasing of real estate;
(d) Lists, offers, attempts or agrees to list real estate for sale;
(e) Offers, attempts or agrees to perform or provide a competitive market analysis or letter opinion, to represent a taxpayer under ORS 305.230 or 309.100 or to give an opinion in any administrative or judicial proceeding regarding the value of real estate for taxation, except when the activity is performed by a state certified appraiser or state licensed appraiser;
(f) Auctions, offers, attempts or agrees to auction real estate;
(g) Buys, sells, offers to buy or sell or otherwise deals in options on real estate;
(h) Engages in management of rental real estate;
(i) Purports to be engaged in the business of buying, selling, exchanging, renting or leasing real estate;
(j) Assists or directs in the procuring of prospects, calculated to result in the sale, exchange, leasing or rental of real estate;
(k) Assists or directs in the negotiation or closing of any transaction calculated or intended to result in the sale, exchange, leasing or rental of real estate;
(L) Except as otherwise provided in ORS 696.030 (12),[7] advises, counsels, consults or analyzes in connection with real estate values, sales or dispositions, including dispositions through eminent domain procedures;
(m) Advises, counsels, consults or analyzes in connection with the acquisition or sale of real estate by an entity if the purpose of the entity is investment in real estate; or
(n) Performs real estate marketing activity as described in ORS 696.600.
Hmmm. So real estate licensees are granted an exclusion from the UPL laws as large as the Grand Canyon, but under the holding in Oregon State Bar v. Smith, they can’t exercise their professional judgment that applies “legal principles to address another person’s individualized needs….”
Riddle Me This Batman. What part of a brokered residential real estate transaction today does not apply legal principles to the seller’s and buyer’s individualized needs? Answer: None. The entire transaction – from the creation of a legally binding contract of sale to the close of escrow – is a series of legal events culminating in the consummation of a transaction involving hundreds of thousands of dollars.
And for better or worse, licensees are expected to guide their clients through this legal minefield. That’s what they get paid to do. If this were not so, Oregon Administrative Rule 863-022-0010 (Course Requirements for Real Estate Broker License Applicants) would be make no sense. It requires that, among other disciplines, in order to obtain a real estate license, applicants must take 30 hours of real estate law; 30 hours of finance; 15 hours of contract law; and 15 hours of agency law. So, what’s the use of training licensees for skills they are not permitted to use?
What kind of reaction do you think you’d receive if the Seller’s Property Disclosure Statement revealed that there was an access easement over the corner of the land, but when asked “What is an easement?” you responded, “I can’t answer that because it would require me to exercise my professional judgment and apply legal principles to your question. You need to hire an attorney to get the answer.”
The reality is that in today’s world of laws, rules and regulations,[8] it is virtually impossible for any successful Realtor® to avoid applying legal principles to his or her client’s needs. Doing less would not, in my opinion, meet the standard of care in the industry today.
For example: ORS 696.870(1)(a) mandates that a “…real estate licensee representing a seller of real property has a duty to inform each represented seller of the seller’s duties created by this section and ORS 105.462 to 105.490 and 696.301. (1) (b) requires that a “…real estate licensee representing a buyer of real property has a duty to inform each represented buyer of the buyer’s rights under this section and ORS 105.462 to 105.490 and 696.301. (Emphasis added.) In short, licensees are expected to: (a) know the law, and (b) advise their clients about the law.
A Commonsense Approach to the Unlawful Practice of Law Conundrum. Actually, there is a subtle distinction here, which we will address below. But here are some observations that should ease any broker’s mind about the unlawful practice of law:
- With the exception of the occasional disbarred or out of state attorney, most of the UPL cases involve services that involved the selection and completion of legal forms;
- The Oregon appellate court cases referred to above are all old cases – they occurred before the verb “to google” found its way into the Oxford English Dictionary, and the explosion of the Internet;
- Today, technology has made legal forms and quasi-legal advice ubiquitous. The best example is LegalZoom.com. They are just one of the many Internet business models that have recognized everyday legal documents can be made into templates and mass merchandised. This realization is not that much different than Uber, which has used the Internet to commoditize the taxi business, and stick their finger in the eye of those big cities that have attempted to keep it a closed shop by regulating it through licensing laws – but eventually consumer demand for lower costs and/or greater efficiency usually wins out;
- The result is that the preparation of legal forms that could once have been characterized as the unlawful practice of law, isn’t likely going to grab the attention of the Bar today – at least not unless: (a) It is occurring on a consistent and public basis; (b) Consumers are involved; (c) Consumers are damaged; and/or (d) There is a consumer complaint.
Today, Oregon licensees are expected to know and understand the law as it pertains real estate transactions, and to help their clients follow the law. Licensees are at greater risk in not knowing the law, than in knowing it. Where they can potentially run into problems is in rendering subjective legal opinions about issues, such as pursuing a particular course of action; this should be reserved to the client’s attorney (e.g. whether the other side’s conduct rises to the level of a breach, for which the transaction should be terminated).
The Take-Away: Informing a client of the applicable law is not the rendering of a “legal opinion”. Realtors® are expected to know the applicable laws. The communication only becomes a “legal opinion” when the law is applied to the client’s specific factual situation, and then morphs into advice as to how the client should proceed going forward.
I suspect, in reality, that many managing principal brokers give their agents or their agents’ clients information about the law applicable to their situation. And I understand why; they likely have more knowledge and experience. But most managing principal brokers know well enough to inform the agent or client that this is not “legal advice”, and that the client needs to speak with an attorney for direction as to how they should proceed.
Again, the Oregon State Bar is not going to come swooping in with a lawsuit seeking to enjoin a broker or principal from doing what Oregon law defines as “professional real estate activity”. It is for this reason that over my 40+ years of practice, I have never heard of the State Bar seeking injunctive relief against a real estate licensee for the unlawful practice of law.
But whether you’re a broker, principal broker, or managing principal broker, being wrong can have adverse legal consequences. This is because you cannot employ the defense of “But I’m not an attorney!”[9] Having rendered a legal opinion, a licensee can be held to the standard of care of an attorney. In other words, if you render an expert opinion on an issue about which you are not an expert (regardless of whether it requires a license) you are held to the standard of care of that expert. Thus, if you advised your client to terminate a transaction, but their attorney would not have given the same advice, you could be held liable for any damages suffered by that client in following your advice.[10]
Conclusion. So, the take-away is that violation of the UPL laws by real estate licensees is a fairly low-risk proposition, due to the safe harbor provisions in ORS 9.160(3) for real estate licensees. The reality today is that discussing the law with a client is almost unavoidable, and Oregon law allows licensees to ply their trade.
Plus, since Oregon brokers have the benefit of OREF’s standardized state-wide forms, their selection and completion by licensees does not create a UPL risk. The same can generally be said in the drafting of addenda, since that too, is part and parcel of what brokers are expected to do every day.
So what is the Doomsday Scenario? First, it isn’t a UPL claim from the Oregon State Bar. And it generally isn’t in informing a client about the applicable law.[11] As noted above in the discussion of Oregon State Bar v. Smith, it is the subjective application of the law to a particular factual situation involving the client – and being wrong.
Here are some examples:
- Giving a buyer advice on the meaning of questions in the Seller Property Disclosure Statement, or how to answer it. (I don’t recommend providing an interpretation or opinion. Instead, let the client rely upon their own interpretation, and encourage them that “If in doubt, disclose.” Sure, it’s legal advice, but it’s also absolutely safe. I know of no buyer that brought a claim against a seller for telling them too much.);
- Advising a buyer whether or not to disclose certain information to their lender;
- Advising a seller or buyer of their damage remedies if the other party breaches the Sale Agreement. (I’m not talking about basics, such as what happens to the earnest money deposit, or the Small Claims Court jurisdictional limit. I’m talking about what, for example, a buyer could claim in damages against the seller beyond specific performance in their transaction, or whether a buyer could evict a holdover seller post-closing and obtain damages in the eviction court.);
- Advising a seller or buyer about application of the FIRPTA law to their transaction (Informing them of the law is not the UPL, just how it applies to their transaction.);
- Advising an out-of-state seller on the Oregon income tax withholding consequences of their transaction. (Again, informing clients of the law is OK, just don’t apply the law to the facts of their situation.)
As should become clear, licensees are expected to know the law. And to the extent the law may apply to their client’s situation, it is appropriate to give the client a heads-up, and encourage them to seek expert advice. In fact, I submit that the failure to recognize the possible application of a law to a client or their property, could be viewed as a failure to meet the current standard of care. For example, if the property is under a tax deferral, and the buyer’s broker knows the buyer’s intended use is going to be different from the existing use, the failure to encourage the client to secure expert advice on the tax consequence of the change of use, could result in liability to the licensee. ~PCQ
______________________________________
[1] The Oregon State Bar is responsible for enforcing ORS 90.160. In this case, it filed an injunction against the defendant, Robin Smith and People’s Paralegal Service, for engaging in the practice of law without a license. “From 1987 until 1995, when the injunction issued, defendants operated a business providing “legal technician” services for a fee. The services included providing consumers with various legal forms available to the public through such sources as Stevens Ness Publishing Company, NOLO PRESS, bankruptcy courts, and the Oregon State Bar, and advising them with respect to their individual legal concerns. Defendants never attempted to represent consumers in court, nor did they sign any documents as attorneys. Moreover, People’s Paralegal posted signs at its place of business advising consumers that its employees were not attorneys….”
[2] State ex rel. Oregon State Bar v. Johnston, 74 P. 2d 395 (1937). In Johnston, a disbarred attorney was fined for continuing to practice law. The court noted that the defendant attorney “…continued to occupy an office in the city of Portland, on the door of which appeared a sign reading, ‘Harold W. Johnston, Attorney at Law’ * * * accepted employment from one Frances Peecher to secure a divorce for her; prepared a complaint for her to sign; and procured another attorney to sign the complaint as attorney for plaintiff.”
[3] State Bar v. Security Escrows, Inc., 377 P. 2d 334 (1962). The Oregon State Bar brought suit against two private corporations and certain of their officers to enjoin them from preparing conveyances (e.g. contracts, deeds, mortgages, satisfactions, leases, options, certificates of assumed business name, bulk-sales affidavits, etc.) as an accommodation for customers who came to them for escrow service. The Oregon Supreme Court granted an injunction “…against the preparation of the documents presently named in the decree, but excepting therefrom the filling-in of blanks under the direction of a customer upon a form or forms selected by a customer. If the customer does not know what forms to use or how to direct their completion, then he needs legal advice. If the customer does know what he wants and how he wants it done, he needs only a scrivener.” 9.160(4)(b) and (c) codify that portion of the Security Escrow holding, which permits escrow companies to act “…pursuant to the instructions of the principals to the transaction as scrivener to fill in blanks in any document selected by the principals; and present “…to the principals to the transaction for their selection any blank form prescribed by statute, rule, ordinance or other law. Of course, in reality, most sellers and buyers do not actually know what form they need, or what information to fill in. But no matter; in the stack of instructions the principals sign at closing is one saying that escrow was just following their direction, and served only as a scrivener.
[4] State Bar v. Miller & Co., 385 P. 2d 181 (1963). The Oregon State Bar sought to enjoin defendants from the unauthorized practice of law based upon certain activities related to the business of preparing estate plans. The Oregon Supreme Court enjoined them from “…preparing estate plans embodying legal analysis either as a separate service or as an incident to carrying on the business of selling insurance.”
[5] Oregon State Bar v. Gilchrist, 272 Or. 552, 538 P.2d 913 (1975). In this case, the Oregon Supreme Court held that the advertising and sale of generic, noncustomized do-it-yourself divorce kits did not, without more, constitute the practice of law.
[6] ORS 9.160(1).
[7] ORS 696.030 lists the type of conduct or occupations that are not regulated as “professional real estate activity”, i.e. those that may engage in the activity, without having a real estate license. Subsection (12) provides that “A nonlicensed individual who analyzes or provides advice regarding permissible land use alternatives, environmental impact, building and use permit procedures or demographic market studies, or a regular full-time employee of the nonlicensed individual performing similar activities. This exclusion does not apply to the handling of transactional negotiations for transfer of an interest in real estate.” Subsection (4) exempts: A nonlicensed individual who is an attorney at law rendering services in the performance of duties as an attorney at law.
[8] Today, the OREF Sale Agreement is 11 pages long. I remember in the early 1970s, sale agreement forms were a single page. Don’t blame OREF! Not a single law in today’s Sale Agreement form existed back then.
[9] And telling your client “I’m not an attorney, but….” and then rendering a “legal opinion”, is not going to save you! If you can’t resist opining, I suggest you tell the client what you “believe” is the case, but encourage him or her to contact their own attorney – and then follow it up with a quick CYA email.
[10] The same liability can exist for attorneys who render bad advice. That is why, in my opinion, the lawyer’s role is to advise the client on the pros and cons of each course of conduct, and let the client make the final decision. Of course, some savvy clients then say to me, “OK, what would you do if you were me?!” However, with the use of email as one’s best evidence, it is much easier today to render careful legal opinions to clients, with the appropriate caveats and disclaimers.
[11] I say “generally” since I have seen liability for informing a client about a law that was wrong. But if in doubt, that risk can be avoided by verifying the law before providing the information.
