Introduction. Unless you’ve been in the real estate industry for ten or more years, it’s quite possible you’ve never heard of listback agreements. Due to today’s lack of housing inventory, the slow re-emergence of residential development, signs of new construction, and innovative newer agents, developers and builders, who’ve not given listbacks much thought, we are seeing some evidence that these arrangements are beginning to reappear.
In its simplest form, a listback agreement is an arrangement whereby a real estate broker – usually with the cooperation of a developer – ties up potentially subdividable land, and then sells the developed lots to builders upon an agreement that the builder “listback” the lots with that broker once the home is constructed. The real estate broker representing the developer may have agreed to forego any commission on the original lot sales to the builders, waiting instead for the larger commission earned when the improved lot is sold. [1]
The rub comes when a builder wants to purchase an available lot, but is told they cannot do so unless they agree, in advance, to use the developer’s real estate broker to list the home, once it is constructed.
The Risks. For those with a passing familiarity about antitrust law, there may be a faint rememberance of the term “tying arrangements.” These are any type of agreement in which one sells a product or service upon a commitment from the purchaser that they [the purchaser] also pay for another product or service. In this case, listback agreements are a form of tying arrangement where the developer “ties” the right to acquire a building lot to the purchaser’s obligation to thereafter use a particular real estate broker for marketing the home once it is constructed.
On its face, this practice could very well violate Oregon antitrust laws, and possibly federal law, as well. The National Association of REALTORS’® legal case summary article, here, presents a Connecticut case that found a listback arrangement to violate that state’s antitrust laws.
There is also an Oregon listback case, here, although it did not decide whether the arrangement violated Oregon’s antitrust law -the court focused, instead, upon several trial motion issues that were on appeal. However, the case clearly demonstrates the consequences of the trying to collect on a listback agreement after the builder/seller refused to pay the developer under a liquidated damage provision for listing the property with another broker. The builder/seller argued that the listback arrangement violated Oregon’s antitrust law. The court sent the case back for re-hearing on other issues. It was likely settled in some fashion, as it does not appear again in the Oregon appellate cases.
For Realtors®, there are several good reasons to avoid the practice of demanding listbacks as a part of a real estate purchase or sale transaction. Here are a few:
- Possible state and federal antitrust violations;
- Consequent civil litigation;
- Realtor® liability for allowing clients to get involved [E&O coverage might even be excluded – and for good reason];
- Oregon Real Estate Agency licensing action [assuming they wanted to weigh in on the subject].
Conclusion. I am not unequivocally saying that listback practices are illegal, per se’. I have not thoroughly researched Oregon’s case law on the topic, and am not [by choice[2]] authorized to even engage in a securities practice. Moreover, there are several elements that must be proven before conduct can be found to violate antitrust law [e.g. dominant market control – which was discussed in the Oregon case, mentioned above]. But the fact that the practice appears on its face to be an illegal tying agreement should be enough for any cautious Realtor® to steer clear of the practice. In my opinion, brokerage company policies should expressly prohibit this activity.
The litmus test for legality might be whether the developer can get a reputable Oregon antitrust lawyer/law firm to stand behind a formal “Opinion Letter” that the practice is legal in this state. I doubt any lawyer would do so – unless the Opinion was so riddled with exceptions and caveats that it provided no real guidance anyway – not to mention the cost of securing such an opinion.[3]
[1] That broker may also have located the property for the developer, and then put the listback agreement in place as a condition of introducing him/her to it.
[2] I enjoy not waking up in the middle of the night worrying about being sued over a massive antitrust claim seeking treble damages and attorney fees.
[3] There is a direct relationship between lawyer fees and risk undertaken in a legal project. Since (a) Oregon lawyers have to obtain and pay for a special endorsement to permit them to maintain a securities practice, and (b) the financial exposure for a state or federal violation is so significant, one should expect that the cost of a legal opinion validating listback arrangements to be several thousands of dollars [squared].
