Oregon’s Initial Agency Disclosure Law

FingersCrossed (2)

Introduction. For perhaps a large number of members in the Realtor® profession, the genesis of initial agency disclosure is unknown.  It was first enacted in Oregon in 1993, and likely existed for the entirety of their careers.  But I actually was around before agency disclosure as we know it today, so remember the transition well – however, I’d prefer to credit it to “institutional memory” rather than Father Time.

The purpose of agency disclosure is to require that real estate licensees clarify for their seller/buyer clients at the outset of the business relationship, the different forms of representation – i.e. representation of the seller only; the buyer only; or both seller and buyer.  

Background.  As hard as it is to believe today in this era of consumer protectionism that some [e.g. cynics like yours truly] would say has run amok,[1] there actually was a time when both the listing agent and the buyer’s agent acted on behalf of the seller alone, and in others, acted as dual agents, with little or no disclosure. In other words, in some cases, buyers had no representation, and in others, the seller and buyer may have had agents representing both of them at the same time.

One relationship, which does not exist in Oregon today, was known as “subagency.” It meant that the seller’s agent who listed the home [sometimes called the “listing agent”] appointed the agent on the buyer’s side as his or her “subagent” to show the home, write up the paperwork, and share in the commission set out in the listing agreement.  In other cases, where there was a large company with multiple offices, agents from different offices were acting as undisclosed dual agents, and not providing exclusive representation to either side.

During these years, there was never any real effort by listing or buyer agents to explain the complexities of these arrangements. There were at least two reasons: (a) They didn’t understand it themselves, since it made no sense to them either; and (b) If they did understand it, they knew if they explained it, their clients wouldn’t like it. And perhaps there was a third, albeit slightly devious, reason – the subagency relationship was often addressed in the sale agreement [assuming the buyer read and understood it in the excitement of making an offer to purchase a home]. I suppose the fact that the subagency relationship was described in the sale agreement gave the non-listing agent some plausible excuse for not having to cover it directly with the buyer.

What was the legal implication of subagency?  It meant that buyers had no claim against the person they believed was representing them, because that person was not their agent; ergo, no fiduciary obligations were owed to them. Since most claims arising out of a real estate transaction are brought by buyers, this subagency framework provided a convenient safe harbor of protection to the non-listing agent.

As for dual agency, like subagency, it was only disclosed in the sale agreement, if at all; it was not normally explained at the commencement of the representation of seller or buyer. As a result, in the 1990s and before, due to lax or nonexistent disclosure laws, sellers and buyers were left in the dark about real estate licensees’ roles as agents and fiduciaries throughout the real estate transaction process. Undoubtedly, most buyers assumed the person acting as their representative was their exclusive agent, as most sellers believed the same of the listing licensee.

Then, along came some enterprising class action lawyers who saw an opportunity; they claimed that the real estate industry had merely elevated form over substance – i.e. while following the de minimus laws regarding agency disclosure, clients were led to believe by the licensees’ conduct that the agent was exclusively representing them, when the agent was actually just a subagent of the listing agent, or a dual agent with the listing agent. This is important on at least two levels: (a) How much confidential information can or should be disclosed to one’s “agent” if they are not really their fiduciary? And (b) How much responsibility does the “agent” have to a client they are not representing – or not representing exclusively?

This confusion finally came to a head in the seminal case, Bokusky, et. al. v. Edina Realty, Inc. et. al., a large Minnesota real estate brokerage. Quoting a brief explanation of the case on Realtor.org, it was described as follows:

The class of plaintiffs consisted of buyers and sellers of residential property wherein agents of Edina represented both the buyer and seller in the same transaction. The plaintiffs maintained that Edina agents “systematically failed to disclose the inherent conflict of interests in dual agency transactions” by relying solely on a form disclosure of the agency relationship contained within the purchase agreement. In a six-count federal complaint, the plaintiffs alleged breach of a Minnesota statute requiring written disclosure of dual agency, breach of a Minnesota Department of Commerce Regulation governing representation of multiple parties in a transaction, fraud, breach of fiduciary duty, breach of contract, and violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Plaintiffs sought damages in the amount of $200 million. Treble damages were available.

It is important to understand that prior to statutory initial agency disclosure laws, common law agency fiduciary duties [i.e. as developed through appellate court precedent] applied.  This included a companion concept of “implied agency.”  Essentially, it stood for the following proposition: If you act like an agent to your customer, and the customer reasonably relies, believing you are acting as an agent on their behalf, the law will “imply” that you are their agent. Once that finding is made, all of the duties of a fiduciary apply [i.e. honesty and good faith, full disclosure, reasonable care, loyalty, confidentiality, fully accounting of funds] even though you did not intend that result.

In California during the late 1980s, there had also been growing litigation against real estate brokers arguing that by becoming an implied agent of a buyer actually turned the broker into an “unintended and undisclosed dual agent” – i.e. as both the subagent of the seller and implied agent of the buyer. As you might imagine, this put brokers in the judicial crosshairs of both the seller and buyer in a single transaction, thus doubling liability exposure.  The result was that in 1987 the California legislature required mandatory initial agency disclosure and the National Association of REALTORS® also began lobbying to require that all states should have mandatory initial agency disclosure laws.

The Edina case was settled in 1993, and together with similar cases across the country, the effect was seismic throughout the real estate industry.  Most, if not all states, passed agency disclosure laws, making each agent the exclusive agent of their respective client, and requiring enhanced disclosure if a single party or single brokerage represented both the seller and buyer.

Agency Disclosure in Oregon. Oregon’s disclosure law requires that real estate licensees provide an explanation of the applicable agency laws to both sellers and buyers at the commencement of the relationship.[2]  The statute is found at ORS 696.820, and is simple in its description:

696.820 Agency disclosure pamphlet; rules 

(1) The Real Estate Commissioner shall prescribe by rule the format and content of an initial agency disclosure pamphlet.[3] The rules must provide that the initial agency disclosure pamphlet is informational only and may not be construed to be evidence of intent to create an agency relationship.

(2) An agent shall provide a copy of the initial agency disclosure pamphlet at the first contact with each party to a real property transaction, including but not limited to contacts in person, by telephone, over the Internet or the World Wide Web, or by electronic mail, electronic bulletin board or a similar electronic method. [1993 c.570 §6; 2001 c.300 §48; 2005 c.116 §15] [Underscore mine.]

Easier Said Than Done.  Hmmm.  The statutory language sounds simple enough – or does it?  When you first have contact with your seller, your give him or her the Pamphlet. But wait! How do you know this is your client?  They merely asked what you thought they could sell their home for.  You haven’t done a listing presentation; they haven’t signed a listing agreement.  In fact, they could just be in the information gathering mode – sorta like a first date through match.com. The deal hasn’t been sealed. You’re just a contestant in a macabre beauty contest.

And what about the buyer?  Just because someone tells you they’re interested in purchasing a home, doesn’t mean they have become your client. Talk really is cheap.

However, the statute should not be read alone, but together with the administrative rule, 863-015-0215, which was recently amended, effective October 1, 2013. It provides the following guidelines regarding delivery of the Initial Agency Disclosure Pamphlet:

  • It must be provided at first contact with (a) a prospective party to a real property transaction; or (b) an unrepresented party seeking representation during the course of a real property transaction;
  • It must be provided in a written format by electronic mail, over the Internet, by USPS mail, facsimile, hand delivery or similar delivery method;
  • An agent does not need to provide the pamphlet to a party who has, or may be reasonably assumed to have, already received a copy from another agent.

It also provides the following guidelines regarding the contents of the Pamphlet:

  •  It is informational only and may not be construed to be evidence of intent to create an agency relationship;
  • It must contain the following information [all of which is found in ORS 696.805 – 696.810, and repeated verbatim in the Pamphlet];[4]
  • A general definition of an agency relationship and the three real estate agency relationships of seller’s agent, a buyer’s agent and a disclosed limited agent;
  • The definition of “confidential information;”
  • The affirmative duties of a seller’s agent;
  • The affirmative duties of a buyer’s agent;
  • The affirmative duties of a disclosed limited agent;
  • The following statement to the consumer, “Whether you are a buyer or seller, you cannot make a licensee your agent without the licensee’s knowledge and consent, and an agent cannot make you a client without your knowledge and consent.”

The Real Estate Agency states that it will make a sample of an Initial Agency Disclosure Pamphlet that complies with the content rules on its website. I assume we can expect that if that language is used by the industry, it will provide complete protection from a charge that the information was inadequate.

Perhaps the most interesting aspect of Oregon’s initial agency disclosure law is not the contents that are required to be disclosed, but simply when the Pamphlet must be delivered.  Here is the language the Oregon Real Estate Agency decided upon:

For purposes of this rule, “at first contact” means at the time the agent has sufficient contact information about a person to be able to provide an initial agency disclosure pamphlet to that person. Contact with a person includes, but is not limited to contacts in person, by telephone, over the Internet, by electronic mail, or by similar methods.  [Emphasis added.]

Aaaahaaa! So, if I understand this new rule, Brokers are supposed to deliver the Pamphlet when they have sufficient contact information to deliver the Pamphlet. Let’s see. Does that mean that if a real estate broker exchanges business cards with a person at a cocktail party, he or she is supposed to pull out a Pamphlet and give it to them, simply because contact information was provided in the context of a real  estate discussion?  And how does that delivery requirement in the rule comport with the statute that says that it’s supposed to be delivered “…at the first contact with each party to a real property transaction”?  If the statute had said “potential party” perhaps I could understand, but the language assumes the recipient is already “a party” to the transaction.  If so, delivery after the sale agreement is fully executed should suffice. Right?[5]

Much Ado About Absolutely Nothing! For all the handwringing that has gone into the Initial Agency Disclosure Pamphlet delivery issue, it is – in my opinion – a solution looking for a problem.  As far as I know, no licensee has ever been taken to the woodshed by the Oregon Real Estate Agency over the timing of delivery of the Pamphlet.[6]

Additionally, to my knowledge, no Oregon seller or buyer has ever taken legal action against an agent for the untimely delivery of the Pamphlet.  While this is not to say the information in the Pamphlet and its delivery are unimportant – they are, especially when the licensee or licensees are engaging in disclosed limited agency.  But if all the intellectual bandwidth that went into the delivery issue had been used for something useful, e.g. fixing the Seller Property Disclosure law, our industry would be far better off.  And to add insult to injury, the incredibly circular definition of “at first contact” in the newly written rule brings us not one micron closer to clarifying when the Pamphlet is to be delivered.

So why does the new administrative rule make so little difference?  Because for the past 20 years, real estate agents have been delivering the Pamphlet when their gut tells them to, and this seems to be working just fine. The fact that there has been no serious regulatory or judicial blowback to date, says it all.  In other words, common sense, mercifully, has trumped poor draftsmanship.

[My thanks to former Oregon Real Estate Commissioner, Scott Taylor, in vetting this article, and helping fill in facts and commentary that I had overlooked.]

[1] I could give multiple examples of recent Nanny-State rules and regulations, but not now.  First, I’d have to brace myself with a stiff drink, read a passage from Proverbs about patience and understanding, and then have a good First Amendment lawyer vet the article to avoid charges of defamation.

[2] However, there is an old Oregon case, Prall v. Gooden (1961), that while it was not an agency disclosure case, does impose a duty on real estate brokers to make the appropriate explanation and disclosures in a real estate transaction, “… commensurate with the education and understanding of the people he is dealing with, and if he is unable to give competent advice he should allow them to obtain it elsewhere.”   Prall should be viewed as applying across the board to all forms of broker-client representation, including initial agency disclosure.

[3]It must be pointed out that for the past twenty years we’ve had these  laws on the books, there never has been an agency disclosure “pamphlet.” Why that term is still carried in the statute is a mystery that rivals the origins of the great Sphinx.  Why don’t they drop the term or publish a pamphlet? Wait, I know! Because with the advent of the Internet, it soon became apparent that it was far easier to email or fax a piece of paper than a “pamphlet.” OK, just drop the term “pamphlet” from the statute and rule!

[4] Although I will not address the issue here, regurgitating the legal mumbo jumbo from the statute into the Pamphlet does not – in my opinion – provide an understandable explanation to the lay person. Talk about elevating form over substance….

[5] Practically speaking, it wouldn’t suffice, since the seller or buyer is already bound to the transaction, which is a little late to be providing an explanation of agency law and the affirmative duties agents have to their clients.

[6] Former Commissioner Taylor recalls a single case brought by the Agency toward the end of his tenure, but agency disclosure was reportedly not the driving force for the action; it appeared to have been included as one of many other violations.