How Brokers Protect Themselves at their Clients’ Expense

When you hire a professional to represent you, your interests should be paramount. If your interests conflict with the interests of that professional, you should be informed of that conflict. Before the representation continues notwithstanding the conflict, you should provide your informed consent to that continued representation. These are some of the hallmarks of “representation.” In at least one regard, real estate brokers — or at least those that use the NWMLS forms — fall far short of this standard.

How, exactly? When a contract fails for pretty much any reason, escrow will typically not disburse the earnest money to either party absent consistent written instructions from both parties. Similarly, before the seller signs another contract for the sale of the same property, it is prudent and proper for the seller to confirm that the first contract truly is dead — selling the same home twice is a sure-fire way to subject yourself to a breach of contract claim. For these and other reasons, it is a near universal practice for the parties to a contract to sign an NWMLS Form 51, a “Rescission of Purchase and Sale Agreement,” when terminating the deal.

NWMLS Form 51 is deeply flawed and totally inconsistent with the notion that the broker “represents” the client, at least in regards to a conflict between the broker and the client. Specifically, the “release” portion of the rescission not only releases the other party to the contract from further liability, it also releases the brokers from all liability. Moreover, it is not too hard to imagine a scenario where the rescission was necessitated by the broker’s own negligence, making inclusion of the release particularly distasteful.

For example, what if the broker failed to timely rescind the contract based on the inspection, and the property has a huge and costly defect? In that circumstance, the buyer might decide to simply walk away, but because the broker blew the inspection deadline the buyer will lose the earnest money. The buyer would then have a good claim against the broker for the loss of the earnest money. But if that buyer signs the Form 51, the buyer releases his broker from this claim.

The irony is that the terms are completely unrelated. There is simply no reason to include the release of the broker in the rescission — other than to protect that broker from a potential claim asserted by the client. In other words, the standard form document used by brokers includes an unrelated and irrelevant term that protects the broker from any adverse claim asserted by the client, even where the adverse claim arose out of the very same facts that led to use of the form document.

So if you’re going to hire a broker for “representation,” be aware that the representation is seriously limited by the broker’s own self-interest. For proof, look no further than the form used by a broker when the deal heads south….

18 thoughts on “How Brokers Protect Themselves at their Clients’ Expense

  1. Hi Craig,

    In a conflict of interest scenario such as this, I wonder how courts have ruled, if a client decided to sue his/her real estate broker over a problem described above.

    Would case law set a precident? Thanks for helping a layperson understand!

    • Jillayne — you’ve narrowed in on the weakest part of my argument…

      Practically speaking, this release is unlikely to ever be enforced by a court, and even if it was enforced on its face I think the plaintiff (client of broker) would still have a viable claim. So before I go any further, let me add: The point of the post is what the Form 51 says about brokers generally. The form itself is probably irrelevant in any particular case. But by including the release term in the Form 51, the NWMLS sheds light on its attitudes in general.

      Speaking from experience, I can tell you that at least one court found the release void and unenforceable for two reasons. First, it is a general contract principle that a contract requires “consideration,” an exchange of something of value in return for the obligations imposed by the contract. A release is a type of contract. Therefore to be valid a release requires consideration. Needless to say, when my client signed the Form 51 there was no exchange of anything of value with the broker. Accordingly, no consideration, no contract, no release.

      Second, it is another legal principle that a contract that violates public policy is void and unenforceable. For example any contract that calls for a criminal act violates public policy and therefore is void (so Dr. Mockovak, you can forget about that breach of contract claim…). It is against public policy for brokers to obtain releases of their own liability to their clients in this fashion (by including the release in an unrelated and necessary form document).

      That said, even if a court upheld the release — very unlikely at best — I don’t think that gets the broker off the hook. Per the Cultum case, a broker is held to the standard of care of a practicing attorney when completing pre-printed forms (which is the practice of law). Inclusion of this release is a pretty clear example of legal malpractice — attorneys simply are not allowed to throw their clients under the bus. So, I see the broker being liable for legal malpractice, with the damages being those sustained as a result of the broker’s negligence in the transaction that, but for the release, would have subjected the broker to liability to the client. In other words, the plaintiff simply has to prove two separate negligence claims: legal malpractice by including the release in the rescission; and broker malpractice, the conduct that actually caused the plaintiff’s harm. I would not see much difficulty in proving the former, leaving the plaintiff in basically the same place as if there was no release.

      Moreover, if a court upheld this release, I think the plaintiff would have an excellent consumer protection act claim (although typically such claims must differ from a malpractice claim, so it may be one or the other). Including the release in the form strikes me as an unfair business practice that harms the consumer.

      Thank you Jillayne for the comment!

  2. Obviously lawyers wrote that form. Not brokers. If the buyer gets their Earnest Money back via the Form 51 the same as if they had done a timely 35R, why is this an issue?

    I don’t like the Form 51 being required by Escrow Companies when the buyer is IN the 35R timeframe, and many do require it. The Escrow Company I use does not require a Form 51 for the buyer to cancel on inspection. But once in a while I have to use the seller’s choice of escrow, especially on a bank owned property, and they do require a Form 51 in addition to a 35R. That really should not be the case.

    Though it seems to me that you defended escrow’s policy of requiring the seller signature to release Earnest Money in the past, even though contractually it is a unilateral right to cancel.

    • Duh. Lawyers wrote ALL of the NWMLS forms. That is required by Cultum.

      Moreover, lawyers wrote that form with the knowledge and consent of the NWMLS. Its an NWMLS form. I think its reasonable to hold them to its contents. I don’t think you can just dismiss this as “from a lawyer.” A lawyer takes instructions from the client, and ultimately the client is responsible for the contents of the document. You wouldn’t try and avoid a contractual obligation because your lawyer wrote the contract that you signed, right?

      Whether or not escrow should require a Form 51 is totally irrelevant to the post. Its a red herring I won’t be chasing.

      • The Form 51 is more commonly used when the buyer is IN the timeframe than out. You may call that a “Red Herring”, but to only consider it as to when the buyer is OUT of timeframe discounts the majority if its actual use.

        As to the brokers being responsible for what the lawyer does…how can you say that and in the same breath hold an agent responsible for what a buyer does not do in a contract? The buyer has the obligation to “do” something in a contract. Are you suggesting the buyer doesn’t know how to count the number of days he has to respond?

        You want to hold the broker responsible for what the lawyer does AND you want to hold the broker responsible for what the buyer does not do as well. Sounds like an arbitrary attack on brokers to me.

        • Only you, Ardell, could so successfully switch things around on me! 🙂

          A few points in response:

          1) It makes no difference when the Form 51 is used or when it is required. You agree it IS used frequently, right? The point is that the form includes the client’s release of the broker from all liability. That’s flat out wrong and inconsistent with the notion that a broker provides “representation.”

          2) This is an NWMLS form. The NWMLS paid a lawyer to draft it (along with every other MLS form) and undoubtedly approved the final version. The NWMLS provides this form to its members for use in transactions when the deal fails. Deals fail, and NWMLS members do indeed use this form. It is astounding that you now claim the NWMLS is not responsible for its content. By that logic, who is EVER responsible for the contents of a legal document other than the lawyer who drafted it? I’ve heard of “blame the lawyers” but this takes it to a whole new level.

          3) Apparently you don’t think the broker should be responsible for professional negligence. Rather, if something goes wrong its “Blame the client!” I mean, you really think the broker has no professional obligation to monitor the inspection contingency period? You reallly think its up to the buyer to say, “Hey, broker, we need to respond to the inspection”?? Wow. Honestly, I never thought I’d hear you make such a point — you’re always so vocal about how brokers help people and how important they are, but if they don’t have an obligation to keep track of deadlines…. And I certainly don’t see the value of a real estate broker if that is the case. To paraphrase, with a professional like that on your side, who needs an opposing party. But I digress.

          4) Arbitrary attack? Please. The Form 51 speaks for itself — and it speaks volumes.

          It would be great if you either defended the inclusion of this release language in the Form 51 (beats me how you can defend the indefensible), OR admit that the language is inappropriate given that a broker is supposed to protect the client’s interests (i.e. provide “representation”). That’s the issue I raise. But I suspect you’ll avoid the issue further and throw up more chaff. And I can’t blame you. You’re in a tough spot on this one, Ardell.

      • I gotta ask, Jerry: So you think this is acceptable “CYA” behavior? From a professional who claims to protect your interests? Surely you can appreciate that it is NOT in the interests of the client to waive claims against the broker. Or is your definition of “representation” limited ONLY to dealings with third parties? In other words, you agree that brokers protect your interests AS LONG AS THOSE INTERESTS ARE CONSISTENT WITH THE BROKER’S INTERESTS. If so, that is limited representation, although I bet nobody bothers to explain that to the client…

          • Practicing “defensively” is one thing; taking an affirmative step to protect yourself from liability at the client’s expense by surreptitiously including an unneccessary and unrelated release in an otherwise required document, and almost certainly without calling the client’s attention to the terms of the release, goes WAY beyond “defensive.”

  3. Isn’t “if you take this money this is the end of things” a fairly consistent legal condition of getting the money? You lose me on that. Most anyone getting a chunk of money has to sign a “this is final resolution” statement in order to get that money.

    You lose me on how this is different. Besides, if they get all of their money back, what’s the need to have an open right to an action against anyone?

    I don’t agree that is it used “appropriately” frequently, and most often it is used completely without cause or reason. I would NEVER use it if escrow companies would did not insist that I do on occasion, and will NOT voluntarily have a buyer use an escrow that makes it common practice to require the 51 in addition to the 35R. Totally unnecessary IMO.

    There is no “wrong” done if the 51 gets the Earnest Money back the same as the 35R would have. Where’s the “wrong” in that? If the buyer gets all of their Earnest Money back and the buyer gets what they want, that being out of the contract, why do you want to sue the brokers, Craig?

    • The point of the post is, “what does the Form 51 say about brokers in light of the fact that it also includes a release of the broker’s liability by the client, a release that is irrelevant and unnecessary in this standard form?” But to address your specific points…

      You’re right, Ardell, if there’s no harm, there’s no foul. But the problem is that the form is used regardless of whether or not there is harm to the client. Its a standard form that is used whenever the contract needs to be rescinded. Therefore, sometimes, there will be harm to the client as a result of the broker’s negligence that led to the need to rescind. See the hypothetical above, where the earnest money is released to the seller. But brokers attempt to avoid that liability by using the Form 51, which specifically relieves the broker from liability. And do any brokers even point that out to the clients?

      Yes, it is common for any settlement or resolution to include a release of liability as between the parties to the contract or dispute. Here, the broker gets a release as well, even though the broker is not a party to the contract. There is no reason why the broker should be released from liability if the buyer wants to avoid further liability under the contract. The rescission should relate to liability between the seller and the buyer, pereiod. The rescission has no rational relation to broker liability. The two issues are distinct and different from one another.

      Finally, I’m curious: Why are you so adamant against using a Form 51? Is it because you don’t think its right that the client releases you from liability unless the client needs to and does so knowingly?

      • I think you’re missing the point.

        IF there is broker negligence, then you don’t use a Form 51 AT ALL. You go straight to an attorney to both sue the broker AND to get the Earnest Money released. The 51 is ONLY to be used when there is no claim of broker negligence.

        As to why I am ferociously opposed to the use of 51 for cancelling on Home Inspection:

        1) the buyer has the unilateral right to cancel under the contract between the buyer and the seller. How dare you require the buyer to have to ask “seller MAY I have my money back.” AS IF the seller has some “right” to say no! They don’t!

        2) The buyer has “a right to cancel on inspection” NOT a “right to rescind”. By forcing the buyer to use a 51 instead of a 35R it gives the appearance of a “rescission” for something else, and puts the buyer into a gray area unnecessarily.

        The buyer DOES NOT need the seller’s “permission” to cancel on inspection OR to get the Earnest Money returned when he/she does cancel on inspection.

        IF the buyer DID in fact need the seller’s permission to cancel on inspection, I would go back to the 1st and 2nd deposit scenario. Small 1st deposit and 2nd due at end of inspection period or NO EM due until after the inspection phase.

  4. Actually Ardell just made your point about the Form 51, it is inadequate. The form should be used if indeed an inspection is the reason for backing away from the contract. There have been several times that Ardell has felt the inspection was an extension of the original intent of the Purchase, and sale Agreement.

    The inspection is a matter of discovery on the part of the buyer that corresponds with the disclosures of a Form 17. It doesn’t necesassarlily reopen the contract to negotiation, or become a reason for not moving forward.

    In the times of a run up in properties, where there was a rush to “tie up” a property, there may have been some reason to use an inspection as a mechanism within the contract. Today I would be very uncomfortable promising a buyer that the use of the inspection was anything more than a discovery of defects.

    In this case I would want a Broker held harmless form, at the very least.

    • David,

      In theory I agree with you, but in practice it just doesn’t work out that way all the time. It usually does with a private seller in an occupied home on a smallish flat lot. But lately with all of the bank owned and builder went belly up properties, there is no real Form 17. There either isn’t one at all or it says “don’t know” to everything.

      One I did had an undisclosed well on the property. The builder never even told the County there was a well and I had to have the well declared “irrigation only” just so the house didn’t have to be bulldozed. Then there was a lawsuit from the neighbor on the Title Report. All undisclosed issues. I know renegotiating the price isn’t “supposed” to happen based on an inspection, but sometimes you find out so many things that were undisclosed, that a renegotiation of price is warranted.

      I had another “new home” in escrow, but when I went to the city and pulled the microfisch and had it inspected by both a home inspector and a structural engineer, well frankly we found a ton of things we could live with, that were not “fixable” but weren’t accounted for in the original offer. We expected everything to be NEW on a new house, and that turned out not to be the case. So we backed up the price $50,000. Seller agreed without any argument whatsoever, so “all’s well that ends well”.

      Both of those closed, so no 51 was involved. I don’t often have to cancel on inspection as I, like you, can see most of the things that are wrong with a house before an inspector comes along.

      What is and is not a “defect” is a very subjective “test”, David. Not everyone’s opinion on that is identical, for sure.

      When I do have client who needs to cancel on inspection, I don’t think it’s fair for ESCROW to DEMAND a 51, when all that is required is a 35R. Really? Craig says agents are not to be considered and yet who is DEMANDING the 51 in the first place? Usually escrow and not the agents or the buyer or the seller. What’s wrong with THAT picture?

      Craig, I have NEVER used a Form 51, except when escrow would not release the Earnest Money without that specific form, which THEY named by its Form #. In the grand scheme of getting my client’s Earnest Money back, what the darned form says becomes secondary to our purpose at hand. Getting the client’s Earnest Money back is the priority.

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