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….