By: Miriam J. Baer, Deputy Legal Counsel
Last July, the Commission implemented a comprehensive new rule regarding agency agreements and disclosure. The provision of that rule that has perhaps generated the most confusion and concern is the one requiring a seller's agent to disclose to a prospective buyer at the "first substantial contact" that the agent does not represent the buyer. That provision also requires the agent to make the disclosure in writing on the Commission's "Disclosure to Buyer from Seller's Agent or Subagent" form.
[For a discussion of the meaning of first substantial contact," see Real Estate Bulletin Vol. 26, No. 3, Fall 1995, page 5: "Agency Law Update: First Substantial Contact. "]
When "first substantial contact" occurs in person
When you are acting as a seller's agent or subagent and your first substantial contact with the buyer will occur in person, compliance with this rule is not difficult. Typically, you will discuss agency issues and options with the buyer at the beginning of the meeting. If the buyer chooses not to be represented by you, then you must work with the buyer as a seller's agent or subagent. In that case, simply give the "Disclosure" form to the buyer, explain that you represent the seller, and ask the buyer to sign it.
When "first substantial contact" occurs electronically
But suppose that a first substantial contact is about to occur over the telephone, the Internet or another form of electronic communication?
Under the original version of the rule, as a selling agent, you were required to break off your discussions with the prospect before that prospect revealed to you any confidential information. You were then required to fax, mail or otherwise deliver a copy of the "Disclosure" form to the buyer. Only after the buyer had received and signed the form could you engage in any conversation during which the prospect revealed confidential information.
Commission amends rule
The Real Estate Commission recognized that in certain circumstances, it is impractical for sellers' agents to provide written disclosure statements to buyers before a "first substantial contact." Therefore, it has amended the pertinent provision of the rule to provide as follows:
If the first substantial contact occurs by telephone or by means of other electronic communication where it is not practical to provide written disclosure, the broker or salesman shall immediately disclose by similar means whom he represents and shall immediately, but in no event later than three days from the date of first substantial contact, mail or otherwise transmit a copy of the form to the buyer.
Oral or electronic disclosure still accomplishes the goals of the rule: it puts the buyer on notice that you, as a seller's agent or subagent, do not represent him. It makes the buyer aware that any information he gives to you may be passed along by
you to your seller-client. Having received this warning, the buyer is then free to tell you anything that he wants you to know, and to keep confidential anything that he does not want you to pass along to the seller.
Wording the disclosure
How detailed should your oral disclosure be? At a minimum, you should disclose to the buyer all the information contained in the box on the front of the "Disclosure" form. Thus, your disclosure essentially would be:
AGENCY DISCLOSURE: When showing you property and assisting you in the purchase of a property, I and my firm will be representing the interests of the SELLER. As such, I, the firm, and all its agents must work to obtain for the seller the best price and terms possible. I,the firm, and its agents must also furnish the seller any information obtained from you or any other source that is material to the transaction or that might influence the seller's decision to sell. Therefore, as a buyer, you should not give me or other associates of my firm any information that you do not want the seller to know.
If your first substantial contact with the buyer will occur by telephone (and it is not practical to provide a written disclosure to the buyer), read the above "Agency Disclosure" language or the language in the box on the "Disclosure" form to the buyer over the phone.
Similarly, if your first substantial contact will occur by electronic mail, then "E-mail" that language to the buyer. But, if your first substantial contact will occur over the fax machine, fax the buyer a copy of the entire form, since it is practical in that situation to provide written disclosure.
Key to compliance
The key to compliance with the new provision is to disclose orally or electronically that you represent the seller before the buyer discloses any confidences to you. Once you have done so, you may solicit from the buyer information such as his price range and financial situation. If the buyer chooses to tell you "confidential" information after disclosure, no violation of the rule will have occurred.
Don't forget to immediately follow up your oral or electronic disclosure with a complete copy of the form. The new provision requires that you do so within three days from the date of your first substantial contact. As always, ask the buyer to sign it. Retain a copy of the signed document for your file.