Seller’s Right To Terminate A Contract
Q: I have a property listed that went into a multiple offer situation. Seller chose a Conventional loan buyer over and FHA buyer. Now that we are under contract, the conventional loan buyer has had to switch to an FHA loan. Does the seller have any right to terminate the contract due to the switch even though it may not cost them any more money?
A: Absent a provision stating otherwise, the Seller does not have the right to terminate.
Disclosure Forms For Farms Without Buildings
Q: When you list a farm with no out-buildings or barns, is there any disclosure forms that need to be completed and signed?
A: No, a disclosure is not required for vacant land.
Unique Bedroom Definitions
Q: I am taking a listing of land with a Barndominium. The seller had a professional licensed appraiser. In that appraisal the appraiser listed it as a one bedroom. The room he referred to has no closet or window but it is a loft open to living space. May I list as “residential” and as a 1 bedroom?
A: There is no standard answer to determine what constitutes a bedroom pursuant to state law. Therefore, you should check with your local codes department to determine whether they have a definition as to what a bedroom is. Appraisers often will look at things like whether there is a window and closet as well as whether the room is above grade level.
MLS Rules Regarding Dates
Q: With regard to the Exclusive Right to Sell Listing Agreement, I feel like there is a conflict between the form and MLS rules regarding the dates to be entered (date to start marketing, effective date, etc.) Can you explain this form?
A: The effective date is the date you enter into the agreement. The Commencement of Marketing Date is the date on which you will list the property in the MLS or advertise elsewhere. You will need to check with your local MLS to determine if they have rules requiring the listing be entered into the MLS within so many days after the Effective date of the listing agreement.
Property Exemptions
Q: It was my understanding that it is a state law that all real property sold in Tennessee must complete an exemption, disclosure, or disclaimer. I am being told by a builder that they do not have to fill out a property exemption. Is this true?
A: The law does not require an exemption form to be completed. If a Seller is exempt from the disclosure statute, they are exempt and do not have to mark why they are exempt. There are still some disclosures they are not exempt from making and these can be found on RF205.
Managing an HOA
Q: I have an agent in my office who is considering managing an HOA that is just being set up. Does the agent have to do that under the “umbrella” of our company? Would I, as Principal Broker, be responsible for anything?
A: Managing an HOA does not require a real estate license in Tennessee and therefore would not have to be done under the umbrella of the firm SO LONG AS the agent does not engage in any activities which do require a real estate license in the management of the HOA.
Purchase & Sale Vs. Counter
Q: When you have received and accepted the counter back, does the original Purchase & Sale and the Counter both need to be bound or just the counter? Or do both need to be signed and bound or just the original P&S or just the counter?
A: You would just enter acknowledgement of receipt on the Counter Offer which was accepted.
Seller Refusing to Authorize the Title Company
Q: I have a valid listing agreement with a seller and they have signed all of the necessary documents; however, the seller is refusing to authorize the title company to close on the property. I feel like it is because the seller does not want to pay my commission. How should I handle this situation?
A: The listing agreement states that in the event Seller unlawfully fails to close on a transaction in which a ready, willing and able buyer was presented and a contract was entered into, you are still owed a commission. At this point, there is likely no way for the Seller to avoid owing you a commission. You may bring this to the Seller’s attention in an effort to prompt them.
Splitting Commission
Q: I am working a deal with another agent. The commission split is not 50/50. How do I handle this situation so that the split is even?
A: Commission splits do not have to even, they are negotiable. You can use RF702 compensation agreement between listing and selling broker to negotiate a different split.
Billboard Advertisement and Phone Numbers
Q: Does Billboard advertisement require an office phone number? The proposed advertisement only includes Company name and website address.
A: Yes, billboard advertisements must include a firm phone number, pursuant to TREC Rule 1260-02-.12 Advertising.
Brokers, Law Licenses, and Closing Companies
Q: If an affiliate broker licensed at our firm has his law license and has closing company and wants to close transaction with clients. Is he allowed to do that? If so, what do we have to disclose. Also, if other agents in office use his title company to close their transactions do they need to disclose anything?
A: TCA 62-13-403(7)(A) and (B) states, “a licensee who provides real estate services in a real estate transaction shall owe all parties to the transaction the following duties: not engage in self-dealing nor act on behalf of licensee’s immediate family or on behalf of any other individual, organization or business entity in which the licensee has a personal interest without prior disclosure of the interest and the timely written consent of all parties to the transaction; and not recommend to any party to the transaction the use of services of another individual, organization or business entity in which the licensee has an interest or from whom the licensee may receive a referral fee or other compensation for the referral, other than referrals to other licensees to provide real estate services under this chapter, without timely disclosing to the party who receives the referral the licensee’s interest in the referral or the fact that a referral fee may be received.”
In regards to a personal disclosure of an ownership interest in a title company, it is permissible for an agent to have an ownership interest as long as the business connection is disclosed to the person receiving the business referral, the buyer. The agent would need to use RF305, and fill the information in under “other” on line 27.
If clients of other agents use the company, nothing needs to be disclosed. Just need to avoid any breaches of confidentiality or duty.
Required to Present Addendum/Escalation Clause?
Q: If a buyer’s agent writes an offer on a property using our Tennessee form RF401 and attaches an addendum with an escalation clause, with the escalation clause listed on the RF401 under section 17, is the listing agent required to present that offer to the seller?
A: The Broker’s Act states, “Unless the following duties are specifically and individually waived, in writing by a client, a licensee shall assist the client by receiving all offers and counter-offers and forwarding them promptly to the client.” Tenn. Code Ann. § 62-13-404(3)(A)(ii). TREC Rule 1260-2-.08 states, “A broker or affiliate broker promptly shall tender every written offer to purchase or sell obtained on a property until a contract is signed by all parties.” Therefore, an agent must present all offers to the client unless they have instructed them not to do so in writing, signed by the seller.
Furthermore, under Code of Ethics Standard of Practice 1-6, “Realtors® shall submit offers and counter-offers objectively and as quickly as possible.” In addition, Standard of Practice 1-7 states in pertinent part, “When acting as listing brokers, Realtors® shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller has waived this obligation in writing.”
Disclose Terms of Multiple Offers?
Q: Please advise as to the ethics of disclosing offers on homes to the other buyers. Looking through the Code of Ethics, I cannot find any reference to whether this would be acceptable or not. I do understand that the decision would be dependent on the seller’s choice.
A: The Code of Ethics does address multiple offers and only requires you to disclose the existence of multiple offers and whether the other offers come from your firm, not the terms of those other offers. Standard of Practice 1-15 states:
Realtors®, in response to inquiries from buyers or cooperating brokers shall, with the sellers’ approval, disclose the existence of offers on the property. Where disclosure is authorized, Realtors® shall also disclose, if asked, whether offers were obtained by the listing licensee, another licensee in the listing firm, or by a cooperating broker.
Financing Contingency & Commitment Letter?
Q: Is a buyer in default if they waive the financing contingency, but do not have the cash to pay for the entire purchase? I hear people say “we would lose our earnest money if the loan fell through.” Is that the worst thing that can happen? Also, if it is not ethical to waive the financing contingency if the buyer does not have the cash, then why is “lender commitment letter” listed as an acceptable proof of funds? Doesn’t this tell the seller you do not have the funds? Is the “waive financing contingency” checkbox there to acknowledge the buyer has cash, or is it a way for the seller to keep earnest money if their loan falls through?
A: We have copied the language from the Purchase and Sale Agreement below. As you can see, forfeiture of earnest money is not the worst that can happen should a buyer default:
Default. Should Buyer default hereunder, the Earnest Money/Trust Money shall be forfeited as damages to Seller and shall be applied as a credit against Seller’s damages. Seller may elect to sue, in contract or tort, for additional damages or specific performance of the Agreement, or both.
A Commitment letter is different from an approval letter. A Commitment indicates the lender has committed to provide the funds.
Build a Team with Another Firm’s Agents?
Q: Is it legal to build a team with other agent(s) from another firm?
A: NO. Refer to TREC rule 1260-02-.41 LICENSEES WHO HOLD THEMSELVES OUT AS A TEAM, GROUP, OR SIMILAR ENTITY WITHIN A FIRM:
(1) Licensees who hold themselves out as a team, group, or similar entity within a firm must be affiliated with the same licensed firm and shall not establish a physical location for said team, group, or similar entity within a firm that is separate from the physical location of record of the firm with which they are affiliated.
(2) No licensees who hold themselves out as a team, group, or similar entity within a firm shall receive compensation from anyone other than their principal broker for the performance of any acts specified in T.C.A. Title 62, Chapter 13.
(3) The principal broker shall not delegate his or her supervisory responsibilities to any licensees who hold themselves out as a team, group, or similar entity within a firm, as the principal broker remains ultimately responsible for oversight of all licensees within the principal broker’s firm. (4) No licensees who hold themselves out as a team, group, or similar entity within a firm shall represent themselves as a separate entity from the licensed firm.
(5) No licensees who hold themselves out as a team, group, or similar entity within a firm shall designate members as designated firm agents, as this remains a responsibility of the licensed firm’s principal broker.
Broker’s Duties for Earnest Money Distribution?
Q: We have a contract that is contingent upon financing. The buyer’s lender denied their loan at the last minute. Now the seller will not sign the earnest money release. How do we handle this situation?
A: Below is information on the broker’s duties relating to the earnest money. If you are the holder of the funds, you can make a reasonable interpretation of the contract or interplead the funds as outlined here.
A principal broker is required under the Broker’s Act to distribute the funds in your escrow account “within a reasonable time.” Tenn. Code Ann. § 62-13-312(b)(5).
TREC has issued a rule which defines what constitutes a reasonable time. Pursuant to TREC Rule 1260-2-.09(7), “Funds in escrow or trustee accounts shall be disbursed in a proper manner without unreasonable delay. Funds should be disbursed or interplead within twenty-one (21) calendar days from the date of receipt of a written request for disbursement of earnest money.”
The principal broker holding the funds has several options available to remit the funds in the event that the deal does not close. We cannot tell you who is entitled to the earnest money. If your client has questions regarding whether he is entitled to the earnest money and/or whether he can back out of a contract, he should speak with his own attorney.
TREC Rule 1260-2-.09(6) outlines how a broker may distribute earnest money: “A broker may properly disburse funds from an escrow or trustee account: (a) upon a reasonable interpretation of the contract which authorizes him to hold such funds; (b) upon securing a written agreement which is signed by all parties having an interest in such funds, and is separate from the contract which authorizes him to hold such funds; (c) at the closing of the transaction; (d) upon the rejection of an offer to purchase, sell, rent, lease, exchange, or option real estate; (e) upon the withdrawal of an offer not yet accepted to purchase, sell, rent, lease, exchange, or option real estate; (f) upon an interpleader action in a court of competent jurisdiction; or (g) upon the order of a court of competent jurisdiction.”
Bear in mind that according to TREC Rule 1260-2-.09(7), this should be done within 21 days from the date it is first requested in writing.
If you have a valid contract, then you will likely only have four options available. The holder of the earnest money can choose the option they wish. You can try to get the parties to agree on the distribution. You may use RF 481, Earnest Money Disbursement and Release Form, for this purpose. This option requires the signature of BOTH the buyer and the seller. Keep in mind that this form also states that both sides are giving up their right to sue on the contract.
If the parties want to reserve the right to file a lawsuit, then it is advisable to have an attorney assist you in drafting an agreement for the release of the funds. If you cannot get an agreement by the parties, you, as the holder of the funds, will need to review the contract to determine if you can make a reasonable interpretation. Bear in mind that if the party who does not receive the funds could file suit against you and the party receiving the funds. However, there is language in the PSA that gives you some protection in the event that this occurs. The PSA states, “No party shall seek damages from Holder (nor shall Holder be liable for the same) for any matter arising out of or related to the performance of Holder’s duties under this Earnest Money paragraph.” If not, then you can interplead the funds.
The final option is a court order (seldom used). An interpleader is a safer option than making an interpretation of the contract, as the judge will determine who receives the funds. If you make a reasonable interpretation, there is the possibility that the party not receiving the funds could sue you.
An interpleader is the court action that the holders of earnest money can take to determine who is entitled to the funds in the event of a dispute between buyer and seller. If you have to interplead the funds, you will need to file a Petition to Interplead Funds in the General Sessions Court of the County where the property is located. You may obtain a copy of the petition by logging onto www.tnrealtors.com and downloading and or printing Form RF 481. Typically, once the petition is filed, copies will be served on the parties to the contract, and a hearing date will be set. On the hearing date, you will appear before the judge and explain why the brokerage is seeking to interplead funds. After the petition is granted, the judge will determine, either that day or at a later hearing, which party (i.e. buyer or seller) is entitled to the funds. The parties will have the opportunity to present their arguments to the judge during that hearing.
The person holding the funds is the one who determines whether to file an interpleader. The seller can request that one be filed, but it is up to the holder of the funds to make that decision.
The procedure for interpleader actions differs from county to county and from general sessions court to chancery court. An interpleader action should be filed in general sessions court if the amount of earnest money is less than $25,000. If the amount is $25,000 or more, the action should be filed in either circuit or chancery court.
If you have to interplead the funds, the buyer and seller will be named as defendants on the interpleader form. This sometimes upsets the parties to think that they are being sued. However, you are not suing them—you are simply turning the funds over to the court and asking the court to decide who is entitled to the funds.
As for court costs in an interpleader, it will depend upon what the earnest money agreement and/or contract states. Generally speaking, the losing party typically is responsible for paying the court costs.
The firm will be the party listed as the plaintiff. If the firm is incorporated, an LLC, or certain types of partnerships, they must be represented by an attorney. An individual cannot represent the interests of an incorporated entity without a law license.
You can always indicate to the parties that if they cannot reach a decision and/or split, that you will interplead the funds—which will involve court costs and attorney fees that you will seek under the terms of the contract. This may encourage them to reach an agreement.
You should also include a specific request for attorney’s fees and costs.
Complaint if Seller Refuses to Sign Offer Rejection?
Q: Is there any ethical or legal reason for a person to file a complaint against a listing agent because their seller refuses to sign a rejection of an offer?
A: You can possibly file an ethics complaint based on the provision below. Pursuant to TREC Rule 1260-2-.08:
A broker or affiliate broker promptly shall tender every written offer to purchase or sell obtained on a property until a contract is signed by all parties. Upon obtaining a proper acceptance of an offer to purchase, or any counteroffer, a broker or affiliate broker promptly shall deliver true executed copies of same, signed by the seller, to both the purchaser and the seller. Brokers and affiliate brokers shall make certain that all of the terms and conditions of the real estate transaction are included in the contract to purchase. In the event an offer is rejected, the broker or affiliate broker shall request the seller to note the rejection on the offer and return the same to the offeror or the offeror’s agent. (Emphasis added).
Obviously, an agent cannot force their client/customer to note a rejection, but they need to ask that this be done.
There is a REALTOR® Code of Ethics provision which is applicable:
When acting as listing brokers, REALTORS® shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. Upon the written request of a cooperating broker who submits an offer to the listing broker, the listing broker shall provide a written affirmation to the cooperating broker stating that the offer has been submitted to the seller/landlord, or a written notification that the seller/ landlord has waived the obligation to have the offer presented. REALTORS® shall not be obligated to continue to market the property after an offer has been accepted by the seller/landlord. REALTORS® shall recommend that sellers/landlords obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract or lease. (Amended 1/19)
Disclosure Required in Leasing Transaction?
Q: TREC rules require that if an agent is selling, leasing or purchasing property, the agent must notify the other party that they are an agent with the Personal Interest Disclosure form. TREC exempts this requirement for property management (leasing). However, the REALTOR® Code of Ethics requires REALTORS® to disclose in every situation. If I own rental property that is being managed by a property-management firm, do I have to make disclosure?
A: If you, the licensee owner, are not acting as a licensee in the transaction, you do not have to disclose your personal interest.
Agent Sign Acknowledgment of Receipt?
Q: I represent a seller on a vacant piece of land. An offer was submitted and also a counteroffer. With regard to the Acknowledgement of Receipt, do I sign this or does my seller?
A: The contract authorizes a licensee to enter in the binding agreement date in the acknowledgement of receipt section. Therefore, you can fill out that section.
Plumbing Surprise: Any Recourse?
Q: I have a buyer-client who purchased a home a year ago. On the disclosure provided by the seller, the home was said to be on city sewer. It also says that it is on city sewer on CRS, and both the seller and my buyer have been paying a sewer bill. My buyer started having plumbing issues last week and found out that it’s actually on a septic. It is going to cost her about $6-$8k to get connected to the city sewer. Does she have any recourse with the sellers?
A: Below is the pertinent statute. The buyer should consult with their own attorney regarding their options.
§ 66-5-208. Purchaser’s remedies
Currentness
(a) The purchaser’s remedies for an owner’s misrepresentation on a residential property disclosure statement shall be either:
(1) An action for actual damages suffered as a result of defects existing in the property as of the date of execution of the real estate purchase contract; provided, that the owner has actually presented to a purchaser the disclosure statement required by this part, and of which the purchaser was not aware at the earlier of closing or occupancy by the purchaser, in the event of a sale, or occupancy in the event of a lease with the option to purchase. Any action brought under this subsection (a) shall be commenced within one (1) year from the date the purchaser received the disclosure statement or the date of closing, or occupancy if a lease situation, whichever occurs first;
(2) In the event of a misrepresentation in any residential property disclosure statement required by this part, termination of the contract prior to closing, subject to § 66-5-204; or
(3) Such other remedies at law or equity otherwise available against an owner in the event of an owner’s intentional or willful misrepresentation of the condition of the subject property.
(b) No cause of action may be instituted against an owner of residential real property subject to this part for the owner’s failure to provide the disclosure or disclaimer statement required by this part. However, such owner would be subject to any other cause of action available in law or equity against an owner for misrepresentation or failure to disclose material facts regarding the subject property that exists on July 1, 1994.
(c) No cause of action may be instituted against a closing agent or closing attorney for the failure of an owner to provide the disclaimer or disclosure required by this part or for any misrepresentations made by a seller on the disclosure form supplied to the purchaser pursuant to this part.
(d)(1) No cause of action may be instituted against a real estate licensee for information contained in any reports or opinions prepared by an engineer, land surveyor, geologist, wood destroying inspection control expert, termite inspector, mortgage broker, home inspector, or other home inspection expert. A real estate licensee may not be the subject of any action and no action may be instituted against a real estate licensee for any information contained in the form prescribed by § 66-5-210, unless the real estate licensee is signatory to such.
(2) Nothing in this subsection (d) shall be construed to exempt or excuse a real estate licensee from making any of the disclosures required by § 62-13-403, § 62-13-405 or § 66-5-206, nor shall it be construed to remove, limit or otherwise affect any remedy provided by law for such a failure to disclose.
(e) The failure of an owner to provide a purchaser the disclosure or disclaimer required by this part shall not have any effect on title to property subject to this part and the presence or absence of such disclosure or disclaimer is not a cloud on title and has no effect on title to such property.
List of Required Transaction Documents?
Q: Is there a list of all required documents for a complete transaction (property disclosure, confirmation of agency, purchase and sale, etc.)?
A: Because all transactions will be different, that means different forms will be required. You can visit the Tennessee REALTORS® Forms on the Fly page and look for the section titled “Residential Listing Package.” This can serve as a starting point.
Are Contracts Assignable in TN? (Hint: Yes)
Q: According to the terms of this Purchase and Sale Agreement, once a contract is signed and accepted, does the Buyer have the right to assign the contract to any person or entity, at the buyer’s discretion, without notification to or approval by the seller?
A: All contracts for the sale of real property are assignable in Tennessee unless otherwise agreed to in the contract. The Tennessee REALTORS® forms contracts are assignable unless something is mentioned in the special stipulations to the contrary. If the assignee does not close, the original buyer is still responsible to close.
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