Duty to Investigate

Posted on November 29, 2012 by Peter J. Christensen

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Prevent an Article 16 Violation by Making Sure a Prospect Isn’t Already Represented

 For several years, I have had the opportunity to teach a class on the topic of the National Association of REALTORS® Code of Ethics. As I go out to teach and talk with agents, I hear similar questions and see common misunderstandings about certain parts of the Code of Ethics. One of most common questions has to do with Article 16 and an agent’s duty to determine whether or not a prospective client has contracted with another agent for the same services.

Hypothetical Situation

Article 16 says REALTORS® should not interfere with the exclusive agency agreements of other REALTORS®. When I teach Article 16, I always start with the following hypothetical situation:

Dwight Agent has a friend of a friend, Angela Client. At a birthday party for their mutual friend, Dwight and Angela strike up a conversation. Angela mentions she is looking for a house to buy, one that can fit a lot of dogs.

Dwight decides to seize the opportunity for new business, and he tells Angela he could help her in her search. Dwight asks Angela whether or not she is currently working with any other agents. She says she was using one for a while, but it wasn’t working out, so she is now looking on her own. But she is willing to give Dwight a shot. Dwight tells her that as long as she is not currently being represented by another agent, he can be her agent. They sign an exclusive agency agreement right there at the party and begin searching for a dog-friendly home the very next day.

Unbeknownst to Dwight, Angela is still under contract with Bernard the Agent. Angela had asked Bernard to release her from their contract but had never actually received a release.

Agency Agreements

After explaining this hypothetical situation, I ask my classes two questions:

  • Does Dwight have a problem?
  • Is it enough that Dwight asked Angela if she was working with somebody else?

Hopefully the answer to the first question is obvious. Yes, Dwight has a problem. His client is contracted to two different agents to provide the same service.

The second question, however, usually produces a variety of responses. Some agents say, “Yes, you should take your clients’ word that they aren’t represented and that should be good enough.” Other agents aren’t as sure and answer with, “I would hope that asking them is enough, but maybe not.” And still others say, “I always double check my clients’ answers; they don’t know these things.”

I usually follow up with this question, “Can’t you trust your buyers?” After the laughter dies down, I ask, “Do buyers always understand the agency contracts they sign? Do they?”

I have heard, countless times, clients recount how they “fired” their agent.  When asked how they did this, they tell how they called their agent and said, “You’re fired.”

Is this enough to terminate a signed agency agreement? Not if they have signed a buyer-broker agreement. A buyer-broker agreement is a binding contract and requires a mutual release before it is terminated. That means the broker and the client both need to agree to terminate the contract.

Buyers often don’t understand the nature of the buyer-broker agreement. This means you can’t always trust your client’s answer, not because they aren’t telling the truth, but because they may not understand how to properly end their relationship with an agent.

Article 16 – Duty to Investigate

Take a look at Article 16 of the Code of Ethics. In Standard of Practice 16-9, it says, “REALTORS®, prior to entering into a representation agreement, have anaffirmative obligation to make reasonable efforts to determine whether the prospect is subject to a current, valid exclusive agreement to provide the same type of real estate service.” (Emphasis added.)

Notice that it says agents have an affirmative obligation to make reasonable efforts, meaning the burden is on the agent and not the client. Most of the time, simply asking your clients whether they have been working with another agent will be enough to satisfy your duty under Article 16. But why might asking this question not have been enough in the hypothetical above? What red flag should Dwight have noticed?

Angela told him she had been working with another agent. Remember, Dwight has an affirmative obligation to take reasonable efforts to make sure Angela is not contracted with another agent. If Angela had simply answered, “no,” without any other evidence of a second buyer’s agent, Dwight would have been safe to proceed based on Angela’s answer. Because she said she had been working with an agent, Dwight then had the duty to take further efforts to ensure the client was not still under contract with the other agent.

These further steps could be as simple as asking Angela a few more questions:

  • “How long ago were you working with the other agent?”
  • “Did you sign an agency agreement with that agent?” If so, “When was it set to expire?”
  • “Did you put in any offers?”

Depending on the answers to these questions, Dwight may be safe to proceed or may need to follow up with a few more questions. If Angela says she was working with her cousin two years ago but never put in an offer and never signed anything, then Dwight is safe to represent Angela.

If, however, she answers that she was working with someone a few months ago and put in several offers on properties, then Dwight is probably going to need to investigate further and ask if she has a release or a copy of her agency agreement.

Eventually, if Dwight cannot get a satisfactory answer, he may need to call the other agent and ask if there is still a current agency agreement in place. It may be an uncomfortable phone call, but it will be more comfortable than sitting through an ethics hearing.

The point is that your potential client’s answers and circumstances will determine how far you need to go to satisfy your affirmative duty to make reasonableefforts to determine if your client is already under contract with another agent.

Simply put, if your client gives you any hints that he may be subject to a current exclusive agency agreement, then you, as the agent, have the duty to make sure he is not currently contracted to another agent for the same services. You must continue investigating until you are satisfied your client is free to contract with you.

Reprinted from Utah REALTOR® Magazine (Fourth Quarter 2010) with permission from the Utah Association of REALTORS®. All rights reserved.

STANDARD OF PRACTICE 16-9

National Association of REALTORS® Code of Ethics

“REALTORS®, prior to entering into a representation agreement, have an affirmative obligation to make reasonable efforts to determine whether the prospect is subject to a current, valid exclusive agreement to provide the same type of real estate service.”

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