2006 NAR Code of Ethics Changes
by Henry “Hank” Lerner, Esq.
Member and Legal Services Director
Pennsylvania Association of REALTORS
Two changes relating to Article 1 of the NAR Code of Ethics have been approved to take effect January 1, 2006. Both will have at least a minor effect on how you practice, and both will be reflected in upcoming revisions to PAR Standard Forms.
Standard of Practice 1-15: Multiple Offers
Standard of Practice 1-15 had stated that listing brokers, with the permission of their seller, must disclose the existence of other offers on a property if asked by a buyer or a cooperating broker. This requirement has been expanded to require that the listing broker also disclose the “source” of that offer. Specifically, the Standard of Practice has now been amended to state (new language is in bold):
“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 whether offers were obtained by the listing licensee, another licensee in the listing firm or by a cooperating broker.”
Standard of Practice 1-13: Confidentiality of Offers
Standard of Practice 1-13 contains a list of disclosures that must be made by a REALTOR® upon entering into a buyer/tenant agency agreement. What had previously been a list of four disclosures has now been expanded to five items with the requirement that REALTORS® advise potential buyer clients about “the possibility that sellers or sellers’ representatives may not treat the existence, terms or conditions of offers as confidential unless confidentiality is required by law, regulation or by any confidentiality agreement between the parties.”
What does this mean to me?
REALTOR® A is the listing broker for a property. On Monday, two offers are submitted, both for full price. One is from a buyer represented by REALTOR® A as a dual agent, the second is by a buyer represented by REALTOR® B, who works for another firm.
On Tuesday morning REALTOR® C calls REALTOR® A and says, “I have a client who is putting together an offer. She would like to know if there are other offers on the property. What can you tell me?”
As a first step, REALTOR® A should determine if he is permitted by his seller to disclose any information about other offers. If the seller has provided instructions to the broker (hopefully in writing) to not disclose any information, then REALTOR® A would respond by saying something like, “I’m sorry REALTOR® C, but my client has instructed me not to disclose that information.”
If REALTOR® A is permitted to disclose information about other offers, what must be disclosed in 2006 is greater than 2005. Under the 2005 Code of Ethics, REALTOR® A could reply simply by saying, “I have two other offers. Thanks for calling.” With the change to Standard of Practice 1-15, REALTOR® A must now respond by saying, “I have two other offers. One is from a client I represent, the other is from a cooperating broker.” Note that there is no requirement for the buyer or buyer agent to ask about the source of the offers; if the seller has provided permission to disclose that these offers exist, the listing broker automatically must disclose the source of the offers.
The PAR residential and commercial listing contracts (Form XLS and Form XLS-C) will be modified to reflect this new requirement. (Note that Form XLS, paragraph 19, currently states that the broker will disclose the existence of other offers unless directed otherwise by the seller.) Continued use of the current forms is fine, as there is nothing incorrect in the current language; the amended language is to help remind the broker what must be disclosed. These new forms should be released in the first quarter of 2006.
Of course, REALTOR® A might provide even more information to REALTOR® C if his client permits it. Many listing brokers might respond to the inquiry by saying: “I have two other offers. One is from a client I represent, the other is from a cooperating broker. I have to tell you, though, that both are for full price and the offer from REALTOR® B’s client has a much higher deposit than normal and waives the mortgage contingency.”
When REALTOR® B gets word that his client’s offer was beaten by REALTOR® C’s client, she calls REALTOR® C to find out how he managed to put together such a good offer. When told that the listing broker disclosed the strengths of her client’s offer, she gets very upset that this information – which she promised her client would be confidential – was disclosed to competing bidders.
This is where the changes to Standard of Practice 1-13 come into play.
Although many buyers, and even some buyer agents, assume that the terms of an offer are confidential between the buyer and seller, this is not the case. Absent a state law or regulation, or a written confidentiality agreement between the parties, there is nothing in the Code of Ethics that requires a seller to provide any confidentiality to the terms of a buyer’s offer. In fact, many of you have probably been in circumstances where you have disclosed certain terms of one offer in an effort to get better terms from another potential buyer.
Because of this misunderstanding, Standard of Practice 1-13 was amended to require that buyer agents explicitly inform buyers that no confidentiality exists. This will hopefully educate both buyers and their agents on this issue, and will encourage buyers with confidentiality concerns to draft a confidentiality agreement if one is necessary or desired.
The PAR Business Relationship Form (Form BR) and Exclusive Buyer/Tenant Agency Agreement – Commercial (Form BR-C) will both be amended to include this disclosure. The NAR Professional Standards Committee has emphasized that there is no specific requirement that this disclosure be in writing. Therefore, until these revisions are released it is still acceptable to use the current forms as long as the additional disclosure is provided orally or is added to the form as an additional term. As with the listing contracts, expect to see these revised forms in the first quarter of 2006. n
If you have any questions about the applicability of these changes, contact the PAR Solutions Center at 1-800-555-3390, or call the PAR Legal Hotline at 1-800-727-5345 between 9-11 a.m. and 1-3 p.m.