Legal Hotline

Legal Library

The Legal Library is a series of questions, answers and articles that have been prepared by the Legal Hotline attorneys based on MAR member questions. This information is provided as a service to MAR members.

Earnest Money Disputes

Disclosure

Agency

Listings

Buy-Sell Agreements

Brokerage

Miscellaneous


Earnest Money Disputes

What should a broker do with earnest money he or she is holding when the seller and buyer dispute who is entitled to it?

When it is apparent both parties claim entitlement to the funds and are unwilling to enter into an agreement in regard to their disbursal, it is recommended the broker initiate an interpleader action. To disburse the money, either to the buyer or the seller, regardless of the clarity of the situation, the broker runs the risk of being the subject of a claim by the other party that the disbursal was improper. An interpleader action will take the decision out of the broker's hands, placing it into the court's, and thus, reduce the risk that a disgruntled party would claim an improper disbursal.

An interpleader action is simply a deposit of the earnest money with a justice or district court asking the court to decide the matter. This will allow both the buyer and the seller to present their cases and claim for the money to the court.

What is an interpleader action and how is it initiated?

An interpleader action is a lawsuit. In the situation of an earnest money dispute where the parties are unable to reach an agreement as to the disbursal of the earnest money, the broker holding the earnest money deposit can initiate the interpleader action by suing both the buyer and the seller. The dollar amount of the earnest money at issue and the residence of the buyer and the seller will have some bearing on where the interpleader action can be filed. If the dollar amount is less than $7,500.00 and both buyer and seller reside in the same county, the interpleader action can be originated in justice court for that county. However, if the amount in controversy exceeds $7,500.00 or if the parties are not residents of the same county, district court will be necessary.

The action is initiated by the filing of an interpleader complaint or affidavit. Essentially what the complaint or affidavit will state is that the broker is holding earnest money, pursuant to an Agreement to Sell and Purchase. The Agreement to Sell and Purchase should be attached as an exhibit to the complaint. The complaint should proceed to explain that the transaction has failed and that the parties are unable to reach agreement in regards to the disbursal of the earnest money. The relief that the complaint or affidavit will request is that the Court decide between the buyer and the seller which is rightfully entitled to the earnest money. In addition to that relief, I would suggest that the complaint or affidavit also ask that the broker be reimbursed for his costs and attorney's fees in starting the interpleader out of the earnest money deposit.

The Montana Association of REALTORS® seven-page buy-sell explicitly gives the broker initiating the interpleader action this right. Still absent that language, it is the Hotline's opinion that such a claim is nonetheless worthy of assertion in an interpleader action.

Upon filing the interpleader complaint or affidavit, a broker will have to arrange for the buyer and the seller to be served with a copy of the filed affidavit and corresponding order. From that point forward, the parties will be obligated to appear in court to assert their claims to the funds.

Disclosure

What is a real estate broker or salesperson obligated to disclose?

The obligation of a broker or salesperson to disclose and that the disclosure requirements vary depending upon the nature of the relationship between the broker and the buyer. A seller agent, buyer agent and statutory broker are obligated to disclose adverse material facts to the other party in the negotiations. Adverse material facts are defined in Montana Code Annotated § 37-51-102(2). That definition states as follows:

  • “Adverse material fact” means a fact that should be recognized by a broker or salesperson as being of enough significance as to affect a person's decision to enter into a contract to buy or sell real property and may be a fact that:
  • materially affects the value, affects structural integrity, or presents a documented health risk to occupants of the property; or
  • materially affects the buyer's ability or intent to perform the buyer's obligations under a proposed or existing contract.
  • The term does not include the fact that an occupant of the property has or has had a communicable disease or that the property was the site of a suicide or felony.

A broker acting as either a seller's or buyer's agent has an even greater disclosure obligation to their principal. Montana Code Annotated §37-51-313(2)(c) and (4)(c) provide as follows:

  • (2)(c) disclose all relevant and material information that concerns the real estate transaction and that is known to the seller agent and not known or discoverable by the seller, unless the information is subject to confidentiality arising from a prior or existing agency relationship on the part of the seller agent;
  • (4)(c) disclose all relevant and material information that concerns the real estate transaction and that is known to the buyer's agent and not known or discoverable by the buyer, unless the information is subject to confidentiality arising from a prior or existing agency relationship on the part of the buyer's agent.

Must a broker disclose a prior appraisal?

The answer varies depending upon the broker's relationship with the buyer.

From the perspective of a seller's agent or statutory broker, the question is whether the prior appraisal is an adverse material fact. In the opinion of the Hotline, a prior appraisal, in and of itself, is not an adverse material fact. An appraisal is one person's opinion on the value of the piece of property. That opinion does not materially affect the value, structural integrity or present any sort of documented health risk concerning the property. As a result, it is our opinion that neither a seller agent nor statutory broker is obligated to disclose a prior appraisal. Please note that if the prior appraisal discloses conditions that would qualify as adverse material facts, the presence of those conditions must be disclosed.

For the broker working as a buyer's agent, the information, in our opinion, is quite arguably relevant and material. Thus, if a buyer's agent is aware of a pre-existing appraisal, that information should be provided to the buyer.

What are the disclosure requirements involving registered sexual or violent offenders?

Montana Code Annotated §37-51-105 provides guidance on the real estate broker's obligation in regards to what is known as "Megan's Law". In particular, this section states as follows:

  • The responsibility of a broker or salesperson with respect to sexual or violent offender registration information maintained by a governmental entity under Title 46, Chapter 23, Part 5, is limited to the disclosure of 1) the fact that the information may be maintained and by whom; 2) the actual knowledge, if any, that the broker or salesperson has of sexual or violent offender registration information that pertains to the property in question.

Thus, to meet the requirement of the first subsection, the broker should disclose to a prospective buyer that this kind of information is available and where this information is located. The sources of such information include Federal Probation Department, Montana Department of Justice, and local county sheriff's offices.

To meet the requirements of the second subsection, if the broker has actual knowledge of the presence of a registered sexual or violent offender that pertains to the property, that information must be disclosed to the prospective buyer as well.

Must a broker disclose the fact a property was the site of a suicide or murder?

Montana Code Annotated §37-51-102 defines adverse material facts as follows:

  • "Adverse material fact" means a fact that should be recognized by a broker or salesperson as being of enough significance as to affect a person's decision to enter into a contract to buy or sell real property and may be a fact that:
  • materially affects the value, affects structural integrity, or presents a documented health risk to occupants of the property; or
  • materially affects the buyer's ability or intent to perform the buyer's obligations under a proposed or existing contract.
  • The term does not include the fact that an occupant of the property has or has had a communicable disease or that the property was the site of a suicide or felony.

As you can see, the term "adverse material fact" does not include the fact that an occupant of the property has or has had a communicable disease or that the property was the site of a suicide or felony (murder is a felony). As a result, it is not incumbent upon a listing agent to affirmatively disclose the fact that a house was the site of a suicide or murder. This however does not mean that the listing agent is permitted to mislead a potential buyer if questions regarding that issue are raised. When marketing a property with this sort of history, it may be well worthwhile consulting with the seller before commencing marketing activities to see how they would prefer to deal with such questions, should they arise.

What must a broker disclose in regard to his relationship with the seller and buyer?

In 1999, the Legislature established a process to use a single form for the initial disclosure to the parties, which would be followed by a subsequent disclosure found in the buy-sell agreement. Essentially, the first disclosure a seller or buyer will receive is the initial disclosure. It contains a full description of the possible relationships and corresponding duties. After that, the subsequent disclosure found in the buy-sell will suffice for all further disclosures.

When a property is listed, the initial disclosure is given to the Seller by the listing agent. This initial disclosure identifies the relationship being disclosed, and describes all of its terms and conditions, along with all of the other duties and relationships. When an agent starts working with a buyer, the same initial disclosure will be given, only identifying the relationship as a buyer or statutory broker relationship.

Thus, when both the seller and the buyer commence working with a broker, the initial disclosure should have been given. Subsequently when the buyer becomes interested in the seller's property and negotiations commence, the seller agent will not need to do an initial disclosure to the buyer, nor will the buyer agent or statutory broker need to do an initial disclosure to the seller. Rather, the subsequent disclosure, contained in the buy-sell agreement itself, will serve this purpose.

What is required for lead-based paint disclosure?

The Montana Association of REALTORS® forms relating to lead-based paint, which were drafted based on the EPA suggestion, work in conjunction with one another. The first of these forms, the Disclosure, is designed for use in any transaction in which the lead-based paint requirements apply (i.e., residential property built before 1978). The Disclosure is given to the buyer, detailing the seller's knowledge about the existence of any lead-based paint hazards or inspections, and providing the buyer the opportunity of taking advantage of a 10-day inspection contingency, or to waive that right. If a buyer desires to take advantage of the contingency, that is when the second document, the Contingency Form, comes into play. This Contingency Form is designed to large extent like the existing Inspection Addendum and provides the necessary language creating a contingency, which allows the buyer to conduct a hazard inspection and remove himself from the transaction if it is not approved. If a buyer elects on a Disclosure Form to waive the contingency, the Contingency Form is not utilized.

Agency

What agency relationships are available in Montana?

There are four basic relationships available under the Real Estate Licensing Act. Those four relationships are seller agency, buyer agency, dual agency and statutory brokerage. The Real Estate Licensing Act, in particular Montana Code Annotated §37-51-102 and 313, describe how these relationships are created and what each entails.

A seller agency relationship is established in one of two ways, either by a broker entering into a listing agreement with the seller or by a broker accepting an offer of subagency from the listing agent.

Similarly, a buyer agency relationship is established in one of two ways, by the broker entering a buyer's broker agreement (Agreement to Locate Real Property) with the buyer or by the broker accepting an offer of subagency from the buyer's broker. It is worth noting that the statutory definition of buyer agent (Montana Code Annotated §37-51-102(8)) anticipates that a written buyer broker agreement will exist between the buyer broker and the buyer. It is this buyer broker agreement that creates the relationship, not the statutory disclosure.

A dual agency relationship may arise in the situation where the broker is both the agent of the seller (pursuant to a listing or accepted offer of subagency from the listing agent) and the agent of the buyer (pursuant to a buyer's broker or accepted offer of subagency from the buyer's broker). As a prerequisite to a dual agency relationship arising, the seller and buyer must review the mandatory disclosure form and consent to the dual representation.

A statutory broker relationship is presumed to exist, unless the broker has entered into a listing with the seller, a buyer's broker agreement with the buyer or has disclosed a relationship other than that of a statutory broker. The statutory broker relationship was designed as the default relationship. It automatically arises unless a seller agency, buyer agency or dual agency relationship is established in the manner as is described above. Neither the Real Estate Licensing Act, nor any interpretations of it with which I agree, prohibits a statutory broker, from dispensing advice or making recommendations. The only limitation on that is the advice and recommendations have to be given while the statutory broker is exercising reasonable skill, diligence, and care. Thus, a statutory broker does not change his or her relationship with a buyer or seller by giving advice or making recommendations.

What are In-House Designations?

Prior to the effect of the 1995 amendments to the Real Estate Licensing Act, which brought about these various agency options, a concern was present, that if a broker took a listing that all other brokers in his or her office were deemed the agent of the seller. This often led to a real or perceived need to act as a dual agent on in-house transactions (i.e. those transactions in which an associate in the office took the listing and another associate was working as a buyer's agent). In order to provide an avenue other than dual agency on in-house transactions, the statutes were amended to provide for the designation of a particular broker or salesperson in an office to serve as a "in-house seller agent designate" and another to serve as an "in-house buyer agent designate" thus avoiding the creation of a dual agency relationship. The designations are made by the broker-owner in the office designating one broker or salesperson as the in-house seller agent designate and another as the in-house buyer agent designate. Such designation can be best memorialized by a memorandum to the files detailing the designations. After the designation and throughout the transaction, the two in-house designates, despite being in the same office, will represent the buyer and seller individually.

Should a broker use a buyer broker agreement to create a buyer agency relationship?

Montana Code Annotated §37-51-102(8) defines a buyer agent as "a broker or salesperson who, pursuant to a written buyer broker agreement, is acting as the agent of the buyer in a real estate transaction and includes a buyer subagent and an in-house buyer agent designate." The first important element of this definition is the phrase "pursuant to a written buyer broker agreement." This language anticipates that a buyer agency relationship is established by a written contract, the buyer broker agreement. Thus, much like the way a seller agency relationship is created by entry into a listing contract, a buyer agency relationship is created by entry into a buyer broker agreement.

Montana Code Annotated §37-51-102(9) defines a buyer broker agreement as "a written agreement in which a prospective buyer employs a broker to locate real estate of the type and with terms and conditions as designated in the written agreement." Two buyer broker agreements are published by the Montana Association of REALTORS®. These are the Agreement to Locate Real Property and the Agreement to Locate Real Property - Short Form. The agency disclosure forms are not buyer broker agreements and while necessary as disclosures, they are not designed to create a buyer agency relationship.

What happens when a seller agency, buyer agency or dual agency terminates?

When one of these relationships is terminated (i.e. when a listing expires or is terminated, when a buyer broker agreement expires or is terminated or when a transaction is closed), so do the majority of the agent's duties. Montana Code Annotated §37-51-313(9) provides the broker's duties upon termination of an agency relationship. In particular, this subsection states as follows:

(9) Upon termination of an agency relationship, a broker or salesperson does not have any further duties to the principal, except as follows:

  • to account for all money and property of the principal;
  • to keep confidential all information received during the course of the agency relationship that was made confidential at the principal's direction, except for:
  • subsequent conduct by the principal that authorizes disclosure;
  • disclosure required by law or to prevent the commission of a crime;
  • the information being disclosed by someone other than the broker or salesperson; and
  • the disclosure of the information being reasonably necessary to defend the conduct of the broker or salesperson, including employees, independent contractors, and subagents.

Listings

Are net listings legal?

Net listings are not illegal in the State of Montana. Despite this, the Hotline strongly discourages their use. This is due to the liability exposure involved. The liability stems from the potential for a seller's complaint, after a transaction has been closed, that the broker mislead them as to the value of the property for the broker's personal profit.

Can a seller or listing agent terminate a listing before it expires?

Both the seller who has entered into a listing contract with a real estate broker and that broker have a right to terminate that listing at any time they may chose. Applicable here is Montana Code Annotated § 28-10-802 which provides "unless the power of the agent is coupled with an interest in the subject of the agency, it is terminated as to every person having notice thereof by: . . .(1) its revocation by the principal; . . . " In the Hotline's opinion, a listing agreement does not create an agency coupled with an interest. As a result, the principal (seller) may terminate it at will.

If the listing form utilized is a Montana Association of REALTORS® Standard Listing Contract, the fact that a seller terminates the listing prior to its scheduled expiration makes the seller liable to the listing agent for a full commission. Whether a court would enforce this contractual term depends upon the circumstances surrounding the termination. If the reason for the termination is because of the listing agent's wrongful acts, I tend to think that a court would be reluctant to award that listing agent a commission. If, however, the termination is so that the seller can sell the property, cutting the agent out of a commission, I tend to think the courts would be more willing to enforce the obligation.

The presence of this termination risk leaves the door open for a listing agent to contact the seller and advise them of the terms of the listing contract and the exposure the seller faces. This could lead to some negotiations for payment of a reduced commission or withdrawal of the request to terminate.

How should a broker document a co-listing arrangement?

In the event one or more brokers desires to enter into a co-listing arrangement, the Montana Association of REALTORS® Standard Listing Contract could be utilized, but only if it is substantially modified. The modifications would first identify both brokers as co-listing agents and secondly describe, as between the co-listing brokers the division of commissions in certain events, such as when the first listing agent sells, the second listing agent sells or when a cooperating broker, affects the sale. All of these must be addressed in the co-listing agreement, which then must be signed by the seller and both co-listing agents.

May a broker list, market and sell a property for a "seller" whose interest in the property arises pursuant to a buy-sell which he has not yet closed?

This question concerns a buyer, under a pending buy-sell, marketing and pre-selling the properties prior to the closing his acquisition. While I believe that a buyer could technically pre-sell through the use of a contingency for successful closing of their acquisition, I do not believe a broker can be involved.

In our opinion, a broker's involvement would result in a violation of the advertising restriction found at Montana Code Annotated § 37-51-321(2). This section prohibits a broker from advertising real property without having an effective, signed listing agreement from the property's owner. In this situation, the buyer is not the owner of the property and, thus, any listing from the buyer, under the terms of this statute, would not qualify the broker to advertise the property. Advertisement in this section is defined broadly enough to encompass all sorts of marketing activities whereby a broker makes the availability of the property known to potential buyers. As you can see, in order for a broker to advertise a piece of property, they must have an effective signed listing from the owner. An individual who is the buyer under a buy-sell that has not closed is not the owner of the property. Thus, buyer could not give an effective listing entitling you to advertise the property. It may be possible for you to obtain the signed, written consent of the owner to advertise the property, pursuant to your listing with the buyer. Such an approach will probably meet the spirit of the law, but quite frankly does not meet the letter of the law.

May a broker list, market and sell property before it is finally subdivided?

Montana law requires the final plat be filed before property is conveyed. In particular, Montana Code Annotated § 76-3-301 provides as follows:

  1. Except as provided in 76-3-303, every final subdivision plat must be filed for record with the county clerk and recorder before title to the subdivided land can be sold or transferred in any manner. The clerk and recorder of the county shall refuse to accept any plat for record that fails to have the approval of 76-3-611(1) in proper form.
  2. The clerk and recorder shall notify the governing body or its designated agent of any land division described in 76-3-207(1).
  3. If transfers not in accordance with this chapter are made, the county attorney shall commence action to enjoin further sales or transfers and compel compliance with all provisions of this chapter. The cost of such action shall be imposed against the party not prevailing.

A related issue arising from the preceding statute concerns whether subjecting a property to a reservation agreement or a buy/sell agreement, contingent upon final plat approval, constitutes a sale of property. In our opinion, it is quite arguable that no sale has occurred due to the contingency for final plat approval that would be present in either a reservation or buy/sell agreement. However, this interpretation is certainly open to some debate.

The one exception found in Montana law to the requirement that the property be finally platted before title can be sold or transferred is an exception for contracts for deed. That exception is found at § 76-3-303 of the Montana Code Annotated that provides as follows:

Notwithstanding the provisions of 76-3-301, after the preliminary plat of a subdivision has been approved or conditionally approved, the subdivider may enter into contracts to sell lots in the proposed subdivision if all of the following conditions are met:

  1. that under the terms of the contracts the purchasers of lots in the proposed subdivision make any payments to an escrow agent which must be a bank or savings and loan association chartered to do business in the state of Montana;
  2. that under the terms of the contracts and the escrow agreement the payments made by purchasers of lots in the proposed subdivision may not be distributed by the escrow agent to the subdivider until the final plat of the subdivision is filed with the county clerk and recorder;
  3. that the contracts and the escrow agreement provide that if the final plat of the proposed subdivision is not filed with the county clerk and recorder within 2 years of the preliminary plat approval, the escrow agent shall immediately refund to each purchaser any payments he has made under the contract;
  4. that the county treasurer has certified that no real property taxes assessed and levied on the land to be divided are delinquent; and
  5. that the contracts contain the following language conspicuously set out therein: "The real property which is the subject hereof has not been finally platted, and until a final plat identifying the property has been filed with the county clerk and recorder, title to the property cannot be transferred in any manner."

This contract for deed approach is substantially different than a reservation agreement or simple buy-sell. A seller who is interested in pursuing this approach should consult with their attorney. It is also possible to take a potential reservation agreement or contingency language for a use in a buy/sell to the local county attorney to gauge his or her acceptance of it. Doing so, however, will raise the issue before the county officials where they might not otherwise be aware of an existing reservation or buy-sell agreements.

Buy-Sell Agreements

How are fixtures and personal property treated in the buy-sell?

The approach the Buy-Sell Agreement, promulgated by the Montana Association of REALTORS®, takes is to automatically include fixtures in the sale of real property, unless they are specifically excluded, and to not include items of personal property, unless they are specifically included. Montana law defines a fixture in Montana Code Annotated §70-15-103. That definition provides as follows:

A thing is deemed to be affixed to land when it is:

  1. attached to it by roots, as in the case of trees, vines, or shrubs;
  2. imbedded in it, as in the case of walls;
  3. permanently resting upon it, as in the case of buildings; or
  4. permanently attached to what is thus permanent as by means of cement, plaster, nails, bolts, or screws.
  5. In case law interpreting this, the intention of the party placing the improvement on the property has also been a factor. Certainly if there is any doubt by a broker regarding whether an item is a fixture or an item of personal property, specific reference as to whether it is included or excluded should be made in the buy-sell agreement.

What is the effect of a contingency expiring or other date for action falling on a Saturday, Sunday or legal holiday?

The Montana Association of REALTORS® Buy-Sell Agreement contains a number of dates by which a particular party must take a particular action. With all these deadlines, the real estate broker and salesperson will consistently find themselves calculating the time when these deadlines will arise, to avoid their client missing an important deadline. It is important that the broker or salesperson know the proper way to calculate those time periods, when tied to a certain number of days and the effect of a time period expiring on a weekend or holiday.

Montana Code Annotated §1-1-306 provides, "The time in which any act provided by law is to be done is computed by excluding the first day and including the last unless the last day is a holiday, and then it is also excluded." Thus, if a buyer has three days from the date of a buy-sell agreement in which to make application for a loan and if the buy-sell agreement was dated Monday, the first day is the following Tuesday, the second Wednesday, and the third Thursday, the date by which the application would have to be made.

Montana Code Annotated §1-1-301 provides, A "day is the period of time between any midnight and the midnight following." Thus, following the preceding illustration, the buyer would need to make application before midnight on the Thursday, to meet the contract's requirement.

The next issue that arises, is the effect of the last day of a time period expiring on a weekend or holiday. Addressing this are two, nearly identical provisions of the Montana Code. The first is Montana Code Annotated §1-1-307, which provides, "Whenever any act of a secular nature, other than a work of necessity or mercy, is appointed by law or contract to be performed upon a particular day, which day falls upon a holiday or a Saturday, such act may be performed upon the next business day with the same effect as if it had been performed upon the day appointed." The second applicable section is Montana Code Annotated §28-3-603, which provides, "Whenever any act of a secular nature other than a work of necessity or mercy is appointed by contract to be performed upon a particular day which day falls upon a holiday, such act may be performed upon the next business day with the same effect as if it had been performed upon the day appointed." The only differences between the two separate sections, besides punctuation, are the exclusion of the words "law or" and "or a Saturday" from the latter's provisions. As both sections are plainly applicable to deadlines established by contract, and as the former is more inclusive than the latter, if a deadline were to expire on a Saturday, the party entitled to act by the deadline would have until the following Monday, so long as it is not a holiday, to perform. Just because the law allows additional time for an action, when the deadline falls on a weekend or holiday, does not mean that a party cannot act during that weekend or on that holiday. That is acceptable. Similarly, if a party is going to give a notice, there is nothing to prevent them from giving the notice on a weekend or holiday. If a weekend or holiday falls during a time period, those intermittent holiday or weekend days are counted as are any others. It is only when the last day of the period falls on the weekend or holiday, that the grace period given by Montana Code Annotated §1-1-307 and 28-2-603 arises.

Should a seller consider making multiple counteroffers?

While it is technically possible for a seller to extend multiple counteroffers to two or more buyers, doing so should be the decision of the seller after he or she is advised of the potential for risk. The risk generally inherent in a multiple counteroffer situation is the potential argument that two or more parties accepted the offer, thus committing the seller to sell the property more than once. The only fool proof way to avoid this potential is to deal with only one buyer at a time.

Assuming the seller elects to pursue a multiple counteroffer, each counteroffer must be carefully drafted. Each should provide that it is contingent upon the other buyers not agreeing to the counteroffer which they have been extended. Multiple counteroffers should also clearly provide that if one buyer accepts the counteroffer extended, that acceptance automatically terminates or withdraws that counteroffer as to the other buyers without notice. Exact language describing what constitutes acceptance, such as receipt by the seller or seller's agent will be helpful as well. The main goal in such language is to construct a mechanism to avoid as much as possible the situation where more than one buyer accepts the multiple counteroffer. It is suggested the broker work with the seller's counsel in drafting this language.

What seller financing options are there to consider in Montana?

Seller financing can be documented through the use of trust indentures, deeds of trust, mortgages, and contracts for deed.

The basic structure of a transaction utilizing a trust indenture, deed of trust, and mortgage are all basically the same. With each of these, title is conveyed to the buyer at closing, via a warranty deed. The buyer will sign a promissory note, along with the trust indenture, deed of trust, or mortgage. The trust indenture, deed of trust, or mortgage will constitute the seller's lien on the property and give the seller recourse to the property in the event the buyer does not pay.

The primary distinction between a trust indenture or deed of trust and a mortgage is in the way they are foreclosed. However, one must also keep in mind that under the law, a trust indenture or deed of trust can only be entered into on properties 30 acres or less in size (40 acres effective October 1, 2001). As a result, if the transaction involves property of greater size, a mortgage will be necessary, unless a contract for deed (as discussed later) is used.

Deeds of trust and trust indentures are generally foreclosed by a non-judicial process that involves advertisement and sale. The trustee identified in the document will record on public record a notice of trustee's sale; cause that notice to be mailed to all parties having an interest in the property; and publish it over a course of time in a local newspaper. The notice process generally takes something more than 120 days. At the time and place set for the trustee's sale, the trustee will auction a property to the highest bidder. The highest bidder will receive a trustee's deed to the property and be entitled to possession of the property ten days after the date of the sale. The borrower and junior lienholders, whose interests were foreclosed, are entitled to no rights of redemption. It is also possible to foreclose a trust indenture or deed of trust judicially like a mortgage, if desired.

As alluded to above, a mortgage is foreclosed by judicial process. In other words, the lender must file suit against the borrower, seeking recovery of the balance due on the debt and a judgment of the court foreclosing the mortgage interest. This proceeds as any other court action. Just how much time it will take depends entirely on the nature of defense raised by the borrower and any junior lienholders. After the creditor recovers judgment, a time will be set for a sheriff's sale. Notice of that sheriff's sale will be published in local papers. At the sheriff's sale, the highest bidder will acquire a sheriff's certificate of sale. The sheriff's certificate of sale entitles the successful bidder to obtain a sheriff's deed one year from the date of the sale. During this one year period time, the debtor is entitled to occupy the property as his personal residence and the debtor, along with any junior lienholders, are entitled to rights of redemption. Redemption allows them to acquire, for the price paid at the sheriff's sale, plus additional costs, the sheriff's certificate of sale.

The basic structure of a contract for deed is different than that involved with a trust indenture, deed of trust or mortgage transaction. In a contract for deed, title is not conveyed from the seller to the buyer at closing. Instead the parties enter into a contract for deed, which anticipates transfer of title after the contract is fully performed. At closing, the parties sign the contract for deed, warranty deeds and quit claim deeds, which are deposited in escrow. They also enter into a notice of purchasers interest, which is recorded immediately after closing on public record. Legal title remains vested in the seller, although the buyer obtains what is known as equitable title.

The process for terminating the buyer's interest in a contract for deed is different than that of a mortgage or trust indenture. Typically, contracts for deed will set out a default procedure, whereby notice is given to the buyer, and upon the buyer's failure to cure in a timely fashion, the seller will be entitled to get the documents out of escrow, including the quit claim deed conveying all of the buyer's interest back to the seller.

On the surface, a contract for deed with a short default period might appear to be one that can be realized upon much quicker than a trust indenture, deed of trust, or a mortgage. However, two things must be kept in mind. The first is that the buyer, without much effort at all, can tie up the escrow by simply demanding the escrow agent not disburse documents. In most instances, the escrow agent wanting to avoid any claims being asserted against it will refuse to release the documents to the seller and instead tell the seller to come back with a court order entitling the seller to the documents. This then puts the seller to the task of suing the buyer. The second is that even if the seller is able to get the documents out of escrow and record the quit claim deed, very often title companies will require the seller to get a fresh quit claim deed from the buyer, which after the buyer's default is quite unlikely, or obtain a decree quieting title. Absent either of these, the title company will generally raise exception as to the default process in their title insurance commitment on subsequent transactions. As a result, the seller could well be thrust into a lawsuit to quiet title, which quite frankly depending upon the amount of opposition by the buyer, could take every bit as long as a mortgage foreclosure.

What remedies are available to a buyer when a seller defaults on a buy-sell?

The remedies available to the buyer include 1) return of the earnest money and termination of the transaction, or 2) suit for damages, or 3) suit for specific performance. These three remedies are mutually exclusive. In other words, if one of the remedies is pursued and obtained, the others cannot be. So, if the buyer elects to take the earnest money and terminate the transaction, this is the buyer's sole remedy. The buyer cannot then pursue specific performance or a suit for damages.

What should be considered in pursuing an action for specific performance?

The buy-sell agreement clearly designates specific performance as one of the remedies. However, the courts, prior to enforcing specific performance, also have an obligation to determine if they feel specific performance is fair. In the case Double AA Corporation v. Newland & Company, (Montana, 1995), the Montana Supreme Court was faced with a specific performance claim. In that case, the seller and buyer entered into a buy-sell agreement involving a ranch. Approximately a year before entering the buy-sell, the seller was advised to sell the property in order to avoid a significant tax problem. After entry into the buy-sell, the seller learned the earlier advice was wrong and that there was no reason to sell the property. Rather, significant reasons existed to not sell, as sale of the property would result in a large capital gain for the seller. Upon learning of this, the seller gave the buyer notice of its desire to rescind the purchase contract. The buyer refused to rescind and sued the seller for specific performance.

The District Court, upon trial, found: (1) the buyer knew, or should have known, before the sale, that the seller misapprehended facts material to the contract; (2) the seller was a victim of mistaken information and inaccurate advice; (3) the buyer and seller had extremely divergent backgrounds in business transactions, as the buyer was a sophisticated investor, while the seller was a somewhat unsophisticated, who was neither prepared for her position nor educated in business nor business transactions, negotiations, or taxes; (4) the court found that the land was not unique to the buyer, based upon the buyer's testimony that the ranch was no more unique than land that he already had except that it was contiguous with property he owned; and (5) The court found that the loss would impose a greater hardship on the seller than the buyer because the seller's decision to sell was a direct result of the incorrect tax advice and the ranch had been in the seller's family for over 100 years.

The Supreme Court commented that, while a mistake regarding a tax effect is not adequate to avoid a contract, it may, in light of circumstances, be sufficient to deny specific performance. It found the District Court was correct in denying the buyer's demand for specific performance.

Additionally, if the remedy of specific performance is pursued, the subject property cannot be sold until the matter is resolved. Thus, a buyer can tie up a property by initiating such a claim. If the seller initiates the suit, he must be prepared to hold onto the property until it is resolved. The role of a real estate broker in this is no more than to generally explain the nature of remedies provided for by the buy-sell and refer the parties to counsel for further advice.

Is a buy-sell signed by less than all of the sellers binding?

The Montana Supreme Court addressed this issue in a case that arose in Flathead County called the Thorton v. Songstad. In that case four individuals, along with a corporate trustee were the vested owners of a particular piece of property. The four individuals signed an Agreement to Sell the property, but the corporate trustee did not sign the Agreement. The buyer brought a claim seeking specific performance of the agreement. In discussing the situation, the Supreme Court noted that the agreement anticipated that 100% ownership of the property was to be sold. Absent the signature of 100% of the owners, evidencing their consent to the sale contract, the Court held that no valid contract had been entered. As a result, the buyer's specific performance action was dismissed.

Brokerage

May an individual with a real estate broker's license, that is on inactive status, receive a referral fee?

Several years ago the Montana Board of Realty Regulation issued a Declaratory Ruling addressing this situation. At that time, the Board of Realty Regulation determined that an inactive licensee could only receive a referral fee for a referral made while the licensee was on active status. The payment of the fee could occur after the license went on inactive status, but the act of making the referral must have occurred when the licensee was actively licensed. A licensee on inactive status would not be entitled to a referral fee for a referral made while he or she was inactive.

How long should a broker keep transaction files and trust account records?

Transaction and listing files should be kept for a period of no less than eight years. The reason for this is that the statute of limitations on written contracts is for a period of eight years. Thus, a lawsuit could arise based upon a listing agreement or transaction occurring eight years ago. Keeping your records regarding that listing and/or transaction will help you defend yourself should this occur. § 8.58.414 of the Administrative Rules of the Board of Realty Regulation is the source of rules relating to trust accounts for real estate brokers. The Board of Realty Regulation mandates that trust account records be maintained for no less than five years.

As between an employing broker and an associate who owns the listings generated by the associate and what is the obligation of a employing broker to pay a commission on pending transactions or listings after the associate has left that office?

Absent an express written or oral contract to the contrary a real estate salesperson or broker, working for a particular office or broker, whether as an employee or independent contractor, is does not own and is not entitled to the benefit of pending sales or pending listings. I base this on two sections of Montana statutes.

Initially, Montana Code Annotated §39-2-102 provides as follows:

  • Everything which an employee acquires by virtue of his employment, except the compensation, if any, which is due to him from his employer, belongs to the latter, whether acquired lawfully or unlawfully or during or after the expiration of the term of his employment.

In addition, Montana Code Annotated § 28-10-601 provides as follows:

  • An agent represents his principal for all purposes within the scope of his actual or ostensible authority, and all the rights and liabilities which would accrue to the agent from transactions within such limit, if they had been entered into on his own account, accrue to the principal.

Based upon these statutes, it is the Hotline's opinion that, unless an express agreement between the office or employing broker and the associate provides otherwise, the office is the owner of the listings, all files and all benefits related to any pending listings or pending transactions, subject only to the obligation of the office to pay the associate whatever portion of the earned fee that they have agreed to pay. The obligation to pay the former associate, following termination, depends upon the terms of the independent contractor agreement or employment agreement between the parties.

What relationships can exist between an office or employing broker and an associate?

There are three general categories of relationships with associates found in real estate offices. Those categories include employer/employee, Statutory Independent Contractor and Common Law Independent Contractor.

In an employment relationship, the employer is responsible for federal and state tax withholding, FICA, unemployment insurance and worker's compensation premiums. Additionally, the employer is responsible for the employee's errors and omissions.

A Statutory Independent Contractor was for many purposes treated like an employee. These purposes include elements of control over the Statutory Independent Contractor's day to day duties. However, for federal and state tax withholdings, unemployment insurance and worker's compensation insurance purposes, the Statutory Independent Contractor is treated as an Independent Contractor, if certain qualifications are met. Those qualifications are as follows:

  • The associate must be a licensed real estate broker or salesperson;
  • Substantially all of the associate's remuneration for services performed as a broker or salesperson must be directly related to sales or other output, rather than to the number of hours worked; and
  • The written agreement existing between the office and the broker or salesperson must provide that the associate will not be treated as an employee with respect to such services for federal tax purposes.

A Statutory Independent Contractor will be treated as an employee for liability purposes. Thus, if a Statutory Independent Contractor engages in some act or omission that is found to be wrongful, the office for which he or she works will be held liable as well.

A Common Law Independent Contractor relationship will insolate the principal from liability for the Independent Contractor's acts. In analyzing whether a broker acts as a Common Law Independent Contractor one must look, among other factors, to the control the principal exercises over the Independent Contractor's day to day activities, whether the principal provides supplies and materials to the Independent Contractor and the method of payment. Often the main impediment to a Common Law Independent Contractor relationship is the degree of control exercised by the principal. While the Common Law Independent Contractor relationship can be maintained, if the degree of control is only over the ultimate work product of the Independent Contractor, it will not be maintained if the principal has control over the Independent Contractor's day to day activities. Items like required floor time, staff meetings, providing secretarial help or dictating the amount of output or hours worked all constitute control over day to day activities that in most instances will result in the lack of a Common Law Independent Contractor relationship.

Although it may be difficult, an office and a broker associate can enter into a Common Law Independent Contractor relationship that will hold up for liability purposes. As mentioned above, the absence of control along with the other factors are critical in the establishment of such a relationship. However, an office and a salesperson cannot create such a Common Law Independent Contractor relationship. This is due to the fact that the sponsoring broker is required to supervise and train all salespersons under his or her license. This statutory obligation to supervise and train is tantamount to control over the day to day activities of the salesperson. As such, a Common Law Independent Contractor relationship that would stand up for liability purposes is probably not obtainable. However, a Statutory Independent Contractor relationship is possible with salespersons.

Is it legal for a broker to pay a referral fee to a real estate broker licensed in another state or country?

Montana Code Annotated § 37-51-321 prohibits a licensee from paying a commission to an individual not licensed as a broker or salesperson in Montana. However, Montana Code Annotated § 37-51-306 specifically provides an ability for a Montana broker to pay a referral fee to a broker licensed in another state or jurisdiction, but only in a limited fashion. Specifically this section states as follows:

  1. A licensed broker may not employ or compensate, directly or indirectly, a person for performing the acts regulated by this chapter who is not a licensed broker or licensed salesperson. However, a licensed broker may pay a commission to a licensed broker of another state or jurisdiction, if the nonresident broker has not conducted and does not conduct in this state a service for which a fee, compensation, or commission is paid.

Pursuant to this section, you can pay a referral fee to an out of state or foreign broker, but cannot compensate him or her for activities requiring a Montana license. Thus, while the payment of a referral fee is allowed, the out of state or foreign broker cannot act as a broker in Montana, nor can you cooperate with the out of state or foreign broker, if he purports to act as a broker in Montana.

Miscellaneous

Is there an automatic one year builder warranty arising on the sale of new construction?

A warranty is a contractual undertaking by a seller to repair or replace a defective product. As with any contract, its express terms will control the warrantor's obligations. Thus, a written builder warranty may generally be enforced according to its written terms.

However, a common misconception exists that, absent any written, contractual warranty an automatic "one year builder warranty" exists. I am aware of no statute or regulation that would create such a warranty in regards to real property without the existence of a contract creating the warranty. While it is certainly possible that a warranty contract could be oral, I suspect that you would concur that enforcing the terms of an oral contract would be difficult due to discrepancies between the parties' recollections of the terms of that oral contract.

Loans guaranteed by the Federal Housing Administration (FHA) or the Veteran's Administration (VA) may require, as a condition of the loan, that the builder enter into a written agreement committing to warrant the home for a period of one year from the date of the loan. The terms of the guarantee are specified in the written document signed by the builder as part of the loan process but are usually quite comprehensive in nature. Defects for materials or workmanship are generally covered and afford the purchaser the ability to call upon the builder to repair or replace damaged or defective items within the one year time frame. Again, these are written agreements entered into by the builder, not something that simply arises automatically.

The confusion in regard to automatic "one year builder warranties" may stem from a common law theory of recovery available in Montana which a buyer could assert against a builder/seller of residential real property, known as the implied warranty of habitability. This remedy is not a contractual warranty, despite the name by which it is called. Essentially this provides recourse to a buyer who purchases a home from the builder who constructed it, in the event that, for one reason or another, the home is not habitable. For this cause of action to arise, the defects that are found in the home must be significant, so that the buyer cannot reasonably be expected to live in the property.

How may a trust indenture be foreclosed?

Under Montana law, a trust indenture can be foreclosed in one of two ways. The first way is by advertisement and sale, which is conducted by a trustee, at trustee sale. A trust indenture can also be foreclosed as a mortgage, pursuant to a lawsuit, and sold by sheriff at a sheriff's sale. Generally a trust indenture is foreclosed as a mortgage for one of two reasons, either the trust indenture is defective (for example, a trust indenture encumbers a property the size of which is in excess of what the law allows) or where the lender is interested in obtaining a deficiency judgment against a borrower.

A deficiency is an amount by which the debt the borrower owes exceeds the value of the property secured and oreclosed upon. When a trust indenture is foreclosed by advertisement and sale, no deficiency judgment is allowed to the lender. However, if a trust indenture that involves property of a commercial nature is foreclosed, like a mortgage, a deficiency judgment may be available. The deficiency is determined by looking at the difference between the sale price of the property at sheriff's sale, and the total dollar amount owing on the debt.

What is procuring cause?

A North Carolina court defined "procuring cause" as follows:

The term "procuring cause" refers to a cause originating or setting in motion a series of events which, without break in their continuity, results in the accomplishment of the prime object of the employment of the broker, which may variously be a sale or exchange of the principal's property, an ultimate agreement between the principal and prospective contracting party, or the procurement of a purchaser, which is ready, willing and able to buy on the principal's terms. Hecht Realty v. Whisnant.

The determination of who is the "procuring cause" is wholly dependent upon the facts of a particular case. The National Association of REALTORS® suggest inquiry into several factors in determining the answer to this question. Those factors are listed in the Code of Ethics and Arbitration Manual published by NAR. Copies of this Manual are available at your local board office or on-line in the member's area of NAR's web site.

When a buyer, who has been working with one agent on a particular property, goes to another broker to continue pursuit of the same property, that other broker should determine whether he would be entitled to the selling agent's share in the listing commission. In order to make the determination, two issues need to be addressed. The first of these is whether a share has been offered on a multiple listing service or otherwise to a selling agent. If it is determined that a share has been offered, the next question is whether that broker or you would be considered procuring cause of the sale. This is where consideration of the definition and factors described above should arise. If the other broker is in doubt, the best way to resolve a situation is to enter into an express written buyer broker agreement with an express provision for the buyer to pay the other broker a fee, if the listing agent does not share.