BARRISTER'S BRIEFING: The Two Unenforceable Standards of Practice in New York
Leon Cameron, Esq. | September 2018
The National Association of Realtors Code of Ethics and Arbitration Manual is the architecture by which Professional Standards enforcement is shaped at the local Association level. In the Code of Ethics itself are 17 Articles and various Standards of Practice. The Standards of Practice are applications of ethics principles to specific conduct in specific circumstances as related to one or more Articles of the Code of Ethics. The Professional Standards Committee of the National Association of Realtors has adopted these Standards of Practice as “interpretations” of the Code.
However, Realtors should be aware that in New York, there are two specific Standards of Practice, 3-4 and 16-16, that are not enforceable due to conflicts with the New York Department of State. One Standard of Practice is in conflict with an opinion letter, the other in opposition to a Declaratory Ruling.
Article 3 of the Code of Ethics deals with the directive to cooperate with other Brokers, except when cooperation is not in the client’s best interest. As a practical interpretation of Article 3, Standard of Practice 3-4 states:
“Realtors, acting as listing brokers, have an affirmative obligation to disclose the existence of dual or variable rate commission arrangements (i.e., listings where one amount of commission is payable if the listing broker’s firm is the procuring cause of sale/lease and a different amount of commission is payable if the sale/lease results through the efforts of the seller/ landlord or a cooperating broker). The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers and shall, in response to inquiries from cooperating brokers, disclose the differential that would result in a cooperative transaction or in a sale/lease that results through the efforts of the seller/landlord. If the cooperating broker is a buyer/tenant representative, the buyer/tenant representative must disclose such information to their client before the client makes an offer to purchase or lease.”
However, on Sept. 28, 1992, the New York Department of State issued a Declaratory Ruling In the Matter of MI Realty (92-37) which effectively declared Standard of Practice 3-4 unenforceable, although that particular ruling was specifically directed at an analogous regulation of the-then Columbia County Board of Realtors’ Multiple Listing Service, Inc. At issue there was an MLS regulation mandating that where a listing broker has entered into an agency agreement with a seller whereby the listing broker agrees to accept a different commission if the listing broker causes the sale of the property without the assistance of another broker, than if the sale results with the assistance of another broker, the listing broker must disclose the existence of that agreement when the property is listed with the MLS.
The Department of State declared the MLS regulation an unlawful restraint of trade in violation of federal anti-trust laws and citing federal caselaw in support, United States v. Realty Multi List Inc., 629 F.2d 1351 (5th Cir., 1980); in addition to state case law, Maxine Gerard, Inc. William B. May & Co., 51 Misc.2d 711, 273 N.Y.S.2d 888 (Supreme Ct. N.Y. County, 1966).
Due to a conflict with an opinion letter from DOS, there is another Standard of Practice, found in the Code of Ethics, which is unenforceable in our state. Standard of Practice 16-16 sets forth:
“Realtors, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation.”
On April 21, 1989, in an opinion letter transmitted from DOS to the-then Executive Vice President of the New York State Association of Realtors, the DOS stated that the Division of Licensing would consider disciplinary action against any licensee who attempted to conduct business in accordance with that Standard of Practice (which was then numbered as 21-16 under a prior version of the Code). The DOS took umbrage with the fact that it appeared that the fiduciary relationship between sellers and their agents, and buyers and theirs, was being tampered with so far as commissions being freely negotiated between principals and agents.
Specifically, the DOS admonished the rationale behind the Standard of Practice by stating that “the new standard usurps the seller’s right to set the amount and other terms upon which incentives are offered to other brokers to assist the listing broker in selling or leasing the property, usurps the buyer’s right, as offeror, to establish the amount and all other terms of the offer (including, of course, which transaction expenses such as mortgage tax, deed stamps, closing costs and brokerage commissions, if any, are to be borne by which principal).”
Realtors in New York are therefore cautioned strongly against conducting themselves in accordance with Standard of Practice 3-4 or 16-16, and conversely are cautioned against filing an Ethics Complaint against a fellow Realtor predicated upon the same.
Editor’s Note: The foregoing article is for informational purposes only and does not confer an attorney/client relationship. For a legal opinion specific to your situation, please consult a private attorney.