LEGAL CORNER: What Documents Are Brokers and Agents Required to Maintain?

John Dolgetta, Esq. | November 2020

John Dolgetta, Esq., Dolgetta Law, PLLC.

It is not uncommon for real estate brokers and agents to make requests, and many times demands, at the closing table for certain documents, such as the lender’s Closing Disclosure, the Contract of Sale, and other documents. Brokers and agents claim that the law requires that these documents be provided because they are mandated under the New York State Department of State regulations [see https://on.ny.gov/3eSar4O] and other regulations to maintain copies of these documents.

Many times, agents attending a real estate closing demand that the parties and/or the parties’ attorneys provide them with copies of the CD, the Contract and even the Lead Paint Disclosure Addendum (which should already be in their possession since they are required by law to have this form signed early on in the process, prior to any closing), or else, as they state, “My broker will not pay me my commission!” This article will attempt to clarify certain misconceptions about what the brokers’ and agents’ duties are with respect to document retention requirements and which documents they are and are not entitled to.

Requirements Under Section §175.23 of the DOS Regulations

According to Section 175.23 (“Records of transactions to be maintained”), subsection (a) requires that “[e]ach licensed broker shall keep and maintain for a period of three years, paper and/or electronic records of each transaction effected through his or her office concerning the sale of real property used or occupied, or intended to be used or occupied, wholly or partly, as the home or residence of one or more persons improved by a one-to-four-family dwelling, or a condominium or cooperative apartment but shall not refer to unimproved real property upon which such dwellings are to be constructed.” Therefore, brokers are required to maintain records for a period of not less than three years for all transactions involving one- to four-family homes, condominium units and cooperative apartments, but not those involving vacant lots.

Copies of these documents may be maintained either electronically or physically. If maintained electronically, the brokerage firm must ensure that there is a backup maintained of all such records. Section 175.23(a) provides that the “records” must contain the following information:

(1) the names and addresses of the seller and the buyer,
(2) the broker prepared purchase contract or binder, or if the purchase contract is not prepared by the broker, then the purchase price and the amount of deposit (if collected by broker),
(3) the amount of commission paid to broker,
(4) the gross profit realized by the broker if purchased by him or her for resale,
(5) any document required under Article 12-A of the Real Property Law, and
(6) the listing agreement or commission agreement or buyer-broker agreement.

It is important to note that Section 175.23 (b) provides that “[i]n some transactions, the broker may not be provided a copy of the documents required to be maintained by subdivision (a) of this section. In such instances, the broker will not be found to have violated the requirements of this section.” Therefore, contrary to the opinion of many brokers, if the broker is not provided with a copy of some of the records referenced in subsection (a), then the broker, and in turn the salesperson, will not be deemed to have violated Section 175.23.

Is A Broker Required to Maintain the Contract of Sale?

Many brokers and agents also believe that they are required to maintain a copy of the fully executed contract in connection with a real estate transaction and that attorneys are required to provide them with a copy of it. This, however, is not the case.

Under Section 175.23(a)(2), the broker is only required to maintain “the broker-prepared purchase contract or binder, or if the purchase contract is not prepared by the broker, then the purchase price and the amount of deposit (if collected by broker).” Therefore, while it is commonplace in Upstate New York for brokers and agents to prepare the real estate contract, that is not the case in southern parts of New York State. In southern New York (notably most areas including and south of Orange and Dutchess counties), the real estate contract is prepared by attorneys. Therefore, in these instances, brokers are not required to maintain and are not entitled to receive a copy of the contract.

It is recommended that both real estate agents and attorneys discuss the issue of sharing a copy of the contract at the start of any engagement. Before an attorney shares a copy of the contract of sale with any party, including real estate agents, the attorney must obtain consent from the client to do so. Attorneys can choose to address this issue in their engagement letters and obtain advance consent from the seller or purchaser to provide a copy of the contract to limited parties such as real estate agents, brokers and title agents. Brokers and agents should also inform their client that they are not entitled to receive a copy of the contract unless the client provides his or her attorney with consent to do so.

Are Attorneys Permitted to Provide Brokers And Agents a Copy of the Contract?

In 2019, the New York State Bar Association’s Committee on Professional Ethics issued an important ethics opinion [Ethics Opinion 1161, see https://bit.ly/2UgTg3d] clarifying an attorney’s obligation with respect to release of the copy of the contract of sale to real estate brokers and agents in connection with a transaction. The committee held that “[w]hen a lawyer rather than a broker prepares a real estate contract, the lawyer may not disclose the contract to the broker without the client’s informed consent….”

Rule 1.6(a) of the New York Rules of Professional Conduct (the “Ethics Rules”) provides that a lawyer “…shall not knowingly reveal confidential information” without the client’s consent. And, while this rule applies specifically to attorneys, it is important to note that brokers and agents, who are also bound by the fiduciary duty of confidentiality, may not reveal confidential information without first obtaining the client’s consent.

Under the Ethics Rules, “confidential information” means “information gained during or relating to the representation of a client, whatever its source, that is (a) protected by the attorney-client privilege, (b) likely to be embarrassing or detrimental to the client if disclosed, or (c) information that the client has requested to be kept confidential.” This is one of the most important duties in an attorney-client relationship and is just as important in the agent-client relationship in a real estate transaction. These issues should be discussed in advance, at the beginning of the real estate transaction so that there is no misunderstanding as to the obligations and duties of the parties with respect to releasing and receiving confidential information.

May an Attorney Simply ‘Bury’ the Broker’s or Agent’s Request?

The committee also indicated that the attorney “…may not bury the broker’s request.” The attorney is required to let the client know that a request had been made by the broker or agent. The attorney is not permitted to simply ignore the broker or deny the broker’s request without letting the client know that a request has been made. Similarly, a broker or agent is not permitted to withhold information, such as an offer, without letting the client know in every instance. Under the Ethics Rules, an attorney “…shall promptly inform the client of,” among other things, “any decision or circumstance with respect to which the client’s informed consent…is required ….”

The Ethics Rules define “informed consent” as “…the agreement by a person to a proposed course of conduct after the lawyer [or agent] has communicated information adequate for the person to make an informed decision, and after the lawyer [or agent] has explained to the person the material risks of the proposed course of conduct and reasonably available alternatives.” The committee points out that the attorney, or alternatively, an agent, must consider the “…facts and circumstances” of each situation in order to “…determine the adequacy of disclosure.” The Opinion provides a useful analysis for all fiduciaries, whether attorneys or real estate agents, to utilize when determining the extent of the disclosure in instances requiring informed consent, as well as instances involving the sharing of confidential information.

Is a Broker or Agent Required to Receive A Copy of the Closing Disclosure at Closing?

Another common misconception is that the brokers and agents are required to receive a copy of the Closing Disclosure at Closing, and that the brokerage firm is required to maintain a copy of the CD under Section 175.23. It is not uncommon for agents at the closing to request a copy of the CD because their brokerage firm requires it as a precondition for the agent to be paid a commission. Again, it should not be a requirement of the brokerage to condition payment of a commission upon receipt of the CD. The only information the broker or agent is required to maintain is that which is listed in Section 175.23.

Privacy Concerns and The Gramm-Leach-Bliley Act

The same analysis and requirements that apply to the delivery of the contract or other confidential documents also apply to the delivery of the CD. Again, attorneys must obtain the consent of the client before releasing a copy of the CD at closing. Currently, with the introduction of the new Closing Disclosure (which replaced the previous HUD Settlement Statement), this is usually not a controversial issue. Most lenders prepare a separate Seller’s CD and Purchaser’s CD, which is permitted under the federal Gramm-Leach-Bliley Act (“GLBA”) [see https://bit.ly/3eS0Ive] as implemented by Regulation P [see https://bit.ly/3lpsjGL], so as to address privacy concerns related to the release of the borrower’s private information. The release of the borrower’s personal and financial information is strictly governed by federal and state law. The National Association of Realtors has prepared a useful TRID Closing Disclosure Guide, which provides a detailed explanation of the disclosure requirements relating to the CD [see https://bit.ly/3loDv6s].

Ultimately, in the event a client does not want the CD to be shared with the brokers or agents, or in the event there is only one collective CD prepared and the lender restricts sharing same, the agents must refrain from making any further demand. Additionally, if the parties refuse to share the CD, the brokerage firm should not refuse to pay the agent based on receipt of the CD.

Clarity Adds Comfort

Many misconceptions have developed over the years and have become commonplace, which brokers and agents believe are legal requirements. While many documents under the DOS Regulations and Article 12-A of the Real Property law are required to be maintained for three years, the items addressed in this article are not. This should allow brokers and agents to reduce some of the paperwork they maintain and also reduce the stress level in a transaction when an attorney or client does not want to share certain documents.

John Dolgetta, Esq.
Legal Corner author John Dolgetta, Esq. is the principal of the law firm of Dolgetta Law, PLLC. For information about Dolgetta Law, PLLC, please visit http://www.dolgettalaw.com. The foregoing article is for informational purposes only and does not confer an attorney-client relationship.”