Director’s Corner ~ Commercial Real Estate Transactions

Spotlight

As a result of a brief discussion at the December 1, 2020 Real Estate Commission meeting, we thought it would be helpful to address concerns that the Commission is seeing with commercial real estate transactions. These concerns stem from not only consumer complaints, but also the examinations that Division staff performs of real estate brokerages.

 

When we look at commercial transactions, there are five common violations that we see:

  1. the use of non-standard forms;

  2. failure to establish agency relationships;

  3. sign crossing;

  4. failure to make brokerage disclosures; and

  5. failure to disclose conflicts of interest.

Real estate brokers are required to use standard forms when acting as a single agent or transaction broker. §12-10-403(4)(b), C.R.S. defines what a standard form is, but the statute also requires the use of a Commission-approved form if one exists and is appropriate for the transaction. The Real Estate Commission does not have approved leases or property management agreements for brokers to use. During brokerage audits, the Division’s financial examiners regularly see brokers that use lease and property management agreements that are drafted by attorneys, but the forms lack the mandatory disclosure language on the form. §12-10-403(4)(b)(II), C.R.S. requires that attorney drafted forms must include the name of the attorney or law firm and the name of the broker, employing broker, or brokerage firm for whom the form is prepared on the form itself. Attorney drafted forms are also required to be created by a licensed Colorado attorney. Colorado real estate brokers cannot use forms that are drafted by attorneys who are not licensed here.

In both sales and lease commercial transactions, we see a high incidence of brokers that fail to establish brokerage relationships in a manner that complies with the license law. We regularly hear from brokers that in a particular transaction, the broker represented the consumer as a single agent, but there is no written agreement in the transaction file that establishes the brokerage relationship. The requirement that a single agency relationship be established in writing is mandated by §12-10-408(2)(b), C.R.S. As a result of the new rules that went into effect on January 1, 2020, Rule 6.14.C requires that a broker, acting as a transaction broker for a seller or landlord, must have a written listing agreement prior to performing any licensed duties. The only type of brokerage relationship that can be created verbally, or based on a handshake agreement, is transaction brokerage where the broker is assisting the buyer or tenant.

Another brokerage relationship issue that we commonly see with brokers in commercial transactions is sign crossing. One of the leading consumer complaints that we receive is about real estate brokers that blatantly disregard the relationship that a consumer has established with a different broker. We have seen numerous cases where the broker, who is well aware that a brokerage relationship exists between the consumer and another broker, contacts the consumer directly and actively tries to negotiate with the consumer to broker the consumer’s transaction regardless of the fact that there is an active agreement in place with another broker. Rule 6.15 prohibits sign crossing and the Real Estate Commission does not take substantiated violations of sign crossing lightly. A sign crossing violation typically results in a $2,500.00 fine and mandatory coursework in ethics and brokerage relationships.

Prior to eliciting or discussing confidential information with a consumer, real estate brokers must disclose in writing what type of working relationship they will have with the consumer. This includes when the broker is going to treat the consumer as a customer. The disclosure is required by Rule 6.5 and §12-10-408, C.R.S. It is not uncommon during a brokerage audit for the financial examiners to identify that the landlord’s broker has not made the required written disclosure to the tenant regarding the working relationship. In the case of a broker that is solely representing one side of a transaction, the required disclosure puts the consumer on the opposite side of the transaction on notice that the broker is not representing their interests.

Lastly, we see numerous brokers that fail to disclose to consumers that the broker has an ownership interest in the property or in a vendor that will be used at some point during the transaction. Rule 6.17 requires a broker to disclose any known conflict of interest in writing that may arise in the course of any real estate transaction. The rule also requires a broker to disclose in writing that the broker is licensed, whether in the contracting instrument or a separate concurrent writing, if the broker is selling, buying or leasing real property on his own account. When a broker or brokerage firm is engaged in property management, there is a duty to make a written disclosure of any known conflict of interest that may arise in the selection or use of a business or vendor. The disclosure is required for any ownership, financial, or familial interest that the broker or brokerage has that is associated with the selection or use of a particular business or vendor. In sales or exchange transactions, brokers are required to make written disclosures regarding any affiliated business arrangements that the broker or brokerage has with a settlement service provider prior to the broker making a referral to the consumer. This disclosure requirement is mandated by §12-10-218, C.R.S. and Rule 6.18. Depending on the circumstances, a violation of the statute regarding affiliated business arrangements, such as a broker requiring the use of an affiliated business by a consumer, can also result in the Division referring the matter to the Consumer Financial Protection Bureau for action.

While we don’t see the same volume of complaints regarding commercial transactions as we do with residential transactions, we have been seeing more concerns come up in both consumer complaints and brokerage audits. Brokers that practice commercial real estate are expected to comply with the same laws and regulations as their residential counterparts. The growing issues with commercial transactions have definitely garnered the attention of the Real Estate Commission, which takes its role of consumer protection very seriously.

Director Marcia Waters

About the Director

Marcia Waters has been with the Colorado Division of Real Estate since August 2005. Marcia started with the Division as a Criminal Investigator for the Real Estate Commission and was promoted to Chief Investigator in 2006. In 2007, she was promoted to the position of Investigations and Compliance Director. In that capacity, she managed the investigatory and settlement programs for the Division. On October 15, 2010, she was promoted to the position of Division Director. The Division of Real Estate licenses and regulates approximately 50,000 real estate professionals. Ms. Waters serves as the administrator for the Real Estate Commission, the Board of Real Estate Appraisers, the Board of Mortgage Loan Originators, the Community Association Manager Program and the HOA Information and Resource Center. Ms. Waters manages the Division’s $6.5 million budget, oversees a staff of approximately 57 full-time employees, and establishes the direction of Division programs based on market and industry trends.