Today’s business and regulatory environment requires brokers to have in-depth knowledge of a variety of laws and regulations to stay out of legal trouble. From deciding the best way to structure your business to minimize liability, to supervising your agents and complying with office and trust account requirements, brokers need clear and accurate legal information. This Broker Toolkit is designed to do exactly that. We recommend that you bookmark this link and use the Toolkit whenever a legal issues arises.

INDEX

1. LEGAL FORMS OF LICENSURE AS A BROKER
2. BROKER RESPONSIBILITIES & DUTIES UNDER THE LICENSE LAW
3. AGENCY
4. TRUST ACCOUNT RESPONSIBILITIES
5. INDEPENDENT CONTRACTOR
6. COMMISSION ISSUES
7. ADVERTISING
8. ANTI-TRUST
9. UNAUTHORIZED PRACTICE OF LAW
10. REAL ESTATE SETTLEMENT & PROCEDURES ACT (RESPA)

LEGAL FORMS OF LICENSURE AS A BROKER

Brokers doing business in Ohio have several available options for how to structure their business. These include sole proprietorship, corporations, partnerships and limited liability companies and partnerships. Each of these has advantages and disadvantages that brokers should discuss with their personal attorney and tax professional. Below is general information on these options.

Sole Proprietorship
Definition: one broker owns all assets of the brokerage and operates the entire business, reporting all losses and profits as his personal income.

Key Points:

• Broker generally does business in his own name (i.e., John Jones, broker) or may obtain permission from the superintendent to do business in a business or trade name. Such a fictitious name should also be registered with the Ohio Secretary of State.
• The broker does not need to create any new legal entity as is required with a corporation, partnership, or LLC. No transfer of assets is necessary; instead, the broker uses his own assets to establish his business.

Advantages of choosing sole proprietorship

• Because there is no new legal entity that must be created or assets that must be transferred, it is the easiest and least complicated way of doing business.
• As the sole owner, the sole proprietor enjoys all profits, and can unilaterally make all decisions regarding how the business will be run.

Disadvantages of sole proprietorship

• There are no other owners or partners of the business with whom to share responsibility or to assist with decision making.
• The business terminates upon the death of the sole proprietor.
• The broker must bear all of the financial risk of the business.
• The broker is personally liable for the debts of the business.

Partnership
Definition: An association of two or more persons who agree to do business together. In order to be licensed as a brokerage, there must be at least one general partner who has a broker’s license. The other partners may be licensed salespersons or may be unlicensed persons.

Key Points:

• The partnership is a separate legal entity; it can sue and be sued.
• The partners are co-owners of the business who contribute money, property or services in exchange for an ownership interest.
• The rights and obligations of the partners are governed by state statutes and the partnership agreement.
• Types of partnerships that can be licensed as a brokerage:
• General partnerships – all partners have a voice in the administration, operation and management of the partnership and are personally liable for the debts of the partnership.
• Limited partnership – the business is administered and managed by one or more general partners but also has one or more limited partners who are passive investors. The limited partners are liable only to the extent of their investment. To be licensed, at least one of the general partners must be a licensed broker.

Advantages of a partnership

• Allows a broker to package his resources with those of others to establish a business – he does not have to use only his personal assets.
• Management responsibility and financial risk are shared with other partners.
• Additional operating capital can be raised by adding partners.
• Depending on the terms of the partnership agreement and assuming there is more than one broker, the partnership can continue in the event of the death of one of the brokers, or the suspension of his license.

Disadvantages of a partnership

• Partners in a partnership are personally liable for the debts of the partnership.
• If there is only one licensed broker affiliated with the brokerage, the business will terminate in the event that broker withdraws from the partnership, he dies or his license is suspended.
• A partnership relationship can be very difficult to dissolve if a partnership agreement is not carefully drafted.

Corporation

Definition: A separate legal business entity created under state law, usually formed to insulate the broker and owners of the corporation from personal liability.

Key points:

• The corporation is owned by the shareholders who contribute money or property in exchange for share(s) in the corporation.
• The shareholders elect a Board of Directors to oversee the operation of the business; the Board of Directors elect officers to handle the day-to-day operations.
• At least one individual broker must be affiliated with the corporation for it to be licensed as a brokerage; there can, however, be an unlimited number of licensed brokers affiliated with a corporate brokerage.
• Salespersons or unlicensed persons may own stock in a corporation that is licensed as a broker, may serve on the Board of Directors or may serve as an officer. If an unlicensed person is an officer, he must submit an affidavit to the Division of Real Estate and Professional Licensing stating that he is not authorized to and will not perform any acts requiring a real estate license. (Ohio Administrative Code Section 1301:5-1-03)
• Copies of Articles of Incorporation, bylaws, and certificate of good standing must be submitted to the Division along with the corporation’s application for a broker’s license.
• Corporation can be “C” Corporation or Sub-S Corporation (see below).

Advantages of a Corporation

• A broker does not have to use only his own assets to create the business, but can generate capital by the sale of stock.
• The broker(s), officers and directors are generally not personally liable for the debts of the corporation.
• If more than one broker is licensed with the corporation, the business will not terminate upon the death of one of the brokers or the suspension of one broker’s license.
• Interest in the corporation can be easily transferred by selling one’s share(s).
• Responsibility for management of the company and financial risk is not carried alone.

Disadvantages of a Corporation

• Establishing a corporation is more complicated and costly because it involves the creation of new legal entity, the preparation of governing documents by an attorney and filing requirements with the Ohio Secretary of State.
• If there in only one broker licensed with the corporation, the business must cease upon the death of that broker or the suspension of his license.
• Tax issues for “C” Corporation
• Double Taxation – the corporation is taxed on its income; shareholders also are taxed on earnings distributed as a dividend.
• Sub-S Corporation
• S-Corp is not taxed; income, losses & profits are “passed through” to shareholders
• No personal liability for shareholders
• Restrictions
• No more than 100 shareholders, possible to have only 1
• Restricts types of shareholders – corporation, partnership, etc. cannot own shares
• No subsidiaries
• Only 1 class of stock

Limited Liability Companies and Partnerships

Definition: Separate legal entity created by Ohio statute that combines both corporate & partnership attributes

Key Points

• Formed by one or more “members” who manage the LLC
• Must file articles of organization with the Ohio Secretary of State
• As a separate legal entity, it can sue & be sued

Advantages of LLC

• Can have unlimited number of members
• All members of LLC have limited liability
• There is no restriction on types of members (i.e., corp, partnership can be a member)
• LLC is considered a “pass through” entity for federal income purposes, meaning the entity does not pay taxes
• Can have more than one broker affiliated with an LLC; salespersons & non-licensed persons can be a member

Disadvantages of LLC

• Because it is a separate legal entity, governing documents must be prepared by an attorney & filed with Secretary of State
• If there is only one broker affiliated with the LLC, the business must cease upon death of that broker or suspension of his license

Association

Definition: A group of persons joining together for a business purpose. It is similar to a partnership, but is not governed by the partnership statutes.

Key Points

• There must be at least one individual broker affiliated with the association in order for it to be licensed.
• There are only about 10 associations licensed as a broker in Ohio.

Advantages and Disadvantages are essentially the same as they are for a Partnership.

Business Names

A sole proprietor, corporation, partnership, LLC or association may request permission from the Superintendent to do business in a name other than its legal name. This is often referred to as a trade name or “dba” (doing business as).

To be approved, the Superintendent must be satisfied that the proposed name is:

• Not misleading or likely to mislead the public; and
• Not the same as or is clearly distinguishable from a name already registered with the Division by an existing brokerage; if it is not distinguishable from the name of an existing business, the Superintendent may approve it if the broker with the similar name consents in writing. (Ohio Administrative Code Section 1301:5-3-03)

The Superintendent has separate approval authority from the Secretary of State. Therefore, even though the Secretary of State has approved a corporate name, or the use of a fictitious name by a sole proprietorship, the Superintendent can still deny the use of the name.

Franchise or Trade Association Name

• The Division will not permit a franchise name or a registered trade association name to be included in a broker’s name or dba (i.e., Century 21, Re/Max, REALTORS), however, these may be used by brokers in advertising.

Reserving a Business Name

• Availability and name approval can be obtained in advance. An approved name can be reserved in advance for minimal fee. This is clearly recommended prior to ordering business cards, yard signs, and embarking on filings with the Secretary of State’s office.
• The broker reserving the name has sixty days to apply for a license in the reserved name.

Once a “dba” is approved and issued, it is the only name that may be used by the broker in advertisements.

BROKER RESPONSIBILITIES & DUTIES UNDER THE LICENSE LAW

A review of the license law reveals no single section that clearly lists those duties that the license law imposes upon a broker. Instead, such duties must be gleaned from various provisions in Ohio Revised Code Chapter 4735 and the Administrative Code. In this section, those supervisory duties and other responsibilities that the license law requires of brokers are discussed.

Supervisory Duties

There is no section in Ohio Revised Code Chapter 4735 that clearly states that the broker is responsible for overseeing the management of the business or supervising the activities of affiliated salespersons. However, it has historically been the position of the Division of Real Estate and the Ohio Real Estate Commission that such duties exist. This policy is supported by the very nature of the two-tiered licensure system established in Chapter 4735.

Ohio Administrative Code Section 1301:5-1-14

• This administrative rule prohibits a broker from lending or leasing his license to a business so that it may become a licensed brokerage.
• This section provides that if a broker enters into such an arrangement and fails to “personally oversee and direct the operation of the business,” he is engaging in misconduct and can be disciplined by the Ohio Real Estate Commission.
• It should be noted that this provision does not prohibit a broker from delegating management or supervisory duties to branch, office, or sales managers. However, it does establish that the broker must exercise ultimate oversight and supervisory control of his business.

Office Requirements in the License Law

Every brokerage must establish and maintain a definite place of business in Ohio. (Ohio Revised Code Section 4735.16(A)) The Division interprets this to be a location at which mail, telephone calls, and the public can be received. The Division will not accept a post office box as a broker’s sole address. An office can be shared with other businesses, or can be in one’s home.

Branch Offices

• If business is regularly conducted by a broker at more than one location, the additional site(s) must be licensed as a branch office(s). A branch office application must be filed with the Division along with a nominal fee (Ohio Revised Code Section 4735.06(A)).
• Each branch office must be “in the charge of” a licensed broker or salesperson.
• The home of a broker or salesperson is not required to be licensed as a branch office merely because business calls are received at that location; however, if meetings with clients/customers are regularly conducted at the licensee’s home, it should be licensed as a branch office.

Change of Address

Brokers must notify the Division of Real Estate of any change of business location. Failure to do so constitutes misconduct and is grounds for disciplinary action (Ohio Revised Code Section 4735.13(D)).

Office Sign

• At each office of the broker, a sign must be erected and maintained with the business name of the broker and that states he is a real estate broker (Ohio Revised Code Section 4735.16(A)).
• If the words “Realty”, “Real Estate”, or the trade name “REALTOR” or the ® trademark appear on the sign or in the broker’s business name, the Division considers that to be sufficient to meet the duty of identifying the broker as a real estate broker on the office sign.
• There are no regulations in Ohio law which mandate the size of the office sign.

Displaying Licenses

• A broker must prominently display the brokerage license in the main place of business
• The license of any branch office must be displayed prominently at each branch office.
• Affiliated salespersons’ licenses do not need to be displayed but must be available for immediate inspection by the Division.

Fair Housing Signs/Pamphlets

• At each office of the broker, he must display a fair housing sign; this must be in the same area where the broker’s license is displayed. Pamphlets with the same fair housing information must also be available to the public. The required signs and pamphlets can be downloaded from the Division’s website.

Maintaining Office Records

• Brokers are required to keep complete and accurate records of all transactions for a period of three years from the transaction (Ohio Revised Code Section 4735.18(A)(24)). This includes any documents relative to the transaction. Broker must only maintain copies of the records; the law does not indicate who has the right to the originals.

Handling Licenses

Maintaining Licenses

• The broker is responsible for maintaining the licenses issued to the brokerage, including the licenses of salespersons. If any license is lost or destroyed, the broker must apply for and pay the fee for replacement.

Returning Licenses

• Any sales license that is returned is placed on inactive status upon receipt by the Division.
• Brokers are required to give written notice to a salesperson if he is returning his license for cancellation (Ohio Administrative Code Section 1301:5-1-06).
• This written notice must be sent by certified mail within 3 days after the license has been returned.
• The notice must include a statement explaining that the agent’s license will be placed on inactive status and their reactivation rights. The broker does not have to explain the reason he is returning the license.
• A broker is not required to return the license of an agent to the Division if the agent has notified the broker that he is transferring his license to another broker.

AGENCY

Each brokerage in Ohio must establish a brokerage company policy on agency. This policy must contain certain mandatory information. In depth information on this brokerage policy including sample policies, can be found on the Agency Law Resource page of the Ohio Association of REALTORS® website.

TRUST ACCOUNT RESPONSIBILITIES

Under Ohio law, a real estate brokerage must maintain a trust or special account to hold monies belonging to other parties. Brokers engaging in property management must have a separate trust account for funds related to that activity.

Duty to Maintain

• All brokers must maintain a non-interest bearing “special” or trust account that is separate and distinct from any personal, operating, or other account of the broker (Ohio Revised Code (4735.18(A)(26)). Details regarding the handling of earnest money is set forth in detail in OAR’s Earnest Money White Paper.
• All monies received in a fiduciary capacity, including earnest money, escrow funds etc., must be deposited in this account.
• The trust or special account must be in a financial institution located in the state of Ohio.
• The account must be in the broker’s name as it appears on his license and must be labeled a “trust account” or “special account” and all checks and deposit tickets must contain those words as well (“Escrow account” is not acceptable) (Ohio Administrative Code 1301:5-5-08(B)).
• The name, account number and location of the financial institution where the account is maintained must be submitted in writing to the Division of Real Estate and Professional Licensing.
• Brokers may maintain more than one trust or special account.

Broker’s Own Funds

Brokers may not deposit or commingle their own funds in the trust or special account.

However, a broker is a permitted to deposit and maintain his own funds in the trust account if they are clearly identified as such and are deposited for one of the following purposes:

• If the financial institution where the account is located requires a special minimum balance that must be maintained in order to keep the account open, the broker may maintain that amount in the account as long as it is designated as the broker’s funds.
• If the financial institution where the account is located charges a service fee for the account, the broker may maintain a reasonable amount to cover the service charge. (Ohio Administrative Code 1301:5-5-08(C))

Required Trust Account Records

Brokers must maintain a record of all trust funds that are received. These records must be kept in columnar form and must include the following minimum information:

• Date funds are received;
• Party from whom funds are received and the purpose of the funds;
• Amount received;
• Date funds are deposited in special or trust bank account;
• Check number and date funds are disbursed;
• Party to whom funds are disbursed and purpose of disbursement;
• Any other documents necessary and sufficient to verify and explain record entries and identify the current balance in the special or trust bank account. (Ohio Administrative Code 1301:5-5-09)

Property Management Trust Accounts

Brokers engaging in property management must establish and maintain a separate trust account for fiduciary funds received in the course of managing real estate. (Ohio Administrative Code 1301:5-5-11)

This account must be in the name of the broker as it appears on his license and must be designated as a “Property Management Trust Account”. This is discussed in detail in OAR’s White Paper on Property Management.

INDEPENDENT CONTRACTOR

The clear majority of brokers in Ohio consider the salespersons licensed with them to be independent contractors. This choice is based upon the reduced responsibilities that brokers have in the areas of worker’s compensation, unemployment compensation and federal, state, and local taxes. Both state and federal law will be applied by a court of law in determining a salesperson’s actual status. It is highly recommended that brokers enter into a written independent contractor agreement with affiliated agents. An in depth discussion of this topic can be found in OAR’s White Paper on Independent Contractors.

COMMISSION ISSUES

The broker’s responsibilities and rights in collecting, paying, and pursuing legal actions for commissions are addressed in Ohio’s license law and elsewhere. Also, new brokers need to understand how disputes with one another can be handled and the standards by which they will be resolved.

License Law Provisions Regarding Commissions

Payment of Commissions

• All monies collected in connection with a real estate brokerage transaction must be collected in the name of and with the consent of the broker. (Ohio Revised Code Section 4735.21)
• This section covers “commissions, deposits, payments, rentals or otherwise.” The Division interprets this to also include any bonuses paid to agents by other licensees or by the parties to the transaction.

Commencing an Action for a Commission

• Only a licensed broker may commence an action for a commission or other compensation in connection with a real estate transaction. (Ohio Revised Code Section 4735.21)
• A licensee can be subject to disciplinary action by the Ohio Real Estate Commission for demanding a commission to which he is not entitled without reasonable cause. (Ohio Revised Code Section 4735.18(A)(10))
• This section does not apply to demands made to another licensed broker; therefore, this does not apply to cooperative disputes between brokers.

Unlicensed Persons

• A broker or salesperson is prohibited from paying commissions or fees to or splitting commissions or fees with persons not licensed in Ohio, if the purpose for the payment is to compensate them for performing acts that require an Ohio real estate license. (Ohio Revised Code Section 4735.18(A)(11) and Section 4735.20(A))
• This section would prohibit paying finder’s fees to unlicensed persons for referring prospective buyers or tenants.

Referral Fees

• An Ohio broker is permitted to pay a commission or referral fee to a broker licensed in another state who refers clients or prospects to the Ohio broker. (Ohio Administrative Code Section 1301:5-5-06)
• The term “refer” or “referral” is defined as the introduction or directing of a person by one broker to another broker for brokerage services.
• This section does not permit the out-of-state broker to perform any acts with respect to Ohio property that requires an Ohio license (i.e., negotiating a contract) except as described below regarding commercial transactions.

Out-of-State Commercial Brokers

• Ohio law allows out-of-state brokers to participate in the sale and lease of commercial real estate located in Ohio even though that out-of-state broker is not licensed in Ohio. (Ohio Revised Code Section 4735.022) To do so, very specific requirements must be met. If these requirements are met, an Ohio broker can pay a cooperative commission to the out-of-state broker. (Click here for more information on this topic.)

Duty to Pay Salespersons

• Upon receipt of a commission, a broker is required to render an accounting and pay a salesperson his earned share within a reasonable time. Failure to do so is grounds for suspension or revocation of the broker’s license (Ohio Revised Code Section 4735.18(A)(30)).
• The “earned share” to which a salesperson is entitled is not defined by law, but rather is determined by the agreement of the parties. The Division will usually look to any independent contractor agreement, commission schedule, or policy manual agreed upon by the broker and agent and enforced by the broker to determine the agent’s earned share.

Duty to Pay Upon Termination

• Unless provided otherwise in an independent contractor agreement or office policy manual, a broker must still pay an agent his earned share of a commission for transactions that were “in contract” at the time the agent terminated his relationship with the broker.
• This commission can be paid directly to the agent even though he may be unlicensed or licensed with a different broker at the time the commission is received.

Deductions/Offsets

• Often a broker wishes to deduct money from a salesperson’s commission for debts the agent owes the broker or to compensate the broker or other affiliated agents for work they did to conclude the transaction.
• Such deductions or offsets by a broker will be allowed by the Division of Real Estate if they were specifically permitted by the terms of an independent contractor agreement, or by the broker’s policy manual. If consent to the deductions does not exist, the Division will limit such deductions to only those expenses specifically related to the transaction on which the commission is owed.

Payment to Agent’s LLC or Corporation

• The Ohio license law allows an agent’s commission to be paid to a corporation, LLC, or other legal entity in which the agent is an officer or has an ownership interest. (Ohio Revised Code Section 4735.20)
• Prior to paying an agent’s commission to such an entity, the broker is required to verify that the agent is either an officer or has some ownership interest in the legal entity to which they want their commissions paid. The broker also must keep a record of this verification for a period of three years along with the following additional information:
• The name of the licensee who earned the commission, fee or other compensation;
• The amount paid; and
• The name of the entity to which it was paid
• Examples of verification would be:
• A copy of the articles of incorporation listing the agent as an officer;
• A copy of a stock certificate demonstrating an ownership interest;
• A copy of the partnership or association agreement;
•  A copy of the articles of organization for an LLC
• A broker may want to ask the agent for a copy of the entity’s authorization to do business in Ohio. Although not specifically required by law, a broker may also want to ask the agent to sign a statement that they:
• Are an officer, stockholder, etc.;
• That the legal entity is authorized to do business in the state of Ohio;
• That the entity is properly registered and in good standing;
• That the entity will not engage in any activity that requires a real estate license;
• That they will notify the broker if any of that information changes or is no longer true (i.e., the agent no longer has an ownership interest, the entity is not in good standing, etc.)

Commission Issues Between Brokers

Duty to Cooperate

• The Ohio Revised Code does not require brokers to “cooperate,” to share or split commissions with other licensed brokers. However, the license law does require that the broker’s policy on cooperation and compensation must be disclosed in the brokerage’s Consumer Guide to Agency Relationships which is provided to both sellers and buyers. (Ohio Revised Code Section 4735.56(B)(5))
• Article 22 of NAR’s Code of Ethics requires REALTORS to “cooperate” except when it is not in the client’s best interests.
• A broker’s duties under agency laws may obligate him to offer cooperation (including a share of commission) to other brokers because it increases the pool of potential buyers.

Disputes Over Commissions

• Disputes between brokers regarding cooperative arrangements or procuring cause will not be investigated, arbitrated, or handled in any way by the Division of Real Estate.
• REALTORS are required to arbitrate such disputes they have with one another concerning entitlement to commissions at their local Board. (Article 17 of NAR Code of Ethics)

Establishing a Basis for a Commission

• An agreement to pay must first be shown to exist between the brokers in order to establish entitlement to a commission. If an agreement can be shown, the next issue to be determined is that of procuring cause.Procuring Cause
• Procuring cause is a legal concept utilized by Ohio courts and local Board of REALTORS® to determine a broker’s entitlement to a commission. It is defined in Ohio case law as a cause directly originating a series of events which without break in their continuity directly results in the accomplishment of producing a ready, willing and able buyer. (See OAR’s Procuring Cause White Paper for a detailed discussion of this topic.)

ADVERTISING

Under Ohio law, the brokerage is responsible to assure that all advertising complies with the license law requirements. This includes internet advertising. These requirements, as well as other pertinent advertising regulations, are discussed in depth in OAR’s White Paper on Advertising.

ANTITRUST

In the area of risk reduction, antitrust liability poses one of the greatest, yet least understood risks for brokers. Below is a summary of the basics on Antitrust.

Basic Prohibitions

The Sherman Act prohibits any contact, combination or conspiracy in restraint of trade.

• In order to establish a violation of the antitrust laws, it must be shown that two or more persons or business entities participated in a common plan or scheme and that the effect of that plan or scheme was to restrain trade.
• Typically the required contract, plan, or scheme is proven by circumstantial evidence. That circumstantial evidence must exclude the possibility that the parties acted alone. If it is equally possible to conclude from the evidence that the parties acted alone (i.e., each made independent business decisions) then the circumstantial evidence is insufficient to establish an antitrust violation.
• To violate the antitrust laws, the restraint of trade caused by the conspiracy or common plan must be unreasonable. The restraint will be considered unreasonable if its anti-competitive effects are not outweighed by any counteracting pro-competitive effects. This is referred to as the “Rule of Reason.”

Per Se Violations

• Although the Rule of Reason is the primary test used to determine if a restraint is unlawful, some restraints are considered to be so destructive that they are presumed to be anticompetitive under the Sherman Act. These are referred to as “per se” violations.
• The per se violations that are most common in the real estate industry are:
• Price fixing
• Group boycotts
• Certain tying arrangements

Price Fixing

It is a per se violation for two or more brokers to agree, conspire, etc. regarding the amount that will be charged the public for their services.

• Brokers and their agents should avoid any language that suggests that fees are the product of an agreement between brokers (i.e., the “prevailing rate”, the “standard” commission).
• There is no prohibition against a broker advertising the rate of commission he charges the public.

Commission Splitting

• The price fixing prohibition also applies to cooperative commissions that are offered to other brokers; two or more brokers cannot agree and should not discuss what they will pay to another broker(s).

Other Terms of Services/Compensation

• Price fixing violations can be based on any agreement to fix or regulate any economic term.
• Thus, brokers cannot agree to fix such terms in a listing as the length or type of listing or the form of compensation (i.e., flat fee v. commission).

Boycotts
A boycott is an arrangement by two or more businesses to withhold patronage or to deal on unfavorable terms with a third party for purposes of reducing competition.

A group boycott is frequently alleged where it is claimed that two or more brokers conspired to refuse to cooperate or to cooperate on discriminatory terms with another broker; usually that other broker is perceived as being a “discount” broker offering a lower commission rate than the alleged boycotters.

To avoid allegations of participating in an illegal boycott, brokers must be careful not to discuss with one another or announce at either social or professional meetings how they will respond to the entry of a new competitor in the market.

Outside Providers

• Occasionally, a claim of a boycott by brokers can involve providers of other related services.
• For example, such an allegation may be raised where two or more brokers agree to withhold advertising from a local newspaper because they were dissatisfied with the paper’s rates.

Tying Arrangements

A tying arrangement is an agreement by a vendor to only sell a product or service to a person if that person agrees to also purchase a different product or service from the vendor.

In order for such a tying arrangement to violate the antitrust laws, it must be proven that the vendor will derive income from the sale of both products or services and that he possesses sufficient market power to restrain competition.

The most typical example of a tying arrangement is that of a “list/back” agreement. This occurs where a builder who also holds a broker’s license or owns a brokerage firm will only agree to build a home for a buyer if he agrees to list his existing home with the builder’s brokerage firm.

Whether such list/back agreements constitute a tying arrangement in violation of the antitrust law usually depends upon whether the builder/broker possesses sufficient market power in the area to restrain competition.

Penalties

Violation of federal antitrust laws can result in one or more of the following sanctions:

• Damages of up to three times the plaintiff’s actual losses, as well as payment of the plaintiff’s attorney’s fees and costs.
• Injunctive relief, which can include court supervision of the defendant’s business for ten years or longer.
• Criminal penalties

UNAUTHORIZED PRACTICE OF LAW

As buyers and sellers continue to demand greater service from real estate licensees and contracts to purchase become increasingly complicated, a growing area of concern for brokers should be that of the unauthorized practice of law.

Basic Prohibitions

The following conduct has been determined by the Ohio Supreme Court to require a license to practice law:

• Drafting legal documents for another
• Rendering legal advice
• Appearing in court proceedings on behalf of another person

Drafting Legal Documents

• Ohio law permits real estate licensees to fill in the blanks on pre-printed, form purchase contracts and leases; this conduct is permitted because it is perceived as falling within the ordinary course of a licensee’s business duties.
• Licensees are not permitted to draft purchase contracts, land contracts, deeds, leases, mortgages, or other legal instruments related to the sale or lease of real estate.
• Potential violations can occur where licensees draft lengthy contingencies or addendums to purchase contracts. To avoid problems in this area, brokers should have frequently requested contingencies or addendums drafted by legal counsel and available for their agents’ use (i.e., inspection contingencies, contingency for sale of purchaser’s existing home, right of first refusal).
• Licensees should also not agree to merely write a purchase contract on behalf of buyers and sellers for a flat fee without providing any other real estate related services.

Providing Legal Advice

• Brokers and their agents are frequently asked for legal advice or to interpret a purchase contract or lease, or to render an opinion as to title by the parties to the transaction. Providing such advice or giving one’s interpretation constitutes the unauthorized practice of law. Brokers must assure that their agents are trained to refer such questions to legal counsel or other appropriate professionals (i.e., refer questions regarding tax implication to a CPA).

Appearing in Legal Proceedings

• Brokers and salespersons may not appear in court on behalf of their clients; therefore, a property manager may not represent or appear in court on behalf of an owner whose property he manages in an action to evict a tenant.
• Nor can a broker represent an affiliated salesperson in a disciplinary hearing before the Ohio Real Estate Commission.

REAL ESTATE SETTLEMENT PROCEDURES ACT

An area of increasing liability for brokers is that of the Real Estate Settlement Procedure Act (RESPA). Passed in 1975, this law has been the recent focus of concern as the Department of Housing and Urban Development (HUD) has stepped up its enforcement of this law. To avoid violations and assure compliance, it is important for brokers to be familiar with the provisions in RESPA.

General Requirements

Transactions Covered

• The provisions of RESPA apply to all settlement services for federally related mortgages, including title searches, title insurance, preparation of documents, termite inspections, surveys, closings, services rendered by real estate licensees, etc.

Requirements of the Act

• A uniform procedure must be followed for all federally related transactions.
• This includes the truth-in-lending disclosures, written explanation of settlement costs, good faith estimates of settlement cost, use of a uniform settlement statement, etc.

Prohibitions Commonly Involving Real Estate Licensees

Title Companies

• A buyer may not be required to utilize the services of a certain title company for title insurance. Violation of this section can result in damages of three times the charges for the insurance.

“Kick-backs” or “Naked Referrals”

• Paying or receiving a fee or thing of value for referring business related to settlement without actually rendering service is prohibited by RESPA (i.e., receiving a referral fee from a title insurance company).

Affiliated Business Relationships

Definition: an affiliated business relationship exists where there is a diversified corporation that packages real estate related services.

• An “ABA” will be found to exist where one individual or firm has more than 1% interest in a company to which it refers business.
• Such affiliated business relationships are permitted as long as an “Affiliated Business Arrangement Disclosure Statement” on a separate piece of paper is given to the party(s) no later than the time the referral is made to the affiliated business.
• This must include a disclosure of the relationship between the referring company and the business providing the settlement service along with an estimate or range of charges generally made.
• If such disclosure is properly made, the referred services may be provided at a discounted rate.
• The only thing of value that may be received from the arrangement is a return on ownership interest or franchise relationship.
• An employee may be compensated by his employer for referring business to an affiliated company.
• Real estate licensees who act as independent contractors would not be eligible for compensation under this exception.
• The provider or other third party cannot compensate the employees of the affiliated company that made the referral, nor can it reimburse the other company for the fees it paid its employee for the referral.
• A party cannot be required to use the affiliated company’s services as a condition for settlement of a loan or purchase of a property.

Computerized Loan Origination (CLO)

• Borrowers are permitted to pay real estate brokers for helping them select a mortgage and pre-qualifying them for financing.
• This allows a broker to utilize an office computer to call up a menu of mortgage products and begin the loan process electronically.
• The fee charged to the borrower must be disclosed in writing and must be paid by the borrower; it cannot be paid by the mortgage broker.

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