Like-Kind Exchange

How Does a Like-Kind Exchange Work?

By: Gary J. Heim, Esq.

Most farmers and land owners have heard of a like-kind exchange, which goes by several other names, including a 1031 exchange or a tax-free exchange. The primary purpose of an exchange is to reduce the federal income taxes resulting from the sale of real estate.

Although an exchange will not be appropriate in all situations, it should be considered whenever business, farm or investment real estate is being sold.  Projecting the income taxes payable from the sale if an exchange is not used is the starting point.  To qualify for the tax savings, not only must the real estate being sold (relinquished property) be used for farm, business or investment purposes, but also the real estate that is being purchased (replacement property) must be held for farm, business or investment purposes.  It is not an all or nothing requirement, however.  The seller can keep some of the cash from the sale and only invest a portion of the sale proceeds in other real estate, but the income tax savings will only apply to the portion of the proceeds reinvested in qualified real estate.

Farm real estate can be exchanged for an apartment or other commercial property; the replacement property does not have to be a farm.  The like-kind requirement is satisfied as long as real estate is exchanged for real estate (used for farm, business or investment purposes).

Some of the more common situations where our office has assisted PFB members with exchanges include: (1) the sale of agricultural conservation easements; (2) the relocation of a farm operation from one place to another; (3) the sale of a portion of the farm for warehousing or other development purposes; (4) rearranging the ownership of jointly-owned property among siblings or others; and (5) the condemnation of property for highway, school, pipeline or other purposes (there are more lenient IRS rules for reinvestment of condemnation proceeds).

The like-kind exchange process usually involves four advisors or services, including: (1) a tax preparer/advisor; (2) an attorney to prepare the agreements of sale and related documents; (3) a title insurance company to insure title to the property; and (4) a qualified intermediary (QI).  The QI is used to satisfy the IRS condition that the seller cannot actually receive the sale proceeds.  Instead, the QI receives and holds those proceeds until it is directed to release the money to purchase a replacement property.

The IRS has rigid deadlines that cannot be extended for hardship or other reasons in the like-kind exchange process.  For example, replacement properties need to be identified within 45 days of the closing for the relinquished property.  Similarly, the closing for the replacement property needs to take place within 180 days of the closing for the relinquished property.

The attorneys at Mette, Evans & Woodside have guided and assisted many PFB members through the like-kind exchange process and can assist you in the evaluation and implementation of a like-kind exchange.

Water Treatment Plan

DEP Provides Clarification On Reporting Requirements For New And Increased POTW Discharges

Water Treatment PlanBy: Randall Hurst

In 2010 the EQB enacted extensive changes to DEP’s NPDES regulations, now codified at Chapter 92a. Among these changes was a revision to a previous requirement to apply for a new NPDES permit whenever significant changes to influent pollutant loadings—either the addition of a new pollutant or a substantial increase in an existing pollutant—was projected to occur.[1] The new regulation, now at § 92a.24(a), is a bit less stringent and states, in part:

[A]ny change of wastestream, that may result in [a] an increase of pollutants that have the potential to . . . violate effluent limitations specified in the permit, or [b] that may result in a new discharge, or [c] a discharge of [i] new or [ii] increased pollutants for which no effluent limitation has been issued, must be approved in writing by the Department before the permittee may commence the new or increased discharge, or change of wastestream. The Department will determine if a permittee will be required to submit a new permit application and obtain a new or amended permit before commencing the new or increased discharge, or change of wastestream. [Internal enumeration added for clarity.]

The NPDES permit provides these reporting requirements in Section A.III.C.2. However, several provisions of the permit appear to conflict with the regulation. Inquiries of DEP permitting staff in regard to these anomalies during permit reissuance negotiations did not result in any clarification. Additionally, one POTW reported to me that it had submitted a request for approval of new and increased pollutants to the regional DEP office, and was told by that office that DEP does not issue written approvals for changes to wastestream.

As a result of growing concern about compliance with the permit provisions, in 2018 I wrote to Mr. Sean Furjanic, DEP’s Environmental Program Manager, asking a number of specific questions. Mr. Furjanic kindly responded to the questions in writing and also replied to a follow-up letter I sent in October.[2] This article is a summary of my questions and DEP’s official responses; because of space limitations, not all issues raised in the letters are discussed here. Unless shown in quotation marks, the “DEP Responses” below are my syntheses or summaries of Mr. Furjanic’s statements. Because DEP’s responses were provided by a senior official, I believe that they constitute Department policy and can be relied on in interpreting and applying the NPDES permit conditions discussed. Please note that this article only addresses issues relevant to POTWs. Some provisions that apply to industrial direct dischargers were not discussed with DEP and may have different policy issues.

In addition to issues regarding reporting planned changes, I also asked about DEP’s policies regarding reporting changes in influent pollutants that are not planned but are discovered after the fact—a situation that is not covered by either the regulation or the permit. DEP’s responses on this issue are also discussed below.

Issue 1—Reporting “new” pollutants: This issue has two subparts.

A.) Definition. “New” pollutants are those that have not previously been detected in the influent, as reported in the most recent permit application. I asked if pollutants that were not tested for in the permit application process are also considered “new” pollutants for reporting and approval purposes?

DEP Response. Yes.

B.) Written Approval.  Both the regulation and the Permit state that a POTW cannot accept the introduction of new pollutants unless it (i) reports the intent to accept the new pollutant,[3] and (ii) receives written approval from DEP. I reported a case where the regional office staff refused to issue a written approval although they did communicate approval by telephone. I asked what a municipality is to do if DEP staff refuses to issue a written approval for the addition of new pollutants.

DEP Response.  DEP did not respond to the question of what to do if the regional office staff does not respond in writing. DEP stated that it does not have a standard operating procedure for how to respond to a notice, but offered that when a request to accept a new pollutant is received, the regional office staff is supposed to: (1) approve the request in writing; (2) request additional information; (3) deny the request; or (4) request submission of an application to amend the NPDES permit to provide for the new pollutant (as provided in the regulation).

Discussion.  If regional office staff does not respond in writing to a request to accept a new pollutant, the POTW is in a difficult position, since it may have to notify a local industry that it cannot accept the waste, or risk a permit violation by allowing the industry to proceed and accepting the new pollutant without DEP’s permission. I suggest that if this situation arises, the municipality consult with counsel as to its options.

Issue 2—Reporting Planned Increases In Existing (“Approved”) Pollutants. The permit introduces the term “approved” pollutants and defines it to mean any pollutant that has been detected and reported to DEP (usually in the permit application), regardless of whether or not there is a permit limit. To determine if a pollutant is “approved,” the POTW should consult the influent and effluent testing data provided in the most recent permit renewal application. As noted below, it may be beneficial to summarize these influent loading data on a separate record for future reference.

There are several inconsistencies between the permit and the regulation regarding “approved” pollutants. DEP provided clarification of these issues, which I have divided into two main topics: when to report, and how permission is obtained.

A.) Determining when to report increases. The regulation requires reporting planned increases of approved pollutants under only two conditions: (i) if an effluent limit violation could result,[4] or (ii) if there is no effluent limit in the permit. The permit includes the first of these criteria and adds three additional ones, which appear to be intended to address the second one (which is not actually stated in the permit). The added permit criteria are: (iii) if the proposed increase in mass loading is more than 20% of the maximum loading reported in the last permit application; (iv) if the increase could cause “pass through or interference”; and (v) if the increase would result in a violation of “water quality standards.” I questioned the addition of reporting criteria not in the regulations[5] and, perhaps of more concern, how POTWs are to determine if any of these criteria apply. The five reporting criteria are discussed separately below.

(i)  Effluent Violation. I asked how a POTW could decide if a proposed increase in pollutants from an industry or hauler might result in an effluent limit violation.

DEP Response.  DEP stated that POTWs may use the “20% rule,” discussed below, as a heuristic method of evaluating the potential to cause an effluent limit violation. (See quoted response under (iii) below.) However, DEP cautions that POTWs are still required to report any planned increase that they think may result in an effluent violation, regardless of whether the 20% rule applies (if, for instance, the current effluent concentrations of the pollutant are very close to the limit). Therefore POTWs would be well advised to estimate the effects on their own and if there is any question, report the planned increase to DEP for further evaluation.

(ii)  Increased Pollutants With No Effluent Limit. As noted above, this regulatory criterion is not stated in the permit. However, DEP indicated that the “20% rule” (discussed next) is intended to provide guidance for meeting the regulatory requirement to report all planned increases of pollutants with no effluent limits. However, since this is implied, not stated, POTWs might consider reporting all planned increases in pollutants with no effluent limits, no matter how small, so that they are in full compliance with the regulation.

(iii)  20% Increase.  I asked how this criterion relates to the two regulatory reporting criteria for increases in “approved” pollutants.

DEP Response.  “DEP has established a notification standard in permits of a 20% cumulative increase for approved pollutants to assist permittees in implementing the provisions in [the regulation] relating to ‘. . . increased pollutants for which no effluent limitation has been issued.’ This 20% standard also applies to pollutants with an effluent limitation . . . .”

Discussion. The “20% rule” provides a numerical criterion that should make deciding what to report easier. POTWs should keep the influent data from their most recent permit application available so that the maximum influent loading[6] of existing pollutants reported in that document can be compared to any proposed increases. The reporting form for planned increases—DEP Form 3800-FM-BCW0482 [7]—requires reporting both the average and maximum influent loading of that pollutant as reported in the last permit application. The Instructions for the form only reference the 20% increase standard; there is no mention of the other permit criteria for existing pollutants. This appears to confirm DEP’s statement that the 20 % rule can be used—with discretion—to evaluate all of the other criteria for reporting increases of existing pollutants.

Also, note the reference to “cumulative” loading. If prior increases less than 20% have already occurred during the five year permit cycle, a subsequent small increase might exceed the 20% cumulative reporting requirement. Thus, a POTW with an active industrial user base may wish to create a spreadsheet of all pollutants being accepted and documenting when increases occur and the magnitude of each one.

(iv)  Pass through and interference

(a)  Definition.  Not all POTWs are familiar with the terms “pass through” and “interference.” I suggested that the definitions of the terms, as they appear in the EPA pretreatment regulations (40 CFR § 403.3(k) and (p)), be included in the Permit.

DEP Response. DEP agrees and plans to do so.

(b) Application.  The EPA definitions require that a permit violation—not necessarily an effluent limit violation—must result from an event in order for it to be considered pass through or interference. Thus, this criterion is similar to, but somewhat broader than, the effluent limit violation criterion in the regulation and the 20% rule can be used with appropriate discretion.

DEP Response. DEP agrees.

(v)  Exceedance of water quality standards. The fourth reporting criterion in the permit for increases in pollutants appears nowhere in the regulation. I asked how POTWs are supposed to evaluate it, since only DEP has the tools to evaluate effluent impacts on receiving water quality. I suggested that since POTWs do not have the ability (or obligation) to compute appropriate effluent limits to maintain water quality standards, that all proposed pollutant increases of any magnitude be reported so that DEP can make that determination.

DEP Response. “The use of the 20% notification standard as discussed above is intended to eliminate the need for a permittee to determine whether the increased loading of pollutants may cause an exceedance of water quality standards. DEP does not expect permittees to perform fate and transport analyses [or] water quality modeling to determine the possible impact on the receiving waters. However, if the facility decides to do so anyway and determines that increased pollutant loading is likely to cause a violation of water quality standards . . . DEP would expect notification regardless of the amount of the increase. DEP will consider how this may be made clearer in the permit language. . . . Your proposal that DEP evaluate all increases of approved pollutants regardless of magnitude is legally appropriate but not practical given DEP’s resources.”

B.) Obtaining written permission. The regulation requires written permission from DEP before accepting any increase in pollutants that meets the regulation’s criteria. The permit, however, states that if DEP does not respond to a notice within 30 days, “the permittee may proceed with the increase in loading.” I asked how DEP reconciles these two apparently contradictory provisions.

DEP Response. “Where DEP does not reply to notification of a planned increase to pollutant loading within 30 days, DEP’s latest issued permit constitutes the written approval.”

Summary Discussion.  Reviewing all of DEP’s responses to my questions about reporting increases in pollutants, and looking at the instructions for the reporting form, it appears that, except in unusual cases, POTWs can rely on the “20% rule” to determine if proposed increases in existing pollutants should be reported.

However, DEP agrees that there is no prohibition on reporting any and all proposed increases, even very small ones. Doing so places the burden of deciding whether an increase would cause an effluent limit violation or result in exceedance of a water quality standard on the agency with the tools (and responsibility) to make the determination—DEP. Hence, reporting every planned increase of any magnitude may be the most protective approach, especially in light of the “permit as shield” rule[8] and DEP’s position that once a planned increase is reported, unless DEP actually denies the request the permit itself constitutes the “written permission” required by the regulation. (But remember that the 20% rule and the deemed approval do not apply to new pollutants.)

Issue 3.  Reporting Unanticipated Changes Neither the DEP regulation nor the permit address the question of new or increased pollutants discovered after the fact, as may happen when an industrial discharger changes its processes without notifying the POTW. However, an EPA regulation (40 CFR §122.42(b)) does require reporting such changes. I asked how DEP wants POTWs to comply, especially since no mention of this regulatory requirement appears in the permit to advise POTWs of the requirements.

DEP Response. DEP agrees that the EPA regulations at 40 CFR §122.42(b) require notification of changes in the wastestream discovered after the fact. The obligation to report changes in waste streams would be triggered upon the permittee’s awareness of the change: “When discovered after the fact, DEP expects that the permittee will notify DEP within 45 days upon discovery, assuming notification criteria are met.” The report of discovered changes is to be made using the same form used for planned changes: form 3800-FM-BCW0482.

Discussion. The “notification criteria” mentioned in the response are assumed to be those in the EPA regulation: “a new introduction of pollutants . . . from an indirect [industrial] discharger . . . [or] any substantial change in the volume or character of pollutants being introduced into the POTW by a source introducing pollutants into the POTW at the time of issuance of the permit.” EPA does not define the term “substantial change,” but given DEP’s reliance on the “20% rule” for everything else, one might assume that DEP would define a “substantial change” using that criterion. Obviously, discovery of a new pollutant would be reported regardless of its magnitude.

Issue 4. Applicability Of § 92a.24 To “Discovered” New Or Increased Pollutants. I asked if the POTW reports “discovered” after-the-fact new or increased pollutants, is that a violation of the Permit (or the regulations) because the change was not reported by the POTW 45 days in advance and written permission obtained?

DEP Response  No, but the POTW should have “mechanisms in place” to take enforcement action against an industrial user that fails to notify the POTW in advance of the change in its discharge.

Discussion  POTWs with EPA-approved Industrial Pretreatment Programs should already be regulating their industrial users so that there are no surprises; other POTWs that accept industrial wastes might consider some sort of industrial monitoring program to try to avoid unexpected changes in pollutants being received. This will both protect the treatment plant and make it less likely that a permit violation can occur.

Final Note. This article does not explore every issue discussed in the correspondence. For instance, there are unanswered questions about the legality of including substantive requirements in NPDES permits that are not contained in the regulations. This article is intended to help POTWs understand the reporting requirements as they appear in their permits, as DEP has explained them. The entire correspondence (omitting, however, some of the attachments) is provided on Mette Evans & Woodside’s website (www.mette.com) under my link and can be reviewed in detail by anyone interested in these issues. You may also contact the author (rghurst@mette.com, 717.231-5215) to discuss any concerns or questions you may have. And, of course, you may wish to discuss these policies with your regional office staff so that everyone is in agreement as to what is required.

[1]  The previous regulation at § 92.7 read, in part, “[Changes] which . . . do not violate effluent limitations . . . shall be reported . . . to the Department . . . . A new permit application shall be submitted and a new permit obtained before commencing new or increased discharge, or change in the wastestream, which would . . . include any new or increased pollutant not identified in a previous permit application.” [Emphasis added.] The latter provision appears to have rarely, if ever, been implemented.

[2]  All of the letters are available on the Mette, Evans & Woodside website (www.mette.com) under my link.

[3]  The Permit adds a requirement that the written notice be at least 45 days in advance and via certified mail.

[4]  The regulation, permit, and reporting form also refer to exceeding “ELGs.” Effluent Limits Guidelines are direct discharge limits which only apply to certain categories of industrial discharger, never to POTWs, so they are not discussed in this article.

[5]  Imposing enforceable permit requirements not provided for by regulation implicates legal principles beyond the scope of this article.

[6]  Keep in mind that the criterion is mass loading, not concentration. Thus, the flows at the time that samples are obtained must be recorded.

[7] The Form is captioned “Planned Changes To Waste Stream Reporting Form” and is found under Wastewater Management/DMR Reports/DMR Supplemental Reports on the DEP website.

[8]  To keep this article of manageable size, I have not included a discussion of this important rule. See discussion on page 10 of my July 12 letter introducing Question 6.

Real Estate What If Question

What if?

Real Estate What If Question

By: James L. Goldsmith, Esq.

These two words are the start of many questions by those who draft contracts, including agreements for the sale of real estate.   Consider Paragraph 18 of the PAR standard agreement entitled Maintenance and Risk of Loss.  This paragraph was borne of the following “what ifs?”  What if the HVAC system or other systems fail after signing but before settlement?  What if the seller is unwilling to repair within the sale price agreed upon?  What if the seller, instead of repair, promises to credit the buyer with the fair market value of the system at the time the agreement was reached?  What if the seller refuses to do anything?  What if the buyer is willing to make the repair and what if the buyer is not?  And you could go on and on and on.

Well drafted agreements are more likely to go beyond basic terms in order to deal with the possibility of intervening events.  Having an agreement that charts a path through all of the possibilities means that the parties don’t have to pause when one of these events occurs in order to negotiate a resolution.  The problem is anticipated and the fix covered.

When teaching, I frequently reference the fact that the agreement of sale is 14 pages long because it covers all of the possibilities and eventualities.  We could strip the agreement down to a 3-4 page agreement, but then when issues arise we would be stuck negotiating a new set of terms and conditions.

The problem addressed by this article is that when agents encounter a situation not covered by the agreement or a standard addendum, they may draft an addendum that doesn’t ask all of the “what ifs.”  This usually happens when the parties are drafting a change in terms addendum following an inspection report that reveals a problem.  When a buyer agent proposes that the seller make a repair, has the agent asked what will assure that the seller selects a qualified, experienced repairperson who will use A-grade materials versus a semi-qualified handyman who uses salvaged parts?

A recent call to the Hotline underscores the problem when the “what ifs” are not asked.  The property in question was serviced by a septic system that failed the buyer’s inspection because of a saturated drain field.  The drain field was wet, perhaps because of a malfunction, but certainly because of the heavy rains and snow that preceded the inspection.  The buyers were gung-ho on going forward with the purchase, but they certainly wanted recourse if a subsequent inspection found a problem.  With the “help” of their agents, the parties agreed that seller would get approval of the drain field by July.  Settlement was March 1.  In late March there was a major sewage back-up that may be related to the drain field.  Seller refused to take any responsibility saying that the agent-drafted agreement merely said that the seller would obtain a passing inspection by July.  July was months away; regardless, the agreement didn’t say that the seller had responsibility if seller couldn’t obtain a passing drain field inspection.

It’s clear that the buyers’ agent hadn’t asked “what if the seller is unable to obtain a report that the drain field was in satisfactory condition?”  In fact, the agent missed asking a whole lot of “what ifs” and the result was an abysmal set of words that covered little.  The aftermath will include litigation.

Effective draftsmanship is a skill and my belief is that licensees are not well trained in it and should probably defer to published standard forms and lawyers.  There is a legal doctrine that holds that ambiguities in draftsmanship are construed against the draftor.  This means that whoever penned the ambiguous language will find that the interpretation accepted by the court is the one most favorable to the other side.  If you wheeled the pen you better draft well and in a manner that can lead to no confusion.  There is nothing wrong with asking your clients to obtain the advice of their counsel.  There is nothing wrong with using tried and true standard forms that go through rigorous scrutiny.  Best of all, however, is having a transaction close only when all lingering doubt, problems and contingencies are resolved.  When the buyer gets everything bargained for in exchange for the full consideration, there are few “what ifs” that have gone unanswered.  Put money in escrow to cover a roof repair and we begin to think what if the repairperson finds more damage than was anticipated; what if a contractor can’t be engaged to complete the work before the balance is to be returned to the seller; what if  . . . what if . . . what if.

Copyright © James L. Goldsmith, Esquire, 2019  |  All Rights Reserved

Mr. Goldsmith is an attorney with Mette, Evans & Woodside and serves as general counsel to PAR.  A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends Realtors® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. 

Are Emotional Support Animals Permitted in a “No Pets Allowed” Property?

It can be a familiar prohibition in condominium complexes and rental properties: NO PETS ALLOWED. Does that include an emotional support animal?

The federal Fair Housing Act enlarges the definition of assistance animal to include “emotional support animals,” which it considers to be a reasonable accommodation. An emotional support animal is a type of assistance animal for a person with a disability under the Fair Housing Act.

An emotional support animal is not a pet, according to the U.S. Department of Housing and Urban Development, and can be animals other than dogs, like cats or other species.

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Deposits – Too Little, Too Late

Real Estate Purchase Deposits

To state that the typical deposit is too low an amount and that it is paid later than should be is not an overstatement.

The purchase deposit, which is referred to as “initial deposit” in the Agreement of Sale, is paid within five days of execution. Why a deposit? It is not a legal requirement of a binding contract. Don’t confuse a deposit with “consideration,” which is essential in the formation of a binding contract. No, a deposit is not legally required, but it is a good idea, assuming that it is of a sufficient amount. A sufficient deposit is a better telltale of the buyer’s interest than of the buyer’s stated expressions of love for the home. Money talks.

A deposit also serves to protect against financial damage suffered by seller in the event of buyer’s breach. If left alone, the seller may, upon buyer default, retain the full amount of the deposit and apply it to the actual damages suffered by seller or to the full purchase price or to retain it as a liquidated damage in lieu of actual losses incurred. Even if the agreement did not include any provision regarding seller’s remedies, the seller would enjoy the benefit of Pennsylvania law and could seek actual damages incurred or sue for the purchase price.

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Mediation Regarding Residential Agreements of Sale – Is it Binding?

The standard residential agreements of sale mandate that buyers and sellers “will submit all disputes” arising from those agreements to mediation.

Equally clear is the requirement that mediation “be concluded before any party to the dispute may initiate legal proceedings in any courtroom, with the exception of filing a summons if it is necessary to stop any statute of limitations from expiring.” While our courts will enforce the requirement that the parties mediate, not all will dismiss a suit that has been filed by a party who did not first invoke mediation. A fair number of courts will stay proceedings (rather than dismiss the suit) until the parties conclude mediation. Other courts simply dismiss a lawsuit filed prematurely because of the language compelling mediation before suit is initiated.

To answer the broader question, yes, mediation is binding. Regardless, there are many instances where mediation does not occur and where suits are filed and left to thrive unhindered by the failure to mediate. This can happen in several ways. An aggrieved buyer files a request for mediation with the local association of Realtors® claiming that the seller failed to disclose material defects. The request for mediation is served on the seller who does not respond or give any indication that she will participate in the mediation process. Maybe the seller lives thousands of miles away or maybe the seller hopes the matter will go away by sticking her head in the sand.

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Working Outside of the Box

Brokers Need to be Aware of Potential Risk When Real Estate Salespeople Have Second Jobs

Real estate salespersons often have second jobs. Should a broker care? All in unison: “it depends.” 

Issues relating to profitability and productivity of a salesperson aside, a broker has reason to be concerned when a salesperson is also employed in a job closely aligned to real estate. There can be unanticipated and negative consequences for the broker and the brokerage.

Recently I was retained to represent a broker sued by the unhappy buyers of new construction. The contractor who built the home was also a salesperson affiliated with the defendant broker though the real estate was never listed with the broker. The broker, however, was aware of the salesperson’s side-business of building homes for buyers with whom the brokerage had no relationship.

Why did the buyers sue the broker in addition to the contractor? On one occasion the buyers met with the contractor at the broker’s office. The purpose of the meeting was to discuss features of the home to be built. Neither the construction contract nor any of the papers that passed between the contractor and the buyers made reference to the broker and the broker never received a fee as a result of the sale of the home or lot. The contractor acknowledged that his construction business was independent of his licensed activity, but the buyers refused to dismiss the broker from their suit.

Ultimately, the court granted summary judgment in favor of the broker. By that time the broker had fully paid the $5,000 deductible required by the errors and omissions insurance. That too could have been avoided.

What if the contractor provided the buyers with a disclosure at their first meeting describing the contractor’s new home construction business as completely independent of the contractor’s affiliation with the broker? A statement to the affect that the broker has no control whatsoever of the contractor’s business and does not receive any benefit, financial or otherwise, from the construction business could have helped.

Such a disclaimer may go far, but keep in mind that aggrieved parties are always looking for a deep pocket. Contractors generally do not carry any type of malpractice coverage and we know that brokers do. Brokers should consider requiring salespersons to indemnify brokers for liability claims asserted against the broker as a result of salespersons’ outside activities. If the salesperson’s side business is truly independent of the broker’s real estate business, this should not be objectionable. Such an indemnity agreement can be made part of the original broker/salesperson independent contractor agreement or it can be executed separately if supported by consideration. Brokers and salespersons entering into indemnity agreement should seek the advice of their legal counsel.

Working Inside the Box – Establishing the Box

Real Estate Sales People Need to Understand Their Broker Agreement

What is your agreement with your broker? A recurring question to the Hotline is “what is my broker’s obligation to pay me when I have pending transactions at the time I affiliate with a new broker?” There are many similar questions relating to fees after termination and whether a salesperson can take her clients and transactions to her new brokerage. 

The answer is always the same: what does your independent contractor agreement provide? If there are provisions regarding payment following termination, voluntary or otherwise, those provisions will prevail. Where the agreement is silent, there is little certainty. One might look to an invariable custom or practice of the broker in dealing with commissions post-termination but rarely is there an invariable practice that the court would accept as binding. It is more likely that the salesperson will lose out. The best practice is to endeavor to work out a resolution and if one cannot be achieved, consult counsel.

An even better practice is to establish terms for separation at the outset. When a salesperson affiliates with a broker, everyone should have high expectations. This is the best time to establish what happens at the end of the relationship. We know licenses are very portable and the odds are that the salesperson will not finish their career where they started. Neither the broker nor a salesperson benefit from uncertainty and suits that can follow termination.

How Can an Organization Manage the Risk of a Cyberattack?

The threat of a cyberattack is the sort of thing that keeps business owners up at night. Having an appropriate plan in place is critical to managing an organization’s response to a cyberattack. An organization will want to both manage risk before a security incident occurs, and mitigate risk afterward.

After a cyberattack, an organization aims to limit financial and reputational damage. But also, an organization should manage operational risk by having clear procedures for risk mitigation in place, before a cyberattack occurs. Organizations should be confident that their response plan will be useful and effective as a risk mitigation tool, and that their agreements with vendors provide helpful provisions to shift this risk when the vendor controls the outcome.

The experienced professionals at Mette, Evans & Woodside can assist your organization with this critical process.

For Sale By Owner and the Statement of Estimated Costs

What happens when a For Sale By Owner (FSBO) freaks out at settlement when she learns for the first time that she is paying seller assist and that the proceeds are less than she anticipated? She goes hunting, that’s what. Who is the likely target?

By definition, a FSBO is without an agent and we all know what a horrible idea that is! A listing agent would have reviewed the agreement and brought to the seller’s attention that seller assist would be deducted from the purchase price. A listing agent would have provided an estimate of closing costs and return.

While it is unlawful for a buyer agent to engage in conduct that confuses or deceives a seller, a buyer agent has no duty, in this author’s opinion, to review all the terms and provisions of the contract with the unrepresented seller. An unrepresented seller has a duty to assure that she reads the contract and understands what she is signing and to seek help if she does not (one the reasons the standard agreement suggests that the parties consult with an attorney).

Unfortunately, the seller may have a successful hunt because, in many cases, the buyer agent fails to provide the unrepresented seller with an estimate of closing costs detailing the costs and estimated proceeds. By regulation of the State Real Estate Commission, a buyer agent is required to present an estimate of reasonably foreseeable expenses associated with the sale that the FSBO may be expected to pay before she executes the agreement. The regulation (Section 334) states “Before an agreement of sale is executed, the brokers involved in the transaction shall provide each party with a written estimate of reasonably foreseeable expenses associated with a sale that a party may be expected to pay . . .” and it goes on to include the type of expenses for which there is to be an accounting. By my reckoning, the only broker involved in the transaction with a FSBO is the buyer broker whose agent is, therefore, duty bound to provide the estimate.

What is the consequence of not providing the estimate? It is likely that a disappointed seller will attribute the full amount of the seller concession to the selling broker and will demand that amount in suit. A common defense is based on causation: the buyer agent’s failure to estimate closing costs and proceeds did not cause the problem; rather, market conditions dictated a reduced sale price or seller concessions. While that may be true, it is difficult to assert this retroactively. Another consequence of not providing the estimate is that the seller may report the omission to the Real Estate Commission, which would likely seek to impose a fine.