Legal Update

Anneliese Fierstos Illinois REALTORS® Legal Hotline Attorney

Illinois REALTORS ® Legal Hotline is the Designated REALTOR ® / managing broker’s go-to source for legal information. Hours: 9 a.m. - 4 p.m. Monday – Friday Phone: 800-952-0578

Email:

IllinoisRealtors.org.

Due to a shortage of homes available on the market for both lease and sale, more properties are in high demand. As a result, many REALTORS® are faced with questions of how to navigate the complex world of presenting and negotiating multiple offers on the same property, and how to handle other complex issues that arise in the world of multiple offers.

There is no exact template on how to handle multiple offer situations. REALTORS® must focus on their duties to their clients and to other parties to the transaction.

The problem with multiple offers is that only one of the offers will result in a sale, and the remaining buyer or buyers will ultimately be disappointed. Therefore, REALTORS® need to keep in mind that the best way to handle these situations is through honest communication with all parties, subject to the client’s lawful direction.

The following questions related to multiple offer situations have been arising frequently on the legal hotline:

Sellers have several options on how to deal with multiple offers, and although the listing broker can offer suggestions and advice, the final decision on how to deal with a multiple offer situation is dictated by the seller. Sellers can accept the “best” offer; they can inform all potential purchasers that other offers are “on the table”; they can “counter” one offer while putting the other offers to the side awaiting a decision on the counteroffer; or they can “counter” one offer and reject the others.

There is no legal requirement for a REALTOR® to disclose to all buyers that there is another offer on the table. Ultimately, the decision whether or not to make that disclosure falls upon the seller. The REALTOR® Code of Ethics, Standard of Practice 1-15 requires disclosure only with permission from the seller. The Code further states that “Where disclosure is authorized,

REALTORS® shall also disclose, if asked, whether offers were obtained by the listing licensee, another licensee in the listing firm, or by a cooperating broker.”

In some cases, after an offer is presented, the buyer’s client is concerned about whether the offer was actually presented to the seller. Standard of Practice 1-7 provides “Upon the written request of a cooperating broker who submits an offer to the listing broker, the listing broker shall provide, as soon as practical, a written affirmation to the cooperating broker stating that the offer has been submitted, or a written notification that the seller/landlord has waived the obligation to have the offer presented.”

A shortage of real estate on the market also creates issues for buyers’ agents. Often a piece of real estate will appear to be perfect for more than one of an agent’s clients and result in two clients wanting to make an offer on the same property and at the same time. These are called “contemporaneous offers.” Under 15-15(b) of the Real Estate License Act [“the Act”], a licensee does not breach a duty to either client by showing the same property to multiple clients or by preparing contemporaneous offers to purchase or lease the same property.

However, the Act does require that the licensee provide written disclosure to the clients for whom the contemporaneous offers are being prepared and the licensee must refer any client that requests a referral to another designated agent. The issue is further addressed by the Illinois Administrative Code which clarifies the timing of when written disclosure to the parties making contemporaneous offers must be as the time the licensee “knows or has reason to know” that offers will be taken under consideration by a seller or their representative at the same time.

In other words, as soon as a licensee becomes aware that a contemporaneous offer situation may arise, they should make written disclosure to both clients and consider the option of referral to another designated agent.

Article 15 of the Act provides that a disclosure needs to be given by a designated agent to two or more buyers when contemporaneous offers are being made for the same property in both a lease situation or a purchase transaction. The important thing to recognize is that when a designated agent is representing two or more prospective buyers or tenants interested in making an offer on the same property at about the same time, then those prospective buyers or tenants have a right to know the designated agent is involved in both offers. The parties may then choose to continue to work with the designated agent or they can ask for other representation. Duties of confidentiality to both buyers remain.

An escalation clause in a real estate contract is a clause that a buyer uses to say: “I will pay X price for this home, but if the seller receives another offer that's higher than mine, I'm willing to increase my offer to a capped price of Y.” Or another example: “I will pay X above the highest offer presented by another buyer.”

These clauses can be problematic. Escalation clauses can create a false sense of security in a buyer, because they often feel that the clause is an absolute guarantee that they will ultimately have the highest offer on the desired piece of real estate.

However, escalation clauses can actually place the buyer at a disadvantage because the capped price (the highest price named by the buyer to which they are willing to escalate) can create an expectation in the seller how much they are willing to accept for the property. In other words, the buyer has “shown their cards” to the seller, and it is not unlikely the seller could simply counter at the capped and eliminate dealing with the clause all together.

Now imagine a scenario in which two buyers submit offers with escalation clauses. In that case, it is likely that the clauses would push the buyers’ offers to the very top of what they are actually willing to pay for the property. In these situations, a seller needs to be wary. Until the contract is finalized and executed, a buyer’s offer with an escalation clause is really just the buyer requesting a rightof-first refusal. It is also possible that the escalation clause was only a negotiating technique and pushed the buyer far above what they may be willing or able to pay. In order to avoid such a stressful and confusing situation, a seller can state to all buyers that they will not accept an offer with an escalation clause and will only consider offers with exact dollar amounts and clear terms.

In cases of escalation clauses, it is always a good idea to have the clauses reviewed by independent legal counsel for the parties involved.

Procuring cause questions have been a very hot topic for the legal hotline. This appears to be the combined result of a shortage of properties on the market during the pandemic and buyers getting excited about the current low interest rates. At any rate, buyers are scrambling to look at properties with any agent they can find available the moment a property becomes available without taking into consideration how this practice impacts the buyer’s agents.

The most frequent scenario presented to the hotline has been when a buyer views a property with one agent, and then returns to the same property with another agent and makes an offer. Often, the first agent to show the property feels entitled to some portion of the offer of compensation and makes that demand upon the buyer, new licensee involved, or the listing agent after closing.

It is important to remember, there is no concrete rule to help determine who is the procuring cause. Being the first REALTOR® to show a buyer a property will not be the defining factor.

The National Association of REALTORS® (NAR) “Code of Ethics and Arbitration Manual,” provides a definition of procuring cause that goes something like this: The procuring cause will be the agent who originated the chain of events, without abandonment (agent leaving client) or estrangement (client leaving agent), that leads to the successful sale with that buyer.

Because there are so many factors involved in these situations, the Illinois REALTOR® Legal Hotline will never offer an opinion on which party is the procuring cause. Often, a final resolution requires arbitration or settlement.

An arbitration hearing panel would need to consider all the facts and circumstances presented by both sides of the argument and determine who best fits within the definition of procuring cause.

NAR produced a 17-question “Arbitration Worksheet” available at www.nar.realtor that lists pertinent questions for the panel to ask in a hearing. (To find it, use NAR’s Google search option and type in “procuring cause.”) The worksheet features some columns to help guide the decision makers as they consider the facts and the answers to the questions. The Legal Hotline Attorney will not give you an assessment of your chances of success (or failure) in a procuring cause hearing.

In lieu of arbitration, members might consider using the Illinois REALTOR® Ombudsman Program. Through the program, any member of the public or an association member who has a question about or dispute with a REALTOR ® can get assistance by filing a request on the webpage. www.IllinoisRealtors.org/

Upon receiving a request for assistance, the case will be assigned to a specially trained Ombudsman who will work with the parties in a dispute to resolve the issue, often to the satisfaction of both parties.

The program does not offer legal advice, but Illinois REALTORS ® representatives can offer guidance on next steps to take, resources for information and can act as intermediaries in some disputes. The program is a cost-free and effective way to deal with disputes like procuring cause.

Learn more about procuring cause in Illinois REALTORS ® Legal A-Z www.IllinoisRealtors.org/Legal/Legal-A-Z/Procuring-Cause

ILLINOIS REALTOR ® (ISSN 0744-221) is published four times a year (January, April, July, October) for $3.00 per year by the Illinois REALTORS ® , The offices of publication and the headquarters and general business offices of the publisher, Gary Clayton, are located at 522 S. Fifth Street, P.O. Box 19451, Springfield, Illinois 62794-9451. The sole owner of the publication is the Illinois REALTORS ® at the address listed above. There are no known bondholders, mortgage or other security holders.

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