Everyone involved in the sale of real estate should know about certain important new changes in Michigan law. Sections of the Michigan Occupational Code affecting all real estate licensees were recently amended in three important respects. First, all realtors now have an affirmative duty to disclose to sellers and prospective purchasers who the agent really represents. The disclosure must take place before any confidential information is revealed to the agent. The new law also provides that the relationship between real estate brokers and their sales people may be that of "independent contractor" not employer-employee. Finally, the new law protects realtors from lawsuits for failing to disclose so-called "psychological" defects1.
Even though most realtors work for the seller, as agent or sub-agent, many purchasers feel that the realtor is "their agent". The purchaser may inadvertently disclose confidential information which that agent is then legally obligated to disclose to the seller.
The Michigan Occupational Code now requires all licensed real estate agents to disclose their legal allegiance. The agent must make this disclosure in writing before the potential client shares any "confidential information" with that agent2.
The purpose of the law is to put purchasers and sellers on notice that the agent may not be working for them, and that the agent is obligated to disclose potentially detrimental information about them to the other side, such as how much money the purchaser is going to pay for the property, or the minimum purchase price that the seller is willing to accept.
The statute contains a suggested form, which appears at the end of this article. The form requires real estate agents to disclose for whom they are working, and the duties which the agency relationship creates. There are four possibilities: Seller's Agent (agent works for the seller); Buyer's Agent (agent works for the purchaser); Dual Agent (agent works for both sides); and Transaction Coordinator (agent does not work for either side). The disclosure form must be signed by both the realtor and the potential buyer and/or seller.
Real estate brokers and their sales people generally have operated as independent contractors, although prior law defined the relationship as one of "employment". This exposed brokers (employers) to potential liability for the negligent acts of their sales people (employees). The law now provides that the relationship between the broker and an associate broker or real estate salesperson may be that of an "independent contractor." To establish an independent contractor relationship, there must be a written agreement in which the broker does not consider the associate broker or real estate salesperson as an employee for federal and state income tax purposes, and at least 75% of the annual compensation paid by the broker to the associate broker or real estate salesperson must be from commissions for the sale of real estate3.
Amendments to the Occupational Code also provide that an action shall not be brought against a real estate agent for failure to disclose to the purchaser (a) that the former occupant of the property has or is suspected of having a "handicap" (such as AIDS) as defined in the U.S. Fair Housing Act; or (b) that the property was or is suspected to have been the site of a homicide, suicide, or other occurrence prohibited by law which had no material effect on the condition of the real estate4. In a landmark California case, the home was the site of a brutal axe murder. The court held that, under certain circumstances, the purchaser could recover from the seller and the seller's agents, for failure to disclose the murder5. In a "spooky" New York case, a buyer was permitted to rescind the transaction because the court found that the house was haunted6. The ghosts were friendly, but the seller still lost. Michigan law now insulates realtors from lawsuits for failure to disclose similar information about non-physical, or so-called "psychological" defects. However, the statute may not insulate the realtor from liability for giving a false or misleading answer in response to a direct question.
This article was written by Gregg A. Nathanson, Esq., an attorney practicing with the law firm of Couzens, Lansky, Fealk, Ellis, Roeder & Lazar, P.C., in Farmington Hills, Michigan. Mr. Nathanson specializes in the areas of real estate, finance, corporate and general business law.
Reprinted with permission from Building Business & Apartment Management (August 1994), publication of the Building Industry Association of Southeastern Michigan.
1. Public Act No. 93 of 1993, MCLA § 339.101 et seq.
2. MCLA § 339.2517
3. MCLA § 339.2501(d)
4. MCLA § 339.2518
5. Reed v King, 145 Cal. App. 3d 261, 193 Cal.Rptr. 130 (1983).
6. Stambovsky v Ackley, 169 A.D.2d 254, 572 N.Y.S.2d 672 (1991).
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