Imagine that Jane is the average home buyer, with no formal legal or business education, trying to purchase her first home in a hot real estate market. Jane retains George, a real estate broker she trusts, and begins spending her nights and weekends bidding on homes in her area. After losing several bidding wars in her state’s market, George advises Jane that adding an “as is” provision at the end of her next offer would increase the chances of her bid being accepted.
Jane knows that the form document George uses provides seller warranties, including a promise to repair any defect found in a home inspection. Because Jane thinks that adding an “as is” provision does not affect the seller’s duty to cure any defect found in the home inspection, Jane accepts George’s advice and, subsequently, her next bid is accepted. A few days later, Jane receives a detailed home inspection that reveals several latent and complex defects that will be very costly to repair. Jane calls George, asking him to enforce her warranty, but George informs Jane that the “as is” provision overrides the rest of the contract and, thus, waives any warranties provided elsewhere by the seller. Unable to afford the repairs, Jane is forced to back out of the contract and loses thousands of dollars of earnest money for doing so.
Although hypothetical, the problem experienced by Jane illustrates the vulnerability experienced by residential buyers and sellers when real estate brokers are given excessive discretion to practice law. In most jurisdictions, real estate brokers are permitted—or even statutorily authorized—to fill in the blanks of pre-approved form documents, drafted by attorneys. See R. Randy Lee, The Limited Ability of Real Estate Brokers to Prepare Contracts, 69-APR N.Y. St. B.J. 32, 33 (1997). The line between filling in the blanks and drafting legal provisions, however, is often thin and difficult to recognize. Id. Although most states agree that brokers are qualified to fill in blanks with purely factual information, the line begins to blur when brokers input language affecting a client’s rights. Id. For example, is a broker authorized to input non-factual language into a large blank when the contract explicitly provides that any language input shall override the other language of the contract, and, if so, how can such an action be distinguished from legal drafting?
This article addresses the opaque relationship of attorneys and real estate brokers created by the combination of non-legal professionals and the use of pre-approved form documents. The article specifically considers whether the common practice of brokers in negotiating a residential purchase agreement risks the unauthorized practice of law. The article suggests potential solutions or improvements to the current practice and concludes with a proposed recommendation.
In May 1978, President Carter declared that “[i]n the great number of cases there is no sound reason for a lawyer to be involved in land transfers . . . . Simplified procedures and use of modern computer technology can save consumers needless legal fees.” See Joyce Palomar, The War Between Attorneys and Lay Conveyancers—Empirical Evidence says “Cease Fire!”, 31 Conn. L. Rev. 423, n.65 (1999) (quoting 64 A.B.A. J. 840, 846 (1978)). President Carter’s remarks represented a growing sentiment that has continued to flourish in the United States: attorneys are no longer required for residential real estate transactions. See Gary S. Moore, Lawyers and the Residential Real Estate Transaction, 26 Real Est. L.J. 351, 351 (1998) (observing that while most people enlist the services of a broker when selling or buying a home, “[a] significantly smaller proportion employ the services of an attorney”). Instead, real estate brokers have become the go-to professionals for residential transactions.
There are multiple reasons for this belief. Id. For one, real estate brokers offer clients an opportunity to decrease the overall costs of the transaction through the elimination of attorney fees. See Gary S. Moore, The Buyer’s Agent and the “As Is” Clause: A Liability Trap?, 27 Real Est. L.J. 374, 386 (1999) [hereinafter As Is Clause]. Although the savings are often modest, they have the potential to result in more square footage for the client for the same amount of money. See Palomar, supra, at 439.
In addition, real estate brokers are often capable of getting properties under contract more quickly than attorneys, reducing the risk of the property selling before the client’s offer is submitted and accelerating the schedule of the closing date. Id. at 439–40. The increased speed of real estate brokers can be explained by the inherent discrepancies between attorneys and brokers: whereas attorneys bill by the hour and are professionally obligated to perform a complete legal analysis, brokers are financially incentivized to close transactions quickly and are charged only with filling in the blanks of a form document. Id.
Battle over Broker Representation
Consumers are likely to choose brokers when left to their own devices, and it should be no surprise that controversy has existed between brokers and attorneys over the extent of a broker’s role in residential transactions ever since the development of the brokerage profession in approximately 1900. See, e.g., Todd M. Schild, To Each Its Own: State Decision-Making and the Residential Real Estate Transaction, 45 Brandeis L.J. 387, 388 (2007).
This controversy can be attributed, at least in part, to the enormous size of the residential real estate market. Id. at 388. The controversy is heightened further by the remarkable overlap between the roles of brokers and attorneys in real estate transactions. Id. at 394-97. Although each has education and abilities that the other does not, many residential activities could be completed by either an attorney or a broker. For example, brokers are exclusively qualified to access a state’s Multiple Listing Service listings, to show houses for sale, and are generally more knowledgeable of the local market. Alternatively, attorneys are exclusively qualified to give legal advice, draft forms, or review documents for a client. Both, however, can fill in the blanks of a form document, set up a closing with a title company, and answer basic questions about a real estate closing.
Consequently, the debate between brokers and attorneys centers not on whether a broker should be able to participate in residential transactions but on how much a broker can participate. See Schild, supra, at 396–97. In other words, to what extent should a broker’s license be limited? Because a broker’s license is predominantly limited by a state’s unauthorized practice of law jurisprudence, the debate over the extent of a broker’s role in residential transactions frequently depends on whether a particular activity constitutes the unauthorized practice of law. Id. at 389.
Unauthorized Practice of Law
Determining whether the activity in question is considered the unauthorized practice of law depends on a state’s particular unauthorized practice of law jurisprudence, which varies state-by-state. Id. Still, the purpose underlying every state’s unauthorized practice of law doctrine is to protect the public interest from “ineffective assistance.” See As Is Clause, supra, at 387. Although attorneys often advocate for the application of the doctrine of the unauthorized practice of law to protect their industry from intrusion, the doctrine is for the protection of the public rather than for the protection of attorneys’ monopoly. Id. Consequently, to determine whether a particular activity constitutes the unauthorized practice of law, most states consider not only whether the activity in question requires legal training, but also whether the public good is better served by deeming the particular activity a practice of law. Id.
The Scope of a Broker’s License
Incidental to Business Test
To determine the extent that a broker is permitted to engage in traditionally legal activities, many courts apply the “incidental to business test.” See Deborah L. Rhode, Policing the Professional Monopoly: A Constitutional and Empirical Analysis of Unauthorized Practice Prohibitions, 34 Stan. L. Rev. 1, 82–83 (1981). Under the incidental to business test, non-legal professionals are permitted to engage in any legal activity that is considered ancillary to their primary employment. Id. at 82. The theory behind such an expansive rule is that, when considering ancillary services, the utility to the public of a one-stop shop outweighs the risk of harm from the unauthorized practice of law. See Palomar, supra, at 458.
A potential weakness of the incidental to business doctrine is that it rests on the assumption that non-legal professionals will have a strong incentive to perform their services correctly to protect their primary business to which the services are ancillary. Id. at 457–58. To limit this potential weakness, most courts permit non-legal professionals to complete ancillary legal services only if there is no charge incurred for those services. Id. at 460–61. Thus, non-legal professionals are, at least in theory, incentivized only to carry out these legal services to maintain their primary business.
Negotiating Purchase Agreements as an Ancillary Service
Courts regularly permit brokers to negotiate residential purchase agreements using the incidental to business test. As Is Clause, supra, at 386. Under this test, many courts have allowed brokers to negotiate purchase agreements as an activity ancillary to the broker’s role of bringing the buyer and seller together. Id. However, most agree that a broker’s role in the negotiation of a purchase agreement cannot be unfettered, so not all negotiation activities by a broker are considered incidental. Id. Consequently, brokers are universally authorized to participate in the negotiation of form documents, but only to the extent that the specific services provided are ancillary to a broker’s primary business.
States appear to universally agree that drafting a purchase agreement from scratch is far outside the purview of ancillary services. Consequently, most states permit brokers to use only pre-approved, form documents that have previously been drafted by a licensed attorney. See Lee, supra, at 33. Even in the minority of states that permit brokers to draft purchase agreements from scratch, brokers must include a provision in their contracts conditioning the agreement on an attorney’s approval. Id. at 33 (discussing Duncan & Hill Realty, Inc. v. Dept. of State, 405 N.Y.S. 2d 339 (4th Dept. 1978)). Practically speaking, the debate over a broker’s role in the negotiation of a purchase agreement, therefore, centers on whether a broker’s particular use of a form document is considered ancillary to the broker’s primary business. See, e.g., As Is Clause, supra, at 386–87.
Unfortunately, states vary significantly on that point. In many states, the rights and duties of a broker have yet to be defined by the legislature, so interpretation is left to the supreme court of the state. By contrast, some state legislatures have passed legislation in an attempt to more specifically define a broker’s role in residential transactions. Because state interpretation varies, assessing whether and to what extent a broker can “fill in the blanks” of a form document requires state-by-state analysis. A comparison of the positions taken by Arkansas, New York, and Tennessee on this point is instructive.
Arkansas: The Arkansas Supreme Court permits “filling in the blanks” of form documents as ancillary to a broker’s primary business if a particular set of conditions is met. J. Chad Owens, An Overview of the Unauthorized Practice of Law in Arkansas, 48-SPG Ark. Law. 30, 32 (2013). Specifically, in Pope County Bar Assn. v. Suggs, 624 S.W.2d 828 (Ark. 1981), the Court specified that brokers are permitted to fill in the blanks of a form document only under the following conditions:
(1) The person for whom the broker is acting must decline to employ a lawyer to prepare the necessary instruments and must authorize the broker to do so;
(2) The forms must be approved by a lawyer either before or after the blanks are filled in but before delivery to the person for whom the broker is acting;
(3) The forms must not be used for other than simple real estate transactions that arise in the usual course of the broker’s business;
(4) The forms must be used only in connection with real estate transactions actually handled by such brokers as a broker;
(5) The broker must make no charge for filling in the blanks; and
(6) The broker must not give advice or opinions as to the legal rights of the parties, as to the legal effects of instruments to accomplish specific purposes, or as to the validity of title to real estate.
Id. at 829 (emphasis added).
Notably, whereas conditions (1) – (4) specify when form documents are available to brokers, conditions (5) and (6) specify actions that a broker must make, or refrain from making, for filling in the blanks to be considered ancillary to the broker’s business. Most importantly, condition (6) states that a broker must not provide “advice or opinions” relating to the legal effects of the document to accomplish “specific purposes.” Consequently, brokers in Arkansas are precluded from advising—or even providing an opinion—that any language be added to a form document. In short, Arkansas brokers are only permitted to insert factual language (i.e., language not “relating to the legal effects of the document”) into blanks on behalf of clients, unless the client independently provides the specific legal language for the broker to input into the document.
New York: Like Arkansas, New York common law permits brokers to “fill in the blanks” of form contracts under particular conditions. See Lee, supra, at 33. In the seminal case, Duncan & Hill Realty, Inc. v. Department of State, 405 N.Y.S. 2d 339 (App. Div. 1978), the court stated that a broker may “fill in the blanks” of a form contract only under the following conditions:
(1) the purchase offer forms must be recommended by the American Bar Association, the National Conference of Lawyers and Realtors, or a joint commission of the bar association and realtors association of the local county;
(2) the form must contain a caveat, in boldface print at the top of the form, alerting the parties to the fact that the signed instrument will become a binding contract, and cautioning them to consult their respective attorneys before signing;
(3) the broker must not insert any provision into the standard form that would require the exercise of legal expertise; and
(4) the broker must adhere to the guidelines of the American Bar Association and the National Association of Real Estate Boards in filling out the forms.
Lee, supra, at 33 (summarizing requirements in Duncan & Hill Realty) (emphasis and numbering added).
Through condition (3), New York precludes brokers from inputting legal language into blanks more explicitly than in Arkansas. As a result, New York brokers are permitted to input only factual language into the document.
Tennessee: Unlike Arkansas and New York, Tennessee has a fairly long history of statutorily authorizing real estate brokers to fill in the blanks of form documents. See Bar Ass’n of Tenn., Inc. v. Union Planters Guaranty Co., 326 S.W.2d 767, 779 (Tenn. Ct. App. 1959) (“the right of real estate brokers to draw documents appertaining to the business of real estate brokers is expressly preserved by statute”). In its early form, the Tennessee statute provided that a broker’s license may be suspended or revoked for “drawing any legal document other than contracts to option, buy, sell, or lease real property . . . .” Id. (quoting Tenn. Code Ann. § 62-1325) (emphasis added). The statutory guidance today is less direct.
The statutes recognize that real estate brokers shall act as an “intermediary in negotiations between the parties” and a broker’s duties include “[a]nswering any questions that the client may have in negotiation of a successful agreement within the scope of the [broker’s] expertise.” Tenn. Code Ann. §§ 62-13-402, 62-13-404. The provision recognizing a broker’s ability to draft documents, however, has been omitted. In its place, the statute provides that a license can be suspended or revoked for “[e]ngaging in the unauthorized practice of law.” Tenn. Code Ann. § 62-13-312.
Although no Tennessee court has directly addressed the extent to which this statute permits brokers to fill in the blanks of form documents, the Tennessee Supreme Court provided a universal test for unauthorized practice of law in Petition of Burson, 909 S.W.2d 768 (1995). In that case, the court was faced with determining whether non-attorneys were engaging in the practice of law by representing taxpayers before a government tax board. In its determination, the court held that an activity constitutes the unauthorized practice of law under Tenn. Code Ann. § 23-3-103 when the activity: (1) constitutes the “practice of law,” as defined in Tenn. Code Ann. § 23-3-101; (2) is performed by a non-attorney; and (3) requires the professional judgment of an attorney. Id. at 776. Because the practice of law is prohibited only for non-attorneys, a Tennessee broker can certainly fill in the blanks if he or she is individually licensed as an attorney in Tennessee. If a broker is not licensed to practice law in Tennessee, then the broker engages in the unauthorized practice of law only if the first and third elements are met.
Tenn. Code Ann. § 23-3-101 defines the practice of law to include the “drawing of papers . . . in [a representative] capacity.” In Haverty Furniture Co. v. Foust, 124 S.W.2d 694 (Tenn. 1939), the Tennessee Supreme Court addressed whether filling in the blanks of a form document may constitute the practice of law. In that case, a non-attorney employee of the furniture company had filled in the blanks of a writ of replevin against a customer on behalf of his employer. Id. At the outset, the court acknowledged that if the furniture company had not been a corporation, no issue would arise because the statute expressly “reserve[s] to every person the right to represent himself.” The issue, therefore, was whether an employee of the furniture company acted unlawfully in drawing the papers for the company.
In finding the employee’s actions proper, the court held that, for a person to engage in the practice of law, the person must (1) act as an advocate or otherwise legal representative on behalf of another, and (2) be “wholly distinct” from the other. Id. at 697–98. In this case, the Court concluded that the employee did not engage in the practice of law because the employee, as a part of the employer, was not wholly distinct from the employer. Id. In other words, the employee was not acting as a legal representative, but as the company itself.
Therefore, under the logic of Haverty, brokers risk engaging in the practice of law if they are (1) “wholly independent” from their clients and (2) act as counselors or otherwise as legal representatives. Id. at 697–98. Regarding the first element, a broker is likely to be considered “wholly independent” of her clients unless the broker is representing herself or an entity to which the broker is related. Id. at 698. Although Tennessee courts have yet to provide specifics on when a broker acts as a legal representative, most states agree that filling in the blanks with “simple factual material” does not rise to the level necessary to be deemed a legal representative. See As Is Clause, supra, at 386. As a result, under the logic of Haverty, a Tennessee broker can likely fill in the blanks of a purchase agreement with simple factual material without risking the unauthorized practice of law. If brokers wish to fill in the blanks with more than simple factual material, however, Tennessee brokers are authorized to do so only when such activity does not require the professional judgment of an attorney.
In Burson, 909 S.W.2d at 769–70, the Court considered whether the activity of representing taxpayers before a government tax board required the “professional judgment of an attorney.” In its determination, the court interpreted the “professional judgment of an attorney” to refer to an attorney’s “educated ability to relate the general body and philosophy of law to a specific legal problem of a client.” Id. at 775. This requirement has the potential to provide more freedom for brokers who wish to input more than simple factual information, but when a broker inputs any language that would require legal education to appropriately apply to the client’s needs (e.g., “as is,” indemnification, or additional closing conditions), the broker risks unauthorized practice of law.
The Broker’s Use of Form Documents Categorizing Information and Form Blanks
Form documents frequently contain a wide range of blanks, each requesting a different type of information from the user. See, e.g., Purchase and Sale Agreement, Tennessee Bar Association (last visited Apr. 8, 2020), https://bit.ly/3dHUNrO. The nature of blanks in a form document —whether they be factual or analytical—has a major bearing on whether the broker is engaging in the unauthorized practice of law.
Generally speaking, the information requested by blanks can be put into one of three categories: (1) non-negotiable, factual information (Type-I information); (2) negotiable factual information (Type-II information); and (3) legal information (Type-III information). The blanks included in form documents can be similarly categorized as either: (1) blanks requesting Type-I information (Type-I blanks); (2) blanks requesting Type-II information (Type-II blanks); (3) blanks requesting Type-III information (Type-III blanks); and (4) blanks permitting the input of Type-I, Type-II, or Type-III information (open-ended blanks). An analysis of the use of each of these forms of blanks is provided below.
The Tennessee “Purchase and Sale Agreement” (TAR form), supra, contains three categories of blanks. This article, therefore, refers to the TAR form to illustrate the use of Type-I, Type-II, and open-ended blanks. Id.
Blanks requesting non-negotiable, factual information include blanks requesting the name of a party, the address of the property, or the legal description of the property. In essence, a blank is considered a Type-I blank if it requires a single, correct response. Because most, if not all, states allow the input of “simple factual material,” filling in the first category of blanks is extremely unlikely to result in the unauthorized practice of law. Because Type-I blanks require a single, correct answer, however, they provide brokers with the least amount of discretion to customize the documents to reflect the true agreement of the parties.
Nearly half of the blanks included in Tennessee’s TAR form can be categorized as Type-I blanks. Specifically, the majority of blanks contained at the beginning and end of the document request non-negotiable, factual information. For example, on the first page of the agreement, the user is asked to complete blanks specifying the city and state of the property, the names of the parties, and the property’s legal description.
Because Type-I blanks require the user to provide “simple factual material,” brokers in most, if not all, jurisdictions are authorized to fill in Type-I blanks. For example, Arkansas brokers may fill out Type-I blanks because specifying factual, non-negotiable information does not require giving advice or opinions as to the legal rights of the parties. See Owens, supra, at 32. Similarly, New York brokers are authorized to provide Type-I information because it does not require the “exercise of legal expertise.” See Lee, supra, at 33. Finally, Tennessee brokers are authorized to fill in Type-I blanks because filling in factual, non-negotiable information does not require the professional judgment of an attorney. See Burson, 909 S.W.2d at 776.
Type-II blanks request information that is factual but may require negotiation between the parties. For example, blanks requesting items that are to remain on the property at closing, when the closing is going to occur, and what title company will host the closing are Type-II blanks. Obtaining the information required by Type-II blanks frequently requires the broker to exercise the broker’s role as an intermediary between the parties: the broker must speak with the buyer and seller, negotiate, and then input the information agreed upon by the parties. See, e.g., Tenn. Code Ann. § 62-13-402. Thus, Type-II blanks allow the broker to customize portions of the form document to the particular needs of the parties.
Within the TAR form, more than half of all blanks are characterized as Type-II blanks because they require negotiable, factual information. For example, the TAR form contains blanks requesting the user to specify the amount of earnest money, the closing date, and even items that are to remain on the property after closing. These items are distinguishable from Type-I blanks because they require negotiation and are contingent on the express desires of the parties.
Overall, brokers are likely permitted to fill in blanks with Type-II information, but the result is less certain than with Type-I. For example, Arkansas brokers are likely able to fill in the blanks of Type-II blanks because they require factual rather than legal information. See Owens, supra, at 32. Arkansas brokers are prohibited only from opining on the “legal rights of the parties,” and providing factual information is unlikely to trigger this prohibition. Similarly, New York brokers must not insert any provision that would require “legal expertise.” See Lee, supra, at 33. Thus, because Type-II blanks include only blanks requesting factual information, New York brokers are permitted to fill in Type-II blanks. Finally, although Tennessee would consider filling in Type-II blanks the practice of law, Tennessee brokers are still permitted to complete Type-II blanks if doing so does not require legal expertise. See Burson, 909 S.W. 2d at 776.
Type-III blanks are substantially different from the preceding two types because Type III blanks request the broker to insert legal language into the document. Type-III blanks give brokers more discretion to customize the form document to represent the intent of the parties. Because brokers are rarely, if ever, authorized to provide legal language directly into a document, however, the use of these blanks is extremely rare. See, e.g., As Is Clause, supra, at 386. The TAR form, for example, does not contain any Type-III blanks. Examples of a Type-III blank would include provisions requesting the broker to describe any warranties provided by the seller, the notice rights granted to each party, or the buyer’s rights to an inspection.
Type-III blanks provide the greatest opportunity for a broker to engage in the unauthorized practice of law. As indicated above, Arkansas brokers are prohibited from giving advice or opinions related to the legal rights of the parties. See Owens, supra, at 32. Thus, an Arkansas broker may input Type-III information if explicitly provided by the client —in which case, the client is representing himself—but the broker is unable to give any advice or opinions regarding such information.
In New York and Tennessee, brokers are expressly prohibited from providing any legal information that requires legal expertise. See Burson, 909 S.W.2d at 776; Lee, supra, at 33. Still, this limitation likely allows New York and Tennessee brokers some discretion to provide legal information. For example, does language specifying a buyer’s contingency of “personally inspecting and approving the inside of the house within three days” require legal expertise? How about language specifying that a buyer agrees to take the property in “as is” condition? Unfortunately, completing these common provisions requires a thorough understanding of the client’s rights. See As Is Clause, supra, at 386–88. A buyer’s broker is unlikely to be trained or experienced enough to explain to a client the legal rights she is waiving by accepting a property in “as is” condition or to draft a proper inspection condition. Consequently, a broker’s discretion in filling in the blanks in Tennessee and New York should be severely limited when providing legal information. See id.; Burson, 909 S.W.2d at 776.
Finally, open-ended blanks include blanks that allow the broker to provide Type-I, Type-II, or Type-III information. For example, an open-ended blank would include a blank for any special stipulations not included elsewhere in the agreement. Open-ended blanks provide brokers with the best opportunity to customize the form documents to the needs of the parties. Moreover, because they do not explicitly request Type-III information, they are much more commonly used than Type-III blanks. Consequently, from a practical standpoint, open-ended blanks are most likely to result in a broker’s unauthorized practice of law.
The Tennessee Association of Realtors has included only one open-ended blank in the entire TAR form. On the ninth page of the document, the TAR form includes a blank titled “Special Stipulations.” Preceding this open-ended blank, the TAR form provides no specific instructions to the user but merely states: “[t]he following Special Stipulations, if conflicting with any preceding paragraph, shall control.” Consequently, not only does the TAR form provide a place for a broker to provide any type of information that the broker desires, but also the TAR form provides a broker with the opportunity to become a drafter capable of trumping every other provision of the contract.
The effect of an open-ended blank depends on the type of information that a broker provides. For example, if a broker adds Type-I information, the blank is treated as a Type-I blank; if a broker adds Type-II information, the blank is treated as a Type-II blank; and if a broker adds Type-III information, the blank is considered a Type-III blank. Consequently, analyzing whether a broker’s use of an open-ended blank is authorized requires: (1) characterizing the type of information the broker provided into the blank; (2) considering the blank as a type equivalent to the information input; and (3) analyzing a broker’s ability to provide information into the deemed type of blank. If a broker uses an open-ended blank to add Type-II information, the broker has very little risk of committing the unauthorized practice of law. By contrast, if the broker inputs Type-III information, the broker is very limited in the language that can be added before the activity constitutes the unauthorized practice of law.
Real estate brokers add significant utility to the residential real estate industry, especially when able to participate in the negotiation of purchase agreements. See Owens, supra, at 32. Most importantly, using brokers to negotiate purchase agreements decreases transactional costs by eliminating attorney’s fees. Id. Further, brokers are often faster at filling out form documents than attorneys, who are burdened by higher professional standards and have less financial incentive to act quickly. Id. Finally, allowing brokers to participate in the negotiation of purchase agreements allows people who live in areas without many attorneys (e.g., rural areas) to be represented. Id.
However, the benefits of using a real estate broker in these ways are outweighed when the broker has a high probability of committing the unauthorized practice of law. See, e.g., As Is Clause, supra, at 385–86. When a broker exceeds the scope of her expertise, the broker endangers the legal and financial well-being of her clients. Id. Consequently, states considering the amount of discretion to give real estate brokers in the negotiation of purchase agreements should pursue two principles: (1) increasing the ability of brokers to adequately negotiate purchase agreements, and (2) decreasing the ability and probability of brokers committing the unauthorized practice of law.
To increase the ability of brokers to adequately negotiate purchase agreements, attorneys should draft form documents to provide maximum discretion to the broker. Without discretion, a broker is unlikely to create a document that represents the true intention of the parties. Attorneys could provide discretion by including Type-II, Type-III, and open-ended blanks within form documents. To pursue the second principle, attorneys must draft form documents to limit a broker’s discretion to draft language that constitutes the unauthorized practice of law. If an attorney does not provide the broker with any discretion, the attorney is capable of assuring that the broker cannot commit the unauthorized practice of law. Ideally, this would mean including only Type-I blanks within form documents. Consequently, the two principles are in tension and the utility of each type of blank must be analyzed independently.
First, Type-I blanks provide utility to the first principle because non-negotiable, factual information is required to complete most contracts. How else would a broker identify the parties or property involved in the agreement? Also, Type-I blanks are very unlikely to increase the probability of the unauthorized practice of law. In most states, brokers are authorized to provide “simple factual material,” and this is exactly what Type-I blanks require. Consequently, Type-I blanks further the first principle without hindering the second. As a result, Type-I blanks should be included.
Next, Type-II blanks provide utility to the first principle by providing the broker with the ability to draft negotiable information. Type-II information is imperative to the broker’s role as an intermediary. Consequently, Type-II information is absolutely necessary to accomplish the purpose of the first principle. Moreover, because most states permit brokers to provide any information that does not require legal expertise, Type-II blanks are unlikely to result in the unauthorized practice of law. Adding the purchase price, specifying what items are to remain in the property after closing, or including a closing location does not necessitate the three years of legal education required of a lawyer. Consequently, Type-II blanks further the goals of the first principle without significantly impairing the second. As a result, Type-II blanks should be used to best serve the broker in form documents.
Because Type-III documents specifically request legal information, they significantly increase the probability of unauthorized practice of law. Drafting legal provisions affecting the legal rights of the parties requires a knowledge of contract and property law that brokers simply are not required to have. Consequently, a provision asking the broker to input the seller’s warranties or state that the buyer is taking the property “as is” is likely to exceed the scope of a broker’s expertise. See generally As-Is Clause, supra. However, Type-III blanks would help further the first principle because they result in more discretion to the broker. If the buyer desires specific legal rights, only Type-III information will provide it. Still, most states wish brokers to use form documents for only simple residential transactions. See, e.g., Owens, supra, at 32. Consequently, Type-III blanks drastically increase the probability of unauthorized practice of law and are useful only in more complex transactions. As a result, Type-III blanks should be excluded.
Finally, open-ended blanks further the first principle more than any other type of blank because they provide complete discretion to the broker. Thus, open-ended blanks give the broker the greatest ability to negotiate a contract that represents the specific need of the parties. When used to add Type-III information to the document, however, open-ended blanks are likely to result in the unauthorized practice of law for the same reasons provided above. Also, providing open-ended blanks for brokers to input unusual language is likely beneficial only when used in more complex transactions. Because form documents are meant to be used in simple real estate transactions, open-ended blanks should not be required for the vast majority of transactions.
From a public policy standpoint, open-ended blanks are likely to be used only by experienced investors willing to purchase a property in “as is” condition or knowledgeable enough to make an offer contingent on seeing and inspecting the inside of the house. But investors are the least in need of cost savings provided by form documents. Average consumers, however, are far less likely to require a broker to add complex language into open-ended blanks and are more in need of cost-savings. Thus, the large benefit of open-ended blanks is likely experienced only by experienced investors, who can afford to hire lawyers to represent their interest or can proceed without the additional conditions.
Further, open-ended blanks could easily be replaced by a combination of Type-I and Type-II blanks. Form documents could easily be amended on an annual basis, so drafting attorneys should solicit opinions from brokers on which blanks should be added. If brokers routinely complain that they are not sure where to add a particular piece of factual information, attorneys could easily add a Type-I or Type-II blank to account for that. If attorneys are not able to account for the input of particular information with Type-I and Type-II blanks, brokers are likely requesting a Type-III blank, which should be explicitly denied to them.
Consequently, open-ended blanks provide brokers with a significant opportunity to commit unauthorized practice of law and are unnecessary in the vast majority of residential contracts, especially contracts involving average consumers. To avoid the dangers of the unauthorized practice of law, open-ended blanks should be avoided in form documents.
Standardized purchase agreement forms empower a real estate broker to effectively negotiate an agreement representing the intent of the parties. To avoid the unauthorized practice of law, however, these form documents should include blanks designed only for factual information—either basic factual information (Type-I blanks) or negotiated factual information (Type-II blanks). Type-I and Type-II blanks create very little risk of unauthorized practice of law and should be sufficient to create a document reflecting the intent of the parties in a vast majority of cases. In contrast, standardized forms should not include blanks designed to elicit legal information (Type-III blanks) or open-ended blanks (Type-IV blanks) that create the risk of brokers inserting legal information. If parties wish to obtain more than a simple real estate transaction using just Type-I and Type-II blanks, they should retain a real estate attorney to assure that their specific needs are properly met.
Problems with Implementation
Although the proposed solution would substantially limit the risk for a broker’s unauthorized practice of law, its implementation would come with adverse effects. Most significantly, precluding brokers from using Type-III and open-ended blanks reduces a broker’s ability to negotiate a contract that adequately represents the intention of the parties. For example, if a buyer wishes to purchase a property in “as is” condition, a broker will likely be incapable of fulfilling that request. Accordingly, the buyer will be required to either retain an attorney or submit an offer that does not completely reflect her wishes.
Also, the proposed solution would adversely affect the transactional costs of investors and other parties wishing to engage in complex residential transactions. If brokers are unable to represent these parties with more complex transactions, then the parties will be required to turn to attorneys. Attorneys, however, increase the overall costs of the transaction, meaning that investors may be less incentivized to purchase residential property because of the increased costs. Investors and other parties wishing to engage in more complex transactions may be more disadvantaged by the increase in time associated with attorneys. Thus, if an investor wishes to add an “as is” provision, she may be forced to choose between making the offer immediately without the provision or making the offer later with the provision. Even if the increase in the time required to make an offer is small, it may be enough to determine who gets to purchase the property in hot residential markets.
Although these issues may complicate the implementation of using only Type-I and Type-II blanks, the disadvantages are significantly outweighed by the policy goal of preventing the unauthorized practice of law. Moreover, the proposed burden on residential transactions may be mitigated by proper drafting. For example, instead of using one broad form document with open-ended blanks, attorneys could draft several more specific forms to address frequent concerns. Whereas one form document may be available to investors who frequently want to purchase properties in “as is” condition, another could address a more traditional, first-time homebuyer situation. Consequently, not only does the goal of preventing the unauthorized practice of law significantly outweigh the disadvantages, but the disadvantages can be further mitigated by careful and specific drafting.
Overall, brokers provide significant utility to residential transactions by negotiating purchase agreements. However, a broker’s ability to negotiate a purchase agreement is substantially limited by the broker’s responsibility not to commit unauthorized practice of law. Specifically, in most states, brokers are precluded from providing any information that would require legal expertise to properly include. Consequently, attorneys should draft form documents that allow brokers to produce a contract adequately representing the intent of the parties and limit the broker’s likelihood of committing the unauthorized practice of law. To accomplish these goals, attorneys should include only Type-I and Type-II blanks within form documents.