The Illinois REALTORS® Legal Hotline fields several thousand calls and emails throughout the year. Questions about business practices under the Illinois Real Estate License Act, contracts to purchase and disclosure, advertising, escrow rules and changing brokerages rounded out the top five issues.
This article examines these frequent legal questions and offers sample scenarios and answers.
1. License law and business practice
The recent changes to the Illinois Real Estate License Act (RELA) have effectively brought the practice of wholesaling under the purview of the Illinois Department of Financial and Professional Regulation (IDFPR). The law includes the practice as one of the licensed activities under the definition of the term “broker” in the Act.
This change will protect the average consumer by making certain that this activity can only be conducted by an individual or entity that is licensed in the state of Illinois, which imposes certain duties on the licensee, such as disclosure of licensee status and disclosure of No Agency to the other party (due to the prohibition against dual agency where the licensee has an interest in the subject property).
The new legislation makes an addition to RELA, requiring a broker’s license to encompass an individual or other entity who, “whether for another or themselves, engages in a pattern of business of buying, selling, offering to buy or sell, marketing for sale, exchanging, or otherwise dealing in contracts, including assignable contracts for the purchase or sale of options on real estate or improvements thereon.”
The definition clarifies “pattern of business” as follows: “an individual or entity will be found to have engaged in a pattern of business if the individual or entity by itself or with any combination of other individuals or entities, whether as partners or common owners in another entity, has engaged in one or more of these practices on two or more occasions in any 12-month period.”
2. Contracts to purchase: Disclosures under the 7.0
The Multi-Board Residential Real Estate Contract 7.0 arguably allows a seller to avoid gaining “actual knowledge” of a material defect that has been revealed by an inspection. The contract provides, “Buyer shall not send any portion of the inspection report with the Notice provided under this subparagraph unless such inspection report, or any part thereof, is specifically requested in writing by Seller or Seller’s attorney.” But does this provision really protect the seller?
The question turns on how a court would interpret that avoidance technique in the event a cause of action was brought against a seller under the Residential Real Property Act. Once a buyer gives notice to a seller that they are terminating the contract under the provisions of Paragraph 12 of the 7.0, it may be difficult for a court to accept the Seller’s claim that they have no knowledge of a material defect in the property in future transactions.
3. Advertising under RELA rewrite:
The RELA rewrite does provide that in advertising which includes the sponsoring broker’s name and a team name or individual broker’s name, the sponsoring broker’s business name shall be at least equal in size or larger than the team name or that of the individual.
This provision was added in response to industry concerns that licensees were not properly representing their association with sponsoring brokerages and it was misleading to the general public.
IDFPR appears to recognize that bringing all advertising into compliance with the provisions of the rewrite may be financially burdensome to some licensees. IDFPR has indicated to the Illinois REALTORS®ʼ legal team that they do not expect immediate compliance, but do expect a showing of “due diligence” in efforts to bring all advertising into compliance over the next several months.
4. License law: Special accounts – escrow disputes revisited
In recent weeks, the hotline has been flooded with questions about what a sponsoring broker should do if they are holding escrow funds, a sale falls through and at least one party is demanding return of the funds.
The guidelines for handling escrow disputes are found in Section 1450.750 (h) of the rules under RELA. Generally, the rules require that a sponsoring broker, who has knowledge that a party to a transaction contests or disagrees with an anticipated disbursement of escrow moneys held by that sponsoring broker, must continue to hold the funds in their escrow account until one of three things occur:
- The sponsoring broker receives a written release from all parties or their duly authorized agents (i.e. an attorney at law or power of attorney) consenting to the disposition (in which case, the funds must be disbursed according to joint written direction from the parties no later than the next business day after receiving the written release);
- A civil action is filed, by either the sponsoring broker holding the escrow funds or a party to the transaction, seeking a court order instructing the sponsoring broker how to distribute the funds; or
- The funds are turned over to the Illinois State Treasurer, Division of Unclaimed Property under the Uniform Revised Unclaimed Property Act [765 ILCS 102-6] due to inactivity of the account, inability to locate the parties, or inability to reach a resolution.
The first option above is fairly straight-forward and easy to follow. However, things become more complicated when one or both of the parties will not sign the written release.
Often, a sponsoring broker does not want to let the funds sit in their escrow account and wait three years before they can transmit the disputed funds to the Illinois State Treasurer. In those cases, a sponsoring brokerage can retain the services of an attorney for purposes of filing an interpleader action. The interpleader action allows for the sponsoring broker, as a neutral third party, to avoid liability to any claimant by forcing the claimants to litigate among themselves and let the court determine who should receive the funds.
Another option is to suggest to the party claiming the escrow funds, and refusing to sign the release, that they may want to seek independent legal counsel for purposes of filing an action in civil court seeking a court order for distribution of the funds.
There is also a provision in RELA which allows a sponsoring broker holding money in escrow to transmit disputed funds to the unclaimed property division of the Illinois State Treasurer within six months of a written demand for a return of the funds. This is an option as long as a lawsuit has not been filed. It should also be noted that this action does not resolve the dispute, but only moves it to another venue.
5. Changing brokerages? Who owns the listing agreements?
If a licensee is changing brokerages, and the licensee has listings in place that have yet to close, the question often arises whether the license can take listings with them to the new brokerage.
The general rule is that the listings belong to the sponsoring brokerage with which the license was associated at the time the listing agreement was entered. In some cases, the employment agreement or independent contractor agreement might have different provisions or provide for some compensation to be paid to the listing agent after the agent leaves. The agent who leaves must cease working with the listing client unless the current listing company has agreed to allow the departing licensee to take the listing to the new sponsoring company.
