BARRISTER'S BRIEFING: When the Code of Ethics Does Not Apply in New York

Most Realtors think that all the articles of the Code of Ethics apply in all situations. If you thought this, you’d be wrong. In New York State, there are two specific provisions of the Code of Ethics that do not apply. Because of the recent uptick in calls and e-mails regarding them, I thought it would be a good time to address each one.

Article 3, Standard of Practice (SOP) 3-4

Just as a refresher, Article 3 relates to agent-to-agent cooperation generally and touches on the obligations related to compensation. It specifically states that:

“Realtors shall cooperate with other brokers except when cooperation is not in the client’s best interest. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker.”

Standard of Practice 3-4, which addresses dual or variable rate compensation, states the following:

“Realtors, acting as listing brokers, have an affirmative obligation to disclose the existence of dual or variable rate commission arrangements (i.e., listings where one amount of the commission is payable if the listing broker’s firm is the procuring cause of the sale/lease and a different amount of commission is payable if the sale/lease results through the efforts of the seller/landlord or a cooperating broker). The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers and shall, in response to inquiries from cooperating brokers, disclose the differential that would result in a cooperative transaction or in a sale/lease that results through the efforts of the seller/landlord. If the cooperating broker is the buyer/tenant representative, the buyer/tenant representative must disclose such information to their client before the client makes an offer to purchase or lease.”

The underlined portions are the most important part of the provision. According to 3-4, if a listing Realtor has an agreement with the homeowner to adjust the overall listing commission if the listing Realtor procures the buyer for the listing (presumably adjusting the commission downward, thus reducing the homeowners overall commission costs), then the listing agent must disclose this arrangement to other potential cooperating brokers. For example, Realtor A lists the property for a 5% commission. However, if the agent procures the buyer, then Realtor A will agree to reduce the commission to 4%. This becomes a 1% savings to the homeowner.

The logic behind the purpose of this provision was that other cooperating agents should be aware of the listing agent’s “sweetheart” deal before the cooperating agent’s buyer makes an offer so that the presented offer may compete with the listing agent’s arrangement. Otherwise, the listing broker’s agreement may give the listing Realtor an unfair advantage against other competing cooperating agent’s buyer’s offers.

In 1992, the New York Department of State, Division of Licensing Services issued a declaratory ruling stating that the provisions of SOP 3-4 are unenforceable in New York. In its ruling, the DOS found that SOP 3-4 enables other Realtors to intrude on private negotiations between principal and agent and required disclosure of confidential information involving transactions to which the other Realtors were not a party. Furthermore, the DOS stated that such a rule created the threat of price fixing pressure that would result in harm to the public through inflation of the costs of real estate transactions.

In the end, the right to negotiate a private contract and the confidentiality related to private contracts outweighed the need for Realtors to disclose their variable rate agreement pursuant to the Code of Ethics. This means that if a listing agent has an agreement with a homeowner that may change the commission owed by the homeowner, they are under no duty to disclose that information to any other Realtors.

Article 16, Standard of Practice 16-16

Article 16 addresses a Realtors’ duty to other Realtors. Its general tenet is that Realtors shall not interfere with another Realtor’s exclusive representation or exclusive brokerage relationship with its clients.

Standard of Practice 16-16 specifically states:

“REALTORS®, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation.”

NAR’s rationale for the creation of this rule stated that it was the listing broker that established the terms of compensation offered to subagents or buyer’s agents. The rule established that subagents or buyer agents could not leverage or withhold an offer to purchase to gain additional compensation from the listing agent.

In 1989, the DOS issued an opinion stating that SOP 16-16 was unenforceable in New York. In its opinion, the DOS stated that NAR was not correct on the law and that all licensees in New York should be aware that it is the seller, not the real estate broker, who has the right to establish the amount and terms of compensation offered to subagents and buyer’s agents and the seller is free to negotiate all terms of a deal. The DOS further stated that the rule failed to account for the rights of the buyer to fully negotiate the terms of a deal and to request a change in compensation for his/her agent.

The DOS added that the rule prohibited the buyer’s agent from making a counteroffer as to the amount of compensation offered by the listing broker and this places the buyer’s agent in the undesirable position of having to either abandon or be disloyal to his client and such coercion constitutes the tort of interference with a fiduciary relationship. As a result, the DOS determined that any Realtor found trying to enforce or obtain compliance with SOP 16-16 in the State of New York could be disciplined by the DOS.

As a result of the DOS holding SOP 16-16 as invalid in the State of New York, Realtors are free to negotiate their cooperating compensation at the direction of their client. However, a Realtor must still act in the best interests of their client; meaning that a Realtor cannot unilaterally take it upon themselves to withhold or change an offer to increase the cooperating compensation simply because they want a higher commission.

Conclusion

As Realtors, you must always be cognizant of the Code of Ethics. Additionally, you must also be knowledgeable about the rules that apply to all licensees in the State of New York. Sometimes, there’s a conflict between the Code of Ethics and the DOS; therefore, Realtors must always be on their toes and aware of the changing landscape through their ongoing practice, their communication with other agents, brokers, HGAR and NYSAR, and through continued education. If you don’t, you could be facing some serious problems.