Walking the Line

by James L. Goldsmith, Esq., Caldwell & Kearns

Doug Marsico, Esq.

Ray Michalowski, Esq.

Brett Woodburn, Esq.

Drafting Agreements of Sale, Addenda

and Deeds, and the Unauthorized

Practice of Law – Conflict in Practices

When does drafting documents for a real estate transaction evolve from the licensed practice of real estate into the unlicensed practice of law? The answer is a straightforward “it depends”! And REALTORS® may be walking closer to that line than they know.

While employing the use of standardized contracts and addenda during the course of a transaction in which a REALTOR® is involved has long been an accepted practice, the increasing complexity of real estate transactions and the expanding role of the real estate professional provide opportunities to blur the lines between what is licensed real estate activity and what is the unauthorized practice of law. These lines, though, were drawn over 70 years ago, and deserve some background.

In 1934, the Pennsylvania Supreme Court decided Childs v. Smeltzer. No case has had greater impact on real estate practice in Pennsylvania, yet its name is practically unknown to REALTORS®. The case provides:

There can be no objection to the preparation of deeds and mortgages or other contracts by such brokers so long as the papers involved pertain to and grow out of their business transactions and are intimately connected therewith. The drafting and execution of legal instruments is a necessary concomitant of many businesses, and cannot be considered unlawful. Such practice only falls within the prohibition of the act when the documents are drawn in relation to matters in no manner connected with the immediate business of the person preparing them, and when the person so drafting them is not a member of the bar and holds himself out as specifically qualified and competent to do that type of work. A real estate broker is not prohibited from drawing a deed of conveyance or other appropriate instrument relating to property of which he or his associates have negotiated a sale or lease.

On its face, one may interpret Childs to mean that real estate brokers and salespersons can draft agreements of sale, addenda, deeds and other documents that are attendant to the transfer of real estate in Pennsylvania. But let’s look a little more deeply.

Childs has been on the books in Pennsylvaniafor the past 70 years. Much has changed in the practice of real estate, calling into question the vitality of that ruling. Of greater concern in evaluating Childs is that Childs addressed the role of a notary in a real estate transaction. The role of a real estate broker was not before the Supreme Court, but was addressed as a side issue and, therefore, the Court’s commentary about what a real estate broker can and cannot do is not binding law. In fact, these comments might be disregarded altogether if a similar issue came before the Court today.

Currently, it is common practice for real estate licensees to prepare agreements of sale and addenda for real estate transactions. While there remains a risk that the appellate courts of Pennsylvaniacould decide that even this task is the (unauthorized) practice of law, as counsel for PAR, we believe that this risk is drastically reduced when REALTORS® use the Standard Agreement for Sale of Real Estate, as available through PAR. While many REALTORS®, consumers and attorneys bemoan the length of the Agreement of Sale, as a standard form, it addresses most of the contingencies, questions and concerns that arise in the “typical” sale of residential real estate. Also, commonly used addenda have been standardized by PAR including those for the sale and/or settlement of other property, for example. (For purposes of this article the term addenda below refers only to non-standard addenda unless otherwise noted.) It would be difficult to argue that a REALTOR® is offering legal advice when he or she is doing nothing more than “filling in the blanks.”

Drafting addenda or significantly “customizing” an agreement of sale, even the PAR Standard Agreement, is more problematic. Any REALTOR® who has called the PAR Legal Hotline asking about the particulars for drafting an addendum to a sales agreement has been advised to consult counsel. Although not the answer that many are seeking, it is advice intended to protect REALTORS® as well as the consumers that they serve. The farther that a REALTOR® strays from the standard language of the Standard Agreement, the closer the REALTOR® gets to providing legal advice. At the very least, the REALTOR® who drafts an addendum takes on the responsibility to ensure that the addendum attains the consumer’s goal. Remember, under RELRA and common law, even when the drafting of a real estate document does not become the practice of law, the drafter has a duty to perform this task in a diligent and competent manner. Is this a duty that you are prepared, by training to assume?

Childs states that, “A real estate broker is not prohibited from drawing [an] appropriate instrument relating to property of which he or his associates have negotiated a sale or lease.” Put another way, there can be no objection to the preparation of deeds or other contracts by such brokers so long as the papers involved pertain to and grow out of their business transactions and are intimately connected therewith. The use of the term “broker” by the Childs court is significant and is further supported by the increased level of training and responsibilities required of, and bestowed upon, brokers under RELRA. In actual practice, does your office limit the drafting of non-standard agreements/addenda to brokers and associate brokers only? Is the subject of the addendum “intimately connected” with the transfer of the real estate? Further, while Childs suggests that brokers may aid in preparing simple transactional documents that are ancillary to the sale or purchase of real estate, it is implicit that anything truly out of the ordinary should be drafted by an attorney.

Childs suggests that brokers may draft a deed for the property negotiated for sale by his or her licensees. Before commenting on the propriety or impropriety of undertaking this obligation, it is critical to limit drafting deeds to only those situations in which the broker or his or her licensees negotiated the sale of the property. Drafting deeds presents its own challenges for REALTORS®. A deed is a legal document. Despite the language in Childs, an appellate court is not likely to hold a REALTOR® to a lower standard than that to which it would hold a lawyer who drafts a deed. Do you have sufficient training in researching and drafting deeds to perform this task at the required level of competency? The definitions of “broker” and “salesperson” contain no explicit language authorizing the drafting of legal documents, including deeds, by real estate licensees.

Legal Tightrope

Of real concern is the ever-increasing complexity associated with drafting deeds. Deed restrictions are increasingly complicated and prevalent, particularly with the growing popularity of planned communities. Legal descriptions may set forth distances or acreage in archaic measurements, like rods or perches. Easements, rights of first refusal, life estates and other restrictions on ownership, improvement or conveyance, which are more common today, raise serious doubt as to whether or not non-binding commentary in a 70 year old case would serve as adequate authorization for a broker to draft a deed. Counsel is confident that the prosecutors with the Commonwealth’s Bureau of Professional and Occupational Affairs would find that a salesperson is not authorized to draft a deed. Brokers, are you willing to undertake this responsibility? Do you recognize that the broker will be held accountable for the agent who prepares a defective deed? If a deed or other conveyancing document must be drafted by someone other than an attorney, it is our opinion that a licensed title agent, rather than a real estate licensee, should perform this task.

As counsel for PAR, we have not heard of any REALTORS® drafting mortgage documents. Perhaps it need not be said, but REALTORS® should not draft mortgage documents! This restriction includes actual financing documents as well as hybrid financing/conveyance documents such as installment land sales contracts.

The lines of demarcation separating the real estate licensees’ duties from the title companies’ duties from the role of the attorneys in a real estate transaction are blurred. All licensed real estate professionals must understand that Pennsylvanialaw prohibits providing legal advice unless properly licensed to do so. The unlawful practice of law is a criminal offense, punishable by up to one year imprisonment and a $2,500.00 fine (42 P.S. §2524). A conviction also must be reported to the State Real Estate Commission within 30 days of the verdict or plea. Furthermore, a conviction for the unauthorized practice of law will result in the offending licensee being held liable for the financial harms caused by this transgression. The unauthorized practice of law is a likely violation of one or more sections of RELRA. The licensee and his/her broker can face significant fines and/or the loss or suspension of their respective licenses on top of any criminal sanctions imposed. Also, as REALTORS®, we are guided by Article 13 of the National Association of REALTORS® Code of Ethics, which provides that: “REALTORS® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it.” Finally, a civil lawsuit for the unauthorized practice of law may be brought by an aggrieved party resulting in an award of monetary damages to the plaintiff.

Why Take Chances?

Preparing documents for a real estate transaction is intimately and inextricably connected with rendering legal advice. Often, they are one and the same. REALTORS® are prohibited from giving legal advice and drafting legal documents. Today, brokers and their licensees are permitted to complete the terms and conditions of the Standard Agreement for Sale of Real Estate and other standard forms. Thus far, REALTORS® have not been cited criminally for practicing law without a license for drafting non-standard agreements, although negligence claims for improper drafting of such documents are not uncommon. We also are seeing unauthorized practice of law claims asserted more frequently in civil suits and believe this is a looming issue for all licensees. The farther licensees stray from using standard forms, the closer they come to providing unauthorized legal services. Real estate licensees may soon be subjected to scrutiny by the State Real Estate Commission and by plaintiffs’ attorneys across the Commonwealth. By recognizing the limits of what is permissible, and by endeavoring not to practice beyond their areas of expertise and scope of practice when representing a consumer, REALTORS® can minimize their risk of practicing law without a license.

Jim Goldsmith, Brett Woodburn, Ray Michalowski and Doug Marsico are attorneys with Caldwell & Kearns. They serve as general counsel to PAR. Their legal practices vary, but each of these attorneys represent and defend real estate agents and brokers in all types of civil law suits and licensing claims across the Commonwealth.