NAR Article 17 and Mandatory Arbitration

Article 17 of the National Association of REALTORS® Code of Ethics calls for mandatory arbitration of contractual disputes or specific non-contractual disputes of REALTORS® associated with different firms, arising out of their relationship as REALTORS® if the local board requires it. The local Northern Virginia Association of REALTORS® (NVAR) does require arbitration of such disputes.

Often times the words REALTOR® and real estate agent are used interchangeably. This is incorrect. REALTOR® is a trademark designation for someone who is a member of the National Association of REALTORS®. What sets REALTORS® apart from real estate agents (which are more accurately salespeople or subagents) is National Association of REALTORS® members are bound by their Code of Ethics.

Issues arise under Article 17 when a REALTOR® acts as a principal in a transaction. Does a REALTOR® who lists and sells his or her own property with another REALTOR® have to submit to arbitration? The National Association of REALTORS® issues Case Interpretations to help clear any ambiguities in the Code of Ethics.

One Case Interpretation features two REALTORS®, Andrew and Britney. Andrew inherits a cabin. He signs a listing agreement for the cabin with Britney. When Britney cannot sell the cabin, Andrew and Britney decide to reduce the price. Within a month, Britney calls Andrew to tell him she has received an offer. The offer is from Britney’s daughter and son-in-law. Because it was an “in-house” sale, Andrew thinks Britney should reduce her commission. Britney disagrees and sends the purchase offer to Andrew. Andrew accepts the offer, but at closing, handled in escrow Britney realizes Andrew had instructed the closing officer to disburse only ½ of Britney’s commission. Britney files an interboard arbitration request against Andrew for the balance of her commission. Andrew refuses to arbitrate on the grounds that he was the seller and had not acted w/in the scope of his real estate license and there had been no “relationship as REALTORS®” as required by Article 17.

The Board of Directors of Andrew’s local Board concurred with him. They noted the operative words in Article 17 refer to contractual disputes between REALTORS® in different firms “arising out of their relationship as REALTORS®”. The Board stated that if Andrew and Britney had wanted to bind themselves to resolve any dispute out of their principal/agent relationship, that could have been accomplished through insertion of an appropriate arbitration clause in the listing agreement. Absent that, there was no obligation for Andrew and Britney to arbitrate. When a REALTOR® acts solely as a principal, they are not subject to the arbitration required by Article 17.

Contrast, another Case Interpretation which finds a REALTOR® who acts mainly as a principal, but not exclusively to be subject to arbitration. In this Case Interpretation, Britney is a broker and property manager who frequently buys and sells income property for herself. She decided to sell a 3 unit building. To maximize market exposure, she listed the property with her firm and entered the information into the MLS. She put a for sale “by owner” sign in front of the property. Andrew who lives near the building called Britney and asked if she was interested in listing her property with him. Britney did not disclose that she was a REALTOR® or broker and said that she did not want to enter into an exclusive relationship with any broker. She did say that she would pay a commission to Andrew if he found a purchaser. Andrew did find a purchaser. At closing Andrew realizes that Britney is a REALTOR® and a broker and that she had instructed only ½ of the commission to be paid. Britney says the property practically sold itself and Andrew had only expended minimal effort. Andrew requests arbitration and Britney declines. The Board of Directors finds that Britney was a principal in the sale of her own property, but that by listing the property, even with herself, she was no longer exclusively a principal.

The answer to whether a REALTOR® who lists and sells his or her own property with another REALTOR® has to submit to arbitration is: it depends on how they were acting. As the Case Interpretation above illustrate, a REALTOR® acting exclusively as a principal is not required to arbitrate. A REALTOR® who blurs the line and acts at all within the scope of his or her license in the sale will have to arbitrate.

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