TEXAS REAL ESTATE BROKERS
The Would Be Lawyers
prepared for:
Dean Richard Hemingway
Texas Tech University School of Law
May, 19 81
~
by: Sol Thomas
It is often said, .. Imitation is the sincerest form of
flattery ...
If this is true, real estate practitioners (espe-
cially those in the brokerage business) must surely hold lawyers
in high regard.
This statement is based on the writer•s obser-
vations of brokers over the past few years who, almost without
exception, engage in some form of unauthorized practice of law.
Of those, some are unaware of such a violation.
will admit to practicing law.
Almost none
However, the problem may be
more easily stated than solved.
11
Real estate is the first
cousin of law .... Because the lawyer•s and broker•s services
run in parallel lines, sometimes the lines cross and friction
results ... l
This problem did not arise just yesterday.
11
Historically
1n the United States, the sale of real estate was primarily a
legal service .... When persons other than lawyers began to
specialize in real estate brokerage, the question of who should
write the sales contract became important. 112
Lawyers properly
maintain that instruments affecting the transfer of legal rights
to property should only be prepared by competent legal counsel.
Brokers, on the other hand, point to 11 the need to expedite the
drafting and signing of the contract, which might be delayed
unduly if the attorney were not readily available to prepare
it.
113
The drafting of such instruments has been held to consti-
tute the practice of law. 114
The State Bar Act provides in part,
.. [flJ 1 1 pe r s o n s n o t me mbe r s o f t he S t a t e Ba r a r e p r o h i b i t e d f rom
practicing law in this State. 115
And further, the provisions of
817
the Real Estate License Act cover the subject as follows:
Any license granted under the provision
of this Act shall be cancelled by the
Commission upon proof that the licensee,
not being licensed and authorized to
practice law in this State, for a consideration, reward, pecuniary benefit,
present or anticipated, direct or
indirect, or in connection with or as
a part of his employment, agency, or
fiduciary relations, as licensee, draws
any deed, note, deed of trust, or will,
or any other written instrument, that
may transfer or anywise affect the
title or interest in land, or advises
or counsels any person as to the
validity or legal sufficiency of any
such instrument above mentioned, or as
to the validity of title of real estate. 6
This would seem a severe enough measure to prohibit the
unlawful broker-law practice.
It does not seem to affect the
broker•s right to earn and collect a commission based on a
contract prepared by him.
In Caneer v. Martin, the fact that
the broker, acting as agent for all parties, drew up a contract
for the exchange of property with a provision for his commission,
did not preclude his recovery of the commission when one set of
818
parties reputiated the contract on the grounds of his unauthorized practice of law. 7 The court in Smith v. Knapp, a
1980 case, went even further.
There the broker reduced an
agreement with his client and an offer from prospective
purchasers to contract form.
Since his right to a commission
was included in the contract, the court found the broker to be
a party and advanced the following retionale:
The practice of law cannot be defined
so as to preclude a party from putting
in writing a personal agreement.
L}he
broke(? ... had the right to make the
contract and the right to make such a
three-way contract, and his rights are
not diminished because the proposed
agreement was put to wr1. t.1 ng. 8
So it would seem that, so long as a broker includes his brokerage
agreement in a sales contract between principals, he is raised
from the status of agent to party and, therefore, can legally
draft the instrument.
On its face, this does not seem unreasonable.
But is such
a rule consistent with the purpose of the prohibiting statute?
11
The ... statute was enacted in the interest of public welfare
and safety for the purpose of prohibiting the practice of law
by unqualified and unlicensed persons under the State's police
power.
119
11
The practice of law is affected with a public interest,
and it is the right and duty of the state to regulate it and
819
control it so that the public safety and welfare will be served
and promoted. 1110
The large volume of cases involving real
estate transactions which are contested on the basis of vagueness or legal insufficiency indicates a partial failure of this
purpose.
These cases represent a waste of judicial energies
and the resources of our society.
This is not to say that progress has not been made toward
the protection of society•s interests in competent legal drafting.
The State Bar of Texas and the Texas Real Estate Commission have
formed a joint committee for that purpose and for the purpose of
eliminating friction between the two professions.
Working to-
gether, they have drafted the Statement of Principles by the
State Bar of Texas and the Texas Real Estate Commission which
provides in part:
The broker shall not undertake to draw or
prepare documents fixing and defining the
legal rights of the principals to a
transaction.
However ... the broker may
fill in ... those printed forms which have
been approved by the State Bar of Texas
and the Texas Real Estate Commission ... as
the required standard forms to be used by
11
all real estate licensees.
To this point the prescribed use of such contracts effects the
desired purposes.
As the bulk of real estate transactions
involve the sales of single family residences, the use of
820
standard contract forms do the most good with the least
possible harm.
techniques:
Three different forms cover most financing
1. Conventional
2. Assumption
3. Vendor
Purchase Money.
But the Principles do not stop there.
It is further
provided that the broker cannot alter the contract
11
except
that brokers shall add factual statements and business details
desired by the principals and shall strike only such matter
as is desired by the principals and is necessary to conform
the instrument to the intent of the principals.~~
12
The ability to add or detract is very little different
than the ability to form and create.
Certainly, this carries
with it the ability to affect the parties rights in real
property.
It is just better than having no contract form to
protect the public.
These forms do nothing to aid in the prevention of
brokers drafting insufficient sales contracts for other types
of realty nor does it prevent the damage done by clumsily
drawn leases of property interests.
explicit.
The case law on this is
In 1973, the court.in Sherman v. Burton plainly
stated that drafting leases is the practice of law and cannot
be done by a real estate agent. 11 1 3
Less complicated leases
might well be handled as the residential sales contracts are.
An experienced broker could write a simple one or two year
lease, if it were prepared from a form previously approved by
a broker•s attorney.
821
The more indiscernible area of the broker-law practice
is the giving of legal advice to clients in the course of
his brokerage employment.
In Palmer, Justice Barron recog-
nized holdings that "preparation of legal instruments and all
advice .to clients involve the practice of law." 14 As a practical matter, the buyer and seller of most properties never
see or talk to an attorney if the transaction is handled by a
real estate agent.
The average buyer or seller of property
generally indicates which lawyer is to draw up the note, deed
of trust, warranty deed or other instruments.
Often, this
attorney is one suggested by the broker or lending institution.
It is not unusual that these parties would rely upon the advice
of a seemingly (or genuinely) knowledgeable real estate agent
as to their rights concerning the property.
But, Texas courts
have long held that generally, being on equal footing, no one
may rightfully rely upon the representations of another as to
what the law is and claim fraud, because everyone is presumed
to know the law. 15
Certainly, this writer would not have real estate agents
remain ignorant of the law to eliminate the possibility of
their dissiminating misinformation to their clients on the
law's intricacies.
Eugene W. Nelson prefaces his book, The
Practical Aspects of Texas Real Estate Law by saying,
It is true that a little learning may be
dangerous, but no learning at all may be
even more dangerous .... A real estate broker
822
needs to know what fee simple title is and
what benefits of title 1nsurance are.
Such
persons require a minimal, basic knowledge
of law pertinent to their fields which
cannot be provided by calling on a lawyer
hourly as legal issues appear.
That
basic legal knowledge is essential to the
legal good health of their operations. 16
There can be no argument with that statement.
No lawyer wants
to spend his entire day answering simple questions on the
telephone.
Mr. Nelson continues his preface, saying,
11
Also,
a properly informed client is a better client and often saves
himself and his lawyer headaches because he knows how to avoid
trouble and seek advice early ... 17
The question arises as to
who .. properly informs .. the client and to whom does the client
look for this .. early advice...
by the client•s attorney.
Ideally, both would be supplied
More often, the principal will rely
upon the advice of his real estate agent who is anxious to
demonstrate his knowledge of all aspects of realty (which includes the legal aspects).
Certain comments on the law by brokers appear to be authorized.
The joint Statement of Principles lays down this admoni-
tion:
The broker shall not practice law, offer, give,
nor attempt to give legal advice, directly
or indirectly, he shall not act as a public
823
conveyancer nor give advice or opinions
as to the legal effect of any contracts
or other such instruments which may
affect title to real estate .... 18
This seems to definitely preclude any comment on the law, but
the next full sentence reopens the door:
However, nothing herein shall be deemed
to limit the brokers fiduciary obligation
to disclose to his principals all pertinent facts which are within the knowledge
of the broker, including such facts as
may affect the status of or title to real
estate. 19
If the existence of a statute or court ruling affecting real
estate is a fact within the knowledge of the broker, can he be
precluded from disclosure by comment?
is allowed to say what the law is.
Apparently, the broker
It would seem a fine line
between a representation of what the law is and a representation
as to the law's effect.
No authority was found to help draw
this line, one side of which is the unauthorized practice of
law and the other is prefessional competency within a non-legal
profession.
The court in Palmer indicated that "each case must
be decided on its own particular set of facts .... certainly, the
Supreme Court of Texas does not and cannot comprehensively
define beforehand what constitutes the practice of law in Texas." 20
Authority from other states has not been so reticent.
824
In
1972, an Oklahoma court explained
that any rendition of ser-
vices for another consenting person that would require a
knowledge of the law and its application constitutes the
practice of law.
And, if such person, belonging to a partic-
ular non-legal occupation, goes beyond determining a legal
question by advising a client on the basis of such determination,
they have engaged in the unauthorized practice of law. 21
As a licensed broker and practicing real estate appraiser,
this writer has witnessed numerous instances in which fellow
brokers offer just that kind of advice to clients and think
nothing about its being unauthorized practice of law.
In their
mind, it is on the same plane as advice on creating tax sheltered
income, or on raising the internal rate of return, or on effective income property management.
Their clients appreciate the
sharing of such knowledge and actively seek such advice from the
broker.
In actual practice, successful brokers become the client's
confidant and advisor in such matters as the tax effect of
purchase or sale, possible future problems and results, and
even on possible remedies, legal and otherwise.
Often the
client only turns to an attorney to effectuate the remedy.
Free advice costs nothing until you use
it~
Unfortunately,
this old addage rings true because the client is the loser if
the advice turns out to be unsound.
But, in most cases he
doesn't look to the broker to rectify the problem.
the other parties involved.
He looks to
The rationale often used is that the
825
client knows, after the fact, he should have gone to a lawyer
first.
He knew the broker was not a lawyer and did not charge
him for the advice.
The Oklahoma court in R. J. Edwards, Inc. v.
Hert said "that a service which otherwise would be a form of the
practice of law does not lose that character merely because it
is rendered gratuitously ... 22
Also, where the problem is based on a misstatement of the
legal effect of an agreement, the court 1n Bourland v. Huffhines
found sufficient grounds, in equity, to avoid the contract.
This is especially true if the advisor has superior knowledge
and is in a trust relationship with the client. 23
However, the bottom line for the unfortunate client is
still generally a loss.
What he saved in legal fees by not
seeking sound legal advice, he will spend many times over in
losses and in the fees required attempting to straighten out a
legal entanglement.
Two very logical questions should follow these allegations.
If the unauthorized practice of law is so widespread, why are
there not more complaints on that ground and why is there
seemingly no effort to prevent it?
The answer lies in several
common sense reasons, although not all are totally valid.
Among laymen, it is suspected that the reasons lawyers
dislike the unauthorized practice of law by real estate practitioners is the effect it has on the lawyer's pocketbook.
some extent this may be true (at least on the surface).
To
Drafting
simple contracts for real estate transactions and advising party
826
clients has been a fertile field for young lawyers in the past.
Although admonished against such actions in the joint Statements
of Principles, real estate agents commonly diminish the need
for an attorney 1n the contract formation stage of a transaction.
Either of two reasons generally sway the uneducated:
1.
11
You can have an expensive lawyer look at this
if you want.
He'll probably, charge you a
hundred dollars to read it.
2.
11
11
0f course, every time an attorney gets involved
in the deal it generally gets so messed up that
no one can do anything.
11
Again, there may be some basis for these statements.
The effect
is an unspoken conspiracy to keep the lawyer out of the transaction until the negotiations have been firmed up by a binding
contract.
Of course, the rights of the parties have been bound
into the same contract and it may be too late to be of much
preventative assistance to your client.
The prevailing attitude
that any aggressive attempt to abolish the unauthorized practice
of law is only motivated by the lawyer's greed has, at least,
caused them to be hesitant about spearheading such an attack.
The other side of that coin is the suspected reason advanced by Moorhead in these words:
[~traightening
out the tangles caused by
others is always more lucrative than giving
advice which will avoid the trouble.
If
financial considerations were to govern, the
827
attorney might well content himself with
performing the former function and leave
the latter to unauthorized practictioners. 24
There may, also, be some truth to this in certain circles, but
not to the extent that attorneys welcome the unauthorized practice of law by laymen.
the State Bar.
Certainly, that is not the position of
The profession•s stand, against unauthorized
practice, is evidence that more than the lawyers pecuniary
. t eres t 1s
. 1nvo
.
1 ve d . 25
1n
The more probable reason for the continued existence of
broker•s unauthorized law practice is the difficulty of knowing
when these acts occur.
giving legal advice.
for some time.
This is especially true with brokers
The ill effect does not usually surface
Even then, unsound legal advice as the causal
factor. would be difficult to prove.
Only if a client presented
his at-torney with an instrument drawn up by a real estate practitioner and was willing to testify as to the unauthorized
practice of law, would there be a solid basis for action.
Otherwise, any attempt to eradicate unauthorized practice would
take on the form of a witch hunt against the people in one•s
own community.
Since most of the violators are also clients or
have referred the party to the transaction to the attorney, it
is doubtful such action would ensue.
The attorney for the
lending institution or for the title company could not realistically be expected to raise the complaint.
And what would be
the result of a successful action against the violator?
828
The
proper remedy to prevent the unlawful practice of law is
injunction and may also be punished by contempt of court. 26
The Unauthorized Practice of Law Committee of the State
Bar of Texas has the duty to seek the elimination of unauthorized law practice throughout the state.
.
su1•t s 1n
1•t s own name. 27
The committee may file
This does not say that an attorney
will or does complain to the committee of most infractions
within the attorney's knowledge.
responsible for this failure.
Social constraints are largely
It is unfortunate that the finan-
cial interest of the legal profession in supressing unauthorized
practice makes it easy for its motives to be impugned. 28 The
fact is,lawyers have a duty to do this.
Bar rules.
It is imposed by State
Canon 3 of the Code of Professional Responsibility
states, 11 A Lawyer Should Assist in Preventing the Unauthorized
Practice of Law. 1129
It is possible that some lawyers do not recognize unauthorized practice when they see it; there are undoubtedly some who
may recognize it but don't act out of apathy. 30 Whatever the
reason, part of the responsibility for the adverse effects on
society from the unauthorized practice of law by real estate
practitioners must rest squarely on the lawyers shoulders.
Since the legal profession either cannot or will not use
the available machinery to eliminate the unauthorized practice of law by real estate practitioners except in the most
flagrant cases, what alternative courses are availalbe?
steps already taken are going in the right direction.
829
The
Perhaps
further negotiation is in order to improve on the present use
of standard forms.
Certainly, the legal profession should
embark on a campaign to educate the public in the wisdom of
seeking preventative legal advice and proper legal instrument
preparation.
it.
The malady will not heal itself.
We owe that duty to the public.
830
We must address
FOOTNOTES
1.
C. Bell, Texas Real Estate
2.
B . Ha rw o o d , C . J a c o b s , Te x as Re a 1 Es t a t e : An I n t r o d u c t i o n
To The Profession
3.
42 (3d ed. 1977).
151 (1978)
E. Nelson, The Practical Aspects of Texas Real Estate Law
57 (1979).
4.
Stewart Abstract Co. v. Judicial Commission of Jefferson
County
1 31 S W 2 d 6 8 6 , 6 9 0 (Tex. Ci v. Ap p . 1 9 3 9) no wr i t
his t.
5.
Tex. Civ. Stat. Ann., The State Bar Act
Art. 320a-l, ~ 3,
(Vernon).
6.
Tex. Civ. Stat. Ann., The Real Estate License Act
art. 6573a,
~ 17, (Vernon).
7.
238 SW 2d 828 (Tex. Civ. App. 1951) error dismissed.
8.
606 SW 2d 46,48 (Tex. Civ. App. 1980).
9.
Palmer v. Unauthorized Practice Committee of the State Bar
of Texas
438 SW 2d 374, 377 (Tex. Civ. App. 1969).
10. Hughes v. Fort Worth Nat. Bank, 164 SW 2d 231 (Tex. Civ.
App. 1942) writ. ref.
11. Statement of Principals by The State Bar of Texas and the
Texas Real Estate Commission, art. 2, ~ 2.
12. Id. at ~ 2.
13. Sherman v. Bruton, 497 SW 2d 316, 322 (Tex. Civ App. 1973).
14. Supra at 376.
15. Safety Casualty Co. v. McGee, 127 SW 2d 176,178 (Tex. Comm.
App. 1939) opinion adopted.
831
16. Nelson, Preface to E.
Nelson, supra at IX-X.
17. Id. at X.
18. Statement of Principals supra at~ 1.
s
19. Id. at s 1.
20. Supra at 376.
21. R. J.
22.
Edwards, Inc.
v. Hert, 504 P 2d 407,416 (Okla. 1972).
Id. at 416.
23. 244 SW 2d 847,853 (Tex. Civ. App. 1922) writ dism'd.
24. The Bar and Unauthorized Practice, Tex. L. Rev. 602 (1941-42).
25.
Id. at 602-3.
26. Stewert Abstract Co. v. Judicial Com. of Jefferson County,
supra at 690.
27. 7 Tex. Jur., Attorneys At Law, ~ 22 at 357.
28. Tex. !:_. Rev., supra at 601.
29. Tex. Rev. Civ. Stat. Ann., Title 14-App., art. XII~ 8 (Vernon).
30. The Fight Against Unauthorized Practice In Texas, 6 S. Tex.
L. J.
163 (1962).
832