Michigan law does not currently require attorneys to supervise real estate transactions. Should Michigan revisit its position on this issue based on the recent practice changes adopted by the real estate industry following the class action settlement in the landmark case involving the National Association of Realtors?¹ These rule changes could leave a significant number of home buyers without licensed real estate salesperson representation in real estate transactions. Although some jurisdictions require attorney oversight, is attorney involvement necessary for the protection of unrepresented buyers?

To understand why home buyers may be vulnerable after the class action settlement in the case of Sitzer v. National Association of Realtors,² it is necessary to briefly explain how things worked in the real estate industry prior to the class action settlement. Before the settlement, a listing agent typically advertised homes for sale on a multiple listing service (MLS) with offers to share compensation with a buyer’s agent. At closings, sellers allocated a portion of their closing proceeds to compensate listing agents, who in turn shared some of their compensation with buyers’ agents. The home seller plaintiffs in the NAR class action case argued that sellers were essentially paying the buyer’s commission in violation of the Sherman Antitrust Act.³

The NAR settlement mandated practice changes to be adopted by the real estate industry. One of those practice changes prohibits any reference to compensation sharing on the MLS. Another change requires NAR member agents to enter into written compensation agreements with prospective buyers before touring homes.⁴ These buyer agreements must include the amount of compensation that buyers will pay their agents, and the amount must be objectively ascertainable.

Not knowing whether a listing agent will pay all, or share in paying some, of the buyer’s agents’ compensation (a practice still permitted so long as it is not broadcast over an MLS), some prospective buyers may be hesitant to contractually bind themselves to a representation agreement. Under the new rules, however, buyers’ agents are required to obtain compensation commitments from their buyers before visiting properties.⁵ Importantly, a buyer’s agent is now prohibited from showing homes to a prospective buyer without a written agreement in place. Because of the expense, buyers may decide to entirely forgo real estate agent representation, especially first-time buyers. These buyers may instead decide to contact listing agents directly about a particular property. Under those circumstances, a listing agent is legally obligated under MCL 339.2517 to provide unrepresented buyers with an agency relationship disclosure form explaining that a listing agent’s fiduciary duties are solely with the seller-client. Without a real estate agent of their own to explain the significance of these disclosures, it is doubtful that an unrepresented buyer will fully appreciate that a friendly listing agent’s interests are incongruous with the buyer’s objectives. Because a “written” buyer’s agency agreement is not required to form an agency relationship in Michigan, listing agents are themselves vulnerable to litigation from unrepresented buyers claiming that an implied agency relationship existed between them. To eliminate any confusion, Michigan legislators might consider revising the occupational code to make it clear that a written agreement is required to or an agency relationship in the context of real estate transactions.

With artificial intelligence powering easily accessible property listing platforms online, finding potential homes is a relatively simple task. Knowing how to navigate the entire process from start to finish is an entirely different story. In addition to preparing the required paperwork and making sure that buyers meet their contract deadlines, especially when time is of the essence, avoiding potential pitfalls such as encroachments, easements, harmful molds, structural defects, foundation problems, water intrusion into basements, infestation, degraded roof issues, title issues, equipment failures, septic fields, and condominium-specific issues are what Realtors are trained to warn their buyer-clients about. For several decades, these real estate professionals have served as reliable sources of professional recommendations, even directing clients to attorneys when needed. Not having real estate agent representation will significantly disadvantage unrepresented buyers. The new practice changes adopted by the real estate industry have not been in place long enough to determine whether post-sale litigation will increase as a result thereof, but this is certainly anticipated. Upon discovery of problems with a purchased property after moving in, what legal recourse will an unrepresented buyer have against a seller?

Michigan adheres to the common law rule of “caveat emptor,” or buyer beware, aside from a few recognized exceptions for fraud that might be asserted by a home buyer against a seller. Consequently, buyers who discover property defects after closing are often left without a remedy. Although a home seller is required to furnish prospective buyers with property disclosures, Michigan’s Seller Disclosure Act⁶ does not impose a legal duty on a homeowner to discover defects; a homeowner is only obligated to honestly disclose known facts.⁷ Even if the elements of fraud can be established, Michigan law does not recognize a fraud claim whenever the buyer had the means of determining that the seller’s factual representations were untrue.⁸ These legal doctrines are manifestly unforgiving. Unrepresented buyers will be extremely vulnerable to the application of these laws.

From a public policy perspective, should Michigan require attorney review, participation, and/or oversight in residential real estate transactions? Would consumers and the general public benefit if attorneys were required in real estate transactions? What assistance might an attorney provide?

Real estate transactions are often intricate. Title insurance issues, for example, are thorny. It is doubtful that a person unfamiliar with them would know the difference between title policies with or without standard exceptions or appreciate the availability of enhanced title policies. At the closing table, buyers are often asked to sign documents eviscerating title insurance coverage that was bargained for in the purchase agreement. Worse yet, closing representatives regularly obtain arguably oppressive indemnification agreements from buyers and sellers. It is unlikely that an unrepresented buyer would know that failing to withhold taxes on gains realized by a foreign seller may subject that buyer to liability under the Foreign Investment in Real Property Tax Act of 1980. What type of deed will the buyer receive at closing, and how will the title be held by the buyers? Will the terms of the purchase agreement merge into the closing, or does the purchase agreement survive the closing? What significance will an “as-is” closing agreement have on the parties, and what happens to the seller’s disclosure statements if they are part of the purchase agreement? These issues, and many more, are critical to understand and address when purchasing a home. Buying a home is usually the largest financial transaction / investment that a person makes in their lifetime. This is why Michigan should explore the issue of whether attorney participation must be required in real estate transactions.

Some states, South Carolina for example, require attorneys to supervise real estate closings, review title work, record documents, and disburse funds.⁹ In holding that real estate closings must be conducted by attorneys, the following was recognized by the South Carolina Supreme Court recognized the following:

Courts of other jurisdictions have recognized dangers in allowing lay persons to handle real estate closings. While some of these cases hold that lay persons may conduct closings, they note that giving advice as to the effect of the various instruments required to be executed constitutes the unauthorized practice of law. Thus, in Coffee County Abstract and Title Co., supra, the title company was permitted to conduct real estate closings with the restriction that no legal advice or opinions be given. Chief Justice Torbert, concurring, gave instructions as to how such a closing should be handled: “If the parties to the transaction raise a legal question at the closing, the title company should stop the proceeding and instruct them to consult their attorneys.” 445 So. (2d) at 857. We agree this approach, in theory, would protect the public from receiving improper legal advice. However, there is in practice no way of assuring that lay persons conducting a closing will adhere to the restrictions. One handling a closing might easily be tempted to offer a few words of explanation, however innocent, rather than risk losing a fee for his or her employer. We are convinced that real estate and mortgage loan closings should be conducted only under the supervision of attorneys, who have the ability to furnish their clients legal advice should the need arise and fall under the regulatory rules of this court. Again, protection of the public is of paramount concern.¹⁰

Other states, like Georgia, for example, prohibit any person other than a licensed member of the state bar from closing a real estate transaction or rendering an opinion regarding title.¹¹ A handful of states require attorneys to participate in the closing of a real estate transaction.¹² At the present time, most states do not legally require a lawyer’s involvement in a real estate closing.¹³ Will the above considerations change following the NAR settlement? Should public policy require an attorney to be involved in the closing of a real estate transaction to protect the buyer in cases when the buyer does not engage the services of a licensed real estate professional? What does Michigan law say about these issues?

The State Bar of Michigan has published an Unauthorized Practice of Law Facts and Information Pamphlet that lists examples of services that might require a Michigan law license if performed in Michigan or for Michigan residents:

• Drafting documents that require legal judgment for another person.
• Giving advice tailored to the particular legal situation of another person.¹⁴

Our state bar association previously addressed whether a title company representative acting as a “scrivener” is engaged in the unauthorized practice of law.¹⁵ When confronted with the issue, State Bar of Michigan Ethics Opinion RI-298 stated that the State Bar of Michigan does not render opinions on the conduct of nonlawyers, such as title companies and real estate closers. Are title companies and real estate agents engaged in the unauthorized practice of law when lawyers are not physically present at closings? As a matter of custom and practice, title companies in Michigan regularly draft deeds for use in real estate transactions and then simply designate the listing agent as the drafter of the deed to avoid any responsibility for drafting. Clearly, the drafting of a deed constitutes the practice of law, and the fiction of pretending that deeds have been drafted by licensed real estate agents is a disservice to the public. If two unmarried people are purchasing a property, should they hold title as joint tenants or as tenants in common? This is something that only licensed attorneys should address.

To protect vulnerable consumers, to reduce post-sale litigation from an already burdened system, and to protect the integrity of land titles, the Michigan legislature, state bar association, and/or the Michigan Supreme Court may want to revisit whether requiring some form attorney participation in residential real estate transactions is needed. In the two states that require attorney supervision of real estate transactions (Georgia and South Carolina), an attorney must be physically present at closings.¹⁶ Other states require attorneys to prepare deeds, review title work, and require attorneys for the preparation of mortgages, assignments, and discharges.¹⁷ What Michigan might decide to do is something that deserves attention. This writer takes no position on this issue.

Regardless of whether Michigan will address the issue of whether attorneys should be required in real estate transactions, attorneys should be ready to assist buyers in reviewing and drafting real estate documents. This is true because some home buyers might now decide to hire a lawyer to assist them with their transactions rather than hiring a real estate professional after the NAR settlement.