CHAPTER SIX

2011 -2012 Core Course For Tennessee Licensees… 6 H Hours CE Credit ITS School of Real estate ItsBusinessTraining@Gmail.Com  This Workbook is the property of ITS School of Real Estate ITSBusinessTraining@Yahoo.com School # 1537 Course # 6816 September 2011 1st Edition   Learning Objectives… This six (6) hour course for continuing education credit is designed not only to help you meet the required educational requirement for completion of a “core course”, but also to examine the changes in law, business practices, and business environments that we as real estate professionals face today. The Tennessee Real Estate Commission has provided the Outline for this year’s core course. This course will include a study of these topics… 1. TREC Law, Regulation, and Policy Changes 2. Disclosures: Mold, Act of Nature/Floodplain, Stigmatize Properties and Suppression of known facts by a licensee 3. Principal Broker Supervision 4. Contracts 5. The Agency Relationship 6. Fair Housing 7. Marketing: Advertising Guidelines and Gift Marketing I hope you enjoy this study and are able to take something away from this course. This review of TREC regulations and Federal laws are to ensure that you and your clients have the very best chance for success and that you have a good understanding of the changes that will affect you in your day to day business activities. Workbook materials by John Wilkinson  Chapter One: New Laws and Amendments The laws and regulations that govern the real estate profession are in a constant state of flux. These laws evolve to meet new technology, business practices, and address areas of need in the realm of business and consumer protection. The State Legislature and Tennessee Real Estate Commission will both be responsible many changes and proposed changes every year. These changes are sometimes minor and tweak minor problems, and sometimes these changes are major and have the effect of changing the way we as real estate professional go about our daily routines. The important thing to remember is that changes in the law are a given, and you must be vigilant to stay informed of these changes and how they will affect you and your clients. As we work through this chapter… Let’s review the entire section provided and not just look at the line or paragraph that is changed or added. We can all use the refresher and the change must be read in the context of the entire section to have a full and complete understand of the law’s purpose.  Senate Bill #2103 and House Bill #2025 Tennessee Code Annotated 62-13-309 Paragraph “G” On April 27th 2009, that legislature sent to the governor an amendment and addition to the Tennessee Code Annotated 62-13-309. This T.C.A. is the law form which the Tennessee Real Estate Commission derives its authority to regulate licenses in the state of Tennessee. Upon approval, this amendment made a substantial change to the license law and marks an unusual occurrence where the state houses step in and make changes directly. Normally and throughout the rest of these changes we will detail, the Commission is acting with the authority given to them by the state. In this instance, the legislature acted and ordered this change that the commission and we as licenses are now obliged to follow. Paragraph “g” was added that reads as follows… A principal broker may act as a principal broker for two (2) firms as long as both firms are in the same location. As used in the subsection (g) the phrase “same location” means that both firms are located and use the same physical address. • Please note that this change does not allow and affiliate to be affiliated with more than one firm, even if that second firm is at the same address.       Regulation Change # 1 1260-01-.01 Application for Examination 1260-1-.01 APPLICATIONS FOR EXAMINATIONS. (1) Affiliate Brokers. Applicants for the affiliated brokers examination must follow the procedures published by the testing vendor approved by the Tennessee Real Estate Commission concerning appointments for testing information required, and deadlines for submission of examination applications. (2) Brokers. Applications for the brokers examination must follow the procedures published by the testing vendor approved by the Tennessee Real Estate Commission concerning appointments for testing, information required, and deadlines for submission of examination applications. (3) An applicant who passes an examination is not necessarily qualified for licensure. (4) No person shall be eligible for examination or be considered for licensure unless two (2) years have passed from the date of expiration of probation, parole or conviction, or from the date of release from incarceration, whichever is later in time. This restriction shall apply to all felonies, and to misdemeanors which involve the theft of money, services, or property. An applicant who appears before the Commission requesting licensure and who is denied will not be eligible for reconsideration for six (6) months from the date of denial. Authority: T.C.A. §§ 62-13-112, 62-13-203, 62-13-301, 62-13-303, and 62-13312. Administrative History: Original rule certified June 7, 1974. Repeal and refiled March 3, 1980; effective April 27, 1980. Repeal and new rule filed April 17, 1985; effective May 17, 1985. Amendment filed September 16, 1987; effective October 31, 1987. Amendment filed November 21, 1988; effective January 5, 1989. Amendment filed June 17, 1991; effective August 11, 1991. Amendment filed July 31, 2006; effective October 14, 2006. Amendment filed December 3, 2007; effective February 16, 2008. Paragraph Four has been added… This rule is self explanatory, but a necessary step taken by TREC to ensure that the public trust is maintained in the licensing process.  Regulation Change # 2 1260-01-.012 FEES 1260-1-.12 FEES. The following fees shall apply: (1) For each examination, a fee to be paid to the testing vendor as set by state contract; (2) For the issuance of an original license, a fee to be paid to the Commission of one hundred dollars ($100.00); Rule 1260-1-.10 RULES OF REAL ESTATE COMMISSION 58 (3) For each renewal of a license, a fee to be paid to the Commission of eighty dollars ($80.00); (4) A fee to be paid to the Commission for the following: (a) Change of firm address, fifty dollars ($50.00); (b) Change of Principal Broker, twenty-five dollars ($25.00); (c) Transfer of affiliation or transfer in or out of retirement status, twenty-five dollars ($25.00); (d) Commission manual, ten dollars ($10.00); (e) Certified copies, one dollar ($1.00) per page; (f) Copies, twenty-five cents ($.25) per page; (g) Printouts of licensee information, charges will be based upon the cost of producing said printout; (h) Certification of licensure, twenty-five dollars ($25.00); (i) Printouts of licensee continuing education, ten dollars ($10.00); (j) Change of name, ten dollars ($10.00); (k) Duplicate license, ten dollars ($10.00); (l) Bad Checks must be made good within five (5) days after the licensee is notified. Any bad check not made good within sixty (60) days of the notification will be subject to a one hundred dollar ($100.00) fee for collection. (5) A penalty fee of fifty dollars ($50.00) per month, or portion thereof, for failing to timely renew a license if the licensee reinstates the license within the sixty (60) day time frame set forth in T. C. A. § 62-13-319(a); provided however, the Commission shall have the discretion to waive or lower said fee for good cause shown. Authority: T.C.A. §§ 62-13-203, 62-13-307, 62-13-308, and 62-13-319. Administrative History: Original rule filed July 14, 1989; effective August 28, 1989. Amendment filed June 17, 1991; effective August 11, 1991. Amendment filed October 1, 1998; effective December 15, 1998. Amendment filed December 8, 1999; effective February 21, 2000. Amendment filed December 3, 2007; effective February 16, 2008. Paragraph 5 has been added… After this 60 day window, a licensee who has failed to renew will be required to re-test and re-apply to the commission for licensing.  Regulation Change # 3 1260-01-.015 E and O Insurance 1260-1-.15 ERRORS AND OMISSIONS INSURANCE COVERAGE. It shall be a requirement for an active licensee to carry errors and omissions insurance to cover all activities contemplated under the Tennessee Real Estate Broker License Act unless the Commission is unable to obtain coverage pursuant to T.C.A. § 62-13-112(g) which would void the requirement of coverage under the applicable contract period. (1) A licensee who places his license in an inactive or retired status is not required to carry errors and omissions insurance until such time as his license is activated. (2) New licensees, licensees who activate their license from an inactive or retired status, and licensees who reinstate their license from an expired status at a time other than the beginning of the licensing period shall pay a prorated premium in accordance with a schedule provided by the insurance provider. (3) The Commission shall perform random audits to assure that licensees have met the requirements of this rule. (4) Any independently obtained errors and omissions insurance policy shall, at a minimum, be issued upon the same terms and conditions as the policy obtained by the Tennessee Real Estate Commission pursuant to T.C.A. § 62-13-112, including, but not limited to, the limits of coverage, the permissible deductible, the permissible exemptions and the term of the policy. Authority: T.C.A. §§ 62-13-203 and 62-13-212. Administrative History: Original rule filed October 15, 1990; effective November 29, 1990. Amendment filed October 1, 1998; effective December 15, 1998. Amendment filed December 3, 2007; effective February 16, 2008. Paragraph four was added to further detail the requirements of E and O plans obtained from a different vendor other than the one the state has contracted with. You are required to have this insurance, but you are not required to use the vendor the state provides.  Regulation Change # 4 1260-02-.02 Termination 1260-02-.02 TERMINATION OF AFFILIATION. (1) Any licensee or principal broker wishing to terminate the licensee’s affiliation with a firm shall submit to the Commission a completed Transfer, Release and Change of Status Form (TREC Form 1). The form must be faxed, mailed, or e-mailed to the Commission to be effective. The principal broker’s supervisory responsibility for the future acts of the licensee RULES OF CONDUCT CHAPTER 1260-02 (Rule 1260-02-.02, continued) June, 2010 (Revised) 2 shall terminate upon the Commission’s receipt of the release form. The principal broker shall retain a copy of the executed form. (2) Within ten (10) days after the date of release, the licensee shall complete the required administrative measures for either change of affiliation or retirement. The licensee shall not engage in any activities defined in §62-13-102 until a change of affiliation is received and processed by the Commission. (3) When a licensee terminates his affiliation with a firm, he shall neither take nor use any property listings secured through the firm, unless specifically authorized by the principal broker. (4) Upon demand by a licensee for his release from a firm, it shall be promptly granted by the principal broker and the principal broker shall return the license to the licensee. If the licensee cannot be located then the principal broker may return the license to the Commission. (5) If the principal broker is deceased or physically unable to sign the release, or refuses to sign a release, the licensee requesting termination of affiliation must submit to the Commission a notarized Affidavit for Release. (6) If the affiliated licensee is deceased or physically unable to sign a release, or refuses to sign a release, the principal broker requesting termination of affiliation must submit to the Commission a completed TREC Form 1. (7) The Commission will not intervene in the settlement of debts, loans, draws, or commission disputes between firms, brokers and/or affiliates. Authority: T.C.A. §§62-13-203 and 62-13-310. Administrative History: Original rule certified June 7, 1974. Repealed and refiled March 3, 1980; effective April 27, 1980. Amendment filed January 21, 1983; effective February 22, 1983. Amendment filed September 13, 1989; effective October 28, 1989. Amendment filed June 17, 1991; effective August 11, 1991. Amendment filed March 16, 2010; effective June 14, 2010. This section is completely new and replaces the 3 points found in the 1991 law. The main differences are being that this rule goes into much more detail about what a licensee is to do in certain situations… Such as death of a broker, refusal by a broker or agent to sign, etc.  Regulation Change # 5 1260-02-.09 Earnest Money 1260-02-.09 DEPOSITS AND EARNEST MONEY. (1) Each broker shall maintain a separate escrow account for the purpose of holding any funds which may be received in his fiduciary capacity as deposits, earnest money, or the like. Rental deposits must be held in a separate account. (2) An affiliate broker shall pay over to the broker with whom he is under contract all deposits and earnest money immediately upon receipt. (3) Brokers are responsible at all times for deposits and earnest money accepted by them or their affiliate brokers, in accordance with the terms of the contract. (4) Where a contract authorizes a broker to place funds in an escrow or trustee account, the broker shall clearly specify in the contract: (a) the terms and conditions for disbursement of such funds; and (b) the name and address of the person who will actually hold such funds. (5) Where a contract authorizes an individual or entity other than either broker to hold such funds in an escrow or trustee account, the broker will be relieved of responsibility for the funds upon receipt of the funds by the specified escrow agent. (6) A broker may properly disburse funds from an escrow account: (a) upon a reasonable interpretation of the contract which authorizes him to hold such funds; (b) upon securing a written agreement which is signed by all parties having an interest in such and is separate from the contract which authorizes him to hold such funds; RULES OF CONDUCT CHAPTER 1260-02 (Rule 1260-02-.09, continued) June, 2010 (Revised) 5 (c) at the closing of the transaction; (d) upon the rejection of an offer to purchase, sell, rent, lease, exchange or option real estate; (e) upon the withdrawal of an offer not yet accepted to purchase, sell, rent, lease, exchange or option real estate; (f) upon filing an interpleader action in a court of competent jurisdiction; or (g) upon the order of a court of competent jurisdiction. (7) Funds in escrow or trustee accounts shall be disbursed in a proper manner without unreasonable delay. Funds should be disbursed or interplead within twenty-one (21) calendar days from the date of receipt of a written request for disbursement of earnest money. (8) No postdated check shall be accepted for payment of a deposit or earnest money, unless otherwise provided in the offer. (9) Earnest money shall be deposited into an escrow or trustee account promptly upon acceptance of the offer, unless the offer contains a statement such as “Earnest money to be deposited by:”. Take note of the additions found in paragraphs #5 and #7. Paragraph #5 addresses the use of a special escrow agent and liability issues created or relieved, and #7 addresses a new 21 day rule for funds disbursement. The rule changes mainly apply to principal brokers.  Regulation Change # 6 1260-02-.12 Advertising 1260-02-.12 ADVERTISING. (1) All advertising, regardless of its nature and the medium in which it appears, which promotes the sale or lease of real property, shall conform to the requirements of this rule. (2) General Principles (a) No licensee shall advertise to sell, purchase, exchange, rent, or lease property in a manner indicating that the licensee is not engaged in the real estate business. (b) All advertising shall be under the direct supervision of the principal broker and shall list the firm name and telephone number. (c) No licensee shall post a sign in any location advertising property for sale, purchase, exchange, rent or lease, without written authorization from the owner of the advertised property or the owner’s agent. (d) No licensee shall advertise property listed by another licensee without written authorization from the property owner. Written authorization must be evidenced by a statement on the listing agreement or any other written statement signed by the owner. (e) No licensee shall advertise in a false, misleading, or deceptive manner. (3) Advertising for Franchise or Cooperative Advertising Groups (a) Any licensee using a franchise trade name or advertising as a member of a cooperative group shall clearly and unmistakably indicate in the advertisement his name, broker or firm name and firm telephone number (as registered with the Tennessee Real Estate Commission) adjacent to any specific properties advertised for sale or lease in any media. (b) Any licensee using a franchise trade name or advertising as a member of a cooperative group, when advertising other than specific properties for sale or lease, shall cause the following legend to appear in the advertisement in a manner reasonably calculated to attract the attention of the public:”Each [Franchise Trade Name or Cooperative Group] Office is Independently Owned and Operated.” (c) Any licensee using a trade name on business cards, contracts, or other documents relating to real estate transaction shall clearly and unmistakably indicate thereon: 1. his name and firm telephone number (as registered with the Commission); and 2. the fact that his office is independently owned and operated. (4) Internet Advertising (a) The listing firm name and telephone number must conspicuously appear on each page of the website. (b) Each page of a website which displays listings from an outside database of available properties must include a statement that some or all of the listings may not belong to the firm whose website is being visited. (c) Listing information must be kept current and accurate. (5) Guarantees, Claims and Offers (a) Unsubstantiated selling claims and misleading statements or inferences are strictly prohibited. (b) Any offer, guaranty, warranty or the like, made to induce an individual to enter into an agency relationship or contract, must be made in writing and must disclose all pertinent details on the face of such offer or advertisement. Review the changes to section #2 (d) and section #4  Regulation Change # 7 1260-02-.33 Gifts and Prizes 1260-2-.33 GIFTS AND PRIZES. (1) A licensee may offer a gift, prize, or other valuable consideration as an inducement to the purchase, listing, or lease of real estate only if the offer is made: (a) Under the sponsorship and with the approval of the firm with whom the licensee is affiliated; and (b) In writing, signed by the licensee, with disclosure of all pertinent details, including but not limited to: 1. accurate specifications of the gift, prize, or other valuable consideration offered; 2. fair market value; 3. the time and place of delivery; and 4. any requirements which must be satisfied by the prospective purchaser or lessor This whole section has been reworded to be more clear and concise. We will go into more detail and cover this subject thoroughly in chapter six.  Regulation Change # 9 1260-02-.37 Septic Letter 1260-2-.37 SEPTIC SYSTEM INSPECTION LETTERS. A licensee preparing an offer to buy shall provide in the offer and make the buyer aware that, for a fee, a septic system inspection letter is available through the Tennessee Department of Environment and Conservation, Division of Ground Water Protection. Authority: T. C. A. §§ 62-13-203 and 62-13-403. Administrative History: Original rule filed December 3, 2007; effective February 16, 2008. This is a new addition to the TREC manual; this is both a disclosure issue and a liability issue for a licensee. There are many instances where a 5 bedroom house may be sitting on a 3 bedroom perk site. This can be for many reasons such as expansion, ignorance, or even fraud. The licensee is obligated to let the potential buyer aware that TDEC is available to advise and answer questions of this nature. Tennessee Department of Environment and Conservation Commissioner Robert J. Martineau, Jr. 401 Church Street, L&C Annex, 1st Floor Nashville, TN 37243 (615) 532-0109 The Division of Ground Water Protection Britton Dotson, Director 10th floor, L&C Tower (615) 532-0762  Regulation Change # 10 1260-05-.01 Education EDUCATIONAL REQUIREMENTS 1260-5-.01 PURPOSE. The Tennessee Real Estate Broker License Act of 1973 (as amended) requires satisfactory completion of certain courses in real estate by applicants for, and holders of, licenses as a broker or affiliate broker. This chapter establishes standards and procedures governing the establishment and operation of courses, programs, and schools which are designed to satisfy such educational requirements. This chapter further establishes guidelines and requirements to be fulfilled by licensees in obtaining required education. Authority: T.C.A. §§ 62-13-106, 62-13-203, and 62-13-309. Administrative History: Original rule filed March 3, 1980; effective April 27, 1980. Amendment filed September 30, 1980; effective December 15, 1980. Amendment filed December 3, 2007; effective February 16, 2008. The last two sentences of this introduction to section 5 of the TREC manual is a restatement of the old introduction to include a specific reference to TREC’s intention to regulate the continuing education market. For example, this course was submitted to educational director Steve McDonald for his review… If he so chooses, a course is submitted to the TREC Board at one of its monthly meetings and voted on for approval. The course is then given an approval number to show its completion of the course submission process.  Regulation Change # 11 1260-05-.03 Course Requirements 1260-5-.03 REQUIREMENTS FOR COURSES. (1) the applicant shall demonstrate to the satisfaction of the Commission that each course submitted for approval will: (a) cover subjects which are reasonably related to the practice of real estate and suitably advanced to benefit and enrich the students enrolled; (b) be conducted in a facility which contains adequate space, seating, and equipment; (c) consist of no fewer than two (2) classroom hours; and (d) incorporate appropriate methods for determining whether a student has successfully completed such course. Such methods shall include, but not be limited to: 1. a minimum attendance requirement of eighty percent (80%), except that such requirement shall be one hundred percent (100%) if the course consists of eight (8) or fewer classroom hours. 2. provisions to make up for all classes missed by a student; and 3. a minimum passing requirement of seventy percent (70%) and a comprehensive final examination (or equivalent measure of achievement), if the course consists of more than eight (8) classroom hours. However, courses taken by affiliate brokers or brokers of eight (8) classroom hours or less may be approved for continuing education or post licensing credit without a comprehensive final examination being given. (2) Each hour of classroom instruction required by T.C.A. § 62-13-303 shall consist of fifty (50) minutes of actual instruction. (3) There shall be a sixty (60) hour course in basic principles required of all applicants for an affiliate brokers license under T.C.A. § 62-13-303. The ‘‘basic principles of real estate’’ course required of applicants for affiliate broker’s licenses by T.C.A. § 62-13-303 shall include significant instruction in the following areas: (a) the real estate business (b) the agency relationship (c) contracts (listings; leases; sales) (d) governmental controls on real estate, including the Tennessee Real Estate Broker License Act (e) legal aspects of real estate (f) real estate mathematics (g) real estate valuation (h) real estate finance Rule 1260-5-.03 RULES OF REAL ESTATE COMMISSION 76 (i) listing, offer to purchase, and settlement forms  (j) Tennessee real estate laws, rules, practice, etc. (k) fair housing (l) any additional subject which the Commission may require by reasonable written notice to course sponsor and/or instructor. (4) The ‘‘office or brokerage management’’ course required of applicants for broker’s licenses by T.C.A. § 62-13-303 shall include significant instruction in the following areas: (a) overview of theories, processes, and functions of management (b) review of contracts and closing statements (c) transition to management role (d) planning; policy-making; setting objectives (e) organizing and staffing (f) recruiting, selecting, training, and retaining sales and office personnel (g) written instruments; policy and procedures manual; contract between independent contractor and broker, and contract between salesperson-employee and broker (h) financial systems and records (i) processes, procedures, and methods of control (j) stages of development in real estate firms (k) market analysis (l) horizontal and vertical expansions (m) mergers and acquisitions (n) governmental controls on real estate including the Tennessee Real Estate Broker License Act (o) any additional subject which the Commission may require by reasonable written notice of the course sponsor and/or instructor. (5) (a) Effective January 1, 1993, the content of all courses approved by the Commission for continuing education shall be directly related to the following topics: 1. Valuation of Real Estate 2. Construction-Property condition, energy 3. Contracts 4. Agency 5. Financing Real Estate 77 EDUCATIONAL REQUIREMENTS Rule 1260-5-.03 6. Investment Real Estate 7. License Law and Rules 8. Property Management 9. Taxation of Real Estate Transaction 10. Closing and Settlement Procedures 11. Land Use, Planning and Zoning 12. Time-shares 13. Type of Property (condo, dom, pud, zero lot line, single, pud, etc.) 14. Fair Housing 15. Antitrust  16. Ethics in Real Estate 17. Professional Liability (b) The Commission may add or delete any subject by means of reasonable written notice to the course sponsor and/or instructor. (6) A candidate for an affiliate broker license shall be deemed to have completed the 60 hour course described in paragraph (3) above if: (a) the candidate holds a college or university degree with a major or concentration in real estate and the candidate’s transcript shows successful completion of at least one 3 hour (30 hours or more of classroom instruction) course in the principles/fundamentals of real estate and at a minimum two more courses totaling at least 60 hours of classroom instruction in real estate as evidenced by the title or description of the course; or (b) the candidate holds a law degree and the law school transcript evidences successful completion of at least one 3 hour course (30 hours or more of classroom instruction) in real property and at least 60 other hours of classroom instruction in contracts and agency. Authority: T.C.A. §§ 62-13-106, 62-13-203, and 62-13-303. Administrative History: Original rule filed March 3, 1980; effective April 27, 1980. Amendment filed September 30, 1980; effective December 15, 1980. Amendment filed May 11, 1984; effective June 10, 1984. Amendment filed April 17, 1985; effective May 17, 1985. Amendment filed November 17, 1987; effective January 1, 1988. Amendment filed November 21, 1988; effective January 5, 1989. Amendment filed September 13, 1989; effective October 28, 1989. Amendment filed November 4, 1991; effective December 20, 1991. Amendment filed March 24, 1994; effective June 7, 1994. Amendment filed October 1, 1998; effective December 15, 1998. Amendments filed December 3, 2007; effective February 16, 2008. Paragraph Six has been substantially restated to detail the requirement for a candidate for licensing to skip the required 60 hour course with a real estate centered college degree. These requirements are much more specific as to the course requirements.  Regulation Change # 12 1260-05-.07 School Records 1260-5-.07 RECORDS. (1) The sponsor of any course(s) approved by the Commission shall maintain accurate and permanent records on all students enrolled in such course(s). The records shall include all information and ratings considered in determining whether students successfully complete such course(s). Such records shall be made available upon request by the Commission or its authorized representative. (2) It shall be the responsibility of each licensee to provide his file identification number at the time of registration for any Tennessee Real Estate Commission approved continuing education course for affiliate brokers, or post licensing course for brokers. If the licensee fails to provide his file identification number to the sponsor, he may not receive credit for the course from the Tennessee Real Estate Commission. (3) Each sponsor of any Commission approved continuing education course for affiliate brokers, or post licensing course for brokers, shall submit to the Commission, within ten (10) working days of the completion of the course, a roster of all students who successfully complete each course. The roster shall include the name and license/file identification number of each student. This information shall be provided in a roster format approved by the Commission. Authority: T.C.A. §§ 62-13-106, 62-13-203, and 62-13-303. Administrative History: Original rule filed March 3, 1980; effective April 27, 1980. Amendment filed May 11, 1984; effective June 10, 1984. Amendment filed February 3, 1992; effective March 19, 1992. Amendment filed December 3, 2007; effective February 16, 2008. This rule has been tweaked a little bit from its original wording to further clarify the commission’s right to access the records of former students held by the school. This change is not of real significance to anyone but real estate school owners, but the licensee will be reassured that their records are recorded properly.  Regulation Change # 13 1260-05-.11 Correspondence Courses 1260-5-.11 CORRESPONDENCE COURSES. (1) The term ‘‘distance education’’ shall be used interchangeably with the term ‘‘correspondence courses’’ and shall include all education in which instruction does not take place in a traditional classroom setting but rather through other media where the teacher and student are separated by distance and/or by time. Distance education courses approved by the Commission shall be completed within one (1) year of the date of enrollment in order for continuing education to be granted to the licensee. Distance education may include, but is not necessarily limited to the following categories of learning materials and/or transmission modes: (a) Printed Material. A distance education course using printed materials may be approved by the Commission if: 81 EDUCATIONAL REQUIREMENTS Rule 1260-5-.11 1. students will be provided a manual or other printed materials; 2. a comprehensive course outline, requirements for successful completion of the course and information regarding availability of faculty to students are provided; 3. it contains at least six (6) written exercises which are to be submitted periodically to the instructor, graded and returned to the student; and 4. if the class provides more than eight (8) hours of credit, a comprehensive final examination or equivalent measure of achievement is executed prior to the sponsor submitting the roster to the Commission indicating successful completion of the course for any and all students. (b) Computer Based/Disk/Online Material. A distance education course using these materials and/or formats may be submitted to the Commission for analysis and possible approval if the course is certified by the Association of Real Estate License Law Officials (ARELLO), or other certifying body at the discretion of the Commission, as to technology, support of the technology, interactivity and course design. 1. The Commission will review these certified courses on a case by case basis to determine whether the curriculum will meet Commission education requirements. 2. Any course which would provide more than eight (8) hours of continuing education shall include a final examination which shall be executed prior to submission to the Commission for education credit. 3. Approval of a course under this paragraph will be automatically withdrawn should certification by the respective certifying body  be discontinued for any reason. Authority: T.C.A. §§ 62-13-106, 62-13-203, and 62-13-303. Administrative History: Original rule filed May 11, 1984; effective June 10, 1984. Amendment filed November 17, 1987; effective January 1, 1988. Repeal and new rule filed December 3, 2007; effective February 16, 2008. This entire rule is new and has replaced the 1988 version. This rules further creates standard by which a course like this is to be created and requires internet based courses to be approved by a third party known as ARELLO which specializes in web based education. Regulation Change # 15 and 16 1260-05-.15-.16 Course Approval 1260-5-.16 COURSE APPROVAL PERIODS. (1) Effective January 1, 1993, the Commission will approve courses based upon a four (4) year review cycle of all courses. Each cycle will end on December 31st of the fourth year. The first four (4) year period of approval will end December 31, 1996. (2) Each course approval shall remain effective until the end of the review cycle notwithstanding the date upon which it was approved. (3) All course providers shall be required to resubmit their courses for approval at least one hundred twenty (120) days prior to the applicable expiration date. Failure to meet this deadline may result in the nonapproval of a course. Authority: T.C.A. §§ 62-13-106, 62-13-203, and 62-13-303. Administrative History: Original rule filed February 3, 1992; effective March 19, 1992. Amendment filed March 24, 1994; effective June 7, 1994. Repeal and new rule filed December 3, 2007; effective February 16, 2008. These changes detail the course approval terms and fees… The major difference is that the courses are now approved for a set two year window, such as 2011-2012 whereas before, the course was good for two years from the time of approval. In addition, TREC now charges $25 for the approval of each individual Instructor.  Chapter One Quiz: Law and Regulation Changes 10 Questions 1. Broker Wayne can now be the principal broker of ABC Realty in Nashville, and also be the principal broker of DEF Realty in Knoxville. A. True B. False 2. Agent John works for Broker Jim at Cheat’em Good Realty at 115 Main Street. Broker Jim has opened a second firm at the same location under the name Honest Realty. Under the new rules, Agent John can be affiliated with both firms because they are in the same location. A. True B. False 3. Policy Statement 2009-CPS-002 makes it clear that priority will be given to complaints by licensees against other licensees. A. True B. False 4. Policy Statement 2009-CPS-003 requires that any individual convicted of a criminal offense must include a certified copy of the conviction with his/her application for licensing. A. True B. False 5. Licensees who attend the meeting of Tennessee Real Estate Commission on the day the Legal Report is presented shall receive four (4) hours of Continuing Education Credit. The licensee must be in attendance for the full day. A. True B. False  6. John was released from jail after being convicted of a felony 13 months ago, according to rule 1260-01-.01 John must wait 11 more months before being eligible for licensing. A. True B. False 7. Under Rule 1260-01-.12 FEES, the penalty for failing to timely renewal is $200 a month. A. True B. False 8. Under Rule 1260-01-.15, a licensee must use the state provided vendor for E & O insurance. A. True B. False 9. Under Rule 1260-02-.37, a licensee preparing an offer to buy shall provide in the offer and make the buyer aware that, for a fee, a septic inspection letter is available through the Tennessee Department of Environmental and Conservation. A. True B. False 10. Under Rule 1260-05-.03, a college graduate with an accounting degree is exempt from the 60 prelicensing requirement and may sit for the real estate exam. A. True B. False  Chapter Two: Contracts What is a contract? Webster’s definition: A binding agreement between two or more parties that is enforceable by law; a formal writing which contains the agreement of the parties, with the terms and conditions, and which serves as a proof of the obligation. Cambridge Dictionary’s definition: A legal document that states and explains a formal agreement between two different parties or groups, or the agreement itself. Course Definition: A voluntary agreement between two legally capable parties to perform or refrain from some legal act. This contract must be free of duress and must include some form of legal consideration. At first glance, what is your opinion of these definitions? Are these definitions accurate? Specific enough?  As we work through this study of contracts we will refer back to these definitions and you will be asked to develop a new definition that incorporates the elements of validity, the necessary parties, and duties. Historical Perspective… Elements in common law… A common misconception is that the contract law practiced in the United States legal system today is a creation of our founding fathers and lawmakers of early American times, but in reality our contract law crossed the Atlantic with the first English settlers who brought their “common law” with them. “A basic axiom to remember is that in the history of the world, as people of different cultures mingle through trade, travel, and immigration or war, we pick up pieces of other people’s culture and religions and incorporate them into our own. This evolutionary process is so slow that it is barely noticeable.” Gene Vitamamti The term common law… “Common law is that which is based on custom or usage of the common people as opposed to law imposed from above by a higher source, such as a monarch, dictator, or religious leader. It is a slow process that is always adjusting itself.” “Note that the common law is designated “ common” because it was a law common to all of England and administered by a central court, as distinguished form the customary law that varied, albeit often in manor ways, from county to county, lordship to lordship, or manor to manor.” Gene Vitamamti  In reality, the 1st elements of the English common law that later evolved into the contract law that we have today began in the 12th century. For the first time, laws were set down to establish the methods by which the evidence or “proofs” of a contract or debt could be proven. Initially there were three options. 1st Proof by Duel… Yes, this is what is implied by the name. As in a Hollywood film, two parties would settle their dispute with weapons. The theory behind this arrangement is that the hand of God would guide the righteous party to victory. For obvious reasons, we are not going to spend a lot of time on this option. 2nd Proof by Witness… The proof of a debt or contract could be proven by the swearing of an oath by two or more witnesses as to the validity of a contract or debt. Initially there were no safe guards, as to the reliability of the witnesses, or the option of examination or defense of the accused party. The simple presentation of two or more witnesses was proof of the debt. We can quickly see how this option could be used a dishonest party to produce “proof” that did not is reality exist. 3rd Proof by Writing… The proof of a contract or debt could be proven by the existence of a written agreement. Initially there was not any set form or required elements, these would come later and by the 15th century this would be the expected and preferred form of proof. For the past 800 years, the evolution of this common law into today’s contract law has been a continual process of trying to prefect this idea of “proof” while trying to guarantee that the contract is an accurate representation of the original deal or agreement. In this evolutionary process, the idea of consideration, or proof of benefit, was established. The first requirements for written contracts were establish with the first Statue of Frauds, and other rules and requirements for elements of a valid contract were slowly codified. As we work through this course, if you will examine each element of contract law as it fits into this evolutionary process, its function will become  clearer. Each element of a contract should work to identify the parties or property, articulate the agreement, or prove the existence of the agreement. What four principles would be in your definition? 1. 2. 3. 4. Give me your definition of a contract.  Expressed vs. Implied Contracts Expressed Contract: This is a contract in which the terms are expressed explicitly, either in writing or verbally. The term and scope of this agreement have been detailed and agreed upon beforehand, and the parties have reached an agreement and mutual understanding. In this type of contract, there is no ambiguity as to the details or agreement; it has already been worked out. • Don’t fall into the common trap where students believe expressed contracts can only be in writing, verbal contracts can also be expressed. Implied Contract: This is a contract in which the terms have not been expressed in words, either orally or in writing. The terms and agreement of the parties can only be determined on inferred by examination of the actions taken by the parties. The evidence of the contract is shown the interaction or subsequent exchange between the parties. • An Implied Contract can be either Implied in Fact or Implied in Law Implied in Fact: This is a contract in which the circumstances imply the parties have reached an agreement even though they have not done so expressly. An example would be… If you walk into a restaurant, sit down, order a steak, and eat the steak. Upon completion of the meal you are expected to pay for the meal. Implied in Law: This type of contract can also be called a quasi-contract. It is not as much of a contract as it is a legal determination. This is a situation where one party would be unjustifiably enriched if the courts were to hold that a contract did not exist. An example would be… An unconscious driver is removed from a vehicle wreck and rushed to an ER where he receives live saving treatment. He is responsible for payment to the hospital for these services.  Bilateral vs. Unilateral Contracts Bilateral: This is the more common of the two; a bilateral contract is where the agreement involves a promise by both parties. Both parties are liable to each other for performance of their respective promises. An example would be… John offers to sell his car to mark for $3,000. John promises to turn over the car and the title, in exchange mark promises to pay the agreed upon $3,000. In this example, both John and Mark have made promises. In the event of a breach by either party, the other party would have options. Unilateral: In this type of contract, only one party makes a promise to the other party. This promise acts an inducement to get the other party to perform some action. In this type of contract, the requirement that acceptance be communicated to the offeror is not required. The offeree accepts by performing the action. When the required action is complete the offeror is liable to the offeree for payment as advertised. In contrast, the offeree is not liable unless he/she performs the action. The offeree can walk away from the offer without recourse. An example would be a sign in the front yard that offers $50 to the first person who removes and Oak tree that was blown down in a storm. Another example would be a $500 reward for the return of my lost dog, Binky. In these examples, the offeror is making a promise to induce the offeree to act. 1st To remove the Oak tree 2nd To return Binky to his/her owner Let’s work through some examples  Give four examples of bilateral contracts… 1. 2. 3. 4. Give four examples of unilateral contracts… 1. 2. 3. 4. What type of contract is an “Offer to Purchase” contract that is commonly used in the real estate Profession? Bilateral or Unilateral  Elements required for Validity Mutual Assent: First and above all, there must be a “meeting of the minds”. There must be an expressed or an implied agreement. This is a requirement that both parties enter into this agreement knowingly and of free will. To have a mutual assent, the agreement must be free of… 1. Misrepresentations: This in an innocent misstatement of a material fact. It is also a misstatement that is relied upon by another individual that suffered damages of some form. Note, that this is a MATERIAL fact. 2. Fraud: This is an intentional misstatement of a material fact that was intended to deceive an individual, or was an intentional omission of a known material defect. 3. Mistake: A mistake is a mutual misunderstanding between the two parties. This does not involve a lack of judgment, ignorance, or unprofessional behavior on the part of either party. It is simple a misunderstanding that prevents the two parties from having a true “meeting of the minds”. 4. Duress, menace, and undue influence: This is to say that both parties must be acting in free will and not under threat or fear of retaliation. Consideration: This is by far the most complicated of the required elements. We will study this element is detail in a further section, but for now. Consideration is value promised by the offeror and/or legal detriment promised or preformed by the offeree. Competent Parties or Capacity: Both parties must have the ability to enter into a legally binding contract. Both parties must also have the ability to understand the terms and the implications of breach and his/her liability within the terms of the contract.  In addition to employees who lack the authorization, children, mentally disabled people, physically stricken and emotionally compromised people can all be ruled as lacking the necessary capacity for entering into a contract. A corporation is technically a entity and has the capacity to enter into a contract. Legal Purpose: Regardless of the form or elements found within a contract, if the subject matter or purpose of a contract is illegal… The contract is not valid The courts will not enforce such a contract. It is said to be void “ab initio” or void for the beginning. Mutual Right to Remedy: Both parties must have an equal right to remedy in the event of breach by the other party.  Void, Voidable, and Unenforceable Contracts Void: This is a contract that never came into existence. It lacked legal purpose or other required elements for validity. This contract is not enforceable upon either party. For example, a contract with a drug supplier for a purchase of illegal drugs would be void. Voidable: If one of the parties in a contract has the option to terminate or cannot be held liable, this contract is said to be voidable. It is important to note, that just because the contract is not enforceable on one party, this does not release the liability against the other party in the contract. An example would be a contract with a minor, the contract can be terminated by the minor…. But this same contract cannot be terminated by the merchant or other party if they have legal capacity. Unenforceable: This is a contract that may have the required element of validity but neither party can force the other party’s obligation. An example of this could be the verbal agreement to purchase a home for $100,000 cash. This contract would be unenforceable because the United States Statue of Frauds requires the contracts for the purchase of Realty to be in writing. • It is important to note that in the above example, if the buyer appeared with the $100,000 and the seller appeared with the deed, the sale could go through and be a valid sale. The difference is that if either party backed out, there would be no recourse for the other party.  Executed vs. Executory Contracts Executed Contract: This is an agreement or contract in which both parties have fully performed their obligations. For example, if John was offering to sell his watch to Mark for $200 and Mark accepts. This contract would be executed WHEN John handed over the watch and Mark paid the $200. The obligation would have been fulfilled and thus the contract would be executed. In contrast… Executory Contract: This is an agreement or contract in which one or both of the parties have yet to full perform their obligations. Using the previous example, If John offered to sell his watch to Mark for $200 at the first of the next month when Mark receives his paycheck. If Mark accepts these terms and agrees to the purchase, this would be an Executory contract because Mark has yet to pay and John has not turned over the watch. These two have a valid contract, but are yet to perform their obligations to each other. “Subject To” Contracts and Contingencies If a contract is a ”subject to” contract, it may fall in to one of these three categories 1. The parties are immediately bound to the bargain, but they intend to restate the deal in a formalized contract that will not have a different effect. 2. The parties have completely agreed to the terms; but have made the execution of some terms in the contract conditional on the creation of a formalized contract.  3. It is merely an agreement to agree, and the deal will not be concluded until the formalized contract has been drawn up. This is shown in Masters vs. Cameron (1954) 91 CLR 353 If a contract specifies “subject to finance”, it imposes obligations on the purchaser. 1. The purchaser must seek finance 2. When offers of finance arrive, the purchaser must make a decision as the suitability of the offers. Inherent in these conditions is a necessary element of good faith. Meehan v. Jones (1982) 149 CLR 571 What are four ideas for protecting you client (seller) when presented an offer with a “subject to financing” contingency? 1. 2. 3. 4.  Consideration I think it is important to take a good hard look at this elusive concept of consideration. It is very possible a real estate professional can have a successful career and never fully gain a working understanding of this antiquated element of contracts. Under the historical English common law, consideration was required for a contract to be enforceable. Modern interpretation on the other hand has viewed contracts to be enforceable simply upon the principle of promissory estoppel. Promissory Estoppel: A doctrine of law that stops one from later denying facts which that person once acknowledged were true and others accepted on good faith. The Two Theories on Consideration… Benefit – Detriment Theory: To constitute consideration, the contract must include an element of consideration that is either to the benefit of the promisor or to the detriment of the promisee. Benefit to the Promisor -orDetriment to the Promisee A historical case to examine this concept is from the 36th year of the Reign of Henry VI (1459 A.D.) The central question, “Is a father’s flippant and off the cuff verbal promise of money made to a suitor in exchange for the suitor’s marriage of the father’s daughter a legal debt?” The courts were asked to determine… Was there a benefit to the father? Was there a detriment to the suitor?  The judges were unable to reach a unanimous opinion; some judges decided that simply getting rid of the daughter served as viable benefit to the promisor (father) and that having to marry the daughter served as a viable detriment to the suitor (Promisee). The daughter herself was argued to be the actual consideration and therefore this was a legal debt owed by the father. Ultimately, these judges were overruled and this debt was ruled to be invalid. I use this example for two reasons. First, this example can create a wildly entertaining argument in a room full of students, and secondly it serves as a good introduction for the second and modern theory of consideration. The Bargain Theory: The contract is seen to be a product of an exchange or bargain between the two parties. For example an “off the cuff” remark to sell a car for $50 would not become binding if a bystander yelled, SOLD. In this evolution of consideration theory, the courts will not investigate the adequacy of the consideration, but will rather look for the evidence of a “bargain” or agreement between the two parties. In this theory, the intentions of the parties are investigated to determine if the contract reflects a true and intentional negotiation or offer. Consideration vs. Earnest Money… I hope by now we have cleared up some of the misconceptions involving consideration, but there are still some out there who will confuse consideration and earnest money. They will tell your buyers that earnest money is a legal requirement for an offer-to-purchase contract. Earnest Money: This is money given in addition to an offer to purchase to show sincerity on the part of the purchaser to go through with the deal if the offer is accepted  Breach of Contract Breach: A breach is a violation of any of a contract’s terms without legal excuse. If the seller defaults, the buyer has three alternatives… 1. The buyer may rescind or cancel contract 2. The buyer may sue for “specific performance” 3. The buyer may sue for “compensatory damages” If buyer defaults, the seller has four alternatives… 1. The seller may declare the contract forfeited; the contract may well contain provisions for the seller to retain the earnest money and or be due an additional sum. 2. The seller may sue for “specific performance” 3. The seller may sue for “compensatory damages” 4. The seller may rescind (cancel or terminate) Liquidated Damages: A specific sum that is agreed upon by both parties and is to be paid in the event that a future breach occurs. This method is used when establishing damages as a result of breach would be difficult to estimate. Compensatory Damages: All costs or losses actually suffered and proved caused by the breach. This includes incidental (expenses incurred by the non breaching party) and consequential damages (known foreseeable loses).  Punitive Damages: Damages awarded to affected party to be paid by the breaching party or wrongdoer as a form of punishment. This is rarely seen in breach of contract cases. Specific Performance: The nonbreaching party (usually the buyer) can ask the court to order the breaching party (the seller) to perform the contract. This does not apply to personal service contracts. Three legal excuses for breach of contract 1. Discharge by agreement of both parties 2. Discharge by operation of law * Change in law that makes action illegal * Statue of Limitations * Bankruptcy Decree 3. Impossibility of performance * Natural disaster * Fire or some other destruction of property  Important Contract Terms Substantial Performance: This is a contract that is nearly completely fulfilled, this level of performance may be sufficient to force payment by the other party. Option Contract: An option agreement is a contract between the owner and a potential buyer… This contract allows the potential buyer to buy a piece of property within an agreed upon window of time for an agreed upon price if he or she chooses… The buyer does not have to go through with the purchase. The owner does have to sell, if the option is exercised… This option is usually accompanied by an option price or fee that is not refunded if the buyer does not complete the deal. Contingency: This is a requirement found in the offer or contract that requires that some action, some duty, or some event be satisfied before the contract can be executed… without satisfaction, the contract will be void. 1st Right of Refusal: The first right of refusal gives the owner of this right the first chance of buying the property if the property owner decides to sell… the owner is not required to sell, the owner of the right is not required to buy…The price does not have to be set in advance. Assignment: The transfer in writing of interest in a bond, mortgage, lease, or contract Novation: the substitution of a new contract in place of an older one, this action terminates and replaces the old contract. Mirror Image Rule: This rules states that if you are to accept an offer, you must accept the offer exactly, without modifications; if you change the offer in any way, this is a counter offer which kills the original offer.  Statute of Frauds In some circumstances, a contract meeting all of the previous requirements for validity must meet the legal requirement of being in writing to be enforceable. The purpose of this requirement is to have written proof of the contracts existence and to detail the terms. The Six types of contracts that fall under the Statutes of Frauds… 1. Guaranty of debt contracts 2. Contracts involving an interest in Realty 3. Contracts impossible to perform within one year of formation 4. Contracts for the sale of goods priced at $500 or more 5. Premarital or Antenuptial Contracts 6. Promises of Executors for Personal Liability for debts of the deceased The Six types of Realty contracts that fall under the Statutes of Frauds… 1. Real Estate Purchase Contracts 2. Leases of Realty 3. Mortgages of Realty 4. Easements 5. Creation of Life Estate 6. Real Estate Broker Contracts  Interpretation of a Written Contract Parole Evidence Rule: A fully integrated and complete contract clearly written cannot be contradicted, varied, or altered by evidence of the parties prior negotiations, prior agreements, or contemporaneous oral agreements General Rules of Interpretation… 1. The meanings of terms are assumed to have their ordinary meaning; if technical, their technical meaning. 2. Any and all ambiguities will be construed against the party who drafted the contract. 3. No contradictions… a written contract can be explained, but not contradicted by trade practices, course of performance, or course of dealing. Uncertainty of Incomplete Contracts In the event a contract is formed that is incomplete or ambiguous on key elements of validity. This contract is said to have “failed to form” or does not exist. If a key element such as price or terms of the performance is left blank or is yet to be determined, the part ...