A house divided

In a case closely watched by the residential brokerage community, New York State’s highest court will soon rule in a legal battle between Prudential Douglas Elliman and the dissatisfied sellers of a Park Avenue co-op.

The 2009 lawsuit, Douglas Elliman LLC vs. Tretter, was filed after the clients refused to pay their broker’s $70,000 commission, arguing that she was also working for the apartment’s buyers without telling them.

In May, the state Supreme Court’s appellate division ruled that the fee must be paid. The sellers, Franklin and Sheila Tretter, are now contesting that decision to the New York State Court of Appeals. The court could rule at any time, affirming the decision in Elliman’s favor, finding for the Tretters, or sending the matter to trial.

However the case plays out, real estate observers said the Tretters’ claim — that their broker was not wholly on their side — should serve as a warning to real estate agents to make certain that buyers and sellers understand who they represent. Elliman LLC vs. Tretter makes clear, lawyers said, that brokers are taking a risk if they allow doubt about their loyalties to creep into transactions. Disclosure forms, newly mandated in condo and co-op transactions this year, have made the procedures for disclosing these loyalties even more explicit.

“I would be concerned, if I was a broker, that I could do all this work and someone could turn around and say, ‘You’re not entitled to your commission, you’re working both sides of the coin,'” said Andrea Lawrence, a real estate lawyer at the firm Epstein Becker Green who has been following the case.

Divided loyalties

It all started in the summer of 2008, when the Tretters listed their two-bedroom apartment, 785 Park Avenue #11C, with Elliman broker Barbara Lockwood. The apartment sold in March 2009 for $1.4 million; as part of the deal, Lockwood agreed to accept a commission of 5 percent, reduced from 6 percent because the sale price was less than the $1.65 million asking price.

But once the deal closed, the Tretters refused to pay the commission. Lockwood, they claimed, had breached her fiduciary duty to them by doing additional work for the buyers, including showing them a similar apartment in the same building.

In April 2009, Elliman sued. (The brokerage, through a spokesperson, declined to comment on the case.) When the case reached the state Supreme Court’s appellate division two years later, a four-judge majority ruled in Elliman’s favor, concluding that Lockwood had indeed satisfied her duty to the sellers and should receive her commission.

“It is uncontested,” the judges wrote, “that Lockwood found buyers who were ready, willing and able to purchase their apartment, who were capable of doing so.”

The Tretters and their lawyer, Randy Heller of the firm Gallet Dreyer & Berkey, declined to comment while their appeal is pending. But in court documents, they claim that Lockwood’s actions made it unclear who she was representing.

Lockwood first met one of the buyers, Taurie Zeitzer, at an open house in the apartment, days after a different buyer had made a $1.5 million offer on the unit, according to court testimony. That offer was accepted, and while that candidate was in front of the board, Lockwood contacted Zeitzer and her husband, eventually showing them five other properties.

Weeks later, the original offer on the Tretters’ apartment fell through. Lockwood brought the Zeitzers to see the apartment again, and they eventually agreed to buy it.

Who represents whom?

That’s where it gets tricky. The relationship between brokers, buyers and sellers in New York is somewhat confusing, especially when the listing broker is also working with the buyers.

Sellers’ brokers here typically sign an exclusive listing agreement that outlines how much the seller will pay in commission when the deal closes. Some buyers, meanwhile, retain their own brokers, who split the commission with the listing broker when the property sells. Other buyers forgo representation and approach sellers directly. In those cases, the selling broker handles both sides of the transaction and gets the entire commission, but is still technically representing only the seller.

In situations where a buyer’s agent takes a client to one of their own exclusive listings, they become a dual agent, which means that both buyer and seller give up their right to the agent’s undivided loyalty. Agents who are acting as dual agents must clearly explain the situation and its implications for each party. (Thanks to a January 2011 change in state law, agents must now obtain a written acknowledgment, signed by the buyer and seller, in order to act as a dual agent. But the change wasn’t yet in effect when the Tretters sold their apartment.)

Such transactions can proceed smoothly with both parties’ permission, said Jonathan Charnas, vice president at the Fox Residential Group and cochair of REBNY’s Residential Sales Council. Recently, Charnas said, he was representing the seller of a co-op on 85th Street when a potential buyer approached him about the unit, unsolicited. At that point, Charnas said, he had two options: Tell the buyer to find another agent, or seek consent to represent both the buyer and seller himself.

“The question is whether the buyer wants to be represented by someone whose allegiance is really to the seller,” he said, “or whether the buyer wants to go out and find someone to represent them.”

In this case, he said, the buyer was an attorney who felt comfortable watching out for her own interests. The seller, meanwhile, agreed to the arrangement and paid Charnas’s commission as planned.

The Tretter dispute focuses on whether Lockwood acted as a dual agent without properly disclosing it, Lawrence explained.

Lockwood had been hired as the seller’s broker, as spelled out in the contract. But, the Tretters later argued, Lockwood confused matters by referring to the buyers, at one point, as her “customer.” The remark was especially vexing, the Tretters contended, because at that point they had already discussed private financial details and strategy with her.

Moreover, they said, Sheila Tretter had raised “strenuous” objections to Lockwood’s showing the buyers other apartments. And there was reason to believe Lockwood “may have attempted to frustrate the completion of the transaction” during negotiations over her commission, according to the state Supreme Court’s one dissenting judge.

Details like this create enough uncertainty about whether Lockwood was a dual agent, the dissenting judge wrote, that the matter should be resolved at trial.

The use of the new disclosure forms will hopefully mean far fewer disputes like the Tretter case, according to Neil Garfinkel, who serves as residential counsel to REBNY and was involved in drafting the new law.

It’s not a foolproof system, however: When the law was first passed, brokers and clients alike found the forms confusing and had trouble getting clients to sign them. Garfinkel, an attorney at Abrams Garfinkel Margolis Bergson, said many brokers have now been trained in using the forms.

The Tretter case is a reminder, however, of the high stakes brokers face if they don’t pay close enough attention to matters of disclosure.

“It can be as simple as just not being clear about who you represent,” Garfinkel said. “If you don’t do the right thing, then you risk the commission.”