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Options to Purchase May Leave Few Options
By Fred Moreno, Chief Deputy Legal Counsel
Have you ever had a client under a lease with an option to purchase who wants to assign their option? Chapter 47G of the North Carolina General Statutes governs option to purchase contracts executed with residential lease agreements. Recently, the North Carolina Court of Appeals handed down a decision regarding the assignment of an option in a lease and determined that, in that case, there was no interest in real property that could be conveyed.
Last year, the North Carolina Court of Appeals published its decision in Cabrera v. Harvest St. Holdings, Inc. (“Cabrera case”). In this case, the Plaintiffs were tenants of a commercial property where they operated their auto mechanic shop. The property owner later became interested in selling his property to Plaintiffs, so the parties entered into an option to purchase contract where the Plaintiffs would pay $2,400 per month as lessees for a period of nineteen (19) months. This lease/option agreement went on to say that during this time, the Plaintiffs could elect to purchase the subject property for $150k and that title to the property would transfer upon full payment of that amount to the owner. The lease/option agreement was not recorded with the Register of Deeds. At some point later on, the Plaintiffs decided to sell their interest in the lease/option agreement to the Defendants for $140k. After going under contract, the Plaintiffs decided they no longer wanted to sell their interest and tried to void the contract. The Defendants then bought the subject property directly from the owner, and the deed was recorded with the Register of Deeds. The Plaintiffs then sued and argued that the lease/option contract that they retained gave them an interest in the subject property.
The NC Court of Appeals, citing the NC Supreme Court case of Mizell v. Dennis Simmons Lumber Co. in a 1917 opinion, said “Generally, option contracts do not themselves create any interest in the property, but only amount to an offer to create or convey such an interest when the conditions are performed, and working a forfeiture when not strictly complied with.” The court went on to say, “In other words, until the option is exercised, the optionee does not hold any property interest to the property in question.” The court found that the Plaintiffs never exercised the option to purchase in the lease/option agreement and therefore never had an interest in the property that they could assign, transfer, or sell. If anything, the agreement between the Plaintiffs and the Defendants only transferred the right to purchase the property under the lease/option agreement.
This is an interesting case and one that brokers should be aware of when dealing with wholesalers. Although this case involved commercial property, the reasoning of the court could provide a similar outcome in a residential transaction. Since the tenant of a lease/option agreement is not the property owner under the reasoning of the Cabrera case, the tenant may not have any real property interest that the broker can market for the tenant. Even if the tenant has exercised the option to purchase and may now have a real property interest, their interest is limited to assigning their option to purchase the subject property, and only then if their agreement allows such a transfer. If you come across such a transaction, seek legal counsel before you list to be sure you know what you are listing, and how it can and should be advertised.
Reminder: Did You Know About the Following Rule Changes?
Rule 58A .1711 Continuing Education Required of Nonresident Brokers
The Commission repealed Rule 58A .1711 on July 1, 2023. Effective July 1, 2023, nonresident brokers must now comply with North Carolina CE requirements as specified in Rule 58A .1702, Continuing Education Requirements.
Essentially, Rule 58A .1702 requires all brokers to take eight credit hours of NCREC-approved real estate continuing education courses within one year prior to the expiration of their license as follows:
- four credit hours of elective courses; and
- four hours of either:
- the “General Update Course,” or
- for a broker with BIC Eligible status, “the Broker-in-Charge Update Course” in lieu of the “General Update Course.”
Therefore, nonresident brokers will no longer be able to utilize the CE requirements from another state to certify they have met the CE requirements in North Carolina. Both the General Update and Broker-in-Charge Update Courses, and a number of other elective courses are available via online delivery enabling brokers to take North Carolina CE even when not present in the state.
NOTE: Nonresident brokers must complete their CE requirements by June 10 of each license year according to Rule 58A .1702.
Rule 58A .1708 Equivalent Credit [for teaching or developing a CE course]
Rule 58A .1708 was amended on July 1, 2023. The Rule now states in part:
- The Commission shall award an approved instructor continuing education credit for teaching a Commission Update course….
- The Commission shall award a broker continuing education elective credit the first time an approved continuing education elective course is taught by the broker….
- The Commission may award continuing education elective credit for developing a continuing education elective course the first time it is approved by the Commission pursuant to 21 NCAC 58H .0401….
Approved instructors and brokers seeking equivalent continuing education credit under Rule 58A .1708, shall submit a form, available on the Commission’s website, that requires them to set forth the information specified in subsections (a), (b), and (c) of the Rule.
NOTE: In order for any application for equivalent credit to be considered and credits applied to the current licensing period, a complete application, the appropriate fee, and all supporting documents shall be received by the Commission no later than 5:00 p.m. on June 17.
Staff Appearances
Steve Fussell, Chief Consumer Protection Officer and Leslie Schwartz, Consumer Protection Officer, spoke at Hodge Kittrell Sotheby’s International Realty on July 11.
Brian Heath, Consumer Protection Officer, spoke at NorthGroup RE on July 19.
Tech Corner: Do You Know Your Trust Account Software?
Do you have a trust account? Have you taken the Basic Trust Account Procedures Course?
The Commission does not require brokerages to have a trust account. However, if a broker will be receiving money while acting in their fiduciary capacity, they must deposit the monies in a trust or escrow account as defined by Rule 58A .0117(b). Additionally, they must deposit the money no later than 3 banking days following receipt unless another time frame is stated under Rule 58A .0016(b).
The Basic Trust Account Procedures Course is required when a BIC assumes responsibility for a trust account (i.e. opens a new account or takes over an existing account). Further, this course must be taken within 120 days of assuming responsibility per Rule 58A .0110(g)(9). During the course, brokers will learn the law and rules regarding trust accounts so they will be able to maintain them in adherence with the License Law and Commission rules. BICs are not required to take the course more than once in a three year period.
Trust Account Tutorials are also available on the Commission’s website to assist brokers with learning the process of maintaining trust account records that comply with Real Estate Commission rules. The tutorials cover Deposits, Disbursements, and Monthly Account Reconciliations using ledgers and trust account journals.
The Commission does not dictate the software that a brokerage must use while maintaining their trust account. However, brokers should possess in-depth knowledge of the trust account software system they choose to use. It would be in the best interest of brokers to receive training and/or hire an expert to ensure they can utilize the full capabilities of the system. Additionally, BICs should be sure to keep the software systems they use up-to-date.
To assist brokers with evaluating the capabilities of their system, the Commission has provided “Broker Software Evaluation Forms” for Sales, Long Term Rentals, and Vacation Rentals on its website. The evaluation forms ask a variety of questions such as:
- Does the software generate a trust/escrow journal?
- Does the software generate supplemental disbursement worksheets that identify each disbursement transaction?
- Does the software generate supplemental deposit worksheets for each bank deposit?
These forms may assist with determining if the software provides the broker with the necessary information and documentation for compliance with the License Law and Commission rules.
NOTE: The Commission encourages brokers to consider whether they can utilize the trust account software independently and comply with the License Law and Commission rules or if they need to employ an expert to assist them.
If you have any further questions and/or comments regarding trust accounts, please email Regulatory Affairs at regulatoryaffairs@ncrec.gov.
Diversity, Equity, and Inclusion Updates
At the North Carolina Real Estate Commission Diversity, Equity, and Inclusion (DEI) are a top priority. We celebrate the differences that make each licensee, Commission Member, Commission staff, and all North Carolinians unique. The Commission is committed to prioritizing DEI in everything we do, fostering an environment where all people feel safe, respected, and valued.
Recognizing that we live in a world that is increasingly more diverse and there are often holidays and observances which are reflective of diverse cultural, ethnic, racial, political, and religious backgrounds, but aren’t as widely celebrated, the Commission would like to take the time to highlight observances in the Month of August and provide you with a helpful tool to identify others.
The United Nations (UN) recognizes August 9th as the International Day of the World’s Indigenous Peoples. Although the United States only recently starting recognizing Indigenous Peoples Day in 2021, and in the month of October, the UN has recognized this day since 1982 as a day to bring awareness to, honor, celebrate, and recognize the contributions and achievements of American’s first inhabitants and Tribal Nations that still thrive today.
August 26th is Women’s Equality Day, which has been recognized since 1971 as the anniversary of the ratification of the 19th amendment granting women the right to vote. Women’s Equality Day is a day to celebrate, uplift, and empower women; acknowledging the progress that has been made in the fight for gender equality but also acknowledging there is more work to be done.
To learn more refer to the links below:
A Proclamation on Indigenous Peoples’ Day, 2021 | The White House
Presidential Proclamation — Women’s Equality Day, 2013 | whitehouse.gov (archives.gov)
Disciplinary Actions
YANLI ZHU (GREENSBORO) – By Consent, the Commission suspended the broker license of Zhu for a period of 12 months, effective July 1, 2023. The Commission then stayed the suspension in its entirety upon certain conditions. The Commission found that Zhu agreed in writing to “rebate” 50% of her commission to buyer-clients. Prior to closing, the relationship between Zhu and her clients deteriorated and Respondent refused to honor the agreement. Zhu did not provide or review the WWREA disclosure at first substantial contact or enter a written agency agreement prior to submitting an offer for her clients to purchase a new home build. Zhu provided the Commission with WWREA disclosures and agency agreements for multiple transactions that were not signed by clients on the dates shown on the forms.
GD REALTY LLC (GREENSBORO) – By Consent, the Commission suspended the firm license of GD Realty LLC for a period of 12 months, effective July 1, 2023. The Commission then stayed the suspension in its entirety upon certain conditions. The Commission found that the firm represented numerous buyer-clients in real estate transactions and failed to provide and review Working With Real Estate Agents Disclosure forms or to obtain written Buyer Agency Agreements prior to offer. During the course of the investigation, the firm asked the clients to sign these agreements and backdate them to the time the agency relationship began and submitted these signed forms to the Commission.
ROSHELLE LEIGH SCHUDEL (ELIZABETH CITY) – By Consent, the Commission suspended the broker license of Schudel for a period of 12 months, initially effective June 1, 2023, however, the Commission later extended the effective date to July 1, 2023. The Commission then stayed the suspension in its entirety upon certain conditions. The Commission found that Schudel failed to supervise an affiliated broker and failed to notify the Commission that she was no longer acting as broker-in-charge.
HEATHER NICOLE SHELTON (GREENSBORO) – By Consent, the Commission suspended the broker license of Shelton for a period of 18 months, effective February 1, 2023, but stayed the suspension after 3 months and placed her on probation for the remaining 15 months upon certain conditions. The Commission found that Shelton, as the broker-in-charge and qualifying broker of The Prestige Group of the Triad Inc. d/b/a Prestige Realty Group, executed a listing agreement but failed to have all of the owners sign. After the property went under contract, the owners changed the water source from municipal to a well. Although Shelton was aware, Shelton failed to inform the buyers or their agent of the change. After closing, buyers learned the well could not be used and paid to run a new water line and meter to the property. In addition, Shelton’s license was inactive from July 1, 2022, through September 15, 2022, yet Shelton continued to engage in brokerage activity.
THE PRESTIGE GROUP OF THE TRIAD INC. D/B/A PRESTIGE GROUP REALTY (GREENSBORO) – By Consent, the Commission suspended the license of The Prestige Group of the Triad, Inc. for a period of 18 months, effective February 1, 2023, but stayed the suspension after 3 months and instead placed the firm on probation for a period of 18 months upon certain conditions. The Commission found that the firm executed a listing agreement but failed to have all of the owners sign. After the property went under contract, the owners changed the water source from municipal to a well. Shelton knew of this change before closing but failed to disclose to the buyers or their broker. After closing, buyers learned the well could not be used and paid to run a new water line and meter to the property. In addition, the Firm’s license was inactive from July 1, 2022 through September 15, 2022, yet the firm continued to engage in brokerage activity.
PHILIP M HENDERSON (CHARLOTTE) – By Consent, the Commission suspended the broker license of Henderson for a period of 12 months, effective August 1, 2023. The Commission then stayed the suspension in its entirety upon certain conditions. The Commission found that Henderson, acting as broker-in-charge of Henderson Properties, Inc., added surcharges to invoices for repairs without full disclosure to or consent from owner-clients. A record inspection showed non-compliance with trust account rules including failure to consistently include the purpose and payee for disbursals on journals and ledgers, failing to maintain the front and back of canceled checks, and posting deposits before payments were received. Henderson’s website misleadingly referenced a division for HOA management following the division’s sale to a separate company.
HENDERSON PROPERTIES INC (CHARLOTTE) – By Consent, the Commission suspended the firm license of Henderson Properties, Inc. for a period of 12 months, effective August 1, 2023. The Commission then stayed the suspension in its entirety upon certain conditions. The Commission found that the firm added surcharges to invoices for repairs without full disclosure to or consent from owner-clients. A record inspection showed non-compliance with trust account rules including failure to consistently include the purpose and payee for disbursals on journals and ledgers, failing to maintain the front and back of canceled checks, and posting deposits before payments were received. The firm’s website misleadingly referenced a division for HOA management following the division’s sale to a separate company.
JACQUELINE KAY REYNOLDS (WAYNESVILLE) – By Consent, the Commission suspended the broker license of Reynolds for a period of 12 months, effective July 1, 2023. The Commission then stayed the suspension in its entirety upon certain conditions. The Commission found that Reynolds listed a subject property for sale and advertised it as containing 1585 square feet when in fact it contained 1362 square feet. The first buyer terminated when his girlfriend had a severe allergic reaction while viewing the property, which they believed was due to the presence of mold. Although Reynolds knew the reason for the termination, Reynolds misrepresented to the second buyer that the first buyer terminated because of a cat allergy.
DERICK LEE REARDON (WILMINGTON) – By Consent, the Commission suspended the broker license of Reardon for a period of 3 months, effective July 19, 2023. The Commission found that Reardon represented a potential buyer who entered into a contract and paid a $10,000 due diligence fee. The listing agent had disclosed in the MLS that this property was located in a CoBRA zone, making it ineligible for federal flood insurance. Prior to entering into the contract, Reardon failed to disclose to the buyer that the property was located in a CoBRA zone. The buyer was unable to secure a loan as a result, terminated the contract, and requested a return of their due diligence fee from the sellers, but were denied.
DEBRA GOLDMAN (FUQUAY VARINA) – The Commission accepted the permanent voluntary surrender of the real estate license of Goldman, effective June 14, 2023. The Commission dismissed without prejudice allegations that Goldman violated provisions of the Real Estate License Law and Commission Rules. Goldman neither admitted nor denied misconduct.
JAMES RICHARD HRISO (CARY) – The Commission accepted the voluntary surrender of the real estate education approvals of Hriso, effective July 19, 2023. The Commission dismissed without prejudice allegations that Hriso violated provisions of the Real Estate License Law and Commission Rules. Hriso neither admitted nor denied misconduct.
NICANDER RANICO MEDALLA (APEX) – By Consent, the Commission suspended the broker license of Medalla for a period of 6 months, effective July 20, 2023. The Commission found that Medalla, the qualifying broker and broker-in-charge of Sercy Capital Group LLC, entered into a listing agreement and entered the property in the MLS indicating another firm, with whom he was affiliated, as the listing firm, that the subject property was adjacent to the Historic District, and that it had several updates and new features installed. Medalla failed to disclose that the property was in fact in the Historic District and failed to verify that required permits were in place or that licensed contractors were used for renovations in accordance with Historic District ordinances. Seven of the renovations done were not in compliance with Historic District ordinances, and the buyers did not discover the misrepresentations until after closing and were then responsible for remedying the violations.
SERCY CAPTIAL GROUP LLC (APEX) – By Consent, the Commission suspended the firm license of Sercy Capital Group, LLC for a period of 6 months, effective July 20, 2023. The Commission found that the firm entered into a listing agreement but advertised the property as being listed by another firm. In addition, the advertisement indicated that the subject property was adjacent to the Historic District when in fact it was inside the Historic District, and that it had several updates and new features installed. The firm failed to verify that required permits were in place or that licensed contractors were used or that renovations were done to the subject property in accordance with Historic District ordinances. In fact, seven of the renovations were not in compliance with Historic District ordinances, and the buyers did not discover the misrepresentations until after closing and were then responsible for remedying the violations. The firm’s license had expired but was later renewed, however, the broker-in-charge failed to re-designate himself as broker-in-charge and the firm continued to advertise and provide brokerage services without a broker-in-charge designated.
Commission Member Cindy Chandler and Legal Education Officer Kizzy Crawford-Heath Recognized by National Real Estate Educators Association
The Real Estate Educators Association (REEA) held their national conference on June 20-24, 2023 and honored two of the Commission’s own.
The 2023 Classroom Education Program of the Year Award was bestowed on Commission member Cindy Chandler, DREI, for her work on the commercial version of the Commission’s mandatory Update course. The award recognized the innovative and successful nature of the classroom program.
In addition, REEA bestowed its “Rising Star Award” on the Commission’s Legal Education Officer Kizzy Crawford-Heath, DREI, for her contributions at REEA conferences and the DREI Summit. The award recognizes a REEA member who has made a significant change or accomplishment in their career within the past 3 years that has positively affected others in the real estate industry.
The Commission remains committed to leading industry-wide discussions and participating in educational events to build knowledge and skills that can benefit North Carolina licensees and consumers.
My license is expired! How do I reinstate it?
To maintain a current license, brokers must renew their license annually between May 15 and June 30. The license of a broker who fails to renew during that period will expire on June 30, and that broker must cease all brokerage activities immediately.
What steps must a broker take to reinstate an expired license? That answer depends on how long the license has been expired.
To reinstate a license expired for less than 6 months:
- Go to the Commission’s homepage (www.ncrec.gov);
- Click on Reinstate your License;
- Enter your license number and PIN (last 4 of your SSN unless you have changed it);
- Answer required questions; and
- Pay the $90 reinstatement fee.
NOTE: Following expiration, a broker’s license is reinstated on inactive status. To regain active status, a License Activation / Affiliation form (REC 2.08) also must be submitted.
To reinstate a license expired for 6 months but no more than 2 years:
- Successfully complete one 30-hour Postlicensing course (course must be completed within 6 months prior to submitting reinstatement application); and
- Submit a reinstatement application with the $90 application fee and all required documentation, including criminal background report;
-OR-
- Submit a reinstatement application with the $90 application fee and all required documentation, including criminal background report; and
- Pass the National and State sections of the license exam.
NOTE: Following expiration, a broker’s license is reinstated on inactive status. To regain active status, a License Activation / Affiliation form (REC 2.08) also must be submitted.
To reinstate a license expired for more than 2 years:
- Successfully complete the 75-hour NC Broker Prelicensing course;
- Submit a license application with the $100 original application fee and all required documentation, including criminal background report; and
- Pass the National and State sections of the license exam.
NOTE: You will be licensed as a provisional broker and be subject to the 90-hour Postlicensing education program. To gain active status, a License Activation / Affiliation form (REC 2.08) also must be submitted.
For more information, review Commission Rule 58A .0505 or visit the “Reinstate your License” page on the Commission’s website. You may also contact the Commission’s Education & Licensing Division at ls@ncrec.gov or 919-875-3700.
Be Aware of Scam Sellers
In its December 2022 eBulletin, the Commission published an article warning brokers about an increase in scams involving fake buyers and fake sellers. The Commission is seeing a rapid increase in the fake seller identity theft scams. A scammer will contact a listing broker and pose as the owner of the property. In many cases, they produce a very realistic driver’s license to show the broker. A listing agreement is signed and the property is then marketed.
In many cases, the real owner will find out about the listing and put a stop to it before the deed has gone under contract. However, the scammer may already have received due diligence money or, in some cases, even completed the sale. This can lead to injury to the real owner, buyer, brokers, and closing attorneys. In some cases, the owner will have to go to court to get the matter resolved with the buyer.
Some similarities have arisen through all the cases. The scammer often gets in contact with the listing broker through a lead generating website. Most of the time, the scammer states that they are traveling or are out of state and cannot meet the broker in person. The scammer often indicates they need a quick sale due to health or other family matters and are willing to take a lower offer to get that quick sale. The scammer requests to sign documents through Docusign, Dotloop, or some other digital signature platform. The emails appear to be legitimate and they feature the proper owner’s name in the email. It is rare, but in at least one case, the scammer met the listing agent at the property in person.
The other common element is that the scammers usually target undeveloped land, vacant or abandoned properties, or properties that are in a trust where an owner has recently died. Typically, there is no one around that might question a real estate sign on a property and that is why they are being targeted. In some cases, a neighbor who knew the owner contacted either the owner or the listing broker to alert them to the questionable listing.
There is no area of the state that is seeing a higher concentration than other areas. This is affecting the whole of North Carolina as well as other states. The scammer ID’s are also coming from other places than North Carolina when the actual owner is from another state.
As brokers, be vigilant when dealing with these types of leads. The scammer will often have a ton of information about the real owner and can answer questions regarding what you might find on the deed, tax records, or county government records. Remember that these are publicly available documents. Be careful about sellers who are too busy to meet in person, or seem extra motivated to sell quickly, yet are traveling out of state. We recommend that when you see these red flags, you take steps to independently verify that the purported owner is who they say they are rather than rely on documents or information coming from the purported owner. This could include googling, checking with neighbors, looking up the seller on social media, and/or requiring Zoom, FaceTime, or some other online face-to-face meeting. Check the history of the property and contact the previous listing agent/firm if something seems strange about the purported seller. It is important to take your time and take steps to protect yourself, your business, and any potential buyer when faced with a seller showing red flags.
The Commission continues to gather information about these scams for possible referral to law enforcement agencies. However, online scammers are often located out of this state and country so prosecution becomes even more difficult. Be wary and protect both yourself, your firm, and your community.