A tie in agreement is when a seller refuses to sell unless the purchaser purchases another product or service tied into the transaction.
Tie in agreements are illegal, and all real estate professionals must avoid them at all costs. Luckily, you’re in good hands here; we are equipped with all the knowledge you’ll need regarding tie in agreements.
In this post, we’ll define tie in agreements, go over their connection with the antitrust laws, and provide practical examples, so you are no longer confused. Let’s do this!
What is a Tie In Agreement?
A tie in agreement, or a tying agreement, is when a seller requires the purchase of another product or service to sell the first. This means that if a buyer does not agree to the terms of the tie in sale, they cannot buy the item or service they wanted in the first place.
A tying arrangement in real estate requires the following aspects:
- Two separate products or services
- A conditional sale
- Market power in the tying product
Examples of Tying Agreements in Real Estate
So exactly what does a tying agreement look like in the real estate world? One example of a tie in arrangement includes if a real estate agent agrees to sell a property on the condition that the buyer lists the property with their firm.
Another example is if a broker is selling a house but tells customers they must also buy an additional property to complete the sale.
Why is important to avoid tying arrangements like in these examples? Well, this monopolistic business practice is against the law and can get real estate professionals into a lot of trouble.
Why Are Tie In Arrangements Illegal?
You may wonder, “What’s wrong with throwing in an extra incentive for buyers?” Well, a tying agreement gives consumers no choice but to pay an additional price if they want to buy a home, lease an apartment, etc.
This compromises a free market and fair housing because only consumers who can afford the tied product can take brokers up on this deal.
So how do we know when a tie in arrangement is against the law? A tying agreement is illegal under the following conditions:
- If the individual or firm selling the tied products has sufficient economic power in the tying product
- If the tie-in sale has actual or probable adverse effects on the competition
- If the buyer has no choice but to purchase the tied product to access the first
If a tie in deal matches any of these conditions, it is a violation of federal antirust laws.
What Are Antitrust Laws?
Antitrust laws are a collection of federal and state government laws that regulate the conduct and organization of business corporations. These laws encourage fair competition and benefit consumers by upholding a free market.
The three federal antitrust laws are as follows:
- The Sherman Antitrust Act
- The Clayton Act
- The Federal Trade Commission Act
But why do we need three different acts?
Well, the Sherman Act was the first antitrust law passed in 1890 to prohibit monopolistic business practices. Unfortunately, this act was nonspecific in its language and left much open to interpretation. This allowed businesses to find loopholes that helped them violate antitrust laws and engage in unethical practices.
But don’t worry! The Clayton Act was passed in 1914 to strengthen the Sherman Act and give power back to consumers. This antitrust law explicitly lists business practices that compromise free competition, including tie-in arrangements and other violations.
So, where does the Federal Trade Commission Act come into play? Also created in 1914, the Federal Trade Commission Act (FTC) was established to enforce the Clayton Act and support principles like fair housing. If a real estate broker were to partake in a tying arrangement, the FTC would come after them and ensure they are penalized.
Penalties for Tie-in Agreements in Real Estate
What kind of penalties can we expect to face if we partake in an illegal tying arrangement?
Individual violators of antitrust law may have to pay as much as $1 million or spend up to 10 years in prison. If an entire real estate company is guilty of offering illegal tying agreements, it may owe as much as $100 million.
How Often Are Antitrust Violators Penalized?
According to the Federal Trade Commission, the laws around tie in arrangements are changing. The Supreme Court seems to take this antitrust law violation even more seriously than before, punishing offenders without the need for additional proof or criminal intent.
But lower courts are more flexible when it comes to tying agreements, as they typically apply the “rule of reason” to each case. Rule of reason is a doctrine created to interpret the Sherman Act and determine the negative effects of the tied sale before ruling.
Regardless, manipulating consumers into buying a tied product or service is always a violation of antitrust law.
Are All Tying Arrangements Illegal?
That being said, not every tying arrangement is against the law. If a seller offers a tied product but has no market power over said product, then they have not violated federal antitrust law.
It’s also important to note that bundling products is a perfectly legal business practice. Bundling is when a broker offers the sale of two products together but allows consumers the option to purchase them separately.
What to Know for the Real Estate Exam
Anyone studying to take the real estate exam must know how antitrust violations like tying arrangements work. Not only will learning this vital information be helpful for the test, but it will enable you to encourage fair housing as a future real estate professional.
Now that you know all about tying arrangements and why they violate antitrust law, you’re that much closer to passing your exam.
So why not brush up on more real estate vocab with our Real Estate Flashcards? Good luck!