LawsonGroupMediation

I am often asked questions about real estate agent or broker liability.  Specifically, I am asked whether agents are held liable for only fraud or wheth an agent can be held liable for negligence as well.

Rather than quote cases right now, which would distract you from understanding how to apply the law to a variety of contexts, I will teach you the legal concepts.  Later, as I see cases that I feel compelled to share with you, they will be presented.

In the past, most court cases wherein a real estate agent or broker was found liable involved fraud.  Actually, there are two kinds of fraud: active and passive.

Active fraud includes these elements that must be proven: 1) The agent misrepresented a fact; 2) The agent knew in advance that the misrepresentation was not true and intended to make that misrepresentation; 3) The misrepresentation was made to induce the plaintiff to act or not act; 4) The plaintiff would not learn of the misrepresentation through due diligence; and 5) the misrepresentation was the proximate cause of plaintiff’s damages or losses.

Active fraud is very difficult to prove, and only the most egregious cases ever resulted in agents being held liable.  However, later another type of fraud cases found its way into the courts:  passive fraud.

With passive fraud, there is no misrepresentation.  Rather, the agent intentionally fails to state a hidden or latent defect, knowing that the hidden or latent defect will not be discovered by due diligence.  Courts around the country have included passive fraud as actionable, and some states have written this legal theory into state statutes requiring agents to disclose known hidden or latent defects.

However, both active and passive fraud are very difficult to prove.  Along with the person suing being required to exercise due dilligence, which causes many lawsuits to fail, they have to prove that the agent knew either actively or passively in advance, and further intended to lead the plaintiffs to their detriment.  This is a very high standard that is difficult to prove.

However, recently plaintiff’s attorneys have been arguing before the courts that a different standard should be used to judge Realtor conduct, that of negligence.  In many states, courts are beginning to recognize the professional malpractice standard of negligence as being appropriate for Realtor conduct.

Under professional malpractice standard of negligence, the plaintiff would need merely to prove that 1) the Realtor owed a duty of care toward the plaintiff client; 2) that the Realtor breached that duty; and 3) that the plaintiff (either the buyer or seller who is not even the client, but the customer of the Realtor) suffered loss or damages as a result of that breach of the duty of care.

In some courts, attorneys have to be extremely careful in the drafting of their lawsuits or the court will require the fraud standard.  However, there is increasing movement toward applying the professional malpractice standard of negligence to Realtor behavior. Realtors need to be more careful than ever to conduct their behavior in a professional manner.

So, how do you protect yourself?  E&O insurance?  Emphatically No!  Even if you have E&O insurance, you will be dragged through the legal mud of a lawsuit and the result is injury to your reputation, your credit report, and time away from your business, costing you a lot of money.

The way to protect yourself is through proper diclosure, the proper application of those disclosures, and maintaining proof of disclosure.

Providing proper disclosure amounts to general legal disclosures that are properly drafted.  In addition, be very concientious to disclose hidden or latent defects, not merely awaiting inquiry into them.  There is a very fine line between maintaining client confidentiality and participating in fraud, so be very concientious about that.

It is also very important, in the normal course of business, to maintain evidence of disclosure.  When clients or customers ask questions, it is a good idea to follow up the meetings with an email or letter confirming the questions and the answers your provided.

However, cases also turn on the proper application of disclosures.  In short sale cases, it is common for agents to merely place the legal disclosures in front of them, provide a short summary of it all, and then obtain signatures.  This is a mistake.  With the vast amount of paperwork in listing a short sale, agents tend to want to keep things to one session.  However, short sale listing meetings should take 2 or even 3 meetings to go over all of the paperwork and explain the process.

Thus, it is very important to go over each point of every disclosure, even reading them word for word with the client providing ample opportunity for questions or discussion.  Merely a signature is not adequate.  An acceptable alternative would be to leave the documents with them, inviting them to read them at their liesure and to write questions on the forms.  Then, at the next appointment, you answer their questions, and have them initial each paragraph on a clean form, with their signatures at the end.  Then, collect the forms you left with them as a worksheet for later evidence if necessary that you fulfilled your duty of care toward them.

I have seen many short sale disclosure forms.  Some are excellent.  Others are lacking and may or may not be adequate.  However, I have seen many disclosure forms used by agents in short sale cases that are wholly lacking and the wording of them would likely fail to protect them in a lawsuit.

This is one of the reasons that we published the Short Sale Business Manual.  This publication provides the legal disclosures demonstrated to be required from the many lawsuits around the country that threaten agents.  As a companion to the main book Short Sales & Loan Modifications: A Practical Guide For Real Estate Agents and Investors, this manual provides all of the disclosure needed for a normal short sale real estate or investment business.

Like lawyers, doctors, accountants, and other professionals, Realtors now must carefully conduct their business in a manner that will not likely result in professional liability.  We all must carefully conduct our professional practices in this manner, and now Realtors are increasingly being held to the same standards of review.

It is not difficult to avoid liability.  I encourage you not to be fearful or discouraged.  I do encourage you, however, to use professional care in covering yourself with properly drafted legal disclosures, taking the time to carefully review each point to clients and customers, and maintain proper evidence of this level of care and attention to duty.

Ken Lawson, JD

TheLawsonGroup Mediation Services