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Top Legal Risks Members Face Today

October 25, 2013

With the real estate industry re-energized with positive movement forward, members need to be reminded of the most common—and some emerging—legal pitfalls and how to avoid them.

To help your members navigate the murky waters of this unique time in the U.S. housing market, NAR offers its biannual Legal Scan, detailing the most common types of claims real estate professionals have found themselves entangled in during recent years.

The Legal Scan surveys key people in the real estate industry and compiles data obtained from case law and statutory research. Legal disputes related to agency continue to be a prominent issue, while technology and social networking have emerged as new top concerns. The good news is that real estate professionals saw an almost 10 percent decline in litigation over the previous scan in 2011. Plus, in the 496 cases where liability was determined, agents and brokers were found not liable in more than 73 percent of cases, a stat that remained unchanged from the 2011 study.

Here are the top 10 legal issues real estate professionals are facing, in order of prominence, according to the 2013 Legal Scan.

Breach of fiduciary duty lawsuits, as in previous years, accounted for the largest single number of residential real estate-related court cases, although in the cases where a determination was made, licensees were found liable only 40 percent of the time. This topic generated a significant number of court decisions (a 29 percent increase over 2011 in case law and jury verdicts) focusing on not only breach of fiduciary duty but also undisclosed dual agency and conflicts over the duties owed to a customer by a buyer’s representative.

For years, state REALTOR® associations have fought for more statutes detailing exactly which duties members owe and what consumers can expect. The 2013 Legal Scan revealed a 34 percent increase in statutes and regulations addressing this issue. For example, Oklahoma no longer defines or provides for transaction brokerage, and it has done away with the common-law agency duties in favor of specific statutory duties. Arkansas enacted a statute describing agency relationships and duties; it provides that the common law of agency applies to relationships between licensees and clients, as supplemented by the statute.

Property condition disclosure and “as is” clauses are an ongoing source of disputes and the second-most common legal issues members face. Given the nature of the market, it’s not surprising that survey respondents said short sales and sales of bank-owned properties were identified as the most significant areas of concern.

For example, in an Ohio case, a bank-owned ­property was sold “as is,” and a flood damaged the property shortly after the buyers moved in. The court found in favor of the seller’s representative, suggest­ing that because the bank had never lived on the property, it wasn’t responsible for disclosing information about the flood risk, and because the property had been sold “as is.”

The 2013 scan revealed a number of new and amended statutes and rules affecting a licensee’s duty to disclose information about the condition of a property. For example, Virginia enacted a law providing immunity to real estate licensees who repeat false information provided by a client, governmental entity, or third party who obtained the false information from a governmental entity, provided the licensee does not have actual knowledge that the information was false. Missouri enacted a law providing that licensees are generally immune from statements made by third-party experts about the condition of the property.

Instances in which parties claimed a real estate practitioner’s actions violated the state deceptive practices or consumer protection statutes accounted for 92 cases, a slight decrease from the 2011 Legal Scan. Of the cases in which liability was determined, the decision favored the real estate professional 77 percent of the time. Most state deceptive trade practices statutes include broad restrictions on “deceptive” or “unfair” trade practices. These laws do not require that the person committing an act of deception have the intent to deceive, merely that the party have the capacity to deceive or commit an unfair trade practice. If a business or individual has this capacity or tendency to deceive, that business or individual may be ordered to cease and desist the deceptive or unfair practice. Many of these cases involved property condition disclosures. In one case, DePompe v. Weichert REALTORS® Inc., a New Jersey court found that a broker can be liable under a consumer-fraud statute. The seller, based on information from a third-party, stated that the property was not in a flood zone, but the buyer later uncovered an updated report placing the property in a flood zone.

RESPA, the Real Estate Settlement Procedures Act, which regulates real estate industry referrals and kickbacks, did not account for a significant source of disputes (64 cases addressed kickbacks, which was a substantial decrease from the 2011 Legal Scan; of the 24 cases where liability was determined, 23 were decided in the real estate professional’s favor). However, respondents identified this issue as among the top three areas in which they would want more training. Specifically, there is a significant need for training regarding affiliated business arrangements. Respondents know there is a great deal of regulation but believe they don’t have enough education on what constitutes a violation.

Frivolous lawsuits costing brokers time and money to settle continue to cause headaches. Respondents believe that these cases are driven by the plaintiff’s emotions and their search for the deep pockets of brokers and their insurance. The time and expense of defending these types of suits often leads brokers to settle. More than 77 percent of the survey respondents believe additional training is needed on how to prevent frivolous lawsuits.

Commission disputes and procuring cause are still a source of major conflict. Over the past two years, this may be largely due to the economy and the tight housing market in many areas. The issue of procuring cause continues to be a problem, particularly as the geographic reach of listings expands due to the growth of regional MLSs and national listing aggregators. This area was the most common source of disputes between licensees. It’s another excellent topic on which to offer training to your members.

Technology issues were not a significant source of disputes; however, survey respondents believe technology issues could become more contentious in the future. Members are asking for training in this area, specifically about social networking and state Internet advertising rules. States have begun adopting rules addressing Internet advertising by real estate agents and have also begun addressing licensees’ use of social networking platforms such as Facebook, LinkedIn, and Twitter, as well as blogs. A few states, including New Hampshire and Ohio, have even begun regulating licensees’ use of social-networking media by, for example, requiring a direct link from the particular electronic platform to a rule-compliant Web page display. Some state Internet advertising rules require advertising the state where the broker is licensed.

With the ever-evolving and increasing use of technology in real estate professionals’ business, whether to market properties or to promote their services, training on this issue is paramount. Respondents said real estate agents are using technology without an understanding of or appreciation for the legal risks it poses.

The last three issues—antitrust (or commission rate setting), third-party liability, and fair housing—were not revealed to be a significant source of disputes but are areas where real estate professionals expressed a desire for more training. Third-party liability was identified as an area of growing concern for licensees, especially regarding appraisers and inspectors. Twelve cases addressed appraiser liability and only one court found the appraiser liable. As for inspectors, respondents to the scan said legal action against inspectors is frequently used as a catch-all for property condition disputes. The four cases where a determination was made were found in favor of the inspector.

The NAR Legal Scan is an excellent view of the landscape in which your members work. It provides valuable insight into the issues they face as they conduct business. Your members have voiced their concerns and will look to you to help provide training on the hot issues facing the real estate industry. The full 2013 NAR Legal Scan is available as a free resource for you and can be found on the Law, Ethics and Policy page on REALTOR.org.

Lesley Walker is associate counsel at the NATIONAL ASSOCIATION OF REALTORS®. Contact her at 312-329-8834 or lwalker@realtors.org.