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Top 10 Legal Risks

September 1, 2007

BY Laurie Janik

Every real estate transaction presents potential legal pitfalls for licensees. Combine an active housing market with an increasingly litigious society, and you have the recipe for lawsuits. Buyers and sellers may bring suits against brokers or agents for a variety of reasons, based on both statutory and common law.

Yet, despite the growing number of suits, licensees are found not liable in almost 70 percent of the reported cases, according to NAR’s 2007 Legal Scan: Legal Issues Facing Real-Estate Management Professionals. The Scan is based on surveys of key people in the real estate industry, as well as data obtained from case law and statutory research.

To help your members avoid legal pitfalls, provide them with educational opportunities and resources addressing these top 10 types of claims in the real estate industry:

1. Misrepresentation, the misstating of some material feature of the property, is the most common type of lawsuit members face. A closely related claim is failure to disclose, which is a failure to note some important feature of the property. Property disclosures in all categories also accounted for the second highest number of court cases between 2005 and 2006. Most commonly misrepresented property features are the foundation and structural features (20 percent of lawsuits). Other commonly alleged misrepresentations involve property boundaries, roofs, and termite problems.
The number of statutes and regulations addressing property condition disclosures rose by 31 percent in 2005 and 2006, which should reduce litigation, especially against real estate professionals.

Limit misrepresentation liability by using seller disclosure forms filled in by the seller (rather than the broker). Brokers should also document and disclose their sources of information and encourage the use of other professionals, like inspectors and attorneys, whenever appropriate. Also, avoid making predictions such as, “This well will never run dry,” or, “The value of this house is sure to appreciate.” They’re recipes for disaster.

2. Breach of fiduciary duty lawsuits accounted for the largest single number of residential real estate-related court cases reported in the past two years. Many of them involved claims of undisclosed dual agency. NAR’s Code of Ethics mandates agency disclosure, but laws governing the method and timing are different in each state. The broad common law agency duties are so poorly defined that many state associations have lobbied for statutory duties (written into law), allowing brokers to know exactly what duties they owe and what consumers can expect.

Limit fiduciary duty liability by providing continuing member education on your state’s current laws on agency disclosure and by promoting the use of agency disclosure forms.

3. Fair housing violations account for the third highest number of reported decisions and can result in costly judgments. Since state and local laws can add protected classes (such as gays and lesbians) to the federal discrimination laws, things can get tricky.
In recent years, some suits have been brought against MLSs because their members included remarks in listings displayed on the Internet, such as “no children” or “perfect for empty nesters,” that allegedly violated fair housing law. Publishing such information on the Internet carries the same liability for the broker as does publishing it in print.

Limit fair housing liability by educating and training members about the fair housing laws. Also, encourage the documentation of all services offered or provided so that everyone is sure to get equal treatment.

4. Antitrust laws are intended to prevent unreasonable restraints of trade. Examples of antitrust violations that impact real estate brokers are price fixing and group boycotts. Competing brokers should never engage in discussions of their commission rates or compensation they offer cooperating brokers or their sales associates. Brokers must also avoid conduct that could lead to allegations that they agreed to refrain from doing business with a certain competitor.

Limit antitrust liability by adopting an office-wide policy addressing antitrust compliance regarding such issues as discussing commission rates with potential sellers. In addition to educating all sales associates about the compliance policy, offices should also avoid preprinting commission rates on standard form contracts or in advertising.

5. Lawsuits involving broker advertising can involve affinity programs, For Sale sign bans, and Internet advertising. Advertising must always comply with state license law and regulations as well as the Realtor® Code of Ethics. License laws frequently address requirements such as indicating the broker’s status as a licensee in each ad. The 2007 Legal Scan shows that technology issues are also growing in importance, particularly in with regard to privacy, spam, and electronic solicitation while regulation of Internet advertising continues to increase.

Limit advertising liability by ensuring that all ads are truthful and not misleading. Practitioners must also comply with any special rules adopted in their state that govern the advertising of property or the promotion of real estate services on the Internet.

6. The status of salespeople as employees or independent contractors can impact a broker’s liability. It’s estimated that 90 percent of brokers use independent contractors as their sales force. Although federal laws make it easier for real estate salespeople to qualify as independent contractors for purposes of federal tax law, state law may still be based on the common law that governs state income taxes, worker’s compensation, and unemployment compensation.

According to the 2007 Scan, employment cases increased 12 percent in 2005 and 2006. Although many federal employment laws do not apply to real estate agents working as independent contractors, it’s interesting to note that the largest real estate-related award was $4.16 million to a sales associate in a case alleging sexual discrimination and harassment.

Steps to limit employment liability include educating members on your state law requirements to qualify as an independent contractor and advocating the use of written agreements between brokers and their sales associates.

7. Environmental issues, such as asbestos, lead-based paint, mold, carbon monoxide, and groundwater contamination, can turn into lawsuits when a broker fails to recommend that the buyer or seller retain an expert for evaluation. Lead-based paint disclosure laws require that brokers advise buyers or tenants of any known lead-based paint hazards, provide purchasers or tenants with a federally approved lead-based paint hazard information pamphlet, and include specific language in all sales contracts or leases. In addition, purchasers are given 10 days to inspect for lead-based paint.

To limit environmental liability, provide member education refreshers on this topic and make sure you know what the common environmental issues and hazards are in your area. Brokers should monitor their salespeople’s compliance with the lead-based paint disclosure and documentation requirements.

8. Real Estate Settlement Procedures Act (RESPA) violations occur when mortgage brokers, lenders, title services, or real estate brokers give or receive anything of value in return for referrals. Although most referral fees are prohibited, the law expressly permits referral fees between two real estate brokers. Also, real estate brokers must disclose if they have an ownership in another service provider, such as a lender or insurance company to which they’re referring a consumer.

More than 35 percent of the respondents believe RESPA issues, including kickbacks and affiliated business arrangements, are significant sources of current disputes. Fifty-four percent believe that the disclosure of settlement costs is at least moderately significant today.

Steps to limit RESPA liability include continuing education, a thorough understanding of the law’s prohibitions, and strict compliance if any referrals are made among affiliated service providers.

9. Unauthorized practice of law spawns lawsuits whenever brokers or salespeople give out legal advice. Generally speaking, courts have said that brokers are permitted to complete the blanks of a preprinted sales agreement that has been approved by an attorney, but may not draft documents or give legal advice.
In the past, many Realtor® associations would meet regularly with the local bar association to determine the appropriate role of the broker and the lawyer in a real estate transaction. But the U.S. Justice Department came down hard on these types of alliances, saying that their purpose was to divide up the marketplace in violation of the antitrust laws. So if your association still addresses this subject with a local bar association, you may want to consider rescinding it.

Steps to limit legal advice liability include knowing the parameters of what brokers may and may not do in your state, and having members urge their clients to hire a lawyer if they have any legal questions.

10. Americans With Disabilities Act (ADA) violation suits have been brought against brokers who fail to do what is “readily achievable with reasonable effort and expense” to serve clients with disabilities. This includes making sure that the broker’s office, which is a public accommodation, is equipped with ramps, curb breaks, and other considerations. Some lawsuits involving the ADA also deal with employment provisions (which apply to offices with 15 or more employees) and brokers who discriminate against a qualified person with a disability.

Steps to limit ADA liability include educating members on their responsibilities under the act.
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Laurie Janik is NAR’s Senior Vice President of Law & Policy and General Council. She can be reached at ljanik@realtors.org.