Realtor Risk Management: 10 Practical Tips to Help Realtors Manage Litigation Risk
Published:
June 20, 2016
Author(s):
Real estate vendors and purchasers have high expectations of their realtors – and they don’t often hesitate to pursue legal action against their realtor when something unexpected happens. And while realtors must have errors and omissions insurance that covers many of these claims, more claims means higher premiums, so both realtors and their insurers have a stake in managing risk of litigation against realtors.
Obtaining and communicating information is one of the realtor’s key objectives because it allows the realtor to protect her client’s interests. But while there are many sources of litigation between vendors or purchasers and their realtors, claims against realtors by their clients generally arise from a gap in that information: a vendor or purchaser alleges that the realtor failed to communicate known information, to ascertain information, to make further recommendations or warnings based on information or communicated false information. The legal basis for these claims is typically negligence (including negligent misrepresentation or misstatement), breach of contract or fraud (when the realtor allegedly withholds or conceals information for her personal gain).
It’s impossible to prevent a disgruntled vendor/purchaser from filing a claim against a realtor. And while what the law requires a realtor to do in any particular case will depend on the specific circumstances, there are some general steps that realtors can take to manage – and minimize – the risk of being sued. Here are 10 practical tips to help realtors minimize their litigation risk.
1. Write It Down
A realtor should always document her efforts throughout the real estate transaction, including the information they’ve received and shared, any independent investigations completed to obtain information, and their recommendations to their client.
2. Know Your Place
The realtor should know their place in the transaction, starting with a solid understanding of the Canadian Real Estate Association (CREA) professional standards for realtors (the CREA Realtor Code). They should also know – and respect – their limitations: they should not opine on issues that fall outside of their expertise.
3. Let the Client Choose the Expert
When an expert is required for clarification of a potential problem with the property, the client (vendor or purchaser) should always be responsible for choosing, retaining and communicating with the expert. If the realtor provides referrals for experts, they should, to the extent possible, give the client more than one option and ensure they appropriately identified the expertise that’s required. And this applies equally to home inspectors.
4. Make Fundamental Recommendations
Whether the realtor is representing the purchaser or the vendor, the realtor should know the property listed. And there are some fundamental recommendations the realtor should make to their client depending on which party they represent.
Purchaser Agent. When representing the purchaser, the realtor should:
- Advise their client of any known issues with the property and its surroundings and recommend obtaining a property condition statement (PDS) and a property inspection.
- Recommend the client’s careful review of the PDS.
- Recommend requesting clarification with respect to any problematic issues outlined in the PDS along with supporting documentation, if available.
- Recommend obtaining an expert opinion about potential problematic issues.
Vendor Agent. When representing the vendor, the realtor should:
- Fully explain to their client the obligation of truthful and complete disclosure when a PDS is required.
- Not complete PDS for the client or direct the client how to answer the questions.
- Advise their client if they have reason to believe the information in the PDS is incorrect and document any such discussions.
- When conditions change, recommend the vendor complete an updated PDS.
- Recommend property appraisal when value of property is not easily determined through a current market analysis.
5. Beware of Possible Structural Defects
If there was a home inspection, the inspector won’t always be able to identify structural issues – but they might identify minor problems that could suggest structural issues. The realtor and their client should carefully consider the potential impact of these minor problems down the road. If the purchaser’s realtor learns, before closing, that there is or was cracking in the foundation walls or floor or of other issues that might be related to a structural defect, they should share that information with their client and recommend further investigation by an expert. Where the purchaser requests a PDS from the vendor, if the vendor’s realtor is aware of a prior, current, or potential structural issue, they should advise the vendor to provide a clear and complete explanation of the problem, any remediation work completed and the current status. If remediation work was completed, they should recommend disclosing any available supporting documentation. In a dual agency situation, the realtor must communicate to the purchaser all known issues with the property and request all available documentation from the vendor on the purchaser’s behalf.
6. Plug Water Infiltration, Leaks & Damage Issues
The realtor should follow the same steps as in the case of possible structural defects. In addition, the purchaser’s realtor should also recommend requesting information about drainage issues. If an expert is required, an appropriate expert could be an engineer, a foundation specialist, a plumber or a fire and water restoration company.
7. Ascertain & Investigate Other Defects
The realtor acting solely for the purchaser should recommend a thorough review of the home inspection report and obtaining a PDS to ascertain any further investigation that’s required. Not all defects or potential defects require expert attention; however, it’s always best for the realtor to err on the side of caution and make the recommendation. The discussions regarding defects or potential defects with clients and the recommendations provided should be well documented.
8. Deal With Mistakes in Boundaries or Title
Where there are or could be mistaken property boundaries or a mistake in title, whether the property is vacant land or not, the purchaser’s realtor should recommend obtaining documentation evidencing title to the property, information regarding encumbrances (for example, right of way, leaseholds, and so on) on the property and retaining a surveyor if there’s any doubt about the property boundaries.
9. Properly Value Property
Claims over improper valuation of the property come up when the client alleges their realtor was negligent in their assessment of the property’s market value. A vendor might assert such a claim if they believe their realtor’s recommendations for the listing price, and ultimately the selling price, were inappropriate and caused them a loss of potential profit; a purchaser in a dual agency agreement with their realtor could make a similar claim against the dual agent alleging they paid too much for the property. Realtors acting for vendors may wish to ask their clients for copies of any appraisals available for the property before completing a current market analysis; realtors acting for purchasers should recommend requesting copies of any and all available appraisals for the property. A realtor should complete the current market analysis (CMA) and inform their client, whether vendor or purchaser, on it. When there’s uncertainty about the property’s market value, the realtor should recommend a property appraisal.
10. Take Due Care in a Dual Agency
A realtor contemplating becoming a dual agent should fully explain the consequences of a dual agency relationship to both the purchaser and vendor before they enter the dual agency agreement, and endeavour to execute the dual agency agreement before the potential purchaser makes an offer. And remember: realtors under a dual agency agreement are subject to a heightened obligation of full disclosure of information relating to the transaction and the property.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Insurance Team to discuss how to avoid – or deal with – legal real estate claims.
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