The current real estate market has caused an increase in activity for real estate professionals. With this increase in activity, there has also been an increase in litigation against real estate agents, brokers, appraisers, home inspectors, mortgage specialists and other real estate professionals across the country.
Likely causes of actions include claims for breach of the standard of care (i.e., professional negligence), breach of contract, negligent and intentional misrepresentation, deceptive trade practice, consumer fraud and other state-specific causes of action. Often, not only will real estate professionals have to defend a lawsuit, but they may also find themselves in a position where they may have to defend their license before their state licensing agency. The following is a list of emerging trends in suits against real estate professionals and the ways in which real estate professionals can guard against such claims.
1. Failing to Advise on a Contract
Whether representing a potential buyer or seller, it is important that real estate professionals identify issues or problematic clauses in contracts before contracts are signed. If a buyer or seller notices a problem after the transaction is complete, then the likelihood that he/she will sue to recoup these damages increases.
An example can be seen in a recent transactional broker professional negligence case out of Colorado in Gibbons v. Ludlow, 2013 CO 49; 304 P.3d 239. In this case, the sellers of property brought an action against their real estate brokers who had been involved in the real estate transaction from the start. The brokers failed to advise the sellers that the purchase agreement from the buyer of their property contained an infrastructure credit provision, which permitted the purchaser a credit of more than $1.6 million against the purchase price at closing for infrastructure costs. After closing on the sale, the sellers filed suit against the brokers to recover the credit, alleging that the brokers were negligent for failing to specifically point out this important provision. Ultimately, the brokers were dismissed on summary judgment, but only after they incurred substantial litigation costs. Advising the buyers as to this provision at the start could have prevented litigation from the onset or served as a defense.
2. Misrepresenting the Value of a Property
Misrepresenting the value of a property has become an increasing area of professional liability for real estate appraisers. Appraisers are required to appraise properties in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP). When appraisals for property fail to adhere to the standards set forth in USPAP, this becomes a potential area for litigation. A recent example can be seen in Illinois in the matter of FDIC v. Masarsky, 2013 U.S. Dist. LEXIS 122806. In this case, the defendant appraisers were retained to prepare written appraisals for mortgage lending purposes. The appraisals were used to facilitate a mortgage refinance loan secured by Colonial Bank. FDIC was the receiver for Colonial Bank.
In reliance on the appraisals, Colonial funded the loan, which was secured by the property. After the borrower defaulted, the FDIC alleged that it subsequently discovered that the appraisals omitted material information regarding the completion of the property and used inappropriate properties as comparable sales. The FDIC alleged that these misrepresentations resulted in an inflated appraised value for the property and a loan that was severely under-secured. The FDIC alleged that had the true value of the property been known, the loan would not have been funded.
The FDIC filed a complaint against the appraiser that, in part, relied upon the allegation that the appraiser did not follow the USPAP guidelines and prevailing industry practices. The defendant appraisers were able to get some of the counts dismissed, but claims premised upon negligent misrepresentation were not dismissed. The negligent misrepresentation claim was based in large part on the alleged appraisers’ failure to follow the USPAP’s guidelines. Appraisers can defend these types of claims by following the standards set forth in USPAP in explicit detail and documenting their compliance in the appraisal reports.
3. Exaggerating the Features of a Property
When facilitating a sale or purchase, agents/brokers must be honest about the features of a property. Over-inflating features in a property and/or exaggerating the qualities of a property can become problematic when the buyer moves into the property and feels misled because the property does not have the features that it was advertised to have at the time of sale. Agents/Brokers should make certain that any advertisements concerning property listings are accurate and not exaggerated. Agents/Brokers should also keep copies of advertisements, listings, emails and other related notes in their file for the time period required by state law in order to defend against these potential claims should litigation ensue. Maryland requires that agents/brokers keep their file for no less than 5 years.
4. Discovering Property Damage
Like Appraisers, licensed home inspectors also face similar claims of professional negligence. These claims typically center on allegations that the home inspector failed to conduct the inspection in a thorough or workmanlike manner or to report defective conditions in the property. Home inspectors should not only conduct a thorough inspection, but document every aspect of their inspection in accordance with the state law/licensing division. It is also prudent to identify areas of the property that were not inspected and document why such an inspection did not happen. Most important, home inspectors should provide a contract before performing work and include a limitation of liability clause. State laws vary on the enforceability of these clauses. Notwithstanding, it is a helpful clause to include in the contract. In Maryland, limitation of liability clauses, are generally permitted in contracts and enforced by the Court.
Other protective measures include requiring the presence of the purchaser at the inspection and clearly documenting all aspects of the inspection, including: the start and stop time, areas inspected, findings, and, if areas cannot be inspected due to weather conditions and the like, documenting these facts as well.
This list is not exhaustive. It seeks to show some of the trends that we have seen develop in recent malpractice claims against real estate professionals across the country.