Realtor Risk Management: 10 Practical Tips to Help Realtors Manage Litigation Risk
June 20, 2016
By Benoit Arsenault, Lawyer at McInnes Cooper
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.
- Write It Down. A realtor should always document her efforts throughout the real estate transaction, including the information she’s received and shared, any independent investigations completed to obtain information, and her recommendations to her client.
- Know Your Place. The realtor should know her place in the transaction, starting with a solid understanding of the Canadian Real Estate Association (CREA) professional standards for realtors (the CREA Realtor Code). She should also know – and respect – her limitations: she should not opine on issues that fall outside of her expertise.
- 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, she should, to the extent possible, give the client more than one option and ensure she appropriately identified the expertise that’s required. And this applies equally to home inspectors.
- 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 her client depending on which party she represents. When representing the purchaser, the realtor should: advise her 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; and obtaining an expert opinion about potential problematic issues. When representing the vendor, the realtor should: fully explain to her 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 her client if she has 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.
- Beware of Possible Structural Defects. If there was a home inspection, the inspector won’t always be able to identify structural issues – but she might identify minor problems that could suggest structural issues; the realtor and her 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, she should share that information with her 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, she 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, she 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.
- 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.
- 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.
- 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.
- Properly Value Property. Claims over improper valuation of the property come up when the client alleges her realtor was negligent in her assessment of the property’s market value. A vendor might assert such a claim if she believes her realtor’s recommendations for the listing price, and ultimately the selling price, were inappropriate and caused her a loss of potential profit; a purchaser in a dual agency agreement with her realtor could make a similar claim against the dual agent alleging she 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 her client, whether vendor or purchaser, on it. When there’s uncertainty about the property’s market value, the realtor should recommend a property appraisal.
- 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 this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
© McInnes Cooper, 2016. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
- Share with others
- Stay informed with our legal updates by subscribing.