Top 10 Legal Issues Facing Brokers

NAR attorney shows you how to stay on the right side of the law.

March 1, 2000

Every real estate transaction presents potential legal pitfalls. Buyers and sellers may bring suits against their brokers or agents, based on both statutory and common law, for a variety of reasons, including misrepresentation or nondisclosure of property conditions, breach of fiduciary duty, and unlawful discrimination, to name a few.

Combine the strong housing market with an increasing litigious society, and you have the recipe for lawsuits. Yet, despite the growing number of suits, licensees are found not liable in almost 75 percent of the cases, according to a new report by the NATIONAL ASSOCIATION OF REALTORS®' Legal Affairs.

To avoid legal pitfalls familiarize yourself with these 10 types of claims and how to avoid them.

1. Misrepresentation is by far the lawsuit that brokers face the most.

In 1998, 57 percent of the lawsuits brought against practitioners (insured under the NAR-endorsed errors and omissions program) were for misrepresentation, and 12 percent were for the close cousin of misrepresentation, the failure to disclose. (Misrepresentation is the misstating of some material feature of the property; failure to disclose is just flat out not revealing some important feature of the property.)

Most commonly misrepresented are the foundation and structural features (20 percent of lawsuits). Other misrepresentations involve property boundaries, the roof, and termite problems.

Commonly omitted disclosures include easements, renovating without a permit, environmental problems, and title problems.

Misrepresentations come in three types: innocent, negligent, and fraudulent. Negligent misrepresentations include failure to disclose significant property flaws out of ignorance; fraudulent misrepresentation is purposefully hiding a property flaw or feature to make the sale.

If you receive property information from a third-party source, attribute the information to that source, saying, for example, "According to the seller, the roof is three years old." To be sued for misrepresentation, the misstatement has to involve a material fact and not just your opinion. Material facts are those that a reasonable purchaser would rely on in making a purchase.

The courts have told us that you may rely on statements that the seller makes to you, unless you have reason to doubt that what the seller says is true. Some states, such as California, require that you not only disclose what you know but that you also conduct a reasonable visual inspection of the property and disclose what that inspection reveals.

To limit misrepresentation liability: Use, and ensure your salespeople use, seller disclosure forms (and be sure that the seller fills out the form). You should document sellers' sources of information and encourage the use of other professionals, such as inspectors and attorneys, whenever appropriate. 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. Agency problems or breach of fiduciary duty

These lawsuits most frequently arise when a problem with a transaction causes one of the parties to seek legal advice and the lawyer asks, "Well, who was representing you?" These cases account for about 10 percent of suits against salespeople and brokers.

Many of the suits involve 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.

To limit fiduciary duty liability: Take continuing education on your state's current laws on agency disclosure and promote the use of agency disclosure forms.

3. Fair housing

Violations account for only 1 percent to 2 percent of litigation but can result in costly judgments. This area is also tricky, since state and local laws can add protected classes (such as gays and lesbians) to the federal discrimination laws.

If sellers don't want to sell to someone of a certain ethnic background or race, you can't afford to take on that business. Testing is a common technique used to detect steering or other fair housing violations. Although it takes up your time in working with buyers who have no intent to purchase a home, the courts have said that testing is lawful.

In recent years, some suits have been brought against MLSs because their members included remarks in Internet listings that violated the fair housing law, such as "no children" or "perfect for empty nesters." Publishing such information on the Internet carries the same liability as publishing it in print.

To limit fair housing liability: Take education and training about the fair housing laws. Document everything so that everyone is sure to get equal treatment.

NAR produces a model equal services report form (one for sales and one for rental) that's a strong tool to use against a claim of discrimination.

4. Antitrust

These laws are intended to prevent unreasonable restraints of trade. Examples of antitrust violations that impact you are price fixing and group boycotts. Competing brokers should never engage in discussions of their commission rates or the amount of compensation they offer cooperating brokers. You must also avoid conduct that could lead to allegations that you agreed not to do business with a certain competitor.

To limit antitrust liability: Adoptan officewide policy that addresses such issues as discussing commission rates with potential sellers, and education of all sales associates with respect to antitrust compliance policy. Avoid preprinting commission rates on standard form contracts or in advertising.

5. False or misleading advertising

These lawsuits can also address affinity programs, For Sale sign bans, and Internet advertising—a hot topic now.

Advertising must always comply with state license law or regulations as well as the REALTOR® Code of Ethics. Licensee laws frequently address requirements such as indicating the broker's status as a licensee in each ad. The Code of Ethics (Article 12) mandates that REALTORS® be careful at all times to present a true picture in their ads.

Recently, real estate commissioners have been looking closely at Internet advertising. Several states have adopted new rules to govern advertising by licensees on the Internet, including the use of e-mail and bulletin boards.

To limit advertising liability: Assure that all ads are truthful and not misleading. Comply with any special rules adopted in your state that govern the advertising of property and the promotion of real estate services on the Internet. NAR has partnered with the Newspaper Association of America to develop guides to effective advertising.

6. Salespeople's employment or independent contractor status

It's estimated that 90 percent of our industry's brokers use independent contractors as their sales force. In 1982 the federal government passed laws making it easier for real estate salespeople to qualify as independent contractors for purposes of federal tax law, but state law may still be based on the common law that governs state income taxes, worker's compensation, and unemployment compensation.

To limit your employment liability: Educate yourself about your state law requirements regarding independent contractor status, use written agreements between you and your sales associates, and create an employee handbook.

7. Environmental issues

Issues such as asbestos, lead-based paint, and groundwater contamination, can turn into lawsuits when a broker fails to recommend persons with the expertise to evaluate those hazards. Lead-based paint disclosure laws require that you advise buyers or tenants of any known lead-based paint hazards, provide purchasers or tenantswith a federally approved lead-based paint hazard information pamphlet, and include specific language in all sales contracts or leases.

In addition, purchasers receive 10 days in which to inspect for lead-based paint. The Environmental Protection Agency can inspect your records to assure that you comply with the regulations.

To limit environmental liability: Stay educated, know what the common environmental issues and hazards are in your area, and compile a list of local environmental inspectors and resources to give to their customers. Also, monitor salespeople's compliance with the lead-based paint disclosure and documentation requirements.

8. Real Estate Settlement Procedures Act

These violations occur when mortgage brokers, lenders, title services, or real estate brokers give or receive anything of value in return for referrals. RESPA is designed to inform homebuyers about the costs of closing and eliminate kickbacks to settlement service providers (including real estate brokers) for referrals.

Although most referral fees are prohibited, the law expressly permits referral fees between two real estate brokers. Also, you must disclose if you have ownership in another service provider, such as a lender or insurance company to which you're referring a consumer. RESPA is in flux, and NAR is pushing to get it modernized and amended.

To limit RESPA liability: Take continuing education and understand the law's prohibitions and strict compliance if any referrals are made among affiliated service providers.

9. Unauthorized practice of law

This spawns lawsuits whenever brokers or salespeople provide legal advice. Article 13 of the NAR Code of Ethics states that "REALTORS® shall not engage in activities that constitute the unauthorized practice of law," which begs the question, What is the unauthorized practice of law?

The courts have tried to strike a balance in their definition and take public policy into consideration. They don't want the public damaged by unskilled practitioners, but they'll look at whether it's in the public interest to allow brokers to engage in certain activities, such as drafting clauses in legal documents. 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. You may not draft documents or give legal advice.

In the past, to determine the appropriate role of the broker and the lawyer, NAR would sit down with the American Bar Association, but the U.S. Justice Department came down hard on that alliance, saying that it was dividing the marketplace. So if your association still has an agreement with the local bar association, you may want to consider rescinding it.

To limit legal advice liability: Know the parameters of what you may and may not do in your state, and urge clients to hire a lawyer if they have legal questions.

10. Americans With Disabilities Act

These violations have been brought against brokers who fail to do what's "readily achievable with reasonable effort and expense" to serve clients with disabilities. That includes making sure that your office, which is a public accommodation, is equipped with ramps, curb breaks, and other considerations to allow a disabled person to access the building. Some lawsuits involving the ADA also deal with employment provisions--which apply to offices with 15 or more employees--and brokers who discriminate against qualified persons with a disability.

To limit ADA liability: Educate yourself about your responsibilities under the act.

Laurie K. Janik was general counsel for the NATIONAL ASSOCIATION OF REALTORS® from 1987 to November 2013.

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