RESPA Worries

December 1, 2007

Real estate practitioners see minimum service issues and stepped-up RESPA enforcement becoming more problematic for the industry in the next two years. At least that’s the opinion of practitioners surveyed for the NATIONAL ASSOCIATION OF REALTORS®’s 2007 Legal Scan: Legal Issues Facing Real Estate Professionals.

Survey participants expect RESPA issues to focus on affiliated business relationships, such as company-owned mortgage and title services, and on kickbacks. Other legal issues that may spark more suits in the next 24 months, according to those surveyed, include Internet advertising, commission disputes, and privacy issues ranging from spam and do-not-call laws to identity theft.

The Legal Scan, which this year features a new e-book format with expanded analysis of legal issues, tabulates how often key real estate issues ended up in court or in regulatory disputes over the past two years. It also looks forward by surveying key contacts, including members of NAR’s Risk Management and Professional Standards committees, attorneys, real estate educators, and members of a REBAC advisory group.

Looking back over the past two years, agency — specifically breach of fiduciary responsibility by agents and issues surrounding dual agency and buyer’s agency representation — accounted for the largest number of residential real estate–related court cases, according to the Legal Scan.

Employment cases also increased in 2005 and 2006, with cases growing by 12 percent. Although many federal employment laws don’t apply to real estate practitioners working as independent contractors, the largest real estate–related award reported by the Legal Scan was a $4.16 million judgment in a sexual discrimination and harassment case (Klein-Cadotte v. Barker & Little Inc., 2006).

Another top award, totaling $1.6 million, also occurred in an employment case—Winston v. Meridian Commercial Inc. In that dispute, a dismissed agent sued when the brokerage denied her access to her client lists and other proprietary information. Despite those two large awards, few real estate brokerage cases resulted in damage awards of more than $500,000.

Although it wasn’t of the highest concern to interviewees, another issue that may result in more legal disputes in the future is property condition disclosure. The number of statutes and regulations addressing property condition disclosure rose by 31 percent in 2005 and 2006, setting the stage for future suits. Some survey participants expressed concerns about disclosures concerning mold and methamphetamine labs. Property condition disclosures in all categories accounted for the second-highest number of court cases between 2005 and 2006, according to the Legal Scan.

Management Legal Issues

For the first time, the Legal Scan this year offers a separate analysis of property management issues. It was created in cooperation with the Institute of Real Estate Management. As in the past, property management professionals were much more likely to face a suit than those engaged in other real estate activities. Premises liability — particularly slip-and-fall accidents, conditions of a tenant’s property, and other events on a property — topped the list of concerns among IREM members.

Fair housing cases, especially those focused on race and disability, saw the biggest increases — 28 percent and 31 percent, respectively — in court cases in 2005 and 2006, according to the Legal Scan. Discrimination based on both race and national origin may also rise in the future, say survey respondents, perhaps reflecting the expansion of multiculturalism in the United States.

Respondents also expect discrimination based on sexual orientation to rise in both employment and leasing over the next two years. Again, the future may mirror the past, as fair housing received significant legislative and regulatory attention in the past two years, with 44 new laws or regulations reported in the Legal Scan.

Property management has the dubious distinction of involving much higher damage awards than other real estate specialties, with 23 percent of damage awards reported in the Legal Scan reaching at least $500,000, compared with only 7 percent of awards above that figure in other real estate–related cases. The largest property management settlement was $9 million, awarded to a tenant who was raped in her apartment (Anonymous Female v. EPT Management Co., 2005).

The case focused on the fact that although numerous crimes had occurred at the property, the management company had failed to take steps to improve security. Three of the five top damage awards — totaling $18.9 million — were the result of dangerous conditions at a property that the management company had failed to correct.

Finally, both surveys, NAR’s and IREM’s, addressed the training that respondents felt should be put in place to reduce future legal liability. Sales practitioners emphasized the need for additional training in buyer representation (68 percent favored more training) and minimum service agreements (67 percent).

They also advocated for training in dual agency, understanding fiduciary duty, and RESPA. In the property management survey, training needs focused on events on a property (54 percent favored more training), national origin discrimination (52 percent), and property condition and common areas (each 50 percent).

Although legal issues remain a source of concern and a financial burden to the real estate community, perhaps there is some good news from the 2007 Legal Scan: Approximately two-thirds of all cases against brokers and practitioners were decided in their favor.