Commercial Real Estate Law & Liability 3 Hour Continuing Education Elective Course

Commercial Real Estate Law & Liability 3 Hour Continuing Education Elective Course 1

Commercial Real Estate Law & Liability 3 Hour Continuing Education Elective Course Revised: February 16, 2005 Course Description This course explores the many ways that real estate business activities may lead to potential liability and civil actions. Section 1 deals with the types of civil actions a real estate agent may encounter as a result of brokerage duties. Section 2 addresses ways within which a real estate agent can help guard against the possibility of any of these liabilities being visited upon him or herself. Learning Objectives 1. Identify the seven examples of civil actions against real estate agents. 2. Identify the seven elements a purchaser has to establish liability against the real estate agent for intentional misrepresentation. 3. Identify the seven elements a purchaser has to establish liability against the real estate agent for negligent misrepresentation. 4. Identify the four elements a purchaser has to establish liability against the real estate agent for intentional interference with contractual obligations. 5. Identify the eleven tips on avoiding lawsuits. Classroom Course Outline I. Civil Actions 90 Min II. Break 10 Min III. Tips on Avoiding Lawsuits or Winning Them If They Are Filed 90 Min IV. 25 Question Final Examination 2

Self-Study Program If you are taking this course via Self-Study please review the following prior to beginning your program. Maximum Allowable Time To Complete Your Program: You have 3 Months to complete this Continuing Education Course. No extensions are allowed. Failure to complete your course in the allotted time will result in dismissal from the course and forfeiture of your course tuition. While we grant students three months to complete this course you are responsible for completing your course, taking and passing the final exam prior to your specific required CE renewal cycle deadline date. Begin your Course: This course consists of Chapters, Lessons or Sections. Begin your course by reading Section 1 in the text. At the end of the section complete any end of Section Review Questions presented. By completing the end of Section exams students are able to grade themselves as to how well they comprehend the section materials. When you have completed Section 1 proceed to the next Section until you have completed your reading and studies. Instructor Assistance: During your course of study contact our office if you need instructor assistance. We will provide you with an instructors name and phone number. Final Examination: Students must take and pass a 25 question final exam in order to receive credit for this course. If you have completed your reading assignments and end of chapter exercises you are eligible to take your Final Exam. Final Exam Appointments: Final Exams appointments can be make locally or with an out of town Exam Proctor. To make your exam appointment visit www.chicagorealtor.com/education and click on the RESOURCES tab and then click COURSE FORMS. Course Completion: When you successfully complete your final exam you will receive a certificate of course completion. Depending on the number of students testing at any given time we reserve the right to mail these documents to students within 7 10 working days after the date of the final exam. Failed Final Exams: If you fail your final exam you may retake the Final exam within two weeks; follow the instructions outline above for Final Exam appointments. Students failing a second time need to re-enroll and retake this course at the full course tuition. CE Compliance Reporting: IDFPR requires each licensed education provider approved to offer continuing education courses to submit to the licensing agency, on or before the 15th of each month, a report of those licensees who have successfully completed a continuing education course offered by the provider during the preceding calendar month. We will report your compliance to IDFPR on the 15 th of the month following your final exam date. Please call 312-803-4910 if you have any questions or email info@rres-online.com. Thank you. 3

Section 1 Commercial Real Estate Law & Liability Civil Actions Civil actions are probably the most common liability which one can encounter in the practice of real estate. These are actions brought by individuals who feel that they have been wronged against those individuals and companies whom they feel wronged them. Most of the civil actions are based on common law as opposed to specific statutes. Common examples of civil actions against real estate brokers include those of breach of fiduciary duty, fraud by deceit, fraud, negligent misrepresentation, negligence, breach of contract and tortuous interference with contractual rights. Breach of Fiduciary Duty The greatest threat to the financial well being of a real estate broker is a claim of a breach of fiduciary duty. Its elements are the most nebulous and subject to interpretation. Its penalties are great. It has long been held that a real estate broker or salesman has a fiduciary duty to act with the utmost good faith and loyalty on behalf of, and to act solely for, the benefit of its principal. The courts have further held that in order to perform this duty, he is obligated until the time of closing, to disclose to his principal all facts which he has or has acquired during their relationship which might reasonably affect the decisions of his principal, and conversely, he must not disclose confidential matters to third parties. If one is found guilty of breaching one s fiduciary duty to their principal, a whole host of damages are available to the successful plaintiff. His damages include any non-economic losses or injuries incurred to the present time or which will be incurred in the future; any economic losses incurred to the present time or which will probably be incurred in the future including anything of value or profit received as a result of the breach of fiduciary duty (commissions); any loss of the plaintiff s principal assets caused by the breach of fiduciary duty; any loss of profits or income which reasonably could be expected to have been earned for the plaintiff had the fiduciary duty not been breached; any loss incurred as a result of the plaintiff being subjected to liability to a third party because of the breach of fiduciary duty (attorneys fees). It is important to note that the remedies for breach of fiduciary duty are greater than any other remedies in any other common law civil cases and generally is an exclusion in errors and omissions policies. Consequently, in every transaction in which you have an agency relationship with your principal, you must be extremely cautious in dealing with your principal so as to act with the utmost loyalty to your principal and not to disclose any confidential information to third parties. 4

Fraud by Deceit (Deceit Through Concealment) The claim for deceit generally arises from a purchaser who has purchased their property and then later discovers that there is some defect in the property which they failed to inspect or which they feel was concealed from them. This type of claim frequently arises in a residential transaction but it can also arise in a commercial setting as well. The concealment must be of a material fact. If there were only minor defects, the materiality threshold would not be met. However, the question as to whether the defect is material or not is a question for the jury or the judge to decide. Another key element is knowledge on the part of a party who allegedly concealed the defect. It is not enough that the broker should have known about a defect or should have exercised diligence in looking for a potential defect through inspection of the property. A person must have actively sought to conceal the fact known to him by either covering up the truth or by preventing the other person from discovering the actual fact for him or herself. Another aspect of deceit concerns justifiable reliance. The general rule is that a person s reliance may be justified even though that person failed to make an investigation which a reasonable person might have made under the same or similar circumstances. However, a person s reliance is not justified if that person failed to make an investigation when that person knew particular facts which would have prompted a person of the same or similar intelligence, education, or experience to become suspicious and make an investigation; and circumstances were such that the person had a reasonable opportunity to make an investigation and such investigation would have revealed the actual facts. It has also been held that if a person relies substantially on their own investigation and acts upon it rather than upon assuming that the other person would not intentionally fail to disclose aspects of the property, then that person has not been deceived and his or her claim must fail. The damages in a deceit action include the difference between the market value of the property and what its value would have been had there been no material defects concealed and any other consequential damages which could be proven. In addition, in certain situations such as wanton and willful conduct or fraud, the court could award punitive damages. Deceit, Fraud (Intentional Misrepresentation) A real estate agent, by his statements, either in writing or in conversation with a purchaser, can be held liable for a false representation. In order to establish his liability, the purchaser has to establish all of the following elements: 1. The agent made a false representation of a past or present fact. 2. The fact was material. 3. The broker knew that the facts represented were either false, or the agent was aware that he did not know whether it was true or false. 4. The agent made the statement with the intent that prospective purchasers act in reliance on this representation. 5

5. The purchaser did rely on the representation. 6. The purchaser s reliance was justified. 7. The reliance caused damage. There are a number of important factors pertaining to this. The salesman s liability on a claim of fraud depends only upon whether the person receiving the information was actually deceived. It does not matter whether that person is an ordinarily prudent and intelligent person. If the person was deceived, the agent is liable. The provision in the contract to the effect that each party to the agreement has inspected the property and does not rely on any representations concerning it made by the broker or by the agent, or on any other representation, does not preclude evidence that, in fact, the purchaser or seller did not examine or inspect the property and did, in fact, place reliance on the broker s statements. A real estate agent is held liable for making statements of fact, but he is not liable for making statements of opinion unless he states, as an opinion, facts which he knows to be false or which he does not honestly believe. For example, statements of income which the property is capable of producing are held to be statements of opinion and not of fact. However, statements of opinion expressed by a real estate agent to his principal may lead to liability for the statements of opinion when they were not factual. These include such statements as to income that would be earned on property. Statements about the income producing capability of a grocery store, where the agent knew that a large supermarket with adequate parking was soon to be erected in the near proximity to the small grocery store, have been held to support a lawsuit by the purchaser against the agent. In addition, an opinion, as opposed to a statement of fact, may be treated as a fraudulent misrepresentation when it is falsely stated. Where a real estate agent knew that the buyer was motivated to enter into the purchase of property primarily by the desire to increase income, the agent s statement of net income, even though a matter of opinion, was unquestionably a material fact under those circumstances which would entitle the purchaser to recover damages from the agent. An agent may be held liable to a purchaser when he fails to state the source of his information. The purchaser is entitled justifiably, to rely on the statement as one made by the agent after the agent s own investigation. One should always disclose the source of information. When asked for information from a potential purchaser regarding income of a property, one would be well advised to write the purchasers, indicating that the statements of earnings from the property were based solely on information supplied by the seller, and disclosing that you have had no opportunity to examine the seller s books and records. Even if you disclose the seller as being the source of your statements, if you do not honestly believe them to be true, you may also be liable. One can also be liable for a statement as to income, productivity, size, zoning or other matters affecting the property if those statements are made by you negligently or recklessly, even though you do not have specific knowledge that those statements are false. In other words, if you make a statement, you will be held responsible for the accuracy of that statement, unless your source of information is specifically disclosed. 6

Your responsibility for providing information to the purchaser varies directly with the ignorance or un-sophistication of the purchaser. A widow, or a person who has had little or no business dealings, but has come into a substantial sum of money which he or she would like to invest, and who is unversed in business matters and in the intricacies of real estate transactions can justifiably place more trust and confidence on your judgment, your statements, your suggestions and recommendations. If you know that a purchaser intends to rely on the income from the property, statements about income are extremely risky. You should recommend that an accountant or a financial advisor verify this information. Some courts have construed an as is provision of the contract as being based on the knowledge which the purchaser had at that time, and if that knowledge is based on false representations or non-disclosures and the true facts are not within the purchaser s reach or ability to learn, the seller, and even the broker, remain liable. There is a well recognized rule that a person cannot contract away responsibility for his own fraud to induce the execution or performance under a contract. A 1961 decision in New York held a real estate agent liable for misrepresentation pertaining to a heating plant notwithstanding the fact that the contact stated that the purchaser had made an independent investigation and was not relying upon either the agent or the seller. The court reasoned that the broker was not a party to the contract and was therefore liable for the misrepresentation. The owner was allowed to escape liability. It is the agent s duty not to make representations exceeding his knowledge of fact. Agents have been held liable to purchasers for simply stating that a septic system was ok when in actuality the agent had no opportunity to determine the condition of the septic system. Liability can also be imposed for innocent misrepresentations. For instance, liability was imposed upon a sales agent who told a purchaser that they could heat the property for $100 per year. However, unbeknownst to the sales agent, the boiler in the furnace had a crack in it which had been artfully sealed and painted over by the prior owner. The court therefore reasoned that it was impossible to heat the house at all and that the representation by the sales agent that the purchaser was told by her that they could heat the property for $100 per year was, in fact, fraudulent. The recipient of fraudulent statements has a wide variety of remedies available to him. Those remedies include damages, rescission, reformation and enforcement of the reformed contract, specific performance, and enforcement of an actual or constructive trust. The measure of damages include the difference between the market value of the property and what its value would have been had the representation been true plus any other consequential damages proximately caused by the false representation, concealment or nondisclosure. It should be evident, if you are guilty of fraud, you can be subject to a great deal of liability and, furthermore, you may not even be entitled to a defense or reimbursement by your principal broker, nor will you likely be covered by your professional liability insurance. Negligent Misrepresentation The action of negligent misrepresentation is very much akin to an action for fraud (intentional misrepresentation). In order for a plaintiff to recover against the defendant in a claim for negligent misrepresentation, the plaintiff must prove: 7

1. The defendant gave false information to the plaintiff. 2. The defendant gave such information to the plaintiff in the course of defendant s profession. 3. The defendant gave the information to the plaintiff for the guidance or use of the plaintiff in a business transaction with a person other than the defendant. 4. The defendant was negligent in obtaining or communicating the information. 5. The defendant gave the information with the intent or knowing that the plaintiff would act or decide not to act in reliance on the information. 6. The plaintiff relied on the information supplied by the defendant. 7. This reliance on the information supplied by the defendant caused damage to the plaintiff. There are a number of important things to consider with respect to this action. There is no requirement of legal connection between the plaintiff and defendant. Also, a defendant may be liable even though the defendant did not give the information directly to the plaintiff. It is sufficient if the defendant gave the information to a third person knowing that the third person intended to supply it to, and use it to influence the plaintiff or a limited group of persons of which the plaintiff was a member. The proper measure of damages for a negligent misrepresentation causing financial loss is the out of pocket rule rather than the out of bargain rule which applies to fraud cases. Implicit in this claim is the concept of negligence. Negligence means a failure to do an act which a reasonably careful person would do, or the doing of an act which a reasonably careful person would not do, under the same or similar circumstances to protect oneself from damages or financial loss. In the context of a real estate transaction, the standard of care is defined as that degree of care which a reasonably careful person would use under the same or similar circumstances. In most instances, the standard of care would be established by expert testimony. There are a number of defenses to this action. Among those include unreasonable reliance of the plaintiff on the misrepresentations of the defendant. This unreasonable reliance would constitute contributory negligence, which the defendant has the burden of proving. In addition, that defense requires the application of an objective test. Thus, the defense applies even though the plaintiff s unreasonable reliance may otherwise have been justifiable in terms of what a person of comparable intelligence, education and experience to that of the plaintiff would have done. Mitigation of damages is also an affirmative defense but, for other reasons, it is only rarely, if ever, a complete defense. A claim of negligent misrepresentation is often stated as an alternative claim to fraud (intentional misrepresentation). The only obvious difference between the two is that the misinformation communicated was done so intentionally as opposed to negligently. Negligence Negligence is most simply stated as a deviation from your normal standard of care which results in damages to the person who was entitled to the performance of that standard of care. In addition, the damages attributable to negligence can be reduced by the concept of 8

comparative negligence. That is, if the plaintiff was himself negligent, the damages by defendants would be reduced by that degree of negligence of the plaintiff. Breach of Contract As an alternative claim against a broker who is their agent, a principal may base what is really a claim of negligence or breach of fiduciary duty under a breach of contract theory. The contract breached, of course, is the listing agreement, but the claim is normally one stated in negligence. This remedy is often difficult to utilize and should not be relied upon as a primary means of recovery against the broker unless the statute of limitations has already expired on other potential actions. Intentional Interference with Contractual Obligations In some instances a broker may be the subject of allegations that he intentionally interfered with other contractual obligations. This often times arises from other brokers or, upon occasion, from a disgruntled purchaser whose offer came in second to a competing offer after the buyer thought that his offer had been accepted. The elements are straight forward in that the plaintiff must prove: 1. The plaintiff had a contract with a third person in which that person agreed to perform certain duties (most likely convey real estate). 2. The defendant knew of the contract or had knowledge of the other facts which reasonably should have caused him to know of it. 3. With such knowledge, the defendant by words or conduct, or both, intentionally induced the third person to terminate his contract with the plaintiff or interfered with the third person s performance of the contract, thereby causing the third person not to perform the contract with the plaintiff; and 4. The defendant s words or conduct, or both, caused the plaintiff to incur damages. It should be noted that contracts which are terminable at will are not subject to this claim since either party to the contract could terminate that contract for any reason whatsoever at any time. Also, an agent may be liable to a third person for intentionally interfering improperly with a contract between that person and the agent s principal. The existence of the agency relationship is relevant in determining whether the agent acted properly. An agent abuses his or her qualified privilege if the interference is not done for bona fide organizational purposes, but is motivated by a desire to do one of the contracting party s harm. 9

Section 1 Review Quiz Please answer True or False. 1. Civil actions are probably the most common liability which one can encounter in the practice of real estate. 2. Most of the civil actions are based on common law as opposed to specific statutes. 3. Civil actions against real estate agents include breach of fiduciary duty, fraud, misrepresentation, negligence and breach of contract. 4. Breach of fiduciary duty is subject to interpretation but poses the greatest threat to the financial well being of a real estate agent. 5. In the event one is found guilty of breaching fiduciary duties to the client, damages may be awarded to the client. 6. Remedies for breach of fiduciary duty are generally not an exclusion in errors and omissions policies. 7. Fraud by deceit generally arises from a purchaser who has purchased their property and then later discovers that there is some defect in the property which they failed to inspect or which they feel was concealed from them. 8. The general rule for justifiable reliance is that a person s reliance may not be justified even though that person failed to make an investigation which a reasonable person might have made under similar circumstances. 9. The damages in a deceit action include the difference between market value of the property and what its value would have been had there been no material defects concealed. 10. The salesman s liability on a fraud claim depends only upon whether the person receiving the information was actually deceived. 11. A real estate agent is held liable for making statements of fact, but he is not liable for statements of opinion unless he knows those statements are false. 12. A statement of fact, as opposed to an opinion, may be treated as a fraudulent misrepresentation when it is falsely stated. 13. An agent may be held liable to a purchaser when he fails to state the source of his information. 14. It is the real estate agent s duty to make representations exceeding his knowledge of fact. 10

15. Negligence means a failure to do an act which a reasonably careful person would do, or the doing of an act which a reasonably careful person would not do, under the same or similar circumstances. 16. If the client is negligent, the damages assessed to the real estate agent would be reduced by that degree of negligence of the client. 17. Intentional interference can occur from a disgruntled purchaser whose offer came in second to a competing offer after the buyer thought that his offer had been accepted. 18. Contracts which are terminable at will are subject to intentional interference since either party to the contract could terminate that contract for any reason whatsoever at any time. 19. An agent may be liable to a third person for intentionally interfering improperly with a contract between that person and the agent s principal. 20. The existence of the agency relationship is relevant in determining whether the agent acted properly. Section 1 Answer Key 1. T 2. T 3. T 4. T 5. T 6. F 7. T 8. F 9. T 10. T 11. T 12. T 13. T 14. F 15. T 16. T 17. T 18. F 19. T 20. T 11

Section 2 Commercial Real Estate Law & Liability Tips on Avoiding Lawsuits or Winning Them If They Are Filed The following are specific tips which a real estate agent should follow on a frequent basis and make part of one s daily routine until it becomes a habit. Make Your Deal a Good Deal for Everybody This may sound ridiculous but the parties to the transaction who feel that the transaction was fair and reasonable generally won t engage in lawsuits pertaining to other minor issues, even if some minor mistake has been made. Consequently, the more one sided you perceive the deal to be, the more likely that there will be problems or complaints later on. When the parties engage in acrimonious debate or negotiations, this should be a tip-off that things could go wrong and you should adjust your actions accordingly. Also, if one party is pressured by financial circumstances beyond their control, they may well be searching for ways to level the playing field by gaining the tactical advantage of having a potential lawsuit against their opponent due to the actions of their opponent or their broker. Document, Document, Document Although nearly everyone stresses this fact, it is surprising how few people go to the trouble to maintain a complete and accurate file of any deal which they are working on. The following are suggestions for the maintenance of a proper deal file: 1. Salesperson Correspondence. Have the secretary photo copy the salesperson s letters for the file after they are signed. Too often the secretary photocopies the letter after it is typed but before it has been proof read and signed by the salesperson. Signed file copies are better evidence that the letters have in fact been sent, without further alteration. Everything sent out by the salesperson should be photocopied and placed in the file. 2. Incoming Correspondence. Date stamp or handwrite date of receipt on all incoming correspondence and materials received, whether by mail, personal delivery or otherwise, by salespeople. Too often it is extremely difficult to determine what did he know and when did he know it? 12

3. Phone Calls. All important phone messages should be saved and dated by day, date and year; use the message portion to summarize what was said in short telephone conversations. Make contemporaneous notes of telephone conversations. Write or dictate the memos to file setting forth the substance of longer conversations. 4. Maintenance. Obtain and file copies of fully signed documents such as proposals, leases, deposit receipts and escrow instructions. All initial and intermediate drafts of documents should also be maintained in the file to show the history and progress of the transaction. Make sure that your file contains both parties signed escrow instructions and any related documents such as title reports. 5. Transmittal and Confirming Letters. Use transmittal and confirming letters. Describe in transmittal letters specifically what is being delivered to the addressee; if there is no time to prepare a letter, make a note to file as to what was delivered, when and to whom it was delivered. Photo copy and file copies of any documents delivered to the addressee with the transmittal letter stapling the documents to the file copy of the letter. The transmittal letter should show on its face that there is an enclosure. Also show if the parties copied with the letter receive the enclosures. Use confirming letters whenever a matter of significance has been discussed. Use letter to identify sources of information, define or explain relationships, confirm understandings, place facts in dispute or allocate, limit or expand responsibilities of the parties. When making a facsimile transmission, always use a cover letter and, if your facsimile machine has the ability to confirm that the transmission was sent, staple that confirmation to the document which was transmitted. 6. Marketing Materials. Date blue-lines, proformas, site plans, etc. This helps clear the date as of which the material contained is accurate and helps show which such documents have been superseded and when. 7. Filing. Keep documents in chronological order, not loose and random in a pouch. Hole punch and fasten documents into the file so documents are not lost. Be consistent in filing methods. For example, file letters, notes and memos on the left side of the file and operative legal documents on the right side. Secretaries should be instructed and trained to index and tab the important documents so they can be easily found. Have a separate index section for names of contacts, telephone numbers and addresses. Organizational efficiency will save search time and provide feedback as to possible missing items and required follow up work. 8. The CYA Letter. Any documents or language affecting a party s legal rights prepared by you should always be accompanied by a letter recommending review of the document by the party s attorney or as appropriate, his accountant or other qualified professional. Recommendations to use other professionals such as industrial hygienists, soils engineers, architects, contractors, etc. to inspect and analyze a 13

9. Discussions with Management/Broker. You will obviously want to discuss important deal points with your broker. If there are any portions of the deal which you feel uncomfortable with or which may involve gray areas of practice and or the law, you should address those concerns by memo to your manager. If possible, you should attempt to obtain a reply in writing for inclusion in your file. This fact alone could become very important if you were sued individually and your client attempted not to defend you because the actions were outside of the scope of your employment. Disclose, Disclose, Disclose One of the most common claims against real estate brokers is either the willful or negligent non-disclosure of a material aspect of the property which is the subject of the transaction. Point out to your client that full disclosure is best for him or her since it would have the effect of preventing lawsuits against them as well. If there is a disagreement between yourself and your client as to what should be disclosed, you should immediately talk to your manager about the disclosure problem. Obviously, you have a fiduciary duty to your client which includes loyalty. You also have license law regulations regarding your duty to disclose both to your client as well as to the customer material aspects pertaining to the property. You should try to resolve your differences with your client concerning disclosure but ultimately, if after consideration you feel that this matter is so pertinent that it must be disclosed, you should either make the disclosure or terminate the listing. Avoid Inaccuracies or Misrepresentations on Promotional Brochures Every statement about the property made by you in writing or orally can be relied upon by the recipients of those statements. Consequently, it is absolutely imperative that those representations be correct. In order to make these representations as correct as possible you should: 1. Obtain owner written approval of all brochures, blue-lines, marketing materials and provide informational cc s on correspondence. 2. You should personally and diligently investigate your own properties which you are marketing. Do not rely on somebody else s prior brochure or information. Do the work yourself. Under most circumstances it is not sufficient to simply rely upon information given to us by the owner or another broker. We have an affirmative obligation to discover adverse factors that a reasonably competent and diligent 14

investigation would disclose. In this regard, you should carefully inspect properties and when taking a listing, should use a comprehensive listing checklist. Thus, listing checklists will be very helpful in establishing that you diligently investigated the property in question. Claims have been made concerning inaccurate information on blue-line information sheets and brochures concerning such things as square footage, nature of the tenancies, amount of rental income, zoning, etc. The disclaimer at the bottom of the information sheets and brochures is not sufficient protection against claims regarding such inaccuracies. It is imperative that the information is verified with the owner prior to the distribution of the information sheets and brochures. Provide Documentation When involved with a sale of property subject to leases, the delivery, inspection and approval of leases by the purchaser within a specified period should be a condition of the agreement. Purchaser must be provided with the leases and offset statements concerning the property prior to this specified time period so that the purchaser cannot subsequently claim that he relied on information contained on the marketing brochures. If inaccuracies are discovered prior to the consummation of a sale, a written disclosure should be made immediately to the purchaser highlighting the discrepancy. If you make a statement that a property is within a particular zoning classification or that property is zoned for a particular use, you are subject to exposure if that statement is incorrect. Furthermore, the requirements of use permits must be explained to the client. Documentation is important in this area. There have been many situations where zoning information was obtained regarding use of the property which was later discovered to be inaccurate. Proper documentation as to the source of that information is essential. Make Deal Subject to Approval of Client All offers to lease, letters of intent, proposals, etc. must be stated as subject to landlord or tenant approval. Don t go out on a limb on the verbal representations of your client whose memory of that conversation may change as circumstances change. Know Your Limitations You should know your limitations. You are a real estate agent whose principal function is finding a purchaser ready, willing and able to purchase your client s property. You are a salesman. You are not an attorney, an architect, a space planner, a developer, an engineer, a tax expert or an environmental expert. If there are any questions from your client or from any other party to the transaction pertaining to any one of these areas of expertise, you should specifically refer those inquiries to the appropriate professional in writing. Once you undertake to perform any of these specific duties, you are held to the same standard of care as those experts are held. You aren t being paid to be anything other than a salesperson, so why should you undertake any additional duties for which you will not be paid and for which you may incur substantial liability if those duties are not performed in a competent manner. 15

Submit Offers Timely You are required to transmit all offers on a specified property to the owner as quickly as possible and the offer should be submitted in an objective and unbiased manner. Many times we have difficulty reaching the owner. This can lead to a claim from the buyer that the agent mishandled and possibly sat on his offer. Documentation of your efforts to contact the owner as well as the use of transmittal letters with the offer would be very helpful protection in this area. Do Not Disclose Client Confidences A part of your fiduciary duties to your client includes keeping your mouth shut. If you disclose client confidences or disclose to third parties aspects about your client s transaction without your client s consent, you could lose your commission, even though your client may not have suffered any damages. Consequently, do not discuss any aspects of your transaction and especially not any client confidences without the express written consent of your client. Nor should you transmit any development plans or results of other inspections on the property purchased by your client to anyone else without the written permission of your client. Earnest Money Oftentimes there are disputes concerning who is entitled to the earnest money in a failed deal. The standard contract provisions adequately address what your rights and responsibilities are. You should never unilaterally make a decision as to who is entitled to the earnest money. If you do, you are likely to be sued by the party who is on the losing end of your decision. It is a game you cannot win but which you can easily avoid. Be a Friend to Your Client In a typical commercial transaction, the time and effort to put together a deal often takes months, sometimes years. During that time you will be engaged in numerous telephone conferences and face to face conferences with your client. Always treat your client with respect, dignity, and courtesy which they deserve. If you consider your client your friend, that client may, in turn, reciprocate that feeling. Just as you would think twice about suing a friend, your client, if he harbors warm feelings for you, he would think twice about suing you. There are many considerations a person goes through before a decision to file a lawsuit is made. You will have to consider the time and expense involved as well as the probability of recovery. If all those considerations lead to a close call on the part of the client as to whether to sue or not to sue, the deciding factor may well be the personal warmth and feeling which your client has towards you. Even if you made a mistake, your client still may choose not to pursue it because of the nature of the relationship with you. In addition to being courteous and responsive to your client, if a wrinkle develops in your deal, you should take all steps necessary and appropriately to seek to rectify the situation. You should carefully explain the problem and, to the extent that you can do so without 16

admitting liability, you should seek to resolve the problem within parameters agreeable to your client. Many lawsuits are filed because the client could not get their agent to respond to their concerns or even talk to them. Don t get in that situation. 17

Section 2 Review Questions Please answer True or False 1. Parties who feel that the transaction was fair and reasonable generally won t engage in lawsuits. 2. Signed file copies of documents are better evidence that correspondence has been sent. 3. Incoming correspondence should be date stamped. 4. All important telephone messages should be saved and dated by day, date and year. 5. Use confirming letters whenever a matter of significance has been discussed. 6. One of the most common claims against real estate agents is either willful or negligent non-disclosure of a material aspect of the property. 7. Every statement about the property made by a real estate agent either orally or in writing cannot be relied upon by the recipient of those statements. 8. One can always rely on previous marketing materials and brochures for information verification. 9. A real estate agent should know his limitations and his scope of expertise. 10. All offers are required to be transmitted to the property owner as soon as possible. 11. Client confidences can be disclosed to other clients. 12. Earnest money refund decisions can be made unilaterally by a real estate agent. 13. A real estate agent s principal function is to find a ready, willing and able buyer to purchase property. 14. Undertaking responsibilities outside the scope of the practice of real estate can subject the agent to liability if those duties are not performed in a competent manner. 15. Many lawsuits are filed because the client couldn t get their real estate agent to respond to their concerns or communicate with them. 18

1. T 2. T 3. T 4. T 5. T 6. T 7. F 8. F 9. T 10. T 11. F 12. F 13. T 14. T 15. T Section 2 Answer Key 19