Top Legal Pitfalls

2003 Lawsuit Survey By Nan Roytberg, Associate Counsel NAR Legal Department Commission disputes jumped in 2002 to 161 cases, up 36 cases from 2001. The booming real estate industry has led to a boom in another area: the courts. In the last two years, there has been a significant jump in the number of lawsuits involving real estate licensees, according to the National Association of REALTORS® 2003 Legal Scan. The Scan, a compilation of data from court decisions, statutes and regulations, surveys of state real estate commissions and industry leaders, and jury verdict reports, indicates there were 1,686 cases involving real estate in 2001 and 2002—a 40 percent jump over the 2001 Scan, which covered the years 1999 and 2000. Keep in mind that although these cases were litigated in 2001 and 2002, the disputes most likely began several years earlier. So this reflects high transaction activity in the years prior to 2001. What’s the most prevalent real estate-related lawsuit? Commission disputes jumped in 2002 to 161 cases, up 36 cases since 2001, according to Scan records. This is despite the fact that commission disputes between practitioners are almost always resolved through arbitration administered by local or state associations. One reason for the jump may be the large number of commission disputes between practitioners and parties not obligated to arbitrate, such as sellers and landlords. Other commission cases dealt with whether an unlicensed plaintiff was entitled to a commission, whether a commission split was unlawful, whether an oral contract was enforceable, whether there was interference with the purchase contract, or the most prevalent scenario: whether the plaintiff was the procuring cause.

Key findings of NAR’s 2003 Legal Scan There was a significant number of cases reported for the 2003 Scan, which—in several areas—represents a significant jump in the number of cases reported for the 2003 Scan (covering 2001-2002) over the 2001 Scan (covering 1999-2000). Topic / Cases in ‘01 Scan / Cases in ‘03 Scan   Commission disputes / 125 / 161 Fair housing: race discrimination / 45 / 67 Agency: breach of fiduciary duties / 27 / 54 For the 2003 Scan, there were 22 damage awards more than $1 million; for the 2001 Scan, there were five damage awards of higher than $1 million. Although brokers or salespeople were held liable in only 34 percent of the cases where liability was determined. The 2003 Scan found 522 new or amended real estate-related statutes and regulations nationwide. Focus training on the following areas, say experts surveyed for the Scan, as these areas will see more disputes in the next two years. Property condition disclosure: toxic mold Technology: new forms of advertising, VOWs, and privacy Agency: dual agency and buyer representation Brokers or salespeople were held liable in at least 50 percent of the following types of disputes: Antitrust: other Employment: independent contractors Employment: other Employment: sexual harassment Employment: wrongful termination Escrow mishandling Fair housing: sex discrimination Frivolous lawsuits: Code of Ethics enforcement by courts, licensing Property management: third-party liability,appraisers

In the past two years, there was also a large increase in race discrimination lawsuits involving violation of the Fair Housing Act (67 cases, up 22 from the 2001 report).

In addition, agency continues to challenge and confuse real estate professionals, buyers, and sellers. The number of breach of fiduciary duty lawsuits jumped significantly to 54 cases, up 27 from the 2001 report.

Most litigation doesn’t involve licensees
Over the period, a sizeable 1,213 of the Scan’s 1,686 real estate-related cases are property management disputes, covering such areas as debt collection, liability for tenants’ property condition, liability for condition of common areas, liability for events on the property, eviction, and fair housing. The property management category also saw one of the most significant jumps in litigation frequency. But the increase can’t be explained by the more-activity-equals-more-cases scenario, because the majority of real estate activity in recent years has been in residential sales rather than rentals. The uptick in rental disputes may be due to plaintiffs’ view that landlords have deep pockets. In fact, all of the top 10 real estate-related damage awards fell into the property management category, with amounts ranging from $2.2 million to $13 million.

Outside of property management, the biggest increase in litigation stemmed from the Real Estate Settlement Procedures Act prohibition against kickbacks (45 cases, up 38 cases from the 2001 report). The participants in these RESPA cases were not, for the most part, licensees. They were mortgage lenders, brokers, insurers, and title companies. The alleged kickbacks involved illegal referral fees, yield-spread premiums, and over-charges for credit reports and other services. Most cases addressed whether the lawsuit could proceed as a class action. Many other cases were either dismissed or decided by a judgment before trial. None of the cases ended with a verdict, though three cases were settled.

What type of lawsuit will dominate in the future?
Most key industry contacts—government and insurance experts, state commissioners, brokers, salespeople, and REALTOR® association attorneys—surveyed for the Scan predict that property condition disclosure litigation related to toxic mold will mushroom in the next two years, as trouble with mold becomes a new hunting ground for lawyers. The media attention that often focuses on the most serious cases, where homes have to be demolished and occupants become seriously ill, may be attracting plaintiffs and lawyers looking for large payouts even though the cases are extreme and rare.

The predicted increase in mold lawsuits also parallels the insurance crisis. Many insurance providers are declining homeowners coverage for properties that have experienced water damage that could lead to mold. A few state licensing commissions are beginning to address toxic mold with mandatory disclosure and some mold cases, particularly in the property management area, are starting to show up in the courts.

More than 70 percent of key contacts surveyed predict that technology, particularly as it relates to online privacy and new forms of advertising and online brokerage, such as virtual office Web sites, will also make the short list of topics most likely to be litigated in the near future. New technologies have given licensees new ways to market themselves and their listings, often without strict adherence to state borders, which can lead to disputes over reciprocity, referral fees, and other licensing issues. Increased interest in VOWs may lead some to challenge state laws regulating property advertising. Also, given the new and likely-to-be-enacted privacy laws in most states regarding telemarketing, breaches of computer security, and unsolicited e-mail, practitioners who engage in these previously unregulated activities may face legal challenges.

Most key contacts say that agency, specifically dual agency and buyer representation, will account for a larger number of court cases in the next two years and should be the focus of additional training. The reason: many states have recently amended their agency disclosure laws, modified their representation agreements, clarified or added to buyer representatives’ duties, and even specified buyer representatives’ duties to third parties. In 2001 and 2002, 29 new amendments and modifications to state statutes and regulations were enacted regarding buyer representation alone, perhaps reflecting its increasing popularity and the need for greater clarity.

Reprinted with permission from NAR’s REALTOR® Association Executive, Summer 2003.