A designated broker’s failure to seek advice regarding the meaning of language in a recently revised Escalation Addendum to a residential purchase and sale agreement results in a lawsuit.
Situation
A designated real estate broker reviewed with her clients the competing purchase offers for their residential property and improperly advised them regarding responding to the competing offers.
Problem
The designated broker was unfamiliar with the language of the Escalation Addendum, and no procedures had been implemented by the designated broker to educate her brokers and review, identify, and correct improper interpretations of those forms.
Mistake
The designated broker improperly advised her clients concerning evaluation and comparison of competing offers and the Escalation Addendum included as part of a Residential Purchase and Sale Agreement. This failure resulted in the clients accepting an offer that was $305,000 less than the best competing offer.
Result
After closing of the purchase and sale, the clients filed suit against the designated broker seeking compensatory damages, punitive damages, and attorney’s fees. The clients alleged that they relied on the expertise of the designated broker to advise them appropriately regarding the Escalation Addendum and to properly supervise the actions of the listing agent. The litigation was promptly resolved after it became apparent that the designated broker would likely be found liable if the case was litigated.
Prevention
The designated broker and listing agent could have avoided litigation if proper education and pre-established office procedures were in place. The designated broker would have served her client better by seeking advice from an attorney regarding the meaning of the language of the Escalation Addendum, as opposed to attempting to independently explain its meaning to her clients. Legal counsel for local real estate broker association may be a good resource for interpreting language in standard forms. For example, if the designated broker had discussed with Association of Realtor’s attorney prior to advising her clients regarding the Escalation Addendum, she likely would have received free advice that would have helped her avoid the above-described lawsuit.
We recommend that all real estate brokerages work with legal counsel to create and utilize in all transactions standard forms signed by the client which make clear that the broker provided to the client the required advice to seek outside expertise. An example would be a standard form entitled, “Acknowledgement of Advice to Seek Legal Counsel” or, “Acknowledgement of Advice to Obtain Expert Consultation Re: ___.” Even if a broker knows that they have orally complied with this duty, if a broker does not use standard forms, the broker should at the very least send a follow-up email to the client documenting their advice.
For more information about E&O coverage and other risk management topics, visit pearlinsurance.com.
The purpose of this article is to inform and insulate real estate professionals from potential monetary claims and professional grievances. The fact patterns are from actual claims against real estate agents. While the author is an experienced claims representative, the opinions expressed herein are general in nature, not fact nor state specific; and therefore, should not be taken as a substitute for legal advice from an attorney licensed in your state. This article was produced in conjunction with AXA XL and is not to be taken as legal advice.