All real estate transactions are fraught with ethical and legal hazards for brokers. The National Association Realtors 2017 Code of Ethics and Standards of Practice contains 17 Articles (and its abundant supporting explanations of Standards and Practices) applies to all real estate transactions. Often, when ethical rules that are serious enough to also have legal value are broken, buyers or sellers bring suits against brokers or agents, based either on statutory or common law. And, real estate professionals licenses are exposed to possible suspension or revocation. These consequences can occur due to a number of serious violations, including misrepresentation, failure to disclosure property conditions, false advertising, breach of fiduciary responsibility, unlawful discrimination, and many others.
Where brokers in currently highly active major US commercial real estate markets deal with great numbers of buyers and sellers in our litigious world of real estate transactions, a high volume of lawsuits is an unfortunate inevitability. The good news is that in the vast majority of suits (75%), licensees are not found liable and real estate licenses are not affected, per NAR Legal Affairs reports, as reported in an NAR attorney's summary report.
To reduce risk of legal consequences, including law suits and potential suspension or revocation of the real estate license, brokers should familiarize themselves with the Code of Ethics, and with the most common types of legal, hence ethical, perils confronting brokers in all transactions.
The most frequently brought lawsuit against brokers, by far, is for misrepresentation. In the NAR's 1998 report, 57% of all lawsuits against brokers and agents, that were NAR insured through its program to protect members against certain errors and omissions, were due to misrepresentation. Another 12% were due to failure to disclose, a close relative of misrepresentation. (Misrepresentation is defined as making a false or misleading statement regarding some aspect of the property.) Failure to disclose is neglecting to reveal some important feature of or issue regarding the property.
Misrepresentation regarding foundation and structure accounted for 20% of lawsuits, per the NAR attorney's summary of the 2000 report, which, given the nature of business activities in the industry, can be reasonably presumed to be consistent with historical data since that time. Roof, property boundaries, and termite problems were other common causes of legal disputes. Disclosure issues included title, easement, and environmental problems, and unpermitted renovations.
Misrepresentations may be innocent, negligent, or fraudulent. Negligent misrepresentations are such ethical violations as failing to disclose major flaws in the property, due to the broker's ignorance of the flaw. Whereas, fraudulent misrepresentation is a concealment of a flaw or feature for the purpose of making the sale.
Courts have determined that agents and brokers may rely upon statements made by the seller, unless there is reason to doubt the truth of the seller's statement. For example, you can say, "According to the seller, the roof is four years old." In some states, you must go beyond what you've been told, and conduct your own visual inspection and disclose what you have discovered from it.
To be misrepresentation, a statement must involve a material fact that the buyer would reasonably rely on in making the decision to purchase, not merely your opinion.
To minimize your potential liability for misrepresentation liability, ensure that your sales agents use seller disclosure forms, and confirm that every seller actually fills out the form. Document sellers' sources of the information they provide. Use inspectors and attorneys when appropriate. And, train sales agents not to invite legal action by making their own assessments or predictions, such as "These foundation cracks are only superficial," or, "Property values in this neighborhood will definitely appreciate."
When broker's agents fail to lead advise sellers to have properties professionally evaluated for hazards such as lead paint, asbestos, contaminated groundwater, and other environmental issues lawsuits can result. Law requires informing prospective buyers of the known presence lead paint, for example, and requires brokers to include specific language disclosing the problem in sales contracts and leases.
To limit your liability due to environmental issues, stay updated on common environmental hazards and issues in your area, EPA information resources, and maintain a list of your local environmental inspectors and other resources to provide your customers. And, monitor your sales agents' compliance with disclosure and documentation requirements for lead paint and other environmental problems that are relevant in real estate transactions.
Breach of Fiduciary Duty or Other Agency Issues
Lawsuits and serious jeopardy to licenses are frequent, due to legal problems arising from nondisclosure of dual agency. About 10%(year 2000) of lawsuits against real estate brokers and sales agents are due to this ethical and legal violation.
The NAR Code of Ethics requires disclosure of dual agency, but laws regarding timing and methods of disclosure vary from state to state. In fact, definitions of agency duties are so insufficient in many states' statues that numerous state associations have asked to have laws created to set forth statutory duties specifying brokers' duties and real estate consumers' reasonable expectations.
To reduce your risk of liability for violations of fiduciary responsibility, take continuing education courses to keep updated on your state's current agency disclosure laws, and require your sales agents to use agency disclosure forms, upfront, in instances of dual agency.
Fair Housing Violations
Only about 1-2% of lawsuits against brokers arise from ethical and legal violations involving fair housing disputes. But, judgments in these cases can be very costly. This is a complicated area of litigation governed by federal discrimination laws.
If sellers decide they don't want to sell to people of a particular race, ethnic background, or sexual orientation, a broker is well advised to avoid taking the listing. A common and simple method used for detecting steering, or other violations of fair housing laws, is to test. The courts have judged that this kind of testing is lawful. Although it consumes some of your time to perform a test, with the help of real estate shoppers who actually have no intent to purchase, it can save much more time later, if legal action ensues.
Legal actions have been taken against MLSs due to members remarks included in internet listings that violate fair housing laws, for example, "perfect for empty nesters," and "no children". These kinds of stipulations are illegal, and carry the same degree of liability whether published digitally or in print.
To reduce your risk of fair housing issues, educate yourself and your sales agents on fair housing ethics and laws. And, document thoroughly, to ensure that all buyers are assured of equal treatment.
See the NAR model equal services report forms, for sales and for rental. These are very useful tools in defending against discrimination claims.
Antitrust laws are meant to prevent unreasonable restraints of others' ability to trade. Price fixing, group boycotts, and other antitrust violations can spur legal actions. Competing brokers must not participate in discussions of their own commission rates, or about amounts of compensation they offer to cooperating brokers. And, avoid any conduct that could possibly lead to charges that you unethically and illegally agreed not to do business with a particular competitor.
To avoid liability due to antitrust issues, educate yourself and all sales agents on antitrust compliance, and maintain a strict company policy prohibiting discussions of commission rates with prospective sellers. Avoid preprinting commission rates on standard form contracts or in advertising.
Lawsuits resulting from false or misleading advertising by a broker may also involve affinity programs, internet advertising, For Sale sign bans, etc..
All advertisements must comply with state laws or regulations governing licensing, and with the REALTOR® Code of Ethics. Laws pertaining to licensees typically include requirements for indicating the broker's status as a real estate sales licensee on all advertisements. Article 12 of the Code of Ethics also cautions its member realtors to be diligent in presenting a true picture in all ads.
Real estate commissioners have examined internet advertising. As a result, some states have adopted laws to govern internet advertising by licensees in their states. These may include use of email and digital bulletin boards.
To manage against liability, ensure that all of your firm's advertisements are truthful and do not feature any language or imagery that may be construed as misleading. And, comply with state laws governing internet advertisements for property sales and for real estate services. The NAR has worked in partnership with the Newspaper Association of America to develop guideline for effective and appropriate advertising.
Sales Agent's Status as Employee, vs. Independent Contractor
An estimated 90% of real estate industry brokers utilize independent contractors to constitute their sales teams. Federal laws passed in 1982 make it qualifying as an independent contractor easier for real estate salespeople, for federal tax purposes. However, state requirement based on common laws governing state income taxes, unemployment compensation, worker's compensation may conflict with federal allowances for independent contracting with real estate salespeople in your state.
To avoid liability regarding employment status of your sales agents, educate yourself regarding your state's legal requirements for status as an independent contractor. And, require written agreements with your sales team members. Further, create an employee handbook including specifications of employment status for all employees of and contractors with your firm.
Real Estate Settlement Procedures Act
Violations of the RESPA often occur when title services, mortgage brokers, other lenders, or real estate brokers receive or give something of value in exchange for referrals. The RESPA is intended to inform buyers about costs of closing and to prevent kickbacks to real estate brokers and other settlement service providers for referrals.
The majority of referral fees are legally prohibited, however, the law does permit referral fees to be exchanged between real estate brokers. Brokers are required to disclose their ownership in other service providers (such as mortgage companies, other lenders, or insurance companies to which you refer a buyer). The NAR has lobbied for needed updates and amendments to the RESPA in this area of restrictions.
To minimize liability due to RESPA violations, receive continuing education, and ensure that you understand ethical and legal prohibitions, and maintain strict compliance in instances of referrals made between affiliated service providers by representatives of your brokerage.
Unauthorized Practice of Law
When brokers or sales agents provide legal advice, lawsuits often follow. The NAR Code of Ethics, Article 13, stipulates that realtors must not engage in any activities construable as unauthorized practicing of law. Courts have worked to define what it means to commit such a violation.
The courts have sought to protect the public from being damaged by unqualified practitioners while also considering whether or not permitting brokers to draft clauses in legal documents may be in the public's greater interest. Ultimately, the courts have decided that brokers can be permitted to complete blanks of preprinted, attorney-approved, sales agreements. But, brokers are not allowed to draft documents or provide legal advice.
The U.S. Justice Department has determined that previous NAR practices of collaborating with the American Bar Association to define appropriate roles of brokers and lawyers were tantamount to dividing the marketplace, and therefore legally prohibited. So, you should discontinue any such arrangements between your local realtors' affiliation and members of the bar association.
To avoid liability due to overstepping in the area of providing legalese or legal advice, be clear on the boundaries of what you are permitted to do in your state. And, advise your clients to hire an attorney, if they have legal questions or concerns that exceed those boundaries.
Americans With Disabilities Act
Legal actions are frequently undertaken by victims due to violations by brokers who fail to comply with their legal responsibility to do what is "readily achievable with reasonable effort and expense" to provide necessary accommodations for their clients with disabilities. The requirements include ensuring that your office, which is legally classed as a public accommodation, provides curb breaks, access ramps, curb breaks, and other modifications allowing disabled people entry into the bu