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THREE COMMON MISTAKES THAT RESULT IN LAWSUITS, ARBITRATIONS AND/OR DEPARTMENT OF COMMERCE CLAIMS
Nash & Lodge, PLLP
By: Stephen J. Nash
The buyer refuses to close. The seller refuses to close. The transaction closes but the buyer later says that the septic
system doesn’t work, there is water in the basement and mold throughout the house. When something bad happens in a
real estate transaction quite often the finger of blame is directed at the Realtors involved in that transaction. In our
experience the chances of a claim being made against one or more of the Realtors involved in the transaction has increased
dramatically over the last two years. It is also our experience that if the consumer is unhappy with a Realtor they won’t
just bring a lawsuit or arbitration claim, they will also bring an ethics and claim to the Department of Commerce.
While errors and omission insurance will provide you with some protection against a lawsuit or an arbitration claim, the coverage
provided is not one hundred percent. Deductibles have been steadily rising and exceptions to coverage are becoming more common.
If your deductible is $5,000.00, you will be spending that amount of money in moist cases if you are sued, even if you win.
While some claims are unavoidable and simply a cost of doing business, many are avoidable. We are increasingly seeing potential
claims that have arisen or have been made stronger because of the same type of Realtor mistakes. Avoidable mistakes. The
following are three common mistakes that Realtors should avoid.
NOT MAKING SURE THAT THE TERMS OF THE PURCHASE AGREEMENT HAVE BEEN COMPLIED WITH.
An example of this is where the purchase agreement calls for something to happen before closing (for example, a septic
certification or a well test) but the listing agent does not order the work and the buying agent never checks to see if it
was done. After the closing the buyer claims that the septic system does not function properly and the well needs replacement.
A septic inspection is completed but there is no agreement as to whether the system complies or if it doesn’t when and
why it doesn’t comply (the seller says it failed sometime after the closing because the buyer has dramatically increased
the use on the system). The seller says the well is fine except that the buyer has failed to properly take care of the system.
The buyers and sellers are both convinced that they are right and look to the Realtors to resolve the situation. If this
situation is not resolved, it is likely that a lawsuit or arbitration claim will be brought by the buyer against the seller
and the listing agent. The buyer may also bring a claim against the buyers agent for failure to make sure that the certifications
were done prior to closing and that there was not a problem. The claim will be for at least $20,000.00. The agents will
file an insurance claim that will provide them with representation. Whatever is there deductible will be gone in a matter
of months, long before the case is resolved. The buyer also filed and ethics complaint and a complaint with the Department
of Commerce. All of the above could have been avoided by simply making sure that the septic inspection and well test had
been completed and provided to the buyer before the closing so that the buyer could determine whether they were comfortable
moving ahead with the purchase.
Practice Tip: Make a checklist for each transaction of everything that must be completed in connection with
the file. Have one column for items that must be taken care of, another identifying who is responsible, another for the date
ordered and another for the date given/received. You should also list each contingency, the contingency date, who is responsible
and whether it has been met, waived or failed. An example is attached as Exhibit A.
NOT AMENDING THE PURCHASE AGREEMENT IN WRITING TO REFLECT ANY AGREED UPON CHANGE OF TERMS.
Not everything always goes as planned. It is vital that any change is reflected in a written addendum to the purchase
agreement. I have heard many Realtors explain to me that the complaint is baseless because the other agent knew what was
going on and agreed with what had happened. I have to then explain to the agent that they have put themselves into an extremely
uncomfortable position of having to explain why this agreed upon change wasn’t put into writing. An example of this
is a situation where the agents discusses a defect in the property that was not disclosed in the Sellers Disclosure (an oversight).
The buyer through the buyer’s agent acknowledges the defect and proceeds to close. Six month later the buyer brings
a lawsuit for misrepresentation as to the condition of the property based upon the defect that was disclosed orally but not
in writing. If the defect had been disclosed in writing through an amendment with the buyer expressly acknowledging the condition
and accepting it as-is, it is unlikely that there would be a lawsuit. Again, the selling agent is put in the uncomfortable
position of arguing that everyone knew of the defect and the buyer accepted it yet also explain why it was never put into
writing. The seller may very well sue the listing agent for negligence and will point to how much commission was paid to
the agent yet somehow the time was not taken to prepare and have signed the addendum that would have avoided the lawsuit.
Practice Tip: If the matter that is being verbally agreed upon is important enough that you will call an
attorney if the other side later denies what was said, it is important enough to be put into a signed addendum.
NOT FILLING IN ALL OF THE PURCHASE AGREEMENT BLANKS.
I
It sounds simply enough but I cannot tell you how many times I have seen purchase agreements and addendums where
blanks have not been filled in. Many times this problem slips through because everyone does what they are supposed to and
no problems arose in the transaction. Where it can cause a great deal of anguish is where one of the parties is looking for
a way out of the purchase agreement and claims that because a term was not completed that a valid purchase agreement was not
created. The other situation that comes up is where one of the parties wants to force the other party to perform yet the
section dealing with the actions that the party is failing to perform is vague because of the missing terms. An example would
be a financing contingency where the mortgage amount was not filled in. What mortgage amount must the buyer apply for? What
if they can qualify for one amount but won’t go through with the transaction unless they can obtain a higher mortgage
amount?
Practice Tip: If you are intentionally leaving a blank empty and the clause makes sense without a word in
the blank, put a line through it or write “not applicable”. If the purchase agreement does not make sense if
you put a line through it or write “not applicable”, strike the entire clause and add a clause to the agreement
that accurately reflects the agreement between the buyer and seller. Forms are easy to work with, but they are generic.
Make sure that your purchase agreement accurately reflects the true agreement between the buyer and seller.
The above are three examples of common mistakes that are easily avoidable yet happen all of the time. If you have an extra
$5,000.00 (or whatever your insurance deductible is) lying around, have the time to deal with depositions, meetings and trials,
have no fear of an ethics complaint or a complaint against your license, there is no need to take the time to avoid these
mistakes. If you would rather take that money and go down south for part of the winter and lie in the sun without worrying
about a lawsuit, an arbitration claim, an ethics or Commerce Department complaint, you had better take the time to avoid the
above mistakes.
NOTICE
The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly
applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can
be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in
a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney
competent in the field of practice relevant to your situation.
Copyright 2007 Nash & Lodge, PLLP
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