Real estate licensees are, by nature, optimists who want the best possible outcome for their clients in any given transaction.
Most of the time, this optimism pays off and the deal concludes with a happy, or at least satisfied, client. But in the world of real estate, unforeseen complications can arise and there are enough transactions that run into trouble to keep lawyers gainfully employed.
Try as you might, it’s simply not possible to eliminate the risk of being sued or having to defend a complaint to the Real Estate Board or Council. Mistakes do happen and unforeseen circumstances do arise. There are also many lawsuits and complaints that lack merit, where the licensee must defend herself even where she’s done nothing wrong (in my practice, these often seem like the majority).
All of this means that, while you may hope to avoid litigation or discipline proceedings, sometimes being embroiled in these processes is unavoidable. When it happens, you shouldn’t become despondent, but instead should report the claim promptly to your managing broker and your insurer and cooperate fully with your legal counsel in defending the claim(s).
Although the risk of being sued is part and parcel of having an active real estate practice, there are certain factors that tend to heighten the risk and, in the event of legal or disciplinary action, of you being held liable or being the subject of a discipline order with the Council. All licensees should know about these risk factors so they can take steps in advance to manage the risk and to better defend claims if they arise.
In preparing this article, I reflected on the various files that have come across my desk and tried to categorize the five most common areas where licensees can get into trouble. This is by no means an exhaustive list, but it does capture in broad strokes the principal risk factors that can lead to litigation or discipline.
- Not knowing the property
- Not managing the client’s expectations
- Not knowing your instructions/not documenting your file
- Not knowing the law
- Not knowing your limits
1. Not knowing the property
Many disputes involving real estate licensees involve some sort of deficiency with the property that’s the subject of the transaction. These claims generally involve an alleged misrepresentation, a non-disclosure, or both.
Misrepresentation claims involve statements regarding some material fact about the property. These statements can either be verbal or in writing. In my practice, the usual misrepresentation claim arises from a statement in the listing information, typically in the comments section describing the property or in the Property Disclosure Statement. Some examples of these types of claims are:
- A statement in the MLS document that the property contains a fully fenced yard, when in fact a portion of the fence encroaches onto neighbouring property
- A statement in the listing or marketing materials that the dwelling is 15 years old, or built in 2004, when in fact the dwelling was substantially renovated in 2004 and contains elements that are much older
- A statement in the listing or marketing materials describing the dwelling as “new construction” when, in fact, the occupancy permit was granted a year or more previously, the home warranty time limits have already begun, and the coverage for certain deficiencies has expired.
Often, the alleged misrepresentation is more in the nature of a “half-truth” or incomplete statement, rather than a statement that is patently false. For example, licensees often use the date of occupancy for the age of a dwelling in circumstances where the dwelling has been extensively renovated.
While this action may make sense given that the only remaining original components are the studs or the foundation, and the home may also be fully covered under a policy of new home warranty insurance, a court may find that the statement is, in fact, a misrepresentation. It can be difficult to defend such claims when disclosure of the true state of affairs – namely, that the home is a substantial renovation rather than a new build – is something that can easily be addressed through a one- or two-line qualifying explanation in the comments section of the listing.
I’ve also dealt with a number of Real Estate Council complaints relating to the same issue. The Council takes the view that it is improper practice for a licensee to use the date of the occupancy permit as the age of the dwelling where there has been a substantial renovation and the dwelling contains older components.
Our advice when it comes to making any representations about a property is to err on the side of caution; ensure that representations regarding the condition or age of the home are accurate based on the most reliable information available. Preferably, you should also make clear the source of that information.
Claims relating to the non-disclosure of a material fact about a property are also very common. (A non-disclosure concerns an omitted fact whereas a misrepresentation concerns a statement that is untrue or misleading.) Because a statement may be misleading due to the omission of a material fact, we often see misrepresentation and non-disclosure claims advanced simultaneously.
The case of Cosway v. Boorman’s Investment Co., 2008 BCSC 1482, provides an example of a licensee who was found negligent. The agent appears to have turned a blind eye to information that suggested that the subject property didn’t extend all the way to an adjoining road, when the physical characteristics of the property (landscaping and fence) made it appear that it did.
The plaintiffs in Cosway were an American couple looking to relocate to the Victoria area. They viewed the subject property in Oak Bay, which the listing described as being 0.62 acre in size, with photographs of the property with landscaping and a fence proximate to Midland Road, on land that was actually within a road allowance registered to the municipality.
During a viewing of the property, the Cosways recalled one of the agents saying that the property was special in that the owners could access it either from Upper Terrace or Midland Road, and the Cosways in turn expressed an interest in reorienting the house and the driveway to provide access from Midland Road.
In the trial decision, Mr. Justice Leask found that the listing agent had, in fact, been informed of the road allowance issue prior to listing the property for sale. The agent who had listed a neighbouring lot spoke with the listing agent and asked him how he was presenting the eastern boundary of the property for sale. The listing agent responded, “Up to the fence,” to which the other agent said, “I think you should investigate further. I think you should question it.”
Sometime later, this same agent had another conversation with the listing agent in which she was more explicit and advised that when her clients bought the neighbouring property, two-thirds of their tennis court was on a municipally designated road allowance; she again recommended that the listing agent investigate the issue. Apparently, he did not.
The trial judge found that the listing agent owed the Cosways a duty to check the “completeness and accuracy of all information which it is usual or customary for brokers to verify” and “all other information as to completeness and accuracy of which he is in doubt” before conveying that information to a purchaser. The court found that the listing agent was negligent in failing to take any steps to follow up on the information disclosed to him by the other agent.
At trial, the listing agent argued that there was in fact no misrepresentation because the listing described the property as 0.62 acre, and this was true. Mr. Justice Leask, however, dismissed this defence peremptorily, finding instead that “the showing of the property with its landscaping and fence was a representation by conduct that the property listed for sale included the garden at least to the line of the fence.”
Although the Court dismissed the lawsuit against the licensee, as there were no damages suffered by the Cosways, this case provides a good example of the type of situation that can lead to liability. Licensees are not property inspectors, but you are required to take appropriate steps to review material facts about a property, which includes checking the accuracy of all information which it is usual or customary to verify or where you have reason to doubt the information.
A good resource for seller’s agents is the Listing Checklist published by the Real Estate Council.
2. Not managing the client’s expectations
The obligations of a licensee in any given transaction are often fact-specific, and much can turn on the nature of the relationship between the licensee and her client. Meeting with the client to discuss the client’s expectations and being clear with the client about the scope of your services – explaining the sorts of things that you will do for the client and identifying those services that you do not provide – is an effective risk management technique and one that is often employed by other professionals in a real estate transaction (just read the qualifying remarks or limitation of liability section of any property inspection report and you’ll get the idea!).
The case of Holt v. Thompson 2006 BCSC 1059 provides a good example of a situation where a licensee failed to clearly articulate the boundaries between her duties and the responsibilities of her client and was ultimately held liable for failing to meet the client’s expectations.
Ms. Holt, the plaintiff, was a 76-year-old professional woman who met the licensee at a kiosk. The plaintiff explained to the licensee that she was looking to buy a condo but was in no rush and was concerned about buying a condo with water ingress problems, as she was aware of a number of stories in the news about the leaky condo epidemic in the Lower Mainland at the time. The licensee offered the plaintiff comfort and assured the plaintiff that she would not sell her a leaky condo.
During their search for a condo in the Port Moody area, the plaintiff inquired about a particular development which had some notoriety for having water ingress problems, and in fact the seller’s disclosure statement for the unit in question did disclose a history of leaks but offered a qualifying remark that the leaks had occurred in two of the other buildings that were part of the complex.
During the subject removal period on the plaintiff’s offer, the licensee received a large binder of strata minutes. When the licensee discussed the records with the plaintiff, the plaintiff advised that she was very busy and would not have time to read through the minutes. The licensee’s standard practice was not to read the minutes, but in this case, she told the plaintiff that she would read the minutes and then put yellow post-it notes on certain pages to identify the important parts.
The evidence at trial was that the licensee urged the plaintiff to read the minutes, but the plaintiff said, “I am very busy and I am relying on you.” Rather than being clear about the limits of her role, the licensee told the plaintiff, “Yes, you can do that, but you have to read as you are the one making the decision.”
The court found that the licensee failed in her duty to the plaintiff because she told the plaintiff that she would not sell her a leaky condo, and that is exactly what happened. The court also found that the licensee was well aware of the plaintiff’s desire to rely on the licensee’s judgment in the matter and that “having told the plaintiff that she would not sell her a leaky condo and would protect her interests, [the licensee] had a duty to make the specifics of the risk the plaintiff was undertaking very clear, and not just to urge her to read the minutes when she knew the plaintiff was very busy and not inclined to.”
Liability in the Holt case could have been avoided if the licensee had been clear with the client about the limits of what she was prepared to do. Where the scope of the services is not well defined, problems can arise, and this is particularly so where the licensee falls into the trap of taking half-steps with the expectation that the client will be handling the rest of the task.
3. Not knowing your instructions/not documenting your file
Real estate transactions are usually multi-staged, with the negotiations spanning days, weeks or even months. The resulting contract may include terms that differ (sometimes significantly) from the original offer.
In such a complex and multifaceted process, the licensee should be wary of something going awry and an important detail being missed. In order to mitigate this risk, you should confirm the client’s instructions at each stage of the negotiation and maintain a reliable record of those instructions in the file.
In my view, following a consistent practice of documenting the client’s instructions and making a record of important conversations or developments during the course of a negotiation is the most effective risk management tool at your disposal. Unfortunately, all too often we find ourselves defending claims in which there is no record of a crucial conversation or meeting, and the licensee must defend herself in a credibility battle where no record exists to help resolve the impasse.
If you have a practice of maintaining a timely and accurate record of material developments in a transaction, you’ll have a significant edge in persuading the court to accept your version of events.
The record may address the very issue which is at the heart of the credibility conflict, in which case it will lend considerable weight to your story, or it may be the case that you can rely on your record-keeping practice in general to persuade the court that the absence of any record to substantiate the client’s version of events means that the alleged conversation or instruction probably didn’t happen.
This was indeed the result in Yu v. Wong, 2005 BCPC 591, where the client alleged that the licensee had fraudulently induced him to sign an offer to purchase property by offering to reduce her commission by an additional $5,000. The client had already negotiated a reduction in commission in the listing agreement that was initialed by the parties. The alleged further reduction was not documented anywhere.
The licensee in the case had kept good records of the transaction and this ultimately tipped the balance in her favour, as the absence of a record to confirm the alleged fraudulent offer was inconsistent with the licensee’s general practice. At paragraph 11 of the reasons, the court observed that, “It is … odd that everything about the negotiations is well documented in writing, including the original agreement to reduce the commission, and that an issue as important to Mr. Yu as an extra $5,000 from the proceeds would be settled by way of a verbal agreement.”
4. Not knowing the law
Licensees are not lawyers and are not expected to be legal experts, but you are expected to possess special skills such as being able to draft binding contracts and to properly advise your clients on the terms of sale.
In order to discharge this duty, licensees should have a basic understanding of how the law applies to the particular client, transaction or property they are dealing with, whether it be a foreign buyer looking to purchase a second home in Vancouver, the purchase or sale of a condominium unit in a new strata development, or a foreclosure sale.
Each transaction may give rise to special legal considerations concerning taxes, rights of rescission, specific disclosure obligations, and restrictions on what terms can be included in an offer. Having a basic understanding of the legislation and legal principles that apply to a given case will help you properly represent your client’s interests.
However, as we discuss in the next section, when dealing with legal issues it is also crucial for you to recognize the limits of your expertise and to refer your client to a lawyer where independent advice may be needed.
In the case of Zedah v. Moadebi, 2017 BCSC 2164, the licensee breached his duty in not being prepared for a court-ordered sale, with the result that the client lost out to a competing bidder.
In Zedah, the client hired the licensee to represent him in a negotiation involving property that was subject to a foreclosure proceeding. Prior to the hearing, the client entered into a binding contract to purchase the property for $380,000 subject to court approval. The offer contained buyer’s subject conditions that were subsequently removed.
The licensee attended court for the court ordered sale, but he didn’t bring a new offer with him or the form for such with only the purchase price to be entered. Instead, the licensee brought the original contract document and when a competing bidder appeared at the hearing, the licensee struck out the $380,000 purchase price and wrote in a new price of $458,888.
The problem, however, was that when the new offer was presented, it was still in the form of the original contract, which contained the buyer’s subject conditions, and consequently the presiding Master rejected the offer because it was not in a form the court could accept.
Had the licensee thought more carefully about the specific legal requirements in a court-ordered sale, namely that the court could only accept a final offer and not an offer subject to buyer’s conditions, he would have been better prepared with the document he needed to fulfill his client’s expectations.
Changing tax laws in the province over the last few years have also been a source of lawsuits and complaints to the Council, where the licensee either fails to disclose the tax liability at the time of the contract or misrepresents the tax implications relevant to a particular deal.
Under the 2016 version of the REALTOR® Code published by the Canadian Real Estate Association (CREA), Realtors® “shall be aware of current legislation and, wherever reasonably possible, be aware of pending legislation (including zoning, government programs, etc.) which could affect trading conditions in the marketplace” (Article 1, Interpretation 1.1).
In addition, Article 7 of the Code states that Realtors® “shall prior to the signing of any agreement, fully inform the signing party regarding the type of expenses directly related to the real estate transaction for which that party may normally be liable.”
Such provisions support the conclusion, as has been found in the case authorities, that licensees have a duty to gather relevant information about the property and its purchase. In some circumstances, such information may extend to the taxes that are applicable to the purchase and payable on completion.
In Sainsbury v. Nanaimo Realty Co. Ltd., 1993 CanLII 285, the licensee was held liable for giving incorrect tax advice to a client regarding the application of GST to the purchase of an acreage near Nanaimo. At the time, March 1991, the GST had been in force for only about four months.
Justice Hood found that the elements of the cause of action for negligent misrepresentation had been made out and made the following comments regarding the standard of care of a licensee in the circumstances: “They … are specialists in a particular field and the plaintiffs were entitled to rely upon them to discharge the duty owed to them as such specialists. This included gathering information relevant to the property, and to its purchase, and, in particular, accurate information requested by the plaintiff.”
Mr. Justice Hood went on to say that the licensee’s “skill and knowledge pertained to the sale and purchase of real property, and in my opinion the plaintiffs were entitled to assume that he would know whether or not the GST applied to the sale of the property; [and] that if he did not know he would make that clear to them.” [Emphasis added].
The Sainsbury case offers a useful cautionary tale of what can go wrong when licensees are involved in real estate transactions where the tax implications are uncertain. The Code provisions mentioned above suggest that a licensee has a duty to be informed about applicable tax legislation, but the Code and the case law do not require licensees to become tax experts or to opine on areas of tax liability that are the subject of specialized disciplines, such as tax accounting.
The Professional Standards Manual recommends licensees tell clients to get legal, tax or accounting advice when faced with tax issues. Indeed, Article 10 of the REALTOR® Code specifically requires licensees to encourage their clients to seek outside professional advice where the transaction concerns matters going beyond the licensee’s own personal competence.
As Justice Hood’s comments above make clear, the brokerage in the Sainsbury case could have avoided liability had the licensee merely done what the plaintiff’s lawyer did upon reviewing the contract of purchase and sale, and recommended that the plaintiff consult a tax expert specializing in GST before committing to the purchase.
5. Not knowing your limits
Along with keeping reliable records, recognizing when the client needs independent professional advice is crucial to mitigating the risk of liability exposure. We often call this strategy “risk-shifting,” and it’s a highly effective method for both reducing the likelihood that you will be sued and for strengthening your defence if you are sued.
The challenge, however, is in being able to admit that you don’t know the answer, having the courage to advise the client to seek an outside professional opinion, and ensuring that your advice is properly documented.
Some licensees are now including language in the contract of purchase and sale stating that the client has been advised to consult with a lawyer regarding the terms of the contract. However, the mere inclusion of independent professional advice clauses in the small print of a contract is not effective risk-shifting and may not belong in the contract.
Proper risk-shifting involves explaining to the client that there are limits on the advice that you can offer and giving specific examples of the sorts of issues where legal, tax planning, accounting or other expert advice would be helpful or necessary.
We would generally advise against including independent professional advice clauses in the contract of purchase and sale, unless they are included as subject conditions for the benefit of the buyer or seller.
A better practice, if the parties do not want to make the offer subject to the buyer or seller receiving professional advice, is to confirm in writing with your client the specific areas in which you have advised them to seek expert advice. Documenting your advice is critical, and effective risk-shifting involves being specific as to the nature of the risk that might arise and the type of outside professional opinion that would assist the client in the circumstances (rather than resorting to general boilerplate).
Real estate is a tough business, and real estate licensees are often caught in the crossfire when a deal breaks down, regardless of whether or not they have done anything wrong. While there is no surefire way to protect yourself from lawsuits or Council complaints in all circumstances (short of an early retirement), we hope this article will help you identify the factors that can lead to trouble, and arm you with the tools to better defend yourself if you ever find that you’re the subject of a claim or complaint.
