Market changes = remorse
Tips for protecting yourself from seller/buyer remorse claims
By Kelly Murray, Whitelaw Twining Law Corporation
Four years ago, I wrote an article for the Risk Report discussing the importance of doing proper market analysis when giving advice on the value of a property. This remains one of the most common claims that I see when defending real estate agents.
When I wrote the last article, the market had been extremely hot and many of my files were claims by sellers saying their agent did not value their property appropriately and it had sold for less than market value. As the current market changes, we’re starting to see buyers claiming that they overpaid for property based upon alleged representations made by real estate agents. Whether the market is going up or down, someone often feels remorse and looks to be compensated.
Given this changing market, it seemed like a good time to revisit the duty of giving advice on property value and the steps an agent can take to reduce the likelihood of such claims, or at least ensure the best possible defence should such a claim be made.
Proper valuation is obviously one of the most important aspects of what an agent does for the client and the one most likely to make a client happy or to cause upset.
The courts have repeatedly held that a real estate agent must use reasonable skill, care and diligence when estimating fair market value (West Coast Engineering Ltd. v. Homelife Benchmark Realty Corp., 1994 CanLII 1130 BCSC).
Most agents understand that to give such advice, it is necessary to carefully review and compare the client’s property to past sales and current listings. The agent must also consider relevant factors that may make a property more valuable than an apparent comparable property, such as unique development potential or a particularly desirable location. Similarly, the agent must investigate any factors that could negatively impact a property’s value, such as unexpected municipal or provincial restrictions (ex. zoning, setbacks), environmental issues, covenants, rights of way, etc.
Depending on the property and the issues, it may be necessary to do more than a search for comparable sales and listings. For example, reasonable diligence may require an agent to pull all charges on title, review the city hall file on the property, investigate various provincial ministries or speak to city planners in order to reasonably give advice on fair market value. The Professional Standards Manual provides guidance on the kinds of investigation that should be done prior to listing a property; the extent of that investigation will depend on the property.
Record your actions
Using reasonable skill, care and diligence is only part of the work. It’s also important to record the work you do and preserve it in your file.
To successfully defend a claim of negligent valuation of property, the agent must also be able to show that such care was taken. Documents, including notes that were created at the time the work was done by the agent, provide some of the most important evidence that your lawyer can use when defending a professional liability claim.
In the recent case of Tsai v. Li (2019 BCSC 1317), the court again considered a claim that a real estate agent had promised to obtain the best possible or, in that case a “heavenly price,” and had failed to do so as the property was subsequently assigned (twice) for a higher price. The court found the seller not to be credible and found that the real estate agent had met the applicable standard of care, as the evidence showed the original contract price was fair market value at that time. The court accepted the real estate market was rising quickly (this was a 2015 sale), and the subsequent assignments did not establish that the original sale price was under value.
This was a difficult case because there were two relatively quick assignments of the property, but it shows that such claims, even with unusual facts that appeared to favour the seller (multiple assignments for profit), can be defended if there is good evidence on fair market value. In Tsai the defence used appraisal evidence and the testimony of the agent to establish that the agent had met the standard of care when giving advice on the value of the property.
In many cases I have handled, the original documents that the agent considered when giving advice regarding fair market value have not been preserved. Part of a court’s consideration when deciding a case is always the credibility of the witnesses; for the judge, the existence of documentary evidence supporting a witness’s testimony can often be the deciding factor on accepting one version of events over another. In Tsai, the plaintiff was not believed, and the appraisal evidence supported the agent’s testimony. However, that is not always the case, and the existence of evidence of the work done by the agent to establish a price is vital to defending such claims.
The most common form of documents that are useful in market value claims is the Comparative Market Analysis (CMA). A properly formulated CMA that includes comparable sales and listings and addresses other relevant market considerations is an effective way to show a court what an agent did to establish market value. Unfortunately (and despite my advice in the last article), agents do not always preserve the CMA in their files. With the ability to keep such documents digitally, there is really no excuse not to save a copy of your CMA for each listing.
In slower markets, I have also seen claims arise based on allegations that an agent failed to keep a client up to date on market conditions, resulting in the property being undersold when the market rose. In slow markets, a property may need to be exposed for long periods of time, and price adjustments may need to happen during the course of the listing. Listing agents should consider conducting the same type of analysis as done at the start of a listing whenever price changes are considered or when offers are made, in order to properly advise and fully inform a client on market conditions. Again, keeping these CMA updates is an important part of being able to defend claims against you.
If your practice is not to present a formal CMA as part of the listing presentation, it’s still important that any research you do related to a property’s value be preserved in your file. This can mean saving lists of comparable sales, listings and notes about your analysis. Use of a checklist that documents research done on each listing is a useful tool for both ensuring you fully investigate a property and for defending against a claim that you failed to do so.
Buyer’s agents also must think about keeping a record of the investigation they have done before they advise a client on offers. In a slower market, buyers often feel remorse after purchasing a property, especially where the market drops after they have entered into the contract. We have started to see claims where buyers are refusing to complete sales on the basis that they were misled on value. Therefore, it is as important for buyer’s agents to be able to defend advice given on market value as it is for listing agents.
In my experience, it is rare that real estate agents can provide legal counsel with the original data/research considered when assessing value to assist in defending themselves. This means that the work done by the real estate agent is harder to show to the court.
Court decisions often turn on documents, as the testimony of parties can be intentionally or unintentionally self-serving. Where parties have documents to back up their version of events, a judge is more likely to accept that version. So when, as defence counsel, we can put into evidence at trial a CMA or a completed checklist, or lists of comparable sales and listings (with dates showing they were generated before or at the time of the listing), we are well on our way to successfully defending a claim.
The danger of reconstructing such data after a claim is made was seen in West Coast Engineering Ltd. v. Homelife Benchmark Realty Corp. (1994 CanLII 1130 BCSC), where the court commented on the need to scrutinize the agent’s evidence with care after cross-examination exposed that documents presented to the court had not actually been part of the agent’s review at the time of the listing.
Fortunately, the court concluded in West Coast that the agent had used reasonable skill, care and diligence in his market analysis, but the risk created by not having available the original research materials could have been avoided by either printing hard copies of what was reviewed at the time or saving the data in an electronic file.
Similarly, making and keeping notes of discussions with clients can also be useful when defending professional liability claims. Such notes are extremely important where a client is giving an agent specific instructions, especially if those instructions are different than the recommendations being made by the agent (for example, in valuation cases where the client does not take an agent’s advice on list price or later price adjustments). The importance of such recordkeeping can be seen in Central Realty v. Holmes (2003 BCSC 436), where the judge commented in the Reasons for Judgment that the agent had taken “copious notes” when describing the agent as “careful and thorough.”
The importance judges give to notes is understandable when one considers that the limitation period for starting a civil claim is two years plus another year for service of the claim. This means that an agent may be unaware of an action for three years, during which time the agent has handled many, many more transactions.
The courts frequently point out in claims against professionals that clients are more likely to have a reliable memory of a one-time important event than the professional who deals with several clients and transactions every month. The existence of notes takes away the advantage that the client has in this regard; their value cannot be overestimated. And yet, like the CMA, it is very rare for me to see notes in an agent’s file.
The reason that all of this documentary evidence is so important is that a real estate agent does not have to be right about fair market value to defend a civil claim. As long as the valuation is not grossly over or under fair market value, a strong defence can be mounted on the basis that the agent met the standard of care by doing sufficient research. This can be true even if an appraiser gives the opinion that fair market value was different than the sale price. Real estate agents are not held to the standard of appraisers (Nixon v.Eden 1998 CanLII 6627).
Therefore, claims against agents based on negligent valuation can be successfully defended even where the appraisal evidence gives a different fair market value, but this can only be done where the court accepts that the agent applied reasonable skill, care and diligence. That evidence must come from you – so preserve it.