Legal Pulse 2Q 2016 Highlights

Welcome to the Legal Pulse risk management report. I am Finley Maxson, NAR Senior Counsel.

The theme for the second quarter 2016 research is third party liability, as a number cases this quarter found that third parties could be liable for the actions of real estate professionals.

By way of background, the Legal Pulse is a quarterly report that explores legal issues affecting real estate professionals, and reviews a variety of sources such as case law, jury verdicts, and statutes organized by topic. There is also an Executive Summary that provides a one-page review of this month’s research. The Legal Pulse and Executive Summary are available on nar.realtor for download.

This quarter’s report covered 4 major subject areas with over 50 total subtopics. As in every edition of the Legal Pulse, Agency, RESPA, Property Condition Disclosure are covered, and in addition this report conducts an annual review of section 1031 exchanges.

Starting the discussion of our third party liability, the first case we will discuss is from California, where a seller was responsible for negligent misrepresentations made by the listing broker serving as a dual agent. In Fong v. Sheridan, a buyer asked the licensee about a musty smell on a seaside property’s first floor. The licensee stated that the smell was “sea air.” Following their purchase, the buyers discovered that both an oil tank and septic tank were buried on the property. The remediation of the property was so extensive that the house eventually was torn down. The licensee and real estate brokerage settled with the buyers, but the case against the seller proceeded to trial. The seller was found to be vicariously liable for the licensee’s statements about the “sea air” smell, but the damages awarded to the buyers were less than the settlement amount and so the buyers recovered nothing. On appeal, the trial court was partially reversed and the case was sent back to the trial court to reconsider the damage calculations.

Our second case also comes to us from California, and this case involves a brokerage’s liability for its salesperson. Janie and James Maguire purchased an abandoned movie theater with the hopes of turning it into a dinner theater. The seller expressed concerns to the Maguire’s real estate professional that the Maguire’s project was not feasible, but the real estate professional never told the Maguires this and instead advised them to proceed with the transaction. Following their purchase, the Maguires learned that their proposed development would not be approved by the city. The Maguires filed a suit alleging that the real estate professional failed to alert them that the property could not be converted into a dinner theater. Judgement was entered against the real estate professional. On appeal, the brokerage was found to be responsible for the entire judgment because the brokerage was responsible for the actions of the real estate professional and the real estate professional had disappeared.

The next case involves a brokerage’s responsibility for the actions of a licensee when the licensee was also the seller of the property. In Goodman v. Rose Realty West, a Florida appellate court reinstated the licensee’s brokerage into the lawsuit because the licensee’s knowledge as the listing broker was the same as when he was acting as the seller and so the brokerage would be liable for the licensee’s actions if there was a concealment.

The final case comes from New Jersey and involves a drainage easement running across the property that was not disclosed. The trial court had dismissed the case relying upon testimony from the seller that she did not know about the easement, but the appellate court reinstated the allegations against both the seller and brokerage because further fact finding was required.

The second quarter had some notable developments on the legislative front. South Carolina, Tennessee, and Nebraska all enacted laws regulating teams. South Carolina also enacted laws regarding recordkeeping for electronic records. Notably, the legislation specifically exempts communications which are not intended to be permanent from the record keeping requirements, such as texts, instant messages, voice mails, or social media posts. The law also allows for record storage in the “cloud.”

Nebraska enacted a law requiring the disclosure of noxious weeds. If a seller has received a notice from the state’s Noxious Weed Control in the past three years, this fact must be disclosed to all prospective buyers.

This concludes the 2016 2nd quarter report. Please check back in November for the third quarter report. Thank you.