The stakes are often high with commercial transactions. To help real estate licensees avoid commercial claims, we discuss the risks, as well as real-life cases and our top tips so you can avoid a claim.
When Lawsuits Can Happen in Commercial Transactions
Non-disclosure continues to be one of the key reasons real estate professionals end up being sued. That is when a property is sold or leased and the new occupant realizes there are major problems after the transaction has closed. If you know about any issues the property has, as a real estate licensee, you are obliged to disclose.
Lawsuits for misrepresentation can occur when a real estate licensee has over-emphasized the benefits of a property (or downplayed the defects). It’s important to keep any representations about the property accurate and factual.
Breach of Fiduciary Duty
As a real estate professional, you owe a fiduciary duty to your clients. That means acting in their best interests in all that you do. Licensees should avoid any actual or perceived conflicts of interest. Ensure communication with clients is completely transparent.
A commercial buyer or tenant may sue a real estate licensee for negligence. This may happen if there has been a lack of due diligence, and important details have been missed. Even unintentional errors can be regarded as negligence.
If you’re a licensee who’s wondering if you need insurance, just check out these real-life cases. These are actual claims and true accounts of cases CRES is currently helping our members to defend.
Case #1 – Commercial Lease Claim
A lawsuit was lodged against a commercial leasing agent.
The case began when a commercial tenant claimed that, after making improvements to the property, he was unable to open his bar/restaurant due to the absence of a permitted ADA-compliant restroom in the common area. When the landlord refused to provide one, the tenant withheld rental payments. The plaintiff landlord brought a suit against the tenant for the missed rent and compensation for the damage caused to the property by their improvements.
The tenant then cross-complained against the commercial leasing agent, alleging he failed to disclose the unpermitted bathroom. There is no evidence that the agent knew about the permit status of the bathroom. There was no duty on the part of the agent to investigate the permit status of the property or common areas. However, there is a $39,000 claim still open, and CRES is assisting the commercial leasing agent with their defense.
Case #2 – Commercial Lease Claim
An insured real estate licensee helped his client to sign a storefront/commercial lease with the claimant landlord. The client then sold their business to another company, so the licensee helped facilitate the signing of a new lease assignment. However, the newly assigned company breached the contract and did not pay rent.
The landlord sued the client for past rent. The client’s attorney also asked the real estate licensee to contribute to the settlement. Otherwise, the attorney said they would file a cross-complaint and argue to have the real estate licensee pay all the client’s contractual damages. This is currently a $24,000 claim and has not yet been closed
Case #3 – Dual Agent Claim
A real estate licensee was acting as a dual agent in a commercial purchase.
The plaintiff wanted and contracted to buy for $250,000, a 6,000 square foot unit of “end-cap,” built-out commercial space comprising three lots. It was occupied by a paying tenant on a five-year lease.
Instead, for $250,000, the plaintiff was sold a different unit that was only 1,000 square feet and an unoccupied and significantly inferior space.
The real estate licensee showed the plaintiff buyer the larger space. However, while the transaction was in progress, the large space was “re-platted” and it went from 6,000 square feet to 1,000 square feet. During the transaction, the licensee obtained the original plat map, but failed to obtain the revised, updated plat map. The licensee also missed the title report reference about the new, updated plat map.
The estimated claim value for this lawsuit is $300,000.
How Can Licensees Better Manage the Risks?
Risk management is an essential part of protecting your real estate business. Here’s how you can better manage the risks and avoid a commercial claim:
- Remember due diligence is a non-negotiable part of every commercial real estate transaction. Verify property records and check all zoning and environmental regulations.
- Document everything because you never know, you might need it to defend a claim in the future!
- Seek out as much information as possible about the property before listing. It’s important to do your homework.
- Disclose any known issues or limitations that may affect the sale or tenancy of the property
- Avoid conflicts of interest and ensure you have your client’s interests at the center of everything you do.
- When it comes to drafting the contract, ensure you pay attention to the details and double-check everything.
Protect Yourself Against a Commercial Claim
Having the right real estate Errors and Omissions insurance in place can give you peace of mind when dealing with large commercial transactions. CRES Insurance has specialized in insurance for real estate professionals for more than 25 years.
Let us find you the best protection at the best price. As part of one of the largest insurance brokers in the world, we have access to more insurance options than just about anyone.
With CRES Errors & Omissions + ClaimPrevent®, you’ll have access to our highly-rated team of expert real estate attorneys so you can avoid claims.
Contact CRES on 800-880-2747 for a confidential discussion today. We can tailor a policy specifically to suit your needs.