According to the Alzheimers Association, one in three seniors dies with Alzheimer’s or dementia. Every 65 seconds, someone in the United States develops the disease.
In your real estate business, you may come across clients in various stages of these conditions. When dealing with clients with reduced mental capacity, you need to be aware of your obligations as a real estate professional, particularly in relation to contracts and transactions.
Here’s what you need to know about dealing with clients with Alzheimers and dementia, or where you suspect mental incapacity exists.
Legal Obligations
Mental capacity or mental incapacity are both complex issues in a legal sense. Capacity is based on both medical and legal factors.
Legally, all parties to real estate contracts must have the capacity to enter into a contract. In California, the legal basis for capacity to enter real estate contracts lies in the California Civil Code. Sections 38 and 39 state that a person of unsound mind has no power to enter into a contract. “Unsound mind” is defined as a person who is “substantially unable to manage his or her own financial resources or resist fraud or undue influence”. Importantly, an unsound mind cannot be proven by isolated incidents of bad judgment.
In California, capacity is presumed unless proven otherwise. Therefore, it’s necessary to prove incapacity, not capacity. In proving incapacity, it’s necessary to demonstrate that the person’s mental function is significantly impaired, and their ability to understand and recognize the consequences of their actions is significantly compromised.
An important factor with Alzheimers and dementia is that there are different degrees of incapacity associated with these conditions. Just because a person suffers from these conditions does not necessarily mean they cannot sell or purchase a property. Capacity can fluctuate over time and differ according to different situations and tasks. There are good days and bad days for people with Alzheimers and dementia, so there are various levels of incapacity.
Potential Liability
As a real estate professional, it’s important you fully understand your duties and obligations. If you’re dealing with a client with Alzheimers or dementia, and it’s proven post-sale that they were of unsound mind and not legally able to enter into a contract, you could find yourself dealing with a lawsuit. A lawsuit could see you facing harsh financial penalties and damage to your reputation.
What You Should Do
If you suspect your client may not be capable of fully understanding a contract to sell or buy a property and/or the consequences of it, follow these strategies to protect yourself and the interests of your client:
Undertake due diligence
Due diligence is critical to both ensure you’re informed about the person’s mental capacity and to protect yourself against future liabilities relating to the transaction.
This may involve further discussions with the client about their level of understanding about the contract for sale. Ensure that all discussions, meetings and any statements from the client confirming they do have the capacity to make a decision regarding a property are in writing and documented in the client file. If called into question in the future, you can then show that some effort was taken to address any concerns regarding capacity.
Seek advice from a lawyer or medical professional
Since capacity is based on factors in both the legal and medical domains, it may be necessary for you to contact a lawyer and/or a medical professional. Incapacity can only be proven in the courts or through a legal document, such as power of attorney, where a person gives another party legal permission to act on that person’s behalf. In some cases, a formal assessment by a health professional can be required in order for this to happen.
While you may have strong suspicions that a client has Alzheimers, dementia or some other condition which impacts his or her capacity to enter a contract, it’s not your role to determine this.
If you have CRES E&O + ClaimPrevent®, you’ll have access to professional legal advice from fully qualified attorneys 7 days a week to assist you.
Remember, you have a duty to your client
You have a duty to your client to ensure you work in their best interests. If they’re clearly unable to enter into a contract due to Alzheimers or dementia, you have an obligation to make additional efforts to understand the nature of the incapacity. However, the duty you have to your client doesn’t negate the ethical obligation to treat all parties to a real estate transaction with honesty.
Protect Yourself Against a Potential Lawsuit
CRES has been providing superior E&O coverage for real estate professionals for decades. Ensure you’re adequately protected against lawsuits and risks that you face in your real estate business.
Contact CRES at 800-880-2747 for a confidential discussion today. Our team can tailor an insurance solution just for you.
