As a real estate broker, you can be held responsible for the things your licensees say. If they say the wrong thing to a client or prospect, you could find yourself facing a lawsuit. While it may seem harmless to discuss the potential for expanding a property, or potential land uses, it’s so important that licensees don’t inadvertently provide advice outside of their scope of expertise. Failing to consider CC&Rs (Covenants, Conditions, and Restrictions) can land the licensee and you as their broker in legal trouble.
In this blog, we will explore the most common things licensees say that could cause a lawsuit. By understanding these risks, and educating your licensees about what not to say, you can protect your brokerage.
Understanding CC&Rs and Their Impact
Covenants, Conditions, and Restrictions (CC&Rs) are governing documents typically used by Homeowners’ Associations (HOA), condominiums, co-ops, or private neighborhoods.
CC&Rs regulate the appearance of a property, maintenance and how a property is to be used. For example, CC&Rs can regulate things such as:
- Fencing around a property
- Whether people can run businesses within the community
- The type of garbage cans allowed
- Landscaping and garden maintenance
- Paint colors and renovations
- Obstructions to views
CC&Rs can even ban homeowners from hanging their laundry outside!
Real estate licensees need to consider that, whether a home has a paid Homeowners Association (HOA) or not, there may still be CC&Rs that impose restrictions. It is also possible there may be a lack of CC&Rs which means there isn’t adequate protection for homeowners.
CC&Rs vary widely across different properties. So, licensees must be extremely cautious when making statements about a property’s potential without a comprehensive understanding of these regulations.
Common Risky Statements and Their Consequences
What might seem like an innocuous statement from a licensee could lead to a lawsuit. Here are some common risky statements that could have serious consequences:
- “There is definitely an opportunity for expansion if you want to build a second story”
- “I’m sure your view would be protected”
- “This property can fit a tennis court”
- “You could easily build out”
- “I have a contractor that could handle that”
- “The property could be rented out for weddings”
- “You could run your business from this property”
- “This property has great potential for short-term rentals”
- “The neighboring property is slated for development, which will enhance your property’s value”
- “The neighborhood is completely safe and free from crime”
- “You can easily subdivide the property for additional income”
- “The property is in a flood-free zone”
- “The property is in excellent condition with no structural issues”
- “The property has no history of pest infestation”
- “The property has a guaranteed rental income” (without a legally binding agreement)
- “The property has no pending legal issues or boundary disputes” (without conducting a thorough title search)
It is crucial that licensees only provide accurate and verified information to clients and prospective buyers. Unsubstantiated statements can lead to false expectations and legal action. Promises about rental income, development opportunities, views, zoning, and the state of the neighborhood can make a property seem more desirable to a buyer and may influence their decision to purchase. However, if things do not go to plan afterwards, who do you think they will tell their lawyers to take action against? You got it — their real estate licensee who told them something they shouldn’t have, as well as the broker.
The Risk of Omission
Keep in mind that omitting facts about a property is also just as risky as saying the wrong thing. For example, if a property has an HOA that has been especially active in complaining about property issues, failure to disclose this could also see both the licensee and broker in legal hot water.
Mitigating Legal Risks and Protecting Your Brokerage
A lawsuit will have both legal and financial repercussions on your brokerage. So, it’s worth doing everything you can to avoid them. Here’s what you can do to minimize the risks:
Educate Your Licensees
Make sure your licensees understand the consequences of their actions and what they say to clients and prospects. They need to know that conducting thorough property research is essential before making any statements about a property’s potential. Information must be verified and no statements should be made outside of a licensee’s scope of expertise.
Disclose, Disclose, Disclose!
Good recordkeeping is also important for your brokerage. Ensure that your licensees maintain detailed records of conversations and disclosures made to clients regarding property features and restrictions. These records will help you defend a lawsuit should you need to.
Recommend Independent Inspections & Advice
Brokers and licensees should always recommend to clients and prospects to get their own independent advice about issues outside of the real estate realm. For example, building inspections, pest inspections, zoning issues advice, or legal advice.
Ensure Your Brokerage Is Insured
Real estate brokers have to navigate many challenges running a real estate business. Insurance coverage is essential to make sure that you can defend a lawsuit if a claim is made against you or your licensees.
From Real Estate Errors and Omissions (our specialty for 25+ years) to Business Owners Policies, Cyber Liability Insurance, and Worker’s Comp, we can find you the best policy for your money. We are part of one of the largest insurance brokers in the world, so we have access to more options than anyone else.
CRES is your insurance specialist for real estate companies and professionals. Contact our team at 800-880-2747 to find out how we can customize an insurance policy to suit your needs today