Commission disputes, property-condition disclosure and agency issues are the most common source of lawsuits for the real estate industry, according to a report prepared for the National Association of Realtors trade group.
The 2007 Legal Scan also found that cases involving fraud and deceptive practices, breach of fiduciary duty and breach of contract were the source of the most damage awards.
Report findings are based on an analysis of 655 lawsuits and jury-verdict reports. Commission disputes were at the center of 153 of the cases, compared with 132 cases relating to property-condition disclosure and 100 relating to agency issues.
The most costly damage award stemmed from a sexual harassment lawsuit filed by the former employee of a Rapid City, S.D., property management firm against that company, Barker & Little Inc., and owner Douglas Hamilton. The employee was awarded $4.16 million in that case.
Other costly damage awards related to a case in which the highest bid on a property was not accepted and a case in which an agent was terminated and alleged that she was denied access to her client lists.
In most of the cases studied, the real estate agent or broker was not found to be liable, according to the report. Of the 319 cases ending with a judgment on the real estate professional’s liability, 210 cases (66 percent) were resolved favorably to the real estate professional and 159 of those cases (50 percent) did not require a trial, the report states.
The agent or broker was found liable in 109 of the cases (34 percent) that had a determination of liability, and damages were awarded in 93 cases. Twenty-eight of the damage awards were between $100,000 and $499,999; 26 were between $10,000 and $49,999; 16 were between $50,000 and $99,999; 14 were under $10,000; and eight were between $1 million and $4.99 million.
About 19 percent of the cases involving damages were in California, followed by 7 percent in Texas and 6 percent in Connecticut.
The study found that 22 cases were settled, and the largest settlement — at $2 million — related to a defamation lawsuit filed by a former agent of a RE/MAX office after she was fired from that office.
When compared to an earlier survey in 2005, the 2007 report found a large increase in the number of fair-housing lawsuits relating to handicap discrimination, which increased from 24 cases in 2005 to 55 in the 2007 report, and race discrimination, which increased from 24 cases in the 2005 report to 55 cases in the 2007 report.
In all, the latest legal report identified 184 cases relating to fair housing, “but when cases involving rental properties were disregarded (they are in a separate Real Estate Management survey), there were 73 fair housing cases,” which represents a decline from the 110 nonrental property cases in 2005, the report states.
There were 25 breach-of-contract cases identified in the latest study, compared with 50 in 2005, and the report noted a decline from 84 to 66 in the number of deceptive trade practices and fraud cases, and a decline from 35 cases in 2005 to 25 cases in the 2007 study relating to alleged illegal kickbacks under federal real estate law.
The number of legal cases relating to third-party liability increased from 13 in the 2005 study to 32 in the latest study, while the number of cases relating to employment issues rose from 42 to 54 and the number of antitrust-related cases jumped from 10 in 2005 to 19 in the 2007 study.
This rise in antitrust cases related to a rise in cases over alleged illegal tying agreements from one case in 2005 to eight in the 2007 study. A tying agreement may require that one service must be purchased as a precondition to obtain another service, for example, and not all tying agreements are illegal.
The study also focused on real estate-related issues addressed by statues and regulations. About 47 regulations or statutes identified in the study related to privacy aspects of technology, compared to two for this category in the 2005 report.
Meanwhile, the number of statutes and regulations relating to anti-solicitation laws dropped from 60 in 2005 to 22 in the latest report.
Regulatory action relating to minimum-service agreements — which have been controversial because of opposition to some of these measures by consumer groups and the U.S. Federal Trade Commission and U.S. Justice Department — are on the rise, totaling 13 in the 2007 report. No minimum-service regulatory measures were reported in the 2005 study.
The number of regulations relating to buyer representation and environmental disclosure also rose significantly since the 2005 study.
A survey of 224 real estate professionals asked respondents to rate the significance of a range of real estate issues, whether the issue was likely to increase in importance over the next two years, and whether further training about the issue is needed.
“Agency issues are the dominant theme,” the report states. “Not only are they a significant source of litigation, legislation and regulation, they are also cited by the survey respondents as an important source of legal exposure.”
About 32 percent of respondents said that agency issues are “a significant source of current disputes,” and identified agency issues such as breach of fiduciary duty, dual agency, agency disclosure and minimum-service agreements as “particularly significant.”
About 40 percent of respondents ranked eight of the agency issues identified in the top three, and six of those issues top the list, the survey found.
Commission disputes and the disclosure of structural defects also ranked high as current issues.
One respondent stated, “Dual agency, particularly single-agent dual agency, remains a bull’s-eye on our backs,” referring to a practice that is allowed in some states in which a single agent can represent both a buyer and seller in the same real estate transaction.
About 39 percent of survey participants stated that kickbacks are significant sources of current disputes, while 36 percent said affiliated business arrangements are significant. And about 54 percent believe that issues relating to disclosure of settlement costs are “moderately significant.”
These issues all related to the federal Real Estate Settlement Procedures Act, a federal act that defines permissible and illegal real estate practices.
Agency and RESPA issues are most likely to increase in significance over the next two years, survey participants said, and also cited technology, third-party liability and disclosure as important issues.
Minimum-service agreements, breach of fiduciary duty, buyer representation, dual agency, agency disclosure and transactional representation/non-agency representation were picked by respondents, in that order, as the most likely to be future problem areas.
And RESPA-related issues are also “likely to increase in importance as well, according to the survey respondents,” the report states.
Agency issues rank high on the list of significant training needs, the report states, along with RESPA, technology and antitrust issues, and disclosure issues including meth labs, mold, valuation and structural defects. Commission disputes and procuring cause also rank high on the list of training needs, the report states.
Other areas that ranked high in training needs include: race discrimination and national origin discrimination, deceptive trade practices and fraud, flipping, “as-is” clauses, frivolous lawsuits, affinity groups, licensing, professional liability, breach of contract, and personal assistants.
The report is available to National Association of Realtors members. A summary is available at the Realtor.org Web site.
