Friday
October 31, 2014

The Law & You: Lawsuits Hit Property Managers the Hardest

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The Law & You: Lawsuits Hit Property Managers the Hardest

Considering today’s vigorous real estate market and litigious society, it’s no surprise that the number of lawsuits filed against real estate practitioners is growing every year.

The good news is that licensees were found not liable in 73 percent of cases brought against them from 1997 to 1999, according to NAR’s 1999 legal environment scan, Past, Present, Future: Legal Issues and Trends Facing Real Estate Professionals. But as anyone who’s been involved in a lawsuit knows, simply having to defend an accusation takes enormous amounts of time and money, regardless of the outcome.

The scan, which reports on more than 420 cases brought against real estate practitioners from 1997 to 1999, identifies areas of vulnerability, which could help you take action to prevent future claims.

Property management cases are overwhelmingly the most common type of claim and have also shown the largest spike since the last study. Of the 181 property management cases reported, almost three-quarters related to either property condition (such as faulty wiring or broken stairs) or events that occurred on the property (such as a fight or a dog bite).

Property management cases, which often involve personal injury or even death, also represent some of the largest damage awards.

Also very common in the ’97 and ’99 reports: property condition disclosure cases. The disclosures that licensees are most frequently accused of omitting are structural problems and environmental problems, including lead-based paint hazards.

Fair housing cases, the third most common type of claim, increased sixfold since the ’97 report. Half the cases were discrimination complaints based on disability or familial status, the two protected classes added most recently to the Fair Housing Act. Those cases often involve landlords’ refusal to let people alter their units or otherwise accommodate a disability or refusal to rent or provide services to families with children.

Agency cases saw a dramatic increase of 333 percent. Half the agency cases in the 1999 scan involved either breach of fiduciary duty (a licensee’s violation of an agency relationship with a client) or not properly disclosing dual agency.

The damages

Again, in the vast majority of cases, licensees were found not liable. However, the cases in which damages were awarded illustrate the potential monetary risks that real estate practitioners face every day.

Of the more than 400 cases included in the study, 50 reported damage amounts (the other cases were settled, still pending, or unreported). The majority of those with reported damages involved allegations relating to property management, agency, or property condition disclosure.

The amount of damages awarded ranged from $2,000 to $6.5 million. In more than half the cases, damages exceeded $50,000.

Property management cases, the most common type of case, resulted in some of the biggest awards. The largest verdict, $6.5 million, involved a 16-month-old baby who was killed by a pit bull when the baby and his mother were visiting a tenant at the property. In another case, regarding a convenience store clerk who was killed during a robbery at the property, the plaintiff was awarded $1.9 million.

Other property management cases involved liability for injuries that resulted from the condition of common areas of leased property, such as falls caused by broken steps.

Cases in which licensees were found to have breached their fiduciary duty to their clients accounted for two of the six largest damage awards in the report. In one case, a 69-year-old rancher was selling 320 undeveloped acres. Just before the listing agreement expired, his agent bought the land for $611,000 without disclosing to his client that large neighboring parcels were being developed into housing. Nine months later, the broker sold the property for $6 million. The jury awarded almost the difference: $5.3 million.

In the other case, a couple listed their home with a broker and accepted an offer. While the sale was pending, the agent persuaded the sellers to sell on other terms, such that the buyer wouldn’t have to take out a large loan, leaving the sellers with a promissory note. The buyers defaulted, and the sellers had to foreclose and resell the property. The jury awarded $1.1 million in damages to the sellers.

Past, Present, Future: Legal Issues and Trends Facing Real Estate Professionals analyzed more than 400 new court cases, surveyed real estate commissioners and key industry contacts, and studied new legislation and regulations. The print version is $25; a searchable CD version is $15. For more information, search “scan” at onerealtorplace.com or call NAR’s Information Central at 800/874-6500.

Largest Number of Cases, 1997–99

Type of Case 1997 1999 % change
Property management 15 181 1,106 *
Property condition disclosure 90 92 2
Fair housing 12 72 416
Agency 12 52 333
Employment 13 36 154
Third-party liability 13 20 54

*In the 1999 study, fair housing cases relating to landlord-tenant issues were counted as both property management and fair housing cases. In the 1997 study, such cases were included only as fair housing. However, even assuming all 72 of the 1999 fair housing cases were property-management related, there would still be a 627 percent jump in other property management cases. Source: 1999 legal environment scan

Largest Damage Awards, 1997–99

Type of Case (state)

Award Year
Property management* (Md.) $6.5 million '98
Breach of fiduciary duty (Calif.) $5.3 million '97
Property management* (N.J.) $1.9 million '97
Breach of fiduciary duty (Calif.) $1.1 million '98
Property management† (N.Y.) $784,000 '97
Property management† (Calif.) $750,000 '97

*Events on the property †Condition of common areas
Source: 1999 legal environment scan

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