I Made a Referral – Am I Liable For any Resulting Negligence?

 

If a professional fails to exercise reasonable care in referring a competent individual to a client, the professional could be held liable for any resulting damages. Although the Arizona courts have yet to specifically address the issue of negligent referrals, support for such a cause of action can be found in case law of other states.

Many negligent referral cases involve lawyers.  In an article published in the Arizona Attorney magazine the author wrote: “. . . you should be aware that there is such a thing as ‘negligent referral,’ in which lawyers have been successfully sued for negligently referring a person to an incompetent or dishonest lawyer. In view of this, you will probably want to make sure that if you refer someone to a lawyer, it is because you have a respect for that lawyer’s competence and effectiveness.” Arizona Attorney, October 2006 43-OCT Ariz. Att'y 10 David D. Dodge (citing I Mallen & Smith, Legal Malpractice § 5.9 (2005)). 

The same advice applies in the real estate context.  In Thomson v. McGinnis, 465 S.E. 2d 922 (W.Va. 1995), a West Virginia court found that a real estate broker may be liable to a buyer for negligent selection and retention of an inspector. In this case, the broker hired an inspector to inspect the heating system of a house. Unfortunately, the inspector hired by the broker was not certified to work on heating systems. The “inspection” consisted only of listening to the furnace while it was running, after which the inspector signed a certification stating the furnace functioned properly. Having received the certification, the buyer purchased the home. After the close of escrow, the buyer discovered that the furnace did not function properly. A certified technician informed the buyer that the furnace had many problems and was unsafe to operate. The buyer then sued the inspector and the broker who had hired the inspector.

The broker argued that she could not be held liable for the actions of the inspector. However, the court stated that the broker may have been negligent in hiring the inspector, who was not certified to inspect heating equipment. The court stated:

While a real estate broker bears no responsibility to conduct an independent investigation of a latent defect, when such broker volunteers to secure an inspection of the premises, or some part thereof, by retaining on behalf of the buyer a third party to conduct the inspection, then that real estate broker may be held liable to the buyer for civil damages if the broker in retaining said third party is negligent in the selection and retention of the third party and if such negligence proximately causes harm to the buyer.

Thus, in making real estate related referrals, a broker should consider:

·        providing the client with more than one referral option, when possible,

·         insisting that the client determine which individual should be hired,

·         encouraging the client to inquire as to the qualifications of the individual and, if applicable, determining whether the individual has errors and omissions liability insurance coverage,

·         not directly hiring any person or business on the client’s behalf.

In conclusion, clients expect their brokers to refer or recommend competent individuals to assist in connection with a home purchase.  And generally, when a broker refers a competent person to do work for a client and exercises no supervision or control over the work, the broker should have no liability even if the person acts negligently.  

 

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.).  Watch for the Fourth Edition, which should be available soon. 

 For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/22/23

 

Agency - The First Question that a Lawyer is Going to Ask

Clearly defining the agency relationships in a real estate transaction is important for both the clients and the brokers/salespersons (“broker”). Brokers must be clear about who they represent in a transaction to determine what duties are owed to which party. Agency relationships become extremely important if a dispute arises – the first question that a lawyer will likely ask a broker when a claim is filed is “who did you represent?”

 Agency Relationship between the Broker and Client

Agency is a relationship in which one person (the agent) is authorized to represent the interests of another (the client) in business dealings with third parties. By the early 1900s, the Arizona courts recognized the agency relationship between the broker and client in a real estate transaction.  By 1950, the Arizona courts overwhelmingly held that a real estate broker is an agent with fiduciary duties to their client. An agent has fiduciary duties to the client, such as confidentiality, accounting, reasonable care, loyalty, obedience, advocacy, and disclosure.

 Creating an Agency Relationship

An agency relationship is created by consent. An agency relationship may be created by express consent, or it may be implied by the conduct of the parties; no formal agreement is necessary. A broker simply must agree to represent the interests of the client, who consents to the representation and delegates authority to the broker to act on the client’s behalf. Compensation does not establish an agency relationship. Arizona courts have consistently recognized that a broker may represent one party in a transaction but be paid by the other.

 Agency Duties

Many states have enacted agency legislation that attempts to specifically list a broker’s duties to a client and non-client. Arizona has enacted no such legislation, however the Arizona Department of Real Estate Commissioner’s Rules do address a broker’s duties, so it is important to become familiar with A.A.C. R4-28-1101.

The Arizona Association of REALTORS® (“AAR”) Real Estate Agency Disclosure and Election (READE)(10/22) form is designed to assist brokers in defining and establishing agency relationships. Additionally, the use of this form will prevent undisclosed dual agency.

The READE form is not an employment agreement, but a disclosure and election of the agency relationship that a buyer or seller will have with the broker in the transaction. As the READE form makes clear, regardless of whom the broker represents in the transaction, the broker will exercise reasonable skill and care in the performance of the broker’s duties. Further, the broker is obligated to be honest and truthful to both parties and disclose all known facts that materially and adversely affect the consideration to be paid by any party. Additionally, the stigmatized property notice is included in the READE form to alert buyers that information regarding certain “stigmatized” property is not required to be disclosed.

The READE form explains the fiduciary duties a broker owes when representing a buyer or seller exclusively, such as loyalty, obedience, disclosure, confidentiality, and accounting. The form also notifies the buyer or seller that the broker may represent others interested in buying or selling the same or similar properties.

The READE form introduces the concept of dual agency (limited representation). The form discloses that, in the case of dual agency, there will be conflicts and that disclosure of confidential information will be made only with written authorization.

Dual Agency (Limited Representation)

Dual Agency (limited representation) occurs when one broker individually, or two salespeople within the same brokerage firm, represent both the buyer and the seller in a real estate transaction. Dual agency is lawful with prior written consent.

The AAR Consent to Limited Representation (12/02) form should be used to obtain the consent of the parties in a dual agency situation.  This form explains dual agency to the buyer and the seller prior to obtaining the parties consent to the relationship.

In general, a dual agent must do the following. 

• Exercise reasonable skill and care in the performance of the agent’s duties.
• Deal honestly with both buyer and seller.
• Disclose (in writing) to both buyer and seller:

·         any information that the seller is or may be unable to perform;

·         any information that the buyer is or may be unable to perform;

·         any material defect existing in the property being transferred; and

·         the possible existence of a lien or encumbrance on the property being transferred. See R4-28-1101(B).

In general, a dual agent must not do the following.  

·            Advocate or negotiate on behalf of either the buyer or the seller.

·            Disclose any confidential information that would place one party at an advantage over the other party (without the informed consent of the other party), such as:

o   the buyer is willing to pay more than the price offered;

o   the seller is willing to accept less than the listing price;

o   a party will agree to financing terms other than those offered;

o   the repairs or improvements that a seller is willing to make or that the buyer is willing to forego; and/or

o   the confidential motivating factors of either party.

Termination of an Agency Relationship

After termination of an agency relationship, the fiduciary duty is ended. However, confidential information must remain confidential after the termination of the relationship. NAR Code of Ethics, Standard of Practice 1-9 imposes a similar obligation to preserve confidential information provided by clients in the course of an agency relationship after the relationship is terminated.  Confidential information should not be revealed, used to the disadvantage of the client, or used to the advantage of the REALTOR® or other third parties. 

Who Did You Represent?

In the event of a dispute or claim, who a broker represented will establish the broker’s duties and ultimately the broker’s liability.  For example, in Aranki v. RKP Investments, 194 Ariz. 206, 979 P.2d 534 (App. 1999) the Court recognized the “important distinctions between the claims” by a buyer against a seller's agent (where no fiduciary duty is owed) and by a buyer against the buyer's agent (where a fiduciary duty is owed).  In a 2015 real estate malpractice lawsuit, the Court quoted the law as set forth in the Aranki case when discussing a broker’s duty to the client versus a broker’s duty to a non-client.  See, The Buyer's Questions - Real Estate Tales From the Courtroom.  And, to read about a case involving the duties of a dual agent, see  The Sex Offender Next Door - Real Estate Tales From the Courtroom.

That is why the first question that a lawyer will likely ask a broker when a claim is filed is “who did you represent?”

 

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.).  Watch for the Fourth Edition, which should be available soon. 

 For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  9/5/23