03/22/2022
CONTRACT LAW IN REAL ESTATE TRANSACTIONS
How much contract law are real estate agents expected to know?
Real Estate agents are generally perceived as key figures in a real estate transaction as they are typically involved from the start to finish, aka “closing”, of a listing or purchase contract and generally act in a ‘representative’ capacity during the entire process. Many of the activities that agents undertake in listing a property, for example creating marketing plans, holding open-houses and providing services on behalf of their client through the escrow process, are customary. What is a bit more difficult to define clearly is the role that agents may have in the actual formation and interpretation of the all-important real estate contract.
A real estate contract is generally and essentially an executory contract between parties interested in transacting with respect to particular real property. While the overall agreement itself may include secondary or executory sub-agreements, they are nonetheless bound by the same applicable contract laws. Thus, contract law is the foundation of any real estate transaction.
A recurring problem I’ve seen in my practice is when real estate agents and brokers are also named as defendants in real estate disputes over the contract itself. When a real estate transaction has not gone as anticipated, the dissatisfied party may try to recover damages from the other party for alleged breaches of the contract. In these transactions, the real estate agents are often named as additional defendants in claims or lawsuits against the other party, usually the seller. A typical claim usually involves the Buyer going after the Seller and their agents for alleged breaches pursuant to the Purchase Agreement or other alleged statutory violations.
Though most purchase agreements are fairly straightforward, there are nonetheless myriad legal issues involved in a successful transaction – the result euphorically encapsulated in three sweet letters: COE (Close of Escrow). Understanding how and when a contract is formed as well as the specifics regarding its ex*****on and enforcement are all crucial to a real estate transaction. Based on the transactions encountered in our practice, there is often, however, a serious gap between the level of contract law necessary to initiate, understand, analyze or interpret the real estate contract for a particular buyer or seller and the level of contract law that can reasonably be expected to be exercised by their respective agents. This gap puts real estate agents and brokers in a precarious situation.
We can readily acknowledge that the duties and responsibilities of a real estate agent are limited in some key ways (i.e. agents can only operate under the supervision and control of their broker). However, given their extensive personal involvement in the process, there nonetheless exists a sense that, somehow, real estate agents are also culpable when something goes wrong, regardless of what the actual facts of the case may be or the extent of their involvement in the alleged wrongdoing.
Most real estate agents are not licensed attorneys and other than the basic educational course required as part of their licensing requirements, do not get much more formal training or education in contract law. Further, regardless of the amount of training, agents are also advised that they should not engage in the unauthorized practice of law – rendering legal advice that may have important legal consequences for their clients is outside the purview of what should and can be expected for real estate agents.
What does this mean for real estate brokers/agents?
Contract law can be complex and nuanced. There is much more to it than most parties and their agents entering into the thousands of real estate transactions everyday realize. I’m reminded of the gap every time our office gets a new inquiry regarding a claim for breach of contract against a buyer/seller that also names their respective agent/broker. And I’m seeing more and more of these types of claims. This attribution of liability to real estate agents and brokers has been both in perception as well as de facto.
Even in the best-case scenario where brokers and their agents are determined to not be liable, the claim or lawsuit itself would have already been a heavy, non-recoverable cost to them. In addition to any potential out-of-pocket costs, defense against these kinds of claims would also likely increase their cost to obtain E&O (Errors & Omissions) or other types of liability insurance.
To be clear, I am in favor of having agents and brokers in real estate transactions. Knowledgeable and experienced agents and brokers can make a huge difference in closing a deal smoothly. Thorough knowledge and familiarity with the nuts and bolts of any real estate transaction is critical to its success. For that very reason, I maintain an active real estate real estate broker’s license to augment my real estate legal practice. The assistance provided by real estate agents can be invaluable in the real estate marketplace and definitely preferable to leaving Buyers/Sellers and Landlords/Tenants to their own device. I shudder to imagine the chaos that would create in today’s legal and real estate environment.
At the same time, it is neither practical nor realistic to expect real estate agents or their brokers to become licensed attorneys. A more pragmatic approach is to examine ways that we can ethically and efficiently deflect some of the liability that has been attributed to brokers and their agents.
It is much more prudent for agents to work with brokers who provide meaningful access to legal counsel (e.g. in-house counsel) or for independent brokers to establish solid working relationships with attorneys whom they easily turn to for legal advice. As with most scenarios, the cost of retaining a reputable attorney upfront will likely be far less than retaining one when a transaction has gone south. Contract law is serious, complex stuff – consumers and real estate agents/brokers alike can benefit by giving it due consideration.
