QUESTION: Our brokerage represented the Buyer who acquired a house that needed considerable work. They could not do the needed repairs prior to COE and opted to wait a few months. They traveled out of the country extensively and were thus concerned that they could not oversee the repairs themselves.
Our Agent has her own property management company that she handles separately under her own broker’s license. The Buyers sent the Agent $30,000.00 and she set up an escrow account to pay the Buyer’s repair people. She helped the Buyers secure comprehensive bids to do the repair work. She prepared a budget for the work that needed to be done. She arranged for the workers to perform the work and instructed the workers to send their repair bills directly to her property management company and she paid the bids from the escrow account.
When the Buyers returned home, they were extremely dissatisfied with the work that was performed. They found out that much of the work was done by the Agent’s uninsured handymen. The Buyers have spent $75,000.00 correcting the problems. They are suing the Agent and her Property Management Company on a variety of theories including the claim that she was acting as an unlicensed General Contractor and she improperly used unlicensed workers.
Our Agent does not have separate insurance. Our E&O carrier has denied her claim because (a) our brokerage does not handle and are not insured for property management activities; (b) the Buyers are not suing us; and (c) the Agent was acting outside the course and scope of her relationship with our brokerage. I am very worried about our Agent. Does she have liability for this claim?
ANSWER: Unfortunately, these facts can be used to establish that the Agent was acting as a General Contractor within the definition of Business and Professions Code Section 7025 et seq., and she needed a license to oversee the submission of bids to make repairs to the property and she oversaw the process of making the repairs and paying for that work. Because of the extensive costs, permits were required but, without a license, she may not have obtained all of the required permits and approvals.
The Agent could well be liable to the Buyers for acting as an unlicensed general contractor and even be subject to other civil penalties. Based upon comparable prior cases, she may have to reimburse the Sellers for the $30,000 she used to pay the workers and she could well be found to be responsible for the $75,000 in damages. Without insurance coverage, she will need to pay the legal fees and costs of her own attorney. Depending upon any agreements that her property management company had entered into with the Buyers, she may also be liable for the Buyers’ attorneys’ fees.
A significant problem in this case is that the Agent used unlicensed handymen. Agents often tout the abilities of unlicensed workers to be able to effectuate the same repairs that a licensed individual would do but for less money (especially if they are doing so without securing any required permits)! In this case, General Contractors must use licensed workers for certain types of projects (such as electrical and plumbing work). Even if the unlicensed workers did not do that type of work; and, unless the Agent expressly warned the Buyers that she was using unlicensed workers and that she warned the Buyers about the potential consequences of not getting permits, then she could well face significant liability for what she did, and did not do, in providing these post-close-of-escrow services.
When recommending inspectors or repair people to clients, Agents should provide their clients with written lists of individuals and companies who are qualified to do the work. The vendors on the list should only include licensed, financially solvent, preferably insured, individuals and companies who are reputable.
Agents should avoid hiring and/or paying for work to be done through escrow or outside of escrow on any property that they list or sell.
Lists of recommended inspectors or repair people should contain appropriate disclaimers to protect the Brokerage and its Agents from liability. The recommended disclaimers are:
It is expressly understood and agreed that neither Broker nor its Agents will serve in the capacity as a General Contractor to determine what work is to be done, to assemble bids or to oversee the work performed by repair persons hired by Sellers and/or Buyers.
It is strongly recommended that Sellers and Buyers only hire people who have appropriate licenses and insurance coverage. Sellers and Buyers need to make sure that all repair work complies with applicable government regulations, including, but not limited to, the issuance of permits, and complies with any agreements between the principals. Broker has not verified, and will not verify, the licensing and insurance information supplied by others nor will Broker determine if the repair work is done properly.
Agents should continue to recommend appropriate professionals to their clients. This is a worthwhile service that real estate licensees can perform to bring added value to the transaction. However, Agents must not make recommendations strictly on the basis of saving money and/or recommend the use of unlicensed professionals, especially with projects that exceed $1,000 and require a permit. That type of recommendation can be extremely penny-wise and pound foolish.
BEST PRACTICE TIPS:
- If a Listing Agent knows that the Seller has used an unlicensed repair person, that fact should be disclosed, in writing, to the Buyer at the time the repair and all other property conditions are disclosed.
Example of Disclosure: Seller used Fred Feeble, an unlicensed handyman, to repair the leak in the kitchen sink on January 4, 2019.
- If an Agent knows that their client, (either the Seller or the Buyer), intends to use an unlicensed individual (no matter how the client learned of that person’s name), the client should be warned, in writing, about the potential problems that can flow from their decision.
Example of Warning: Many people use unlicensed repair people to save money. However, using unlicensed individuals may create problems because these people may not be qualified to do the work; they may not know all of the legal requirements for performance of that work; they may not have insurance, performance bonds or other means to enable them to financially stand behind the work performed and, if permits are not pulled, the work may be deemed illegal which could trigger negative consequences including, but not limited to, fines, red-tagging the project, and/or requiring that the unpermitted work be completely removed.
- When scheduling an inspector or repair person, the Agent or their assistant needs to advise the vendor and the client that the Agent is strictly performing a scheduling function for the client as a customer service. It should be quite clear that neither the Broker nor the Agent is hiring the inspector or repair person and that they are not serving as a General Contractor.
Example of Instruction: Please issue your report and bill in the name of (Insert name of Client) but you can send it to the client in care of our office. The client is the person who is hiring you.
DO NOT FORWARD TO SELLERS OR BUYERS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2019 10/25/19