(This is the first in a series of future Practice Tips on “How to Disclose” Specific Topics)
QUESTION: I recently took two listings of single-family homes. The Seller of the first listing told me that he and some of his neighbors have filed a class-action lawsuit against the manufacturer and distributer of roofing material that was used on their homes which they believe is defective. The Seller says they are “suing everyone” involved in building the homes. The second Seller had been in a HOA lawsuit against the builder/developer for various construction defects that just settled.
Now that I have been told about these two lawsuits, I want to help protect both of these Sellers and myself from any potential claims by the Buyers. What advice should I give to my clients and what steps should I take now that I know about these lawsuits?
ANSWER: The best advice that you can give to both Sellers is that the existence of any past, present or contemplated claims or lawsuits must be properly and fully disclosed to the Buyers. Even if a lawsuit has been settled or otherwise resolved, the fact that there was a lawsuit must still be disclosed to the Buyer. Precisely what information should be provided with respect to those claims or lawsuits is an important legal issue which should be determined by the Attorneys who represent the Sellers in those legal actions.
Sellers also need to discuss with their Attorneys what effect, if any, their decision to sell the Property will have on the claim or lawsuit or any resolution that may be reached. Sellers also need to be warned that whatever they tell you about these cases is not confidential; Sellers need to be told that you will need to disclose whatever information and/or documentation that they provide to you and thus they should discuss this matter with their own Attorneys first.
After the Sellers have received the correct advice, recommendations and warnings, you are obligated to disclose what you know, regardless of the source of that information.
There are essentially four steps that the Seller’s Agent should take when there is a known, past or current claim or lawsuit affecting the Property:
STEP ONE: Document Advice to Seller to Contact Attorney Handling the Claim or Lawsuit to Obtain Information and Documentation to Enable Seller to Make Full and Complete Disclosure.
The recommended language for this written advice, which can be included in an email to the Seller, is on Attachment 1.
STEP TWO: Document Recommendation that Seller Discuss Effect of Selling Property on the Claim or Lawsuit or any Resolution of the Claim or Lawsuit.
The recommended language for this written recommendation (which can be added into the same email that includes the advice in Step One) is on Attachment 1.
STEP THREE: Warn the Seller of Agent’s Obligation to Disclose Information and Documents provided by the Seller.
The recommended language for this written warning (which can be added into the same email that includes the advice in Step One) is also on Attachment 1.
STEP FOUR: Document Agent’s Knowledge of Claim or Lawsuit – To Be Included in Agent’s AVID.
If you receive any information about a past, present or contemplated claim (including a Mediation and/or Arbitration), you should disclose that knowledge and provide whatever documentation you have received from any source using the Attribute, Disclose & Disclaim format for disclosing oral information and/or documents which is on Attachment 2.
If a lawsuit was actually filed by Sellers (either on their own or with others, such as a class action lawsuit) and/or a lawsuit was filed that names the Seller as a Defendant or Cross-Defendant, then the existence of that lawsuit is a matter of public record. Any information that you receive regarding that lawsuit (such as the County where the suit was filed and the name/contact information of the Attorney handling the case for the Seller) should be disclosed in writing and Buyers should be encouraged to investigate that lawsuit. The format for disclosing past or current litigation is on Attachment 3.
If an HOA is involved in the lawsuit, it would also be prudent to warn Buyers that past or current lawsuits can impact the amount of HOA fees and assessments. The recommended language for this written disclosure is on Attachment 3.
PRACTICE TIPS
- Seller’s Agents who are aware of any type of past, current or contemplated claims or lawsuits should provide the Seller with the right advice, recommendations and warnings by following Steps One, Two and Three above and then follow-up with the recommended disclosures to the Buyer in Step Four.
- If Sellers refuse to follow any or all of the advice and recommendations provided by the Seller’s Agent, Seller’s Agent should promptly notify the Manager or Broker (who may want to discuss these issues with Risk Management Counsel); the Seller’s Agent should document the Seller’s refusal by sending an email to the Seller using the format explained in an earlier Broker Risk Management Weekly Practice Tip.
See Weekly Practice Tip: How to Handle Clients Who Will Not Follow Advice?
This Weekly Practice Tip is an attorney-client privileged document 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.
ATTACHMENT 1:
DOCUMENTING ADVICE, RECOMMENDATIONS AND WARNINGS TO SELLER REGARDING DISCLOSING KNOWN CLAIM OR LAWSUIT
Advice to Seller to Contact Attorney Handling the Claim or Lawsuit to Obtain Information and Documentation to Enable Seller to Make Full and Complete Disclosure.
You have advised me that there is a (past, present or contemplated) claim or lawsuit affecting the Property. You need to discuss precisely what information you can and cannot disclose to potential Buyers with the Attorney(s) who have handled or are currently handling your case. It is extremely likely that the Attorney(s) will have court documents (or documents submitted in Mediation and/or Arbitration) that contain information about the Property including, but not limited to, alleged defects, problems and concerns, repair estimates and other material facts that impact the value and desirability of the Property that Buyers will need to know about. It would be best for you to contact the Attorney(s) as quickly as possible to obtain this information and the relevant documentation so that the disclosures can be provided to Buyers.
I cannot secure the information and material for you; there may be matters that are confidential and/or protected by the Attorney-Client Privilege. Simply request that your Attorney put together the necessary information and documentation into a packet that can be provided to Buyers and have that material sent to me.
IF SELLERS RECEIVED A SETTLEMENT/JUDGMENT, ADD:
I have been advised that this claim/lawsuit was resolved and that you received some money. You need to discuss with your own Attorney(s) to what extent you can legally disclose the amount of money you received and/or any other terms of the resolution. It is my understanding that settlements are sometimes confidential. Your Attorney will also need to advise you as to how to disclose the resolution and whether you need any special contract language to be included in the Purchase Agreement with the Buyer which your Attorney will need to draft for you.
Recommendation for Seller to Discuss Effect of Selling Property on the Claim or Lawsuit.
You should also discuss with your Attorney what impact, if any, your decision to sell the Property may have on the claim or lawsuit, including but not limited to, your ability to proceed with the claim or lawsuit, your rights to any settlement or judgment, how will the claim or lawsuit affect the Buyer and/or the impact that the claim or lawsuit will have on the value or desirability of the Property.
Warning to Client re Agent’s Obligation to Disclose
You may have some information and/or documentation regarding claims or lawsuits and, if so, should provide that documentation directly to the Agent. Please be advised that anything that you provide to me as your Agent is no longer “confidential” or protected by the “Attorney-Client Privilege” and must be provided to the Buyer.
ATTACHMENT 2:
DOCUMENTING AGENT’S KNOWLEDGE OF CLAIM OR LAWSUIT
Disclosure in AVID (using Attribute, Disclose & Disclaim Format) of Oral Information that Agent has Received from Seller About a Claim:
On [date] , I was advised by [insert Seller or whoever revealed the existence of the claim] that there is a claim by [insert either Seller or name of person/entity making the claim, such as the HOA] that [insert name of any individuals or entities who are accused of doing something in the claim] is responsible for [insert brief summary of knowledge regarding the claim ].
Neither I, nor my Broker has verified any of this information; we have not and will not investigate the specifics of the allegations, the validity of the allegations and/or the claimed damages, if any. Buyer should investigate.
Disclosure in AVID (using Attribute, Disclose & Disclaim Format) of Written Information that Agent has Received from Seller About a Claim:
On [date] , I received the attached [list out the email and/or documents that were received] from [insert either Seller or name of person/entity that provided the written information ] which concerns a claim that [insert name of any individuals or entities who are accused of doing something in the claim] is responsible for [insert brief summary of knowledge regarding the claim ].
Neither I, nor my Broker has verified any of this information/documentation; we have not and will not investigate the specifics of the allegations, the validity of the allegations and/or the claimed damages, if any. Buyer should investigate.
ATTACHMENT 3:
DOCUMENTING KNOWN LAWSUIT
Disclosure in AVID regarding Current Lawsuit
Broker has been apprised that the Property (or the common interest development) is currently involved in a lawsuit filed in the Superior Court in. the County of __________ by (name or identity of Plaintiff) . Broker has not and will not investigate or verify any of the information regarding this pending litigation.
Buyer(s) should contact (name of lawyer with contact information) who is handling this case for further information. Buyers should also go to the Courthouse to check on all documents that have been filed.
Buyer(s) are encouraged to investigate the nature of this lawsuit during their inspection/investigation contingency, if any, so as to satisfy themselves about the legal and practical significance and/or impact of that lawsuit on the use, development, value and condition of the Property including, but not limited to, the ability to securing financing and/or insurance.
IF IT IS A HOMEOWNERS’ ASSOCIATION SUIT, ADD:
Pending lawsuits can impact the amount of current and/or future fees and assessments that the HOA will charge owners. Thus, it is imperative that you thoroughly investigate this issue during your inspection/investigation contingency period, if any.
Disclosure in AVID regarding Resolved Claim or Lawsuit
Broker has been apprised that the Property (or the common interest development) had been involved in a lawsuit filed in the Superior Court in. the County of __________ by (name or identity of Plaintiff) but Broker understands that the lawsuit was resolved. Broker has not and will not investigate or verify any of the information regarding this lawsuit.
Buyer(s) should contact (name of lawyer with contact information) who handled this case for further information. Buyers should also go to the Courthouse to check on all of the documents that were filed.
Buyer(s) are encouraged to investigate the nature of this lawsuit during their inspection/investigation contingency, if any, so as to satisfy themselves about the legal and practical significance and/or impact of that lawsuit on the use, development, value and condition of the Property including, but not limited to, the ability to securing financing and/or insurance.
IF IT WAS A HOMEOWNERS’ ASSOCIATION SUIT, ADD:
Even resolved lawsuits can impact the amount of current and/or future fees and assessments that the HOA will charge owners. Thus, it is imperative that you thoroughly investigate this issue during your inspection/investigation contingency period, if any.