Q: My buyer has discovered some defects in the home after escrow closed and has asked me for help. She feels that the seller must have known of the defects and did not disclose them. What can I tell her?
A: Sadly, this is not an uncommon occurrence. When your buyer finds any problems, defects or damage (“damage”) after escrow closes and feels that someone may be liable for the damage, proceed with caution and follow these recommended steps:
- Advise your buyer to determine the nature, extent and scope of the damage. This will usually entail hiring a contractor or other expert to investigate the Property. That person can then and write a summary of the problem and an estimate of the repair cost;
- Recommend that your buyer take pictures of the damage; and.
- Encourage your buyer to review the transaction documents including all of the disclosures, reports and advisories that were given to the buyer so that they can refresh their recollections as to what they knew about the Property when they bought it.
If the damage is relatively minor; for example, within the $10,000 limit of Small Claims Court (“SCC”) jurisdiction for individual plaintiffs ($5,000 for all entities), then the buyer may not wish to hire an attorney but go instead to SCC where attorneys are not allowed. (Note: The Purchase Agreement states that claims within the jurisdictional limits of SCC are exempt from the obligation to mediate and/or arbitrate.)
However big or small the buyer’s claim may be, the best practice is for the real estate licensee to always recommend that buyers consult with a qualified California real estate attorney to ascertain all of the buyer’s options. Determining who is and who is not responsible for any post close of escrow claims is a legal determination.
In some cases, what appears to be relatively minor damage could, in fact, be much greater once the defective areas are opened up. This is particular true if the claim involves water intrusion, mold, settlement and/or foundation issues which often involve significant repairs and costs.
Small Claims Court: If the buyer chooses not to hire an attorney because they wish to proceed in SCC, the buyer can write a claim letter to the parties they believe are responsible which sets forth the damage and a request for payment of a specific amount to compensate the buyer. It is often best to attach copies of any reports or inspections of the damage, an estimate of damages, and pictures. It is also a good practice for the buyer to give the parties a specific date to respond. If the matter cannot be resolved through informal negotiations, the buyer can then file suit in SCC.
If the Buyer is interested in filing a SCC action, consider giving the buyer a copy of the CAR Legal Memo Entitled “Small Claims Court Manual” found at: https://www.car.org/legal/recasesandresources/SmallClaimsCourt
You can also refer the buyer to the California Department of Consumer Affairs Small Claims Court Guide found at http://www.dca.ca.gov/publications/small_claims
The buyer may ask you to write the claim letter for them. You have no legal obligation to do so and the best practice is to not write such a letter. Tell your buyer to write their own letter and, at best, you can transmit it on to the Listing Agent, but only if the buyer insists. Follow these guidelines:
- Advise your buyer that they should discuss the matter with a qualified California real estate attorney regarding the extent of damages, who may have potential liability, and the result they want (money damages, repairs, etc.). If they cannot write their own claim letter, then they should have their attorney do so.
- Keep in mind that the agency relationship terminates as a matter of law when escrow closes. You are not the buyer’s agent after escrow closes and you should not take on any new duties.
- Writing a claim letter is actually providing legal services for the client and that could mean that you are acting outside of your agency duties and responsibilities and potentially violating the law by providing legal services without a license to practice law.
- You may inadvertently create liability for taking care of the buyer’s damages depending upon how you write the letter.
- You should not make any effort to draft a letter if it was a dual agency transaction; this could be viewed as “taking sides” and acting against your own client.
The buyer may ask you to help them commence mediation against the seller. Mediation in post close of escrow claims is a legal proceeding that is best handled by attorneys. It is not your responsibility to initiate mediation nor should you do so. See also Weekly Practice Tip entitled “Mediation for Buyers and Sellers” for more information.
If clients want a referral to a mediation service, they can consider using the C.A.R. “Real Estate Mediation Center for Consumers.” The website is: www.consumermediation.org Some experienced mediators have signed up to be mediators through that service. They are required to provide a discounted fee for the first hour of their services but in some geographical areas there are not many qualified mediators to choose from. Buyers and sellers can go to that website and fill out a request for mediation. CAR staff can then provide assistance to the principals in setting up the mediation but the real estate licensees should not be involved in that process.
If the buyer decides to hire an attorney, the attorney will probably write the initial demand letter. If the amount being claimed is greater than $10,000 and is against the seller, the attorney will likely demand mediation as required by the contract between buyer and seller. If the attorney demands mediation of either of the brokers, remember that brokers and agents are not obligated to participate and should only do so after securing advice from their own brokerage and/or litigation counsel.
Finally, at the outset, it is a good idea for the buyer to discuss with their own attorney the cost of pursuing a claim (attorney fees and other costs) in relation to the anticipated outcome, and the amount of time such a claim will likely take to process. Many, but not all, claims settle, in which case each party usually pays their own attorney fees, and it is important for buyers to consider a cost-benefit analysis of pursuing claims beyond SCC or mediation.
PRACTICE TIPS
- It is important to know that you have no legal obligation to assist your buyer in pursuing their post close of escrow claim and it is in the best interests of the buyer to get the right advice from their own qualified California real estate attorney. One way to document that you have provided the buyer with the right advice is to use the attached Advisory for Buyers Considering Pursuing a Claim After Escrow Closes (which has as its subtitle Why Buyers Need to Retain a Qualified California Real Estate Attorney.
Note: This Advisory should only be used when there is a transaction where you had represented a buyer and the buyer now wants your assistance or advice on how to proceed with a claim; and then follow the advice in this Tip. DO NOT PROVIDE THIS ADVISORY TO A BUYER WHERE YOUR BROKERAGE ACTED AS A DUAL AGENT REPRESENTING SELLER ALSO.
- You should not assist your buyer in any way without first obtaining the approval and permission of your broker or manager (preferably in consultation with your brokerage counsel). This includes, but is not limited to, preparing summaries of events, documents or any other material.
- Be careful not to give legal advice. Do not, for example, give any opinions or make any assumptions about who is liable (seller, inspector, other agent, etc.) or the amount of damages, or what is the best course for the client to follow. All of these issues involve making legal determinations and thus should be left to the buyer to determine, preferably in consultation with the buyer’s qualified California real estate attorney.
- Especially in dual agency situations, it is important to remain neutral; do not take sides or decide who is right or wrong. Do not send any type of communication in which you refer to “my buyer” or “your seller” since these possessive pronouns evidence a bias in favor of one party over the other.
- Regardless of the explanation given, do not meet with the buyer’s attorney to discuss anything. The buyer’s attorney is not your attorney and may attempt to get you to admit wrongdoing. Regardless of who is making the request, do not sign anything without first having the document approved by your your company’s legal counsel. Those statements may come back to hurt you later.
- Be aware that in many instances once a claim commences against the seller and/or other parties (such as the listing agent or inspectors), the buyer’s agent becomes a target. Buyers have been known to tell their agents, “We aren’t mad at you! Our attorney is just going after your broker’s insurance company.” The fact is that if there is a claim, you are a target either directly by the buyer’s attorney or by the attorneys for the other parties.
- If the buyer and seller agree to mediate, you are not obligated to attend. Regardless of why a client asks an agent to be there (“They just want me there for moral support.”), anyone who attends a mediation is an automatic target and can be asked to pay money to resolve the dispute. You should not attend the mediation without authorization from your broker in consultation with your brokerage counsel.
- If you are asked to produce the broker’s file, or documents from your file, or to appear and testify at a mediation or hearing, do NOT agree to do so. Check with your brokerage’s attorney on how to proceed.
- If you receive a summons, a subpoena, a request from anyone, even the DRE, to sign any declarations or official documents, a request to participate in any legal proceeding, a claim letter of any kind or any oral communication from any person or their attorney regarding a transaction, immediately deliver that communication to your broker/manager who will consult with legal counsel regarding the next best steps. Then, do not discuss the matter with anyone except your brokerage’s attorney.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip 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 2018 Page 3 of 3 09/14/18
ADVISORY FOLLOW BELOW:
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Advisory for Buyers Considering Pursuing a Claim After Escrow Closes
Why Buyers Need to Retain a Qualified California Real Estate Attorney
This Advisory is designed to provide practical guidance to Buyers who, after the Close of Escrow, discover problems, defects or damage (“damage”) in the Property. If you feel that someone may be responsible for the costs of repairing that damage, then you may have a potential claim and you need to consult with a qualified California real estate attorney for legal advice. Claims are legal matters and real estate agents cannot give you legal advice regarding how to handle your claim.
Whether or not you retain legal counsel, there are some practical steps that you may want to consider:
- Attempt to determine the nature, extent and scope of the damage. This step this will usually entail hiring a contractor or other expert to investigate the Property. That person can then write a summary of the problem and provide an estimate of the cost of repair;
- Take pictures of the damage and affected areas; and
- Review the transaction documents including all of the disclosures, reports and advisories that you received to refresh your recollections as to what you knew about the Property when you bought it.
Once you have determined the extent of the damage and the cost to remedy it, you need to assess what you are willing to do to pursue a possible claim.
A. SMALL CLAIMS COURT (“SCC”) is an option if the damage is relatively minor; for example, within the $10,000 jurisdiction limit of Small Claims Court for individual plaintiffs ($5,000 for all entities). If this option is viable, then you may not wish to hire an attorney since you can sue directly in SCC. Note that that the Purchase Agreement excludes claims within the jurisdiction of SCC from any obligation to mediate and/or arbitrate.
Even if you believe that SCC is the right option for you, it is still recommended that you initially consult with a qualified California real estate attorney to obtain legal advice as to all of your options. In some cases, what appears to be relatively minor damage could, in fact, be much greater once the defective areas are opened up and/or other damage is discovered. Your attorney can help guide you on several issues including, but not limited to, who are the right parties to name in any claim and whether or not you should write a demand letter. If you choose not to hire an attorney, you can write a demand letter to the party or parties that you feel may be liable, setting forth the problems and the demand for payment of a specific amount, or repairs to be made, attaching copies of any reports of inspections of the damage, an estimate of damages, and photographs of the damage. It is appropriate to give the recipient(s) of the claim letter a specific date to respond. If the matter cannot be resolved through informal negotiations, the next step would be to file suit in SCC. For a guide on the SCC go to: http://www.dca.ca.gov/publications/small_claims.
B. HIRING AN ATTORNEY: If you decide to hire an attorney, make certain that the attorney is a Qualified California Real Estate Attorney so that you get the best advice on how to proceed. If the amount being claimed is greater than $10,000 and the claim is against the Seller, your attorney will likely send a written demand for mediation as required by the Purchase Agreement. At your first consultation with that attorney, you should discuss the cost of pursuing a claim (attorney fees and other costs) in relation to the anticipated outcome as well as the amount of time involved in pursuing such claims. Many, but not all, claims settle and it is important to consider a cost-benefit analysis of pursuing claims beyond SCC or mediation.
REAL ESTATE AGENTS ARE NOT QUALIFIED TO GIVE LEGAL ADVICE. BUYER ACKNOWLEDGES THAT HE/SHE WILL SOLELY RELY ON THEIR OWN QUALIFIED CALIFORNIA REAL ESTATE ATTORNEY FOR LEGAL ADVICE.