RISK MANAGEMENT

3rd Edition

Robert de HeerMarcia L. Russell, DREI

Topics Managing Risk

Misrepresentation, Nondisclosure, and Unauthorized Practice of Law

Disclosure of Environmental Hazards

Agency

Federal Fair Housing Laws

Americans with Disabilities Act

Antitrust Laws

Introduction:Managing Risk

Components of Risk Management Education Risk shifting

Errors and omissions (E&O) insurance Inspections by third-party experts

Risk anticipation Seller disclosure statements Red flag inspection Verbal representations confirmed in writing

Risk control

Chapter 1:Misrepresentation, Nondisclosure, and Unauthorized Practiceof Law

Misrepresentation

Definition A false representation of a material fact or a failure to disclose a known property defect which causes the consumer to suffer damages

Misrepresentation (cont.)

Imposes liability on several bases of law Active fraud Passive fraud Negligent misrepresentation Negligent nondisclosure Negligent advice

Active Fraud

Knowingly making a false statement about a material fact with the intention to deceive the buyer

Case Law Loch Ridge Construction, Inc. v. Barra Pumphrey v. Quillen

Passive Fraud

Intentionally concealing known material defects to a buyer The buyer is unlikely to discover the defect The defect relates to health or safety The agent has led the buyer away from discovering the defect

Case Law May v. Hopkinson Lynn v. Taylor Century 21 Page One Realty v. Haghad

Negligent Misrepresentation

Imposes liability for statements which the real estate agent did not know were false but should have known were false Relying on statements made by sellers

Case Law Johnson v. Greer Real Estate Company

Negligent Non-Disclosure Imposes liability for failure to exercise adequate care to discover a material defect and disclose it to the buyer

Case Law Easton v. Strassburger Gouveia v. Citycorp Person to person financial Center, Inc.

Provost v. Miller Hoffman v. Connell Amato v. Rathbun Realty, Inc.

Negligent Advice Imposes liability for giving incorrect professional advice when the agent should have known the advice was wrong

Case Law Gerard v. Peterson

Stigmatized Property

Property psychologically impacted

Event occurred or suspected to have occurred on property

No physical impact

Stigmatized Property (cont.)

Most states have laws that declare stigmas are not material facts

Stigmas include: Murder

Natural death

Suicide

Assault

Sexual assault

Felony crimes

AIDS and HIV

Disclosing Other Stigmas Determine whether the information is fact or fiction

Check state laws Determine materiality Discuss disclosure with the sellers

Megan’s Law Background Sex offender registration

National website http://www.mapsexoffenders.com

Federal law mandates community notification of location of sex offender

Exemption for real estate licensees in some states

Limiting Liability Frequent causes of litigation and how to avoid them

Summary of risk reduction recommendations

Unauthorized Practice of Law Practice of law defined Standard forms Broker/lawyer accords and filling in the blanks

Legal advice or judgment

Chapter 2:Disclosure of Environmental Hazards

The Real Estate Agent’s Role Recognize potential environmental hazards

Recommend sellers retain experts to evaluate hazards

Have attorney draft disclosure of environmental hazards

Fulfill duties when representing buyers

Major Environmental Legislation The Resource Conservation and Recovery Act (RCRA) Enables EPA to regulate hazardous waste generators

Definition of hazardous waste under RCRA

Major Environmental Legislation (cont.) CERCLA (Superfund)

Provisions of the law Response actions

SARA Amended CERCLA Provisions of the law Environmental responsibilities Liability for cleanup Limiting a landowner’s responsibility

Environmental Due Diligence The process of taking all appropriate and reasonable steps to ascertain there is no contamination at the site

This includes becoming aware of red flags that might suggest the possibility of contamination

De Minimis Settlement The EPA will consider a de minimus settlement with innocent landowners Limits the amount that must be contributed for the cleanup

Underground Storage Tanks and Hazardous Waste Definition Estimates of the number of underground storage tanks range from 3 to 5 million

EPA estimates that approximately 40% are leaking

Cost of removing tank and treating contamination can exceed $1 million

Clues indicating possible presence of USTs

Evaluating Environmental Hazards

Preliminary Site Assessment

Phase 1: Environmental Assessment

Phase 2: Environmental Assessment

Phase 3: Environmental Assessment

Specific Environmental Hazards Water quality Ground water contamination

Asbestos Asbestos has been used in construction material because it is a good fire retardant and efficient insulator

Exposure to asbestos causes cancer and other diseases

Use in buildings has been prohibited since 1978

Asbestos removal should only be done by experts

Common Places Where Asbestos Is Found

Vinyl flooring material Patching compounds and textured paint Ceiling tiles and sprayed ceilings Stove and furnace insulation Door gaskets Pipe insulation and wall/ceiling insulation

In some appliances, roof shingles, and siding

Formaldehyde Colorless, gaseous chemical compound used in home insulation until early 1980s

Health risks

Radon Radon is a naturally occurring odorless, tasteless, radioactive gas

Radon is the second leading cause of lung cancer after cigarette smoking

Radon testing is easy and affordable

Problems with radon can be corrected by sealing cracks and increasing ventilation

EPA recommends testing for radon before listing a home for sale

Mold

Latest environmental scare Response by the real estate profession

Response by the insurance industry

What Is Mold?

Type of fungi

Common indoor molds

CDC position on heath concerns

Mold Reproduction Food source Optimum temperature Moisture

Dealing with Mold Disclosure responsibilities of real estate professionals

Risk reduction tips

Specific Environmental Hazards Polychlorinated Biphenyls (PCBs) Use EPA concerns

Lead-Based Paint Disclosure Law is designed to protect families from exposure to lead from paint, dust, and soil

Involves housing built prior to 1978

Children between the ages of 18 months and 6 years are at greatest risk

Lead-Based Paint Disclosure (cont.) Lead-based paint is the most common cause of lead poisoning in children

Health problems include: Damage to the brain and nervous system Behavior and learning problems Slowed growth Hearing problems Headaches Coma, convulsions, and death

Summary of Housing Not Covered Housing built after 1977

Zero bedroom units

Housing for the elderly or persons with disabilities

Leases for less than 100 days when there is no opportunity to renew

Foreclosure sales

Rental housing certified as lead-free

Disclosure Requirements Sellers and landlords must disclose known lead-based paint and/or hazards and provide available reports to buyers and renters

Buyers and renters must be given the pamphlet Protect Your Family From Lead in Your Home

Lead warning statements

Disclosure Requirements (cont.)

Homebuyers are given the opportunity to have a 10-day period to conduct an inspection

Sellers, lessors, and real estate agents share responsibility for compliance

Enforcement HUD penalties up to $11,000 for each violation

EPA Civil penalties up to $11,000 per violation

Criminal penalties up to $11,000 per violation

Private action with treble damages available

What Is Methamphetamine? Illegal substance also known as "meth," "speed,"

"crank," "crystal," and "ice“ Potent synthetic drug that is a stimulant of the

central nervous system Effects are similar to those of cocaine:

A "rush" or intense feeling of pleasure that lasts longer than cocaine

It is injected, snorted, taken orally, or smoked Long-term use leads to physical dependence Symptoms include high energy and rapid speech Chronic users may experience severe depression,

delusions, hallucinations, paranoia, and display violent behavior

Addiction has reached epidemic proportions and is impacting society at all levels

Meth Labs Proliferation of meth labs throughout America

Contamination of property used for cooking meth Dangers of exposure to children and adults

Contact local health departments to assess the property prior to allowing it to be reinhabited

Meth Lab Substances Alcohol Ether Benzene Toluene/paint thinner Freon Acetone Chloroform Camp stove fuel/Coleman®

fuel Starting fluid Anhydrous ammonia Heet® White gasoline Phenyl-2-propane Phenylacetone

Phenylpropanolamine Iodine crystals Red phosphorous Black Iodine Lye (Red Devil lye) Drano® Muriatic/hydrochloric

acid Ephedrine (over-the-

counter) Cold tablets Bronchodialators Energy boosters Rock salt Diet aids

Red Flags Indicating Presence of Meth Labs Unusual, strong odors (like cat urine, ether, ammonia, acetone, or other chemicals)

Blacked-out windows Renters who pay their landlords in cash (most drug dealers trade exclusively in cash)

Lots of traffic—people coming and going at unusual times (there may be little traffic during the day, but at night the activity increases dramatically)

Excessive trash including large amounts of items such as antifreeze containers, lantern fuel cans, red chemically-stained coffee filters, drain cleaner, and duct tape.

Unusual amounts of clear glass containers being brought into the home

Chapter 3: Agency

Common Causes of Legal Action Lack of disclosure of agency relationship

Insufficient knowledge of agent’s duties to sellers and buyers

Breach of fiduciary duties when dealing with buyers

Conflicts of interest Misrepresentation Agents implying they have certain skills they actually lack

Agents who buy property for their own account

Consequences of Breach of Fiduciary Duty

Loss of commission Rescission of transaction

Loss or suspension of license

Actual damages Punitive damages in severe cases

Criminal penalties in severe cases of fraud

Risk Reduction Recommendations Education Use of disclosure forms Written company policy addressing agency relationships

Seller’s Agent Fiduciary responsibilities owed to seller

Sub-agency Responsibilities of seller’s agent to buyer

Buyer’s Agent Fiduciary responsibilities owed seller

Responsibilities of buyer’s agent to seller

Buyers who should or must be clients

Buyer Representation Agreement Form to be signed Disclosures to listing broker, seller, and closing (escrow) agent

Compensation Advantages of buyer brokerage

Dual Agency Dual agency situations Duties of dual agent to both buyer and seller

Unintended or accidental undisclosed dual agency

Risk of dual agency

Disclosure of Agency Relationship Written disclosure with informed consent

Timing of disclosure

Company Agency Policies Seller agency exclusively

Advantages Drawbacks

Buyer agency exclusively Advantages Drawbacks

Company Agency Policies Single agency whether listing or selling Advantages Drawbacks

Dual agency for in-house sales Advantages Drawbacks

New Class of Broker in Some States Non-agent

Chapter 4:Federal Fair Housing Laws

Housing Covered Under the Act Covers most housing Exempt properties

Overview of Federal Legislation

1968 Civil Rights Act of 1968

1973 Rehabilitation Act of 1973

1974 Housing and CommunityDevelopment Act

1974 The Equal Credit Opportunity Act

1988 The 1988 Fair Housing Amendments Act

1995 The Housing For Older Persons Act

Evolution of Protected Classes

Civil Rights Act of 1968 Race Color Religion National origin

Housing and Community Development Act of 1974 Sex

1988 Fair Housing Amendments Act Familial status Handicap

Prohibited Actions—Sale or Rental

Refusing to rent or sell housing Refusing to negotiate for housing Making housing unavailable Denying a dwelling Setting different terms, conditions, or privileges for sale or rental of a dwelling

Providing different housing services or facilities

Prohibited Actions—Sale or Rental (cont.)

Falsely denying that housing is available for inspection, sale, or rental

Blockbusting

Denying access to brokerage services such as the MLS

Prohibited Actions—Mortgage Lending

Refusing to make a mortgage loan Refusing to provide information regarding loans

Imposing different terms or conditions on a loan

Discrimination regarding property appraisals

Refusing to purchase a loan Setting different terms or conditions for purchasing a loan

Additional Prohibited Actions Threatening, coercing, intimidating, or interfering with anyone exercising a fair housing right

Advertising or making any statement that indicates a limitation or preference based on membership in a particular protected group

Definition of a Disability A physical or mental impairment that substantially limits a major life activity

A record of such an impairment Being regarded as having such an impairment

Definition of a Disability (cont.) A physical impairment is an physiological disorder or condition, cosmetic disfigurement, or anatomical loss affecting one or more body systems

A mental impairment includes mental retardation, emotional illness, organic brain syndrome, and specific learning disabilities

Disability Discrimination Reasonable modifications Reasonable accommodations

Definition of Familial Status

Anyone under the age of 18 living with a parent or legal guardian

The written designee of such parent or legal guardian

Anyone about to obtain custody of someone under the age of 18

Pregnant women

Housing For Older Persons Act of 1995 Act repealed significant services and facilities requirement for housing to qualify for “Housing for Older Persons” exemption

Act provides for a “good faith defense” for real estate agents

Steering The practice of channeling minority home seekers to designated areas and not permitting them access to all available housing is known as steering

Steering is not a total refusal to sell or rent

Steering violates the Fair Housing Act’s “otherwise make unavailable or deny” provision

Examples of situations involving steering

Fair Housing Advertising The Fair Housing Act makes it unlawful to make, print, or publish, or cause to be made, printed, or published, any notice, statement, or advertisement, with respect to the sale or rental of a dwelling, that indicates any preference, limitation, or discrimination because of race, color, religion, sex, handicap, familial status, or national origin

1995 HUD Memorandum Race, Color, National Origin“Master Bedroom;” “Rare Find;” “Desirable Neighborhood”

Religion“Merry Christmas;” “Happy Easter”

Sex“Mother-in-Law Suite;” “Bachelor Apartment”

Handicap“Great View;” “Walk-in Closet;” “Walk to Bus Stop”

Familial Status“No Bicycles;” “Family Room;” “Quiet Streets”

Redlining Mortgage credit discrimination Insurance redlining

Enforcement Mechanisms

HUD Direct Court Actions

Department of Justice

Chapter 5:Americans With Disabilities Act

Purpose of the ADA

To provide a clear and comprehensive national mandate to eliminate discrimination against persons with disabilities

Definition of Disability

A physical or mental impairment that substantially limits a major life activity

A record of such an impairment Being regarded as having such an impairment

Definition of Disability (cont.) A physical impairment is an physiological disorder or condition, cosmetic disfigurement, or anatomical loss affecting one or more body systems

A mental impairment includes mental retardation, emotional illness, organic brain syndrome, and specific learning disabilities

ADA Titles I–V

Title I—Employment Covers all aspects of employment including application procedures, employee compensation and other terms, conditions, and privileges of employment

Title II—Public Services Prohibits discrimination by state and local governments

ADA Titles I–V (cont.) Title III—Public Accommodations

Public facilities goods and services must be accessible to customers who have disabilities

Title IV—Telecommunications Hearing and speech impaired persons must have telephone services that are functionally equivalent

Title V—Miscellaneous Provisions

The Americans With Disabilities Act

ADA and the Fair Housing Act

Tax Breaks

A tax deduction of up to $15,000 per year for removing barriers

A tax credit of up to $5,000 per year for smaller businesses for removing barriers

Title I—Employment No covered entity shall

discriminate against a qualified individual with a disability due to the disability regarding:

Job application procedures Hiring, advancement or termination Employee compensation Job training Other terms, conditions, or

privileges

Definitions

Substantially limited Qualified individual with a disability

Reasonable accommodation Undue hardship Essential job functions

Prohibited Actions

Limiting, segregating, or classifying a job applicant or employee in a way that adversely affects employment opportunities based on disability

Participating in a contractual relationship that subjects an employer’s qualified applicant or employee to discrimination based on disability

Prohibited Actions (cont.) Denying employment opportunities to a qualified individual because that person has a relationship or association with an individual with a disability

Refusing to make reasonable accommodation to the known physical or mental limitations of a qualified applicant or employee with a disability unless the accommodation imposes an undue hardship on the business

Prohibited Actions (cont.)

Using qualification standards, tests, or other selection criteria that screen out an individual with a disability unless they are job-related and consistent with business necessity

Failing to use employment tests in the most effective manner

Examples of Reasonable Accommodations Reserved parking spaces Level or ramped entrance Access to conference rooms Widening doorways Job restructuring Provision of qualified readers and interpreters

Reassignment to vacant position Modification of examinations Acquisition or modification of equipment

Enforcement

EEOC Civil action in federal district court

Available remedies

Avoiding Claims UnderTitle I

Prohibited questions from employers

Questions employers may ask Employer rights concerning illegal drugs and alcohol

Title III—General Rule

No individual shall be discriminated against on the basis of disability in the full and equal enjoyment of goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation by any person who owns, leases, or operates a place of public accommodation

Places of Public Accommodation

Place of lodging Restaurants Place of entertainment Place of public gathering Sales or rental establishment

Places of Public Accommodation (cont.)

Service establishment Station used for public transportation

Place of public display Place of recreation Place of education Social service center

Title III Requirements

Removal of architectural and communication barriers

Auxiliary aids and services Reasonable changes in policies, practices, or standards

Priority System For Removing Barriers

An accessible entrance from parking, public sidewalks, and public transportation

Access to location where goods and services are made available

Access to restroom facilities Additional measures that promote accessibility

Alterations To Existing Buildings

The primary function area The path of travel to altered area

Restrooms, telephones, and drinking fountains

Enforcement Civil action in federal district court

Action by the attorney general

ADA Tips for commercial real estate practitioners

Chapter 6:Antitrust Laws

The Sherman Antitrust Act of 1890 Background

Designed to protect competition and prevent monopolies

Employed by the federal government to break up large companies that had abused their economic powers

Categories of Restraints

Price-fixing Group boycotts Tying arrangements

Bid rigging Market divisions

Establishing a Violation Under the Sherman Act

Contract, combination, or conspiracy involving two or more competitors

Restrains trade

Types of Violations Per se violations Rule of reason

Perfectly Competitive Market

A large number of participants A product or service that varies little from provider to provider

Low entry barriers Price information that is readily available

Agreements to Fix Price

Price fixing Case Law

United States v. National Association of Real Estate Boards

McLain v. New Orleans Real Estate Board

The Per Se Rule Against Boycotts

A boycott is a refusal by two or more entities to deal with a third party

Illegal conduct

Illegal Tying Agreements

A tying arrangement may be defined as an agreement by a party to sell one product only on the condition that the buyer also purchases a different or tied product

Case Law Northern Pacific Railway v. US

Elements of an Illegal Tying Arrangement

Two separate products or services that are tied together

Possession of market power A restraint that is not “insubstantial”

Elements of an IllegalTying Arrangement (cont.)

Are products or services generally sold as a unit?

Do the same consumers use both items?

Is the price of the combined unit the aggregate of the individual component parts?

Market Divisions Agreements to divide territories

Antitrust Issues in Today’s Real Estate Market

Fee-for-service business model Minimum level of services Some states prohibit rebates to homebuyers

Application of Antitrust Laws to Boardsor Associations of REALTORS®

Supreme Court ruling in Associated Press v. United States Competitive advantage Membership must be made available on reasonable and non-discriminatory terms

Trade association must demonstrate that the purpose is to upgrade industry standards, improve industry efficiency, or offer new products or services Board of REALTORS®—threat of antitrust complaints

Membership Qualification Criteria A valid real estate license and actively engaged in the real estate business

A place of business within the state or a contiguous state

No record of official sanctions involving unprofessional conduct

Membership file No recent or pending bankruptcy Completed the board indoctrination course Signified intention to abide by Code of Ethics, etc.

Qualification Criteria For REALTOR® and REALTOR-Associate®

A valid real estate license and actively engaged in the real estate business

Employed by or affiliated with a REALTOR® as an independent contractor

Must make application for membership in the board

Membership file Completed the board indoctrination course Signified intention to abide by Code of Ethics, etc.

Antitrust Enforcement

Treble damages Attorney fees Court supervision Prison terms Corporate fines Individual fines

Price Fixing Case Law

United States v. Foley

United States v. National Association of Real Estate Boards

Boycott Law

Case Law Penne v. Greater Minneapolis Board of REALTORS®

Market Force v. Wauwatosa Realty, Inc.

Antitrust Law and Boards of REALTORS®

Case Law Grillo v. Plainfield Board of REALTORS®

Marin County Board of REALTORS® v. Palsson

Glendale Board of REALTORS® v. Hounsell

Pomanowski v. Monmouth County Board of REALTORS®

Thompson V. Metropolitan Multi-List

Plaintiffs alleged that Board conditioning access to MLS on membership to the Board was an illegal tying arrangement

Appeals court ruled that these were two separate products

Thompson brokers

Reducing Risk of Antitrust Liability

Office policies Education Training Standard forms What to do What not to do