Claims against attorneys alleging malpractice in the handling of real estate matters have risen sharply in the past decade.1 Real estate attorneys perform tasks that are highly specific, technically complex and very repetitive which can often lead to claims. This Risk Management Bulletin will look at five top claims faced by real estate practitioners and risk management suggestions on how to best manage the risk.
1. Inaccurate property description
Claim facts: Attorney agreed to be a scrivener to prepare a deed for a buyer and seller of real estate. Attorney drew up the sale, subdividing 28 of 72 acres owned by seller. Emails between the parties and negotiations all demonstrated the intent of parties to buy and sell 28 acres. Attorney used an old reference deed and inadvertently prepared a deed purporting to convey all 72 acres of property instead of 28. Buyer decided to try to take advantage of the obvious error forcing the seller to file an action to fix the error to the deed. Seller pursued a claim against the attorney.
Risk management: While not the main thrust of the claim, it is best for attorneys not to represent both parties in a real estate transaction. The conflict of interest was used by both buyer and seller tangentially to their advantage in the legal malpractice action. They each claimed that the attorney was looking out for the other party's interests. In this case, the main error was the attorney not being careful in the preparation of the deed due to its routine nature. Attention to detail is paramount in real estate matters. Attorneys need to double and triple check the essential details in preparing documents prior to execution and filing. If using assistants, attorneys also need to use competent assistants who also pay close attention to detail.
2. Cash back at closing
Claim facts: Attorney represented the buyer in a purchase of residential real estate. Purchase price was agreed upon, but the lender refused to fund a mortgage over a fixed percentage of the overall deal. Buyers and sellers agreed to "inflate" the purchase price and then "refund" the overage back to the buyer at closing. A secondary lender pursued a claim against buyer's attorney for fraud in that it had relied on in error what it thought were acceptable debt to asset ratios in the loan and the true market value of the home. The attorney faced both an ethical grievance and a legal malpractice claim. The attorney was not specifically involved in the negotiations, but was still held to be participating in the scheme.
Risk management: To avoid being brought into "cash back at closing" schemes, attorneys need to carefully review all closing documents and insist on full disclosure of all elements of a transaction. Attorneys need to watch for two sets of settlement statement numbers. If the settlement statement does not give the lender the true value of the home, the attorney should not go forward with the closing.
3. Vague lease language
Claim facts: Attorney represented the landlord leasing space to a buyer/lessee who wanted to retrofit the property to the buyer's business requirements. The landlord agreed to pay up to $10,000 for the retrofit of the property with the buyer responsible for any costs over $10,000. Emails during negotiations confirmed this fact. The landlord retained counsel to draft the lease agreement. The attorney used language that did not make it clear that the cap on the retrofit contribution from the landlord was $10,000. The buyer incurred over $75,000 in retrofit costs and sued the landlord. The landlord then sued his attorney.
Risk management: The attorney appeared to have used a form lease and spent little time amending the lease form indicating the retrofit cap expenses. The buyer appeared to notice this and took advantage of the vague language. Attorneys need to be careful to not overly rely on forms to practice law. Part of the responsibility of a lawyer (and what the client is paying the lawyer to do) is to protect a client's interests, even in the event of an unusual situation that requires more than using a standard form to make sure that the client's interests are served. Proofreading contract language is paramount.
4. Inadvertently creating attorney/client relationship
Claim facts: Attorney represented the seller in a residential real estate transaction. The buyer was pro se. At the closing, the buyer asked the seller's attorney several questions about the meaning of certain disclosures. Trying to be helpful and finalize the transaction, the attorney patiently answered all of the buyer's questions. One of the questions involved the meaning of an environmental disclosure about an old fuel tank buried on the property. The buyer claimed he relied upon the attorney's explanation to his detriment and stated he would not have gone through with the closing had he known how much removal of the tank would cost him.
Risk management: The attorney had only the best of intentions. However, the formation of the attorney/client relationship is a subjective one from the purported client's perspective. The attorney should have had the buyer execute a document indicating that he understands that the attorney represented the seller only and that he had the right to retain his own independent counsel. In addition, even with that document executed, the attorney should have stated to the buyer that while he would like to help him, he simply cannot answer his questions.
5. Attorney acting as escrow agent
Claim facts: Attorney represented the seller in a residential real estate transaction. At the closing, the buyer demanded that money be set aside for repairs noticed in the walk-through. Seller's attorney agreed to hold $9,000 in escrow to ensure the completion of the repairs. Attorney prepared an escrow agreement executed by seller and buyer that stated only that "$9,000 would be held in escrow to ensure that seller completed the following repairs." Seller completed repairs within days. Buyer refused to agree to release the funds held in escrow. Buyer claimed the repairs were not done properly. After a year, the seller's attorney released the funds to his clients. Buyer filed a disciplinary grievance and a claim against the attorney. While the attorney was able to return the full amount of money in escrow to his clients, the attorney had often allowed the balance in his client trust account to fall below $9,000.
Risk management: The attorney was ultimately vindicated on the release of the funds in that buyer had unreasonably withheld her consent. However, the attorney would have been wise to have drafted a clause in the escrow agreement indicating that the funds could be released if buyer unreasonably withheld consent. Also, it would have been better for the attorney to have had the title company hold the funds as he was formally charged with conversion of the $9,000 in funds. In mitigation, he had returned the funds, but the attorney was accused by his clients of waiting until he had replaced them before releasing the funds. If an attorney must hold funds in escrow from a real estate transaction, the attorney must treat those funds as if they belong to the client and never let the balance fall below the full amount of the amount held.
About the author
Gawain Charlton-Perrin, Esq., Director of Risk Management, Professional Liability, focuses on risk management for professional liability programs, including accountants, architects and engineers, lawyers, and miscellaneous professionals. He is also a nationally-recognized author and lecturer on professional liability, ethics and risk management.
1 Profile of Legal Malpractice Claims 2004-2007 and 2008-2011 ABA Standing Committee on Lawyers' Professional Liability.
April 2018 LC 2016-299