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RISK MANAGEMENT 3 rd Edition Robert de Heer Marcia L. Russell, DREI.

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Presentation on theme: "RISK MANAGEMENT 3 rd Edition Robert de Heer Marcia L. Russell, DREI."— Presentation transcript:

1 RISK MANAGEMENT 3 rd Edition Robert de Heer Marcia L. Russell, DREI

2 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

3 Introduction: Managing Risk

4 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

5 Chapter 1: Misrepresentation, Nondisclosure, and Unauthorized Practice of Law

6 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

7 Misrepresentation (cont.) Imposes liability on several bases of law Active fraud Passive fraud Negligent misrepresentation Negligent nondisclosure Negligent advice

8 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

9 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

10 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

11 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.

12 Negligent Advice Imposes liability for giving incorrect professional advice when the agent should have known the advice was wrong Case Law Gerard v. Peterson

13 Stigmatized Property Property psychologically impacted Event occurred or suspected to have occurred on property No physical impact

14 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

15 Disclosing Other Stigmas Determine whether the information is fact or fiction Check state laws Determine materiality Discuss disclosure with the sellers

16 Megan’s Law Background Sex offender registration National website http://www.mapsexoffenders.comhttp://www.mapsexoffenders.com Federal law mandates community notification of location of sex offender Exemption for real estate licensees in some states

17 Limiting Liability Frequent causes of litigation and how to avoid them Summary of risk reduction recommendations

18 Unauthorized Practice of Law Practice of law defined Standard forms Broker/lawyer accords and filling in the blanks Legal advice or judgment

19 Chapter 2: Disclosure of Environmental Hazards

20 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

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

22 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

23 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

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

25 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

26 Evaluating Environmental Hazards Preliminary Site Assessment Phase 1: Environmental Assessment Phase 2: Environmental Assessment Phase 3: Environmental Assessment

27 Specific Environmental Hazards Water quality Ground water contamination

28 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

29 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

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

31 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

32 Mold Latest environmental scare Response by the real estate profession Response by the insurance industry

33 What Is Mold? Type of fungi Common indoor molds CDC position on heath concerns

34 Mold Reproduction Food source Optimum temperature Moisture

35 Dealing with Mold Disclosure responsibilities of real estate professionals Risk reduction tips

36 Specific Environmental Hazards Polychlorinated Biphenyls (PCBs) Use EPA concerns

37 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

38 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

39 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

40 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

41 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

42 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

43 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

44 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

45 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

46 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

47 Chapter 3: Agency

48 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

49 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

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

51 Seller’s Agent Fiduciary responsibilities owed to seller Sub-agency Responsibilities of seller’s agent to buyer

52 Buyer’s Agent Fiduciary responsibilities owed seller Responsibilities of buyer’s agent to seller Buyers who should or must be clients

53 Buyer Representation Agreement Form to be signed Disclosures to listing broker, seller, and closing (escrow) agent Compensation Advantages of buyer brokerage

54 Dual Agency Dual agency situations Duties of dual agent to both buyer and seller Unintended or accidental undisclosed dual agency Risk of dual agency

55 Disclosure of Agency Relationship Written disclosure with informed consent Timing of disclosure

56 Company Agency Policies Seller agency exclusively Advantages Drawbacks Buyer agency exclusively Advantages Drawbacks

57 Company Agency Policies Single agency whether listing or selling Advantages Drawbacks Dual agency for in-house sales Advantages Drawbacks

58 New Class of Broker in Some States Non-agent

59 Chapter 4: Federal Fair Housing Laws

60 Housing Covered Under the Act Covers most housing Exempt properties

61 Overview of Federal Legislation 1968Civil Rights Act of 1968 1973Rehabilitation Act of 1973 1974Housing and Community Development Act 1974The Equal Credit Opportunity Act 1988The 1988 Fair Housing Amendments Act 1995The Housing For Older Persons Act

62 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

63 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

64 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

65 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

66 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

67 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

68 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

69 Disability Discrimination Reasonable modifications Reasonable accommodations

70 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

71 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

72 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

73 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

74 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”

75 Redlining Mortgage credit discrimination Insurance redlining

76 Enforcement Mechanisms HUD Direct Court Actions Department of Justice

77 Chapter 5: Americans With Disabilities Act

78 Purpose of the ADA To provide a clear and comprehensive national mandate to eliminate discrimination against persons with disabilities

79 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

80 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

81 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

82 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

83 The Americans With Disabilities Act ADA and the Fair Housing Act

84 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

85 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

86 Definitions Substantially limited Qualified individual with a disability Reasonable accommodation Undue hardship Essential job functions

87 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

88 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

89 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

90 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

91 Enforcement EEOC Civil action in federal district court Available remedies

92 Avoiding Claims Under Title I Prohibited questions from employers Questions employers may ask Employer rights concerning illegal drugs and alcohol

93 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

94 Places of Public Accommodation Place of lodging Restaurants Place of entertainment Place of public gathering Sales or rental establishment

95 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

96 Title III Requirements Removal of architectural and communication barriers Auxiliary aids and services Reasonable changes in policies, practices, or standards

97 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

98 Alterations To Existing Buildings The primary function area The path of travel to altered area Restrooms, telephones, and drinking fountains

99 Enforcement Civil action in federal district court Action by the attorney general

100 ADA Tips for commercial real estate practitioners

101 Chapter 6: Antitrust Laws

102 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

103 Categories of Restraints Price-fixing Group boycotts Tying arrangements Bid rigging Market divisions

104 Establishing a Violation Under the Sherman Act Contract, combination, or conspiracy involving two or more competitors Restrains trade

105 Types of Violations Per se violations Rule of reason

106 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

107 Agreements to Fix Price Price fixing Case Law United States v. National Association of Real Estate Boards McLain v. New Orleans Real Estate Board

108 The Per Se Rule Against Boycotts A boycott is a refusal by two or more entities to deal with a third party Illegal conduct

109 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

110 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”

111 Elements of an Illegal Tying 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?

112 Market Divisions Agreements to divide territories

113 Antitrust Issues in Today’s Real Estate Market Fee-for-service business model Minimum level of services Some states prohibit rebates to homebuyers

114 Application of Antitrust Laws to Boards or 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

115 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.

116 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.

117 Antitrust Enforcement Treble damages Attorney fees Court supervision Prison terms Corporate fines Individual fines

118 Price Fixing Case Law United States v. Foley United States v. National Association of Real Estate Boards

119 Boycott Law Case Law Penne v. Greater Minneapolis Board of REALTORS® Market Force v. Wauwatosa Realty, Inc.

120 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®

121 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

122 Reducing Risk of Antitrust Liability Office policies Education Training Standard forms What to do What not to do


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