A contract is not just a way to transfer property—it’s a shared understanding about the property’s condition and everyone’s responsibilities during the real estate transaction.
Breach of contract claims are very common and can take many forms, according to The Herbert H. Landy Insurance Agency, a Texas REALTORS® risk management partner.
A buyer may accuse a seller of not completing, or poorly completing, agreed-upon repairs before the close of escrow. Perhaps a seller has agreed to deliver a rental property without tenants and then runs into trouble when the tenants hold over.
Buyers and sellers often make breach of contract claims against their own agents. “Most breach of contract and negligence claims involve, at their core, an undisclosed defect or condition with the property being sold or purchased,” says Betsy Magnuson, President of The Herbert H. Landy Insurance Agency.
The claimant will usually add a breach of contract claim alongside other claims, such as negligence and breach of fiduciary duty. These claims can also include failing to properly list or market properties, allowing due diligence periods to lapse, and failing to adequately explain the terms and conditions of the purchase agreement, she adds.
More generally, breach of contract claims can arise from a client’s perception that the agent was not looking out for the client’s best interest, according to Magnuson.
In the example of the buyer accusing the seller of incomplete or poorly completed repairs, the seller may try to shift blame to the agent, claiming the agent recommended the contractor who made the repairs, Magnuson says. In another example, a buyer may claim to have been unaware of a property’s problems because the agent discouraged getting a home inspection or other testing.
There are a few steps you can take to protect yourself when it comes to breach of contract issues.
Do your due diligence
“Agents should sit down with their clients and go through the provisions of the contract with them before signing, and to the extent possible document this,” Magnuson says. “Make sure clients are aware of and agree to the critical deadlines set forth in the contract, and that the client is aware of repercussions of missing certain deadlines.” Make sure your clients fully understand and agree to any contract addenda, she says.
Show your work and everyone else’s
Keep the transaction fully transparent, Magnuson advises. “Share all commu-nications with clients. Ensure that they receive all inspection reports and other documents,” she says.
She also recommends thoroughly documenting all material communications with clients and events that happen during escrow. “Document conversations with clients and, whenever possible, have them acknowledge in writing that they reviewed the material in question and that they understand the contents, information, and implications,” she says.
Leave decisions to the client whenever possible
The agency recommends that agents avoid recommending or endorsing contractors. If agents choose to do so, they should provide a list of contractors and advise the client to independently research their work and reputation, Magnuson continues.
Keep opinions to yourself
Magnuson advises agents to avoid offering opinions on matters outside of their expertise or without adequate information, such as whether certain inspections are needed.
Reach out ASAP
Your errors-and-omissions insurance can help you if you are facing a breach of contract complaint or claim. Magnuson says to notify your broker and E&O insurance provider as soon as possible. Your insurance provider will work with you on how to proceed with the claim, such as involving an attorney.