There has been a lot of bad news in the real estate market over the past few years. Homeowners have experienced a fall in home values, and some have faced foreclosure, bankruptcy, or mortgage default.
For lawyers in Wisconsin who do real estate work, the risk of malpractice continues to rear its ugly head, although not to the extent that it does nationally. According to recent American Bar Association reports, real estate practice was the area of law in which malpractice claims against lawyers increased the most during the four-year period ending in 2007, and it has continued to be near the top of the list during the past couple of years. Only plaintiffs’ personal injury work accounted for more claims than real estate work.
But that’s nationally. During the past two years in Wisconsin, although real estate work has continued to generate more malpractice claims than most other areas of practice, the number of real estate claims against lawyers insured by Wisconsin Lawyers Mutual Insurance Co. (WILMIC) has held steady. Overall, real estate is still second only to plaintiffs’ personal injury work, accounting for roughly 17 percent of claims reported to WILMIC in 2008 and 2009.
Nationally, experts believe the rise in claims involving real estate work resulted from the increasing complexity of real estate deals and the subprime mortgage crisis. Most experts in Wisconsin, however, believe that the subprime mortgage crisis was not as problematic here as in other parts of the country, and this may be one reason real estate-related claims in the Badger state have not risen as much as they have elsewhere.
Nevertheless, there are still potential pitfalls and red flags that Wisconsin real estate lawyers should avoid.
Whenever I speak to groups of lawyers, I often talk about the top five or so areas of practice that are the riskiest. When lawyers find out that real estate generates the second most claims behind plaintiffs’ personal injury work, I often hear, “Real estate work isn’t that risky, what goes wrong in these claims?” Sally Anderson, vice president – claims at WILMIC, did real estate work before joining WILMIC in 1994. “There is a perception that this is an easy area of practice. Add to this the reality that real estate brokers, title companies, and others get involved in transactions, so often a lawyer is seen as the ‘deal breaker.’ This gives rise to another problem, in that clients in this area have a tendency to limit their lawyers tremendously.”
When it comes to real estate transactions, these are not normal times, and there is plenty that can go wrong. Anderson says, “One of the biggest reasons for errors in real estate matters is that transactions, in particular, are always a rush. Lawyers are often brought in at the last minute and struggle to catch up. Technology makes this even worse, as a huge amount of information can simply be emailed, without much direction on the part of a client about the client’s concerns in the matter. Add to this the fact that a lawyer’s standard of care isn’t lower just because he or she got into the transaction at the last possible second, and the potential for claims is clear.”
Another potential problem is that real estate seems to be an area of law in which lawyers, perhaps more so than in other areas of practice, sometimes let themselves be bullied by their clients. Or maybe lawyers just fall prey to the syndrome of wanting to help. Anderson says such good intentions sometimes have bad consequences. “That means that when a client comes to a lawyer and says, ‘Just look over the papers and be sure it’s all okay,’ or worse, two clients appear in the lawyer’s office and say, ‘Just write up the deal for us,’ the lawyer is willing to be involved in situations where, if anything goes wrong, it will surely be seen as the lawyer’s fault.”
Reasons for Real Estate Malpractice Claims
During the past two years, roughly 17 percent of all claims reported to WILMIC arose in the real estate practice area (second only to plaintiffs’ personal injury work). The most cited causes for the real estate claims are listed below.
- 24 % Lawyer’s inadequate discovery or investigation of a matter
- 10 % Lawyer’s failure to get client’s consent or adequately inform client
- 10 % Lawyer’s failure to know or properly apply the law
- 10 % Conflicts of interest between clients
- 6 % Failure to follow client instructions
Anderson says real estate claims also have what is known in the insurance industry as a “long tail.” That is, there can be a very long time between when the work is done and when a potential claim is discovered. If property remains in the same hands for a long time, an issue that didn’t exist or was unknown for decades could suddenly become a problem. When one party sells, the new buyer may object to some of the accommodations that were made by the former owners over the years. Anderson says, “The result is that a lawyer’s work done years earlier becomes the subject of scrutiny.”
At WILMIC, 24 percent of the claims filed in the real estate area over the years have arisen out of the lawyer’s inadequate discovery in or investigation of a matter; this is double the percentage of claims arising from this error type in all other areas of practice. “For example,” Anderson explains, “a lawyer never learned that the site was a former gas station or located the problem with the legal description. Getting in late to a real estate transaction is often the problem. If a client isn’t allowing the lawyer enough time to do the work properly, maybe the lawyer needs to decline the representation or extend the timeline.”
Ten percent of WILMIC’s claims in real estate matters are a result of lawyers failing to get their client’s consent or adequately informing their client. Anderson says, “Lawyers sometimes take things for granted because of their familiarity with the issues and often don’t explain quite well enough for the client to understand what the problems may be.” She says, “Never underestimate the power of a letter, not to cover yourself, but to explain the importance of the decisions the client is making.”
Another 10 percent of claims made against real estate lawyers arise from failure to know or properly apply the law. Filing construction liens, working on condominium matters, and even holding earnest money without a specific agreement have gotten lawyers into hot water. Anderson says, “Much of what a real estate lawyer needs to know starts with a check of the statutes and administrative code.”
Conflicts of interest account for another 10 percent of WILMIC’s real estate claims. Anderson says, “Real estate is one of those areas where dual representation ‘seems’ to be acceptable. That is an illusion. Watch out for family deals, friendly deals, and favors. Be sure you know who your client is at all times.”
Six percent of WILMIC’s real estate claims arise out of a failure to follow client instructions, although sometimes lawyers get into trouble because they do follow instructions, without providing all the alternatives the clients may not have known about or considered. Anderson says, “The best way to deal with this issue is to document your work carefully. This is especially true if you can’t deliver what the client wants.”
Seven Rules for Real Estate Lawyers
Anderson’s experience in real estate practice as well as in handling claims that arise in this area of law have led her to come up with a list of seven rules for real estate lawyers to follow:
- Know who your client is and also know who isn’t your client. Be sure the parties know that, too.
- Don’t allow yourself to be rushed to the point that you can’t do your job properly.
- Be very wary when you are asked to just look things over to be sure everything is okay. Do you want to be the insurer of the deal?
- Be particularly careful when working for families, friends, and small businesses. Real estate practice pre-sents a significant risk of conflicts.
- Document your advice and the importance of the decisions made by the client. A letter confirming the client’s decision and your advice may end up being invaluable to both of you.
- Be skeptical. If any part of the deal seems “too good to be true,” you may be facilitating a fraud.
- Be mindful of your clients’ objectives. Even though they seem to know what they want, that may not be the best way to accomplish the goal. If that’s the situation, you will likely be faulted for not discussing the better path.
An attorney handling real estate matters today must be very careful. First, make sure you understand your clients and the details of the transaction. Review all the documents being signed. Take nothing for granted (that’s true regardless of the type of legal matter you are handling). Explain all the documents to your clients and make sure they understand them. Be sure the documents comport with your clients’ objectives. If there is something out of the ordinary, address it in writing and get your clients’ acknowledgment in writing.
Most important, don’t be rushed into a closing by your clients. They may resist your efforts to complete your review and properly advise them, and they may argue that all the issues in the transaction have been taken care of. If they insist on getting it done before you are ready, you may want to consider whether you should be taking on the matter at all. If a mistake turns up later on, who do you think clients will blame?