Why Your REIX Policy May Not Be Enough: Understanding Third-Party Risks

Did you know your REIX professional liability policy doesn’t cover all the risks industry members face in day-to-day practice?

REIX coverage is designed to protect you from errors, omissions, or negligent acts related to conducting real estate trades. However, it does not extend to certain third-party risks, especially those that arise when you’re responsible for someone else’s property.

A Real-World Example

A precedent case in Alberta involved an industry member conducting an open house. As it was winter, he decided to light a fire in the fireplace to set the mood and add some warmth. Unfortunately, he did not check to ensure the flue was completely open. The result was tens of thousands of dollars in smoke damage.

The agent reported the claim to REIX. Coverage was denied for two reasons; one because the smoke damage was not a trade in real estate, and second, damage to and loss of use of a property is an exclusion in the REIX policy.

The homeowners then reported the fire to their insurer and were also denied coverage. So, the industry member tried to claim it against his own homeowner’s policy and was denied. The agent then sued his insurer for coverage and the matter ended up at trial.

The finding at the trial was not a good one for the industry member. The court concluded that as the owner of the home was not present at the time of the open house and the industry member had total care, custody and control of the property, he was liable. The judge ordered him to pay all of the damages himself.

Other Common Third-Party Risks

• Theft claims after an open house
• Slip and fall injuries on the property
• Damage to personal belongings during showings

These types of claims are not covered by REIX and can leave you financially exposed.

The Solution: CGL Coverage

A Comprehensive General Liability (CGL) policy is an affordable and essential safeguard for industry members. It covers third-party risks like property damage and bodily injury and gives you peace of mind when a home is in your care.

We strongly recommend securing a CGL policy. The modest premium is a small price to pay for protection against potentially significant financial liability.

Am I Covered if I’m Listing or Buying My Own Property?

REIX is often asked, “Am I covered if I’m listing or buying my own property?” You might have heard the saying “A lawyer who defends themselves in court has a fool for a client”. Does the same apply to a real estate practitioner? Whether it does or not, I will leave for you to judge, but we’re here to bring some clarity to the insurance implications as it applies to this situation.

When REIX was being created, and the policy wording was drawn up, our insurance consultant advised that no professional liability insurance program covers claims that are not arms-length. In other words, claims on dealings that they had a personal interest in were to be excluded from coverage. This means, if you’re buying or selling your own property, you’re not covered.

The easiest way to think about this is to remember that REIX coverage is not for sellers or buyers, but for you as a neutral third-party. When you are the buyer or seller, you are no longer a neutral third party because you have aa personal stake. One licensee had a good term for this: “It’s called insider trading!”

What if I List My Property with Another Licensee?

No, you are not. You are still a seller in this instance. REIX does not cover sellers. The licensee that took the listing is covered as long as they have no vested interest in the property. It is a risky idea to list your property with another licensee, and here’s why: If the buyer sues the selling and listing licensees, then REIX, due to its fiduciary duty to defend the listing licensee, would have no choice but to sue the selling licensee. That would then mean that the seller/licensee would be defending two lawsuits instead of one. One from the buyer and one from REIX.

What About Brokerage Coverage?

Does the brokerage have an interest in the property? If not, the brokerage does have coverage, despite happening to have the individual selling the property registered with them. The exception to this is when the broker/owner is selling their own property while influencing the mind of the brokerage. This will cause no coverage for the brokerage, even though it may technically be a separate entity.

Is REIX Against Licensees Buying or Selling Their Own Properties?

No, we are not! Go ahead… just remember that you are not covered for errors and omissions insurance on that sale. REIX simply wants those who trade on their own behalf to be mindful of the exclusions in the E&O policy. Remember that being a licensee means that a much higher degree of disclosure is imposed on you when selling your own properties, so disclose everything you know no matter how insignificant you think it might be. 

Many homeowners use security cameras and smart doorbells to monitor their property inside and out. While these devices enhance safety, they can also record during showings. As a buyer’s agent, you should assume that you and your clients are being recorded at all times.

Homeowners may use surveillance footage to gauge a buyer’s interest, potentially influencing negotiations. If discussions about pricing, budget, or repair concerns are shared with the seller, it could weaken the buyer’s position.

Legal Considerations

When showing homes, it is essential to be aware of potential surveillance cameras and the legal liabilities that could arise. In an era where smart home technology is growing, agents must exercise caution to protect their clients and themselves. The key points to remember:

1. Recording Audio Without Consent is Illegal – In Canada, it is illegal to record private conversations without the consent of at least one party involved.
2. Video Surveillance in Private Spaces – Homeowners can have video surveillance, but they must avoid recording areas where visitors expect privacy, such as bathrooms.
3. Disclosure Requirements – Homeowners are not always required to inform agents or buyers about cameras. If an agent suspects recording, it’s best to proceed with caution.

Understanding Liabilities

Failing to recognize the risks of surveillance could lead to legal issues or loss of client trust. Making negative remarks about a property can result in a defamation claim. A seller recording a conversation, and gaining confidential buyer information, can affect the transaction outcome. Therefore, to ensure privacy and trust throughout the process all parties need to be aware of these risks and take appropriate measures.

“Creative” Marketing Can Lead to Trouble

There are times when creativity is encouraged and celebrated, and then there are moments when “creative language” in real estate can lead to trouble, potentially even a lawsuit.

While creative phrasing is often seen in property listings, some of the most exaggerated (and misleading) examples tend to appear when describing suites in a property. From “mother-in-law suite” to “mortgage helper” to “regulation suite” and similar terms which are often used to appeal to other agents and buyers seeking ways to buy a home and manage their mortgage.

Using exaggerated terms is not in itself fraudulent but using these terms could lead to allegations of fraud in a lawsuit asserting these terms were purposely used to mislead people. It is important to note that REIX does not cover fraud. More on this below.

Only Two Terms for Describing a Suite

When it comes to factual advertising, listings and disclosures, there are only two ways for an agent to describe a suite: legal or illegal. Make sure you determine what category the suite falls into and use that term only to avoid lawsuits.

“Regardless of whether you’re describing the property in advertising material, on a website, or in comments to a potential buyer, we strongly encourage our subscribers to ensure they include the term ‘legal’ or ‘illegal’ as their only descriptors,” says REIX CEO Lisa Sabo.

“REIX coverage could potentially be denied if it can be proven in a lawsuit that the words were intentionally used to deceive the buyer and the listing agent knowingly acted with that specific intent to sell a property,” she adds. Even without allegations of fraud, a subscriber may be subject to paying a deductible in the event a claim payment is necessary.

Terms to Not Use

There are many phrases used to describe suites that REIX recommends avoiding including:

• income potential
• extra bedrooms and bathrooms, perfect for multi-generational living
• suite potential
• easy to suite
• mother-in-law suite
• mortgage helper
• regulation

How to Avoid Issues?

State clearly and accurately in the description if the suite is illegal or legal.

You can list the features of the suite (updated floors, new appliances, etc.) once you state if the suite is illegal or legal. Once mentioning the status, to best protect yourself, do not use the terms listed above or similar phrases.

Case Study: Claims Focused on “mother-in-law suites” Can be Costly

In one claim filed with REIX, the selling agent used the term “mother-in-law suite” in their property listing expecting that the buyer would understand that the suite was an illegal one. After the sale closed, the buyer discovered the suite wasn’t legal, and in fact it was illegal. They sued the selling agent for misrepresenting the property. The agent was found liable by the Court, and their professional liability coverage was determined to be not in effect because they had knowingly misstated the facts.

Of the many claims that REIX has handled on this topic, most claimants are attempting to recover for two reasons; a loss in value because the property they’ve purchased is no longer an income-generating property, and they’re seeking to recover the income they would have generated if the suite had been legal.

The combination of these two factors can make for a potential six-figure settlement.

The Bottom Line

Catchy and creative terminology may seem harmless and attract interest for your client, but it could cost you your deductible or a lot more if it is deemed untrue or deceptive.

To stay safe, only use the correct terms: legal or illegal.

With rising property costs in Alberta and Saskatchewan, more consumers are turning to alternatives to traditional freehold titles. One alternative growing in popularity is bare land condominiums. Bare land condominiums can be an alternative way to get the living space and amenities you want while sharing some common costs with others, but it’s important that all parties involved in a potential transaction understand what’s included (and not) in a deal involving this type of ownership.

Understanding the differences is key

In conventional condominiums, residents own their unit and share the costs of maintaining the common property of the building and lot, it is built on. This is unlike bare land condominiums, which can but don’t typically involve a multi-family structure.

Bare land condominiums involve owning the lot and all improvements on it, such as the structure and landscaping while dividing the cost of owning and maintaining common property. This would usually include things like landscaping and snow removal. In most circumstances the bylaws in bare land condominiums are far less restrictive. Due to the unique nature, bare land condominium transactions require a Real Property Report (RPR).

Following due process for a bare land condominium

Misunderstandings can lead to significant legal issues, as demonstrated by one of REIX’s largest claim payouts to date. In this case, the buyer alleged that their lawyer informed them the property was a bare land condominium at their lawyer’s office on the day of close. This crucial detail, which the agent had failed to disclose earlier, prompted the buyer to refuse to close, causing the deal to collapse the day of closing.

The property was incorrectly listed as a freehold, while the title clearly stated it was a bare land condominium. Upon reviewing the evidence, the court recognized substantial differences between freehold properties and bare land condominiums, where owners must be members of the strata corporation and adhere to its bylaws and controls. The court ruled that the agent had misrepresented the property, allowing the buyers to rescind the transaction.

The bottom line: Transactions involving bare land condominiums differ from typical transactions. Bare land condominiums are NOT to be listed under single family residential for ‘better marketing exposure’. All REIX subscribers must follow the proper procedures and ensure all parties are fully informed of the precise nature of the property before writing a deal.

As real estate professionals, you’ve all been asked to “pull title” on a property before you become involved in either listing a property or writing an offer on one. But pulling title is not enough. Once you have the Certificate of Title you need to read it from top to bottom and be sure to advise your client about what is registered on the title and what those registrations mean.

REIX is currently managing one of the largest claims in its history involving a potential mistake by an insured who failed to understand the importance of a right-of-way registered on the title. The right-of-way drastically restricted what the buyer could do with the property. The buyer had planned to add an additional building as well as a recreation area – both of which were not allowed because of the right of way. 

So, what exactly are you looking for when you are looking through a Certificate of Title and the registrations listed? Some key pieces of information include:

Proper names of the owner(s) – make sure the owner(s) listed on title are the same people that you are dealing with. In other words, make sure your client has the authority to sell the property.

Rights of way – whether they’re for utilities such as electricity, water or natural gas, or for easements, many properties have rights of way registered on their title. Typically, this is to allow for maintenance, but there are also occasions when things such as access to an adjoining property or shared use of a property feature, are allowed; or a restriction as to future plans for the property as is the case in the REIX claim mentioned above.

Potential legal action – has someone has registered a court judgment on the property, or a Certificate of Lis Pendens (meaning that someone has registered a pending lawsuit that involves a claim to an interest in the property)? Other registrations also signal to you that more information is needed. These registrations may involve a foreclosure, divorce, differing kinds of debts, or interest in the property. These are all items that need to be researched further before a sale can occur.

Mortgage(s) or liens – if there are any mortgage(s) owing against the property. The amount shown on the title likely does not reflect the actual mortgage balance accurately, but it still indicates money owing against the title. If a lien or caveat has been filed against the property, there may be a balance owing that needs to be paid prior to the sale proceeding.

Other restrictions – such as restrictive covenants, which can vary widely depending on the terms in them. These covenants typically continue on and restrict usage and rights of the potential new owners. Potential buyers need to be aware of these before deciding to purchase the property. In some cases, these can be minor (colour or type of landscaping or fencing), but they may also be significant (property cannot be used to house livestock or maximum size or number of buildings on the site, for example).

Title registrations can be significant

It’s important for you as a real estate professional to ensure you understand all restrictions registered on a title. Communicate with your client and don’t hesitate to contact REIX if you are unsure about how to advise your client. It may be that your client needs to seek independent legal advice. 

The bottom line?

Pulling title is definitely a key step in the real estate process, but not as important as carefully reading it and making sure your client is aware of the information provided on the title. As always, if you have a question, call REIX!

REIX has openings on our Advisory Board and Committees! Are you passionate about the real estate industry? Do you have valuable insights to contribute? Each year, REIX looks for diverse and experienced members to join our Advisory Board and committees. Interested licensees and registrants in both Saskatchewan and Alberta are encouraged to apply. Wondering what this entails? Serving on REIX’s Advisory Board is a pivotal role that involves overseeing the organization’s operations and shaping its future. As a board member, you would actively participate in establishing REIX’s strategic direction, ensuring alignment with its mission and goals. Your responsibilities would include approving annual business plans and budgets, which are critical for REIX’s sustainability. Additionally, you’d engage in reviewing and approving REIX’s financial statements, ensuring transparency and fiscal health. The board convenes at least three times per year, providing ample opportunities for collaboration and decision-making. Importantly, all committees report directly to the Advisory Board, making your contributions instrumental in guiding REIX toward success.   For additional information pertaining to our committees we welcome you to visit REIX Advisory Board and Committee Descriptions – REIX: Alberta Real Estate Insurance Exchange Find the nomination form on our website here.   All appointments will be made at our June 2024 Advisory Board meeting to begin service in fall of 2024. Advisory Board and committee appointments are one-year terms which may be renewed for a maximum of six years. Please download the Nomination Information Form and submit it to REIX admin at admin@reix.ca. All applications must be submitted by April 30, 2024. If you have any questions, please contact Lisa Sabo, CEO REIX at Lsabo@reix.ca or (403) 228-2667, Ext. 2; toll free at 1-877-462-7349.

Ensuring Transparency in Real Estate Transactions

 

When it comes to buying or selling a property, transparency is crucial.  Courts have found that both sellers and agents have a responsibility to disclose any relevant information about the property’s condition. 

 

It is important to educate sellers about the risks associated with not disclosing relevant information about the property’s condition. 

 

Failure to disclose can lead to lawsuits and financial consequences down the line. By being transparent, sellers and their agents can avoid potential legal issues.

 

When buyers have a complete understanding of what they are investing in, they are making an informed decision.  This protects against a buyer suing their agent when they become aware of an issue they feel should have been disclosed.

 

Material Latent Defects

Sellers should disclose any material latent defects, which are hidden flaws or issues that may not be easily visible or known to the buyer but give rise to an argument that the property value is impacted by them. Past issues or claims related to the property should be disclosed, regardless of whether they have been resolved or remediated. This includes previous insurance claims, repairs, or renovations. 

 

REIX is currently managing a lawsuit that involves failure to disclose a previous insurance claim arising from plumbing issues.   The amount claimed is well over $100,000.  This lawsuit could have been avoided by transparency. 

 

If any information is disclosed in the private remarks section of the MLS listing / feature sheet, it is crucial to ensure that the buyer(s) are aware of these remarks before waiving any conditions. 

It is also important to note that silence is actionable. If you are aware of a defect or issue with the property and choose not to disclose it because the agent/buyer(s) on the other side never asked the question, you may still find yourself in a world of legal trouble. The same goes for any unlawful instructions your seller client gives to you. It is important to have these conversations with your sellers and disclose information and defects.

 

Local Regulations and Forms

In Saskatchewan, sellers are required to complete a Property Condition Disclosure Statement. This form is provided to a seller to fill out and list any previous issues, defects, or important disclosures that need to be made with respect to the property. Having sellers fill out this form is not only a great way to ensure that they have disclosed any pertinent information, but also provides as evidence in the event a party claims an issue was not disclosed. Having sellers fill out and sign this form also prompts the conversation of disclosure and can aid in warning them about the risks of failing to disclose.

 

Don’t Assume

Sellers should not assume that certain issues are “common knowledge” and therefore do not need to be disclosed. Even if an issue seems obvious or well-known, it is still important to include it in the disclosure. This helps avoid any potential misunderstandings or disputes in the future. 

 

Case example:  REIX resolved a lawsuit that involved our insureds who were sued by out-of-town buyers who purchased property not knowing major changes were planned to a nearby thoroughfare.   While it may have been common knowledge to a lot of potential buyers, it was not in this case and should have been disclosed.

 

Follow-Up in Writing

After any discourse conversation regarding property condition, it is advisable to follow up with a confirming email. This email should outline the date, time, and details of the disclosure conversation, as well as any instructions given. This documentation serves as evidence of the disclosure and ensures clarity for all parties involved.

 

If an agent receives a question from the other side of a deal and they are unsure of the answer, it is crucial to consult with their client.  After confirming this with the client, provide written clarification to the other agent.  This help maintain accurate and reliable communication between all parties and avoid future lawsuits.

 

If something needs to be disclosed after completing the initial disclosure form, it should be done through an addendum. This addendum should clearly state that “the buyer is aware that the seller has disclosed…” [the additional information]. This ensures that all parties are aware of any updates or changes in the property’s condition.

 

In conclusion, property condition disclosure plays a vital role in real estate transactions. It promotes transparency, protects buyers, and helps sellers fulfill their legal obligations. 

 

By following these tips and ensuring open communication throughout the process, both sellers and agents can create a trustworthy environment that benefits everyone involved.

 

Remember, when it comes to property condition disclosure, honesty is always the best policy!

 

Thank you, 

REIX