Real Estate Transaction Errors: What You Need to Know
Even the best attorneys make mistakes, but not all mistakes made by attorneys qualify as legal malpractice. According to the American Bar Association (ABA), 4 out of 5 lawyers will get sued for malpractice in their legal career. The likelihood of being sued is greater for real estate attorneys, as it is one of the high frequency areas of practice.
There are many mistakes that can be made during a real estate transaction, such as errors in preparing a deed or mortgage; errors on financing documents; lease or loan guarantee language that doesn’t properly protect the client’s interests; errors and omissions in closings, etc. However, in order to qualify as malpractice, the plaintiff must prove that the attorney was negligent in the underlying real estate case and, but for the attorney’s actions, the plaintiff would have had a better result. There must be an attorney client relationship, negligence and a resulting loss.
The pie chart below depicts the errors in real estate law, by percentage, that we have seen at OAMIC in the last decade.
The top three errors are error in public record search, failure to react to calendar and failure to follow a client’s instructions. The severity of these errors is usually dependent on the underlying case and can range from zero payment to significant payouts.
Error #1: Public Record Search Errors
Error in public record search is the most common error for our real estate attorneys. An attorney’s failure to do due diligence in a public record search can result in a legal malpractice lawsuit. A real estate attorney is obviously not a grantor of a clean title, but when the attorney is hired exclusively to execute a title opinion or a similar responsibility, then they have a duty and can be held liable if negligent. Legally, when property is transferred with liens or other impediments against the title, the claim follows the property. As a result, the buyer can unknowingly inherit the encumbrance.
When providing a title opinion, a lawyer must conduct due diligence and communicate with the client if the title has defective deeds, judgments, unpaid taxes or any claims on the property. Aside from properly conducting a search, lawyers can mitigate this risk by advising the client to purchase title insurance to cover losses resulting from a clouded title. In addition, attorneys should have a solid understanding of title insurance coverage and be able to locate exclusions. In cases where the attorney has been hired to examine a title, the attorney not only has a duty to do a reasonable search but also has a duty to disclose any material defects to the client. If an attorney negligently or willfully withholds information that is significant to a client’s decision, the attorney may be sued for malpractice.
Error #2: Failure to React to Calendar
Because real estate attorneys handle multiple transactions at the same time, failure to react to a calendarized item is a common error in this area of practice. For example, an attorney may miss the deadline for filing a lien or for a renewal of judgement. Fortunately, calendar errors are some of the easiest errors to avoid as there are software systems that firms can use to stay on top of deadlines. Investment in and the proper use of a calendaring system like Clio can reduce the emergence of these errors substantially.
It is important to note that 12% of our claims in the real estate area of practice emerge from failure to REACT to calendar and only a handful from other calendaring errors like failure to ascertain deadline correctly. This shows that it is not enough to invest in a calendaring system, but proper use of the system or software is key in reducing these errors.
Error #3: Failure to Follow a Client’s Instructions
The real estate practice pulls in a diverse group of clients such as developers, owners, institutional investors, tenants and lenders. It is important that the attorney understands and executes the real estate deal according to the client’s wishes. Communication errors such as failure to follow a client’s instructions generate 11% of our real estate claims. Attorneys must be sensitive to the needs and expectations of the client, as different clients have different needs regarding property use. A dependence on staff can often lead to a breakdown in communication as the attorney gets removed from the process resulting in failure to follow the client’s instructions.
To mitigate against this error, give each file the necessary attention, gathering all relevant information. If possible, meet with the client at least once and document conversations and instructions. It is easy to forget instructions when handling multiple transactions. Finally, make sure you understand your client’s needs, carefully review all documents and get the client’s acknowledgement in writing especially in situations where there is an odd request.
Reduce Your Risk
The skills that real estate attorneys need to possess – high attention to detail, excellent communication skills and effective time management – are essential not only to the practice, but also to avoiding legal malpractice lawsuits. These skills coupled with the risk management tips outlined above can effectively reduce the probability of a malpractice lawsuit.
Claims often prove to be aggravating, anxiety-causing and time-consuming, even with OAMIC carrying most of the load to resolve the issue. Therefore, doing everything possible to stay out of the situation is time and effort well spent!