The legislature gives lawyers or notaries special powers to draw up instruments dealing with the purchase and sale of property. It goes without saying that in the performance of their work, these people must meet a certain standard of care to their clients, or principals.
However, in some cases, they may find themselves in a sufficiently “proximate” position to attract potential liability for economic damages suffered by a third party – even without any direct contractual relationship with that third party.
This duty of care arises from proximity, foreseeability and reliance.
The courts have repeatedly ruled that Realtors also possess special skills, have fiduciary duties and must adhere to a certain standard of care in the performance of their work, so logic would demand that this type of liability-by-proximity also extends to real estate professionals.
So exactly what is that elusive concept of “proximity”? In the negligent performance of professional services (such as turning a blind eye to a looming problem) resulting in economic loss, it means a lot more than a merely physical connection. It includes sundry circumstances that cause one person (the third party) to rely or depend in a reasonable way on the other; the “dependent person” is vulnerable to all risks caused carelessly by that other person.
The two test questions that must be answered are:
1. Was the harm that occurred the reasonably foreseeable consequence of the defendant’s act? In Donoughue v. Stevenson (1932), Lord Atkin introduced the negligence principle that a person could be held liable for reasonably foreseeable harm. This concept has been around for over 70 years.
2. Are there reasons, notwithstanding the proximity between the parties established in the first part of this test, that tort liability should not be recognized? If proximity and foreseeability are established, then a prima facie duty of care arises.
To demonstrate what we have to consider, let’s get down to cases.
This connotation of proximity was used by Lord Wilberforce in the celebrated case of Anns v. Merton London Borough Council. (1978). It says that the relationship between the plaintiff and the defendant is of such a nature that the defendant is under an obligation to be mindful of the plaintiff’s legitimate interest. Subsequently, this test was applied in
The Anns case was also referred to in Esser v. Brown (B.C. Supreme Court) and Esser v. Luoma (B.C. Court of Appeal), dealing with a notary’s omissions and breach of her duty of care for failing to exercise reasonable care to one of the plaintiff sellers (who was not her client).
In Whittingham v. Crease & Co. (1978), a solicitor was instructed by his client to draw up a will in which the plaintiff was identified as the “residuary beneficiary”. For some reason, the will failed and the beneficiary lost his interest in the estate. The B.C. Court of Appeal held that the solicitor owed a duty of care toward the third party. Because that third party was so closely and directly affected by the lawyer’s acts or omissions, the lawyer could have reasonably foreseen that the third party was likely to be injured by his acts and omissions. The lawyer was liable to the beneficiary even though there was no contractual relationship between them.
The subject of proximity is also dealt with in Heath v. McGuire (B.C. Supreme Court), where a lawyer undertakes to his client to perform a task for a third party. He may have a duty of care to that third party whether or not the third party relied on that undertaking.
Another case about the duty of care of a solicitor to a third party (who is not his client) for economic loss is Tracy & Morin v. Atkins (1979). The court held that a solicitor acting for a buyer in a real estate transaction owed a duty of care in tort to the unrepresented sellers on the basis that the sellers relied on him to register the mortgage. Since Realtors also have fiduciary duties, a parallel situation to this may possibly be a Buyer’s Agent selling an unrepresented (no agency) FSBO; especially if the FSBO carries a mortgage for a marginal buyer.
Another example that comes to mind is the information contained in a feature sheet (prepared by the listing agent who has no contractual relationship with the buyer), where the buyer’s buying decision is triggered by some erroneous item contained in the feature sheet.
The following case was settled out of court: a woman appointed a friend as her executor. When she died, the executor was determined to use the services of his Realtor friend to sell the house, which was required to settle the estate. The Realtor friend quoted a value guesstimate (no written market analysis) of $380,000. The heirs felt that this was too low and invited a stranger who was building new houses nearby to submit a bid. That builder submitted a written offer for $425,000 full price with a deposit of $25,000, private sale, and no commission payable.
The executor did not accept that offer, but instead he contacted his Realtor friend and without the knowledge (or approval) of the heirs, he listed the house with his friend for $428,000 with a $3,000 commission payable. While the first offer was still open for acceptance, the executor then immediately proceeded to sell the house through his Realtor friend to somebody else for $428,000, with a $3,000 commission payable, but otherwise for exactly the same terms: all cash, same deposit, identical completion and possession dates as the original first offer (which was still on hand). As they had merely duplicated the first offer (plus a commission) it was painfully obvious that the sole reason for the sale to the second buyer was to enable the executor’s Realtor friend to earn a commission (a fact that the executor freely admitted).
Although multiple offers were the norm of the day because of the existing red hot seller’s market, neither the executor nor the Realtor allowed the first buyer to compete against the second buyer. The heirs were upset when the first buyer advised them in writing that – if given a chance – he would have been willing to pay $450,000 for the property.
Through the actions of the executor and his Realtor friend, the disappointed beneficiaries had lost $25,000.
So how do the parties stand from a legal point of view? The executor could have been sued in a lengthy and expensive Supreme Court action. How about the Realtor?
In White v. Jones (1995), Lord Goff addressed the fact that if the duty of care by
proximity is not recognized, the only person who might have a valid claim against the Realtor (the executor) has suffered no loss. The only people who did suffer a loss (the disappointed beneficiaries) have no claim against the Realtor who, after all, at the time of listing the property had undertaken to his client (the executor) to perform a task for the benefit of a third party (the beneficiaries). He should have a duty of care to that third party, whether or not the beneficiaries relied on that undertaking. Consequently, the judge stated there is a gap in the law that needs to be filled. The assumption of responsibility by the Realtor to his client, the executor, should be held in law to extend to the intended beneficiaries. The Realtor could reasonably foresee that the beneficiaries may, as a result of the Realtor’s failure to allow the two buyers to compete against each other in a bidding war, be deprived of a portion of their intended legacy. Lord Goff then concluded that in cases such as this, the intended beneficiaries should have a remedy (“practical justice”).
From a practical point of view, what can a Realtor do to protect himself from liability by proximity? Don’t be overconfident. Double check everything from independent sources.
Think carefully before making (foolish) statements or promises. Ponder the consequences of your actions. Avoid all possible conflicts of interest. No amount of commission is worth your integrity.
If in doubt, talk to your manager. If warranted, urge all parties to obtain independent legal advice. Document everything because the paper trail you create may some day save your neck. One of the best ways of being safe is by observing your real estate board’s and CREA’s Code of Ethics and Rules. Always remember that the name of the game is to learn before and not after a court appearance.
The late Albert Teichner FRI, CMR, RI(BC), CRES retired after 35 years in the real estate industry.
He wrote 100 columns for REM. Albert died on January 15, 2007.
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