Communication-Related Errors Are the Most Common Cause of Real Estate Claims

Real estate law accounts for the second highest number of legal malpractice claims in Ontario, after civil litigation. But real estate law is responsible for a higher percentage of claims costs than litigation – and the trends are up for both the count and cost of real estate claims.

For the years 1999-2009, real estate-related claims averaged 29 per cent of LAWPRO ’s claims count (612 claims per year), and 30 per cent of our claims costs ($19.7 million per year). On average, resolving a real estate claim cost LAWPRO $43,325 over that period.

And the big surprise to most lawyers: The most common cause of malpractice claims on real estate files are lawyer/client communication-related errors – they account for 40 per cent of real estate claims. Communications errors fall into one of three general categories:

• A failure to inform the client or obtain the client’s consent;
• A failure to follow a client’s instructions; and
• Poor communication with the client.

A review of common fact scenarios for each type of error will give you a good understanding of why these errors happen and the steps you can take to avoid a communications-related claim.

FAILURE TO INFORM CLIENT OR GET CONSENT
The most common type of communications error on real estate files – 49 per cent of communications-related claims – involves a failure to obtain the client’s consent or to inform the client.
Examples of this type of error include:

• Failing to disclose material information to a lender client. Such material information could include, for example:
• A recent transfer of the property for a lower amount.
• A series of recent transfers of the property for escalating amounts.
• The existence of outstanding tax arrears or arrears on a mortgage in priority.
• The fact that the deposit was paid by someone other than the purchaser or is a “phantom deposit” (i.e., although the agreement of purchase and sale indicates there was a deposit, no deposit was actually made).
• Failing to inform a client about restrictions on land use contained in a subdivision agreement.
• Failing to review the survey and to discuss the risks or problems it reveals with the client.
• Failing to explain the location of a condominium parking space to a client. The number posted for a parking space in the parking garage may not correspond with that parking unit’s number on the condominium plan.
• Failing to inform a client who selects title insurance about the searches that the lawyer will not be performing and the type of information that these searches would reveal about the property, such as zoning, encroachments or survey issues.
• Failing to inform a client who does not select title insurance about the post-closing protections provided by title insurance that the client is not receiving (e.g., regarding post-closing encroachments onto the property and fraud).
• Failing to inform a client well before closing about any significant problems arising out of requisitions going to the root of title that might result in the transaction being aborted.

FAILURE TO FOLLOW CLIENT’S INSTRUCTIONS
A “failure to follow client instructions” is the second most common communications-related error and accounts for 41 per cent of communications-related claims. It really amounts to nothing more than a simple failure to follow a client’s specific instruction. The most frequent scenarios for this error include:

• Not inquiring about or following through on the client’s intentions for future use of the property. For example, not doing the necessary zoning searches or getting title insurance with a future use endorsement. The client may intend to build a swimming pool, but sewers or utility easements may make this impossible. Zoning may not permit a home-based business or multiple dwelling units.
• Failing to ensure that the condominium unit shown on the plan meets the client’s expectations, (e.g., whether it overlooks a lake or a parking lot.)
• Failing to do a proper title search and review the survey to ensure that the access route to an otherwise “landlocked” rural property that a client is relying on is properly deeded and reflected on title.
• Failing to inform a client about possible environmental contamination arising from the existing or a prior use of the property (e.g., as a gas station or dry cleaning operation) that might interfere with the client’s intended future use.

POOR COMMUNICATION WITH CLIENT
Poor communication with the client is the third most common communications-related error and causes 10 per cent of this type of claim. Common scenarios for this error include:

• Failing to ensure that the client understands what you are telling him/her and that you understand what he/she is telling you, particularly if there is a language barrier.
• Failing to ensure that the client understands clearly what you will be doing as the lawyer and what the client is responsible for doing.
• Failing to establish clearly who your client is, (e.g., where two or more family members have an interest in the transaction.)

Avoiding communications errors
When it comes to avoiding or reducing the likelihood of a communications-related claim, the importance of putting things in writing cannot be over-emphasized. While the failure to have written confirmation of instructions and advice is not negligence in and of itself, such written communication can be extremely helpful in defending you in the unhappy event that a claim is made against you (or about you to the Law Society, or if you are defending your account before an assessment officer).

Why is having something in writing so helpful? Because more often than not, this type of claim involves the lawyer recalling that one thing was said or done, or not said or not done, and a disappointed or upset client who alleges something different.

This type of claim is very hard for LAWPRO to defend successfully. At the end of the day it essentially comes down to a question of credibility. Judges tend to prefer the client’s evidence, as the client usually has a much better recollection of what transpired and what was said.

Remember, most clients are only involved in one or two real estate deals in their lifetimes, so they tend to remember exactly what happened. On the other hand, lawyers who have done hundreds or thousands of deals tend to have little or no recollection about what happened on a specific transaction, especially one in
the distant past.

And unfortunately, we frequently find inadequate documentation in the lawyer’s file to back up the lawyer’s version of what occurred. All too frequently, we see files with no notes or correspondence documenting what was said and done, and on occasion, even files with no reporting letters whatsoever.

Fortunately, communications-related errors are among the easiest to prevent. You can significantly reduce your claims exposure by documenting your work:

• Confirm the information that your client provided to you, your advice to the client, the client’s instructions to you, and what steps were taken on those instructions.
• Document the time spent reviewing the title search, and note what issues were discussed with the client. This can be done in your notes, and in interim or final reporting letters, or even in an e-mail message. Admittedly, you can’t document everything on every file, but taking the time to document unusual things or issues that seemed to concern the client can be very helpful in the event of a claim, especially if you have a difficult or demanding client.

CONSIDER DOCKETING TIME
Most real estate lawyers do not track or docket the time they spend on real estate files. This is a shame, as there are two benefits of doing so.

First, by tracking lawyer and staff time you can determine the actual amount of time you are spending on each file – a critical piece of information for determining if you are making any money on each real estate deal you complete.

Secondly, even taking just a few seconds to make detailed dockets can be a lifesaver. “Conference with client re: condo purchase, including re: parking space and locker” is much better than just “Conference with client re: condo purchase”; “Conference with client re: review of subdivision agreement, including restrictions on future building” is much better than just “Conference with client re: subdivision agreement.” Weeks, months or even years after a deal is completed, detailed dockets such as these can serve to confirm that particular issues were discussed with the client.

This was taken from the article “Real estate claims trends: errors and insights” that originally appeared in the December 2010 issue of LAWPRO Magazine. In that same issue there were several other articles on real estate and title insurance. The full issue is here (PDF) and individual articles are here.