Journal of Property Valuation and Investment

Emerald Article: Professional negligence and indemnity in real estate William North

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To cite this document: William North, (1993),"Professional negligence and indemnity in real estate", Journal of Property Valuation and Investment, Vol. 8 Iss: 1 pp. 24 - 37 Permanent link to this document: http://dx.doi.org/10.1108/EUM0000000003276 Downloaded on: 06-06-2012 To copy this document: permissions@emeraldinsight.com This document has been downloaded 711 times since 2005. *

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Peter Mahoney, (1993),"Professional negligence and indemnity", Journal of Property Valuation and Investment, Vol. 8 Iss: 1 pp. 38 - 52 http://dx.doi.org/10.1108/EUM0000000003277 Anthony Lavers, Alistair MacFarquhar, (1993),"Judicial attitudes to professional liability for propertyinvestment advice", Journal of Property Valuation and Investment, Vol. 8 Iss: 1 pp. 53 - 79 http://dx.doi.org/10.1108/EUM0000000003278 Lim Lan Yuan, (1993),"Public sector valuations", Journal of Property Valuation and Investment, Vol. 8 Iss: 2 pp. 166 - 183 http://dx.doi.org/10.1108/EUM0000000003281

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PROFESSIONAL NEGLIGENCE AND INDEMNITY IN REAL ESTATE

WILLIAM D. NORTH
Keywords Professional negligence professional indemnity caveat emptor misrepresentation USA Summary The American real estate industry has in recent years suffered from a proliferation of litigation in relation to professional negligence. Both the residential market and the commercial sector have been affected to such an extent that it is no longer clear whether the decision-makers take any responsibility for their actions but rely solely upon the real estate professional to act as a guarantor of the transaction. Introduction In the past few decades, consumers have become more and more insistent that the products and services they buy satisfy high standards of quality and utility. Consumers have also become less complacent and more inclined to voice their complaints and to sue when performance expectations are not met and dissatisfaction or economic or physical injury result from deficiencies in products and services. The real estate industry of the United States has not escaped this trend of litigious consumerism. Purchasers of homes and other types of real estate and real estate services have increasingly regarded the real estate broker or salesperson with whom they dealt as a source of, and therefore responsible for, their dissatisfaction. With growing frequency, house purchasers assert claims against brokers upon discovery of defects such as termite infestation, cracked or collapsing foundations, roof or wall leakage, sewage system problems, or deficiencies in the size of the property or lot. The seriousness of this trend is apparent from the fact that of all claims filed in the USA against real estate brokers for any reason, nearly 65 per cent are filed by disgruntled pur24

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chasers, and well over one-half to two-thirds of those claims involve allegations of misrepresentation, negligence or fraud. This trend is also significant because the penalties assessed against real estate brokers for misrepresentation can be severe. Purchasers have been awarded damages to compensate them for repair of defects or for the loss in property value because of defects. Punitive damages have also been awarded in some cases. On occasion transactions have even been rescinded and the broker required to compensate the buyer for the costs he incurred. Since most state licence laws prohibit fraud or misrepresentation, suspension or loss of one's real estate licence can also occur. Criminal penalties for fraud may be possible. Disciplinary action for violation of the National Association of Realtors Code of Ethics, which requires the Realtor to avoid 'exaggeration, misrepresentation, or concealment of pertinent facts', is also a possibility. Courts faced with such claims have been forced to examine the nature and scope of the relationship between the buyer and the real estate broker (and his sales agents) and the duties and obligations arising out of that relationship. Typically, the broker and seller execute a listing agreement establishing a contractual relationship appointing the broker as the seller's agent to locate a ready, willing and able buyer. That agency relationship imposes upon the broker the fiduciary duties of loyalty, obedience, care and diligence in pursuit of the sale of the property. Ordinarily, however, there is no similar agency or other contractual relationship between the broker and the buyer, and thus the duties, if any, owed by the broker to the buyer are not really defined, although an increasing number of brokers are seeking to establish agency relationships by contract with buyers. Historically, the broker was viewed as having essentially no affirmative legal obligation to the buyer because the prevailing standard was that applicable in most other commercial transactions: caveat emptor or 'buyer beware'. Under that standard, while a broker could be liable to a purchaser for engaging in intentionally deceptive conduct, the broker had little or no duty to the buyer other than to refrain from such fraudulent conduct. Although the demise of that standard has occurred more slowly in real estate transactions than in other contexts, today caveat emptor is largely or completely inapplicable to most real estate transactions. In place of caveat emptor, courts began explicitly or implicitly to impose on real estate brokers a duty to treat buyers honestly and fairly even though no contractual agency or other relationship existed. The broker's duty to advise buyers of known material defects in the property was established. In addition to the duty not to deceive the buyer intentionally, brokers were expected to act affirmatively to disclose defects of which they, but not the buyer, were aware. Silence regarding known defects ceased to be permitted, and liability was imposed on brokers for their failure to speak. More recently, purchasers began to seek, and courts began to award, compensation when a property was discovered to have defects which the broker had failed to disclose or describe correctly, even though the broker's
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misrepresentation of some aspect of the property resulted simply from oversight, error or lack of care in obtaining and providing information to the buyer about the property. A few courts have even gone so far as to hold brokers strictly liable for misrepresentations made 'innocently', and where, despite the exercise of care and diligence in ascertaining or confirming information about the property, the broker nevertheless misstated some material fact. Fortunately, this harsh result has been reached only in a few jurisdictions. Some courts have employed principles of tort law to judge brokers' conduct toward the buyer and imposed liability for negligence. These courts suggest that brokers must not only act carefully and prudently in providing accurate information to purchasers, but that they have an affirmative professional duty to exercise diligence in preventing the unknowing purchase of a defective property. These courts have gone so far as to hold that even careful confirmation of the accuracy of the information provided to the buyer is not adequate. The broker also owes the purchaser a duty to obtain and disclose all relevant information about the property which the buyer may find pertinent to his purchase decision. Finally, many jurisdictions have also prohibited deceptive or unfair trade practices by statutes which either expressly or by judicial interpretation apply to real estate brokerage services. These statutes provide yet another basis to judge the broker's conduct and another basis on which to impose liability on the broker. It is important to recognise that the issue of broker liability for fraud or misrepresentation is raised only by his factual statements (or omissions) regarding the property or its condition. Statements of opinion are not properly the basis for a claim by the purchaser, since they generally do not contain facts upon which the purchaser may claim he relied in deciding to purchase the property. The only exception to this rule is when the broker gives an opinion about a factual matter (eg, 'I believe the zone is R-2'), since, although such a statement is only opinion, the broker is presumed to have superior knowledge and therefore be a reliable source of the factual information. Commonly used laudatory statements such as 'a real beauty', 'won't last long', 'great location for families', and the like do not generate claims of fraud or misrepresentation. Only statements of material facts, ie those conditions or features of the property which the buyer takes into account in his purchase decision, raise such claims. It is my purpose here to explore each of the theories which measure the duty or standard of care owed a by a real estate broker to potential purchasers. While the discussion of these theories involves representative cases, it should be understood that most Plaintiff-purchasers allege the broker's liability on several theories. Because the facts in many cases will often support liability on more than one theory, and because these legal theories and the circumstances which give rise to their application can overlap, the terminology courts use to describe these theories may not be uniform nor provide a consistent statement of these theories.
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Caveat emptor At common law the doctrine of caveat emptor was the prevailing rule in essentially all commercial transactions. That principle functioned to produce reasonable and fair results when the products bought and sold were relatively siple, ordinary and well-understood commodities like grain, lumber or livestock. Over time, however, courts and legislatures have become more sympathetic to the often unequal bargaining positions of consumers and sellers of products and services. The difficulty consumers encountered in recognising and weighing the importance of actual or potential defects in increasingly complex products led courts to eliminate or minimise the principle of caveat emptor and to apply certain implied warranties to the sale of products. Caveat emptor requires merely that a seller of property and his agent must speak, if at all, in truthful fashion. They may not affirmatively and intentionally mislead or deceive a purchaser, for example by stating that a particular defect does not exist when in fact it does. But no obligation exists to offer particular information about the property, including information about known adverse features or defects in the property. The broker (and the seller) may remain silent and permit the transaction to proceed without making the purchaser aware of latent defects and without incurring liability for any injury the purchaser may suffer as a result of them. Caveat emptor has been expressly or implicitly rejected in cases in all but three jurisdictions which have considered the standard of conduct as applied to real estate sales. Only Ohio, Maine and Alabama continue to follow the doctrine, but even in these jurisdictions significant limiting qualifications have been recognised. In fact, while Ohio retains the doctrine, its application is so limited as essentially to eliminate the inequities which other states have found unacceptable.

Fraud Even under the now discarded doctrine of caveat emptor, liability was always imposed when a broker knowingly made false statements or took actions designed to misrepresent the property and deceive the purchaser. Such cases have arisen most commonly when the broker has stated that a defective or undesirable condition does not exist, when in fact it does, or that a particularly desirable condition or feature is present, when it is not. The elements of a cause of action for fraud in a sale are: (1) a representation; (2) of a material fact (rather than opinion); (3) which is false; (4) which is known to be false or made in culpable ignorance of its truth or falsity; (5) which is made for the purpose of being relied upon; (6) which is reasonably relied upon by the purchaser; and
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(7) which leads to injury to the purchaser (Richmond v Blair, 142 III. App3d 251(1985)). Since the other elements are ordinarily present and easily demonstrated, the principal contested issue in a case alleging fraud is ordinarily whether the broker actually knew that his representation was false. Regrettably, from the standpoint of real estate professionalism, there are numerous examples of brokers being held liable for having knowingly made false statements to purchasers to induce them to buy property. Fraud does not, however, consist only of making knowingly false statements to a purchaser. Brokers have been held liable for statements made with 'culpable ignorance', that is, where the broker consciously has no knowledge of the truth or falsity of his statements but makes them with reckless disregard for their accuracy. Other examples of broker fraud include incomplete statements or representations designed to conceal from the purchaser the existence, nature or extent of a defect; actions or statements intended to deny or limit the purchaser's opportunity to inspect the property and discover defects; and representations which the broker fails to correct when he discovers they are incorrect. Since an essential element of fraud is the broker's culpable ignorance or actual knowledge of a defective condition, a number of courts have refused to impose fraud when the broker is without such knowledge and reasonably, but incorrectly, believes the representation to be accurate. Brokers have also been excused when the buyer was unable to show reasonable reliance on the broker's statement, or where the broker's statement was viewed as mere 'puffing', or when the buyer could and should have discovered the error by exercising ordinary care. Numerous jurisdictions have held that the failure to advise a buyer of known defects which he is unlikely or unable to discover himself constitutes a form of 'passive fraud'. Under this theory of liability, the broker may not 'stand silent'. In the words of a leading California decision holding that the broker has an affirmative duty to speak, the court said: '[W]here a real estate broker or agent, representing the seller, knows facts materially affecting the value or desirability of property offered for sales and these facts are known or accessible only to him and his principal, and the broker or agent also knows that these facts are not known to or within the reach of the diligent attention and observation of the buyer, the broker or agent is under a duty to disclose these facts to the buyer...(and) is liable for damages caused by non-disclosure to the buyer of defects known to him and unknown to and unobservable by the buyer' (Cooper v Jevne, 56 Cal. App. 3d 860 (1976)).
Negligent misrepresentation

Another generally recognised duty of the broker to the purchaser is the duty to use care and diligence in making correct statements about the
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property to the buyer. Some purchasers, perhaps quite properly, have felt aggrieved by a real estate broker's unintentional misrepresentation of certain features of a property. Whereas a claim for fraud requires proof of intent to deceive or culpable ignorance, the liability of a broker for 'negligent misrepresentation' does not require such intent or reckless culpability. Negligent representation arises not from the broker's intent to mislead or deceive the purchaser, but rather from his lack of care in ascertaining or confirming the accuracy of the information he provides to the purchaser. Many courts have concluded that the broker has a duty to act diligently and carefully and is liable for a misrepresentation of fact, however 'innocently' made, resulting from his failure to do so. For example, the broker in Maxwell v Ratcliffe (356 Mass. 560 (1969)), advised the purchasers of a house that the basement was dry, when the fact that the house experienced periodic seepage was plainly indicated on the Multiple Listing Service (MLS) property data form. The broker simply overlooked this statement on the MLS form and was held responsible for the purchaser's damages arising from his error. Similarly, in Johnson v Geer Real Estate Company (239 Kan. 324 (1986)), the broker honestly believed and so advised the purchaser that the property was connected to a sewer system, and failed to notice certain circumstances which suggested that not to be the case. The broker was therefore held liable when the purchaser discovered that the property was actually on a septic system. While many courts have held that brokers have a duty to act carefully in confirming the representations they make to purchasers, and that they may be held liable for incompetently obtaining or communicating information or for making misrepresentations which ordinary care would have revealed to be false, they have usually refused to impose liability for negligent misrepresentation when the broker's incorrect representations were made notwithstanding his good faith and exercise of due care. This result is wholly consistent with the principle underlying the imposition of liability for negligent actions, since liability is appropriate only where lack of adequate care produces injury to another. Liability for negligence is not imposed where one's actions are prudent but nevertheless result in injury to another. Allegations of negligent misrepresentation also often raise two other questions: First, how much reliance a broker may place on information obtained from the seller without independent confirmation of that information; and, second, what is the broker's liability if such information, transmitted to the buyer, turns out to be false. Courts addressing this issue have almost uniformly concluded that the broker may rely on the seller's statements without verification unless he has reason to know or suspect the information is not true. Such was the ruling in Hoffman v Connall (108 Wash. 2d. 69 (1987)). In that case, the seller indicated to the broker that certain stakes and other markers represented the property's boundaries, and also that he had the property surveyed before his purchase. The broker, in turn, relayed that information to the buyer. After purchasing the property, the buyer discovered
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that the boundaries were not correctly defined by the markings identified by the seller, and that certain property improvements actually rested on the neighbour's property. The buyer was required to spend nearly $6,000 to move those improvements onto his own property, and sued the seller and broker for those expenses. The Supreme Court of Washington held that, while a broker may be liable for negligently providing misinformation to a purchaser, no liability lies for misrepresentations made wholly innocently on the basis of information received from the seller when the broker had no reason to suspect the seller's information was untrue.

Negligence

Beyond active and passive fraud and beyond negligent misrepresentation, negligence is yet another basis upon which purchasers have attempted to assert liability against brokers for property defects discovered after the purchase. Like negligent misrepresentation, the theory of negligence does not require that the broker actually be aware of the property defect. Unlike negligent misrepresentation, negligence does not require that the broker have made a specific affirmative representation of a material fact which is untrue. The basis of a negligence claim is the broker's failure to act with care to protect the purchaser's interest in avoiding properties with latent defects. The broker's duty is more rigorous than merely acting carefully in providing accurate information to the buyer. The duty includes the obligation to exercise reasonable care to identify and disclose unknown material defects or non-apparent conditions. A broker may be liable if his lack of care breaches that duty and results in the purchase of a defective property. The law of negligence generally imposes the duty to act with due care for the welfare of others. Liability arises when one's actions or inactions breach that duty of care and result in injury. Where the actions of a professional such as a doctor, lawyer, accountant, or real estate broker are measured by a negligence standard, the care required is that which a 'competent professional' would exercise under the circumstances. Thus, the broker's conduct is compared to that of a hypothetical careful and competent broker. If, by the exercise of ordinary care, that hypothetical broker would have discovered and disclosed to the purchaser a particular defect, the broker who fails to do so may be liable under the negligence standard for the purchaser's damages. Negligence principles require brokers to take affirmative steps to prevent buyers from suffering injury by unknowingly purchasing defective properties it is not sufficient that the broker merely avoid making intentional or mistaken misrepresentations about the property, or even that he disclose all known defects. The application of the negligence theory of liability to real estate brokerage is most clearly expressed in two relatively recent cases Easton v
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Strassberger (152 Cal. App. 3d 90, 199 Cal. Rptr 383 (1984)) and Gouveia v Citicorp Person-to-Person Financial Center Inc (101 NM 572, 686 P. 2d 262 (1984)). In Easton, the Plaintiff had purchased a house which was seriously damaged by a massive movement of the land on which it stood, reducing its value from approximately $170,000 to $20,000. The purchaser sued the seller, the listing broker and certain housebuilders, charging the broker with fraud and negligent misrepresentation. At trial it was revealed that there were certain readily apparent indications, or 'red flags', that the property rested on unstable soil. The Plaintiff voluntarily dismissed the fraud count, but the trial court gave the jury instructions relating to negligent misrepresentation as well as negligence. The jury held the broker liable on the basis of negligence, and the broker appealed against the verdict. Having failed to find either fraud or negligent misrepresentation, the California Court of Appeal described the issue before it as being whether or not liability could be imposed on the broker for mere negligence. The court decided this question in the affirmative, holding that a broker's duty included the obligation to perform a reasonably competent and diligent inspection and to disclose to the buyer defects or other material facts revealed by the inspection. The court found that such an inspection would have discovered the soil problem and that, particularly in light of the 'red flags', the broker was negligent in not performing such an inspection and revealing the problem to the purchasers. Since the Easton case was decided, in an effort to clarify and limit the obligation of inspection which the court imposed on brokers, visual inspection of real estate properties has been made a statutory duty in California and, by negative implication, brokers are relieved from the obligation to 'discover' and disclose defects which a visual inspection would not reveal. Similarly, the court in Gouveia imposed a standard of care requiring the broker to discover and disclose property defects to potential purchasers, although it characterised the failure to do so as a form of negligent misrepresentation. Relying on Easton, the court indicated that this duty may include an inspection obligation as well. The court reasoned that without a duty to perform a reasonable inspection the broker would have an incentive to remain ignorant about the property while the inexperienced purchaser relied on him for accurate information. The negligence standard imposed in these cases permits the broker to be held liable if property contains a defect which, by the exercise of reasonable care and diligence in inspecting the property, the broker should have discovered and disclosed. While at first blush this duty of inspection may appear to be a significant additional burden for brokers, it is not one which it is difficult to satisfy so long as it is fairly confined to matters within the ordinary knowledge and competence of brokers. The danger which the negligence theory of Easton poses is that the duty to inspect, discover and disclose defects will be extended to features and conditions which are reasonably discoverable only by experts in various other disciplines and not by brokers and will thereby establish a standard of care which brokers cannot satisfy.
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Innocent misrepresentation and strict liability

The ultimate extension of broker liability is, of course, liability for an innocent misrepresentation: liability without fraud, without negligent misrepresentation and without negligence. Three courts have held that a broker is absolutely liable for damages suffered by a purchaser for any erroneous statements he may have made concerning the property, no matter how responsible and diligent his efforts to avoid such errors may have been. The Alaska Supreme Court's decision in Bevins v Ballard (655 P. 2d 757 (Alaska 1982)) most clearly illustrates application of this 'innocent misrepresentation' or 'strict liability' standard. In Bevins, the broker made certain representations to the purchasers that the well on the property would furnish an adequate water supply. After the purchase, however, the well failed to provide sufficient water and the purchasers sued the sellers and the broker for the costs incurred in deepening the well. The purchasers claimed that the brokers had failed in their duty to inspect the property and report any defects and also that they negligently misrepresented the property. The trial court held that the brokers had no general duty to inspect the property, and that they had not been negligent in failing to investigate and confirm the seller's statement that the well was adequate since no circumstances suggested otherwise. Despite these conclusions, the court nevertheless held the brokers jointly and severally liable. On review, the Alaska Supreme Court held that a broker could be held liable for an entirely innocent misrepresentation and affirmed the trial court's decision that the broker was liable on that basis. The court justified its decision as a policy choice, motivated by the desire to allow purchasers to rely confidently on a broker's representations and to enhance the broker's incentive to investigate carefully and disclose correctly the property's characteristics or to encourage the buyer to do so. The court indicated that '[A]s between the broker who communicated the misrepresentation, and the purchaser whose only fault was to rely on the broker, we think it preferable that the broker bear any loss caused by misrepresentation' (655 P. 2d at 763). This is a dramatic and harsh result, since it suggests that even though a broker prudently and diligently investigates the property and the representations he makes about the property (including those based on information received from the seller), he is liable if he incorrectly describes some material aspect of the property. It is a theory of liability which requires the broker to become a veritable guarantor of all statements he makes about the quality and condition of the property. While the court attempts to mitigate this extreme result by noting that brokers may protect themselves by investigating the owner's statements, disclaiming knowledge about the property or obtaining indemnification from the seller, it is unclear whether such techniques would provide effective insulation from liability. A similar conclusion was reached in Gauerke v Rozga (112 Wis. 2nd, 332 NW 2d 804 (1983)) where the Supreme Court of Wisconsin imposed liability on an agent for his innocently incorrect statement, based on information
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received from the seller, regarding the acreage and river frontage of the property sold. The court imposed this liability on the basis of 'strict responsibility', again implying, as in Bevins, that no measure of diligence or effort by the broker could eliminate liability if in fact his statement was incorrect. Like the Bevins court, the decision was expressly based on the policy choice of placing the loss on the innocent broker rather than the innocent purchaser. Yet a third case suggesting that liability may be imposed for innocent misrepresentation is Spargnapani v Wright (110 A2d 82 (D.C. 1954)). In that case, liability was imposed for the broker's innocent but incorrect representation about the capabilities of the property's furnace. While the court indicated that its decision was also based on the broker's act of fraud for making a statement without knowledge of the truth or falsity of the statement, the court nevertheless plainly held that liability may be imposed for a false representation innocently made. Statutory liability for misrepresentation In addition to, but wholly apart from, the 'judge made' law of fraud, misrepresentation, and negligence, are the statutory efforts to define the rights of real estate purchasers and the obligations of brokers. In this connection, many states have adopted statutes prohibiting consumer fraud, intentional or negligent misrepresentation, or unfair and deceptive trade practices. Violations of such statutes have been asserted, generally successfully, by real estate purchasers against brokers in Illinois, Louisiana, Maine, Massachusetts, Montana, New Jersey, Oregon, Texas and Washington. Most statutes of this variety prohibit knowing, intentional misrepresentations, and therefore largely serve only to codify the familiar prohibition against fraudulent acts. This codification is nevertheless significant, since it may allow a state attorney general, rather than only the disgruntled housebuyer, to bring the action, it may impose specific penalties or expressly authorise the awarding of punitive damages in appropriate circumstances, and it may permit the purchaser to recover attorney's fees as well. Overview and risk reduction responses There is no question that the law of professional liability and negligence in the United States has now developed to the point at which there is a clear obligation on the part of real estate brokers to treat buyers honestly, fairly, and competently. This obligation seems neither unreasonable nor onerous, especially in light of the long standing aspiration to and claims of professionalism asserted by real estate practitioners. Even the negligence standard recognised in the Easton case seems fair so long as the broker is not obliged to discover defects or problems beyond the reasonable scope of his training, knowledge and expertise. 33

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In fact, given the state of the law, it might be difficult for some readers to understand why American real estate practitioners should devote so much time and attention to the subject of professional negligence and be so concerned about it. And yet in a recent survey members of the National Association of Realtors ranked 'professional liability' as their number one concern. The reasons it should rank so high are readily apparent. First, the United States is a litigious society. Consumer litigation is not only socially acceptable but encouraged. Simple rules of civil procedure make filing lawsuits easy and the ample supply of lawyers ready and able to accept lawsuits on a contingent fee basis makes them cheap. Backlogs in the courts and the consequent increase in the costs of defence encourage settlement of even spurious claims which, of course, encourages the filing of more such claims. The class action permits aggregation of claims too small to otherwise justify litigation and allows consumer litigation to be essentially cost-free, risk-free speculation. The number of lawyers in practice in the United States has nearly doubled every 20 years since 1950 and presently exceeds 715,000. Every real estate broker in the United States is keenly aware that today there is no consumer of real estate services who cannot, and without significant 'out of pocket cost', assert a claim of fraud, misrepresentation or professional negligence against any real estate professional who fails, for any reason, to fulfil the consumer's performance expectations. And that knowledge is enough to concern any professional who appreciates the complexity of his business and his limited margin for error. The second reason why the United States real estate brokers are deeply concerned with the extent of their professional liability is that they are liable not only for their own performance but are also vicariously liable for the performance of sales people licensed to them. The broker is also liable for performance of other brokers and their agents who cooperate with him in the sale of properties as subagents. This broad scope of the broker's liability is further escalated by the limited control and supervision which the broker is able to exercise over his sales agents who primarily function as independent contractors and hence are not subject to the same degree of discipline and management as employees. Given the extent of his vicarious liability for the representations and performance of others, the United States real estate broker must necessarily view every increase in the quality or quantity of disclosure, inspection, or advice which the law requires as a source of expanded risk. And, increased risk in turn translates almost directly and immediately into increased recruiting, management and training costs, higher insurance premiums and legal fees, and lower profits. The third reason for the current critical concern of United States real estate brokers with professional liability is the practical difficulty of accommodating the rapid changes which are occurring in the nature and extent of the services buyers are requiring. Not long ago, brokers were perceived as primarily 'tour guides' of houses for sale or apartments for rent. Buyers
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expected little more of the broker than to identify properties, show them the floor plans, amenities and grounds, and convey their offer to the seller. This limited expectation no longer prevails. Today the broker is called upon by buyers to provide vital information which they have not the time, resources or expertise to obtain themselves. They expect the broker to identify and discuss the merits of financing alternatives, choices between forms of ownership, and the adaptability of a property to a desired use or lifestyle. They expect the broker to 'flag' environmental or structural hazards or defects as well as other conditions which might increase his costs or reduce his satisfaction with his purchase. These expectations coupled with the rapid changes occurring in the real estate marketplace increase the risk of being 'wrong' or providing 'stale' information, or failing to meet the standard of care and competence the law requires. Organised real estate in the United States is addressing the issue of professional liability, negligence and indemnity through a broad spectrum of programmes and initiatives designed: to assure that the buyer's expectations conform to what the broker is able and willing to satisfy; to clarify responsibility for representations and transfer as much of that responsibility as possible to the seller or to other advisers involved in the transaction; to improve the skills, knowledge and informational resources of the brokers and their sales personnel; to enhance the capacity of brokers to understand what the law requires of them as professionals; and to oppose or reverse laws and judicial decisions which unreasonably or arbitrarily extend professional liability or impose liability without fault. To accomplish the first objective of conforming buyer's expectations to the reality of the broker's performance capacity, the Association has undertaken educational programmes aimed at the public describing the proper role and function of the broker. It has developed listing and other contracts which define responsibility for various real estate functions and representations and disclaim liability for those not expressly assumed. It has encouraged legislation requiring the existence and significance of the agency relationship between the broker and the seller to be disclosed to the buyer whenever it exists. To accomplish the second objective of limiting direct and vicarious liability, the Association has developed and encouraged the use of property disclosure forms which require the seller to attest in writing to the condition of his property. Sellers and buyers are being offered the opportunity to obtain a 'home inspection' which, if refused, can make them responsible for any defects the inspection would have revealed. Multiple Listing Service rules and practices are being tightened to provide the listing broker with greater control over the handling of the transaction by a cooperating broker. Employment 35

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and independent contractor agreements are including cost of defence and indemnity provisions protecting the broker from suits prompted by the professional negligence of his sales people. The third objective, of improving the skills, knowledge and resources of the brokers, involves a wide range of programmes enhancing brokers' knowledge of financing alternatives, ownership forms, environmental hazards and other matters of concern to buyers. The quality and quantity of MLS information concerning listed properties is being expanded and computerised. Tax and title information is being assembled, programmed and integrated into the MLS systems. Data concerning environmental hazards, land use restrictions, and financing alternatives are being systematically assembled, correlated and disseminated. Specialisation and certification programmes are being encouraged and basic and supplemental education programmes have been developed for brokers and their sales agents. To enhance the capacity of brokers to understand their legal obligations as professionals, the National Association has established a series of legal liability educational programmes describing such obligations in detail. 'Hotlines' have been established in growing numbers to respond immediately and directly to the legal questions of member brokers and sales people. Legal counsel of real estate boards and state associations have been networked through the National Association to assure an efficient exchange of information concerning legal theories, defences and trends in professional negligence and liability. Statistics concerning pending and decided cases involving professional negligence and other broker liability issues are maintained and disseminated along with in-depth legal analyses of them. And, finally, to resist the unreasonable extension of professional liability, the Association provides support for litigation which might establish favourable precedent, sometimes as a friend of the court (amicus) and sometimes through provision of counsel or attorney's fees. The Association provides professional liability insurance for purchase by its members at favourable rates and with broad coverages. It provides arbitration facilities and dispute resolution alternatives to litigation for use by its members and by the public. The Association also engages in comprehensive lobbying efforts to restrict class actions and contingent fee arrangements, to oppose 'consumer fraud' laws imposing strict liability, to limit punitive damages and to clarify the standards by which professional negligence and misrepresentation will be measured. Conclusion There is a legal adage that litigation is a function of frustration and frustration is a function of expectation. Professional negligence is, by definition, the failure of a professional to fulfil the duty of care and competence which the law and those who deal with him should be able to expect from a professional.
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To return to the standard of 'buyer beware' is to repudiate the concept of professionalism in real estate. For professionalism to have any meaning, it must require a reasonable standard of honesty, care, and competence. And yet to adopt a standard which makes the real estate professional a guarantor of the transaction is to make professionalism too costly for survival. The middle standard which equates reasonable expectations with reasonable professional performance is the Golden Mean which the real estate community must identify, establish, and defend. Acknowledgement
Much of the material in this paper is derived from the National Association's monograph on Professional Liability by the Legal Affairs Division as part of its Legal Liability series.

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