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Real Estate Law FLASHPOINTS December 2020

Mike Rooney | 312-401-3454 | E-mail Mike Rooney

Representing Residential Real Estate Sellers and Buyers: Caveat Counsel

These are times that will try not just men’s but lawyers’ souls! Perhaps this statement is not as memorable as Thomas Paine’s original quote, but at least this version includes persons of any gender. Likewise, it is telling that the inspiring words of our Declaration of Independence, that all men are created equal, were actually written by men who owned slaves and made no mention of any other gender. Each generation has its own trials and tribulations, and each profession has its own challenges to be faced. Indeed, transactional attorneys in the residential real estate field are no exception.

In our current environment, the economic trends in the practice of law and the coronavirus pandemic collide and combine to increase dramatically the pressures on transactional attorneys in the residential real estate field. Following the collapse of the residential real estate market and the accompanying weakness in the economy generally because of the mortgage crisis, more and more Illinois lawyers wanted to represent fewer and fewer sellers and buyers of residential properties. The result was a decline in the size of fees lawyers were willing to charge for such work and, no surprise, a growth in the need to find additional ways to supplement the lawyer’s income. In that environment, many lawyers quoted (and some continue to quote) absurdly low flat-fee charges and replace the lost legal fees with money they could earn as title agents. Whether such arrangements are ethical, lawful, or wise is beyond the scope of this article.

In March 2020, the COVID-19 pandemic intruded into that environment in full force. Closing residential transactions became either more tedious or simpler, depending on one’s point of view. Some markets slowed appreciably, but the work-from-home, remote-learning scenario suddenly meant more people in the house and increased the desirability of larger homes so families could spread out even as they were locked down. Communication between clients and lawyers changed from in-person meetings to e-mails and electronic conferences, some with only audio and some with video added. However, as the real world changed, the Illinois Rules of Professional Conduct of 2010 (RPC) did not, and RPC 1.1 still requires the lawyer to represent the client competently with “the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” RPC 1.4(b) still describes the lawyer’s obligations of communication with the client, including the obligation to explain the matter so the client can make informed decisions regarding the representation.

A recent malpractice case (and remember that not all malpractice involves ethical violations), although pre-COVID 19, is a reminder of the risk transactional attorneys face. Crawford v. Hayen, 2020 IL App (1st) 200076.

The plaintiff purchased a condominium unit that suffered water infiltration damage to the common elements of the building as well as to the unit itself. The plaintiff sued the seller, the seller’s agent, and the plaintiff’s own attorney for damages. The trial court granted the attorney’s motion to dismiss the malpractice action and explained that the plaintiff sued the seller for withholding information about the water problems and thus could not sue the attorney for malpractice. The appellate court reversed and remanded for further proceedings.

Although the seller had disclosed some minor information about the water issues, the seller did not disclose the extent of the problem and further said she had provided all available information from the association. That turned out not to be the case. Even after the plaintiff’s attorney made additional requests, no further information was given. In the plaintiff’s case against the seller, the plaintiff alleged that the seller “purposely chose not to” provide more information although it was clear she was aware of it. 2020 IL App (1st) 200076 at ¶11. The seller’s deliberate failure to include such information apparently caused the trial court to dismiss the complaint for legal malpractice on motion by the defendant attorney. The appellate court noted that the plaintiff’s allegation that additional information could not have been discovered using ordinary prudence contradicted the allegation that his attorney should have been able to obtain that same information.

However, the appellate court went on to say the attorney has a duty to inform the client of the available options for alternative legal solutions and to explain the foreseeable risks and benefits of each option. The plaintiff alleged that if he had been properly advised by the attorney, he would have requested that funds be escrowed to pay for the necessary remediation of the water infiltration and to make required repairs. Thus, it was not the attorney’s failure to discover the extent of the defects but rather the attorney’s failure to explain to the client all the client’s options and to advise the client of the risks and benefits of those options that resulted in the reversal of the trial court’s dismissal of the case. The plaintiff had, in fact, hired an independent inspector who prepared a report indicating potential water infiltration issues.

The gist of the malpractice case being the negligent failure to advise the client as opposed to a negligent failure to discover the extent of water infiltration is important when considering the obligation of any attorney retained to represent a home buyer. The malpractice count included allegations that the attorney breached two separate duties. First, the plaintiff alleged the attorney breached a “duty to adequately investigate and secure all available information about patent or latent defects of the condominium prior to closing.” 2020 IL App (1st) 200076 at ¶13. Second, the plaintiff alleged the attorney failed to advise him properly concerning the ramifications and options concerning the disclosures that were made.

The allegation concerning a duty to investigate and secure all available information about latent defects is more than a little troubling. Latent defects, by definition, are those that are not readily apparent at first sight. It boggles the mind that any attorney representing a purchaser would agree that the attorney is responsible either for discovering latent defects or for adequately investigating and securing all available information about them. It also seems that even patent defects are beyond the scope of the attorney’s responsibilities. Most attorneys do not ever actually go to the property the client is purchasing, much less inspect it. Isn’t that why both real estate agents and attorneys advise buyers to engage the services of an independent home inspection service? And if the inspection identifies a patent defect — say, a broken window — it is generally not the province of the attorney to investigate and secure all available information about that defect. The appellate opinion does not indicate whether the defendant attorney objected to the form of that allegation, but it is hoped that he did.

The allegation that the attorney failed to advise the client properly is the basis for the reversal. Even though the appellate court acknowledged that the seller’s misconduct was a proximate cause of the purchaser’s damages, it also found that there can be more than one proximate cause of the plaintiff’s injury. If the attorney was negligent in advising the client, the attorney could not avoid liability for that conduct simply because another party was also guilty of contributing to the same injury.

There are practice pointers to be gleaned from this case. First, while there is ample attention in the appellate opinion devoted to the matter of the attorney failing to investigate and secure all available information about latent and patent defects in the property, that is not the basis for the reversal. Second, the attorney’s alleged breach of the duty to advise the client concerning risks and benefits of various options is the basis for the reversal. Third, that duty to advise becomes ever more important when considered in connection with the economics of representing sellers and buyers in residential real estate transactions. Flat-fee pricing seems to be prevalent for residential real estate transactions, and one wonders how frequently those flat-fee arrangements fail to cover the attorney’s actual time in the event problems must be examined and considered so that proper advice can be given.

Fourth, the COVID-19 pandemic has changed much about the practice of law, including almost a total elimination of in-person consultation in the transactional realm. That may be advantageous to both clients and attorneys if the attorneys do an adequate job of reducing advice formerly given orally to well-drafted and thorough written advice, whether in e-mail or general advice template formats. The client can be given an outline of options, along with general advice about the benefits and risks of each approach. The client should be advised to communicate to the attorney any questions or concerns. And while telephonic contact is still available, the attorney may be at a disadvantage unless he or she follows up with the client immediately after the conversation with a letter or e-mail confirming what was discussed and encouraging further questions if the client does not understand the client’s options.

It has never been possible to avoid all risks in residential real estate transactions, either for the attorney or for the client. Attorneys do well to advise residential real estate purchasers to obtain an independent inspector’s examination of the premises along with the seller’s disclosure (and, for condominiums, the association’s disclosure pursuant to §22.1 of the Condominium Property Act, 765 ILCS 605/1, et seq.). Once the reports are received, they should be reviewed by both the client and the attorney to ascertain the risks presented. The attorney then should advise the client of the options for dealing with each risk and the benefits and risks of various approaches. When further information is not available or is hard to acquire, the attorney should say just that and again suggest options, including the benefits and risks of those options. Be careful out there, folks!

For more information about real estate, see REAL ESTATE TAXATION: EXEMPTIONS, ASSESSMENTS, AND CHALLENGES (IICLE®, 2020). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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