HOW TO AVOID TROUBLE IN REAL ESTATE TRANSACTIONS
by Robert D. Reis*
In certain places around the country, real estate transactions have led to malpractice losses that are significantly above the national average. Fortunately, Virginia is not one of those places. Unfortunately, however, Virginia real estate practitioners are not immune to malpractice claims. With that in mind, here are a few practice tips, categorized by problem area, that may help Virginia real estate attorneys avoid malpractice claims.
Search and Investigative Problems
- Use Checklists. Checklists can be a good resource for both new attorneys and experienced practitioners. While a form checklist may not set out all tasks necessary for all representations, it will (if properly designed and used) help practitioners and staff avoid the most common pitfalls.
- Implement Peer Review. Peer review is a much bandied about term. It sounds good, but few attorneys or staff members wish to give up the independence necessary to make peer review effective within the office. Additionally, there is the reality that no client will pay for a double review of the file or courthouse records. Nevertheless, periodic review of randomly selected files and searches can catch errors and, more importantly, communicate to all in the office that complete searches and thorough investigation are the cornerstones of quality work and maintenance of firm reputation in the real estate area.
- Avoid Assumptions and Shortcuts. This is particularly true if you are doing legal work for a friend, relative, office employee, or a family member of an employee. The fact that all may view the work as a favor is irrelevant. Seemingly simple and/or repetitive tasks promised to individuals with whom the attorney is quite comfortable are far too often left incomplete or completed in an untimely fashion.
- Be Extra Diligent in High Volume Work. Read and review previous title opinions prior to issuing a new title opinion on the same parcel of property. Particularly in batch sale situations such as a condominium project, a missed mortgage or other lien can be extremely costly. High volume work does not mean that the quality of the work can suffer. For example, you should never rely on someone else's title report as a means of cutting costs.
- Make Certain that Title Abstractors are Insured. If the abstractor you use is not insured, do the work yourself or find an abstractor who is.
Drafting Problems
- Use Standardized Forms. The use of standardized forms helps reduce the risk of drafting errors.
Client Communication Problems
- Use Engagement Letters. Many real estate practitioners take the position that due to the relative speed with which real estate transactions are completed, there is no need to send engagement letters. On the contrary, engagement letters should be sent to all clients as soon as the firm is retained. One reason for this guidance is that any attorney who is present at a closing may be viewed by the buyer as having an obligation to review and advise the buyer regarding the transaction. Do not allow this assumption if this is not the case. Engagement letters seek to prevent misunderstandings regarding the scope of representation as well as provide clarification. For example, an engagement letter might state exactly what items will be included in a contract or specify what documents will and will not be prepared. The use of standardized engagement letters that can be easily tailored to individual clients (a Hot Docs template, for example) makes this practice possible without unduly burdening staff.
- Educate all, Including Sophisticated, Clients. Send an informational letter to all clients. These letters can be standardized and should include a description of the conveyance process, a delineation of who will be responsible for what tasks, and expected deadlines for completion of all tasks. Common impediments that might arise should be mentioned.
- Send Status Updates. Status updates should be programmed into the computer calendar or docket system so that you can inform the client if the closing cannot be accomplished on the target date. If that occurs, and the delay will be a few days, a staff member should call and update the client. If questions remain, invite the client to talk with the attorney. For delays longer than one week, the attorney should call the client to fully explain the reason for the delay and what will be done to correct the problem. This call should be followed up with a confirming letter.
- Be Honest and Realistic at all Times. If the office has much work to do, clients will generally accept a more liberal deadline if they expect it from the outset. Any potential problem should be brought to the client's attention as soon as it is discovered. If the potential concern is at all material, it should be addressed in writing. Do everything possible to dispel any unrealistic client expectations.
Accounting Problems/Quality Control
- Review all Settlement Sheets. We strongly advise that a second employee or an attorney review all HUD 1 and other settlement sheets in order to ensure that the proper numbers were transferred from mortgage company correspondence or other sources.
- Verify Vendor Information in Writing. All information to be included on closing documents should be verified in writing. If time is short, fax a confirming note to the vendor after a phone call with the reported information to allow the vendor to catch any discrepancies as soon as possible.
- If Closing, Follow Through. If you are the closing attorney, make certain that you handle the disbursements as well. See the transaction through to completion to ensure that everything is complete. Relying on others to complete the final items is risky.
Conflict of Interest Problems
- Keep the Conflict Database Current. The conflict database should include all personal business involvements of office members, past and present clients (and their spouses, if individuals), adverse parties, lending institutions with whom the firm does business, property addresses, corporate names, partnership names, key employees of businesses, officers and/or directors of businesses, corporate subsidiaries, shareholders, and prospective clients who were declined. Of course, keep the database current.
- Use The Conflict Database. A conflict database should not serve as a back up to a primarily memory-based conflict system. The database should be readily accessible and accessed at all first contacts. If additional parties become known further into representation, an additional conflicts check should occur, and the database updated at that time.
- Document Conflict Resolution. When a potential conflict has been identified, a non-involved attorney (or conflict committee) should be involved in making the ultimate decision as to whether the firm can move forward and, if so, how. This individual should be a senior member of the management group so that he or she will be able to rise above financial concerns and examine the proffered representation in light of what the ultimate benefit or concern for the firm will likely be. Sole practitioners should have a mentor or colleague with whom the most difficult conflict questions can be shared and honestly discussed (without mentioning names). Keep notes regarding the conflict resolution process. Of particular importance are two key pieces of documentation. If the decision is that representation can proceed as long as everyone consents, make certain that what is obtained is actually informed consent. A waiver that simply acts as a written acknowledgement of the existence of a conflict of interest is insufficient. The second document is a letter of closure. Do not assume that some undefined passage of time transforms a current client into a past client for conflict checking purposes. In the absence of written documentation and for all conflict checking purposes make this assumption: "Once a current client, always a current client, unless you can document otherwise."
- Avoid Favors. NEVER work on a matter that involves a personal interest of any person in the office (including you), especially if the interest is shared with another party. The risks are significant, and the client who is a staff member, family member, or long-time friend will expect a "friend of the family" fee. Contrary to popular belief, these clients can and will sue if things go wrong.
**Mr. Reis serves as the President and Chief Operating Officer for Attorneys Liability Protection Society, a risk retention group headquartered in Missoula, Montana. ALPS provides Lawyers Professional Liability Insurance to attorneys in private practice in many areas of the United States and its territories.