The facts
A seller owned three adjoining parcels of commercial land; one parcel was sold for $200,000 to "Ladies Luxuries," a business that developed exclusive women's boutiques. Ladies Luxuries requested the sales contract require that no similar business occupy the adjacent parcels.
After the sale, based upon a survey conducted prior to closing, the seller declared that the size of the parcel had increased and Ladies Luxuries would receive more land than originally contracted. Therefore, the size of the two remaining parcels was reduced. A buyer, Ms. Parks, offered $425,000 for the remaining parcels as part of a "like kind" real property exchange under the rules of IRS Code Section 1031. The seller's agent did not inform Ms. Parks' agent in writing that the two parcels were smaller than originally represented. And Ms. Parks' surveyors were unaware of the results of the first survey, so their survey results did not note the size discrepancy.
Although Ms. Parks was unhappy with the size discrepancy, she was still willing to proceed with the sale because the property still qualified for a "like kind" exchange with another property she owned. However, Ms. Parks did not disclose to the seller that she intended to use the property to develop an exclusive women's boutique, so when she learned of the restrictive covenant included in the Ladies Luxuries' contract, she realized she could not proceed. Her property had already been sold and the proceeds were being held pending completion of the exchange. However, the 45-day period during which the "like kind" exchange rules require the seller to identify the replacement property and designate them for the exchange was about to expire.
Ms. Parks was unable to locate comparable property in time, and she was forced to cancel the purchase, resulting in substantial taxes and penalties. She sued the seller and the seller's agent, alleging they failed to disclose both the restrictive covenant and the change in the first parcel's lot size. The case was settled in favor of Ms. Parks for $250,000.
The result
In this case, better communications and written documentation of all that transpired by the selling agent, could have possibly prevented the failed real estate transaction and subsequent claim.
Risk factors
Risk factor #1
Not documenting changes in writing opens you to potential legal issues and problems. Although the selling agent testified that she orally informed Ms. Parks’ agent of the first parcel's size change, there was no written evidence that this occurred. All changes to property size, value or restrictive covenants that affect a property for sale which occur prior to closing should be communicated in a timely manner and in writing to a potential buyer's agent or lawyer, or to the buyer, if the buyer is unrepresented.
Risk factor #2
Using special transactions may require additional attention to detail. "Like kind" transactions can be a practical choice for taxpayers planning to sell, purchase or construct buildings on real property because they can defer taxes on capital gains. However, real estate agents must inform clients of their responsibility to tell potential buyers about any changes made to the property and any contractual restrictions or limitations.
Risk factor #3
The selling agent did not take all the steps necessary to keep everyone informed. Subsequent to showing a party, if you become aware of any changes to the property or any contractual restrictions seek the client's permission to disclose them to potential buyers. If permission is granted, do so both orally and in writing. If the client refuses to do so, consider resigning from representing the client. If you resign, inform both the client and any buyers or their representatives in writing that you have resigned from the representation.
*The claim scenario is strictly documented for illustrative purposes only and provides an example of what a policy could cover. It is intended to provide a general overview of the program described. Please remember only the insurance policy can give actual terms, coverage, amounts, conditions and exclusions. Program availability and coverage are subject to individual underwriting criteria.
